Matthew Cunningham

Oct 12, 2009 (DVB), The introduction of a new 5,000 kyat banknote last month has revealed potential weaknesses in the Burmese economy as fears of inflation begin to spread across the country.

This cool reception highlights the Burmese public's distrust of the kyat currency and the fragility of the Burmese economic establishment overall. The 5,000 kyat note, which official and blackmarket exchange rates make it equivalent to around $US850 and $US5 respectively, began circulation on 1 October. The discrepancy is alarming, with the Asian Development Bank (ADB) saying that the official rate applies only to transactions undertaken by the government and state enterprises.

Sean Turnell, of the Australia-based Burma Economic Watch, believes that the fear of inflation underlies a deeper mistrust by the Burmese people over the economic system, and even the political regime.

"Inflation is a threat to the Burmese regime in an unconventional sense," he said. "In Burma the issue is that there is such little trust in the currency, it is such a fragile thing, that inflation is a manifestation of ongoing distrust, which has a more profound aspect than just rising prices. "The larger problem here is that the monetary and financial arrangements in Burma are essentially dysfunctional," he said, adding that the release of the banknote was an implicit signal that the regime officially recognises ongoing inflation.

It is not only average citizens who are worried. Shortly before the release of the currency, government officials met with traders and asked them not to raise prices.

For the ruling junta, monetary stability should rank high on the list of priorities. In the past, monetary and economic problems have had social and political consequences far beyond the realm of economics. Turnell said that "unrest has been triggered by episodes of demonetization" as the regime has attempted to tackle problems of inflation in the past.

The demonetization of currency in 1987 by then junta leader, Ne Win, was a leading cause of the 1988 uprising. Rampant inflation was also linked to the September 2007 monk-led uprising, with fuel and other basic commodity prices soaring to new levels.

As uncertainty continues to pervade Burmese society, citizens look for protection by investing in precious commodities. Gold prices in Rangoon have risen dramatically as traders and individuals seek to stockpile valuable commodities in the hope of avoiding the possible fallout from inflation. "[People were] worried that they would lose their wealth, people are more interested in buying properties such as land, vehicles and housing," explained a Rangoon based businessman.

At the heart of the issue is the fact that the average Burmese citizen does not have access to bank accounts or other financial instruments that could offer protection against rampant inflation. Combine this with a general mistrust of the economic establishment in Burma and you have a high chance for volatility in the market. One thing for certain, however, is that if inflation continues to rise, the poor and middle class will be affected most.

"The one group of people who can't protect themselves from inflation are the poor and even the retired," he said. "Anyone who can't protect themselves, anyone who is not in a position to yield bribes, they are the people who really get hit by this."