myanmar (burma) · myanmar (burma) 1 country report february 2007 ' the economist intelligence...

Country Report

Myanmar (Burma)

February 2007

The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

Myanmar (Burma) at a glance: 2007-08

OVERVIEW The State Peace and Development Council (SPDC, the ruling military junta) will push on with its "road map to democracy", but there is little likelihood that this will lead to meaningful political reform. The US will remain a stern critic of the regime, but the junta!s ties with China and the Association of South-East Asian Nations (ASEAN), which includes Myanmar, remain fairly strong. The leader of the opposition National League for Democracy, Aung San Suu Kyi, remains under house-arrest, and despite intense international pressure the junta has no plans to release her in the near future. Economic policymaking will continue to be erratic. Although the energy sector will remain fairly buoyant, the outlook for the rest of the economy is poor. High inflation and weak confidence will exert downward pressure on the kyat!s free-market exchange rate, but buoyant exports of gas will help to keep the current account in surplus and bolster foreign-exchange reserves.

Key changes from last month

Political outlook • There remains a degree of incoherence in international efforts to persuade

the SPDC to implement genuine political reform. In January the UN Security Council failed to adopt a resolution criticising Myanmar, despite receiving support from a majority of members, as both China and Russia used their veto.

Economic policy outlook • The Central Bank of Myanmar remains reluctant to tighten monetary policy,

despite the acceleration in inflation. The central bank!s stance reflects the fact that it operates without any independence from the government, which is currently heavily reliant on central bank funding.

Economic forecast • There are signs of increased economic activity, particularly in the oil and gas

industry and the mining sector. However, the junta!s claims of double-digit real GDP growth are not credible. We expect the economy to grow by around 3-4% a year in 2007-08.

The Economist Intelligence Unit

The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For 60 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide.

The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

London The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8500 E-mail: [email protected]

New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) 554 0600 Fax: (1.212) 586 0248 E-mail: [email protected]

Hong Kong The Economist Intelligence Unit 60/F, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: [email protected]

Website: www.eiu.com

Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com

Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office

Copyright © 2007 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it.

ISSN 1361-1445

Symbols for tables �n/a� means not available; �� means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

Myanmar (Burma) 1

Country Report February 2007 www.eiu.com © The Economist Intelligence Unit Limited 2007

Contents

Myanmar (Burma)

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2007-08 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

17 Economic policy

18 The domestic economy 18 Output and demand 20 Employment, wages and prices 21 Financial indicators 22 Sectoral trends

24 Foreign trade and payments

List of tables 9 International assumptions summary 11 Forecast summary 17 Central government tax revenue 18 Interest rates 19 Output of state-owned enterprises 20 Foreign direct investment 21 Consumer prices 21 Money supply and credit 24 Tourist arrivals 25 Key exports and imports 27 International liquidity

2 Myanmar (Burma)


List of figures 12 Gross domestic product 12 Consumer price inflation 25 Natural gas exports 26 Imports

Myanmar (Burma) 3


Myanmar (Burma) February 2007

Summary

The State Peace and Development Council (SPDC, the ruling military junta) will push on with its "road map to democracy", but there is little likelihood that this will lead to meaningful political reform. The US will remain a stern critic of the regime, but the junta!s ties with China and the Association of South-East Asian Nations (ASEAN), which includes Myanmar, remain fairly strong. The leader of the opposition National League for Democracy, Aung San Suu Kyi, remains under house-arrest, and despite intense international pressure the junta has no plans to release her in the near future. Economic policymaking will continue to be erratic. Although the energy sector will remain fairly buoyant, the outlook for the rest of the economy is poor. High inflation and weak confidence will exert downward pressure on the kyat!s free-market exchange rate, but buoyant exports of gas will help to keep the current account in surplus and bolster foreign-exchange reserves.

There has been limited progress with the political reform process, with the National Convention failing to complete its task of drafting the principles for a new constitution during its most recent session. Speculation over the deteriorating health of the SPDC chairman, Senior General Than Shwe, has intensified. The threat of an increase in political violence has increased. China and Russia have used their veto to block a UN Security Council resolution criticising Myanmar. ASEAN members continue to struggle to find an effective way of pushing for reforms in Myanmar.

Tax revenue growth (in nominal terms) remains strong, but the government continues to borrow heavily from the Central Bank of Myanmar. Interest rates have remained unchanged, despite signs of accelerating inflation. The junta has stepped up its anti-corruption drive.

There are some signs of growth in the economy, but the junta�s claims of double-digit GDP growth remain unsubstantiated. A large hydropower project has boosted foreign direct investment approvals. Inflation remains in double digits, but the free-market kyat exchange rate has strengthened slightly.

The import bill rose sharply during the first quarter of 2006 on a year-on-year basis, while a sharp drop in exports of gas contributed to a 19% year-on-year contraction in total export revenue. Nevertheless, with the merchandise trade account remaining in surplus, international reserves have continued to rise.

Editors: Danny Richards (editor); Duncan Innes-Ker (consulting editor) Editorial closing date: February 6th 2007 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2007-08

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Myanmar (Burma)


Political structure

Union of Myanmar

Military council

Following a military coup in September 1988, the State Law and Order Restoration Council (SLORC) assumed executive power; in November 1997 the SLORC was renamed the State Peace and Development Council (SPDC)

Chairman of the SPDC, Senior General Than Shwe

The Pyithu Hluttaw (People!s Assembly) was abolished after the military coup in 1988; an election was held for a new People!s Assembly in May 1990, resulting in an overwhelming victory for the opposition National League for Democracy (NLD), but the junta has refused to allow parliament to meet. In September 1998 the NLD set up a ten-member "people!s parliament" committee to represent the deputies elected in 1990. In August 2003 the junta announced a seven-point plan that would lead to the convening of parliament following fresh elections. No timeframe for the plan has been announced, although the National Convention"called to draft a new constitution"has met several times

May 27th 1990; next election date unknown

The SPDC controls all the organs of state power

Since the military coup, most political parties have been declared illegal. The handful that are still officially registered face many restrictions on their activities. The NLD is the most significant remaining opposition political party. The junta has developed the Union Solidarity Development Association (USDA), first set up in 1993 as a welfare organisation, into a quasi-political party and support bloc for the military regime. A number of ethnic-based political and armed groups also exist. After decades of conflict, many have now signed ceasefire agreements with the junta, although some groups continue to pursue armed resistance

National League for Democracy (NLD); National Unity Party (NUP); Shan Nationalities League for Democracy (SNLD) and other ethnic-based parties

Chairman Senior General Than Shwe Vice-chairman Deputy Senior General Maung Aye Secretary-1 Lieutenant-General Thein Sein Prime minister General Soe Win

Agriculture Major-General Htay Oo Commerce Brigadier-General Tin Naing Thain Defence Senior General Than Shwe Energy Brigadier-General Lun Thi Finance & revenue Major-General Hla Tun Foreign affairs Major-General Nyan Win Home affairs Major-General Maung Oo Industry-1 Aung Thaung Industry-2 Major-General Saw Lwin Mining Brigadier-General Ohn Myint Telecommunications, posts & telegraphs Brigadier-General Thein Zaw

Kyaw Kyaw Maung

Key ministers

Main political parties

Central bank governor

Form of state

The executive

Head of state

National legislature

National elections

National government

Main political organisations

Main members of the State Peace and Development Council

Official name

Myanmar (Burma) 5


Economic structure

Annual indicators

2002a 2003a 2004 a 2005 b 2006b

GDP at market prices (Kt bn)c 5,625.3 7,716.6 9,078.9 9,747.3 11,618.4

GDP (US$ bn)c 5.8 8.0 10.0 8.9 9.1

Real GDP growth (%)c 5.3b -2.6b 0.2 b 5.2 3.0

Consumer price inflation (av; %) 57.1 36.6 4.5 9.4 a 16.3

Population (m)d 48.9 49.5 50.0 50.5 a 51.1

Exports of goods fob (US$ m) 2,421.1 2,709.7 2,926.7 4,554.9 5,557.2

Imports of goods fob (US$ m) 2,022.1 1,911.6 1,998.7 1,744.6 2,057.8

Current-account balance (US$ m) 96.6 -19.4 111.6 1,078.3 1,506.4

Foreign-exchange reserves excl gold (US$ m) 470.0 550.2 672.1 770.7 a 1,100.0

Total external debt (US$ bn) 6.6 7.3 7.2 6.8 6.9

Debt-service ratio, paid (%) 3.8 3.9 3.8 2.5 2.1

Exchange rate (av) Kt:US$e 970.0b 960.0b 910.0 b 1,095.0 1,280.0

a Actual. b Economist Intelligence Unit estimates. c Fiscal year (beginning April 1st of year shown). d Mid-fiscal year. e Free-market exchange rate.

Main origins of real gross domestic product 2002/03 % of total

Components of nominal gross domestic product 2004/05 % of total

Agriculture 54.6 Total consumption 87.9

Industry 13.0 Total investment 11.7

Manufacturing 9.2 Exports of goods & services 0.2

Services 32.4 Imports of goods & services -0.1

Principal exports 2005 US$ m Principal imports 2005 US$ m

Gas 1,405.7 Machinery & transport equipment 280.5

Teak & other hardwoods 481.7 Refined mineral oil 261.8

Pulses 259.5 Base metals & manufactures 195.3

Textiles & garments 245.6 Fabrics 185.9

Fish, fish products & prawns 184.9 Electrical machinery 107.8

Main destinations of exports 2005 % of total Main origins of imports 2005 % of total

Thailand 44.5 China 28.4

India 11.9 Thailand 21.5

China 6.8 Singapore 18.1

Japan 5.1 South Korea 5.9

Malaysia 3.2 Malaysia 5.4

6 Myanmar (Burma)


Quarterly indicators 2004 2005 2006 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 QtrPrices Consumer prices (2000=100) 280.7 283.2 288.9 297.8 318.2 316.2 n/a n/aConsumer prices (% change, year on year) 3.7 6.1 8.9 8.9 13.4 11.7 n/a n/aFinancial indicators Exchange rate Kt:US$ (av) 5.63 5.58 5.70 5.82 5.93 5.91 5.78 5.74Exchange rate Kt:US$ (end-period) 5.48 5.63 5.84 5.87 5.95 5.91 5.75 5.76Central bank rate (end-period; %) 10.0 10.0 10.0 10.0 10.0 10.0 12.0 n/aDeposit rate (av; %) 9.5 9.5 9.5 9.5 9.5 9.5 12.0 n/aLending rate (av; %) 15.0 15.0 15.0 15.0 15.0 15.0 17.0 n/aM1 (end-period; Kt bn) 1,487.7 1,686.0 1,742.8 1,814.3 1,953.4 2,136.3 2,197.5 n/aM1 (% change, year on year) 25.4 29.5 21.2 22.0 31.3 27 26.1 n/aM2 (end-period; Kt bn) 2,081.8 2,287.3 2,394.1 2,505.6 2,651.1 2,861.0 2,976.4 n/aM2 (% change, year on year) 32.4 33.3 29.9 26.0 27.3 25.1 24.3 n/aSectoral trends, production Rice (annual totals; �000 tonnes)a 22,000 ( 22,000 ) n/a n/a n/aNatural gas (bn cu ft) 92.6 101.7 105.5 103.2 101.0 94.7 n/a n/aTin in concentrates (tonnes)b 126 125 88 180 225 244 n/a n/aZinc in concentrates (tonnes) 101 104 55 53 47 126 n/a n/aForeign trade (Kt m) Exports fob 2,786 6,672 5,314 5,609 4,292 5,431 n/a n/aImports cif -2,427 -2,345 -3,453 -2,371 -2,936 -2,792 n/a n/aTrade balance 359 4,327 1,862 3,238 1,356 2,639 n/a n/a

Foreign payments (US$ m) Merchandise trade balance 320.4 472.0 n/a n/a n/a n/a n/a n/aServices balance -45.1 -37.8 n/a n/a n/a n/a n/a n/aIncome balance -196.5 -170.5 n/a n/a n/a n/a n/a n/aNet transfer payments 27.9 32.9 n/a n/a n/a n/a n/a n/aCurrent-account balance 106.8 296.6 n/a n/a n/a n/a n/a n/aReserves excl gold (end-period) 672.1 774.4 709.4 754.7 770.7 890.0 938.9 1,088.0

a Estimates for fiscal year, beginning April 1st of year shown. b Includes output from joint ventures.

Sources: UN Food and Agricultural Organisation; Myanmar Central Statistical Organisation, Selected Monthly Economic Indicators; IMF, International Financial Statistics.

Myanmar (Burma) 7


Outlook for 2007-08

Political outlook

The State Peace and Development Council (SPDC, the ruling military junta) will push ahead with its "road map to democracy" in 2007-08. Following a break of nearly nine months, on October 10th 2006 the National Convention (NC) resumed the drafting of principles for a new constitution, one of the first steps on the road map. In this most recent session, which ended in late December, NC delegates began work on drawing up the principles for the final few chapters of the new constitution. SPDC officials have hinted that the NC will probably complete its work by 2008. However, the complete process"which includes the holding of a referendum on the new constitution, followed by elections"will remain protracted. The reform process is not expected to usher in meaningful political reform, as the military will ultimately retain a firm grip on power. While pledging to advance its reforms, the junta will also continue to crack down on opposition groups, particularly the National League for Democracy, whose leader, Aung San Suu Kyi, remains under house-arrest. The SPDC is also taking steps to ensure that it can counter any public opposition, recently announcing plans to introduce conscription and strengthen local-level militias.

In addition to pushing ahead (albeit slowly) with plans to put in place a new constitution that will guarantee that the military retains some degree of control, the SPDC also appears to be introducing measures that will enable it to control any future ostensibly civilian government. Senior members of the junta, including the SPDC�s chairman, Senior General Than Shwe, may resign their military posts at some point, in order to lead a new governing council or transitional government. In late 2006 the junta began a reorganisation of its local-level officials, appointing new heads of many of its district, township and village-level �peace and development councils� (PDCs). Whereas local military leaders remained as heads of the district-level PDCs, the township-and village-level councils will be run entirely by civilians. However, appointments are overseen by the military, and many of those being appointed are members of the Union Solidarity Development Association, which is being groomed as the SPDC!s civilian political wing.

The junta has been the focus of growing international attention in recent months. However, there remains a degree of incoherence in international efforts to persuade the SPDC to implement genuine political reform. In January 2007 the UN Security Council failed to adopt a resolution criticising Myanmar, despite receiving support from a majority of members, as both China and Russia used their power of veto. China and Russia objected to the resolution, which was put forward by the US, on the grounds that they did not believe that Myanmar posed a threat to international security. Perhaps in an effort to avoid action by the Security Council, prior to the debate on the resolution, the junta had been displaying an apparent willingness to re-engage with the UN, permitting the UN!s under-secretary general for political affairs, Ibrahim Gambari, to make two visits in 2006.

Domestic politics

8 Myanmar (Burma)


Although the SPDC has managed to avoid becoming the subject of a UN Security Council resolution, the situation in Myanmar will remain on the council!s formal agenda. In addition to this greater degree of international scrutiny, the junta could also face growing criticism from its regional allies. Although Myanmar!s fellow members of the Association of South-East Asian Nations (ASEAN) have eschewed any moves to intervene directly in Myanmar!s domestic affairs, the US is pushing leading members of the group to take a tougher stance against the junta. Some members have already adopted such a position unilaterally, owing to their concerns about the damage that the junta is doing to ASEAN!s reputation. However, at the annual ASEAN summit in January, although the group called on the SPDC to accelerate its reform process, it maintained an accommodating stance. This year a working group is due to complete a draft ASEAN charter. The charter will go some way towards moving ASEAN away from its long-held policy of non-interference in the internal affairs of member countries"a step that appears to be targeted partly at Myanmar. However, the commitment to consensus remains, suggesting that the charter is unlikely to contain much in the way of punitive measures.

Economic policy outlook

There has been speculation that the SPDC is planning to unveil a major economic reform programme in the near future, focusing on privatisation and policies to attract foreign investment (the junta is working on legislation giving tax breaks to foreign investors in planned special economic zones, or SEZs). There is a clear need for an overhaul of the junta!s economic policies. The economy remains in a fragile state, owing to the junta�s failure to pursue a sustainable fiscal policy. Its heavy reliance on financing from the Central Bank of Myanmar has undermined the bank�s ability to follow a coherent monetary policy. The junta has also displayed a penchant for extreme policy initiatives, with little apparent consideration for their damaging side-effects. It is possible, however, that the junta will implement some programmes over the next year or so that will be welcomed by foreign investors. For example, in November 2006 the information minister, Brigadier-General Kyaw Hsan, announced that an SEZ would be set up in Thanlyin township, in the Yangon Division, with foreign investors operating in the zone to be offered special privileges. However, the quality of the junta�s overall management of the economy is poor, and there is little likelihood of any genuine improvement in this respect in 2007-08.

The outlook for fiscal policy is dire. Although there is a lack of up-to-date statistics on the government!s fiscal position, it is unlikely to be healthy, as the junta remains heavily dependent on central bank funding to finance its expenditure. This situation is set to continue, particularly since the salary outlay for the public sector expanded sharply in mid-2006. Nevertheless, the SPDC managed to sell stakes in 11 state-owned enterprises in mid-2006, and tax revenue continues to rise at a fairly rapid pace in nominal terms. Some revenue-raising measures were implemented in 2006, including a rise in electricity prices and an attempt to reduce widespread tax evasion. Some subsidies for government employees have also been ended. However, over the

Policy trends

Fiscal policy

International relations

Myanmar (Burma) 9


next few years the junta is unlikely to make the cuts to either defence or non-essential spending that would be needed to rein in its budget deficits.

The central bank is not expected to make any effort to tighten monetary policy in the next few years, despite the likelihood of high inflation. The central bank made a surprise move in April 2006, raising its leading indicator rate by two percentage points, to 12%, the first such change in around five years. This coincided with the government!s decision to raise public-sector salaries, and the move was thus probably aimed at containing inflationary pressures. However, the central bank remains reluctant to tighten monetary policy aggressively, as it operates without independence from the government and is therefore keen to avoid increasing the public sector!s debt-servicing burden.

Economic forecast

International assumptions summary (% unless otherwise indicated)

2005 2006 2007 2008

Real GDP growth World 5.0 5.4 4.8 4.8

OECD 2.5 3.0 2.3 2.4

China 10.2 10.5 9.5 9.0

EU27 1.6 2.7 2.3 2.1

Exchange rates ¥:US$ 110.1 116.2 114.3 99.8

US$:� 1.246 1.256 1.342 1.363

SDR:US$ 0.677 0.678 0.654 0.640

Financial indicators � 3-month interbank rate 2.18 3.08 4.00 4.10

US$ 3-month Libor 3.56 5.19 5.14 5.01

Commodity prices Oil (Brent; US$/b) 54.7 65.3 58.8 57.4

Gold (US$/troy oz) 445.0 604.5 635.0 650.0

Food, feedstuffs & beverages (% change in US$ terms) -0.5 16.1 4.5 -1.2

Industrial raw materials (% change in US$ terms) 10.2 50.1 -0.5 -13.2

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The Economist Intelligence Unit forecasts that annual global GDP growth (on a purchasing power parity basis) will ease from an estimated 5.4% in 2006 to 4.8% in 2007-08, which is in line with a significant slowdown in the OECD economies, owing largely to a weakening US performance. The regional economy will remain buoyant, and there will be fairly strong demand in Myanmar!s main Asian export markets"particularly China, Thailand (for gas) and India. We have revised down our forecast for global crude oil prices, to US$58.8/barrel in 2007 (previously forecast at US$65/b) and US$57.4/b in 2008 (US$63.3/b previously). As Myanmar is heavily dependent on imports of refined petroleum products for transport and electricity generation, this trend should mean that supply-side inflationary pressures in the country will ease in 2007-08. Global prices for food, feedstuffs and beverages will rise by an annual average of 4.5% in 2007, before dipping by 1.2% in 2008.

International assumptions

Monetary policy

10 Myanmar (Burma)


Although the junta is likely to continue to claim that the economy is growing at double-digit rates, there is unlikely to be any evidence to support this. We expect the economy to grow at around 3-4% a year in 2007-08, a slow pace of growth compared with that of other countries in the region. There will be continued growth in the oil and gas sectors in terms of both production and exploration activity, but the rest of the economy will remain weak. Agriculture continues to suffer from poor productivity, with output remaining below potential levels. Manufacturing is constrained by the inadequate quantity and quality of inputs, primarily owing to problems in obtaining access to imports. Other difficulties include power shortages, a lack of competitiveness vis-à-vis imports from Thailand and China, and limited demand for manufactured Burmese exports, such as garments, partly because of the current ban in the US on imports from Myanmar. Weak forecast GDP growth is also a reflection of the poor prospects for consumption and investment. Consumer spending is constrained by low average incomes and a lack of confidence, owing to price instability and the weak free-market exchange rate. Domestic investment is constrained by limited access to capital. Although there will continue to be foreign interest in energy, mining and petroleum projects, other sectors hold only limited attractions, as foreign firms are either discouraged from investing by their home governments or put off by Myanmar!s poor business environment.

Anecdotal evidence suggests that consumer price inflation is rising sharply. Prices for important commodities soared in the wake of the government!s decision to raise public-sector salaries in March 2006, and rice and fuel prices remain high. However, official data (which form the basis of our forecasts) are unlikely to reveal the full extent of inflation, with year-on-year inflation officially indicated as slowing to an average of 11.6% in the first quarter of 2006, down from 14.3% in December 2005. Based on this official data series, we estimate annual inflation at an average of around 16% in 2006, but prices for most commodities are likely to have risen at a much faster pace. Although supply-side inflationary pressures could ease in 2007-08, the central bank is set to carry on funding the government!s budget deficit, and the consequent growth in the money supply will continue to push up the general price level. It is probable that the junta will attempt to contain inflation by implementing ad hoc (and potentially ill-devised) remedies, but these will be of a short-term nature and will fail to address the structural weaknesses in the economy.

The free-market exchange rate fell back slightly in early 2007, to stand at around Kt1,300:US$1. The kyat will remain on a downward trend over the next few years, depreciating from an estimated annual average of Kt1,280:US$1 in 2006 to around Kt1,500:US$1 in 2008. Despite the forecast surplus on the current account during the next few years, confidence in the kyat will continue to be weighed down by the general political and economic uncertainty in Myanmar and the potential for further ill-planned policy changes. The overvalued official rate, which is linked to the IMF!s SDR, will remain broadly stable in 2007-08, at close to Kt5.8:US$1, as it is unlikely that the junta will take any steps to realign

Inflation

Exchange rates

Economic growth

Myanmar (Burma) 11


its official exchange rate with the free-market rate. However, rising levels of international reserves may give the junta some impetus to do so.

Export revenue will remain buoyant in 2007-08, supported by Myanmar!s sales of natural gas to Thailand, in addition to strong demand from China and India for Burmese mining, energy, agricultural and forestry products. However, exports of manufactures, such as garments, will remain weak, largely owing to the US ban on imports from Myanmar and international consumer boycotts of Burmese goods. The import bill will also expand in 2007-08. If planned petroleum and hydropower projects develop rapidly, there could be a surge in imports of machinery and materials, but growth in imports of other goods will be restrained by the shortage of foreign exchange and by high import taxes. The current account is forecast to remain in surplus, with the large merchandise trade surplus being offset only partly by the substantial deficit on the combined services and income accounts. The income deficit will expand in line with the repatriation of profits of foreign investors in the mining and energy sectors, but official transfers (remittances by migrant workers, together with limited aid inflows) will offset the deficit on the services account.

Forecast summary (% unless otherwise indicated)

2005 a 2006 a 2007b 2008b

Real GDP growthc 5.2 3.0 3.3 3.8

Gross fixed investment growthc 0.2 2.0 6.0 8.0

Gross agricultural production growthc 3.5 1.2 1.4 2.0

Consumer price inflation (av) 9.4 d 16.3 26.1 26.7

Consumer price inflation (year-end) 14.3 d 19.3 29.3 23.1

Short-term interbank rate 15.0 d 16.5 17.0 17.0

Government budget balance (% of GDP)c -2.7 -3.4 -3.6 -3.8

Exports of goods fob (US$ bn) 4.6 5.6 6.3 6.6

Imports of goods fob (US$ bn) 1.7 2.1 2.4 2.7

Current-account balance (US$ bn) 1.1 1.5 1.7 1.2

Current-account balance (% of GDP)e 12.1 16.6 15.9 9.8

External debt (year-end; US$ bn) 6.8 6.9 7.5 7.8

Official exchange rate Kt:US$ (av)f 5.8 d 5.9 5.8 5.7

Exchange rate Kt:US$ (av)g 1,095.0 1,280.0 1,410.0 1,500.0

Exchange rate Kt:¥100 (av)g 994.8 1,101.4 1,234.1 1,503.8

Exchange rate Kt:Bt (av)g 27.2 33.8 40.1 43.0

a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Fiscal year (beginning April 1st of year shown). d Actual. e Fiscal year (beginning April 1st of year shown); at free-market exchange rate (which understates size of GDP). f Official rate. There is a wide differential between the official and free-market rates. g Free-market exchange rate.

External sector

12 Myanmar (Burma)


Myanmar Asia excl Japan

Gross domestic product(% change, year on year)

Myanmar Asia excl Japan

Consumer price inflation(av; %)

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

20

02

03

04

05

06

07

08

0.0

10.0

20.0

30.0

40.0

50.0

60.0

20

02

03

04

05

06

07

08

The political scene

The National Convention (NC), the body charged with drafting the principles for a new constitution, adjourned on December 29th. Its more than 1,000 delegates had been meeting since October. According to Lieutenant-General Thein Sein, secretary-1 of the State Peace and Development Council (SPDC, the ruling military junta) and chairman of the NC Convening Committee, guidelines for all chapters of the constitution have now been completed. The NC may finalise the last of these guidelines when it meets again later this year (a date for the next session has not yet been announced.) So far, the NC has formally adopted the basic principles for eight chapters out of a total of 15. The military suspended the country!s last constitution in 1988, but is committed to drafting a new constitution as the first step on the "road map" for political reform, which was unveiled in 2003. The SPDC has not set out a timeframe for implementing the road map process, and progress remains slow"the NC resumed work in 2004.

When the NC has completed its work, the SPDC plans to set up a body to draft a constitution, which will then be put to a public referendum for approval. In theory, the SPDC will then call a national election. The junta is promoting the road map process as a transition to what it calls �disciplined democracy�. However, opposition groups believe that the process will yield few meaningful changes, with power expected to remain concentrated in the hands of the military. The junta is keeping tight control over the road map process itself, with debate at the NC being severely restricted. Consequently, leading civilian political organisations, including the opposition National League for Democracy (NLD), have boycotted the NC.

In January 2007 the chairman of the SPDC, Senior General Than Shwe, visited Singapore, where he reportedly received medical treatment for a heart condition. Although this was not officially confirmed, Senior General Than Shwe did not attend the country�s Independence Day celebrations on January 4th, contributing to mounting speculation that his health is deteriorating. Senior General Than Shwe has subsequently appeared on television taking

The "road map" reform process edges ahead

The SPDC chairman appears increasingly frail

Myanmar (Burma) 13


part in the quarterly meeting of the SPDC. Nevertheless, despite such public appearances, it does appear that the ageing general is becoming more frail. The SPDC chairman!s apparent worsening health has raised speculation over the future leadership of the SPDC; as there is no effective mechanism for the transfer of power among the top generals, there is no certainty as to who will succeed Senior General Than Shwe.

The SPDC chairman appears to be grooming his protégé, General Shwe Mann, the joint chief-of-staff of the armed forces, to take his place. In September 2006 rumours emerged that Senior General Than Shwe had handed over key military posts to General Shwe Mann. Although such rumours have yet to be confirmed, the SPDC chairman may be set to step down from his various military posts in a bid to recast himself as a future �civilian� leader. He would probably not have risked such a move, however, unless he had first succeeded in placing his close allies in top military posts. Complicating the process, Senior General Than Shwe cannot afford to alienate the faction loyal to the SPDC deputy chairman, Deputy Senior General Maung Aye, who is in theory second in command.

Although there are few public signs of rifts within the junta, power struggles among the generals have erupted in the past with little warning. For example, General Khin Nyunt"once one of the three most powerful members of the SPDC"was purged in late 2004 and is now under house-arrest. General Ne Win, who dominated the military government for several decades, ended his days under house-arrest after the SPDC turned on him and his family. It is possible that differences among the top generals could prompt another such shake-up. However, the junta has proved adept at containing such upheavals, which have not appeared to loosen its grip on power.

The junta has recently faced an increase in public opposition. A group calling itself the "88 Generation", which is led by student activists who were involved in the pro-democracy protests of 1988, appears to be emerging as a new focus for anti-junta activity. In October 2006 the group launched a petition to campaign for the release of political prisoners, including a group of five activists arrested in September. The five included one of the most prominent student leaders from the 1988 protests, Min Ko Naing. All five had already spent many years in jail for their part in the 1988 pro-democracy protests. (There are an estimated 1,100 political prisoners in Myanmar. In January the junta stated that, in an amnesty to mark Independence Day, it had released just fewer than 3,000 prisoners, of whom around 40 were political prisoners.) By the end of October, when the petition campaign ended, the group claimed to have collected more than 500,000 signatures.

Unusually, the junta appeared to turn a blind eye to the petition campaign (although two of the organisers were arrested). Such public shows of opposition to the junta are extremely rare, as the military government censors all media and has banned gatherings of more than five people. Generally, those involved in public protests against the regime have faced long jail terms. Despite the risks, the 88 Generation has continued its activities. In the first week of November the group organised a week of multi-faith prayers for

A new activist group steps up pressure on the junta

14 Myanmar (Burma)


peaceful political change and for the country�s political prisoners. As part of the campaign, supporters gathered at the Shwedagon pagoda, one of the most important Buddhist temples in the country. In January the 88 Generation launched its latest campaign, �Open Heart�, encouraging people to write to Senior General Than Shwe to ask the junta to tackle social and economic problems, and to call for political and economic reform. The campaign was expected to last one month, with a target of sending 25,000 letters.

In January the SPDC released all of the five activists who were arrested in September 2006, including Min Ko Naing, dropping all the charges against them. (The timing of their release most likely reflected the junta�s efforts to deflect international criticism ahead of a vote on a proposed resolution of the UN Security Council condemning the junta.) The five have continued to call for a national reconciliation process and for peaceful political change. For the time being, the junta appears prepared to tolerate such activities. However, should these campaigns escalate, particularly if the 88 Generation calls for any sort of mass public demonstration, the junta is likely to act swiftly to detain the group�s leaders once again.

The opposition movement has generally relied on non-violent, civil disobedience tactics to protest against the military regime, such as those used by the 88 Generation. However, one small group, known as the Vigorous Burmese Student Warriors (VBSW), has a history of carrying out violent attacks. Most recently, the group claimed responsibility for several letter bombs sent in January, including one which exploded at a post office in the capital, Yangon. The bombs appeared to target officials from the police and the Union Solidarity Development Association (USDA), which is being groomed as the civilian political wing of the SPDC, as well as the Chinese embassy (China is one of the regime�s key trade and investment partners.) Small bomb explosions have become increasingly frequent over the past few years, the worst being a blast in May 2005 in Yangon that killed at least 23 people and injured around 160. The SPDC has blamed pro-democracy groups operating in exile for the bombings, but all of these groups except the VBSW have strongly denied any involvement. In some cases the bomb blasts may have been the result of feuds among military personnel. However, the claims by the VBSW of responsibility for the letter bombs in January this year suggest that at least one opposition group is prepared to use violent tactics against the regime.

Myanmar�s border regions will also continue to be destabilised by the ongoing efforts of the SPDC to wipe out armed resistance from ethnic-minority groups, some of which have been engaged in military campaigns against the regime for more than 50 years. These conflicts have displaced large numbers of people, with around 140,000 refugees from Myanmar now living in camps in Thailand, and a further 535,000 people displaced from their homes inside the country. This year may see an intensification of fighting between the SPDC and the armed wing of the Karen National Union (KNU), the largest group still resisting the junta militarily. Tentative peace talks between the KNU and the SPDC unravelled in late 2006. In October the SPDC informed the KNU that it would no longer honour an informal agreement to halt hostilities that had

There are threats of an increase in political violence

Myanmar (Burma) 15


been in place since early 2004. As a result, conflict in parts of Karen state is likely to intensify over the next few months.

On January 12th the UN Security Council failed to approve a resolution on Myanmar. The eight-point resolution included calls for the release of all political prisoners (including the NLD leader, Aung San Suu Kyi), an end to human rights abuses against ethnic minorities, and substantive political dialogue with all stakeholders. The US government, one of the SPDC!s strongest critics, had campaigned hard to have the resolution brought before the Security Council, on the grounds that the poor human rights situation in Myanmar, as well as the spread of illegal narcotics, posed a threat to regional peace and security. The resolution received nine votes in favour (from Belgium, France, Ghana, Italy, Panama, Peru, Slovakia, the UK and the US). However, China and Russia, which are permanent council members, used their veto to block the resolution. South Africa also voted against, while Indonesia, Qatar and Congo (Brazzaville) all abstained. China and Russia had opposed the US campaign on the grounds that the situation in Myanmar did not pose a threat to international security and hence did not belong on the UN Security Council!s agenda.

Other branches of the UN have continued to keep up pressure on the junta. In November the UN under-secretary general for political affairs, Ibrahim Gambari, made his second visit to Myanmar, following an earlier trip to the country in May 2006. During the trip he was able to meet senior members of the junta, including Senior General Than Shwe, as well as Aung San Suu Kyi. Following the meetings, Mr Gambari reported that his discussions with the junta had been more substantive than those held during his previous visit. In December the UN General Assembly passed its latest resolution condemning widespread human rights violations in Myanmar. In a statement in January, the UN secretary-general, Ban Ki-moon, called on the junta to make progress on political reform and to release all political prisoners, including Aung San Suu Kyi. However, the SPDC has ignored a number of similar calls in the past.

The US administration!s efforts to push through a UN Security Council resolution on Myanmar left the Association of South-East Asian Nations (ASEAN) in an uncomfortable position. Myanmar!s fellow ASEAN members have typically sought to defend Myanmar against international criticism, both championing the junta!s reform process and insisting that continued engagement with the regime is the best way to bring about change. However, the situation in Myanmar has become a growing source of embarrassment to some ASEAN members. As the road map process has dragged on, a number of ASEAN countries have become concerned that the lack of tangible progress is undermining the group!s credibility. It was notable that Indonesia abstained from voting on the UN Security Council resolution in early January, rather than voting against the measure.

In January the Malaysian foreign minister, Syed Hamid Albar, criticised US efforts to push through a UN Security Council resolution on Myanmar, saying that the failure to pass the resolution had served to strengthen the military regime. However, there is no consensus within ASEAN on how best to handle

A Security Council resolution on Myanmar is blocked

ASEAN is increasingly unsure how to handle the SPDC

16 Myanmar (Burma)


the SPDC. Although Malaysia, the Philippines and Indonesia have been quite vocal in calling for change, newer member states such as Vietnam and Laos oppose more interventionist tactics by ASEAN. The SPDC, meanwhile, continues to show little regard for the concerns of its ASEAN associates. In January Senior General Than Shwe once again failed to attend the annual summit of ASEAN heads of state, sending the prime minister, General Soe Win, in his place. The closing statement issued at the end of the summit reiterated ASEAN�s call for the SPDC to release political prisoners and to make faster progress in implementing the road map process, but there were few strong words, and the group avoided any discussion of what steps (if any) would be taken if the junta continued to ignore its demands. Moreover, in an apparent rejection of international efforts to put pressure on one of its members, ASEAN stated that it needed to preserve its credibility by "demonstrating a capacity to manage important issues in the region". During the summit, the group!s leaders reviewed a draft of an ASEAN charter, which could make the group operate as a rules-based entity, rather than on the basis of consensus, as is currently the case. However, it remains unclear whether the charter would contain provisions for the group to impose sanctions upon member states for failing to abide by its rules.

The SPDC�s effort to deepen ties with India has resulted in a recent flurry of high-level visits. General Shwe Mann visited India in December, and in January India�s minister of external affairs, Pranab Mukherjee, visited Myanmar. The Indian government is seeking support from the SPDC to contain a range of separatist groups operating on the border between the two countries. India is also hoping to boost energy imports from new offshore gasfields in Myanmar!s territorial waters in which its state-owned oil and gas companies have a stake. In exchange for increased military co-operation, the SPDC wants to source military equipment from India. During his visit in January, Mr Mukherjee confirmed that India would sell a range of military equipment to the SPDC. However, the US and EU have imposed an arms embargo on the SPDC, which has relied on China in recent years for much of its military hardware.

In contrast to the improvements in ties between Myanmar and India, Myanmar!s ties with neighbouring Thailand have cooled slightly since September last year, when a military coup in Thailand removed the prime minister, Thaksin Shinawatra, from office. Under the Thaksin government, Thailand developed close economic ties with Myanmar, becoming the country�s leading trade partner. However, Thailand�s interim prime minister, a retired general, Surayud Chulanont, is expected to take a tougher stance towards Myanmar. While serving as head of Thailand!s armed forces in the late 1990s, Surayud took a hard line towards the SPDC, motivated partly by his concerns over the flow of illegal drugs from Myanmar into Thailand. After becoming interim prime minister, Surayud left Myanmar off his initial tour of ASEAN member nations. Although he did finally make a visit in November, Thailand�s interim government seems keen to create some distance between itself and the military regime in Myanmar.

The SPDC looks to India for support and investment

Myanmar (Burma) 17


Economic policy

Central government tax revenue surged in January-March 2006, the final quarter of fiscal year 2005/06 (April-March), according to the Central Statistical Organisation (CSO). Total central government tax revenue jumped by 79.4% year on year in nominal terms during the quarter, driven up by a rise of 145.7% in revenue from the commodities and services tax. Boosted by this strong growth in revenue in the final quarter of 2005/06, total central government tax revenue for the full fiscal year jumped by 60.3% year on year, to Kt459bn (around US$79bn at the inflated official exchange rate, or around US$350m at the free-market exchange rate). Nevertheless, the pace of revenue growth was down compared with 2004/05, when central government revenue expanded by 77% year on year, driven up by a 424% surge in customs revenue following an increase in import tariffs. Reflecting the high base, in 2005/06 customs revenue dropped by 15.3% year on year, to Kt17.9bn. Other revenue sources all showed strong growth in 2005/06, with revenue from income tax up 48.4% year on year, to Kt142bn, and revenue from profit tax rising by 42%, to Kt63bn.

Central government tax revenue (Kt m unless otherwise indicated)

2004 2005 2006 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 QtrTax revenue 66,048 125,282 61,985 80,183 92,188 224,725 Commodities & services tax 30,129 51,057 27,596 27,069 41,961 125,465 Income tax 19,037 50,588 13,318 28,617 27,249 72,871 Profit tax 10,966 15,864 13,599 16,241 15,804 17,516 Customs tax 2,863 4,427 4,773 4,644 3,729 4,751 Lottery & stamp duty 3,053 3,346 2,699 3,612 3,445 4,122

Source: Central Statistical Organisation, Selected Monthly Economic Indicators.

The CSO does not publish regular data on expenditure. Historically, the State Peace and Development Council (SPDC, the ruling military junta) has run a large deficit on both the central government and the overall public-sector accounts. According to the Asian Development Bank, the total public-sector deficit reached around 6% of GDP in 2004/05, owing to heavy losses by the country!s state-owned enterprises (SOEs). It seems likely that this pattern has continued. The SPDC continued to borrow heavily from the Central Bank of Myanmar in 2005/06, which suggests that expenditure continued to outpace growth in revenue. In 2005/06 the stock of net credit received by the central government from the central bank expanded by 25% year on year, to Kt2.4trn (US$414bn at the official exchange rate, or US$1.8bn at the free-market rate).

In a statement in December 2006, the minister for planning, Soe Tha, indicated that consumer price inflation had reached over 16% year on year in September. Despite the acceleration in inflation, the authorities have yet to make any adjustment to monetary policy. Instead, they have used ad hoc controls and subsidies in a bid to control prices. The high level of domestic debt means that the SPDC is reluctant to raise interest rates, even during periods of high inflation. Since April 2006, the central bank rate has remained

Tax revenue growth remains strong

Interest rates hold steady, despite rising inflation

18 Myanmar (Burma)


at 12%, the rate for loans to SOEs has remained at 17%, and the savings deposit rate has remained at 12%. (Interest rates were raised in April 2006 for the first time in around five years.) As inflation accelerates, the savings deposit rates have again dropped into negative territory in real terms, thereby making it difficult for Myanmar�s shaky banking sector to attract depositors.

Interest rates (%)

2005 2006 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr JulCentral bank ratea 10.0 10.0 10.0 10.0 12.0 12.0Deposit rate (6-month) 9.5 9.5 9.5 9.5 12.0 12.0

Lending rate (working capital, SOEs) 15.0 15.0 15.0 15.0 17.0 17.0

a End-period.

Source: IMF, International Financial Statistics.

In late 2006 the junta launched a major crackdown against corrupt officials in the Customs Department. Around 500 officials were detained for questioning, of whom around 100 were subsequently arrested. In late October the director-general of the department, Khin Maung Lin, was given a 66-year jail term. The junta claims that action has been taken against more than 1,000 civil servants in 2005-06. In an unusual move for the junta, which tends to react badly to public criticism, a complaints hotline has been opened to enable the public to raise concerns about staff at the Ministry of Home Affairs.

Despite these efforts, corruption remains a serious problem throughout the military and government. Myanmar obtained one of the worst scores in the annual Corruption Perception Index for 2006, published by the anti-graft watchdog Transparency International. The index placed Myanmar and Iraq jointly in 160th place"only Haiti achieved a worse ranking. It is not clear how effective the junta�s latest anti-corruption efforts will be. In the past, such anti-corruption drives have often been politically motivated. For example, allegations of corruption were used to dismantle the military intelligence organisation run by a former senior SPDC member, General Khin Nyunt, after he was ousted from the junta in an internal coup in late 2004.

The domestic economy

Output and demand

In December the minister for planning, Soe Tha, stated that real GDP growth had slowed slightly, to 13.2% year on year, in fiscal year 2005/06 (April-March), down from 13.6% in 2004/05. The underlying data are not yet available, as Myanmar�s GDP data are several years out of date, apart from the headline growth figures, and unreliable. Also, there are no comprehensive data on agricultural and industrial production. The limited data that are available on industrial output suggest that there was an upturn in activity in 2005/06, but the double-digit GDP growth rates claimed by the junta still appear unrealistic.

The SPDC claims double-digit GDP growth for 2005/06

An anti-corruption drive targets customs officials

Myanmar (Burma) 19


Data on industrial production by state-owned enterprises (SOEs) show that output of cotton yarn and fabrics, paper, cement, natural gas and crude oil all rose in volume terms in 2005/06 on a year-on-year basis. However, production of most goods was not rising at double-digit rates. For example, output of natural gas (now by far Myanmar!s largest export) rose by a modest 7.1% year on year, to 404bn cu ft in 2005/06, a slight slowdown compared with growth of 7.9% in 2004/05. Crude oil output rose by 6.4% year on year in 2005/06, after rising by 4.5% year on year in 2004/05. Cement output rose by just 1.8% year on year in 2005/06, after dropping by 8.5% in 2004/05, which suggests that the construction sector remained sluggish. Output of cotton yarn and fabrics showed more robust growth, rising by 9.6% and 19.1% year on year respectively in 2005/06. This increase was driven by a recovery in the export-oriented garment manufacturing sector, which had been hit hard by a US ban on imports from Myanmar imposed in mid-2003 (the US had previously been a major market for Myanmar!s garment exports). But sugar output continued to fall, dropping by 28% year on year, to 38.1m tonnes in 2005/06, after falling by 2.1% in 2004/05.

Rising electricity sales in 2005/06 indicate reasonably strong energy demand from the industrial sector as a whole. Electricity sold to all industrial units rose by 11.7% year on year in 2005/06, after remaining almost static in 2004/05.

Output of state-owned enterprises (tonnes unless otherwise indicated)

2004 2005 2006 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 QtrCotton yarn ('000 lb) 2,291 2,025 1,879 2,084 2,563 2,587Cotton fabrics ('000 yd) 3,971 3,541 3,591 3,529 5,037 5,545Paper 4,169 4,811 4,907 5,454 4,432 4,238

Cement 118,962 162,945 140,142 125,820 114,327 162,779Sugar 32,185 20,735 � � 16,145 21,971

Natural gas (m cu ft) 92,644 101,639 105,493 103,180 100,955 94,730Crude oil ('000 barrels) 1,783 2,024 2,105 2,041 1,963 1,853


In 2005/06 Myanmar approved a record US$6bn in foreign direct investment (FDI), according to data from the Central Statistical Organisation (CSO). FDI approvals in recent years have been meagre, and in 2004/05 they totalled only US$158.3m. The huge leap in 2005/06 was driven by one project: the Tasang dam, on the Salween river. Deals for the project, totalling just over US$6bn, were signed by Thai interests in March 2006. The project is expected to take around 15 years to complete, and will have a capacity of 7,100 mw, with most of the electricity to be produced for export. The oil and gas sector attracted a modest US$35m in new FDI approvals 2005/06, but foreign investment has totally collapsed in almost all other sectors"no new projects were approved in manufacturing, hotels and tourism, transport or agriculture.

There could be continued expansion in FDI approvals as several new offshore gasfields go into production, and as other planned hydropower projects on the Salween river take shape. However, foreign investment in other sectors remains low, as investors continue to be deterred by the poor business

A hydropower project boosts FDI approvals to record levels

20 Myanmar (Burma)


environment, including international sanctions and consumer boycotts, and by high levels of political risk. The Tasang dam project itself could still face delays. The project is opposed by a range of non-governmental groups concerned that it will result in the forced relocation of local people and the destruction of large areas of forest. The new military-backed Thai government also appears keen to reduce its reliance on Myanmar for its energy imports. As a result, there may be delays before the recent high FDI approvals translate into actual inflows of investment.

Foreign direct investment (US$ m)

2004/05 2005/06Main sources China 126.6 0.7Thailand 29.0 6,034.4Japan 2.7 �India � 30.6Main sectors Power � 6,034.4Oil & gas 142.6 35.0Real-estate development 31.3 �Mining 6.0 0.7Manufacturing 3.5 �Hotels & tourism -25.1 �Total incl others 158.3 6,065.7


Employment, wages and prices

According to data from the CSO, the consumer price inflation rate remained in double digits during the first quarter of 2006. Inflation averaged 11.6% year on year in January-March 2006, down slightly from an average of 13.4% year on year in the fourth quarter of 2005. Inflation averaged 9.4% year on year in 2005 as a whole, but picked up steadily throughout the year, driven up by rising food prices"food has the heaviest weighting in the consumer price index. Food prices continued to drive the overall upturn in inflation in the first quarter of 2006, with the food price index showing an average increase of 12.5% year on year.

Inflation data are not yet available for the remainder of 2006. In a statement in December Soe Tha indicated that consumer price inflation had reached over 16% year on year by September. It is likely that inflation remained in double-digits throughout the second half of 2006. A wage increase for around 1m civil servants in April 2006, followed by an increase in electricity prices in May, will have put some upward pressure on prices. Anecdotal evidence also suggests that the price of rice rose strongly throughout 2006, the result of rising production costs as prices for fuel and fertiliser rose. The price of other crops, such as onions, also picked up in late 2006, owing to heavy flooding in central Myanmar, which damaged crops.

Inflation remains in double digits

Myanmar (Burma) 21


Consumer prices (period av)

2004 2005 2006 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 QtrGeneral index (1997=100) 426.0 429.8 438.4 451.9 482.9 479.8 % change, year on year 3.6 6.1 8.9 8.9 13.4 11.6

Food index 424.7 425.8 439.8 453.1 484.0 478.9 % change, year on year 0.6 4.2 9.8 9.8 14.0 12.5


Financial indicators

Rising foreign-exchange reserves have helped to stabilise the free-market value of the kyat, which was trading at around Kt1,300:US$1 in the first weeks of January 2007. (Free-market exchange rate data are approximate, as the junta does not publish such figures.) The kyat has recovered from a low of around Kt1,450:US$1 at the end of April 2006, when the currency came under pressure because of fears that a massive pay rise for civil servants would push up prices. The rarely used official exchange rate is fixed against the IMF!s SDR unit. As a result, the official rate barely moved in 2006, averaging around Kt5.8:US$1.

Both narrow money supply (M1) and quasi-money (comprising time, savings and foreign-exchange deposits) continued to expand rapidly in the first seven months of 2006. At the end of July broad money supply (M2) had expanded by 25.6% year on year. The junta has continued to rely on credit from the Central Bank of Myanmar to offset its budget deficit. At the end of July total outstanding credit to the central government had expanded by 27.3% year on year, to Kt2.6trn (US$456bn at the official exchange rate, or around US$2bn at the free-market exchange rate). The government continued to absorb the bulk of credit, accounting for 80.6% of all credit outstanding at the end of July.

Money supply and credit (Kt m unless otherwise indicated; end-period)

2005 2006 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr JulNarrow money (M1) 1,742,805 1,814,295 1,953,375 2,136,300 2,197,547 2,244,919 % change, year on year 28.1 26.1 31.3 26.7 26.1 26.8

Quasi-money 651,284 691,319 697,736 724,728 778,814 818,039Broad money (M2) 2,394,089 2,505,614 2,651,111 2,861,028 2,976,361 3,062,958 % change, year on year 29.9 26.0 27.3 25.1 24.3 25.6

Total credit 2,557,451 2,695,174 2,870,851 2,977,351 3,169,271 3,254,143 Claims on central government 1,999,436 2,106,872 2,265,512 2,403,258 2,542,317 2,622,914 Claims on non-financial public enterprises 46,277 40,227 34,415 8,633 38,377 41,102 Claims on private sector 511,738 548,075 570,924 565,460 588,577 590,127


Strong money-supply growth continues

The free-market kyat exchange rate is up slightly

22 Myanmar (Burma)


Sectoral trends

In addition to Myanmar�s legal agricultural crops, there is a huge illegal economy based around the production of opium. According to a recent report by the UN Office of Drugs and Crime (UNODC), there has been a sharp drop since 1998 in the area of opium poppy cultivation, which stood at 130,300 ha in that year. Moreover, the area under cultivation dropped by 34% year on year in 2006, to 21,500 ha. However, this year-on-year reduction was offset by a strong 55% year-on-year rise in yields. As a result, the UNODC estimates that potential production totalled 315m tonnes in 2006, up by 1% year on year. Rising prices meant that opium production in 2006 had a potential value of US$72m, up from US$58m in 2005. The junta claims that it is committed to eradicating opium production by 2014, but Myanmar remained the world�s second-largest opium producer in 2006, after Afghanistan.

Despite a 7% year-on-year contraction in output of natural gas in the first quarter of 2006, in 2005/06 gas output rose by 7.1%, according to CSO figures. Owing to recent offshore finds, output of natural gas (most of which is exported) looks set to remain buoyant. In January 2007 Thailand�s PTT Exploration and Production (PTTEP), a subsidiary of the partly state-owned PTT, announced the discovery of a "promising amount" of gas in block M9 in the Gulf of Mataban. Three flow-rate tests were conducted, and the results showed a maximum flow rate of 71.4m cu ft per day. PTTEP has a production-sharing contract for the block with the state-owned Myanmar Oil and Gas Enterprise (MOGE). The new find in block M9 follows a number of large offshore finds in blocks A1 and A3, which are expected to go into production by 2009-10. These blocks together have total confirmed recoverable reserves estimated at 4.8trn-8.6trn cu ft.

Blocks A1 and A3 are being developed by a consortium comprising Daewoo and Kogas of South Korea, and India!s GAIL (formerly known as the Gas Authority of India) and ONGC Videsh. Some gas from blocks A1 and A3 will be retained for domestic use, and some is likely to be exported, although the junta has still not finalised an export agreement. Proposals to transport the gas to India through a new pipeline have stalled, owing in part to India�s difficulties in negotiating a route for the pipeline through Bangladesh. MOGE has indicated that none of the pipeline proposals currently on the table are acceptable, and in early 2007 the junta called for proposals for a liquefied natural gas project to exploit the gas instead.

Currently, the bulk of Myanmar�s energy exports go to Thailand. This may change over the next few years, however. Following the September 2006 coup in Thailand, the new military-backed government carried out a review of the country�s medium-term energy policy, and signalled a wish to reduce Thailand!s reliance on energy imports from Myanmar. In November Thailand�s energy minister, Piyasvasti Amranand, acknowledged that the country would remain reliant on energy imports, but indicated that the government would seek to diversify their sources. However, even if Thailand does look elsewhere for its energy needs, Myanmar�s energy-hungry neighbours, China and India, are both vying to secure a deal to import gas

Natural gas production remains strong

Rising yields offset efforts to curb opium production

Myanmar (Burma) 23


from the A1 and A3 blocks; South Korea and Japan have also expressed interest.

Electricity exports will rise over the medium term, assuming that a series of massive hydroelectricity projects on the Salween river go ahead, including the 7,100-mw hydropower plant at Tasang, which is estimated to cost US$6bn. These projects, however, have raised deep concerns among environmental and human rights groups, which fear that the construction of the power plants will result in the forced relocation of local people and the destruction of forest. Among the planned projects, a Chinese state-owned energy firm, Sinohydro, and Thailand!s state-owned electricity utility, EGAT, are scheduled to develop a 600-mw hydropower project at Hat Gyi, further down the Salween river, at an estimated cost of around US$1bn.

Thailand�s commitment to developing the Salween hydropower projects may, however, be wavering. Despite the fact that a number of agreements have already been signed, in October Thailand�s energy minister, Piyasvasti Amranand, suggested that the Tasang dam plans were still not firm.

In October the Ministry of Mines announced plans to privatise the country�s largest state-owned gold mine, the Kyaukpahtoe mine in the north of Sagaing Division. Myanmar has a modest mining sector, producing copper and other metals, as well as gems such as jade and rubies. Owing primarily to surging world copper prices, exports of metals and ores rose by just over 16% year on year in value terms in 2005/06, to Kt645m (around US$111m at the official exchange rate, or nearly US$500,000 at the free-market rate), despite a 10.4% year-on-year contraction in export volumes. The sector has attracted little foreign investment, and much production remains small-scale and under-resourced. Selling Kyaukpahtoe could inject some much-needed investment into the mining sector. However, the insistence of the SPDC that around one-half of the mine�s estimated capacity of gold production must be given to the state each month may deter investors.

According to data from the CSO, international tourist arrivals totalled just over 313,700 in 2005/06, up by just 0.2% year on year. Arrivals were dragged down by a 7.3% year-on-year fall in arrivals by air, to 144,628 (arrivals by air accounted for just over 46% of the total, with much of the rest accounted for by day-trippers from Thailand arriving at land border checkpoints). The drop-off in arrivals by air partly reflects the high base: in 2004/05 arrivals by air jumped by nearly 30%. Arrivals in January-March fell by 6.4% year on year to 96,345.

The start of several new international flights into Myanmar in the second half of 2006 may boost air arrivals. For example, in August a Thai low-cost airline, Thai Air Asia, started daily flights to the Burmese capital, Yangon. In November South Korea!s Asiana Airlines and Korean Air were given permission to begin regular flights to Myanmar. However, despite the increased capacity, a strong upturn in arrivals is unlikely while boycott campaigns organised by international pro-democracy groups continue.

Tourist arrivals remain static in 2005/06

The SPDC puts its largest gold mine up for sale

Investment in hydropower increases

24 Myanmar (Burma)


Tourist arrivals 2004 2005 2006 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 QtrArrivals (no.) 91,058 102,883 60,451 61,929 95,012 96,345 % change, year on year 0.5 8.4 2.5 3.0 4.3 -6.4


According to the Ministry of Communications, Posts and Telegraphs, the number of Internet users in Myanmar reached 300,000 in 2006. This represents a huge increase compared with 2005. According to the International Telecommunication Union (ITU), Myanmar had only 78,000 Internet users in 2005, or 0.15 per 100 people, giving it one of the lowest ratios of Internet users to population in Asia. Even at 300,000 users Myanmar!s ratio is low, at around 0.6 users per 100 people. By comparison, Thailand had 11 users per 100 in 2005, although Cambodia had only 0.3 per 100, according to ITU figures.

Although the SPDC claims that it wants to promote the information technology (IT) sector, it has done little to foster IT skills or use. Few people own computers, and although a small number of Internet cafés have opened in the larger cities, the cost is prohibitive for most people. Moreover, e-mail communications are strictly monitored, and many websites hosted outside Myanmar are blocked. As a result, Myanmar has not experienced the boom in Internet usage seen throughout much of the region.

Foreign trade and payments

Export revenue dropped sharply in the first quarter of 2006, falling by 18.6% year on year, to Kt5.4bn (around US$930m at the official exchange rate, or US$4.2m at the free-market rate). Commodities continue to account for the bulk of Myanmar�s exports. Revenue from the country�s main export commodity, natural gas, plunged by nearly 54% year on year, to Kt1.6bn, in the first quarter of 2006. This poor performance, however, is not indicative of a slump, but rather reflects the unsteady stream of revenue generated by exports from the huge Yetagun and Yadana offshore gasfields to Thailand. Supporting this view, data from the Bank of Thailand (BOT, Thailand!s central bank) indicate that Myanmar!s exports to Thailand rose by 30% in 2006, to US$2.3bn. (Thailand�s imports from Myanmar are dominated by natural gas.) It is likely that gas exports to Thailand rose in the final quarter of 2006, as the partly state-owned Thai energy firm, PTT, agreed to raise its imports from Myanmar!s Yadana offshore gasfield"from 525m cu ft/day to 565m cu ft/day"from September 1st.

Exports of teak and other hardwoods dropped slightly in the first quarter on a year-on-year basis, but exports of pulses more than doubled, owing to strong demand from India (the main importer of pulses from Myanmar). Garment exports also performed well, rising by 55.6% year on year in value terms, suggesting that the sector is recovering as exporters gain access to new markets following the imposition of sanctions by the US in 2003.

Exports drop sharply in the first quarter of 2006

Internet usage remains low

Myanmar (Burma) 25


0

20

40

60

80

100

120

140

160

180

Jan2004

Mar May Jul Sep Nov Jan05

Mar May Jul Sep Nov Jan06

Mar

Natural gas exports

(bn cu ft)


Imports rose by 19.1% year on year in the first quarter of 2006, to Kt2.8bn. Surging world commodity prices drove up imports of refined mineral oil, which were up by 67.9% year on year, and base metals and manufactures, which rose by 23.4%. Imports of fabrics rose 41.4% year on year in value terms, in line with the recovery in the export-oriented garment sector. Reflecting weakness in consumer demand, imports of consumer goods dropped by 0.6% year on year to Kt1.1bn in the first quarter of 2006. Most of the growth in the overall import bill stemmed from a 47.5% year-on-year expansion in capital goods imports, to Kt975bn, in the first quarter. Growth in imports of intermediate goods was also strong, with such imports rising by 26% year on year, to Kt683.5m (equivalent to US$5,340 by the free-market exchange rate, or US$117.8m by the official rate). In line with the sharp drop in export revenue and the surge in the import bill, the merchandise trade surplus dropped to Kt2.6bn in the first quarter of 2006, down from Kt4.3bn in the year-earlier period.

Key exports and imports (Kt m unless otherwise indicated)

Jan-Mar

2005 2006 % changea

Exports

Gas 8,098 1,597 -53.9

Teak & other hardwoods 2,776 592 -4.0

Pulses 1,495 748 104.7

Garments 1,415 479 55.6

Prawns, fish & fish products 1,065 291 23.4

Metals & ores 698 108 -32.8

Maize 111 29 -61.2

Rubber 201 44 8.3

Rice 227 61 -17.3

Total exports incl others 21,887 5,431 -18.6

Imports rise, contributing to a smaller trade surplus

26 Myanmar (Burma)


Key exports and imports (Kt m unless otherwise indicated)

Jan-Mar

2005 2006 % changea

Imports

Machinery & transport equipment 1,616 705 31.8

Refined mineral oil 1,508 132 67.9

Synthetic & woven fabrics 1,071 238 41.4

Base metals & manufactures 1,125 209 23.4

Electrical machinery 621 112 28.2

Plastics 490 186 83.7

Total imports incl others 11,067 2,792 19.1

Trade balance 10,821 2,639 �

a January-March 2006 compared with year-earlier period.


0

200

400

600

800

1,000

1,200

1,400

1,600

Jan2005

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan06

Feb Mar

GovernmentPrivate


Imports

(Kt m)

In 2006 Myanmar�s foreign-exchange reserves continued the steady increase recorded in the past few years. According to the latest available data from the IMF, Myanmar�s total international reserves topped US$1bn for the first time at the end of the third quarter of 2006, up from a low of US$234m in 2000. The recovery in international reserves is the result of the improving merchandise trade position, which returned to surplus in 2001 following the start of large-scale gas exports to Thailand. At the same time, the State Peace and Development Council (SPDC, the ruling military junta) has sought to protect vulnerable reserves by imposing a range of restrictions both on imports and on access to foreign exchange. Foreign-exchange reserves will receive a further boost over the next few years, assuming that there are rising inflows of foreign investment into several major energy projects. However, these projects are also likely to boost demand for imported equipment and materials, which would result in a short-term erosion of the merchandise trade surplus. The SPDC may therefore keep its existing restrictions on imports and access to foreign exchange in place, at least for the time being.

Despite the recent improvement in the reserves position, Myanmar�s debt-servicing record remains poor. The SPDC has ceased servicing some of its

International reserves top US$1bn

Myanmar (Burma) 27


debts to multilateral donors, and has recently sought an extension on a US$110m soft loan from the Export-Import Bank of Thailand, according to media reports in November. In late 2006 China reportedly forgave a US$30m loan to Myanmar.

International liquidity (US$ m; end-period)

2005 2006 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 QtrForeign exchange 709.3 754.6 770.5 890.0 938.9 1,088.0SDRs & IMF reserve position 0.1 0.1 0.2 � 0.2 0.1

Gold (national valuation) 11.8 11.7 11.6 11.7 12.0 12.0Total international reserves 721.2 766.4 782.3 901.7 951.1 1,100.1


myanmar (burma) · myanmar (burma) 1 country report february 2007 ' the economist intelligence...

Documents