Money in Myanmar. Safety first.
Money and the way people handle it are an awkward story in Myanmar. Five decades of military rule have transformed people’s attitudes to their personal and business finances. Burma - as it used to be called – stood as a strong trading nation and the biggest rice exporter in the region on the cusp of independence, but was transformed into an inward-looking, fear-driven society.
The monetary policies of a succession of military governments didn’t do much to instill trust in Myanmar’s currency, the kyat. The kyat was pegged to the dollar at an unrealistic rate (6 kyat to the dollar) that overvalued the national coin grossly thereby creating a thriving black money market. Worse were the demonetizations, sometimes inspired by astrologers and in some cases prompted by honest attempts to tackle the informal economy, although virtually bound to fail without sound monetary policies to match the effort.
The 50 and 100 kyat notes were demonetized in May 1964, but it was the demonetization of 1987 that really crippled the Myanmar economy and dealt a major blow to confidence in the government’s economic management. Suddenly 60 percent of all paper money and the savings of many people were rendered useless. In combination with exploding rice prices, this was one of the economic drivers behind the nationwide protests that erupted in 1988.
Then in early 2003, Myanmar suffered a major banking crisis. The crisis was triggered by the collapse of informal finance companies, the so-called A-Ky-oe-Saung-Lou-Ngan, and spread to the formal financial sector, when fear-inspired bank runs resulted in the downfall of a number of banks and a liquidity crisis. The after effects are still felt today. Confidence in Myanmar banks has never really recovered.
As a result of the troubled financial recent past, transactions in Myanmar are still carried out using cash. Salaries are paid in cash, and money is kept under matresses, instead of keeping it in a current or savings account. As a result banks have to make do with a very limited money supply. They are hard-pressed to fuel Myanmar’s economic growth by supplying loans to emerging companies in need of finance.
“Safety first” rules the real estate market as well. Property owners hold on to their prized possession in the hope that at some time in the future they might reap massive benefits. Often the owners lack the means and the knowledge to develop properties themselves, resulting in dilapidation and low mobility. Meanwhile, limited supply inflates property prices beyond reasonable levels, which in turn strengthens the belief of “house hoarders” in the wisdom of clinging to their properties a little longer. Call it delusional, as at some point the bubble will burst.
Optimism, however, is buoying Myanmar’s political and economic transition. In October, the Central Bank asked banks to start accepting less-than-perfect dollar notes – will expatriates finally be able to use their CB-numbered notes? Questions hang over the hundi, the informal system that helps people make long-distance payments. How long will this survive? Several banks are automating their systems after centuries of exclusively using hand-written ledgers. ATMs are on the rise, internet banking will arrive late this year or in early 2015, and the arrival of foreign banks will prompt domestic financial institutions to up their game.
Ultimately trust is the key. The damage of fifty years can’t be undone in a day. Harmful memories can only be undone by consistency and experience. If the Myanmar government and the Central Bank of Myanmar repeatedly prove they are worth the trust of citizens by coupling sound monetary policies with decent banking regulation, and the Central Bank actually supports banks when they are in trouble - an element sorely missed in the 2003 crisis - at some point the momentum will pick up.
When people start trusting banks, they will start to save. Banks will finally be able to play their role as catalysts.
Only then will Myanmar live up to its economic potential.