A 500 billion political land mine and Myanmar’s gaping budgetSubmitted by phochan on Thu, 05/26/2016 - 10:27
A 500 billion political land mine and Myanmar’s gaping budget
Growth retardation of the agricultural sector connects too many aspects of economy issues such as lack of investment, lack of industrialization, obstacles in producing and distribution of goods, high unemployment rates, etc.
It is a high priority economic policy that the new government must endeavor to implement as the development of the agricultural sector directly influences rural development.
To boost agricultural growth means to boost quality of living in rural areas which in turn will send out positive ripples across other industries relating to agriculture.
Political land mine
If the issue of poverty in rural regions cannot be quelled, events can happen one after another; public unrest and chaos will lead to economic instability which will ultimately head towards a situation where the political sector will be affected.
For Myanmar’s lower income class, 62 percent of their income goes toward putting food on their tables and within that amount, 30 percent is used only for rice. A strong imagination is not needed to see that 32 million people (70 percent of the total population) below the poverty line suffer greatly when prices of rice and general good rise.
The cost of rice is indeed explosive, capable of blowing away social and political stability.
The main focus when the agriculture sector is concerned is rice. Through an economist’s eyes, one can see that it depends on factors on both teams; farmland acres, number of farmers, capital investment, cost of production, machineries and cost of rice on Supply’s side of the field while national income, rate of rice consumption, population, trade and other costs for Demand.
Now the government is looking to solve the problem by supporting the supply side with more loans. There are many international economic models involving rice and there also are countries in South East Asia which built their vast wealth off from agriculture.
I’d like to spotlight several strategic policy related deficiencies in the government’s plan to increase the loans by Ks 150,000 per acre.
The Central Bank have yet to announce at the Union Parliament on how much the interest is for borrowing Ks 500 billion from the reserves via a 92days bank note which can be extended indefinitely. It has previously been 4 percent and since Myanma Agricultural Development Bank (MADB) charges 5 percent interest, it seems as if MADB will absorb the remaining 1 percent.
The calculated time period for the 5 percent interest to come in falls around May to December (6 months). I have also read in a research paper that some amount of the loan must be submitted as deposit as well.
History have also shown that the economy also get destabilized due to budget deficit situation as well as the government, in efforts to support the farmers, pumped high amount of cash into the market which makes money supply abundant and affecting general goods prices.
After the Union Parliament agreed on 23 May 2016 on the decision to print Ks 500 billion for MADB, the currency exchange rate went up to Ks 1188 per dollar.
It must be taken seriously into account the fact that efforts by the government to cure the ailments through loans, which have failed time and time again throughout history, is severely lacking when good governance is concerned.
The amount of enterprises that are involved with government bureaucracy and are actually generating income is little. Let’s take a look at the amount of loans the government has given out since fiscal year of 2012-2013.
The amount of loan money from the government has been increasing year by year and presently, around Ks 1766 billion will be borrowed by the ministry under its 100 days plan.
Since those under 10 acres of farmland are eligible for the loan, it was Ks 1461 billion when it previously was at Ks 100,000 per acre. Now that the amount has been set to Ks 150,000 instead, it has to increase now by half of the previous amount.
It is unknown as to how it came to be set at Ks 1766 billion because on page 33 of Myanmar Agricultural in Brief 2011 by Department of Agricultural Planning have stated that there are 19.95 million numbers of farmlands that are less than 10 acres in size.
If summarization of this segment of the article was required, it would be that one has to come to the conclusion that the price of goods have increased after finding out that the amount of money in circulation is higher in comparison to the amount of agricultural products (rice) produced.
A look at the credit policy will reveal that MADB holds responsibility for bad debts but the bank is never involved in neither the decision making nor the examination of the loan requests right down to the lowest levels of administration as bank staffs are not allowed to go on field trips regarding the loans.
This gives all the power to those in charge from loan investigation committees such as village tract chiefs or village elders.
The credit management structure needs to be amended because all the bank needs to do is to give out the loan to anyone who bears the recommendation of those committees. The bank’s role in all this is nothing but an agent for the money distribution channel for the loan to reach the farmers.
This is neither a solid banking administration system nor a profitable juncture. The MADB must be involved with the decision making process as much as bearing responsibility for the loans it gave out. The management structure must be tweaked somewhat and to prove that point, we can look at the data from Mandalay’s MADB.
Around 33 percent of the loans were never returned and calculating from that fact, even with 8 percent interest rate, it will not even cover the initial costs. I have read in a research paper also that the government’s loan contribution to the agricultural cause only covers around 25 to 30 percent of the total agricultural costs. But the MADB have stated that it covers up to 40 percent. If it was low quality rice, it costs around Ks 200,000 and double that amount if it was a high quality breed like Pale Thwe.
The gaping hole in Myanmar’s budget stream
I remember reading a report by a world famous Myanmar economist that the MADB is the hole in the budget stream. The MADB split from the budget ministry in 1996 and put under agricultural ministry which made it so that institutional laws regarding trade and budget do not concern the MADB.
It is also not under the control of the CB making it quite distant from budget and monetary policies. Any amount the MADB needs, it takes from the Myanma Economic Bank. Since they operate under their own laws, they are outside the budget stream which makes it very difficult to find and analyze their year reports, accounting systems, balance sheets, etc.
Since the MADB is under the agriculture ministry now, it makes it the responsibility of the Office of the Auditor General of the Union and making it difficult to calculate gains and losses as well as measurements of growth. A structural adjustment should be in order to bring MADB back into the circle.
A long term strategy must also exist in order to transform the MADB into an independent enterprise relying on its own funds from a national enterprise relying on the government’s support. There are plenty of international examples in South East Asia of such.
For example is the Bank Rakyat Indonesia which became a public company limited in 2003 with the government holding 56.75 percent of the shares and the rest were sold to public. It practiced proper corporate governance by utilizing board management as well as being transparent with its data to the public, taking full responsibility for results of both internal and external audits.
The danger levels of civil support government banks have slowly been increasing. The cause of that can equally be blamed on three parts. The first part is due to the weather, natural disasters, unstable costs, international products and market. The second is that the banks supported by the governments have no authority on policy making. The third and final reason is because heavy government surpluses are no longer popular in countries that are burdened by government ran enterprises that are in transition.
If the government really must support agricultural growth, every support scheme for the agricultural sector must be 5 to 10 years long projects which will aim to include every stakeholder with better coordination systems within the next five years.
The loans and supports must not only be limited to the actual planting but be available for the whole value chain; infrastructure, transport, storage, fertilizer, electricity, breeds and machineries. If the country lacks these things, international investment must be invited and for that to happen, the policies must already exist or be made together with the private, public as well as international organizations.
Only when these factors can be realized parallel to each other, all of the loan schemes that have seen failure year after year can find success.