Free Myanmar's Long Road to National Reconciliation by Trevor Wilson

70 billion of this had been repaid by the first quarter of 2004. 20
Burma’s Macroeconomic Environment
     
    Poor banking practices were the proximate cause of Burma’s financial crisis of 2003, but such practices took place in a macroeconomic environment that was hardly conducive to the proper functioning of financial intermediaries. Among banking malpractices most frequently reported, for example, were procedures through which banks lent money to their customers in order to enable them to pursue various inflation-hedging strategies — including investing in the “private finance companies” and speculating in gold and real estate. Such procedures were extraordinarily risky for the banks, since they depended on the “bubble” inherent in each of these strategies, and bubbles are well known for their tendency to burst, as all ultimately did, but they would not have been pursued in the systemically-damaging way they were if it had not been for the fact that chronic inflation would otherwise have impoverished the prudent minded.
    Unfortunately, high and persistent inflation is but one of a number of macroeconomic problems that beset Burma. Others include an unstable “dual” exchange-rate regime that rewards rent-seeking behaviour and promotes corruption, a current account position that is usually deeply in deficit, negligible foreign exchange reserves, chronic underemployment, foreign debt arrears, and a policy-making environment that is arbitrary and often irrational. 21 All of these woes, however, have an important root cause — the large and persistent budget deficits that are run up by Burma’s central government. In the latest year for which we have data on Burma’s fiscal position, the 2000–2001 financial year (that is, April 2000 to March 2001), the revenue of the central government accounted for little more than 60 per cent of its spending. 22 There is little reason to believe this situation has improved (see Table 4.4 ), and what efforts have been made to increase the taxation revenue of the central government have only added to the chaos and confusion that always seem to accompany policy-making and policy implementation in Burma.
    One typical illustration of this was the announcement by Burma’s Ministry of Finance and Revenue in June 2004 of a new flat-rate tax of 25 per cent on imports, to replace a differentiated series of duties ranging from 2.5 to 20 per cent. 23 This could be seen as a sensible attempt to bring coherence to Burma’s rates of duty, but the announcement was accompanied by another which declared that the exchange rate used to calculate the value of imports (and upon which the duties were levied) would also rise, from a staggered rate of US$1 = 100–180
kyat
(for different commodities) to US$1 = 450
kyat.
Taken together, these comprised two significant revenue enhancing measures (to the extent they were not evaded), but the effect was rather ruined by the chaos that ensued in Burma’s cross-border trade as a consequence of the abrupt and arbitrary nature of the announcements (after an initial effort to keep the rate rises a secret) and of their implementation. 24 The change in the dutiable exchange rate was itself a sensible development — at US$1 = 450
kyat,
at least it sat in the middle of the divide between Burma’s official fixed exchange rate of around US$1 = 6
kyat,
and the prevailing “market” exchange rate of over 1,000
kyat
to the US dollar. However, the change provided yet another element of uncertainty regarding the value of Burma’s currency, while not removing the obvious incentive for corruption created by the application of differential exchange rates.

     
    In the absence of adequate revenue, the Burmese regime has reverted to the device time-honoured in application but universally ill-starred in its effects — monetization. Simply, the Burmese government borrows from the central bank (effectively “prints money’) to cover its budget shortfall. The