Burma: First an Election, Now an Exchange Rate That Makes Sense Read more: http://globalspin.blogs.time.com/2012/04/08/burma-first-an-election-now-an-exchange-rate-that-makes-sense

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Burmese kyat notes in a bank in Yangon, Burma's business capital, on April 5, 2012. Last week, the Burmese central bank set a new official exchange rate for its national currency that reflects what it's actually worth

As Nobel Peace Prize winner Aung San Suu Kyi begins her journey to Burma’s capital of Nyapidaw as an elected member of parliament, the government has taken an important step of its own to bring the country’s economy out of the dark ages: last week, Burma’s central bank set a value on the national currency that reflects what it’s actually worth. With the U.S. and the E.U. inching closer to easing some of their economic sanctions against the country, the timing of the move couldn’t be any better.

The central bank set the new official exchange rate at 818 kyat (pronounced chaht) to the U.S. dollar — in line with the most recent black-market rate — and decided in the future its value would be determined at currency auctions on a daily basis. For decades, Burma had operated with the wildly unrealistic official exchange rate of 6.2 kyat to the dollar — one of the starkest features of all that was wrong with the economy of one of the world’s poorest and least developed countries.

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The financial distortions caused by the fairy-tale currency value were used as a tool for corruption by the powerful, contributed to the growth of an enormous black economy and presented unnecessary hurdles and barriers to foreign investment. The pervasive use of the black-market exchange rate, which reflected the true value of the currency, left virtually everyone in Burma involved in illegal activity and thus vulnerable to extortion, scams or intimidation. Foreign firms, meanwhile, had to resort to byzantine trades in agricultural or other goods they didn’t normally deal in to navigate the dual exchange rates without losing money. The situation also made it impossible to put a true value on Burma’s state enterprises and created bizarre situations in which the official salaries of top generals were in the range of $40 a month.

For at least a quarter-century, the World Bank and International Monetary Fund had urged Burma’s leaders to rectify the country’s exchange rate as a first step toward economic reforms. But just like the international community’s pleas for political reforms, those urgings fell on deaf ears — until now. Sean Turnell, an expert on Burma’s economy at Macquarie University in Australia, says the new exchange rate is significant progress for the country. “It removes the single most prominent ‘signpost’ of Burma’s poor economic environment of the last few decades, will greatly ease the circumstances of Burma’s traders, foreign investors, and should transform the country’s public finances,” he tells TIME.

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For many years of mismanagement under military government, the country held fast to its 6.2-kyat-to-the-dollar rate, even as the black-market rate soared to over 1,000 kyat to the dollar. When Burma began to emerge from its extreme isolation in the early 1990s and needed to appease foreign investors, the government adopted a complex system of Foreign Exchange Certificates (FECs) to be used in lieu of the currency. The value of FECs, however, was also distorted. In 2008, the U.N. complained that 20% of the aid money it donated to Burma was being lost when dollars were exchanged for FECs. According to many Burma watchers, the money that disappeared in conversions over the years was being pocketed by the ruling elite. Analysts say the generals and their inner circle were notorious for using the confusing currency regimes to turn a profit off business deals, investments and aid. “The ruling generals and their family members took advantage of this system,” said Wai Moe, a reporter with the Irrawaddy, a news website on Burma run by exiles.

Turnell says that the new currency rate will do much to improve the government’s image with foreign companies by providing more certainty and making the atmosphere for investment more inviting. But rectifying the official exchange rate alone won’t be enough to pull Burma out if its economic mess. “There is still a long way to go on economic reform in Burma, which to some extent lags behind political developments now. The hard stuff that really touches upon the interests of the ruling elite still lays ahead,” Turnell says. In order to attract foreign investors now, Burma needs to remove the system in which all exporters and importers need licenses to operate in the country, as well as institute reforms in property rights and strengthen the rule of law. Even so, Turnell says, in the eyes of economists, fixing the kyat is a good start toward helping everyone get a better bang for the buck.

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