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Country Report

Myanmar (Burma)

May 2005

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Myanmar (Burma) at a glance: 2005-06

OVERVIEWThe ruling military junta, the State Peace and Development Council (SPDC),will push on with its “road map to democracy” in a bid to win somelegitimacy for the regime. However, unless the junta releases Aung San SuuKyi, the leader of the opposition National League for Democracy (NLD), andallows her party to operate freely, the road map will lack any credibility. Armyhardliners have consolidated control, and conflict with armed ethnic groups islikely to escalate. Economic policy will remain erratic, and economic growthwill be held back by feeble investment, shortages of key inputs, a poorbusiness climate and the impact of international sanctions. However, theenergy sector will remain fairly buoyant. High inflation and poor confidencewill exert downward pressure on the free-market exchange rate.

Key changes from last month

Political outlook• The threat of instability is rising, with small-scale bombings in major cities

taking place with greater frequency and becoming more deadly. However,the bombings are unlikely to precipitate a widespread uprising; the junta’sgrip appears to remain strong, and it continues to crack down harshly onprotestors.

Economic policy outlook• There has been no change in economic policy in recent months. Nominal

interest rates remain unchanged despite the sharp swings in inflation.

Economic forecast• The junta estimates that GDP grew by 12.6% in fiscal year 2004/05 (April-

March), and it has set a similar target for 2005/06. However, these rates ofgrowth are unrealistic. Proxy indicators and anecdotal evidence suggest thateconomic growth has been much slower and that prospects for growthremain poor.

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Myanmar (Burma) 1

Country Report May 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Contents

Myanmar (Burma)

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2005-067 Political outlook8 Economic policy outlook9 Economic forecast

12 The political scene

16 Economic policy

18 The domestic economy18 Output and demand20 Employment, wages and prices20 Financial indicators22 Sectoral trends

25 Foreign trade and payments

List of tables9 International assumptions summary11 Forecast summary17 Central government tax revenue17 Interest rates19 Output of state-owned enterprises19 Foreign direct investment20 Consumer prices21 Money supply and credit24 Tourist arrivals26 Key exports and imports27 Trade with Thailand27 International liquidity

List of figures12 Gross domestic product12 Consumer price inflation22 Rice imports25 Imports

Myanmar (Burma) 3


Myanmar (Burma)May 2005

Summary

The ruling military junta, the State Peace and Development Council (SPDC),will push on with its "road map to democracy" in a bid to win some legitimacyfor the regime. However, unless the junta releases Aung San Suu Kyi, the leaderof the opposition National League for Democracy (NLD), and allows her partyto operate freely, the road map will lack credibility. Army hardliners haveconsolidated control, and conflict with armed ethnic groups is likely to escalate.Economic policy will remain erratic, and economic growth will be held back byfeeble investment, shortages of key inputs, a poor business climate and theimpact of international sanctions. However, the energy sector will remain fairlybuoyant. High inflation and poor confidence will exert downward pressure onthe free-market exchange rate.

Rumours of another internal split within the junta hierarchy have been rife.The National Convention (NC) has made little progress in meeting its aims ofdrafting the principles for a new constitution the NC resumed on February17th, but the session only lasted a few weeks. A crackdown on Shan oppositiongroups has intensified. There have been several bomb attacks in recent months,the most serious of which killed at least 11 people in early May. Myanmar sfellow members of the Association of South-East Asian Nations (ASEAN) haveexpressed frustration at the junta s failure to live up to its promises on reform.

The junta has yet to formulate any coherent policy to correct currentmacroeconomic imbalances. Tax revenue continues to rise, but the junta s hugepublic-sector deficit is unlikely to have fallen. There has been no change innominal interest rates. It is unlikely that the junta has made any progress inmeeting its commitments to reducing labour abuses.

The SPDC has claimed unrealistically high growth rates for fiscal year 2003/04(April-March) and 2004/05; proxy indicators suggest that economic growth hasbeen poor. Although consumer price inflation eased in the first half of 2004, itis likely that inflation has accelerated since then. Foreign investment hasremained weak.

The merchandise trade surplus has deteriorated in line with falling exportrevenue and rising imports. However, Myanmar s international reservesposition continues to improve.

Editors: Danny Richards (editor); Gerard Walsh (consulting editor)Editorial closing date: May 12th 2005

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

The political scene

Economic policy

The domestic economy

Foreign trade and payments

Outlook for 2005-06

4 Myanmar (Burma)


Political structure

Union of Myanmar

Military council

Following a military coup in September 1988, the State Law and Order RestorationCouncil (SLORC) assumed executive power; in November 1997 the SLORC was renamedthe 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; anelection was held for a new People s Assembly in May 1990, resulting in anoverwhelming victory for the opposition National League for Democracy (NLD), but thejunta 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. InAugust 2003 the junta announced a seven-point plan that would lead to the convening ofparliament following fresh elections. No timeframe for the plan has been announced,although a National Convention called to draft a new constitution met briefly in 2004and early 2005

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 thatare still officially registered face many restrictions on their activities. The NLD is the mostsignificant remaining opposition political party. The junta has tried to develop the UnionSolidarity 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 nowsigned ceasefires with the junta, although some groups continue armed resistance

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

Chairman Senior General Than ShweVice-chairman Deputy Senior General Maung AyeSecretary-1 Lieutenant-General Thein SeinPrime minister Lieutenant-General Soe Win

Agriculture Major-General Htay OoCommerce Brigadier-General Tin Naing ThainDefence Senior-General Than ShweEnergy Brigadier-General Lun ThiFinance & revenue Major-General Hla TunForeign affairs Major-General Nyan WinHome affairs Major-General Maung OoIndustry (One) Aung ThaungIndustry (Two) Major-General Saw LwinMining Brigadier-General Ohn MyintTelecommunications, post & 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& Development Council

Official name

Myanmar (Burma) 5


Economic structure

Annual indicators2000 a 2001 a 2002a 2003 a 2004 b

GDP at market prices (Kt bn)c 2,552.7 3,548.5 5,625.3 7,716.6 8,228.1GDP (US$ bn)c 7.2 5.7 5.8 8.0 9.0

Real GDP growth (%)c 6.2 5.3 b 5.3b -2.0 b -1.3Consumer price inflation (av; %) -0.1 21.1 57.1 36.6 9.7Population (m)d 47.5 48.2 48.9 49.5 50.2

Exports of goods fob (US$ m) 1,661.6 2,432.4 2,544.1 2,510.1 2,552.1Imports of goods fob (US$ m) 2,165.4 2,376.3 2,161.6 1,932.4 2,054.4

Current-account balance (US$ m) -211.6 -169.6 10.2 49.7 -37.8Foreign-exchange reserves excl gold (US$ m) 223.0 400.5 470.0 550.2 672.1Total external debt (US$ bn) 5.9 5.7 6.6 6.9 b 7.0

Debt-service ratio, paid (%) 3.8 2.8 3.8 4.1 b 4.6Exchange rate (av) Kt:US$e 355.3 b 620.0 b 970.0b 960.0 b 910.0

a Actual. b Economist Intelligence Unit estimates. c Fiscal year (beginning April 1st of year shown). d Mid-fiscal year. e At free-marketexchange rates.

Main origins of real gross domestic product2001/02 % of total

Components of nominal gross domestic product2003/04 % of total

Agriculture 57.2 Total consumption 89.0Industry 10.2 Total investment 11.0 Manufacturing 7.8 Exports of goods & services 0.2

Services 32.4 Imports of goods & services -0.2

Principal exports 2003 US$ m Principal imports 2003 US$ mGas 647 Machinery & transport equipment 407Textiles & garments 350 Fabrics 258

Teak & other hardwoods 297 Refined mineral oil 223Pulses 242 Base metals & manufactures 154

Fish, fish products & prawns 145 Electrical machinery 83

Main destinations of exports 2003 % of total Main origins of imports 2003 % of totalThailand 30.2 China 28.9US 9.7 Singapore 20.7

India 9.0 Thailand 14.0China 5.6 Malaysia 9.2Japan 4.5 South Korea 5.5

6 Myanmar (Burma)


Quarterly indicators2003 20041 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

PricesConsumer prices (2000=100) 243.5 259.2 265.7 270.8 266.9 265.3 n/a n/aConsumer prices (% change, year on year) 58.3 47.9 30.5 18.7 9.6 2.4 n/a n/aFinancial indicatorsExchange rate Kt:US$ (av) 6.22 6.09 6.11 5.89 5.72 5.83 5.80 5.63Exchange rate Kt:US$ (end-period) 6.19 6.07 6.01 5.73 5.75 5.80 5.79 5.48Central Bank rate (end-period; %) 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0Deposit rate (av; %) 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5Lending rate (av; %) 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0M1 (end-period; Kt bn) 1,129.8 1,126.3 1,128.6 1,186.1 1,301.7 1,360.1 1,438.4 1,487.7M1 (% change, year on year) 34.6 32.1 17.8 17.5 15.2 20.8 27.5 25.4M2 (end-period; Kt bn) 1,545.7 1,497.8 1,524.4 1,572.4 1,715.9 1843.1 1,989.1 2,081.8M2 (% change, year on year) 18.4 11.8 3.7 1.4 11.0 23.1 30.5 32.4

Sectoral trends, productionRice (annual totals; ‘000 tonnes)a ( 24,640 ) ( 23,000 )Natural gas (bn cu ft) 83.2 n/a n/a n/a n/a n/a n/a n/aTin in concentrates (tonnes)b 193 n/a n/a n/a n/a n/a n/a n/aZinc in concentrates (tonnes) 107 n/a n/a n/a n/a n/a n/a n/aForeign trade (Kt m)Exports fob 4,666 3,929 3,319 3,210 3,658 3,845 n/a n/aImports cif -2,943 -3,599 -3,630 -2,525 -3,643 -3,736 n/a n/aTrade balance 1,723 330 -311 685 15 109 n/a n/a

Foreign reserves (US$ m)Reserves excl gold (end-period) 542.0 525.6 501.9 550.2 681.5 622.0 639.3 672.1

a Fiscal year, beginning April of year shown. Estimate for 2004. 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 2005-06

Political outlook

Myanmar s poor political climate is unlikely to improve in 2005-06, withprospects for democratic reform remaining dismal. The ruling military junta, theState Peace and Development Council (SPDC), will proceed with its ownversion of political reforms under its "road map to democracy", but this processlacks legitimacy, and the likelihood of meaningful political reform taking placeover the next few years is low. The SPDC has reconvened the NationalConvention (NC), which has the task of drafting principles for a newconstitution, but this process could be protracted; the most recent NC session(in February-March) lasted only six weeks. Despite this uncertainty over thetimeframe for drafting the constitution, there is little doubt that the resultingconstitution, which would include reserving parliamentary seats for themilitary, will lack legitimacy. It will also not be representative nearly all of the1,000 or so NC delegates were hand-picked by the junta, and debate isstrictly controlled.

The UN has called for the reform process to be made more representative,particularly by incorporating the views of the largest civilian politicalopposition group, the National League for Democracy (NLD), which has boy-cotted the convention in protest against the continued detention of its leader,Aung San Suu Kyi, and its vice-chairman, U Tin Oo. However, the junta is notexpected to change tack and will continue to implement a strategy ofsuppressing the NLD, and its popular and charismatic leader. The SPDC alsoappears to be taking a more hardline approach to containing the threat to itshold on power posed by ethnic minority groups. A number of ethnic Shanleaders were recently detained on charges of "conspiracy against the state".

Because the NLD is boycotting the NC, the SPDC needs the support of anumber of ethnic groups that have signed ceasefires in order to support itsclaims that the NC is a nationally representative body. However, if the juntaproceeds to intimidate these groups, such support is unlikely to be forthcoming.Moreover, long-term fundamental differences are likely to emerge between thejunta and the "ceasefire groups", which remain keen on securing some form ofautonomy for their respective regions. The draft principles for the constitutionmake it clear that there can be only one armed force, but attempts by thejunta to get ceasefire groups to lay down arms could prompt them to walkout of the NC, and perhaps even to break ceasefire agreements. The junta hasalso stepped up attacks on a number of rebel ethnic minority groups inrecent months.

Aside from the focus on political reform, a battle for power appears to be takingplace within the junta hierarchy. This follows the purge of a former primeminister and head of military intelligence, General Khin Nyunt, in October2004. It is rumoured that the SPDC is planning a major reshuffle of key posts.Such changes in line-up will provide some indication of tensions and shifts inpower between the top generals. For now, however, Senior General Than Shwe,

Domestic politics

8 Myanmar (Burma)


the chairman of the SPDC, appears to be the most powerful figure within theSPDC, adept at balancing the various factions within the regime.

The threat of instability is also rising, with small-scale bombings in major citiestaking place with greater frequency and becoming more deadly. The mostrecent explosions, in early May in Yangon, killed at least 11 people and injured162 (according to official reports). There is little certainty as to which groups areresponsible. The SPDC has blamed ethnic rebel groups in addition to the exiledNational Coalition Government of the Union of Burma, all of which haverejected the accusations. The bombings are unlikely to precipitate a widespreaduprising; the junta s grip appears to remain strong, and any signs of protestcontinue to be dealt with harshly by the regime.

The Association of South-East Asian Nations (ASEAN) continues to adhere to itslong-standing principle of non-interference in the domestic affairs of fellowmembers. However, in the past few months there has been some unusuallydirect criticism of the junta from parliamentarians in some fellow membercountries, particularly Malaysia and the Philippines. Such moves reflectconcerns that the group s image will suffer if Myanmar takes over as chair, asscheduled, in 2006. The US government has already stated that it might boycottASEAN meetings in 2006 if the junta fails to implement reform. In a bid toavoid a rift within the grouping, ASEAN foreign ministers have asked the SPDCto decide whether Myanmar should take over as chair next year (clearly hopingthat the junta will save them embarrassment by bowing out). It is possible thatthe SPDC will announce that it will not become chair in 2006, but it willprobably cite "internal difficulties" as the reason, rather than admit to sub-mitting to external pressure. As distasteful as this loss of face will be to theSPDC, it is a more likely outcome than the junta taking the reform steps thatASEAN and other foreign governments have called for.

Economic policy outlook

The outlook for economic policy remains poor. The junta s pariah status meansthat it cannot access external financial assistance. It has received financialsupport from China and Thailand, but it is still heavily dependent on itsdestabilising policy of monetising the budget deficit. The aim of medium-termeconomic policy seems to be to reduce reliance on imported inputs and toboost agricultural output, but little has been done to promote investment inagriculture or to improve the welfare of farmers. Indeed, the junta has oftenbacktracked on its efforts to liberalise trade in the main agricultural goods, andthis trend is likely to persist in 2005-06. There is also a high risk that thegovernment will continue to implement ad hoc policy initiatives with negativeside effects.

Although government revenue from taxes has expanded, revenue growth inreal terms has been weak, and tax collection is structurally depressed becausemuch of the economy operates in the untaxed "grey" area. The governmentconsequently relies on funds from the Central Bank of Myanmar to meet itsspending requirement. According to the latest available data, by the end of 2004

Policy trends

Fiscal policy

International relations

Myanmar (Burma) 9


the Central Bank s claims on the government had expanded by 36.8% year onyear. The government does not produce regular and timely data onexpenditure, but it is unlikely to have reduced state spending in recent years asit has been unwilling either to restructure inefficient state enterprises or toreduce defence spending, although cuts have been made to health and educ-ation services. Over the next few years the junta is unlikely to change thisstance, and the general government budget deficit will stay above 5% of GDP.Given its failure to secure budgetary support from foreign donors to meet itsfinancing needs, the junta s policy of monetising the budget deficit will remainin place.

The junta is not expected to tighten monetary policy in 2005-06 by raisingnominal interest rates because such a move would increase its domestic debt-servicing burden. Even during recent periods of rapid inflation it refused toraise nominal interest rates, and real interest rates therefore went steeplynegative. Although real interest rates rose in the first half of 2004 as inflationeased, this trend is not expected to continue since inflation is expected to pickup again, and nominal rates will be unchanged. Both the development and thestability of the banking sector continue to be undermined by the failure toadopt coherent and flexible monetary policy. Although the banking sector isrecovering from near-collapse in early 2003, a high risk persists that the CentralBank will fail to reverse the overall deterioration in the banking system in theforecast period without technical and financial assistance from internationalfinancial institutions.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2003 2004 2005 2006Real GDP growthWorld 3.9 5.1 4.2 3.9OECD 2.0 3.3 2.4 2.3EU25 1.1 2.4 1.9 2.1

Exchange rates¥:US$ 115.9 108.1 102.7 93.8US$:€ 1.132 1.244 1.350 1.400SDR:US$ 0.714 0.675 0.646 0.628Financial indicators€ 3-month interbank rate 2.33 2.13 2.10 2.25US$ 3-month Libor 1.21 1.62 3.46 4.52Commodity pricesOil (Brent; US$/b) 28.8 38.5 46.0 40.0Gold (US$/troy oz) 363.3 409.5 435.0 402.5Food, feedstuffs & beverages (% change in US$

terms) 6.6 9.1 -6.5 -1.4Industrial raw materials (% change in US$ terms) 13.0 21.0 3.5 -6.7

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

International assumptions

Monetary policy

10 Myanmar (Burma)


The pace of world GDP growth at purchasing power parity will slow in2005-06 to an annual average of around 4%, down from 5% in 2004. Stronggrowth in Myanmar s main export markets in Asia, particularly in Thailand,China and India, will ensure that external trade stays buoyant. In addition,India s growing energy demands, a result of rapid economic expansion, couldprovide Myanmar with a major market for its natural gas. The EconomistIntelligence Unit has revised upwards its forecast for crude oil prices (datedBrent Blend) to an average of US$46/barrel in 2005 and US$40/b in 2006. Thiswill push up import price inflation, as Myanmar is heavily dependent onimports of refined petroleum products to fuel the country s electricitygenerators. Global prices for food, feedstuffs and beverages will drop by around6.5% in 2005, before falling slightly further in 2006. Rice prices will rise sharplyin 2005, jumping by 20.7%, before contracting by 6.7% in 2006.

The lack of reliable GDP data makes it difficult to assess trends in Myanmar seconomic growth. Official data show that real GDP rose by 13.8% year on yearin fiscal year 2003/04 (April-March), but this is unrealistic. As a proxy forindustrial activity, sales of electricity to the industrial sector rose by only 4.4%in 2003/04, whereas the junta claims that industry expanded by 20.7%. Thejunta estimates that GDP grew by 12.6% in 2004/05 and has set a similar targetfor 2005/06. However, anecdotal evidence indicates that the prospects forgrowth remain poor. Business and consumer confidence is weak, and shortagesof power and essential imported inputs continue to limit the prospects for amarked improvement in economic activity. Foreign direct investment (FDI) is avital source of capital for cash-strapped Myanmar, but international sanctionsand consumer boycotts, combined with the junta s own mismanagement of theeconomy, have driven away many large-scale investors. Investor enthusiasm isalso unlikely to recover as long as US sanctions banning all imports fromMyanmar are still in force and until the junta s dire record on labour andhuman rights improves. The only sector that has the potential to record stronggrowth is oil and gas, with the recent signing of exploration and productiondeals with Chinese, Thai, Indian and South Korean firms.

Although consumer price inflation eased sharply in the first half of 2004,falling to an average of around 6% year on year, for the year as a whole annualinflation is expected to have risen to around 10%. Rice prices picked up again inthe second half of 2004 following the government s easing of restrictions onrice exports in June. (The government s decision to ban rice exports in January-June 2004 contributed to a sharp fall in rice prices and a consequent drop ininflation.) Petrol prices also rose sharply in the second half of the year and willcontinue to remain high. In addition, the decision by the SPDC to increaseimport taxes in mid-2004 is likely to have introduced additional inflationarypressure into the economy. Upward pressure on prices will persist during theforecast period in line with the junta s continued willingness to monetise thebudget deficit.

The government is not expected to realign its official exchange rate with thefree-market rate in 2005-06. The grossly overvalued official rate, which is linkedto the IMF s Special Drawing Right (SDR), will be broadly stable during this

Inflation

Exchange rates

Economic growth

Myanmar (Burma) 11


period at around Kt6:US$1. Although the free-market kyat has appreciatedslightly in recent months at around Kt920:US$1, it will continue to fluctuate onits long-term downward trend. The junta has a habit of implementing newpolicy measures without warning or explanation. The subsequent confusionamong businesses and consumers is often reflected in a sharp depreciation inthe free-market value of the currency. This tendency is unlikely to change in theforecast period, and the public s confidence in the junta s ad hoc managementof the economy will remain low.

Export revenue will be fairly stable in 2005-06. Exports of manufacturedproducts, particularly textiles and garments, will remain weak in line withconsumer boycotts and the US ban on imports from Myanmar. However,mining, energy and agricultural exports to Myanmar s large neighbours, China,India and Thailand, will remain robust. Indeed, exports to Thailand, mainly ofnatural gas, jumped by 43% year on year in 2004, according to the Bank ofThailand (the Thai central bank). Gas exports to Thailand will continue toexpand in line with the recent discovery of additional reserves in the Yetagungasfield. Although the import bill has been pushed up by the increased cost ofbuying in refined petroleum products, the shortage of foreign exchange andhigh import taxes will restrain import demand in 2005-06. The merchandise-trade account is therefore likely to remain in surplus in the forecast period. Thissurplus will be offset by a large deficit on the combined services, income andcurrent-transfers accounts. Income debits are now running at around US$700ma year, reflecting the repatriation of earnings from large energy and miningprojects. Current transfers, mainly earnings from migrant workers overseas,have dwindled in recent years and will continue to be weak.

Forecast summary(% unless otherwise indicated)

2003a 2004 a 2005b 2006b

Real GDP growthc -2.0 -1.3 1.3 2.1

Gross fixed investment growthc -0.5 0.5 2.5 4.0Gross agricultural production growthc -0.2 -3.0 1.8 1.2

Consumer price inflation (av) 36.6d 9.7 25.0 27.3Consumer price inflation (year-end) 17.4d 25.0 25.0 30.0Short-term interbank rate 15.0d 15.0 d 15.0 15.0

Government budget balance (% of GDP)c -2.7 -5.0 -5.2 -5.1Exports of goods fob (US$ bn) 2.5d 2.6 2.6 2.7

Imports of goods fob (US$ bn) 1.9d 2.1 2.2 2.3Current-account balance (US$ bn) 0.0d 0.0 -0.2 -0.2

Current-account balance (% of GDP)e 0.6d -0.4 -1.5 -1.3External debt (year-end; US$ bn) 6.9 7.0 7.1 7.3Exchange rate Kt:US$ (av)f 960.0 910.0 980.0 1,020.0

Exchange rate Kt:¥100 (av)f 828.3 841.6 954.7 1,088.0Exchange rate Kt:€ (av)f 1,087.0 1,131.8 1,323.0 1,428.0

Exchange rate Kt:Bt (av)f 23.1 22.6 25.8 27.5

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); atfree-market exchange rate (which understates size of GDP). f At free-market exchange rates.

External sector

12 Myanmar (Burma)


Myanmar Asia excl Japan

Gross domestic product% change, year on year

Myanmar Asia excl Japan

Consumer price inflationav; %

-4

-2

0

2

4

6

8

2000 01 02 03 04 05 06

-10

0

10

20

30

40

50

60

2000 01 02 03 04 05 06

The political scene

Following on from the purge of the then prime minister, General Khin Nyunt,in October 2004, in late January 2005 Thailand s prime minister, ThaksinShinawatra, commented that there was "some form of tension" within theruling military junta, the State Peace and Development Council (SPDC),sparking rumours of another internal split. The rumours appear to have beenset off by the death of Lieutenant-Colonel Bo Win Tun, who was a personalassistant of the SPDC s vice-chairman, Deputy Senior General Maung Aye.According to one line of speculation, Colonel Bo Win Tun died defendingGeneral Maung Aye during an assassination attempt by another seniormember of the junta. This version is unconfirmed, however, and other reportssuggest that Colonel Bo Win Tun committed suicide. Whatever the truth of thematter, the mystery surrounding the death sparked rumours of a violent riftbetween the prime minister, Lieutenant-General Soe Win, and General MaungAye. There has also been talk of tension between General Maung Aye and theSPDC chairman, Senior General Than Shwe. However, publicly the juntacontinues to present a united front.

The SPDC has continued its efforts to dismantle the military intelligence (MI)services that formed the power-base of General Khin Nyunt until his ouster inOctober 2004. The Yangon region military commander, Major General MyintSwe, has been placed in charge of a new intelligence unit, the Office of MilitaryAffairs Security (OMAS). Closed-door trials of many former MI members andassociates are continuing. General Khin Nyunt appears to be under housearrest. Two of his sons, Lieutenant-Colonel Zaw Naing Oo and Ye Naing Win,are also in detention.

The drafting of a new constitution remains a protracted affair. On February 17ththe SPDC re-opened its National Convention (NC) the body tasked withdrafting a new constitution. However, this latest session only lasted six weeks.On March 31st Lieutenant-General Thein Sein, secretary-1 of the SPDC and headof the convention, stated that the NC had been "temporarily adjourned" untilthe end of the year. The process has been tightly controlled, and has moved at

The National Conventionmakes little progress

Rumours of trouble amongleading generals is rife

Myanmar (Burma) 13


a slow pace. Following the announcement in August 2003 of a much-vauntedpolitical reform "road map", the NC reconvened in May 2004, but only for afew weeks.

Despite the recent short session, the junta claimed that the NC had made someprogress towards its aims, approving plans for the legislative branch ofgovernment, and working on detailed plans for the judicial and executivebranches of government. However, local and international opposition groupscontinue to criticise the convention as meaningless, as it has no delegates fromthe country s two most prominent civilian political parties, the National Leaguefor Democracy (NLD) and the Shan Nationalities League for Democracy(SNLD) the two parties that took first and second place in the 1990 election.When the NC reconvened in May 2004, the NLD decided to stay away, insistingthat it would not join until its party offices were allowed to reopen and its twotop party leaders its secretary-general, Aung San Suu Kyi, and its vice-chairman, Tin Oo were released from detention. Both have been either in jailor under house arrest since May 2003.

The SPDC has cracked down on political activity by ethnic Shan groups.Following a meeting on February 7th that brought together members of Shanpolitical and "ceasefire" groups, the SPDC detained around ten people. Thosedetained included one of the country s most prominent opposition figures,Khun Htun Oo, chairman of the SNLD. Several other senior SNLD memberswere also arrested, including the party secretary-general, Sai Nyunt Lwin, alongwith members of a newer group, the New Generation Shan Party. Alsodetained was Major-General Sao Hso Ten, chair of the umbrella Shan StatePeace Council, which comprises two ceasefire groups, the Shan State Army-North (SSA-N) and the Shan State National Army (SSNA). The SPDC apparentlymade the arrests after the group met to discuss proposals for a federal system(although the substance of the meeting is not known). They are being held inInsein prison in the capital, Yangon, where closed-door trials appear to havebegun. Delegates from SSA-N and SSNA boycotted the most recent February-March NC session in protest at the arrest of Shan leaders (the SNLD wasalready boycotting the NC).

Ahead of the reopening of the NC in February, the UN secretary-general, KofiAnnan, warned the junta that the NC lacked credibility without participationby the NLD. He also stated that the work of the convention might not berecognised or endorsed by other countries, including those in the region.Following the closure of the convention, Mr Annan issued a further statementin early April, calling on the SPDC to clarify its plans and agree a timeline forreforms. He also called on the regime to begin dialogue involving all politicaland ethnic groups, reopen NLD offices, and free NLD leaders and other politicalprisoners. The SPDC has rejected calls by the UN for faster progress on reform,and it continues to deny access to the country to the UN special envoy toMyanmar, Razali Ismail. Co-operation with other international bodies has alsodeteriorated in recent months; a high-level delegation from the InternationalLabour Organisation (ILO) cut short its visit to Myanmar in February whensenior leaders of the junta refused to meet with the group.

The UN’s patience iswearing thin

Crackdown on Shanopposition groups intensifies

14 Myanmar (Burma)


There have been a number of bomb attacks in several cities in recent months.On May 7th three bombs exploded simultaneously in Yangon. According toofficial statements, the bombs, which exploded outside two supermarkets andone convention hall (where a Thai trade fair was taking place), killed at least 11people and injured 162. In late April a bomb at a market in Mandalay killed atleast two and left 15 injured. On March 17th and 19th two small bomb blastsoccurred in Yangon (one in a bus station and one in a hotel), although no onewas injured. These are the most recent in a series of bombings since mid-2004.The SPDC has blamed exiled opposition groups, particularly the NationalCoalition Government of the Union of Burma, although no group has takenresponsibility (and for the most part these groups have remained stronglycommitted to non-violence). The SPDC also blamed ethnic groups, namely theKaren National Union (KNU), the Karenni National Progressive Party (KNPP),and the Shan State Army, for the May 7th bombings. Again, these groupsdenied any involvement. It is possible that the blasts are related to tensionswithin the SPDC; the ouster of General Khin Nyunt caused some speculationthat the rift within the various branches of the military could erupt intoviolence.

Tensions between the SPDC and ceasefire groups appear to have intensified inrecent months. Following the ouster of General Khin Nyunt, who had beeninstrumental in pushing for peace talks with several groups, the SPDC at firstmade efforts to meet with ceasefire groups to reassure them that the ceasefireswould hold. However, the SPDC has made it clear that it wants these groups todisarm as soon as the NC has finished its work without giving assurances ongreater autonomy for ethnic groups. This tougher line has caused relations withsome ceasefire groups to deteriorate sharply in recent months.

It is possible that without General Khin Nyunt the SPDC has decided to pursuea military rather than diplomatic solution to its ongoing conflicts with ethnicgroups. Indeed, fighting has escalated between the SPDC and several remainingarmed ethnic groups yet to reach ceasefires with the SPDC. The largest of these,the KNU, began ceasefire talks in late 2003, but in January this year the KNUreported that the SPDC had attacked one of its major bases in Karen State onthe Thai-Myanmar border. In mid-March KNU delegates met with the SPDC fortalks, but made little progress in formalising a ceasefire agreement. Clasheshave continued, with several attacks taking place in March and April.

The SPDC has often used breakaway groups that have signed ceasefires withthe SPDC to attack non-ceasefire groups, and this appears to have been the casein recent months. In March the SPDC joined forces with a heavily armedceasefire group, the United Wa State Army (UWSA), to attack areas held by theShan State Army-South. Further south, in Kayah State, the SPDC has begunanother major offensive aimed at taking Nya Moe, the last remainingstronghold of the Karenni Army (KA), the armed wing of the KNPP. The SPDCforce there has been bolstered by troops from the Karenni National People sLiberation Front (KNPLF), a breakaway group from the KNPP. The joint SPDC-KNPLF attack on the KA was launched on January 6th, around two weeksbefore the KNPP and SPDC were expected to meet to hold confidence-building

Clashes with non-ceasefiregroups intensify

Tensions escalate with ethnicceasefire groups

Bomb explosions arebecoming more frequent

Myanmar (Burma) 15


talks. KNPP leaders have indicated that these talks have been indefinitely post-poned while the attack on Nya Moe continues. According to a report made by aUK-based non-governmental organisation (NGO), Christian SolidarityWorldwide, the SPDC may have used nerve gas against Karenni troops duringan attack in February. Karenni leaders report that some troops sufferedvomiting, dizziness and burns following shelling by the SPDC in February,raising the question of whether the junta is using chemical weapons againstethnic groups. The SPDC has denied these allegations.

Although the Association of South-East Asian Nations (ASEAN) has repeatedlydefended Myanmar to the international community, some ASEAN membershave been putting greater pressure on the junta to initiate meaningful reform,particularly by 2006, when Myanmar is scheduled to become chair of ASEAN.However, with time running out and the SPDC apparently no closer to makingreal reform or releasing Aung San Suu Kyi, a number of ASEAN member states,notably the Philippines and Malaysia, are becoming more vocal in theiropposition to Myanmar taking over as chair. At a meeting in Jakarta inFebruary, parliamentarians from Cambodia, Indonesia, Malaysia, Singaporeand Thailand formally launched an inter-parliamentary caucus on Myanmar.The legislators want to see faster progress on political reform in Myanmar. Theyintend to put pressure on their respective governments to ensure that Myanmarcompletes certain reforms before it is allowed to take over as ASEAN chair.

In Malaysia, one of Myanmar s erstwhile allies, in late March members of theruling coalition announced that they would put forward a motion calling forMyanmar to be passed over as chair unless political reforms were carried out.In the Philippines, the foreign secretary, Alberto Romulo, has also been vocal (atleast by ASEAN standards) in his calls for change in Myanmar. He stated in mid-April that he had urged the foreign minister, Major-General Nyan Win, toannounce progress on reforms by the time of the ASEAN foreign ministersmeeting in July, including releasing Aung San Suu Kyi and allowing RazaliIsmail, the UN special envoy to Burma, to visit. In late February Lieutenant-General Soe Win visited the Philippines, where he met the Philippinespresident, Gloria Macapagal-Arroyo, who also called for faster progress andexpressed concern about the continued detention of Aung San Suu Kyi. ThePhilippine Senate subsequently passed a resolution calling for Myanmar to bedenied the chairmanship of ASEAN unless Aung San Suu Kyi is freed. Even inThailand, which has moved closer to the SPDC over the past few years underThaksin, there has been growing pressure for the junta to introduce politicalreform. In late April the Thai Senate passed a resolution stating that Myanmarshould not become chair of ASEAN until Aung San Suu Kyi is released.

Despite these efforts to exert greater pressure on the junta to initiate politicalreform, ASEAN s foreign ministers failed to secure any agreement on the issueduring an annual retreat in April. As usual, ASEAN put consensus first,apparently choosing to let the SPDC decide whether it should take on the roleor not. By leaving the decision with the junta, ASEAN s foreign ministers arealmost certainly hoping that the SPDC will decide to pass up on its turn tochair the group, preventing the group from having to make a tough and divisive

ASEAN may be hoping thejunta relinquishes chair

ASEAN increases pressure onthe junta to initiate reforms

16 Myanmar (Burma)


decision. Before the retreat, General Nyan Win had been rather bullish,indicating that the SPDC fully intended to take its turn as chair of the grouping.However, in statements after the retreat he seemed to have softened slightly,stating that Myanmar would not be a "burden" to the regional group. The issuewill be discussed again and is likely to be decided at the next ASEAN foreignministers meeting, which will be held in Laos in July.

The US State Department has been hinting for some months that it will boycottjoint meetings with ASEAN if Myanmar takes over as chair next year. The US isa member of the ASEAN Regional Forum (ARF), which brings together the tenmembers of ASEAN, plus the US, EU and other nations with a key strategicinterest in the region, including China and Japan. In late March US officialsmade clear that a final decision had not yet been made on participation in ARFand other regional ASEAN meetings in 2006-07. However, a six-monthlystatement on Myanmar by the State Department s Bureau of East Asian andPacific Affairs reported that prospects for meaningful political change andreform had continued to decline. The US has already renewed its sanctionsbanning investment and trade with Myanmar, and has reiterated that thesemeasures will not be lifted until Aung San Suu Kyi and other political prisonersare released, NLD party offices allowed to re-open, and the SPDC beginsdialogue with opposition groups.

Economic policy

The ruling military junta, the State Peace and Development Council (SPDC), haslittle capacity for coherent economic policy-making. Although the top generalsfrequently talk about import substitution as a way of conserving scarce foreignexchange, little has been done. The junta also wants to control inflation, fearingthat sharp price increases could spark public protest. Again, little has been doneto bring inflation under control. Indeed, the SPDC s reliance on printing moneyto fund its huge public-sector deficit has tended to stoke inflationary pressures.The junta s failure to come up with any coherent economic policies, combinedwith the impact of economic sanctions and falling foreign investment, has leftthe country struggling with problems ranging from deepening poverty to aweak private banking sector.

According to data from the Central Statistical Organisation (CSO), total centralgovernment tax revenue rose by 111.8% year on year in the first four months offiscal year 2004/05 (April-March). Revenue for the four-month period totalledKt57.6bn (US$9.9bn at the inflated official exchange rate, or around US$60m atthe free-market rate). Revenue from income tax, profit tax, customs tax, andlottery and stamp duty all rose strongly. The rise in revenue from customs taxeswas particularly strong, reflecting changes to the import tax regime introducedin June 2004 the junta imposed a flat-rate tax of 25% on a range of importeditems, replacing a previous raft of taxes at rates ranging 2-20%.

The continued growth in central government revenue (in nominal terms) isunlikely to be enough to reduce the junta s huge public-sector deficit without areduction in expenditure by the country s bloated state-owned enterprises. The

Tax revenue continues to rise

The junta lacks coherenteconomic policies

The US puts pressure onASEAN

Myanmar (Burma) 17


junta does not publish up-to-date budget data, but continued strong moneysupply growth, much of which is channelled to the central government,suggests that there has not been a significant reduction in the public-sectordeficit, despite rising revenue.

Central government tax revenue(Kt m, unless otherwise indicated)

2002/03 2003/04 Apr-Jul 2004/05 % changea

Tax revenue 109,576 166,066 57,551 111.8 Commodities & services tax 47,039 59,415 16,211 43.2 Income tax 36,084 69,898 16,433 107.9 Profit tax 11,058 22,483 11,236 243.0 Customs tax 4,691 3,961 9,936 646.9 Lottery & stamp duty 10,704 10,309 3,735 11.9

a April-July 2004/05 compared with year–earlier period.

Source: Central Statistical Organisation, Selected Monthly Economic Indicators.

Nominal lending and deposit rates remain unchanged. According to data fromthe IMF s International Financial Statistics, at the end of 2004 bank deposit ratesremained at a nominal 9.5%, with state-enterprise lending rates at 15%. Theserates were unchanged during the first two months of 2005 and it is likely thatthese rates are once again negative in real terms. Although official inflation dataare only available up to mid-2004, anecdotal evidence suggests that there was astrong upturn in inflation during the final few months of the year.

Interest rates(%)

2003 20041 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Central bank ratea 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0Deposit rate (6-month) 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5Lending rate (working capital, state-owned

enterprises) 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0

a End-period.

Source: IMF, International Financial Statistics.

In February a delegation from the International Labour Organisation (ILO) cutshort a fact-finding visit to Myanmar. The visit was intended to assess thejunta s commitment to reducing labour abuses. The team met with members ofthe junta including Lieutenant-General Soe Win. However, the team decided towithdraw when it became apparent that no meetings were scheduled with thehighest ranking members of the SPDC, including Senior General Than Shwe,the SPDC chairman.

Myanmar has one of the world s worst records on labour. The junta has ahistory of using forced labour in public works projects, such as building roadsand tourism infrastructure, as well as forcing civilians to work as porters for thearmed forces. In 2000 the ILO recommended that its member organisationstake action against Myanmar (the ILO took the unusual step of calling forsanctions against Myanmar.) There were hopes of a reduction in labour abusesafter the junta allowed the ILO to open an office in Yangon in 2002 and to send

The junta fails to curb labourabuses

Nominal interest rates remainunchanged

18 Myanmar (Burma)


missions to different areas of the country. However, human rights groups reportthat widespread labour abuses have continued, particularly in ethnic-minoritydominated areas along the country s borders. Delegates from the failedFebruary mission criticised the lack of progress made by the SPDC over the pastyear or so. In March the ILO once again called on its member governments andorganisations to consider taking further action against Myanmar for its failure tocurb labour abuses.

The domestic economy

Output and demand

In press reports in April the ruling military junta, the State Peace andDevelopment Council (SPDC), claimed that Myanmar posted real GDP growthof 12.6% in fiscal year 2004/05 (April-March), down from 13.8% year on year in2003/04. According to the junta, annual real GDP growth averaged 12.4% in2001/02-2004/05. It is difficult to assess these claims because little regularoutput data are published, and official figures tend to be inflated andfrequently revised. However, proxy indicators suggest that economic growth inMyanmar is far below the rates claimed by the SPDC. For example, electricitysales fell during the first few months of 2004/05, making it unlikely that theindustrial sector was expanding. Total sales of electricity by the state-ownedMyanma Electric Power Enterprise dropped by 6.6% year on year in April-July2004 to 1bn kwh. Sales of electricity to industrial units over the same perioddropped by 6.5% year on year, suggesting that industrial output had also fallen.

Data for output volume of key items produced by state-owned enterprises(SOEs) are the only regularly available figures on industrial output. Thesefigures also tend to confirm an overall poor performance during the first fourmonths of 2004/05. For example, output of cotton yarn rose by 3.4% year onyear, but output of cotton fabrics fell by 10.3% year on year. The fall suggeststhat export-oriented garment manufacturers were still struggling following a USban on all imports from Myanmar imposed in mid-2003 (the US had been akey destination for Myanmar s garment exports). Garment manufacturers basedin Myanmar have also been affected by international campaigns pressuringretailers in overseas markets to cease sourcing goods from Myanmar.

Production of some other key goods by the state sector fell in April-July; forexample, output of paper was down by 10.6% year on year. Production ofcement posted a small rise of 1.6% year on year in April-July, probably reflectinga modest improvement in the construction and infrastructure sectors as thecountry s liquidity crisis began to ease. Output of natural gas also managedgrowth of 5.1% year on year in April-July. However, these growth rates are stillfar below those implied by the junta s overall GDP growth figures for thewhole fiscal year. Looking at the agricultural sector (by far the largest sector,accounting for around one-half of current-price GDP), one proxy indicator doesnot suggest a strong performance in 2004/05; imports of fertiliser (in valueterms) fell by 81.4% year on year in April-July.

Output levels remain relativelypoor

The SPDC claims double-digitgrowth

Myanmar (Burma) 19


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

2003 20042 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Jula

Cotton yarn ('000 lb) 1,744 2,363 1,759 1,774 1,666 794

Cotton fabrics ('000 yd) 3,872 3,514 3,580 3,533 3,348 1,220Paper 3,908 4,587 4,320 4,991 3,515 1,441

Cement 141,871 141,270 151,460 148,307 142,148 52,433Sugar 1,732 - 36,578 15,751 - -Natural gas (m cu ft) 86,645 87,546 88,589 87,075 91,334 30,990

Crude oil (‘000 barrels) 1,836 1,855 1,771 1,700 1,841 619

a Provisional data.


Foreign investment picked up during the first few months of 2004/05, but froma low base. Myanmar attracted a meagre US$13m in new foreign directinvestment (FDI) approvals in April-July 2004 compared with only US$5m inthe year-earlier period. For the whole of 2003/04 FDI approvals totalled onlyUS$91.2m. FDI approvals peaked at US$2.8bn in 1996/97, but have subsequentlyfallen sharply as investors have been driven away by the junta smismanagement of the economy, combined with the impact of internationalsanctions and consumer boycotts. Typically, only around one-third of approvedinvestment translates into actual inflows; hence the latest approvals figureswould suggest that actual FDI inflows will slow to a trickle over the nextcouple of years. According to the latest available figures from the IMF sInternational Financial Statistics, actual foreign investment inflows totalled onlyUS$133.5m in 2003, having fallen steadily from US$317.8m in 1998.

Foreign direct investment(US$ m)

2003/04 Apr-Jul 2004/05Main sourcesSouth Korea 34.9 -UK 27.0 -Thailand 22.0 7.0Hong Kong 3.0 -China 2.8 6.0Canada 1.5 -Main sectorsOil & gas 54.3 -Transport 30.0 -Manufacturing 2.8 3.5Agriculture & fisheries 2.6 -Tourism - 3.5Mining 1.5 6.0

Total 91.2 13.0


Foreign investment approvalsremain low

20 Myanmar (Burma)


Employment, wages and prices

Consumer price inflation dropped markedly during the first half of 2004,dragged down by falling food prices, but inflation started picking up early inthe second half. Inflation averaged only 2.4% year on year in the second quarterof 2004, down from 9.6% year on year in the first quarter, but increased slightlyto 2.8% in July, according to the latest data from the Central StatisticalOrganisation (CSO). Food prices (which have the heaviest weighting in theconsumer price index) dropped by 0.8% year on year in the second quarter of2004 and in July. The fall in food prices was driven by the junta s ban on allexports of rice for six months starting in January 2004, resulting in a sharp dropin domestic prices. Prices for most non-food categories in the consumer priceindex continued to rise strongly. Prices in the fuel and light category rosesharply, up by 22.4% year on year in January-July 2004. There was also sharpgrowth in prices in the clothing category (up 15.4%), miscellaneous goods andservices (12.4%), and house rent and repairs (12%). Anecdotal evidence suggeststhat overall consumer price inflation picked up sharply in the second half of2004, with increases for many items approaching triple figures by the end ofthe year.

Consumer prices(period average)

2003 20041 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Jul

General index (1997=100) 369.5 393.3 403.2 411.0 405.0 402.6 411.0 % change, year on year 58.3 47.9 30.5 18.7 9.6 2.4 2.8Food index 388.2 403.8 414.2 422.0 408.9 400.5 407.3 % change, year on year 67.9 49.9 27.6 14.3 5.3 -0.8 -0.8


Starting from April 1st 2005 the SPDC increased salaries for civil servants(including government staff and teachers). At the lowest level, wages haveincreased threefold to Kt17,700 per month (around US$18.5 per month at thefree-market exchange rate, or around US$3,100 at the massively overvaluedofficial exchange rate). The pay hike, and the subsequent increase in demandand spending power, is likely to bring some further upwards pressure on theprice of basic goods.

Financial indicators

The free-market exchange rate for the kyat held steady at around Kt900-950:US$1 during the first few months of 2005. The wide margin with the fixedofficial exchange rate also remains in place, with the official rate averagingaround Kt5.6:US$1 during the first two months of 2005. The official rate is littleused, although some SOEs benefit from being able to buy foreign exchange atthe official rate.

The free-market exchange rateremains stable

Civil servants receive payincrease

Consumer price inflationpicks up

Myanmar (Burma) 21


Recent changes in regulations governing foreign currency transactions couldcreate a modest rise in demand for foreign exchange, bringing some slightdownwards pressure on the kyat. The three banks licensed to handle foreigncurrency transactions the Myanmar Investment and Commercial Bank, theMyanmar Foreign Trade Bank and Myanmar Economic Bank (all state-owned)have stated that related fees for foreign currency transactions have to be paid inforeign exchange, a move that will help the banks to cover their costs (thebanks are required to pay international fees in foreign exchange). However,slumping foreign investment and sanctions on trade mean that internationalfinancial transactions are fairly minimal (and so related fees will not be high).The real problems for the free-market exchange rate remain poor publicconfidence and shortages of foreign-exchange reserves.

Quasi-money supply (which includes time, savings and foreign-exchangedeposits) continued to expand in the fourth quarter of 2004, rising by 7.9%quarter on quarter and 53.8% year on year. This expansion in turn boostedgrowth in broad money supply (M2), which rose by 32.4% year on year at end-December, despite a slight slowdown in the rate of growth of narrow money(M1). After a banking crisis hit in early 2003, a run on banks resulted in a fall inquasi-money. However, growth in quasi-money began to pick up from thesecond quarter of 2004 onwards; the rapid upturn by the end of 2004 reflectsthe return of some degree of confidence in the banking system, albeit from alow base. However, the banking sector remains beset by problems includingpoor regulation, and many people in Myanmar prefer to hold savings in theform of valuables.

Total outstanding credit rose by 32.4% year on year at the end of 2004,compared with growth of only 1.4% year on year at the end of 2003. The severeliquidity crisis that hit in 2003 persisted during the first half of 2004. Althoughthe central government was largely insulated from the crisis, credit to theprivate sector fell sharply year on year in the first half of the year, beforepicking up in the second half, and rising by 25.5% year on year at end-2004.Nevertheless, this rapid growth comes from a low base, and the private sector sshare of total domestic credit has yet to recover to pre-crisis levels. The privatesector accounted for 37.8% of total outstanding credit at end-2002, before thecrisis hit. Its share then fell to one-half this level during the crisis. It hadrecovered slightly to 19.1% by end-2004.

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


Narrow money (M1) 1,129.8 1,126.4 1,128.6 1,186.1 1,301.7 1,360.1 1,438.4 1,487.7 % change, year on year 34.6 32.1 17.8 17.5 15.2 20.8 27.5 25.4Quasi-money 415.9 371.5 395.9 386.3 414,205 482,996 550,743 594,169

Broad money (M2) 1,545,688 1,497,817 1,524,391 1,572,402 1,715,927 1,843,107 1,989,123 2,081,824 % change, year on year 18.4 13.1 3.7 1.4 11.0 23.1 30.5 32.4

The pace of growth indomestic credit accelerates

Money supply is rising rapidlyagain

22 Myanmar (Burma)


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


Total credit 1,560,609 1,567,786 1,640,154 1,707,788 1,787,192 1,946,818 2,130,107 2,255,448 Claims on central government 1,074,086 1,149,547 1,235,110 1,297,134 1,450,231 1,544,167 1,651,463 1,774,558 Claims on local government n/a n/a n/a n/a n/a n/a n/a n/a Claims on non-financial public

enterprises 3,748 22,024 36,966 68,107 3,601 38,007 56,007 50,959 Claims on private sector 482,775 396,215 368,078 342,547 333,360 364,644 422,637 429,931


Sectoral trends

Production of rice, the country s main staple, remains weak. The UN Food andAgriculture Organisation (FAO) estimates that production of paddy fell to 23mtonnes in 2004, from an estimated 24.6m tonnes in 2003. Production wasaffected by severe flooding in key rice growing areas in August and September2004, and some producers may also have switched to other crops following thecollapse in domestic prices in the first half of the year (after the junta imposeda six-month ban on all rice exports starting from January 2004). Rice exportsdropped to only 20,000 tonnes in January-July compared with nearly 270,000tonnes in the year-earlier period. In value terms (in kyat) rice exports fell by94.6% year on year during this period.

0

20

40

60

80

100

120

Jan2003

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan04

Feb Mar Apr May Jun Jul

Rice exports’000 tonnes


Myanmar s energy sector is one of the few areas in which prospects look good.Large offshore gas discoveries in 2004 have attracted the interest of Indian,South Korean, and Chinese investors. Exploration of the huge A1 offshore blockis continuing. The block is being explored by a consortium comprising SouthKorea s Daewoo, Korean Gas Corporation, and India s ONGC Videsh and theGas Authority of India (GAIL). In April tests at a second field in the block,known as the Shwephyu field, revealed additional reserves of around 5trn cu ft,compared with 4trn-6trn at the Shwe field. The total estimated reserves for thewhole block have now been revised up to 20trn cu ft. The consortium hopes tosell gas from the A1 block and nearby A3 block to India via a US$1bn pipeline

Offshore gas production is setto rise

Rice production and exportremains weak

Rice production and exportremain weak

Myanmar (Burma) 23


that will transport the gas through Bangladesh. Although the three nationsinvolved have reached an informal agreement on the pipeline, a memorandumof understanding has yet to be signed. Myanmar had suggested a meeting tosign the agreement in late April, but the Bangladesh government turned thisdown. Before signing an agreement, Bangladesh wants to reach a bilateralagreement with India over three key issues access to export markets in Nepaland Bhutan, access to electricity imports from the same two countries, and areduction in the trade deficit with India.

In late January a consortium comprising China National Offshore OilCorporation (CNOOC), China Huanqiu Contracting and EngineeringCorporation and Singapore s Golden Aaron signed a production-sharingcontract with the junta s Myanmar Oil and Gas Enterprise (MOGE) to exploretwo onshore blocks (C1 and C2) and a further offshore block (M2). The sameconsortium signed an agreement to explore offshore blocks M10 and Block A4in December 2004. However, in early April the Ministry of Energy announcedthat no more foreign investment would be permitted in onshore blocks, leavingthe future of a number of foreign-invested exploration projects in doubt.Although MOGE is to be the only onshore operator, it may still contract outexploration and operation to foreign firms.

China Non-ferrous Metal Mining and Construction (CNMC) may invest up toUS$500m in developing the Tagaun Taung nickel deposits north of Mandalay. Afeasibility study has yet to be completed, but initial estimates suggest that theplanned plant could produce 30,000 tonnes per year of ferro-nickel for use inChina s fast-growing stainless steel industry. If the feasibility study provespromising, CNMC will go ahead with a joint venture under Myanmar sMinistry of Mines. Construction could start within two years, and becompleted within a further 2-3 years. It is likely that much of the output wouldbe exported back to China. With nickel currently trading at around US$15,000per tonne on international markets, this would generate significant exportearnings for Myanmar. In January-July 2004 Myanmar s exports of all metalsand ores totalled Kt272m (US$47m at the official exchange rate.)

In 2003/04 Myanmar officially exported 281,300 cu tonnes of teak, up by 36.8%year on year. This trend continued through the first four months of 2004/05;teak exports rose by 20.6% year on year in volume terms, to 102,900 cu tonnes.The actual level of exports is believed to be far higher. High demand in Chinaand Thailand means that illegal exports have thrived. An independentmonitoring organisation, Global Witness, has stated that Myanmar s annualexports of all timber (including teak) have been around double the officiallyreported levels, based on data from countries that made import figuresavailable. According to recent reports in the official newspaper, New Light ofMyanmar, the SPDC wants to encourage private firms to invest in plantationsof teak and other hardwoods, in exchange for export rights when theplantations reach maturity. In 2004/05 the SPDC wants to establish 34,000 haof forest plantations, with around 25% given over to teak. A small number ofprivate firms will be given permission to plant a percentage of this total.

A nickel mine project is beingexplored

Onshore exploration will belimited to domestic firms

Teak exports are rising

24 Myanmar (Burma)


However, teak and hardwoods are slow to mature, so it will be a number ofyears before these plantations give a boost to legal hardwood exports.

Myanmar is enjoying an upturn in international tourism. According to the latestavailable data, tourism arrivals in January-July 2004 reached 175,123, an increaseof 15.6% year on year. The rise was driven by a leap in arrivals from other Asiancountries, including Malaysia, Singapore, Japan and South Korea. The overallincrease in arrivals has been driven by a rapid rise in arrivals by air, up by30.5% year on year in January-July to 82,352, accounting for 47% of all arrivalsover the seven months. The national airline, Myanmar Airways International,added new regional services in both 2003 and 2004, and two Thai carriers(Thai Airways International and Phuket Air) have also added new flights toMyanmar. Despite this increase in arrivals, growth in the tourism sectorremains below potential, as arrivals continue to be affected by a number offactors, particularly a worldwide international boycott campaign. A new high-profile British campaign to boycott tourism in Myanmar was launched inFebruary; the campaign received backing from the British prime minister,Tony Blair.

Tourist arrivals2003 20042 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Jul

Arrivals (no.) 35,391 48,260 90,604 94,950 58,981 21,192 % change, year on year n/a -14.6 -8.8 -4.3 66.7 26.1


In early April the Ministry of Finance announced that it had revoked thelicences of two of Myanmar s largest private banks, Asia Wealth Bank andMyanmar Mayflower Bank, for violating the country s banking laws. Althoughno details of the banks misdemeanours were given, the SPDC had beeninvestigating money-laundering at both banks. The two banks were blacklistedby the US Treasury in November 2003 because of US concerns over theirinvolvement in money-laundering; the SPDC subsequently launched its owninvestigation. Administrators from the Central Bank of Myanmar will wind upthe two banks. Despite the closures, concerns remain over the health ofMyanmar s remaining banks, and over continued problems with money-laundering. The international Financial Action Task-Force (FATF) lifted itsspecial countermeasures against Myanmar in late 2004 after a new law oninternational co-operation on money-laundering was passed in mid-October.However, Myanmar remains on the FATF s watchlist of countries regarded astaking inadequate steps to curb money-laundering.

Two private banks are closed

Tourist arrivals are rising

Myanmar (Burma) 25


Foreign trade and payments

Myanmar s merchandise trade account remained in surplus during the firstseven months of 2004 (the latest data available), but the surplus shrank.Exports dropped by 15.3% year on year in January-July, to Kt8.7bn (US$ 1.5bn atthe official exchange rate) in line with the poor performance of a number ofkey commodity exports. Conversely, imports picked up, rising by 6.7% year onyear during the same period. As a result, the merchandise trade surplus fell byalmost 85% year on year in January-July.

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The overall fall in exports has partly been the result of a drop in exports ofnatural gas, the largest single export earner. Natural gas exports fell by 29.8%year on year to Kt2.3bn in the first seven months of the year, dragging downoverall exports. Garment exports also fell sharply, contracting by 51.1% year onyear in January-July. The drop in garment exports reflects the impact ofsanctions imposed by the US in July 2003 (the US had been a major market forMyanmar s small export-oriented garment sector). Fisheries exports also fell inJanuary-July, as did exports of rice and rubber; the 94.6% year-on-year fall in thevalue of rice exports was the result of an export ban imposed by the rulingmilitary junta, the State Peace and Development Council (SPDC), for six monthsfrom January 2004. A few key exports performed well in January-July. Forexample, exports of teak and other hardwoods rose by 13.9% year on year toKt1.3bn, and exports of metals and ores jumped by 66.5% year on year toKt272m (US$47m). Although the SPDC claims to regulate hardwood exports,extensive smuggling means that the real level of export earnings from teak arelikely to be higher than the official figures suggest. Pulses have now overtakengarments as the country s third-largest export. India remains the dominantmarket, although recent deals signed with several Singaporean companiesshould result in an increase in the export of pulses to Singapore.

The expansion in the import bill in January-July 2004 was driven by a rise inimports of machinery and transport equipment, refined mineral oil, metals,and electrical machinery. However, imports of synthetic and woven fabricsdropped by 41% year on year in January-July in value terms, reflecting the

State-sector imports are stillrising

The merchandise trade surplusdeteriorates

26 Myanmar (Burma)


slump in the country s export-oriented garment manufacturing sector. Importswere driven by demand from the state sector; state sector imports rose by 85%year on year in the first seven months of 2004 as credit started to flow againafter the previous year s banking crisis. However, credit to the private sectortook far longer to recover, and imports by the private sector fell by 17.1% year onyear in January-July.

Key exports and imports(Kt m unless otherwise indicated)

Jan-Jul2003 2004 % changea

ExportsGas 3,933 2,281 -29.8Teak & other hardwoods 1,978 1,317 13.9Pulses 1,613 1,066 3.4Garments 2,329 810 -51.1Prawns, fish & fish products 964 514 -10.6Metals & ores 298 272 66.5Rubber 106 58 -39.9Rice 331 20 -94.6

Total exports incl others 15,123 8,711 -15.3ImportsMachinery & transport equipment 2,472 1,888 26.7Refined mineral oil 1,357 1,080 94.8Synthetic & woven fabrics 1,545 639 -41.0Base metals & manufactures 936 833.5 49.5Electrical machinery 634 745 55.2Plastics 643 314 -29.2Total imports incl others 12,721 8,329 6.7Trade balance 2,402 382 -84.6

a January-July 2004 compared with the year-earlier period.

Source: Central Statistical Organisation, Selected Monthly Economic Indicators

According to figures from the Bank of Thailand, Thailand s central bank,Myanmar s exports to Thailand, its leading export market, rose by almost 43%year on year (in US dollar terms) to US$1.3bn in 2004. This was sufficient tooffset a similar rise in imports from Thailand, leaving Myanmar with a healthybilateral trade surplus. This trend continued into the first quarter of 2005, withexports to Thailand surging by 63.3% year on year. Over the past few years,Myanmar s exports to Thailand have been dominated by natural gas from theYadana and Yetagun gasfields. However, Myanmar s own data suggest thatexports of natural gas contracted year on year in the first seven months of 2004in kyat terms. Therefore, the jump in exports to Thailand for the whole of 2004either means that gas exports picked up strongly in the second half of the year,or there was a strong rise in exports of other items to Thailand.

Trade surplus with Thailandwidens

Myanmar (Burma) 27


Trade with Thailand(US$ m)

1 Qtr 1 Qtr2002 2003 2004 2004 2005 % change

Exports to Thailand 902 907 1,289 245 400 63.3

Imports from Thailand 323 439 609 153 190 24.2Balance 579 468 680 92 210 128.3

Sources: Bank of Thailand.

Myanmar s international reserves continue to rise; by the end of 2004 totalinternational reserves had reached US$684.7m, sufficient to cover around threemonths of imports. Reserves rose further in early 2005, jumping to US$731.4m.Reserves have been boosted by current-account surpluses. Also, in recent yearsthe junta has managed to secure some soft loans and export credits from itsneighbours. Nevertheless, the SPDC has limited access to international capital,and it continues to build up arrears on its external debts.

International liquidity(US$ m; end-period)

2004 2005Aug Sep Oct Nov Dec Jan

Foreign exchange 613.2 639.1 630.3 660.0 672.1 718.7

SDRs & IMF reserve position 0.2 0.2 0.4 - - 0.4Gold (national valuation) 11.8 11.9 12.1 12.4 12.6 12.3Total international reserves 625.2 651.2 642.8 672.4 684.7 731.4


Reserves continue to rise

myanmar (burma)€¦ · myanmar (burma) may 2005 the economist intelligence unit 15 regent st,...

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