EARLIER ARTICL:PAPER TIGER

[moe@xxxxxxxxxxxxx]

The Far Eastern Economic Review
     08/07/97

     Paper Tiger

     7th August, 1997  
     060
     ECONOMIES
     PAPER TIGER

     In the early 1990s Burma seemed on the verge of an economic boom, but gross
     economic mismanagement and a vastly overvalued currency have brought the
     country's economy to its knees. 

     By Bertil Lintner in Bangkok 

     In the welter of international reporting about weakening Asian
currencies, few have
     paid much attention to the sickest currency of all. In just over a
month Burma's kyat
     has plummeted on the blackmarket from 170 to the dollar to 250-300. If
the rest of
     the world hasn't noticed, Burmese consumers have. They began to realize
something
     was wrong when the supermarkets removed price stickers from their
goods. "No
     one knows what to charge for imported items because no one knows what the
     Burmese currency is worth," says a Rangoon resident. 

     Indeed, Burma is now facing its worst economic crisis since 1988-the
year massive
     unrest brought the current military junta to power. Today's crisis is
every bit as
     explosive. While the plunging kyat is its most obvious symptom, Burma's
economic
     malady runs far deeper. At its heart is gross government mismanagement
that has not
     only debased the currency but fuelled inflation, discouraged foreign
investment and
     depleted reserves. Short of cash, the government has begun stealing
from its citizens,
     denying them access either to gold or to their own foreign-exchange
accounts. 

     It's a long way from the early 1990s, when Burma seemed on the verge of an
     economic boom. New buildings were springing up all over Rangoon, and
there were
     more cars in the streets than ever before. But that mini-boom is
exactly what caused
     the kyat's collapse, according to the International Monetary Fund and
independent
     economic analysts. 

     "There was no real growth, no production. Rangoon was little more than
a Potemkin
     village," says Josef Silverstein, professor emeritus at Rutgers
University, in the United
     States. Adds a Rangoon-based economic analyst: "The money came from
     remittances from workers overseas, and from a massive influx of drug
money into the
     legal economy in the mid-1990s. Money came in-and went out again [much
spent on
     expensive imports]. And now the party is over." 

     The roots of the crisis stretch back to 1989, soon after the State Law
and Order
     Restoration Council seized power. By selling a chunk of its Tokyo embassy
     compound for what a well-placed source in Rangoon estimates at $300
million,
     Slorc was able to buy itself a measure of stability and push forward
with its economic
     agenda. "The Slorc appeared to be doing all the right things," says the
source. "It
     liberalized the economy and welcomed foreign investment, and there was some
     degree of coordination of the government's activities." 

     The government sustained the illusion of progress partly through the
fiction of its
     official exchange rate. Set at six kyats to the dollar, it values the
currency at 40-50
     times the blackmarket rate. According to a highly critical IMF report
issued in May,
     the government's use of the official rate to compile macroeconomic
figures vastly
     distorts everything from imports and exports to domestic consumption
and GDP. 

     But things began to fall apart in April 1992, when Slorc Chairman Gen.
Saw Maung
     (who died on July 24 this year) was replaced by Gen. Than Shwe. Eager for
     patronage, Than Shwe redistributed the six economic portfolios then
held by Gen.
     David Abel, who remains minister of national planning and development. As a
     Rangoon-based Western diplomat puts it: "Economic warlords replaced the
     economic tsar." 

     The government compounded its woes by creating a three-tier currency
regime that
     all but discredited the already weak kyat. In February 1993 officials
introduced
     foreign-exchange certificates that foreign visitors could swap for
dollars, one-to-one,
     sparing them the need to buy kyats at the official rate. In December
1995 the
     government also allowed Burmese to hold FECs which they initially could
trade at
     100 kyats per dollar. As locals dumped kyat and bought FECs, the currency
     plunged. 

     The FECs might not have mattered had the economy been improving. It was
not.
     Massive problems continued with foreign investment, development and food
     production. Of the $3.2 billion of investment approved since the first
reforms of
     1989, only $1.2 billion had been invested by March 31, 1996, according
to the
     IMF. About $900 million went into the oil and gas industry, much of it
to drill dry
     holes onshore in the early 1990s. Other money went into hotels, of
which there is
     now a glut. All in all, says the Rangoon-based analyst, Burma's direct
investment
     "never translated into any significant development of the manufacturing
sector." 

     Or of agriculture. Attempts to restore rice exports to their pre-World
War II glory
     have failed miserably. According to government figures, Burma exported $198
     million worth of rice in fiscal 1994-95, but rice exports fell to $78
million the
     following year, and to $47 million in the year to March 31, 1997. As
the IMF puts it,
     "problems related to procurement of crops, agricultural pricing and
export policies"
     continue to hobble the sector. 

     Tourism was no saviour either. The government designated 1996 "Visit
Myanmar
     Year," hoping to draw in visitors. But political unrest and, the
government claims,
     negative publicity abroad, kept foreigners away. 

     By mid-1996 the government was short of cash. The Tokyo-embassy proceeds
     were depleted, and foreign investment wasn't coming in. Reserves shrank
to less than
     the foreign-currency deposits they are supposed to cover (see chart).
More money
     was printed to buy up dollars and FECs in circulation. "That was also
when the
     government resorted to stealing people's money," says a Western
diplomatic source
     in Rangoon. 

     It did that by, first, luring personal savings. In June 1996 the
government announced
     that bank deposits would start paying interest on foreign-exchange
accounts for the
     first time and that it would abolish a 10% tax on withdrawals. "The
outcome was a
     rush to the banks" to make deposits, says the Rangoon-based analyst.
"But three
     weeks later, the government made it impossible for people to withdraw their
     savings." 

     There was no official ban on withdrawals, but by posting inquisitive
plainclothes
     military intelligence officers at the Myanmar Foreign Trade Bank, the
government
     effectively kept customers away. 

     While most depositors can't get to their money (a privileged few have
access), the
     government can-and has spent it freely. By last September, foreign-exchange
     reserves had fallen to 1.2 billion kyat, about half the level of claims
on these assets. 

     "Because of the lack of transparency and accurate market information in
Burma, it
     took almost a year before the final collapse came," says the
Rangoon-based analyst.
     Early this year, even more kyats were printed. And when the usual
mid-year slump in
     agricultural exports hit, the bubble finally burst. 

     By July the FECs began to develop their own blackmarket rate, still
much higher
     than the official rate but below the price for actual dollars. When
people rushed to
     buy gold this summer, the government ordered gold shops to stop trading. 

     The government's countermoves are coordinated by a newly formed monetary
     stabilization committee headed by intelligence chief, Lt.-Gen. Khin
Nyunt. But its
     actions have proved totally counterproductive: Food prices have shot up
as the kyat
     has become almost worthless. "This presents a real crisis for the
government, as
     rising food prices may have an explosive impact," says David Steinberg,
director of
     Asian Studies at Georgetown University who recently visited Burma. 

     Faced with such a critical situation, the government has begun to
dictate the kyat's
     unofficial exchange rate, hoping to restore it to a sustainable 170 to
the dollar. 

     "But that's the reintroduction of a command economy, which is not going
to help
     solve Burma's problems," says the Rangoon-based analyst. "It's not only
the kyat
     that has collapsed, it's the entire scheme to liberalize the economy."
Those efforts, he
     says, represented Burma's most significant steps towards a real,
market-based
     economy in years. "Now," he says, "this is the end of that chapter."