NOT FOR CITATION

28 October 2010
 Contemporary Parallel Foreign Exchange Market in Myanmar
with Special Reference to the US Dollar and FEC

Since 1977, Myanmar has been sticking fixed exchange rate pegging to the IMF's
special drawing right (SDR) at the fixed rate of kyat 8.50847 or at approximately kyat
6 per US$. Although the country initiated various economic reforms after 1988,
foreign exchange regulation act of 1947 and exchange rate adjustment remained
untouched. Sole movement of foreign exchange regime was, in 1993, introduction of
Foreign Exchange Certificate (FEC) technically equivalent to the US dollar.

Although foreign exchange control act of Myanmar restricts the citizens to hold up
foreign currencies, the US dollar became common currency for economic transaction
as well as a type of property for investment in the private sector after initiation of
reform period. Subsequently, the government pursued deficit budget as well as
applied expansionary monetary policy by setting low interest rates even below
inflation. These policies affected on local currency to depreciate through high
inflation. Since then, Myanmar currency Kyat value has been declining severely from
85 Kyat per US dollar in 1990 average, 450 Kyat in 2000 average, 1150 Kyat in 2005
average, to 1200 Kyat in 2008 average. At those times, US dollar in the international
market is relatively stable.

After world economic crisis of 2008, US dollar which long stands as a leading
international currency turned out to weaken in the world currency market. The
emergence of Euro currency at around 2000 also challenged the status of US dollar.
However, what the United States targets is not European Union but Asia’s emerging
giant economy, China. The United States criticizes China for its artificial devaluation
of Yuan because of huge trade deficit of the great power against China. However, the
US economy including international trade and employment situation cannot recover
as much as expects although China returns to its floating exchange rate system within
certain band. Twin deficits of America, i.e. trade deficit and budget deficit, enforced

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Federal Reserve to print too many dollars, causing inflation and dollar depreciation.
Figure (1) shows dollar value against gold metal within last two decade, in which
depreciation of dollar has begun since before world financial crisis.

Figure 1.  Gold Price in US Dollar Terms (1990‐2010) ($/Ounce) 

1400

1200 Rapid 
Depreciation of 
1000 US$ 
US Dollar

800

Crisis Period 
600

400

200

0
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010
Source: goldprices.com/GoldHistory.htm

As shown in Figure (1), US dollar value in terms of gold metal started to rapid fall in
2006 but dollar appreciated against Myanmar Kyat up to end of 2008. It is because the
inflation or money supply in Myanmar at that time was higher than that of counterpart
countries including the America. Especially huge budget deficit of Myanmar resulted
from accelerated expenditure on infrastructures such as new capital city of Nay Pyi
Taw and expressway has been financed by the Central Bank of Myanmar through
printing money. The situation was reversal after 2008. Much slower speed of Nay Pyi
Taw construction due to completion of major infrastructures, big pushes in
privatization of state-owned enterprises, fuel stations and vacant government
buildings in former capital city of Yangon, successive implementation of auctions for
raided vehicles throughout the country retained Kyat in circulation and reined
inflation as well. Chronic double-digit inflation was pulled down to around 6 percent
in 2009.

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Beyond end of 2008, Myanmar Kyat against dollar can be said appreciation because
the price of one dollar equivalent to Kyat 1280 in 2006 and Kyat 1300 in 2007
declined to Kyat 1190 in 2008 and Kyat 1080 in 2009. Then again, parallel market
rate of a little bit more than Kyat 1000 per US dollar in January 2010 significantly
falls down after August-September. Kyat-Dollar exchange rates within last decades
and during recent period of time are shown in Figure (2) below.

Figure 2.  Kyat‐Dollar Exchange Rate (1999‐2010 September) 

1400

1200

1000

800
Kyat per US$

600

400

200

0
99

00

01

02

03

04

05

06

07

08

09
19

20

20

20

20

20

20

20

20

20

20

ep
ar

‐Ju

l‐S
M

pr
n‐

 Ju
 A
 Ja

10
10
10

20
20
20

Source: Self-Compilation

Recently, dollar value against Kyat has a decreasing trend and reaches to the level at
the time of 2002-2003. Thus, Kyat value can be said currency appreciation upon US
dollar, compared to its bottom during 2006-2007 periods. But Kyat value is far below
them during the country’s economic booming era of around 1997. In fact, it is
questionable whether Kyat value is soundly grateful for the economy or not.

Of course, Kyat currency becomes more valuable against dollar, but its currency
appreciation cannot be applicable to those commodities in the domestic market. For

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example, prices of such commodity/property as rice, edible oil, diesel fuel and gold as
shown in Figure (3) are not necessarily declining but even increasing for certain items
including rice and gold.

Figure 3.  Price Trends of Selected Commodities and US Dollar in Domestic Market 

7000
6500
6000
5500
5000
4500
4000
K yat

3500
3000
2500
2000
1500
1000
500
0
2009 2010 2010 2010 2010 2010 2010 2010 2010 2010
D ec J an F eb Mar A pr May J un J ul A ug S ep
U S $   (K y a t  p e r  $ ) R ic e   (, 0   K y a t  p e r  b a g )
P e a n u t  O il  (K y a t  p e r  vis s ) D ie s e l  F u e l  (K y a t  p e r  g o lla n )
G o ld   (, 0 0   K y a t  p e r  tic k le )

Source: Various Domestic Journals and Self Compilation

While there is deflation in dollar currency market, other commodity market has more
or less inflationary pressure but it is rather moderate with compared to the past
experiences. More than 20 percent of change of CPI in 2008 went down, as mentioned
above, about 6 percent, and it is expected to be around 10 percent in 2010 as well.
Maintaining low level of inflation is desirable but local currency appreciation is
controversial as it is closely related to the export promotion and then balance of
payment status. The impact of Kyat value increase will be analyzed later part of this
study.

As an alternative point of view, local currency appreciation in terms of dollar value is

to be explained by focusing international foreign exchange market. So far, dollar

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exchange rates in terms of developed economies’ currencies such as Euro (EU
countries), Pound (Britain), Yen (Japan), Won (South Korea), and Sing Dollar
(Singapore) as well as Asian emerging economies’ currencies such as Yuan (China)
and Baht (Thailand) are investigated to assess the status of great power’s currency
during past some one and half year. Given May 2009 as the based period by setting
100 point for each of the other countries’ exchange rate against one US dollar, the
changes of exchange rate index are disclosed in Figure (4) as follow.

Figure 4.  Changes of Exchange Rates (per US$) Index of Selected Currencies   
    (Base Period: May 2009=100) 

Source: exchangerate.com

It is very clear that US dollar value has been declining since mid-2010, as shown in
above figure, against other currencies of developed economies as well as emerging
Asian economies. The United States has worrisome about trade deficit and stagnation
of the economy so that, according to the Wall Street Journal, the Federal Reserve is

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planning for additional purchases of U.S. Treasuries in order to stimulate the economy
and export sector through inflation drive. It is natural that the economies prefers
inflation and deathly afraid of deflation.

In fact, under siege of the US dollar is not the problem of the United States but the
other countries. At the IMF meeting during early this October, there was talk of
currency war. Thailand has approved measures to encounter rapid rise of Baht. Japan
said it is monitoring and will take action if needed. Brazil complained the U.S
economic policies. Because dollar is probably reserve currency all over the world,
many countries and people suffer losing of purchasing and living standard from dollar
depreciation. Due to rapid decline of dollar value, central banks and people began to
sell out dollar holding in their hands and turn to buy gold as a hedge, and it
contributed further depreciation of dollar and further rise of gold price.

Certainly, rapid increase of Kyat value against dollar is or may be problem for the
economy of Myanmar as well. Very recently, dollar depreciation discourages export
activities. Myanmar’s trade policy links import to the export. It means that all imports
are eligible only by using export earnings after tax deduction. Since foreign currencies
(mostly US dollar) in terms of export earning have import rights, there are earning
exchange rates occurring in the market, which are naturally higher than any other
exchange rates. Dollar in the form of export earning with higher value than ordinary
US dollar makes incentives for export promotion. Currently, export earning rates have
been decreasing and it significantly affects on exports.

While the US dollar in the international market started to decline in the mid-2010,
Myanmar government relaxed income of service fees as the export earnings in June
2010. Since then, all foreign exchange earners deposit their income in the banks and
convert into exchange earnings after deduction of 10 percent tax. Meanwhile, many
local entrepreneurs are scaling down their businesses to watch and see the climate of
November election, and Myawaddy-Mae Sot border check point which is the second

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largest trade route among border trade has been shut down for months. As overall
economy of Myanmar is likely stagnated, import demand becomes to fall. Over
supply of export earnings associating with contracted demand pulls down the price of
export earnings. Handicapped export earnings reach to its recorded bottom even
below ordinary dollar value. According to the prevailing parallel market exchange
rates in the early September 2010, export earning was Kyat 895 per dollar while
ordinary dollar was Kyat 900. Rice exporters are still conducting their export
activities but they have to try hard to meet break-even points. However, fishery
businesses delay their exports and negotiate to reduce export price identification with
respective authorities and to raise price offer with buyers.

Another impediment in the economy is creation of Foreign Exchange Certificate

(FEC) which was initiated in 1993. The FEC is used by some countries such as Soviet
Union, China and North Korea but FEC in these countries is a proxy for their national
currency, not for a foreign currency. Myanmar’s case is very different from these
countries’ experiences. Since Myanmar FEC is pegged to the US dollar, value of all
certificates in circulation needs to have dollar back-up. However, both citizens and
foreigners in Myanmar have worrisome on FEC and its back-up currency because it is
impossible in the banks to convert into dollar although officially pegged so. Very first
election within two decades and possible of new government make blur the people
upon FEC as an issue in the economy. The concern driving people to give up FEC,
associating with the fall of US dollar value, demolishes FEC exchange rates as shown
in Figure (5).

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Figure 5.  FEC Exchange Rates (1999‐2010 September) 

1400

1200

1000
K yat per F E C

800

600

400

200

p
ul
an
99

00

01

02

03

04

05

06

07

08

09

e
 J
 A
 J

 S
19

20

20

20

20

20

20

20

20

20

20

10
10

10

10
20
20

20

20
Source: Self Compilation

Dropping speed of FEC exchange rates are faster than that of green back and export
earnings. FEC value is lower as much as 10 to 12 percent than US dollar value.
Indeed, FEC is directly pegged to the US dollar but its exchange rate does not
necessarily depend on dollar at all. Instead, it depends on the government policy. This
time is not the first experience in which FEC value declines in a rapid phase. When
cyclone relief aid in terms of foreign currencies (i.e. US$, ¥, €, S$, etc) came into the
country’s foreign exchange authorized agency namely Myanmar Foreign Trade Bank
(MFTB) after devastation of Cyclone Nargis in May 2008, the bank reissued equal
amount of this foreign aid in the form of FEC. These FECs were then to be converted
into Kyat in order to pay out local expenses in the country. At that time, the
certificates were worth as much as 25 percent less than the market value of its back-
up currency, US dollar. Because of several complaints about this issue, the
government favoured the FEC by offering the right to purchase diesel fuel from the
state-owned fuel stations. At that time, fuel supply was monopolized by the state and
was under rationing system. Due to the government’s policy change, FEC exchange
rates suddenly bounced back and even passed over dollar rates.

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It is not surprising that the US dollar has continued its decline against the world's
major currencies so that Myanmar Kyat value easily followed them. However, apart
from the decline of US dollar itself in the international market, there are the other
causes of Kyat appreciation due to the domestic market situations. The first cause is
contraction of Kyat currency circulation in the country due to retaining by the
government by mean of privatization of fuel stations, public works such as road
construction and toll gate services and public infrastructures such as ports and
container terminals; issue of Treasury Bonds; transfer of public buildings in Yangon;
and successive auctions of seized automobiles throughout the country. The second
cause is higher foreign exchange accumulations from FDI in resource extractions and
power generation (especially from China), net savings of natural gas exports which
was previously injected into Nay Pyi Taw construction in huge amount but much slow
tempo at present, and probable receives of jade and gem emporiums. Rumors also
whispered in the market that recent new bank owners and winners of auctions of
public properties sold out enormous amount of foreign currencies in their hands. At
the same time, the government tenders for its various departments disburse all
procurements in foreign currency. The third cause may be shift of hoard areas from
the US dollar to the gold, because of annoying further depreciation of US$. Finally,
the fourth cause is stagnation of domestic investment and consequent decline of
import demand by the local businesses in order to look at coming election. Of course,
closure of Myawaddy-Maesot border point effects on bilateral trade but importers
choose trade diversion by using Kawthaung-Renong check point and Three Pagoda
border pass.

At the present time, foreign exchange earners, especially exporters, have a great hope
for the change after election. In fact, if one looked at regional foreign exchange
market, rapid appreciation would be Japanese Yen followed by Thai Baht and
Singapore dollar against US dollar. Taking 11 May 2010 as a base, changes of dollar

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exchange rates for selected currencies including Myanmar Kyat for about six months
to 26 October 2010 is illustrated in the Figure (6).

Figure 6. Change of Exchange Rate Index for Selected Currencies (11 May to
26 October 2010) (11 May = 100)

109
107
105
103
101 KRW
99 JPY
97 S$
95 T HB
93 MMK
91
89
87
85
6 / 8/20 10
6 / 5 /2 1 0

7 / 3 /2 1 0

8 / 0 /2 1 0

9 / 4 /2 1 0
5 / 8 /2 0 1 0
6 / /2 0 1 0
6 / /20 0

6 / 2 /2 1 0
7 / /2 0 1 0
7 / 6/20 0

7 / 0 /2 1 0
8 / /2 0 1 0
8 / 3/20 0

8 / 7 /2 1 0
8 / 4 /2 0 1 0
9 / /2 0 1 0
9 / 7/20 0

9 / 1 /2 0 1 0
1 0 8 /2 1 0
1 0 /5 /2 0 1 0
1 0 1 2 /2 0 1 0
1 0 1 9 / 0 10
6 / 10
10
25 1

29 01

27 01

31 1
1 0

2 0

2 0

1 0
2 0

2 0

/2 2 0
20
5 / 1 /2

1
1

2
5/

/
/

Source: exchangerate.com for KRW, JPY, S$ and THB; self compilation for MMK

Within this currency shock period, Myanmar Kyat appreciated abut 11% while
Japanese Yen 12%, Thai Baht 7%, Singapore dollar 6% and Korean Won 1% against
American dollar. Twin scenarios are to be expected for Kyat exchange rate in the
post-election period: trade liberalization with cancellation of FEC on one hand and
rapid FDI inflow on the other hand. When internal trade is more deregulated, the
higher imports will raise demand for UD dollar and Kyat currency will depreciate. In
contrast, when foreign investors have a good view on investment climate of the

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country after election and wide inflows of FDI is possible, extra supply of foreign
currency will push up again the value of Kyat currency.

All in all, Kyat currency appreciation is not working in the commodity market but in
the foreign exchange market, particularly against dollar and FEC. National currency
appreciation discourages export activities through lesser price competitiveness in the
world market but encourages imports with relative lower price. While maintaining
esteemed Kyat value and being unable to control exterior affects of US dollar
depreciation, this is a good to support imports of necessary capital goods and
appropriate technologies aiming to promote various productive sectors for the country
as a whole.

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References

- Connie Madon, “Is the US trying to devalue the dollar?”,

www.bloggingstocks.com/2010/10/13/is-the-us-trying-to-devalue-the-dollar/
accessed on 17 October 2010.
- Gold Price History, www.goldprices.com/GoldHistory.htm, accessed on 17
October 2010.
- Khine Tun 2009, “The Case for Exchange Rate Unification I Myanmar”,
Economic Development in Transition Period of Myanmar”, Chulalongkorn
University Printing House.
- Plim Report, “What does the USA dollar devaluation mean to you?”,
www.plim.org/01%20usa_dollar_devalua.htm accessed on 18 October 2010.
- The New Light of Myanmar (various issues)
- The Voice Journal (various issues)
- Weekly Eleven Journal (various issues)
- Yangon Time Journal (various issues)
- www.exchangerate.com

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