Evolution of Myanmar's Foreign Exchange Certificate

Myanmar, formerly known as Burma, has undergone significant economic and political transformations over the past century. One of the pivotal aspects of these changes has been the evolution of its foreign exchange system, particularly the Foreign Exchange Certificate (FEC) or Myanmar Dollar. Introduced as a response to the complexities of Myanmar's dual exchange rate system, the FEC has played a crucial role in the country's economic narrative. This article delves into the origins, purpose, impact, and eventual phasing out of the Foreign Exchange Certificate in Myanmar, providing a comprehensive overview of its evolution.

Historical Background

Pre-Independence Era

Before gaining independence in 1948, Burma was a British colony, and its economy was closely integrated with the British Empire. The Burmese Rupee was introduced in 1937, replacing the Indian Rupee, which was previously used. The economy was primarily agrarian, with rice being the main export.

Post-Independence Economic Policies

After independence, Myanmar's economic policies were influenced by socialist principles under the leadership of Prime Minister U Nu and later General Ne Win. In 1962, Ne Win's coup d'état led to the nationalization of major industries and the implementation of the Burmese Way to Socialism. This era was marked by economic isolation and stagnation, and the currency system became more complex and restrictive.

Dual Exchange Rate System

In the 1970s and 1980s, Myanmar's economy struggled with significant challenges, including inflation, foreign debt, and trade deficits. To address these issues, the government implemented a dual exchange rate system. The official exchange rate was significantly overvalued, while a parallel market rate reflected the true value of the Kyat. This system led to widespread corruption, inefficiencies, and a thriving black market for foreign exchange.

Introduction of the FEC

Rationale and Objectives

The Foreign Exchange Certificate (FEC) was introduced in February 1993 as part of Myanmar's efforts to reform its foreign exchange system and manage the dual exchange rate regime. The primary objective of the FEC was to capture foreign currency inflows and reduce the impact of the black market. By offering a legal and controlled alternative for foreign exchange transactions, the government aimed to stabilize the currency and improve its foreign reserves.

The FEC was designed to create a more transparent and regulated environment for foreign exchange transactions, providing an official channel for foreign currency to enter the economy. This was particularly important in the context of Myanmar's economic challenges, as the government sought to reduce reliance on the black market and increase its control over foreign exchange.

Implementation and Mechanism

The FEC was issued by the Central Bank of Myanmar and was pegged to the US Dollar, thus, being sometimes referred to as Myanmar Dollar. Foreign visitors and businesses were required to convert a portion of their foreign currency into FECs upon entry into the country. These certificates could then be used for a variety of transactions, including hotel bills, airfare, and purchases at designated shops. The FEC was intended to function alongside the Kyat, offering a parallel but regulated means of conducting transactions in foreign currency.

To facilitate the implementation of the FEC system, the government established authorized exchange counters at airports, hotels, and major cities. These counters were responsible for issuing FECs and facilitating their use in various transactions. The FECs themselves were available in denominations of 1 dollar, 5 dollars, 10 dollars and 20 dillars, making them convenient for a wide range of expenditures.

Initial Reception

The introduction of the FEC was met with mixed reactions. On one hand, it provided a legal channel for foreign currency transactions, which was a step toward addressing the inefficiencies of the dual exchange rate system. On the other hand, the mandatory conversion requirement was seen as restrictive by foreign visitors and businesses, leading to some resistance and continued use of the black market for better rates.

Foreign businesses operating in Myanmar had to navigate the complexities of the FEC system while adhering to local regulations. This added a layer of complexity to their operations, particularly for those dealing with both local and foreign customers. Despite these challenges, the FEC system marked an important step in the government's efforts to stabilize the economy and manage foreign exchange flows.

Evolution and Impact of the FEC

Early Years and Adjustments

In the initial years, the FEC system underwent several adjustments to improve its functionality and acceptance. The government expanded the range of transactions that could be conducted with FECs and worked to increase the availability of FECs at official exchange counters. Efforts were also made to educate the public and businesses about the benefits and regulations associated with the FEC.

The early adjustments included efforts to address the initial resistance from foreign visitors and businesses. The government launched information campaigns to explain the purpose and benefits of the FEC system, aiming to build trust and acceptance among users. Additionally, measures were taken to streamline the process of obtaining and using FECs, making it more user-friendly.

Economic Impact

The FEC had a notable impact on Myanmar's economy. By capturing a portion of foreign currency inflows through official channels, the government was able to bolster its foreign reserves. This, in turn, helped to stabilize the exchange rate and reduce the reliance on the black market. Additionally, the FEC provided a more predictable and controlled environment for foreign investors and tourists, contributing to economic activities in sectors such as tourism and hospitality.

The increased foreign exchange reserves resulting from the FEC system allowed the government to have greater control over monetary policy and exchange rate management. This contributed to a more stable economic environment, which was beneficial for attracting foreign investment and supporting economic growth. The tourism industry, in particular, saw positive impacts as the FEC system made it easier for tourists to engage in legal and transparent financial transactions.

Challenges and Criticisms

Despite its benefits, the FEC system faced several challenges and criticisms. One major issue was the disparity between the official FEC exchange rate and the black market rate, which continued to incentivize unofficial transactions. Additionally, the mandatory conversion requirement was seen as an inconvenience by many foreign visitors, leading to negative perceptions of Myanmar's business environment. Furthermore, the dual currency system created complexities for businesses, particularly those dealing with both local and foreign customers.

The persistent black market for foreign exchange posed a significant challenge to the FEC system's effectiveness. Many individuals and businesses preferred the higher rates offered by the black market, undermining the government's efforts to channel foreign currency through official channels. This issue highlighted the difficulties in fully eliminating parallel market activities and achieving a unified exchange rate.

Attempts at Reform

Throughout the 1990s and early 2000s, the Myanmar government made several attempts to reform and improve the FEC system. These efforts included adjusting the exchange rate to better reflect market conditions, expanding the range of permissible transactions, and increasing the availability of FECs. However, these reforms had limited success in fully addressing the underlying issues of the dual exchange rate system and the black market.

Reform efforts also included measures to enhance transparency and accountability in the issuance and use of FECs. The government introduced stricter regulations and monitoring mechanisms to prevent misuse and ensure compliance with official policies. However, these measures were often met with resistance and had varying degrees of success in achieving their intended outcomes.

Transition and Phasing Out of the FEC

Economic Liberalization and Reforms

In the late 2000s and early 2010s, Myanmar embarked on a series of economic liberalization and reform measures aimed at opening up the economy and attracting foreign investment. These reforms included efforts to unify the exchange rate system and improve the overall business environment. As part of these broader reforms, the government recognized the need to address the complexities and limitations of the FEC system.

Economic liberalization efforts were driven by a desire to integrate Myanmar into the global economy and attract foreign investment. The government implemented a range of measures to create a more open and investor-friendly environment, including regulatory reforms, trade liberalization, and efforts to improve infrastructure and governance. These reforms were aimed at addressing the structural challenges that had hindered economic growth and development.

Phasing Out the FEC

In 2012, the Central Bank of Myanmar announced plans to phase out the Foreign Exchange Certificate system. The decision was driven by the desire to simplify the exchange rate regime, reduce reliance on parallel markets, and create a more transparent and investor-friendly environment. The phasing out process involved gradually reducing the mandatory conversion requirements and encouraging the use of the Kyat for all transactions.

The phasing out of the FEC was implemented in a phased manner to minimize disruptions and ensure a smooth transition. The government introduced measures to gradually reduce the mandatory conversion requirements for foreign visitors and businesses, allowing them to use the Kyat more freely for transactions. This process was accompanied by efforts to increase the availability of Kyat at official exchange counters and improve the overall accessibility of foreign exchange services.

Transition to a Unified Exchange Rate System

The phasing out of the FEC was accompanied by efforts to transition to a unified exchange rate system. In April 2012, the Central Bank of Myanmar introduced a managed float exchange rate system, allowing the Kyat to be traded more freely in the market. This marked a significant shift from the dual exchange rate regime and aimed to bring the official exchange rate closer to market realities.

The transition to a unified exchange rate system was a key component of Myanmar's broader economic reform agenda. The managed float system allowed the exchange rate to be determined by market forces, while the central bank retained the ability to intervene in the market to stabilize the currency. This approach aimed to achieve a more balanced and realistic exchange rate that better reflected economic conditions and market dynamics.

Impact on the Economy

The phasing out of the FEC and the transition to a unified exchange rate system had a profound impact on Myanmar's economy. The move was seen as a positive step toward economic modernization and integration into the global economy. It helped to reduce the discrepancies between official and black market rates, improve foreign exchange management, and enhance the overall business environment. Additionally, the reforms contributed to increased investor confidence and foreign direct investment in Myanmar.

The unification of the exchange rate system helped to eliminate the distortions and inefficiencies created by the dual exchange rate regime. It provided a more transparent and predictable environment for businesses and investors, reducing the risks associated with exchange rate fluctuations and black market activities. The reforms also supported greater economic stability and growth, contributing to improvements in key sectors such as trade, investment, and tourism.

Legacy and Lessons Learned

Legacy of the FEC

The Foreign Exchange Certificate system played a significant role in Myanmar's economic history, particularly during a period of complex economic challenges and transition. While it had its shortcomings and faced criticisms, the FEC system was an important step in managing foreign exchange flows and stabilizing the economy. Its introduction highlighted the need for innovative solutions in the face of economic difficulties and the importance of adaptability in policy implementation.

The legacy of the FEC system lies in its role as a transitional mechanism during a period of significant economic challenges. It provided a legal and controlled alternative for foreign exchange transactions, helping to stabilize the currency and improve foreign reserves. While it faced criticisms and challenges, the FEC system was an important step in Myanmar's economic reform journey and contributed to the country's broader efforts to manage foreign exchange and stabilize the economy.

Lessons Learned

The evolution of Myanmar's Foreign Exchange Certificate system offers several lessons for policymakers and economists:

Flexibility and Adaptability: Economic policies must be flexible and adaptable to changing conditions. The FEC system underwent several adjustments to improve its functionality and address emerging challenges.

Market Realities: Exchange rate policies should reflect market realities to avoid creating incentives for black market transactions. The disparity between official and black market rates was a persistent issue in the FEC system.

Transparency and Simplification: Simplifying the exchange rate regime and creating a transparent and investor-friendly environment are crucial for economic growth and development. The transition to a unified exchange rate system was a key step in this direction.

Public Perception and Education: Public perception and education play a significant role in the success of economic policies. Efforts to educate the public and businesses about the FEC were important in improving its acceptance and functionality.

Gradual Transition: Gradual transitions and phased approaches can help manage the impact of significant policy changes. The phasing out of the FEC and the introduction of a managed float exchange rate system were implemented gradually to minimize disruptions.

Conclusion

The evolution of Myanmar's Foreign Exchange Certificate system is a testament to the complexities and challenges of managing a dual exchange rate regime in a transitional economy. Introduced as a response to economic difficulties and the need for foreign exchange management, the FEC played a significant role in Myanmar's economic narrative. While it had its limitations and faced criticisms, the FEC system was an important step toward stabilizing the currency and improving foreign reserves.

The eventual phasing out of the FEC and the transition to a unified exchange rate system marked a significant milestone in Myanmar's economic reform journey. These changes contributed to a more transparent, investor-friendly environment and helped to integrate Myanmar into the global economy. The legacy of the FEC and the lessons learned from its evolution offer valuable insights for policymakers and economists in managing foreign exchange systems and addressing economic challenges. As Myanmar continues its path toward economic modernization and growth, the experiences and lessons from the FEC era will remain an important part of its economic history.