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Cablegate: Understanding Burma's Exchange Rate System

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RR RUEHCHI RUEHDT RUEHHM RUEHNH RUEHTRO
DE RUEHGO #0137/01 0520856
ZNR UUUUU ZZH
R 210856Z FEB 08
FM AMEMBASSY RANGOON
TO RUEHC/SECSTATE WASHDC 7211
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHGG/UN SECURITY COUNCIL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1736
RUEHBY/AMEMBASSY CANBERRA 0925
RUEHKA/AMEMBASSY DHAKA 4773
RUEHNE/AMEMBASSY NEW DELHI 4486
RUEHUL/AMEMBASSY SEOUL 8016
RUEHKO/AMEMBASSY TOKYO 5577
RUEHCN/AMCONSUL CHENGDU 1357
RUEHCHI/AMCONSUL CHIANG MAI 1395
RUEHCI/AMCONSUL KOLKATA 0225
RUEATRS/DEPT OF TREASURY WASHDC
RHHMUNA/CDR USPACOM HONOLULU HI
RUEHGV/USMISSION GENEVA 3523
RHEHNSC/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1354
RUEKJCS/SECDEF WASHDC
RUEHBS/USEU BRUSSELS
RUEKJCS/JOINT STAFF WASHDC

UNCLAS SECTION 01 OF 03 RANGOON 000137

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, EEB/IFD/ODF
PACOM FOR FPA
TREASURY FOR OASIA:SCHUN

E.O. 12958:N/A
TAGS: ECON EFIN PREL BM
SUBJECT: UNDERSTANDING BURMA'S EXCHANGE RATE SYSTEM


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1. (SBU) Summary. Although the Burmese Government maintains an
official exchange rate at 6 kyats to $1, in reality, Burma has a
multiple exchange rate system. Exchange rates vary from 450 kyats
to $1 to 1255 kyats to $1, depending on the transaction. Because
the official exchange rate overvalues the currency by more than
20,000 percent, most transactions are done at the market rate
(currently 1160 kyats/$1), although the GOB requires that foreigners
and foreign companies must pay all bills and taxes at the official
rate. Burma's lack of a clear exchange rate policy significantly
impedes economic growth and investment. End Summary.

Overvalued official exchange rate
---------------------------------

2. (U) Although the official currency of Burma is the kyat, the
government also issues Foreign Exchange Certificates (FEC), which
have a value equivalent to the U.S. dollar. The Burmese Government
introduced the FEC in 1993 to promote tourism and until recently
required that all foreign tourists convert at least $200 into FEC
upon entry into Burma. In 1977, the Burmese Government officially
pegged the kyat to the IMF's Special Drawing Rights (SDR - an
international reserve asset) at a rate of 8.5 kyat to 1 SDR.
Accordingly, it also pegged the kyat to the U.S. dollar at a 6 kyat
to $1 rate, although GOB regulations state that the official rate
for foreign currencies including the U.S. dollar, yen, pound
sterling, and Euro are determined on the basis of daily calculations
of the values of the currency against the SDR. There is no official
kyat/FEC exchange rate.

3. (SBU) According to the IMF, the GOB's official exchange rate is
overvalued by approximately 20,000 percent. As a result, an
unofficial multiple exchange rate system exists, where people trade
foreign currency or FEC for kyats at the market rate, currently 1160
kyats/$1 or 1160 kyats/1FEC. During the annual IMF Article IV
meetings in September 2007, the IMF urged the GOB to adopt a unified
exchange rate system to correct distortions in the market economy.
The Burmese Government has made no efforts since then to unify the
exchange rate system, claiming that the change would disrupt Burma's
fragile economy.

Various Exchange Rates
----------------------

4. (SBU) Although the GOB will not admit that the official exchange
rate is overvalued, it has established additional exchange rates
policies for specific transactions. Additionally, it condones the
use of the market exchange rate, allowing money changers to operate
with relative freedom throughout the country. The official exchange
rate only applies to the public sector and is used primarily for
accounting purposes, IMF reports explain. According to business and
banking contacts, there are now eight informal exchange rates:

--Greenback rate: Although Burmese people are not allowed to hold
or keep foreign currency per the Foreign Exchange Regulation Act of
1947, many Burmese do so because of the foreign currencies' relative
strength to the kyat. There are approximately 10 wholesalers of FEC
and U.S. dollars in Rangoon, and approximately 70 brokers who will
change money at the market rate. As of February 21, the greenback
rate was K.1160/US$. Brokers prefer new, unwrinkled $100 bills to
other dollar notes and may give a lower rate for older, wrinkled
bills. Falling prey to urban myths, many retailers and brokers will
not accept any bills that have a small tear or mark on them, nor any
with the "CB" serial code, allegedly because they believe it stands
for "Counterfeit Bill."

--FEC Rate: The GOB pegged the FEC to the U.S. dollar at a one to
one ratio. However, the FEC often has a lower real value on the
market, due to high demand for U.S. dollars. Some traders engaged

RANGOON 00000137 002.2 OF 003


in arbitrage, earning money off the exchange rate difference between
the FEC and U.S. dollars. In recent weeks, the FEC has appreciated
against the U.S. dollar because of the dollar's weak value on the
world market. As of February 21, the market exchange rate of FEC
was K.1160/FEC.

--Theinbyu counter rate: The GOB allows select private companies,
including state-owned Myanmar Economic Holdings Ltd, foreign
embassies, and international organizations, to buy U.S. dollars and
FEC from a shop on Theinbyu road in Rangoon. The Theinbyu counter
rate is set at K.450 per U.S. dollar or FEC.

--Export earning rate: This rate is only available to local
companies that earn U.S. dollars by exporting. In Burma, a company
cannot import products unless it has export earnings. As a result,
there is a high demand for export earnings, and the GOB limits the
amount of export earnings a company can hold. Companies with export
earnings transfer the dollar amount to importers at the export
earning rate. There is no set exchange rate for export earnings, as
the exporter and importer negotiate the rate for each transaction.
As of February 21, the export earnings rate averaged K.1255/US$.

--Dollar Transfer rate: This is the market rate for U.S. dollars
earned locally by staff of international organizations or companies
that conduct business with foreigners within Burma. Dollars earned
domestically are not considered export earnings, and thus do not
command as high of an exchange rate. As of February 21, the
D-Transfer rate was K.1150/US$.

--Seamen earnings rate: The GOB considers salaries earned by crewmen
who work on foreign ships to be export earnings. However because
crewmen must fill out complicated paperwork to remit money or sell
dollars as export earnings, most crewmen do not exchange money in
Burma. Instead, many remit money to Burma using the unofficial
hundi system (to be reported septel). As of February 21, the market
rate of seamen earnings was K.1255/US$.

--Hundi rate: Because of banking restrictions and a general mistrust
of banks, many Burmese citizens and foreign companies remit money
through the informal hundi system. Through this system, money can
be sent to and from Burma through both domestic and overseas
brokers. As of February 21, the Hundi rate for remitting money to
Burma was K.1255/US$ and K.1250/US$ for remitting abroad.

--Customs informal rate: According to the Burmese Customs
Department, the GOB established a customs valuation rate of K.450
per $1 in 2004 for imports into Rangoon. For border trade, the
customs valuation rate varies from K.850 to K.1,200 per $1,
depending on the product and the product's origin.

Using Exchange Rates as a Tax
-----------------------------

5. (SBU) The GOB requires that foreigners pay all bills, including
telephone, rent, and hotel fees, in either dollars or in kyat at the
official exchange rate. Additionally, foreign-owned companies must
pay a 10 percent tax on all earnings, calculated using the official
exchange rate. As a result, it costs substantially more for
foreigners and foreign companies to do business in Burma than do
local entrepreneurs.

6. (SBU) The Burmese Government also uses the official exchange
rate to tax companies when State-Owned Enterprises purchase foreign
exchange at the official rate rather than the market rate. Although
private companies avoid financial transactions with SOEs, at times,
the GOB will call on a company and "suggest" that it sell its export
earnings to a SOE. By allowing SOEs to purchase foreign exchange at
the official rate, the GOB implicitly subsidizes the state-owned

RANGOON 00000137 003.2 OF 003


enterprises, putting more money in its own pockets. Although the
IMF argues that the GOB's actions hinder economic growth by
distorting production, consumption, and investment, the GOB
continues to use the multiple exchange rate system to its own
advantage.

Comment
-------

7. (SBU) The senior generals lack any understanding of basic
economic principles, resulting in continued mismanagement of the
economy. The regime's arguments that unifying the exchange rate
system would disrupt Burma's economy" are flawed, as the private
sector, which accounts for 90 percent of the economy, already
operates in a market rate system. In reality, the GOB does not want
to change the multiple exchange rate system because it utilizes it
for its own advantage, employing the official exchange rate as a
defacto tax on foreigners and companies. While foreigners are
paying more to subsidize the government, the senior generals and
cronies maximize their personal profits by buying buy dollars at the
official exchange rate. While the Burmese struggle to survive on
just a $1 a day, the regime manipulates the economic system for its
own financial benefit.

VILLAROSA

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