This record is a partial extract of the original cable. The full text of the original cable is not available.

300923Z Sep 03

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 001238 
 
SIPDIS 
 
STATE ALSO FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
USPACOM FOR FPA 
 
E.O. 12958: DECL: 09/29/2013 
TAGS: EFIN ECON AFIN PGOV BM
SUBJECT: BURMA'S MAGIC FEC: WHAT GOES DOWN MUST COME UP 
 
 
Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D) 
 
¶1. (SBU) Summary: After following closely the gyrations of 
the U.S. dollar/kyat market exchange rate, the Burmese 
Foreign Exchange Certificate's (FEC) value has diverged 
significantly in recent months.  Sharp dips and climbs 
unrelated to the greenback are very unusual, and no solid 
explanation is available for recent occurrences.  However, 
the recent moves have reinvigorated speculation over the 
FEC's future with no satisfactory conclusions except that the 
increasingly useless FEC has little importance to the Burmese 
economy.  End summary. 
 
The SPDC and its FEC 
 
¶2. (SBU) The Foreign Exchange Certificate (FEC) was 
introduced in 1993, as a way for exporters, Burmese 
nationals, and others who earned foreign exchange to withdraw 
their money from government banks -- the only banks 
authorized to hold foreign currency -- without the GOB losing 
any of the precious cash.  The FEC cannot be converted back 
into hard currency, ensuring that the government would get 
every penny of the mandated USD 300, later USD 200, 
conversion to FEC imposed on foreign independent travelers 
from 1994 until August of this year.  The banks hand out FECs 
at a 1 FEC to USD 1 rate, with FEC in theory backed by actual 
foreign exchange reserves.  At first, the FEC could be 
exchanged legally at only the official 6 kyat/FEC rate. 
However, in July 2001 authorities bowed to the active black 
market and changed the authorized FEC rate to 450 kyat/FEC -- 
still lower than the market rate prevailing at the time. 
 
¶3. (SBU) With the continued weakening of the economy, 
increasing inflation, and depreciating kyat, the FEC's black 
market value has strayed significantly from its fixed 450 
kyat value -- maxing out at 1095 kyat/FEC in October 2002. 
However, during most of this period the FEC/kyat value tended 
to track fairly closely the gyrations of the USD/kyat rate. 
Until the spring of 2003, the FEC/USD gap was stable, with 
the greenback worth about 5-10 percent more, widening 
occasionally to 15-20 percent depending on the comparative 
demand for the more liquid, but illegal, U.S. dollar vs. the 
legal, but less useful and non-covertible, FEC. 
 
¶4. (SBU) The FEC/USD gap began to widen in early May 2003 as 
the dollar's relative stability against the kyat was not 
matched by a steadily weakening FEC.  Talk of the FEC's 
abolition, a recurring theme in the country's hyperactive 
rumor mill, fed this move out of FEC.  The FEC dove 26 
percent in late June/early July as merchants became 
increasingly reluctant to accept FEC at par with the U.S. 
dollar.  Even some government businesses, previously willing 
to accept or even mandating payment in FEC, refused to take 
it.  After a brief FEC revival, the GOB's removal of its 
airport FEC counters on August 15th was taken as evidence by 
many of imminent demonetization of the FEC, and brought the 
FEC crashing down to 540 kyat/FEC on August 19 -- its lowest 
point in two years.  Because many were at the same time 
buying up U.S. dollars in anticipation of the impact of U.S. 
sanctions, in late August the FEC/USD gap reach an historic 
level, about 42 percent. 
 
¶5. (SBU) Beginning in mid-August a strange reversal of the 
FEC's fortunes began.  Predictably, because of continued 
import controls, combined with a move by the government to 
respond to new U.S. sanctions by denominating all letters of 
credit in euro, the dollar's value against the kyat slipped 
-- down 5 percent by mid-September.  However, for no apparent 
reason, the FEC went the other direction rocketing 45 percent 
against the kyat during that period.  By late September, the 
yawning USD/FEC gap had closed to 15 percent. 
 
What Gives? 
 
¶6. (C) Understanding how currencies move in Burma is a 
difficult task even when they do what they're "supposed" to. 
When one of the three (kyat, U.S. dollar, FEC) does something 
starkly counterintuitive, comprehension is all the more 
elusive.  However, the reviving FEC may be a result of a 
concentrated strategy by some actor or actors to reduce the 
supply of FEC in the marketplace while sparking speculative 
demand.  The demise of the garment sector, largely due to new 
U.S. sanctions banning imports of Burmese goods into the 
United States, is another apparent factor. 
 
¶7. (C) On the supply side, the most obvious change is the 
removal on August 15th of the requirement for all foreign 
tourists to exchange USD 200 into 200 FEC.  Overnight, and 
without subsequent explanation, the authorities removed the 
exchange counter from the Rangoon airport arrivals hall. 
More diaphanous evidence of a supply-side explanation comes 
to us from an array of business sources who report it very 
difficult to find large supplies of FEC from the usual black 
market brokers. 
 
¶8. (SBU) Problems in the country's garment sector may also be 
impacting the supply of FEC.  Garment factories, employing 
100,000-200,000 workers, generally changed FEC export 
earnings into kyat to pay salaries.  Now that many of these 
factories are closed and many employees have been laid off, 
this monthly infusion of FEC is no longer occurring. 
 
¶9. (C) On the demand side, a coordinated campaign of rumors 
may be encouraging some speculative demand.  Currently, very 
few businesses are obligated to accept FEC -- international 
hotels, airlines, and some government utilities for example. 
However, several of our most reliable business sources have 
independently reported to us that various 
government-controlled commodities previously sold in U.S. 
dollars -- most notably sugar, GSM cellphones, and gems (the 
biannual international gems emporium is coming up in 
mid-October) -- must now be purchased only with FEC.  Sources 
also reported that Myanma Petroleum Products Enterprise, the 
parastatal gasoline and diesel retailer, is now selling large 
amounts of diesel only in FEC.  However, these rumors seem to 
have little backing.  Government entities controlling these 
commodities deny that there has been any change in their 
previous U.S. dollar-only policy, but it's clear that the 
rumors are out there and may be leading to some speculative 
purchasing or hoarding of FECs. 
 
Comment: What Lies Ahead for the FEC? 
 
¶10. (SBU) The FEC's future is as uncertain as its recent 
levitation.  Other than to "save face" by prolonging a worn 
out policy, or protect the hoarded wealth of a few generals, 
the GOB has no real reason to keep the FEC, as there are very 
few practical uses for it.  Even most Burmese paid in foreign 
exchange (such as Embassy, UN, and international NGO 
employees) never make FEC withdrawals, instead transferring 
the foreign exchange in their bank accounts into the account 
of a broker who gives them an "account transfer" kyat rate -- 
usually somewhere between the current black market rates for 
FEC and U.S. dollars.  Presuming currency laws would continue 
to prohibit Burmese citizens from holding foreign exchange, 
abolishing the FEC might even give a boost to demand for the 
beleaguered kyat -- shops and utilities accepting FEC would 
have to convert to kyat. 
 
¶11. (SBU) Some argue that the current appreciation of the FEC 
is a GOB plot to informally eliminate the FEC by gradually 
removing it from circulation.  More likely, though, after 
this current inexplicable blip, the FEC will remain in the 
market and resume its normal role as a safer, but 
second-best, choice for cash holdings.  Either way, the FEC 
has been so marginalized in recent months that we don't see 
much impact on the economy for the better or worse. 
Martinez