Burma is in the throes of a spiralling financial crisis that threatens to undermine the country's already fragile political and economic stability.
In early February, a dozen privately run, unregulated deposit-taking companies suddenly collapsed, leaving their depositors empty-handed. Since then, confidence in the broader banking system has also crumbled and runs on banks have become commonplace.
So far, the military government's efforts to stem the crisis are only exacerbating it. The ruling State Peace and Development Council has capped withdrawals at 50,000 kyats (about $50 at the unofficial exchange rate) a week and plugs have been pulled on automatic teller machines. Banks have stopped accepting transactions on credit cards they issued, and even Buddhist temple funds have been frozen.
Most controversially, the Central Bank has ordered private banks to immediately call in between 20% and 50% of their loans. But because Burma is still largely a cash-and-carry economy, as bank liquidity dries up, many businesses are having difficulty paying staff salaries, and some have closed down altogether in recent weeks, according to Burmese trade union officials in Bangkok.
To calm the panic, SPDC Secretary No. 1 Khin Nyunt in February told a government meeting that there was "no safer place" than banks for Burmese savers. His message came soon after Finance and Revenue Minister Khin Maung Thein was sacked for allegedly taking out bank loans for gambling trips to Macau. He is now under investigation and has been replaced by Brig.-Gen. Hla Tun, the former head of military ordnance.
At the same time, a media blackout on the banking crisis was ordered after a Rangoon-based magazine, Living Colour, reported that Burma's largest private bank, Asia Wealth Bank, had extended loans 50 times greater than its underlying reserves. Military intelligence officials, usually involved in combating currency counterfeiting, have also started interrogating corporate and individual debtors about their ability to pay, and have taken over the day-to-day operations of some private banks.
"They are sowing seeds of deep distrust in the market economy," says Sean Turnell, a banking researcher at Macquarie University in Australia, who studies Burma's financial system. "After this episode there will be almost no confidence left in Burma's economic and monetary institutions."
That will worsen the already dismal foreign investment climate. Under United States-led sanctions, U.S. companies have been prohibited from making new investments in Burma for nearly six years. Growing economic instability could put off Singapore, Malaysia and Thailand, all of which have made new investments in the country in recent years. The junta's hopes that United Nations-led reconciliation talks with opposition leader Aung San Suu Kyi would bring in multilateral aid and new investment have waned as the talks stall.
What went wrong? For starters, Burma has a primitive banking system, with privately owned banks entering the market only in 1992. Many of the entrepreneurs given licences to establish banks had scant banking experience. Asia Wealth Bank, for instance, was set up by a former truck driver; Kanbawza Bank, another large private bank, was established by a school teacher.
DRUG MONEY DRIES UP
According to Rangoon-based Western diplomats and U.S. State Department reports, some of Burma's big banks are money-laundering fronts for the syndicates that control the country's massive narcotics trade. Turnell believes that Thailand's two-month-old war on drugs is having "a contagion effect" as cash from the drug trade that usually flows to Burma's banks dries up. Western diplomats also report that Chinese businessmen transferred their money from Burma to Yunnan, the adjacent Chinese province, after rumours spread that one of Asia Wealth Bank's major investments in China had gone bust.
The last time Burma faced a financial crisis of this magnitude was in the late 1980s when the government suddenly demonetized high-denomination bank notes, wiping out many people's savings overnight. That resulted in nationwide unrest and eventually the bloody military crackdown in 1988. Today, there are some haunting parallels: People have lost savings, workers aren't getting paid, rice prices are climbing, and unrest is festering--angry depositors have been throwing rocks at banks in recent weeks.
"The economy is starting to spin out of control," says Maung Maung, director of the Bangkok-based Federation of Trade Unions of Burma. "And this is a problem you can't just shoot or put in jail."