BURMA: FEC CONTINUES TO DEPRECIATE; NGOS, UN LOSE

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000596 SIPDIS STATE FOR EAP/MLS, INR/EAP DEPT PASS TO USAID/ANE, USAID/OFDA PACOM FOR FPA TREASURY FOR OASIA E.O. 12958: DECL: 07/28/2018 TAGS: EFIN EAID ECON PREL PGOV BM SUBJECT: BURMA: FEC CONTINUES TO DEPRECIATE; NGOS, UN LOSE REF: A. RANGOON 592 ¶B. RANGOON 137 RANGOON 00000596 001.2 OF 003 Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4 (b and d) ¶1. (C) Summary. Burma's Foreign Exchange Currency (FEC), which should have 1:1 parity with the US dollar, continues to depreciate against the dollar. Historically, the FEC/US dollar exchange difference has averaged 50 kyat; the current difference is currently more than 250 kyat. Since May, the FEC value has dropped from 1080 kyat to 880 kyat, a 19 percent decline. During the same period, the US dollar has appreciated from 1115 to 1175 kyat per dollar. Depreciation is due to supply and demand: as more dollar-denominated humanitarian assistance flows into Burma, which can only be withdrawn from Burmese banks in FEC, the supply of FEC in the market increases, lowering its value. At the same time, the drop in tourism due to monsoon season means there are fewer dollars in the market, increase the kyat value of dollars. The continued FEC depreciation affects the ability of international organizations to operate in Burma, as well as reduces the value of assistance they can offer to Cyclone Nargis victims. The Burmese Government profits from the FEC/Dollar exchange difference, since they keep the dollars while issuing FEC, an intrinsically worthless piece of paper. Businessmen estimate the GOB has earned more than $10 million since May. End Summary. FEC Depreciating Daily -------------- ¶2. (SBU) Under GOB foreign exchange rules, organizations operating in Burma can only use local currency, either kyat or Foreign Exchange Currency (FEC). The GOB created the FEC valued at one US dollar to permit people inside Burma to engage in dollar transactions and encourage people to deposit their dollars in GOB banks. Organizations can bring in foreign currency if they have a dollar account with the Myanmar Foreign Trade Bank (MFTB). However, upon fund transfer, the MFTB will convert the foreign currency into either FEC or kyat at a predetermined exchange rate. Per GOB regulations, for international organizations, including Embassies, UN agencies, and NGOs, one FEC is equivalent to 450 kyat (For more on Burma's exchange rates, please see Ref B). Even if organizations have a GOB permit to hold dollars, they cannot withdraw dollars directly from MFTB, only FEC. ¶3. (SBU) Despite the GOB's claim that one FEC is worth one US dollar, in reality, the FEC/kyat exchange rate has always been less than the dollar/kyat exchange rate. Historically, the exchange difference between FEC and US dollars has averaged 50 kyat. On April 28, one FEC was worth 1080 kyat; one US dollar was worth 1115 kyat. However, one week after Cyclone Nargis devastated Burma and NGOs and international organizations began receiving humanitarian assistance, the exchange difference between the FEC and dollar increased to 130 kyat on May 8. The value of the FEC continues to depreciate vis-a-vis the US dollar. As of July 28, one US dollar was worth 1175 kyat, while one FEC traded for 915 kyat, a difference of 260 kyat. Since May, the FEC has depreciated approximately 19 percent, a 16 percent decline compared to last year's rate. GOB the Only Winner -------------- ¶4. (C) The growing FEC/US dollar exchange rate differential RANGOON 00000596 002.2 OF 003 affects the operational ability of international organizations and undermines humanitarian relief and recovery efforts, NGOs and UN agencies heads lamented. During a recent trip to Burma, UN U/SGY for Humanitarian Relief John Holmes informed senior officials that the continuing depreciation of the FEC had reduced the overall value of humanitarian donations by more than 20 percent in real terms (Ref A). Save the Children Deputy Director Guy Cave opined that the exchange rate difference acts as a de facto tax on any money coming into Burma. If the FEC continued to depreciate, NGOs would be unable to implement planned programs and would have to request additional funding from donors, he noted. ¶5. (C) The declining exchange rate affects all sectors. Several of our small grantees have complained about the FEC rate, requesting for additional funds to cover their program costs. Without extra funds, many of the small grantees may be forced to cut parts of their program or shorten its duration. We have observed many Burmese companies refusing to accept FEC, instead soliciting payment in either kyat or dollars (even if they lacked a permit to hold dollars). When asked why, they noted that the expanding FEC/US dollar exchange difference hurt their profitability. Several NGO staff members have lamented that their previously high salaries - paid in FEC - can no longer cover their bills. While most businesses have not increased employee salaries, some have provided additional incentives - transportation and food costs - to help offset the effects of the FEC depreciation, City Mart owner Win Win Tint told us. ¶6. (C) The sole winner of the FEC's depreciation is the Burmese regime, businessmen and NGO partners told us. By converting dollars into FEC, the GOB keeps the dollars and makes a sizeable profit by buying kyat and then converting the kyat back to FEC. Additionally, by exchanging FEC with US dollars, the GOB is able to hold on to hard currency, bolstering its foreign exchange reserves. While no one knows exactly how much the GOB has earned from the FEC exchange rate, businessmen estimate it to be more than $10 million, based on the amount of humanitarian assistance that has entered Burma in the past two months. Why is the FEC Depreciating? -------------- ¶7. (C) According to money changers, the depreciation of the FEC is due primarily to the increased supply of FEC and decreased supply of US dollars in the market. Historically, the value of the US dollar vis-a-vis the kyat appreciates during Burma's monsoon season (May-October),as there are fewer tourists bringing dollars into Burma. This year is no exception, and the recent cancellation of traditional European tours to Burma (to be reported septel) means that the US dollar should continue to appreciate during the next few months. As more humanitarian assistance flows into Burma, the supply of FEC in the market will continue to increase, reducing its value. U Soe Win of Myanmar Vigor Consulting Company told us that the FEC devaluation will continue for at least the next six months, as relief efforts continue. ¶8. (C) U Soe Win also told us of his suspicions that the GOB was printing additional FEC and kyat without taking older money out of the money supply. Indeed, new FEC and kyat bills have been readily available for the past two months. The additional FEC in the money supply would further drive down the exchange value, he noted. Several businessmen told RANGOON 00000596 003.2 OF 003 us of rumors that the Burmese Government plans to eliminate the FEC in the near future. People with FEC were selling it in an effort to maximize exchange, they noted. While there is no evidence that the GOB will eliminate the FEC, as more people sell their FEC for kyat, the supply of FEC in the market increase, resulting in further devaluation of the currency. ¶9. (C) Economic sources also report that the GOB is manipulating the exchange rate for its own purposes. On July 22, the day U/SGY Holmes arrived in Burma, the FEC rate increased from 880 kyat to 950 kyat. Money changers told us that military-owned Myanmar Economic Holdings Ltd. purchased FEC on July 21, only to sell it on July 23. GOB officials highlighted the temporary appreciation of the FEC as evidence that the situation would improve, Caves told us. Comment -------------- ¶10. (C) The depreciation of the FEC will remain a serious issue as long as Cyclone Nargis relief efforts continue. Although the UN will request that the GOB allow international organizations and NGOs to withdraw relief funds in US dollars rather than FEC, the regime is unlikely to approve this request. The IMF, during its annual Article IV consultations, regularly raises the issue of unifying the exchange rates, which falls on deaf ears. The reason the GOB resists exchange rate unification is because they have been profiting handsomely from the current confusing system. VILLAROSA