US embassy cable - 05RANGOON1139

UNCLAS SECTION 01 OF 02 RANGOON 001139 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/MLS, EB/TPP 
TREASURY FOR OASIA:AJEWELL 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, PGOV, BM, Economy 
SUBJECT: BURMESE KYAT DEPRECIATES TO RECORD LOW 
 
Refs: Rangoon A)1073, B)0924, C)0542, D)0489 
 
1. (SBU) Summary: The unofficial rate of the Burmese kyat 
reached a record low of K.1360/$1 on September 30, beating 
the previous record of K.1270/$1 in September 2002.  This 
depreciation reflects the worsening economic situation, and 
may continue until at least Nov/Dec, when the kyat 
traditionally appreciates as new crops of opium poppy and 
tourists come in.  End summary. 
 
Depreciation Momentum Builds 
---------------------------- 
2. (SBU) One year ago, the rate was K.932/$1.  The rapid 46% 
decline started after the bomb explosions in Mandalay and 
Rangoon on April 26 and May 7 (refs C, D).  Shortly 
thereafter, at a May 15 press conference, the deputy finance 
minister indirectly warned people to handle foreign 
currencies only according to official regulations, which 
preclude exchanging at the commonly-used unofficial rate. 
He also cited the seizure of $90,000 from a local resident 
at the Rangoon airport. (Note: It is technically illegal for 
Burmese citizens to hold foreign currency without official 
permit. End note.)  His statements sparked worries about a 
possible scarcity of dollars, and pushed the exchange rate 
up to K.1010/$1 on May 24.  Cyclical forces also affect the 
rate: the kyat usually falls from May to November (rainy 
season) and appreciates from December to April (tourist and 
harvest season). 
 
3. (SBU) The kyat's unofficial rate of K.1360/$1 in 
September is the record low in Burma's market exchange rate 
history.  The official rate remains fixed at K.6/$1, as it 
has for the last two decades, but this rate is used only for 
recording import/export transactions in the government's 
imaginary budget.  There are numerous reasons for the recent 
plunge, including: 
 
-- The government took control of a private bank, the 
Myanmar Universal Bank (MUB), in early August without any 
official announcement (Ref B).  This prompted widespread 
kyat withdrawals from MUB and other private banks, which 
were then converted into dollars and gold. 
 
-- Rumors about counterfeit K.1000 notes and reports of 
counterfeit currency seizures further reduced confidence in 
the kyat. 
 
-- Central Bank financing of the growing budget deficit 
(K.680 billion, or over $700 million in 2004-05) creates 
inflationary pressure. 
 
-- New unpublished trade regulations controlling exports and 
imports that were introduced in August (ref A) slowed trade 
and drove some businessmen to increase speculation in local 
foreign exchange market. 
 
-- Revaluation of the Chinese yuan weakened the Burmese 
kyat.  Also, some traders are now purchasing and holding 
dollars until they need yuan to counter the daily 
depreciation they would suffer by holding kyat. 
 
-- Overall mismanagement of the economy by the government 
and the unpredictable political situation. 
 
Prices Reflect New Rates 
------------------------ 
4. (U) In the past, when exchange rate and gold prices 
increased, Military Intelligence (MI) arrested moneychangers 
and gold merchants, basically halting the unofficial trade 
for a while.  This time there has been no confirmed news of 
action against moneychangers or gold merchants, although the 
rates are at record highs.  Primarily due to the exchange 
rate, prices of most imported goods rose from 5% to 20% in 
September.  Some electronic goods and computer stores are 
now selling goods based on the daily dollar exchange rate. 
 
5. (U) Prices of some locally produced items produced with 
imported inputs, including detergent powders, coffee mix and 
medicines, also increased 15% to 20% last month.  Taking 
advantage of the situation, and to help cover other costs, 
some shopkeepers also raised prices for locally-made goods 
(including the staple breakfast fish soup, mohinga). 
Consumers are told that the high prices are due to the 
dollar exchange rate.  To date, there has been no government 
reaction. 
 
Comment: Rebound Expected 
------------------------- 
6.  (SBU) Although some think the exchange rate will 
deteriorate even further before turning around, the end of 
the rainy season is expected to bring more dollars, and 
business, into the country.  Opium production is down, so 
the seasonal impact of the poppy harvest may be lower than 
in previous years.  The government is hoping for increased 
numbers of tourists this season.  Their dollars will be 
welcomed by both residents and government alike.  End 
comment. 
Villarosa