Time to Set the Kyat Free
By Sean Turnell 9 July 2015
Much excitement, and no little panic, has accompanied the recent fall in value of the Burmese kyat. Down around 13 percent this year, and 26 percent since the instigation of the “managed float” arrangements in 2012, the decline in the kyat has also brought with it a return of many of the economically repressive impulses of the old regime—commands, controls, restrictions, rationing—and even the arrest of some of those pesky informal foreign exchange dealers.
In the view of this author, all of this is misplaced. The falling exchange rate of the kyat is not, in itself, a problem—and certainly not a reason for the return of a mindset that for fifty years ground Burma’s economy into penury.
Exchange rate fluctuations naturally accompany managed float regimes and reflect changes in economic fundamentals, in sentiment, and a whole range of matters that routinely drive “prices” in a market economy.
Thus exchange rate movements are sometimes a barometer of how a country is faring, but equally they move in response to factors beyond a country’s control such as fluctuations in the prices of its principal exports, imports and so on.
In Burma’s case, the country has relatively high inflation, and the prices of its commodity exports have fallen. Meanwhile, global insecurities have driven something of a flight to the US dollar, causing the exchange rates of most countries to depreciate against it. In this environment, a fall in the exchange rate of the kyat might be expected and, ordinarily, welcome.
Why welcome? A lower exchange rate makes Burma’s exports cheaper (and thus more competitive in international markets) and has a similar effect for the country in terms of being a favored location for foreign investment.
Of course, imports become more expensive for the same reason. This has some negative aspects (higher imported input costs primarily) but equally “protects” domestic producers by allowing them to also be more competitive against foreign suppliers.
It is true that a lower exchange rate increases the domestic currency value of foreign currency debt but in aggregate, Burma has little of this (even as some individual “crony” firms are exposed in this manner—which might go some way to explaining the current panic in some circles).
Burma is a low-cost labor location, but in other ways, including relatively high inflation rates and higher costs from degraded and inefficient infrastructure, it is at a cost disadvantage vis-à-vis rival investment locations such as Vietnam, Laos, Cambodia and so on. A lower kyat helps compensate for these costs and risks and so evens up the score a little.
An instructive example of the potential benefits of a lower exchange rate here is the case of Australia. The fall of the Australian dollar (down 25 percent against the $US since 2012, and 13.5 percent since the start of 2015) tracks almost precisely the downward movement of the kyat. Yet, this has been the cause of much relief in Australia rather than angst.
Compensating for lower commodity prices (exports priced in $US now have a higher $A value), mainly from a slowing China, the fluctuating $A has effectively shielded the Australian economy (now, and on numerous prior occasions) from international downturns and volatility.
A Reversion to Command and Control
But if a falling exchange rate is no bad thing, this does not mean that this most recent episode of kyat decline has been met with relief, or even equanimity, in government circles. Rather, an air of crisis, panic, and impulsive reversion to old measures of command and control have been the order of the day.
Instead of letting the kyat fall in the market, and in this way allowing a “price” (exchange rate) that brings kyat demand and supply into equality, the monetary authorities have intervened in the market in the ways of old.
Declaring an official exchange rate (currently hovering around K1,100: $US1) that is above that prevailing in the free market, they are artificially creating an excess of demand for $US over supply, leading to shortages of that currency and restrictions on how much of it can be withdrawn from banks: at present, up to $US5,000 per transaction, with a maximum of two transactions per week.
These restrictions are in place even for designated foreign currency accounts and apply both to individuals as well as large corporations—the latter aspect leading to very significant difficulties for foreign investors, especially in meeting payroll and other routine payments. But whatever the activities and access being blocked, the message sent is that once again Burma’s financial sector is riddled with broken contracts, doubtful property rights and inherent instability.
Naturally, the “black market” for foreign currency has also been reinvigorated from all of this, alongside an “informal” exchange rate at growing variance to the official rate. Into this market have poured speculators, not the least of which are Burma’s own banks.
In short, what is fast being created amounts to Burma’s old monetary regime; parallel markets and multiple exchange rates, while speculators, spivs and connected entities profit from the chaos.
What Needs to be Done?
Burma’s exchange rate problems have their own Gordian Knot solution, just waiting to be cut simply by holding the current government to its commitment of allowing the kyat to float. A genuine managed float in which government intervention is limited and rare, would see the kyat fluctuating according to fundamentals and circumstances and would no longer be a vehicle for rent-seekers and speculators to make one-way bets against the public good.
No exchange rate regime is without risk or cost, but a genuinely managed floating exchange rate regime’s costs are transparent and, given reasonable development of Burma’s financial sector, insurable against by real traders and investors.
Of course, with access to the formal foreign exchange markets long denied them, most people in Burma have long lived with the informal exchange rate. Properly floating the formal exchange rate will simply bring the informal and formal exchange rates and markets back together—precisely the stated intention back in 2012, but undone in 2015.
Burma’s Central Bank has some very capable people (especially at the Vice-Governor level). Nevertheless, at present Burma’s monetary authorities, in the broadest sense, lack the capacity to properly operate and police an administratively intensive and corruption-inducing quasi-fixed exchange rate arrangement.
We have seen this movie before. Time now to really set the kyat free.
Sean Turnell is Associate Professor in Economics at Sydney’s Macquarie University.