But the opportunity to right the wrong is here and the reformation needs to be irreversible
A CENTURY ago, Rangoon (now Yangon) was one of Asia's great trading centres and home to a diverse ethnic mix. Its 19th century population of 100,000 has since swelled to about 6 million in greater Yangon, which now suffers from cracking infrastructure, electricity brown-outs, traffic congestion and growing pollution.
I first visited the city in the mid-60s as a young central banker (and have been back often until the 90s), working alongside prominent bankers and economists at the Union Bank of Burma (the central bank).
Its colourful history is reflected in the city's heart, where ancient Buddhist pagodas sit next to churches and cathedrals, Sunni and Shia mosques, Hindu and Parsee temples, and a Jewish synagogue. I well recall at its very centre stands the magnificent Shwedagon Pagoda sitting serenely in gold glittering amid the city skyline.
Then, Yangon was the home to hundreds of Victorian and Edwardian-era buildings, including the edifices of Lloyds and HSBC bank, and the all-teak Pegu Chub where Rudyard Kipling stayed.
I am told many have since been demolished to make way for development. But even then, I was glad the Victoria-era Strand Hotel (that once welcomed George Orwell) has been transformed from a run-down budget hotel into an elegant 5-star. Before the make-over, I recall seated at lunch in the sparsely furnished hotel caf and was told that its original 8-page menu (dating back to pre-WWII) now carried only plain sandwiches all else were just not available. Even so, the Yangon of today is nothing like the quaint 60s Rangoon I used to know.
No more Burma
With the combined size of France and Britain, resource rich Myanmar sits strategically between India and China and alongside South-East Asia, with ports on the Indian Ocean and Andaman Sea. As such, it is coveted by China's western provinces as a strategic energy-security asset. Bordering five nations (including Bangladesh, Thailand and Laos) with Malaysia to the South, Myanmar offers multiple avenues for Asian engagement as the United States shifts its focus to the growth axis within the Asia-Pacific region.
Yet poverty is jarringly endemic, especially outside Yangon. While the European Union has started to unwind sanctions, punitive US measures continue to cut deep into the domestic economy. Bear in mind Myanmar was among Asia's most prosperous before the 1962 military coup ushered in the disastrous Burmese Way to Socialism that brought sweeping nationalisation and rapid global isolation.
After 50 years of often brutal military rule, Myanmar is today one of the world's poorest. One-third of its 60 million people live on less than US$1 a day! The International Monetary Fund (IMF) estimated its GDP to be just over US$50bil. Its neighbour Thailand, with 67 million, has a GDP (US$350bil) that is 6 times larger. Similarly, Malaysia's GDP (US$285bil) is nearly 6 times its size but has less than one-half its population.
Years of mismanagement by a corrupt and inept military regime have left Myanmar without a functioning economy. I am told a trip to the country-side can feel like a ride in a time machine back to pre-industrial society oxen drives ploughs where houses are thatched and bamboo is used extensively. Most areas are devoid of sewage, paved roads or cell-phone reception. Residents power light bulbs with car batteries, even though there are few cars in sight.
Myanmar is poised at an important juncture in its often tragic history. Reform, to paraphrase Victor Hugo, is an idea whose time has come. In the 12 months since he became President, U Thien Sein has led his nation down a radical path away from dictatorship to elections, vowing to “root out the evil legacies deeply entrenched in our society.”
By all accounts, the bookish 66-year old leader is no radical reformer I have heard visiting generals refer to him as the Gorbachev of Myanmar, prematurely I think. An advisor to the former president described him as: “Not ambitious; not decisive; not charismatic; but very sincere.”
Despite the nascent signs of change, Aung San Su Kyi sums up the outlook best early this year to a group of visiting Malaysians: “I don't think it's past the point where you can say it's irreversible. But we are going to have to make it irreversible... I think, the (investors) should wait a little.”
The IMF's economic report in January 2012 concluded: “The new government is facing a historic opportunity to jump-start the development process and lift living standards. Myanmar has a high growth potential...” It needs to “turn its rich natural resources, young labour force and proximity to some of the most dynamic economies in the world into its advantage.”
Its recent efforts are in the right direction, starting with establishing macro-economic stability, mainly at improving monetary and fiscal management. It has started the process with working plans to unify the exchange rate and to gradually lift exchange restrictions on current international payments and transfers.
Modernising the economy will also involve removing impediments to growth: from enhancing the business and investment climate, to modernising the financial system, to liberalising trade and foreign direct investment (FDI). However, foreign banks are unlikely to be let in before 2015. There is still much to change. Given decades of neglect, “you name it, we need to reform it,” remarked a government advisor. Fortunately, they are open to outside help with the reform process, unusual for a regime that used to regard global institutions with great suspicion.
IMF estimates GDP growth in Myanmar will rise by 5% in FY2011/12 and then by 6% in FY2012/13, stimulated by buoyant commodity exports and fixed investment reflecting improved business confidence. Inflation is expected at 4.2% currently with the recent fall in food prices, but anticipated to rise to 5.8% in FY2012/13 as oil prices rise. The “market” exchange rate had appreciated by about one-third (to 830 in January 2011) since end FY2009/10 following large foreign capital inflows. International reserves rose to US$5.3bil at end FY2010, sufficient to finance seven months of imports.
On the fiscal front, further improvements can be expected. Exchange rate unification should improve revenues, although the losses of state-economic enterprises (SEEs) will become more apparent and transparent. The fiscal deficit had averaged 5%-5% of GDP in the past two years but, should improve mainly due to new gas exports as they come on stream. It is expected that additional revenues will go towards building human capital, health care and infrastructure.
Tax reform would emphasize direct taxation over indirect taxes to protect the poor. The FY2012/13 budget has targeted a lower deficit of 4.6% of GDP. Privatisation of SEEs would boost private-sector led growth. Recent steps to improve competition in key sectors can be expected to reduce informal market activity and reduce prices.
New exchange regime
Reforming the highly complex exchange rate system is top priority, and rightly so. It will remove a constraint on growth. Indeed, its success will help establish a monetary policy framework for price stability. But the Central Bank of Myanmar (CBM) needs to be empowered with operational autonomy and policy independence to meet its mission, including bringing about market determined interest rates to help build efficient financial intermediation, including a stock exchange.
Myanmar is one of only 17 nations with dual exchange rates (i.e. different exchange rates for different purposes). Officially, US$1=6.4 kyats (pegged to the IMF's Special drawing rights since 1977). Unofficially (in the streets' “black market”), it had far exceeded 1,000 (in 2009) and now hovers around 800 kyats. The official rate is used for government revenue and for imports by some SEEs. As a result, state revenue is grossly underestimated.
From April 1 the kyat was allowed to float against the US dollar, managed using an auction system. The CBM will conduct sealed bids for a given amount of US dollar, from 14 authorised domestic bank dealers. In practice, market forces will be allowed to determine the kyat's value, within a trading band of 0.8% on either side of the reference rate set daily by the CBM (at 818 on April 2).
This move also calls for enhanced regulation and supervision of banks. From continuing trials over the next 12 months, interbank currency and money markets are expected to emerge. According to IMF: “Certain exchange restrictions can be removed immediately, for example, by allowing the use of all foreign currency bank account balances for imports, easing import licensing requirements and access to the newly-established foreign exchange retail counters.”
Currency reform is a delicate process and can have far reaching impact on ordinary folks. People still remember 1987 when the cancellation of certain bank notes by the late dictator Ne Win wiped out people's savings, and led to pro-democracy uprising the following year which the military crushed and killed thousands. Poor implementation could easily destabilise the economy.
The business community remains nervous with the latest move: (a) the new rate could become unstable given the narrow market; or worse, (b) strengthen further to the detriment of exports; or (c) prove difficult to maintain stable due to speculative influences. To be successful, the value of the kyat has to be seen as determined by the orderly interplay of market supply and demand.
New investment laws
The new investment laws, while likely to significantly improve Myanmar's business climate, won't solve its massive infrastructure deficit, or answer concerns over its unpredictable legal system, its dysfunctional banking system (ATMs and credit cards are not widely used), and its opaque policy making process. Still, the new laws are keenly awaited.
Foreign investors will be (i) granted a 5-year tax holiday; (ii) free from needing a local partner to start businesses; (iii) free to form joint ventures (with at least 35% foreign capital); (iv) allowed to lease land for up to 30 years, to be extended twice, 15 years each time; (v) required after five years, to employ at least 25% skilled local labour; (vi) exempted to export; (vii) guaranteed against nationalisation; (viii) free to repatriate 100% of profits; and (ix) allowed to import skilled labour.
A new telecommunications law is also expected to create four new phone licences, open to foreigners to bid. Myanmar has only 2-3 million (some estimate much less) mobile phone users today. The number of internet users is even smaller 110,000. The government's target is 50% wireless penetration by 2015.
What, then, are we to do?
The push is on for a really “open door” society. Developments are still evolving. All round support is needed to accelerate and secure political and economic reforms. They have come a long way from where they were a year ago. Today presents a real opportunity for permanent change.
We hear from Aung San Suu Kyi that the President is “sincerely motivated.” He has since moved firmly on both political and economic fronts. The challenge is for the West to recalibrate its response to reciprocate the bold reform initiatives. It would appear there is a new mind set in Myanmar.
The country has been secluded for so long that this time around, people with their new found freedom may understandably, have set their expectations too high to be realistic. Implementation can easily fall short. They have lost everything over the past 50 years. They have nothing more to lose. They want and deserve more in terms of really improving the plight of its impoverished people. They expect much better healthcare and education. Quick reforms in land and agriculture are also badly needed.
All this will require serious political effort by the West commensurate with that made by Myanmar. They urgently want to achieve enough progress to make the process irreversible. For them, there can be no turning back. “People have high hopes (and)... like to see progress on the streets.” I wish them well.
Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email: email@example.com