(Analysis) – Over the past year or so, long-time watchers of Burma’s economy have been confronted by an unexpected and unprecedented phenomenon––the rise and rise of the Burmese kyat. It is a currency whose (unofficial) depreciation has been hitherto an all-but sure bet, and which for a time plummeted to the depths of being worth just 1,450 kyats to the US dollar, compared to its fixed ‘official’ rate of around 6 kyats to the dollar. The kyat has appreciated by more than 20 per cent in the last year, and more than 40 per cent from its all time low. Currently valued at around 800 kyats to the dollar, the ascent of the kyat calls for some explanation.
As it turns out though, this is no easy task. Foreign exchange markets everywhere are swayed by a myriad of forces (not all of them rational), and Burma’s unofficial exchanges are buffeted by more uncertainties than most. Nevertheless, we can look at six forces at play:
- The US dollar is falling too. Sometimes forgotten in the debate surrounding Burma’s currency is that it is popularly measured not against some fixed inviolable standard, but a currency (the $US) that itself ‘floats’ on global foreign exchange markets. As such, the movement of the kyat’s value against the dollar is not determined by forces solely pushing the kyat, but also by those acting upon the US currency. So, to what extent is the rise of the kyat just a reflection of the fall in value of the US dollar?
The answer is – quite a lot. Across the same period as the rise of the kyat, for instance, the US dollar has fallen by roughly 10 per cent in value against a representative basket of currencies (as determined by the IMF). Meanwhile, against a ‘commodity currency’ such as the Australian dollar, it has fallen by around 20 per cent. Now the unofficial kyat is only partly a commodity currency (Burma is primarily a producer of commodities and energy like Australia, but the kyat is clearly not anywhere near as liquid as the $A), but we should not be surprised if it at least partially tracks the movements of commodity prices.
The upshot? Perhaps around half of the rise of the kyat represents, in fact, the fall in value of the US dollar against a range of other currencies and commodities.
- Increasing exports have increased the demand for the kyat, pushing up its price. Burma’s official exports increased by 19 per cent across 2010-2011 (that is, April to March). Such exports comprise natural gas, beans and pulses, teak and other hardwoods, fish and fish products, gems, and what is yielded from mining (to name just the most prominent). Most of these products are priced in dollars and other foreign currencies, but their extraction and/or creation requires at least some kyat payments to Burmese workers and others in the supply chain (less so for capital-intensive exports such as gas, relatively more for agricultural commodities).
- Increasing foreign investment has similarly driven demand for the kyat, causing the exchange rate to rise. As widely reported, in recent times there has been something of an upsurge in foreign direct investment in Burma, especially from China. Of course, much of this for the moment reflects investment approvals rather than the actual flow of funds, so the effect of this on the exchange rate is less than it might seem. Similarly, much Chinese investment brings no great demand for the kyat, given the Chinese predilection for using their own currency to pay what in effect are their own suppliers and workers in Burma. Nevertheless, such investment would certainly lead to some ‘leakage’ into increased demand for the kyat, and some increase in its price accordingly.
- Privatization has led to a scarcity of the kyat, increasing its value. This view, popular amongst business people in Rangoon, suggests that the recent prominent sales of state enterprises and buildings (mostly to well-connected cronies) has led to something of a ‘drying up’ of the kyat, and an increase then in its scarcity-value. This argument is, however, only partially convincing. It must be juxtaposed, for instance, against the Burmese government’s continued practice of minting ever greater quantities of kyat to ‘finance’ its budget deficit (such money printing rose by nearly 30 per cent in just the first nine months of 2010/11). More convincing is a related idea––that some of the buyers of state property may have repatriated funds otherwise held offshore to make their (kyat) purchases. It is, however, difficult to say how important this factor might be, since we know little about how the buyers of privatized assets have sourced their payments.
- Burma’s re-emergence as a narcotics producer has pushed up the value of the kyat. Recently the UN’s ‘World Drug Report 2011’ reported that Burma had more than doubled its share of opium production in the past year, while maintaining its position as a significant regional supplier of methamphetamine and other synthetic narcotics. Burma’s role as a drug producer has often resulted in ‘spikes’ in the value of the kyat, the reason being identical to that argued with respect to exports generally (but more so, given that opium is a highly labour intensive business). Mostly these spikes are seasonal (that is, occurring when payments are made to opium farmers and others at harvest), but lingering effects are often identifiable throughout the year.
- Finally, there is a degree of speculation that is lifting the kyat. The rise of the kyat has been prolonged and steep enough to bring about a certain speculative momentum. In other words, we have a situation now where it is likely that some ‘investors’ are buying the kyat purely on the basis that they expect its value will rise, and that they will profit by going ‘long’ in the currency. This effect is very difficult to quantify, but gambling is not exactly an unfamiliar pastime in Burma.
So, such are some reasons as to the ‘why’ of the upward march of the kyat. There could well be others of course, but each of the above are at least plausible individually and, I would argue, compelling collectively.
A final point might be to ask the question of whether the rise of the kyat matters very much. Well, not as much as in most countries, since Burma’s economy is so dominated by the state and its decision-making, but enough to have an impact. Particularly hurt are private sector exporters and tourism operators, whose (mostly) $US earnings are now worth so much less in local currency (in which their costs are primarily met). Likewise, Burmese workers abroad are negatively affected since their earnings sent home yield less kyats than they used to. Of course, normally a rising currency brings benefits too, especially to consumers wanting to buy (now cheaper in local currency terms) foreign imports. But alas, in Burma at the moment it appears that retailers are not passing on their foreign exchange gains (indeed, many reports suggest rising kyat prices for imports), and so the Burmese consumer is yet missing out. This last aspect has a certain familiarity about it. Burma is so often an ‘exception’ to the patterns of standard economics, the costs of which are invariably suffered by its people. In this at least, whatever the value of the kyat, nothing much changes.
Sean Turnell is an associate professor in economics at Macquarie University, Sydney, Australia. He is the author of, 'Fiery Dragons: Banks, Moneylenders and Microfinance in Burma' (NIAS Press).