Foreign Exchange Certificates -- Wh

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Subject: Foreign Exchange Certificates -- Who Really Benefits? 

Foreign Exchange Certificates -- Who Really Benefits? 
By Kyi May Kaung 

Visitors to Burma notice that everyone, even trishaw peddlers, want to be
paid in U.S. dollars -- or coupons called FECs, or Foreign Exchange
Certificates. After all, the local currency known as kyat is hyper-inflated
and loses value almost daily. As one Burmese told the author, the successful
mohinga [soup with noodles] seller down the street "buys gold every evening
because she's afraid of the money." The FECs are an attempt by the ruling
State Law and Order Restoration Council (SLORC) to overcome that lack of
confidence in the currency -- and provide a linchpin for a supposedly"open
-market economy" as a medium of exchange and a store of value.

Like much in the Burmese economy, these paper certificates are merely a
gimmick and not a solution for a chronic shortage of foreign exchange and a
glut of kyats. In short, FECs are supported by little more than the
government's ability to keep printing them and getting people to accept them
as a proxy for U.S. dollars

This paper game started with economic reform in February 1993, when the
regime allowed exporters to set up foreign-currency accounts in Burmese
banks and use them to buy foreign goods as well as scarce local commodities.
The aim was to create an exchange rate determined by the market, rather than
using an official rate that greatly overvalues the kyat. To carry out this
reform, the government began issuing FECs, which trade at 160 or 170 kyat
per dollar vs. the official rate of about six kyat per dollar. According to
an official source, the reason behind establishing the FECs was to promote
tourism and to allow Burmese citizens to hold some sort of foreign exchange.

Each FEC note bears the claim that it is equivalent to a certain number of
dollars, but that's not exactly true. The certificates are convertible only
into local currency, not dollars. Private ownership of foreign currency, in
fact, largely remains illegal. Instead, SLORC promises that once the
certificates are deposited into a dollar-denominated bank account, they can
be used to import foreign goods and services.

The few who are able to benefit from this scheme can import luxury cars or
electric power generators that come in handy in a capital city with frequent
blackouts. The elite who live in Rangoon and rent private homes to
foreigners can deposit that money into foreign exchange accounts and -- with
government permission -- buy such scarce goods as cement with FECs. They
cannot use the foreign exchange to travel abroad or pass it on to someone
else. In short, the FECs simply represent private freedom to import -- once
the holder gets government approval.

As SLORC's foreign exchange reserves have dried up, it has become
increasingly difficult to cash in FECs. Indeed last August Burma's foreign
exchange reserves fell to less than $200 million, just enough to cover one
month of the country's merchandise imports. In response to the shortage of
hard currency, the government simply printed more kyat and used them to buy
more dollars from local private business people at the market exchange rate.
The FECs, on the other hand, has traded at parity with the US dollar --
therefore holding its value far better than the local currency. Holders of
the certificates, however, have to wait much longer to get permission to use
them for imports. How long can the regime sustain the value of paper
certificates that are increasingly hard to use for imports? Many observers
believe that SLORC has created a bubble that will burst eventually.

No one knows exactly how many FECs have been issued. Late last year the
official word in Rangoon was that FECs made up nearly three percent of the
currency that circulated at the market exchange rate. There are unofficial
reports that SLORC may have printed more than twenty times as much of those
paper certificates. Whatever exact numbers, Burma is in the paradoxical
position of using FECs -- a currency backed only by the freedom to
import?while restricting the freedom to import. Does this make economic sense?

Kyi May Kaung holds a Ph.D. in Political Science from the University of
Pennsylvania. She is a writer and poet and is currently a broadcaster at
Radio Free Asia in Washington D.C.
Burma Debate March/June 1997
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