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The Burmese government will soon terminate its use of foreign exchange certificates (FEC) in favour of streamlining the country’s complex currency system, Information Minister Kyaw Hsan has said.
“In the future there will be no more FECs, just [Burmese] kyat and foreign currencies”, the minister told a press conference on Friday last week.
The system, which came into being in February 1993 after Burma’s first attempt to open up its economy, was an attempt to maintain government control over foreign currency exchange in order to help service its debt. It also looked to simplify Burma’s complex and convoluted multiple exchange rates which have plagued the country and its economy.
The certificates were traded at the rate of one FEC for one US dollar, and also sought to stem rampant inflation in the country that was partly induced by a lack of foreign currency reserves. This had necessitated the printing of more money.
The vouchers offered exchange rates above the official, but unrealistic, exchange rate: the government pegs the Burmese kyat at six to the US dollar, while FECs brought that up to around 450 kyat to the dollar. The real exchange rate however had hovered at around 1,000 kyat to the dollar, but in recent months has dropped down to as low as 750 kyat.
There is yet no indication of what rate the relevant banks will offer for one FEC, an issue which Australian economist Sean Turnell said could give clues to any future pegging of the currency, if as has been hinted there will be an attempt to unify the multiple exchange rates.
Two major factors have come about to drastically change the landscape of Burma’s currency: the first has been the massive reduction in the value of the dollar, through quantitative easing and economic problems in the US.
The second has been a surge in foreign currency reserves of the Burmese government from increased gas and natural resource exports, commodities that have seen prices rise internationally. Its privatisation drive over the last year has also seen Burmese business people move overseas money back to the country as they sought to buy up privatised assets.
“Burma’s foreign exchange and foreign reserves position is dramatically different to when it first introduced the FECs,” Turnell told DVB. “At that time it had barely two months import cover and so was doing everything it could to squirrel away foreign currency.”
This has drastically increased the value of kyat by around 20 percent, according to The Economist, making it the best performing currency in Asia.
But this has caused serious problems for Burma’s exporters, particularly in areas like garments. Similarly, it has reduced the price that agricultural commodities are sold on the domestic market as they are no longer competitive exports, pushing prices down and farmers into debt.
All this has prompted the government to reduce export tariffs over the last few months, from 10 percent to 7 percent in June and then today cut again to two percent for at least six months, according to Reuters. The reductions however were only for certain categories largely agricultural commodities such as pulses and sesame. This did not include the key garments sector and as Myint Soe, a vice-chairman of the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI) lamented to Reuters: “It’s a pity the latest measure does not cover some other important export items like garments and wood products.”