Burma’s Central Bank has lowered interest rates by two percent as the government attempts to fight a currency crisis, which has seen the Kyat become the best performing currency in Asia.
Despite the move, interest rates in Burma remain the second highest in the region, behind Vietnam. Moreover, Burmese are likely to retain a widespread lack of confidence in the country’s banking sector, according to Australian economist Sean Turnell.
“In the last day I have received two complaints from business people I know with respect to deposit rates,” he told DVB.
Interest rates on deposits were reduced to 10 percent, while for loans they were lowered from 17 to 15 percent. A government announcement said the latter meant that “entrepreneurs who are willing to do more business can take out loan with low interest rate”.
Yet a Burmese economist who spoke to DVB on condition of anonymity said that the continuing five percent gap between interest on deposits and loans would mean banks still make hefty profits, likely to the detriment of others.
“This is only going to hurt elderly people and pensioners who deposit their savings in the banks as they are now receiving two percent less interest while commodity prices remain the same,” he added.
Economic analyst Aung Thu Nyein believes that the country’s high interest rates are a result of the previous banking crisis in 2002-03 when banks collapsed because of a lack of capital, so the government insisted on high interest rates to ensure suitable capital was kept in banks.
However several major changes have been enacted by the Burmese government as it grapples with a strengthening domestic currency, the kyat, a result of massive inflows of money into the energy sector. Prior to the drop in interest rates, it had embarked on a mission to phase out foreign exchange certificates in an effort to streamline Burma’s complex currency system.
Given the widespread distrust of the banking sector, which is rife with corruption and often marred by high inflation, Burmese tend to either horde money in their homes, or stockpile commodities such as gold.
However it has been rumoured that expatriate Burmese and even Chinese have taken advantage of Burmese banks’ high interest rates, which compare favourably to China’s, which hovers around the relatively high rate of six percent as that country seeks to settle rampant growth. US interest rates are closer to one percent.
While the lowering of interest rates would stimulate spending in a “normal” economy, says Turnell, Burma is a different kettle of fish.
“First up, the banks don’t really lend to business. They do supply certain financial facilities – payment services primarily – but they do not engage in long term lending,” he said, adding that “the environment is too risky, and the collateral requirements too strict”.
To mitigate a complete lack of transparency the government has insisted on collateral for bank loans to be set at 100 percent, thereby seriously impeding lending and liquidity.
Transparency is therefore the number one issue facing the Burmese economy as it is perilously stuck between massive inflows of foreign direct investment (FDI) jumping to some 40 percent of GDP in the last year, and a complete lack of measured economic management on the other, from years of military rule.
“Land tenure arrangements are extremely problematic,” notes Turnell, whilst the President’s chief economic advisor, U Myint, lamented at a recent economic forum that there is “no proper accounting system for business firms and rampant corruption both on the part of the business tax payer and the government tax collector”.