The foreign-exchange market is a devilishly difficult place to turn a profit. Massive and closely watched, edges are impossible to maintain. Most FX traders lose money. So Banyan was impressed to encounter one Myanmar-based punter who, with just a few years’ experience, has managed to produce 22% returns trading the volatile, illiquid kyat, the local currency. Or, rather, he would be impressed—were this upstart trading against counterparties who had any say in the matter.
In the 12 months ending in June, the Tatmadaw, the army that overthrew Myanmar’s elected government in 2021, earned Ks6.4trn ($1.8bn) from the FX market, according to a recent analysis by Jared Bissinger, a Burma-watcher. These proceeds, bigger than the military budget, were not the fruits of market nous. Instead, they were stolen from Myanmar’s exporters through a system of rigged exchange rates.
The scheme works like this: Burmese exporters earn revenue abroad in foreign currency and must book profits in kyat. Exporters would prefer to swap to kyat at the prevailing market rate (about 4,400 kyat per US dollar), but since 2022 have been forced to do so at two rates set by the junta. A quarter of proceeds must be converted at the official rate, which, at 2,100 kyat per dollar, is divorced from reality. Second is the slightly less mad “online platform rate”, around 3,500 kyat per dollar, at which the remaining three-quarters of export earnings must be converted. The junta-controlled central bank tightly manages trades happening through a London-based platform.
The result is that a third of exporters’ earnings are syphoned off to the regime, calculates Mr Bissinger. Some go towards providing subsidised FX for favoured importers, such as those bringing in fertiliser and fuel. Increasingly, the funds are being used for the Tatmadaw’s foundering war effort. FX is needed to buy military equipment, much of which Myanmar cannot make itself. Private companies help the military import arms through a shadowy trade network that runs from Thailand to Russia. Though this “death trade” has shrunk recently, it still amounts to $250m in the most recent fiscal year, the UN’s special rapporteur estimated in June.
These economic tactics are brutal, just like the Tatmadaw’s conduct on the battlefield. They suggest that the army is desperate. As a share of GDP, the budget deficit is on track to triple in three years. American sanctions have stranded at least $1bn in FX reserves; another $4.5bn appears to be in limbo in banks in Singapore. Myanmar’s fossil-fuel reserves, once abundant, are drying up. New drilling projects have ceased, oil majors such as Total and Chevron have fled, and China and Thailand, the biggest buyers of Burmese gas, are diversifying away. Artillery shells frequently fall near pipelines. The junta-dominated jade trade (at one point worth $31bn annually, the equivalent of half of Myanmar’s GDP) is under assault from China. In nominal terms, tax revenue looks stable, but inflation has undermined purchasing power. Prices rose by 27% in both 2022 and 2023.
Meanwhile, many Burmese are fleeing the country and trying to get their money out, too. This applies constant downward pressure on the currency. The Tatmadaw has tried to arrest its way to currency stability: in June it charged dozens of FX and gold traders for “engaging in speculation to hinder the country’s economic development”. Yet the kyat will not co-operate: in August, it fell as low as 7,500 per dollar, more than triple the official rate, and has remained volatile. To finance government spending at home the junta has resorted to money-printing. The National Unity Government, a government-in-exile made of opposition lawmakers, claims the junta has printed 30trn kyat ($6.8bn) since it seized power in 2021. This has stoked inflation. The price of staples has risen by 426% since the coup. Half the country is in poverty.
All this is short-sighted. The Tatmadaw is risking economic collapse. By rigging exchange rates and printing money, it has massively distorted price signals. This is destroying commercial activity. Foreign sales of garments and gas, Myanmar’s biggest exports, have fallen sharply. The junta’s FX-meddling is cannibalising its remaining legitimate sources of foreign exchange. And further battlefield losses to rebel groups in parts of the country will hardly make it a wiser economic manager. A saying about myopic traders applies: the Tatmadaw is, by all appearances, picking up pennies in front of a steamroller.
© 2024, The Economist Newspaper Limited. All rights reserved. From The Economist, published under licence. The original content can be found on www.economist.com
