Please tell me how Myanmar’s economy will turn out if U Thein Sein takes another term

A child looking at KFC shop in downtown Yangon. (Photo-Kyi Naing)

Dear Sayagyi U Myint,

We had exchanged open letters over an article I wrote in March.

The article I wrote was “Would Myanmar plunge deeper into recession?”

Since you felt dissatisfied with it, you wrote an open letter to me. I replied you in two letters. You then wrote another letter on April 11 over my letter. I have not written anything to you since then.

Now I recall you when I imagined what Myanmar’s economy would become if President U Thein Sein took office for the second term. What will be your take? I wonder.

I have read the report you wrote over the awful plunge of Myanmar currency in July. I have noticed that you warned in the report that the bank and financial crisis should not have happened at the time the general election was about four months away.

You also mentioned eight solutions to the problem. I do not know whether or not things were handled as you advised. I later read another report compiled by U Set Aung, deputy governor of the Central Bank of Myanmar (CBM).

Dear Sayagyi,

Before other things, I first and foremost want to tell you my speculation. If [the President] won the second term through the incorrect voter lists whose accuracy was guaranteed only up to 30 per cent, Myanmar’s economy would never recover.

Even the crony tycoons who are doing well for the time being could lose their businesses.

The situation from six months ago and now

I wrote “Would Myanmar plunge deeper into recession?” in March. I said in the article that Myanmar’s economic situation was unfavourable.

I pointed out three factors: the inflation rate could rise to the highest, the swelling government expenses and the enlarging budget deficit, and the import exceeding the export which could affect the kyat depreciation more and increase trade deficit.

I wrote that the country’s economy would be in chaos if those three were unstable.

First, the inflation rate was between 2 per cent and 4 per cent in 2011-2012. The rate was nearly 6 per cent in 2013; 7.06 per cent in late 2014.

It rose to 8.18 per cent in April and to 10 per cent in July this year.

If it continued like this, the inflation rate would be at two-digit number in 2016.

The economists believed that it is risky for a country like Myanmar if the inflation rate is above 5 per cent.

The next thing is swelling government expenditure which was not reduced in time.

The government’s revenue was Ks 6,453.66 billion and expenditure was Ks 8,083.304 billion in 2011-2012 fiscal year when President U Thein Sein took office. The budget deficit was Ks 1,629.66 billion then.

However the government’s spending became the highest in the current fiscal year 2015-2016. The budget deficit topped Ks 3,600 billion within a year. The accumulated budget deficit during President U Thein Sein’s administration is more than Ks 10,000 billion.

At the same time, the Myanmar currency value has plunged steadily. The kyat weakened by 35 per cent against the US dollar in March. It was expected that the kyat value would fall by 40 per cent based on the circumstances that time.

But the reality is worse than expected.

The Myanmar currency value plunged by 60 per cent in August, the highest yet. People in business sector concerned about the handling of the CBM that time. The kyat depreciation is yet to recover.

I pointed out in my article in March that the enlarging trade deficit was worrisome and the constant kyat depreciation was disturbing. But you, Sayagyi U Myint, did not accept that.

You replied that the kyat depreciation relieved the costs in export and increased the spending for import. Since the import goods became pricey, the import might drop and the export would rise.

I take it that the kyat depreciation is not to be worried about and the export may rise, and that you wanted me to wait and watch.

I waited and watched, as you wanted me to. And I found that the import continued to rise just the way it was since FY 2012-2013. What you said that “the import would drop automatically due to kyat depreciation and the export would increase” did not happen.

I will prove that by comparing the two fiscal years.

The export totalled US$5,926.617 million in October, 2014.

The export earning is only $5,530.927 million this October. This year’s export amount is $395.69 million less than that of the same period last year.

The import is not reduced significantly. It was spent $7,896.217 million so far this year on imports. In last year October, $8,373.202 million was spent. This year’s import amount is reduced by $476.985 million.

By seeing this, it is clear that the export amount did not increase due to kyat depreciation and the imports also did not decrease significantly.

It is correct that the trade amount increased. But the trade deficit enlarges more during President U Thein Sein’s government.

The trade deficit would total $9,556.5 million during four years.

The trade deficit for the FY 2015-2016 was primarily expected to be $4,100 million only.

The amount went up to $2,191.008 million in five months since the beginning of the year. So, it is likely to surpass the expected amount.

During these months, the export did not exceed the import. While the export totalled $5,295.562 million, the import already hit $7,486.57 million.

I said that the government was responsible to handle the situation in the article in March. I warned that the inflation rate needed to be reduced. The government’s spending must be cut and the budget deficit must be reduced. The import had to be reduced during the time of kyat depreciation.

But the government could not sort out any of these three problems. That means the situation is worse now than it was in last six months.

In danger zone

Dear Sayagyi U Myint...

I do not know how you will describe the country’s current economic situation.

But I think it is now in a danger zone.

The government’s expenditure was not cut; the trade deficit was not handled. The inflation rate is at its peak. The kyat depreciation is out of control. Meanwhile there are not much foreign reserves left.

Economists suggest that a country should hold foreign reserves the equivalent of six months’ worth of imports.

But some have started to question if Myanmar even has the foreign reserves the equivalent of two months’ worth, let alone three months’ worth.

Only the CBM will know the exact figure.

The International Monetary Fund (IMF) warned of the country’s lessening foreign reserves in August. The CBM sold American dollars through the overseas auctions to ease the rising prices in engine oils and some import goods due to kyat depreciation. This results in decrease of foreign reserves.

The short- and long-term overseas debts total Ks 25,205 billion. This accounts for more than 30 per cent of GDP.

Some foreign loans were received in American dollars which means the debt that needs to be paid will be higher as the dollar value gets higher. The same goes for the interest. This results in more dissipation and loss of money.

The most important thing is the economic situation of the country. The report compiled by the Asian Development Bank (ADB) in September warned of 1) the increase in debts, 2) the increase in government’s expenditure, and 3) swelling trade deficit.

The World Bank Group’s (WBG) report in early October highlighted the fall of Myanmar’s economy. The economy grew by 8.5 per cent in FY 2014-2015, but it is likely to drop to 6.5 per cent this year.

This means the economic growth has fallen back during U Thein Sein’s administration.

The future growth is up to the next government after the election. The other reports mentioned this fact.

Who said about what?

Three reports that analysed Myanmar’s economy were released in last three months. The UK-based Economist Intelligence Unit’s (EIU) report over Myanmar’s economy in August, the WBG’s Myanmar Economic Monitor in October and the IMF’s Staff Report’s for Article IV Consultation in September.

Moreover the ADB’s Asian Development Outlook 2015 includes a text about Myanmar.

The EIU’s report forecasts the country’s economy for 2015-2019 in terms of politics. The IMF’s report also predicts the economy based on political conditions. Both of the reports indicate that the betterment of Myanmar’s economy relies on the political conditions in post 2015.

They all speculate the country’s politics based on two factors.

The first one is the Nationwide Ceasefire Agreement (NCA) and the second is the general election scheduled on November 8. The EIU takes the role of MaBaTha (the shorthand for the Committee for the Protection of Race and Religion) into account when talking politics.

The outcome of the NCA was unclear at the time of the release of the EIU’s report. They hoped for the best. But, their wish did not come true.

The EIU expected that the National League for Democracy (NLD) would win the majority of the seats if the election is free and fair.

Further, it said only a free and fair election and a renewed impetus for political reform on the part of the next administration would lead to stronger Western engagement.

The EIU also believed that the NLD-led government’s fiscal policy would be more flexible than that of Union Solidarity and Development Party.

Although the country’s GDP was 6.4 per cent in 2014-2015, it would become 7.4 per cent in this fiscal year.

The increase in foreign investment depended on the political reforms and the election, they warned.

President U Thein Sein cancelled the $300-million Dagon City 1 project, the report mentioned. It pointed out the involvement of MaBaTha behind the scene and said such happening could hurt the confidence of the foreign investors. 

Moreover the inflation rate would continue to rise till 2019 by given circumstances and could hit Ks 1,300/dollar or higher.

The country’s commodity price index reached 9.4 per cent, the highest in this year. A drop in the price of Myanmar’s main export product natural gas was worrisome, the report warned.

The EIU is an independent organisation and every one in business sector respects their findings.

To summarise, their report warned that the future economic situation depended on the politics and the investors would retreat if the election was unfair and Myanmar’s international engagement would become weak.

World Bank’s report

Since the WBG is working with the government, it left the political context out of the report.

The economic growth would drop by 6.5 per cent and the inflation rate would increase by 11.3 per cent in the FY 2015-2016, it said.

The country's economic growth rate is said to have decreased due to recent flooding and slow investment.

Exports of agricultural products might have decreased but it is not possible to decrease the income generated from exporting gas, the country major export item. However, it is said that decreasing prices of oil and gas in the international market could impact on Myanmar's gas exports.

Reviewing the 2014/15 fiscal year, gas exports stood at 42 per cent, the largest percentage in any other export product. Agricultural, fishery and meat exports stood at 23 per cent; mineral exports at 12 per cent; garment exports at 8 per cent; and other general exports at 14 per cent. Exports of forest products accounted for only 1 per cent.

What is significant is that in the 2014/15 and the early 2015/16, mineral exports, including gems, have decreased. Particularly, jade exports have decreased by 38 per cent, compared to the previous year.

Forest product exports have also decreased sharply. Forestry exports in the first 11 months of 2014/15 fell to US$65 million from US$750 million over the same period in the previous year. Such a decrease has been seen since the logging was banned on April 1, 2014.  

The World Bank said inflationary pressures increased in 2014/15 and have remained high in the first half of 2015/16. The rate of inflation reached the highest level in April and May this year, having an impact on foodstuffs as well as other non-foodstuffs.  

Government reserve money has significantly decreased since late 2014. The depreciation of Kyat continued to increase until after September of 2015, the World Bank indicators show.

According to estimated calculations for 2015/16, foreign investment depends on special economic zones and investment will flow into the country slowly during the election period. Those calculations were made taking into account the conditions of Thilawa and Dawei special economic zones.

IMF report

International Monetary Fund's staff report for the 2015 Article IV Consultation is different from that of the World Bank. IMF has openly warned against sensitive issues. It says that a successful conduct of the November general elections and a timely conclusion of the peace negotiations will provide a firm basis for greater political and social stability and underpin continued economic transition.

The growth momentum remains strong, but signs of economic overheating have emerged in the face of supply bottlenecks and loose financial conditions. In particular, with rising inflation, currency depreciation, trade deficit, more loans for private businesses and little reserve money, urgent actions are necessary to reduce vulnerabilities, IMF reviews. Moreover, the government is urged to reduce budget deficit.

With kyat depreciation since 2014, normally, Myanmar should have had foreign reserves for five or six months' import value. However, in March 2015, foreign reserves covered around three months of imports. At the end of 2015/16, the inflation rate has reached 13 per cent and the remaining amount of foreign reserves is only for two and a half months. If that continues so difficulties will ensure till 2017/18, IMF points out.

IMF also estimates that lower natural gas prices would further reduce export earnings and government revenue. Revenues earned from gas sales will continue to fall till 2017/18 from now. It also says a slowdown in China's economic growth would have a negative impact on Myanmar.

However, there will be FDI inflows to Myanmar through energy and manufacturing industries. A booming tourism sector will also help boost transportation and construction industries.

Despite IMF's hopes for the booming tourism industry, the EIU's report points out to Myanmar's tourism sector.

According to figures in 2014, seventy-one per cent of foreign tourists to Myanmar were from Asian countries and only 17 per cent from the Western countries. Among Asians, most were from Thailand, the second most from China and the third most from Japan. The report says tourists who want to visit Myanmar have to consider the country's political climate.

Another important point IMF has pointed out is that Myanmar has not made sufficient progress in addressing AML/CFT (Anti-money laundering/Combating financing of terrorism.

Overlapping factors

The international economic and monetary organisations have highlighted several overlapping factors.

They raise similar concerns over inability to control rising inflation and kyat depreciation, reduce trade and budget deficits, the possibility to earn low income from gas exports and inability to remedy financial vulnerabilities.

The 2015 general election is more important. There could be a way out of those concerns if the election is free and fair. If not, we could face a situation that is worse than before 2010.

The government is luring foreign investors into doing business in Myanmar with special economic zones as a showcase. This is why the government is pushing for the completion of Thilawa SEZ. Only if that project is successful, will there be other expectations. It is undeniable that more foreign exchange can be earned from the communication sector. There are still challenges to the establishment of Yangon Stock Exchange. One challenge is up to the forthcoming election. Likewise, it is a challenge for the Central Bank how to deal with the foreign banks that have come to run in the country.

Myanmar Investment Commission (MIC) says foreign investments flow into the country continuously. But we need to consider what kinds of investors and what kinds of businesses they are investing in.

According to the figures available up to August 31, Myanmar had approved 979 tasks/projects to be implemented with foreign investments. They are all valued at US$ 57 billion. The amount comes not only from Thein Sein's presidency but also from the whole period after 1988. Those projects are already approved but all of them have not been in operation. Only 707 projects are running with an investment amount of US$ 46 billion.

Most investors in Myanmar are from China. They are investing about US$ 14 billion in the country. Singapore is the second largest investor with over US$ 10 billion and Hong Kong, the third with over US$ 7 billion.

Out of the Western countries, Britain has made investments most with an amount of US$ 3 billion. The US has invested more than US$ 4 million.

India's investment has amounted to US$ 726 million while Japan has invested just over US$ 452 million.

Agriculture forms the backbone of Myanmar's economy. The government is talking about a transition from manual farming to mechanised farming. Foreign investors however do not take must interest in the agricultural sector.

Most foreign investors come to Myanmar to invest in the oil and gas sector, which accounts for 39.97 per cent of all other sectors. The electricity sector stands at 28.39 per cent, the manufacturing sector at around 10 per cent; the agricultural sector at 0.5 per cent; and the industrial sector at 0.4 per cent.

Foreign investments mainly eye the country's natural resources. There are few investments in agricultural and manufacturing sectors, which can however benefit in the long run. Unlike South Korea and Japan, Myanmar cannot rely on exports.

Most of the countries investing in Myanmar tend to seek exploitation. Frankly speaking, Myanmar's economic is like walking on the ropes. It will slow down if the 2015 election is not free and fair. As natural resources are not inexhaustible, we could see things that are worse than those before 2010.

Who stole the country's natural resources?

It is clear that the situation will be worse than the period under military junta before 2010 unless the upcoming election is free and fair.

Under the military regime, their major source of income relied on tapping natural resources. Through nepotism, corruption and money laundering, a handful of people accumulated wealth. But it is the ordinary people who have to live in poverty.

Global Financial Integrity (GFI) issued a report in September titled "Flight capital and illicit financial flows to and from Myanmar: 1960-2013. The report highlighted how much Myanmar had lost money during 53 years from 1960 to 2013.

The report says that illicit trade outflows totaled nearly US$ 20 billion while illicit trade inflows totaled US$ 77.7 billion. More than half of the amount earned from illicit trade inflows was from 2010 to 2013 after the Thein Sein government came to power.

In 2013, a controversial issue surfaced over the possession of US$ 11 billion in five foreign bank accounts outside Myanmar. At that time, involvement was denied. Yet, no one has rebutted the latest issue of illicit trade inflows.

The GFI report points out that illicit financial flows totalled US$ 400 million per annum in the 1960s. But they have now reached US$ 8 billion annually.

GFI said Myanmar could have lost at least US$ 2.9 billion and as much as US$ 3.6 billion over the period of 54 years. Consequently, internal savings were lost and public funds important for the country were stolen.

As illicit financial flows are severe, the next government to be chosen through election must take an urgent action to stop them. If not, GFI says, illicit financial flows will have a negative impact on the country's economy, causing direct economic loses as well as more crimes, corruption and losses of public funds.

As shown in GFI indicators, it is not certain that the next government will be able to stop illicit financial flows if the present incumbent fails to do so.

Wrong moves

President Thein Sein's government conducts its election campaigns by talking about the increased numbers of mobile phone users and cars and construction of road networks.

In reality, they are basic needs that any government must fulfill for their people. Reviewing the five-year term of the government, we cannot say that all basic needs have been fulfilled on a cent per cent basis.  

It is good to see more people use mobile phones and buy cars. But we can notice that there is no enough per capita income. Inadequate per capita income, rising inflation, and the high cost of living including basic food prices and health expenses must be considered.

A person whose daily wage is Ks 3,600 will earn only Ks 108,000 a month. He won't be able to save money when his phone bills and other expenses are added.

So the increase number of mobile users is not a sign of progress. How much per capita income has increased is a real progress for a country.

Looking at the gross national income (GNI) calculated based on the World Bank indicators, annual per capita income of a Myanmar citizen is US$ 1,270. Such amount gives an extra of US$ 80 to be out of the list of least developed countries. But Myanmar is at the second bottom of the list of 11 Asean countries including East Timor after Cambodia.

Please give your estimation, Sayagyi U Myint

In March, I said there is growing concern over increased trade deficit as imports exceed exports in our country, resulting in continued kyat depreciation. You didn't accept it, however.

But you mentioned growing trade deficit in a paper submitted in July. The paper suggested some remedies for the kyat depreciation. I assume that you have accepted this point.

I have not heard you blame excessive government spending for budget deficit. It is clear why there has been a lot of government spending. A huge sum of money is being spent on the elections. When President Thein Sein came to power, rural development and poverty alleviation funds were raised. Meanwhile, U Ohn Myint who is loyal to President Thein Sein became Union minister for livestock, fishery and rural development. He will run for election in Yangon's Kyauktan Township Constituency.

I don't know how those funds have benefited the rural people. A lot of money was spent on this.

For the 2014/15 fiscal year alone, Ks 50 billion was allotted for rural development and poverty alleviation. Those spenders themselves will know all the money was really spent on this. In the first half of the fiscal year, just over 10 billion (20 per cent of the total amount) was spent. The money was not found to have been spent when necessary. But it is covertly being used now in the run-up to the elections. We cannot say how many people there will be like Union minister Thein Nyunt, who canvassed for votes in Maubin Constituency by saying about electric power supply in rural areas.

Such wrongful things are accountable especially to the president's economic advisers such as Sayagyi, Dr. Zaw Oo and Dr. Aung Tun Thet. Some of your economic advisory board are trying to secure a place in organisations like KDI.

So can you imagine what can happen to Myanmar's economy if President takes another term? If you do not find it convenient to say about it in public or think that the government's tenure is about to end, you'd better resign as economic adviser.

Six months or a year ago, I predicted Myanmar's economy would fall. At that time, even the World Bank and ADB could not predict. Only now, did the World Bank say that its economy would fall by 6.5 per cent.

Now again, let me say that Myanmar's economy will never recover if there is any electoral fraud. Britain that has invested over US$ 3 billion and European counties will also turn their backs on Myanmar.

We already experienced the investment from a country like Singapore in 2000.  Can we rely on China that is beginning to see a slow economy and Thailand under dictatorial rule? I want suggestions from an expert like you. If U Thein Sein takes another term,…

Note: The currency exchange rate is around Ks 1,280/USD at the time the article is written on October 11.(Ref: Central Bank of Myanmar)