VZCZCXRO3455
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 
 
 
RANGOON 00000137  001.2 OF 003 
 
 
¶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