UNDERSTANDING BURMA'S EXCHANGE RATE SYSTEM

UNCLAS SECTION 01 OF 03 RANGOON 000137 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/MLS, EEB/IFD/ODF PACOM FOR FPA TREASURY FOR OASIA:SCHUN E.O. 12958:N/A TAGS: ECON EFIN PREL BM SUBJECT: UNDERSTANDING BURMA'S EXCHANGE RATE SYSTEM RANGOON 00000137 001.2 OF 003 ¶1. (SBU) Summary. Although the Burmese Government maintains an official exchange rate at 6 kyats to $1, in reality, Burma has a multiple exchange rate system. Exchange rates vary from 450 kyats to $1 to 1255 kyats to $1, depending on the transaction. Because the official exchange rate overvalues the currency by more than 20,000 percent, most transactions are done at the market rate (currently 1160 kyats/$1),although the GOB requires that foreigners and foreign companies must pay all bills and taxes at the official rate. Burma's lack of a clear exchange rate policy significantly impedes economic growth and investment. End Summary. Overvalued official exchange rate -------------- ¶2. (U) Although the official currency of Burma is the kyat, the government also issues Foreign Exchange Certificates (FEC),which have a value equivalent to the U.S. dollar. The Burmese Government introduced the FEC in 1993 to promote tourism and until recently required that all foreign tourists convert at least $200 into FEC upon entry into Burma. In 1977, the Burmese Government officially pegged the kyat to the IMF's Special Drawing Rights (SDR - an international reserve asset) at a rate of 8.5 kyat to 1 SDR. Accordingly, it also pegged the kyat to the U.S. dollar at a 6 kyat to $1 rate, although GOB regulations state that the official rate for foreign currencies including the U.S. dollar, yen, pound sterling, and Euro are determined on the basis of daily calculations of the values of the currency against the SDR. There is no official kyat/FEC exchange rate. ¶3. (SBU) According to the IMF, the GOB's official exchange rate is overvalued by approximately 20,000 percent. As a result, an unofficial multiple exchange rate system exists, where people trade foreign currency or FEC for kyats at the market rate, currently 1160 kyats/$1 or 1160 kyats/1FEC. During the annual IMF Article IV meetings in September 2007, the IMF urged the GOB to adopt a unified exchange rate system to correct distortions in the market economy. The Burmese Government has made no efforts since then to unify the exchange rate system, claiming that the change would disrupt Burma's fragile economy. Various Exchange Rates -------------- 
¶4. (SBU) Although the GOB will not admit that the official exchange rate is overvalued, it has established additional exchange rates policies for specific transactions. Additionally, it condones the use of the market exchange rate, allowing money changers to operate with relative freedom throughout the country. The official exchange rate only applies to the public sector and is used primarily for accounting purposes, IMF reports explain. According to business and banking contacts, there are now eight informal exchange rates: --Greenback rate: Although Burmese people are not allowed to hold or keep foreign currency per the Foreign Exchange Regulation Act of 1947, many Burmese do so because of the foreign currencies' relative strength to the kyat. There are approximately 10 wholesalers of FEC and U.S. dollars in Rangoon, and approximately 70 brokers who will change money at the market rate. As of February 21, the greenback rate was K.1160/US$. Brokers prefer new, unwrinkled $100 bills to other dollar notes and may give a lower rate for older, wrinkled bills. Falling prey to urban myths, many retailers and brokers will not accept any bills that have a small tear or mark on them, nor any with the "CB" serial code, allegedly because they believe it stands for "Counterfeit Bill." --FEC Rate: The GOB pegged the FEC to the U.S. dollar at a one to one ratio. However, the FEC often has a lower real value on the market, due to high demand for U.S. dollars. Some traders engaged RANGOON 00000137 002.2 OF 003 in arbitrage, earning money off the exchange rate difference between the FEC and U.S. dollars. In recent weeks, the FEC has appreciated against the U.S. dollar because of the dollar's weak value on the world market. As of February 21, the market exchange rate of FEC was K.1160/FEC. --Theinbyu counter rate: The GOB allows select private companies, including state-owned Myanmar Economic Holdings Ltd, foreign embassies, and international organizations, to buy U.S. dollars and FEC from a shop on Theinbyu road in Rangoon. The Theinbyu counter rate is set at K.450 per U.S. dollar or FEC. --Export earning rate: This rate is only available to local companies that earn U.S. dollars by exporting. In Burma, a company cannot import products unless it has export earnings. As a result, there is a high demand for export earnings, and the GOB limits the amount of export earnings a company can hold. Companies with export earnings transfer the dollar amount to importers at the export earning rate. There is no set exchange rate for export earnings, as the exporter and importer negotiate the rate for each transaction. As of February 21, the export earnings rate averaged K.1255/US$. --Dollar Transfer rate: This is the market rate for U.S. dollars earned locally by staff of international organizations or companies that conduct business with foreigners within Burma. Dollars earned domestically are not considered export earnings, and thus do not command as high of an exchange rate. As of February 21, the D-Transfer rate was K.1150/US$. --Seamen earnings rate: The GOB considers salaries earned by crewmen who work on foreign ships to be export earnings. However because crewmen must fill out complicated paperwork to remit money or sell dollars as export earnings, most crewmen do not exchange money in Burma. Instead, many remit money to Burma using the unofficial hundi system (to be reported septel). As of February 21, the market rate of seamen earnings was K.1255/US$. --Hundi rate: Because of banking restrictions and a general mistrust of banks, many Burmese citizens and foreign companies remit money through the informal hundi system. Through this system, money can be sent to and from Burma through both domestic and overseas brokers. As of February 21, the Hundi rate for remitting money to Burma was K.1255/US$ and K.1250/US$ for remitting abroad. --Customs informal rate: According to the Burmese Customs Department, the GOB established a customs valuation rate of K.450 per $1 in 2004 for imports into Rangoon. For border trade, the customs valuation rate varies from K.850 to K.1,200 per $1, depending on the product and the product's origin. Using Exchange Rates as a Tax -------------- ¶5. (SBU) The GOB requires that foreigners pay all bills, including telephone, rent, and hotel fees, in either dollars or in kyat at the official exchange rate. Additionally, foreign-owned companies must pay a 10 percent tax on all earnings, calculated using the official exchange rate. As a result, it costs substantially more for foreigners and foreign companies to do business in Burma than do local entrepreneurs. ¶6. (SBU) The Burmese Government also uses the official exchange rate to tax companies when State-Owned Enterprises purchase foreign exchange at the official rate rather than the market rate. Although private companies avoid financial transactions with SOEs, at times, the GOB will call on a company and "suggest" that it sell its export earnings to a SOE. By allowing SOEs to purchase foreign exchange at the official rate, the GOB implicitly subsidizes the state-owned RANGOON 00000137 003.2 OF 003 enterprises, putting more money in its own pockets. Although the IMF argues that the GOB's actions hinder economic growth by distorting production, consumption, and investment, the GOB continues to use the multiple exchange rate system to its own advantage. Comment -------------- ¶7. (SBU) The senior generals lack any understanding of basic economic principles, resulting in continued mismanagement of the economy. The regime's arguments that unifying the exchange rate system would disrupt Burma's economy" are flawed, as the private sector, which accounts for 90 percent of the economy, already operates in a market rate system. In reality, the GOB does not want to change the multiple exchange rate system because it utilizes it for its own advantage, employing the official exchange rate as a defacto tax on foreigners and companies. While foreigners are paying more to subsidize the government, the senior generals and cronies maximize their personal profits by buying buy dollars at the official exchange rate. While the Burmese struggle to survive on just a $1 a day, the regime manipulates the economic system for its own financial benefit. VILLAROSA