The announcement that a new 20,000 kyat banknotes will be introduced at the end of this month has sent a jolt of inflation panic through Myanmar’s financial markets, and raised concerns among business people that more economic turmoil and pain lies ahead.
The junta-controlled Central Bank of Myanmar announced on Sunday that it will issue new 20,000 kyat banknotes on July 31, a denomination that is double the value of the current highest banknote of 10,000 kyats. It has said the new banknote is being issued to commemorate the construction of a giant marble Buddha statue and the first anniversary of the first anniversary of the junta’s “white elephant” calf.
The announcement caused shock. Businesses and markets, especially currency-exchange counters, and gold and jewellery shops, shut or suspended operations. The prices of automobiles and commodities also rose over widespread concerns that the introduction of the new banknotes will cause prices to jump.
Gold and jewellery shops, and currency-exchange counters in Yangon, Mandalay and some border towns closed on Sunday, while Hundi money-transfer services suspended services for a few hours.
On Tuesday, some gold and jewellery shops reopened in Yangon, but even most of those that reopened were not selling.
The price of gold rose from 3.2 million kyats per tical (16.3 grams) on Friday to 3.6 million kyats on Sunday, before falling slightly to 3.5 million kyats on Monday. The rate remained the same today.
Gold traders said most shops suspended sales on Sunday and are only buying back previously sold items due to volatile prices.
“We don’t dare to display our jewellery in showcases as any chaotic things could happen,” the owner of a gold shop in Yangon’s Latha Township said. “In this kind of situation, people tend to make panic purchases. Or a riot could also break out if people become frustrated with how hard their daily living conditions are,” the shop owner explained.
With prices rising daily, gold shop owners could face heavy losses within a week if they resumed sales amid intense volatility, she added.
Online Hundi services, especially those that transfer money between Myanmar and Thailand, suspended operations for a few hours on Sunday after the central bank’s announcement filtered through the state-run media. Currency-exchange counters in Yangon shut immediately and most remained closed as of today.
Although, online Hundi and street-side freelancers in downtown Yangon resumed offering currency-exchange services their exchange rates rose. The average exchange rate between the kyat and the Thai baht on Hundi services on Friday was 85 kyats for one baht. As of today, the rate has risen more than 10% to 95 kyats per baht. Although it is illegal, the Hundi service is widely used for cash transfers inside Myanmar and to and from other countries. It is especially popular with migrant workers who remit money to their families.
The market price of the kyat fell from 3,100 to the US dollar on Friday to 3,400 to the greenback today.
Fears that the kyat could be devalued with the introduction of a new, higher denomination banknote are a major cause of the panic, traders and economists say.
Besides hitting gold and jewellery shops, vehicle prices are also surging, traders say. The prices of used cars in Yangon have almost doubled. On Friday, a used 2008-model Toyota Probox was selling for about 23 million kyats on average, but the price has risen to 40 million kyats as of today, dealers said.
The market was shocked by Sunday’s announcement and prices of vehicles are expected to keep rising in the coming days, said a car dealer in Yangon’s Kyi Myin Daing Township.
Owners of big and small businesses, and employees who earn high salaries, fear their kyats held at home or in bank accounts will be devalued and they are rushing to buy gold, foreign currency, and vehicles.
Basic commodities, food and other goods in markets also began rising the day after the new banknote was announced.
Meanwhile, the junta has denied that the new banknote will cause inflation.
Junta spokesperson Major General Zaw Min Tun told state media on Monday that despite price fluctuations after the announcement, inflation is unlikely because only a limited number of 20,000 kyat banknotes will be issued for commemorative purposes.
The new banknotes will only be exchanged for old and damaged banknotes with lower denominations and each person will only be allowed to acquire three 20,000 kyat banknotes.
Economist U Moe said that the release of a new denomination would not be a problem if the junta printed only a limited number of banknotes and distributed them the way it announced it would.
However, people in Myanmar have experienced “juntanomics” before. The term was coined to describe the hyperinflation that resulted from the economic mismanagement of military-installed dictators in Latin America. More recently it has become a hashtag on Twitter to draw attention to the self-serving and inherently flawed economic policies of military-controlled governments from Africa to Southeast Asia, including Myanmar.
Previous military regimes tried to escape budget deficits by excessive printing of cash, U Moe explained, adding that this was done without transparency or awareness of how monetary markets work.
This has been one of the main causes of damage to the economy throughout Myanmar’s history, and it is also why people are afraid the junta will repeat its mistakes, he explained.
“If the junta prints the money it needs, it will definitely have a bad impact on the economy, the kyat’s devaluation will continue and people will have to suffer the burden of this,” he said.