‘A slow-motion train wreck’: Junta’s policies worsen foreign currency shortage

The regime’s latest capital controls have spooked the business community, exacerbated the shortage of dollars and sent the kyat plummeting – and experts say the junta could be running out of foreign exchange needed for vital imports. 

By FRONTIER

It’s the billion-dollar question that everyone seems to be asking: Is Myanmar’s military regime running out of money?

A series of shock policy decisions over the past week aimed at shoring up foreign currency reserves have focused attention on the junta’s finances. 

On July 13, the regime-controlled Central Bank of Myanmar revoked an exemption to local companies with at least 10 percent foreign ownership that meant they did not have to automatically convert foreign exchange holdings at the official rate. The same day, banks were told to suspend overseas loan repayments, possibly forcing their clients into default. 

The next day, the junta’s Ministry of Commerce decreed that exports of agricultural commodities through border trade must be carried out in dollars, and all exporters needed to show evidence of advance payment to get export clearance.

On July 21, the Central Bank reportedly ordered banks to convert any remaining foreign currency held by registered companies into kyat, except for the few who remain exempt, including those operating in Special Economic Zones.  

These measures sent a clear message: the situation is desperate. 

This has undermined business confidence, which had already been shaken badly by an April 3 announcement freezing foreign currency reserves in foreign banks, and requiring most of it to be converted into kyat at the official rate of K1,850. Since then, the regime has strictly controlled imports, inadvertently creating shortages of essentials such as fuel, palm oil and, most recently, gas for cooking.

Although the regime has maintained its currency peg, the lack of faith in its economic management has been apparent in the informal market, where the kyat’s gradual decline has accelerated. On July 18, the local currency fell from around K2,235 to the dollar to below K2,300, with some sources giving the rate as closer to K2,400. On July 19, it appeared to be trading for around K2,500. The exchange rate was so volatile that gold traders simply suspended sales, unsure how to price their goods. 

“There’s now panic setting in. The State Administration Council is desperate to buy dollars and conserve dollars,” said one Myanmar economist, who spoke on condition of anonymity, referring to the military regime’s official name. “Because of the Central Bank’s intervention, the situation is only getting worse.”

The nation’s bank balance

Most of the regime’s bills can be paid by simply telling the Central Bank to print money. This is precisely what it did in the months after the coup, when state revenues collapsed and depositors rushed to withdraw money from private banks.

Central Bank data to the end of September 2021 shows that the amount of cash in the economy outside of banks rose from K16.05 trillion to K26.64 trillion, an increase of 66pc.

But when it comes to paying for imports, printing trillions of kyat isn’t going to work. What matters is the balance of payments – effectively, the Myanmar economy’s bank statement with the rest of the world – and the Central Bank’s foreign currency reserves, which can be called on if the balance of payments is negative. 

There’s no publicly available figure for the regime’s current foreign exchange reserves, but various data provides some evidence that the regime might be running low.

Prior to the coup, the Central Bank had reserves of US$7.67 billion, but in October 2021 the regime’s Minister for Investment and Foreign Economic Relations U Aung Naing Oo told Reuters this had fallen to around $6 billion. Central Bank figures appear to confirm this decline, with a $1 billion balance of payments deficit in the July-September quarter of 2021.

Although $6 billion might sound like a lot, in an economy the size of Myanmar’s it can disappear quickly if the balance of payments remains in the red.

The trade balance is one key metric for calculating balance of payments. A collapse in imports after the coup actually pushed the trade balance into positive territory in 2020-21, according to official statistics, and Min Aung Hlaing also trumpeted a small trade surplus during the “mini-budget” from October 1, 2021 to March 31, 2022. Since then, however, the trade balance has turned negative, despite severe restrictions on imports. 

Not all of Myanmar’s foreign trade is captured in the official statistics. Goods that are illicit or illegal, such as drugs or weapons, are off the books. More prosaically, each year around $2 billion of imports from Thailand – everything from whiskey to fuel to used cars – are missed because the trade goes through informal gates run by the Karen State Border Guard Force.

Trade though reflects only part of the balance of payments. Foreign currency can flow in and out of the economy in many other ways, including foreign investment, remittances, grants, loans and loan repayments, and investment outflows.

The National League for Democracy government often ran trade deficits but managed to avoid balance of payments problems or a shortage of foreign exchange because investment, aid and remittances remained strong. 

The regime, in contrast, has run a balance of payments deficit despite a small trade surplus, reflecting the fact that other sources of foreign exchange have taken a big hit since the coup. 

Central Bank and budget figures show that several major sources of foreign currency inflows – including foreign investment, remittances, grants and loans – have decreased sharply or disappeared entirely since last February. Meanwhile, the regime says it has continued to make payments on its foreign debt. 

More recently, though, the trade balance has fallen negative. This has likely been putting more pressure on foreign currency reserves. 

The World Bank’s latest Myanmar Economic Monitor, released yesterday, said these balance of payments pressures had “become acute” and it was “plausible that foreign exchange reserves have fallen to insufficient levels as at mid-2022”. 

‘Things must be difficult’

Beyond the data, the snap decision on April 3 to freeze all foreign currency and forcibly convert it to kyat sent the strongest signal yet that all was not well with the regime’s finances. 

Imports are now being tightly controlled, with businesses forced to seek permission from a new Foreign Exchange Supervisory Committee to transfer money to overseas suppliers.

“I really do think they [the regime] don’t have enough US dollars … Although we don’t have data, for them to have to take these actions it reflects how difficult things must be,” said a senior official at a local private bank.

The banker said the fact that importers of goods generally considered essential, like food items, have been unable to get import permits suggests reserves were low. “That shows the limited amount of dollars has to be focused on only the most essential items.”

The capital controls came at a time when Myanmar’s economy seemed to finally be stabilising after the shock of the coup, with local banks beginning to relax restrictions on withdrawals and some manufacturing, construction and retail picking up.

“It felt like the economy was coming back to some sort of normality, but the government regulations have really screwed things up,” the banker said. 

One likely trigger for the capital controls was rising prices for key commodities, including fuel, palm oil and fertiliser, in the wake of the Russian invasion of Ukraine in late February, which have pushed the trade balance into deficit. 

The local economist said higher commodity prices had only accelerated the underlying problem in the balance of payments, likening the balance of payments crisis to a “slow-motion train wreck”. “Since February 2021, the situation has been gradually getting worse and worse,” he said.

Dr Htwe Htwe Thein, an associate professor in international business at Australia’s Curtin University, said the regime’s policies were driving away foreign firms.

“Everything the regime is doing with forced currency conversion, it feels like going back to Dark Ages, when corruption was rampant, and the military favoured its cronies. It’s like a nightmare and it’s getting worse and worse. That’s why businesses are leaving – mostly because of the very poor business environment and erratic decision making,” she said.

A failed playbook

But the regime’s “solution” to the balance of payments problem is likely to be counterproductive, observers told Frontier.

It has effectively confiscated all foreign currency in the banking system – with a few exemptions, like foreign companies – by forcibly converting it to kyat and then limiting access to that foreign currency for imports.

“They’ve taken the dollars out of the hands of customers and they’re now in the banks but basically under the [regime’s] control,” the banker said. “They can only do it once. After that, why would anyone keep dollars in their accounts?”

Mr Kim Edwards, senior economist and programme leader for Myanmar at the World Bank, told Frontier that the policy would only help the regime in the short term.

While the policy might “initially reduce the pressure on foreign exchange reserves”, the impact is likely to decrease as businesses adapt, he said. They could do this in a range of ways, such as by keeping foreign currency, including export earnings, in offshore accounts or using informal payment…