This space in BEW is devoted to economic questions of immediate interest for current advocacy. In this first issue, we’d like to highlight the crisis that is rapidly descending upon Burma’s Foreign Exchange Certificates (FECs) system.

FECs were established by Burma’s military regime in 1993. Originally created as a means by which tourists could avoid having to purchase the Kyat (Burma’s near-worthless official currency) at the grossly overvalued official exchange rate, FECs were sold against foreign currency at an exchange rate that approximated that prevailing in the free market. Each FEC was nominally worth US$1. In order to create confidence in what was, in effect, a new currency, the regime maintained that each FEC was ‘backed’ by reserves of its US dollar equivalent. In December 1995 the regime declared that FECs could be exchanged for Kyat as well as foreign currency – making them the internal currency of choice for many locals too.

The value of FECs critically depends on confidence. Confidence that the regime has sufficient foreign currency to back them, confidence that the regime has not employed the printing press for FECs in the way that they do for the Kyat. At many points over the last eight years, this confidence has been undermined by Burma’s chronically low foreign exchange reserves and the suspicion that there were indeed too many FECs around. For some time, FECs have traded at a discount (at present around 25%) against their face value.

(In US$ millions. Source: IMF and BEW calculations)

Now matters are much worse. Burma’s foreign exchange reserves (above) remain critically low, but the situation has approached meltdown as a result of a recent decision by the regime to bribe its officer class. This bribe came in the form of a declaration in January of this year that henceforth military officers are to receive half of their pay in the form of FECs. An attempt to buy off trouble by giving sections of the military a hedge against inflation and the falling value of the Kyat, it is an implicit recognition that inflation in Burma (the measure by which purchasing power is decreasing) is catastrophically beyond the levels officially reported.

As shall be examined in BEW, this move will not likely succeed, given the very low levels of Burma’s foreign reserves. Amidst speculation that FECs are soon to be abolished because of the discrepancy between issue and reserve-backing, U Than Lwin, Deputy Governor of the Central Bank of Myanmar (CBM), said recently that ‘FECs are fully backed by the Central Bank against the acquisition of US dollars, and even if they were to be withdrawn, the bank would hand out the greenback equivalent’.[1] An implausible assertion in the view of BEW.

Notwithstanding the assurances of the Deputy Governor, and adding to the sense of crisis in the FEC system, the CBM announced in June that it was revoking the licences of all 10 of the existing money-changers authorised to sell FECs. These are to be replaced by 5 new operators (two of which are the junta-owned Myanmar Economic Holdings and the Myawaddy Bank) who will be required to report all of their deals on a weekly basis to the Department of Foreign Exchange Management. The CBM has established buying and selling rates of FECs at 490 and 500 Kyats respectively to $1US.

Meanwhile the Kyat continues its slide into almost complete worthlessness, recently recording an all-time low free market rate of over 800 to $US1. It is worth remembering that the ‘official’ exchange rate is around 6 Kyat to $US1.

As BEW was going to press, the Burmese regime announced that it was ordering all licensed money-changers to reduce the price of FECs to 450-460 Kyat to $1US.

Lenin once famously observed that the best way to bring down a political system was to debauch the currency. Burma’s military regime has now managed to debauch two. Its fall surely cannot be long postponed.

BEW Comment, June 2001