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Myanmar’s de-dollarization looks like financial suicide

New Measure Barring Local Possession Of Foreign Currency Threatens To Alienate The Few Foreign Investors Left In The Benighted Nation

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A Myanmar man counts local kyat notes at a market in Yangon on April 19, 2017. Photo: AFP / Roberto Schmidt

CHIANG MAI – After a year of political, social and economic self-destruction, Myanmar’s coup-installed junta appears now to be committing financial suicide.

On April 3, Myanmar’s central bank issued a directive requiring all Myanmar citizens to change their foreign currency holdings and transmittances from overseas into Myanmar kyats at state-licensed banks. The directive, published in state media and branded by critics as a desperate money grab, said the transfer must be done within “one working day.”  

It is still unclear how the crude measure will be enforced and implemented but follow-up guidance has said that US dollars must be changed at a rate of 1,850 kyats to the greenback, yielding the central bank a windfall on the exchange at the prevailing market rate of 2,015 kyats to the dollar.

Other currencies will be calculated at similar, most likely unfavorable, rates dictated by the central bank. According to the World Bank, Myanmar’s foreign reserves stood at a mere US$7.8 billion as of December 2020, just over a month before the February 2021 coup and the last reliable public data on the country’s reserve position.

Myanmar’s foreign debt is estimated at between $10 and $11 billion. Western sanctions imposed in punitive response to the military’s seizure of power from Aung San Suu Kyi’s elected administration have targeted the military’s key economic interests and certain top personages.  

According to the central bank’s first statement on the new measures, all transfers of foreign currency “must be carried out through [authorized] banks with the permission of the Foreign Exchange Supervisory Committee.”

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All foreign currency account holders will also be forced to convert holdings acquired before April 3 into kyats, with a vague option to apply for an exemption to the new rules. It was also announced that some foreign currency may be kept in approved banks following approval by relevant authorities, including the Myanmar Investment Commission.

The foreign investment community is understandably up in arms over the surprise and draconian order.

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Stacks of Myanmar kyat are seen on the counter before a client collects them, at a bank in Yangon, Myanmar October 19, 2015. Photo: Agencies

On April 4, the Japanese Embassy sent a letter to the junta saying “Japanese companies operating in Myanmar will face serious challenges in following the new regulation, which will cause difficulties in continuing their businesses in the country. It will also be detrimental to the function of the Embassy of Japan and other official organizations.”

Two days later, the Singaporean Embassy issued an almost identical statement that merely changed “Japanese companies” to “Singapore companies.” Both embassies requested exemptions for companies from their respective countries, which are among Myanmar’s top providers of foreign investment.

On April 8, a dozen business groups — among them the French Myanmar Chamber of Commerce, AustCham Myanmar, EuroCham Myanmar, the British Chamber of Commerce in Myanmar, and the German Myanmar Business Chamber — issued a joint statement saying that the new foreign currency rule “needlessly lowers the living standards of the Myanmar people, halts foreign business activity, stops the flow of foreign direct investment (FDI), and creates trade tensions with other countries.”

Restriction on the use of foreign currencies, the statement noted, “disconnects Myanmar from the global economy and global financial system.”

According to well-placed sources in Yangon, not even local banks seem to know what the new rules actually mean, how they will be enforced by military authorities, and what will happen if the banks are deemed to have violated them.

Analysts and observers believe there are three main reasons behind what many see as a desperate move to gain access to foreign currency at a time the local economy has nearly collapsed due to the military’s February 2021 coup and the nationwide unrest that has followed.

The first and most obvious motivation stems from the fact the junta has nearly depleted its foreign reserves and desperately needs a way to earn, or in this instance, take foreign currency to avoid defaulting on foreign debts.  

Another reason may be to control, and possibly strangle, money flows from foreign donors and exiled groups to anti-junta activists and civil society groups inside the country. The new measure will effectively make it illegal to hold foreign funds, making it easier for authorities to track and check transfers to such groups.

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Myanmar’s new foreign exchange rules may aim to block foreign money flows to activists and civil society organizations. Image: Twitter

Only entities registered with authorities will be allowed to receive funds from abroad — and then that money would in any case have to be changed into kyats unless they have acquired an exemption from that rule.

But holders of kyat accounts may withdraw only 500,000, or the equivalent of less than US$250, per week under the military junta rules. That, of course, has raised the question of whether the central bank actually has enough kyat reserves to cover the conversion of all foreign holdings into local currency.

The third reason for the move became clear when the Japanese and Singaporean embassies issued their statements requesting exemptions from the new rules.

Inadvertently, perhaps, the pleas were made to the “Ministry of Foreign Affairs” of “The Republic of the Union of Myanmar” and thus amounted to de facto official recognition of the coup-installed government that has otherwise been shunned and sanctioned by the West.

Whatever the case, the economic and diplomatic benefits the junta may derive from the new rules are bound to be dwarfed by the negative consequences of such an ill-conceived measure to assert more military control over the economy.

It’s unclear if the Japanese and Singaporean companies that are still in the country since the coup will consider uprooting if not given the exemptions they have requested. The rules will also likely deter other foreign companies from investing in the country, which was already a tough sell amid the post-coup political upheavals and devastation caused by Covid-19.

But Myanmar needs more, not less, foreign investment to revive the economy.

The International Labor Organization (ILO) stated in a January 2022 report that Myanmar is on brink of economic collapse one year after the coup. According to the ILO, the country’s employment losses in 2021 amounted to 8% of the workforce, or 1.6 million lost jobs. It said Myanmar’s construction, garment, tourism and hospitality industries were among the hardest hit, as were rural farmers.

Similarly, the United Nations Development Program (UNDP) issued a statement in December 2021 that estimated “by early 2022, nearly half of Myanmar’s 55 million population — some 25 million people — will be living below the national poverty line. There now appears little doubt that the country’s poverty headcount is likely to return to levels not seen since 2005, effectively erasing 15 years of pre-pandemic economic growth.”

Kanni Wignaraja, director of the UNDP Regional Bureau for Asia and the Pacific, was quoted as saying: “A slide into poverty of this scale could mean the disappearance of the middle class – a bad omen for any rapid recovery from this crisis,” she noted.

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Myanmar Migrant workers pass the Thai-Myanmar border in an official service truck as they leave Thailand from Mae Sot in Tak province in northern Thailand. Photo: AFP / Ye Aung Thu

In many ways, Myanmar’s broad economy, especially foreign-exposed sectors like tourism, was until now a dollar-based economy, with many transactions conducted in foreign rather than local currency.

Trying to eliminate that economy overnight, analysts and observers predict, is bound to put more strain on an already fragile economy that contracted 18% in the year ended September 2021. The World Bank predicted a paltry 1% growth on that contraction in 2022, though the projection was made before the de-dollarization measure was announced.

But Myanmar’s increasingly isolated generals may not care, particularly if they think sympathetic allies like China will turn the other cheek on the foreign currency measure and bail them out if the economy slips deeper into crisis.

The junta’s lurch towards de-dollarization might thus give rise to a new yuan-based financial order – and even greater dependence on Beijing.