Myanmar (Burma) at a Glance: 2005-06

Country Report

Myanmar (Burma)

Myanmar (Burma) at a glance: 2005-06

OVERVIEW The ruling military junta, the State Peace and Development Council (SPDC), will continue to emphasise its “road map to democracy” in an effort to confer a degree of legitimacy on its regime. However, until the junta releases Aung San Suu Kyi, the leader of the opposition National League for Democracy (NLD), and agrees to allow her to operate freely, the road map will receive little international support. Real GDP growth will be held back by a range of international sanctions, sluggish domestic demand, credit limitations and severe shortages of power. The junta will maintain a highly overvalued official exchange rate, and double-digit inflation and deteriorating confidence will exert downward pressure on the free-market exchange rate.

Key changes from last month Political outlook • On October 19th the prime minister, General Khin Nyunt, was removed from office and replaced by the hardline secretary-1, Lieutenant-General Soe Win. Although General Khin Nyunt is by no means a reformist, his position had been increasingly under threat owing to indications of a widening rift between him and the SPDC chairman, Senior General Than Shwe, over plans for reform. Economic policy outlook • Although the junta’s medium-term economic policy focus seems to be one of reducing reliance on imported inputs and boosting agricultural output, the junta has often backtracked on its efforts to liberalise trade in key agricultural goods, and this trend is likely to continue in 2005-06. Economic forecast • Although the import bill has been pushed up by the high cost of imported refined petroleum products (imports rose by 22.8% year on year in the first quarter of 2004), the shortage of foreign exchange and the recent rise in import taxes will dampen overall import demand in 2005-06.

November 2004

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Contents

Myanmar (Burma)

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2005-06 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

16 Economic policy

18 The domestic economy 18 Output and demand 19 Employment, wages and prices 20 Financial indicators 21 Sectoral trends

24 Foreign trade and payments

List of tables

9 International assumptions summary 11 Forecast summary 17 Central government tax revenue 18 Interest rates 18 Output of state-owned enterprises 19 Foreign direct investment 20 Consumer prices 21 Money supply and credit 24 Tourist arrivals 25 Key exports and imports 26 Trade with Thailand 26 International liquidity

List of figures 12 Gross domestic product 12 Consumer price inflation 22 Garment export revenue 25 Exports and imports

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Myanmar (Burma) 3

Myanmar (Burma) November 2004 Summary

Outlook for 2005-06 The ruling military junta, the State Peace and Development Council (SPDC), will continue to emphasise its “road map to democracy” in an effort to confer a degree of legitimacy on its regime. However, until the junta releases Aung San Suu Kyi, the leader of the opposition National League for Democracy (NLD), and agrees to allow her to operate freely, the road map will receive little international support. Real GDP growth will be held back by a range of international sanctions, sluggish domestic demand, credit limitations and severe shortages of power. The junta will maintain a highly overvalued official exchange rate, and double-digit inflation and deteriorating confidence will exert downward pressure on the free-market exchange rate

The political scene The prime minister, General Khin Nyunt, has been removed from office, and the SPDC has dropped its foreign minister, Win Aung. These moves suggest that the hardliners within the junta have tightened their hold on power. The NLD has campaigned for the release of political prisoners, including Aung San Suu Kyi, but has had no success. The UN has urged faster progress on reforms. The EU agreed to comprise over Myanmar’s attendance at the Asia-Europe Meeting in early October, but it has since tightened its sanctions against the SPDC. Myanmar’s fellow members of the Association of South-East Asian Nations (ASEAN) have been losing patience with the junta. The US has kept up the pressure for reform.

Economic policy Although no meaningful economic reforms have been introduced in recent months, the junta has focused on pushing farm exports. Tax revenue has risen in nominal terms, but the budget deficit is likely to have remained high. Real interest rates have risen in line with the recent easing of inflation, but the public’s confidence in the banking system has remained weak.

The domestic economy The economy probably contracted in fiscal year 2003/04 (April-March), based on a number of proxy indicators. Falling rice prices have brought about a sharp easing in inflation. The free-market kyat has remained under pressure. Money supply growth has picked up again, but private-sector credit remains tight. Rice production is expected to disappoint.

Foreign trade and payments The merchandise trade surplus contracted sharply in the first quarter of 2004. This was in line with weakening export revenue and a rising import bill. International reserves have slipped. Editors: Danny Richards (editor); Graham Richardson (consulting editor) Editorial closing date: October 20th 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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Political structure

Official name Union of Myanmar

Form of state Military council

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

Head of state Chairman of the SPDC, Senior General Than Shwe

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

National elections May 27th 1990; next election date unknown

National government The SPDC controls all the organs of state power

Main political organisations Since the military coup, political parties have in theory been permitted to operate on the basis that they are officially registered, but they face many restrictions. A number of organisations, most of them ethnic-based, were in armed conflict with the government for many years. Many have now reached an accommodation with the government, although some groups continue armed resistance. The Union Solidarity Development Association (USDA) was set up in 1993 as a welfare organisation and support bloc for the junta

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

Main members of the State Peace Chairman Senior General Than Shwe & Development Council Vice-chairman Deputy Senior General Maung Aye Secretary-1 Lieutenant-General Soe Win Secretary-2 Lieutenant-General Thein Sein Prime minister Lieutenant-General Soe Win

Key ministers Agriculture Major-General Htay Oo Commerce Brigadier-General Tin Naing Thain Construction Major-General Saw Tun Defence Senior General Than Shwe Energy Brigadier-General Lun Thi Finance & revenue Major-General Hla Tun Foreign affairs Major-General Nyan Win Industry (One) Aung Thaung Industry (Two) Major-General Saw Lwin Mining Brigadier-General Ohn Myint Telecommunications, post & telegraphs Brigadier-General Thein Zaw

Central bank governor Kyaw Kyaw Maung

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Economic structure

Annual indicators 2000a 2001a 2002b 2003b 2004b GDP at market prices (Kt bn)c 2,552.7b 3,523.5b 5,627.0 7,659.7 8,870.6 GDP (US$ bn)c 7.2b 5.7b 5.8 8.0 9.6 Real GDP growth (%)c 6.2 5.3b 5.3 -2.0 -1.5 Consumer price inflation (av; %) -0.1 21.1 57.1a 36.6a 17.2 Population (m)d 47.5 48.2 48.9a 49.5a 50.2 Exports of goods fob (US$ m) 1,661.6 2,316.9 2,874.9 2,127.4 2,121.2 Imports of goods fob (US$ m) 2,165.4 2,587.9 2,079.8 1,879.6 1,963.8 Current-account balance (US$ m) -211.6 -308.6 361.1 -269.5 -410.2 Foreign-exchange reserves excl gold (US$ m) 223.0 400.5 470.0a 550.2a 580.0 Total external debt (US$ bn) 5.9 5.7 6.6a 6.8 6.7 Debt-service ratio, paid (%) 3.8 2.9 3.4a 5.4 4.9 Exchange rate (av) Kt:US$e 355.3b 620.0b 970.0 960.0 920.0 a Actual. b Economist Intelligence Unit estimates. c Fiscal year (beginning April 1st of year shown). d Mid-fiscal year. e At free-market exchange rates.

Main origins of real GDP 2001a % of total Components of nominal GDP 2001a % of total Agriculture 57.7 Total consumption 87.1 Industry 10.6 Total investment 12.8 Manufacturing 8.3 Exports of goods & services 0.7 Services 31.6 Imports of goods & services -0.6

Principal exports 2001a US$ m Principal imports 2001a US$ m Gas 514.9 Machinery & transport equipment 656.1 Pulses & beans 272.2 Base metals & manufactures 230.4 Teak & other hardwoods 260.2 Crude oil 214.2 Fish, fish products & prawns 117.5 Electrical machinery 184.5 Rice 80.6 Edible oils 82.7

Main destinations of exports 2001 % of total Main origins of imports 2001 % of total Thailand 29.3 Singapore 22.2 India 13.6 Japan 13.1 US 12.8 South Korea 12.2 Singapore 6.3 Malaysia 11.9 Malaysia 5.2 China 10.6 a Actual.

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Quarterly indicators 2002 2003 2004 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Consumer prices (2000=100) 203.6 228.2 243.5 259.2 265.7 270.8 266.9 n/a Consumer prices (% change, year on year) 57.8 59.4 58.3 47.9 30.5 18.7 9.6 n/a Financial indicators Exchange rate Kt:US$ (av) 6.42 6.40 6.22 6.09 6.11 5.89 5.72 5.83 Exchange rate Kt:US$ (end-period) 6.43 6.26 6.19 6.07 6.01 5.73 5.75 5.80 Central bank rate (end-period; %) 10.0 10.0 10.0 10.0 9.0 9.0 9.0 9.0 Deposit rate (av; %) 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 Lending rate (av; %) 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 M1 (end-period; Kt bn) 958.1 1,009.5 1,129.8 1,126.3 1,128.6 1,186.1 1,301.7 n/a M1 (% change, year on year) 46.4 44.0 34.6 32.1 17.8 17.5 15.2 n/a M2 (end-period; Kt bn) 1,470.6 1,550.8 1,545.7 1,497.8 1,524.4 1,572.4 1,715.9 n/a M2 (% change, year on year) 37.1 34.7 18.4 11.8 3.7 1.4 11.0 n/a Sectoral trends, production Rice (annual totals; ‘000 tonnes)a 22,780 - - - 24,640 - n/a n/a Natural gas (bn cu ft) 81.7 85.2 83.2 n/a n/a n/a n/a n/a Tin in concentrates (tonnes)b 47 123 193 n/a n/a n/a n/a n/a Zinc in concentrates (tonnes) 64 186 107 n/a n/a n/a n/a n/a Foreign trade (Kt m) Exports fob 5,540 4,706 4,666 3,929 3,319 3,210 3,658 n/a Imports cif -3,615 -4,931 -2,943 -3,599 -3,630 -2,525 -3,643 n/a Trade balance 1,925 -225 1723 330 -311 685 15 n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 449.8 470.0 542.0 525.6 501.9 550.2 681.5 n/a a Fiscal year beginning April of year shown; 2003 figure is estimated. b Includes output from joint ventures. Sources: UN Food and Agricultural Organisation; Myanmar Central Statistical Organisation, Selected Monthly Economic Indicators; IMF, International Financial Statistics.

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Outlook for 2005-06

Political outlook

Domestic politics The ruling military junta, the State Peace and Development Council (SPDC), continues to claim that it is making efforts to proceed with political reforms outlined in its seven-point reform “road map”, which incorporates plans for a referendum on a new constitution and eventual parliamentary elections. However, the likelihood that meaningful political reform will take place over the next few years is low. In recent weeks the political outlook has deteriorated further in line with moves by the SPDC’s chairman, Senior General Than Shwe, and other hardline members of the junta to displace more moderate government officials who appear to be in favour of some form of dialogue, albeit limited, with the National League for Democracy (NLD), the main opposition party. (The NLD won an overwhelming victory in the last election, in 1990, but this result has never been recognised by the junta.) On October 19th the prime minister and head of military intelligence, General Khin Nyunt, was removed from office and replaced by the SPDC’s secretary-1, Lieutenant-General Soe Win, who is deeply opposed to permitting Aung San Suu Kyi any kind of freedom to operate and to the idea of making any concessions to the NLD. Although General Khin Nyunt was by no means a reformist, his position had been increasingly under threat owing to indications of a widening rift between him and Senior General Than Shwe over plans for reformGeneral Khin Nyunt is perceived to have been more aware than the other top generals of the need to improve the junta’s image and seek some form of legitimacy. (However, the decision to remove General Khin Nyunt from power was reportedly made following claims that he had been involved in corrupt business practices.) Prior to General Khin Nyunt’s ouster, in a cabinet reshuffle in September one of his allies within the government, Win Aung, was sacked as foreign minister and replaced by a senior military official, Major-General Nyan Win, who has close ties to Senior General Than Shwe. The recent decision to oust General Khin Nyunt raises questions over whether the junta will abandon its road map for democratic reform, which was unveiled by General Khin Nyunt with much fanfare in August 2003. However, the junta has already placed a great deal of emphasis on its move to reconvene the National Convention (NC) in May 2004, the first step on the road map. The NC, which has the task of drafting the principles for a new constitution and has been boycotted by opposition political and ethnic groups, went into recess in July and remained closed in mid-October. Although the NC may resume within the next few months, there could be further delays owing to the fact that the junta will be keen to drag out the convention’s activities and the reform process in general. By doing so, the SPDC will be in a position to pursue other objectives: to bolster membership of the political groups that it has set up; to move key military figures into civilian government roles; and to suppress the NLD and deflate the popular support commanded by Aung San Suu Kyi. If the junta pushes ahead with the road map and edges towards the holding of a

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tightly controlled election within the next few years, it will only do so with the assurances of having parliamentary seats reserved for the military, in addition to having a powerful political wing, namely the Union Solidarity Development Association (USDA), capable of suppressing support for the NLD.

International relations Western governments are intent on isolating the SPDC in order to force regime change in Myanmar. The US has already passed a range of economic sanctions (including a ban on all investment and imports), and in September the US Senate passed a resolution calling on the UN Security Council to take action against the SPDC. The EU has also tightened its sanctions against the junta. This decision followed the junta’s failure to release Aung San Suu Kyi and end restrictions on the NLD by October 8th, the first day of the Asia-Europe Meeting (ASEM, an informal forum for dialogue between EU member states and a number of Asian countries). Thailand and the other members of the Association of South-East Asian Nations (ASEAN) are taking a non- confrontational approach. However, despite a stated unwillingness to interfere in Myanmar’s domestic political situation, these governments are scrambling behind the scenes to persuade the SPDC’s leaders to make some concessions to international opinion. They are particularly keen to see the junta release Aung San Suu Kyi and set a date for an election by the time Myanmar takes over as chair of ASEAN for a year in 2006.

Economic policy outlook

Policy trends There is little prospect of any marked improvement in the quality of economic management in 2005-06, in view of the fact that the SPDC has neither the will nor the capacity to deal effectively with the country’s grave economic problems. The junta’s pariah status internationally means that it cannot access vital external financial assistance; it therefore remains heavily reliant on a destabilising policy of monetising its budget deficit. The junta did manage to reduce inflation in early 2004, but only by imposing a temporary ban on all rice exports, a move that caused domestic rice prices to plummet and created severe economic hardship for many farmers. The junta’s medium-term economic policy focus seems to be one of reducing reliance on imported inputs and boosting agricultural outputa reasonable enough aim, given that the economy is largely agrarian. However, the junta has done little to promote investment in this sector or to improve the welfare of farmers. Indeed, it has often backtracked on its efforts to liberalise trade in key agricultural goods, and this trend is likely to continue in 2005-06.

Fiscal policy The government’s revenue from taxes continues to expand, rising by 55% year on year in fiscal year 2003/04 (April-March). However, revenue growth in real terms is weak. Tax collection is structurally depressed because much of the economy operates in the untaxed “grey” area. The government consequently remains reliant on funds from the Central Bank of Myanmar to meet its spending requirement. (In May the Central Bank’s claims on the central government were up by 34% year on year.) Although the government does not produce regular and timely data on expenditure, there is unlikely to have been a reduction in state spending in recent years, as the junta has been unwilling to

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restructure inefficient state enterprises and reduce defence spending. (There have, however, been cuts in spending on areas such as health and education.) Over the next few years the junta is unlikely to change this stance, and the general government budget deficit will remain around 5% of GDP. With the junta failing to secure budgetary support from foreign donors to meet its financing needs, its policy of monetising its budget deficit will remain in place.

Monetary policy The junta is not expected to tighten monetary policy in 2005-06. Indeed, monetary policy will remain subordinate to the government’s fiscal concerns. Nominal interest rates have remained unchanged over the past few years, despite rising inflation during this period, and there is little likelihood that the junta will raise nominal interest rates over the next few years, primarily because such a move would increase its domestic debt-servicing burden. Real interest rates rose in the first quarter of 2004 in line with easing inflation. Prior to this, real interest rates had been steeply negative for a number of year, and this undermined the development and stability of the banking sector, which suffered a near-collapse in early 2003. The banking sector is slowly recovering, but without much-needed technical and financial assistance from international financial institutions the Central Bank will struggle to reverse the overall deterioration in the state of the banking system in 2005-06, and banks will remain on a shaky footing throughout this period.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 Real GDP growth World 3.9 5.0 4.2 4.1 OECD 2.1 3.6 2.7 2.5 EU25 1.1 2.4 2.5 2.3 Exchange rates ¥:US$ 115.9 109.0 107.5 106.0 US$:€ 1.132 1.227 1.270 1.298 SDR:US$ 0.714 0.680 0.671 0.662 Financial indicators € 3-month interbank rate 2.33 2.10 2.25 3.15 US$ 3-month Libor 1.21 1.51 3.11 5.05 Commodity prices Oil (Brent; US$/b) 28.8 39.3 37.5 29.0 Gold (US$/troy oz) 362.8 421.3 375.0 337.5 Food, feedstuffs & beverages (% change in US$ terms) 6.6 8.6 -4.2 8.9 Industrial raw materials (% change in US$ terms) 12.8 20.2 -0.3 -3.6 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. The pace of world GDP growth (at purchasing power parity) will slow in 2005 and 2006, to 4.2% and 4.1% respectively, from 5% in 2004. Continued strong growth in Myanmar’s main export markets in Asia, particularly Thailand, China and India, will ensure that external trade remains fairly buoyant. At an annual average GDP growth rate of around 5.9%, Asia and Australasia (excluding Japan)

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will enjoy the fastest expansion of any region in 2005-06. The Economist Intelligence Unit expects crude oil prices to fall to an average of US$37.5/barrel in 2005 and US$29/b in 2006, from US$39.4/b in 2004. Global prices for food, feedstuffs and beverages will dip in 2005, but will then rebound sharply in 2006. Rice prices will remain strong, rising by 9.7% in 2005 and remaining fairly stable in 2006.

Economic growth The lack of reliable and timely national-accounts data prevents an accurate assessment of how the domestic economy is performing. However, it is clear that the economy continues to suffer from a number of weaknesses, primarily related to shortages of power and essential imported inputs. According to official figures, in 2003/04 sales of electricity dropped by 37.7% year on year, and combined imports of capital and intermediate goods fell by 7% year on year in nominal terms. The accessibility and affordability of such imported goods is unlikely to improve over the next few years, owing to continued restrictions and the government’s recent decision to increase import taxes. Across specific sectors, the outlook is mixed. Opportunities for manufacturers, particularly in the garment and textile sector, have worsened owing to the US ban on imports from Myanmar and the increasing prevalence of international consumer boycotts. In the agricultural sector the junta’s temporary ban on exports of rice and some other commodities in the first half of 2004 has probably prevented renewed investment, either because of financial constraints or waning confidence. The only sector that is expected to record strong growth in 2005-06 is oil and gas. The recent signing of exploration and production deals with Chinese, Thai, Indian and South Korean firms indicates that this sector will continue to provide the main source of foreign direct investment over the next few years.

Inflation Consumer price inflation eased in early 2004, owing solely to the sharp drop in rice prices because of the government’s decision to ban rice exports. In the first quarter of the year (the latest data available) inflation slowed to 9.6% year on year, from an annual average of 36.6% in 2003 and 57.1% in 2002. However, annual inflation is unlikely to drop to single digits in 2004. Domestic rice prices have picked up again, and with the government having eased restrictions on rice exports in June there is a risk of renewed upward pressure on overall food prices in the second half of 2004. The SPDC’s decision to increase import taxes in mid-June will introduce additional inflationary pressure into the economy. Moreover, in view of the fact that the junta will continue to monetise its budget deficit in 2005-06, upward pressure on prices will persist.

Exchange rates The government is not expected to realign its official exchange rate with the free-market rate in 2005-06. The grossly overvalued official rate, which is linked to the IMF’s SDR, will remain broadly stable during this period around Kt6:US$1. However, the free-market value of the kyat will continue to fluctuate markedly around a long-term downward trend. After dropping to Kt980:US$1 in June (a few days after the government announced that it had raised import taxes), the kyat stabilised at around Kt950:US$1 in the third quarter. The junta has made a habit of implementing policies, such as the recent raising of import taxes, without warning or explanation, and the subsequent confusion among

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businesses and consumers is often reflected in a sharp depreciation in the free- market value of the kyat. This is unlikely to change in 2005-06, with the public’s confidence in the junta’s ad hoc management of the economy remaining low.

External sector Despite the expected continuation of the US ban on imports from Myanmar, overall export revenue will pick up in 2005-06, although it will remain below the peak recorded in 2002. In view of the fact that there is little prospect of meaningful political reform in 2005-06, the US is likely to extend its ban on imports to cover most of this period. This ban, in addition to the impact of international consumer boycotts, will limit export growth, mainly of manu- factured products such as textiles and garments. However, Myanmar’s large neighbours, China, India and Thailand, which between them accounted for nearly 45% of total Burmese exports in 2003, will not follow the US in imposing economic sanctions. Myanmar’s agricultural, forestry, mining and energy exports will therefore remain buoyant. Indeed, gas exports to Thailand, which drove the rapid growth in exports in 1999-2002, will increase in the near future in line with the recent discovery of additional reserves in the Yetagun gasfield. Although the import bill has been pushed up by the high cost of imported refined petroleum products, the shortage of foreign exchange and the recent rise in import taxes will dampen overall import demand in 2005-06. The continued weakness in imports will ensure that the merchandise trade account remains in surplus, but this will be offset by a fairly large deficit on the combined services and income accounts. The current account will therefore remain in deficit in 2005-06.

Forecast summary (% unless otherwise indicated) 2003a 2004a 2005b 2006b Real GDP growthc -2.0 -1.5 1.3 2.3 Gross fixed investment growthc -0.5 0.5 2.5 4.0 Gross agricultural production growthc -0.2 -3.0 1.8 1.5 Consumer price inflation (av) 36.6d 17.2 26.5 27.2 Consumer price inflation (year-end) 17.4d 25.0 25.0 30.0 Short-term interbank rate 15.0d 15.0 15.0 15.0 Government budget balance (% of GDP)c -4.5 -5.0 -5.3 -5.3 Exports of goods fob (US$ bn) 2.1 2.1 2.1 2.3 Imports of goods fob (US$ bn) 1.9 2.0 2.0 2.0 Current-account balance (US$ bn) -0.3 -0.4 -0.5 -0.4 Current-account balance (% of GDP)e -3.4 -4.3 -5.0 -3.2 External debt (year-end; US$ bn) 6.8 6.7 6.8 6.7 Exchange rate Kt:US$ (av)f 960.0 920.0 1,110.0 1,150.0 Exchange rate Kt:¥100 (av)f 828.3 844.6 1,032.6 1,084.9 Exchange rate Kt:€ (av)f 1,087.0 1,128.1 1,426.3 1,480.6 Exchange rate Kt:Bt (av)f 23.1 22.7 27.2 29.0 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Fiscal year (beginning April 1st of year shown). d Actual. e Fiscal year (beginning April 1st of year shown); at free-market exchange rate (which understates size of GDP). f At free-market exchange rates.

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Gross domestic product Consumer price inflation % change, year on year av; %

Myanmar Asia excl Japan Myanmar Asia excl Japan 8 60

50 6 40 4 30

2 20 10 0 0

-2 -10 01 02 03 04 05 06 01 02 03 04 05 06 2000 2000

The political scene

General Khin Nyunt is The prime minister, General Khin Nyunt, was removed from office on October removed from office 19th in controversial circumstances, with details of the move remaining unclear. The news of General Khin Nyunt’s ouster was initially reported by Thailand’s government spokesman, Jakrapob Penkair, who confirmed that General Khin Nyunt had been removed from office because he had been “involved in corruption”. There were also reports that General Khin Nyunt had been placed under house-arrest. However, the ruling military junta, the State Peace and Development Council (SPDC), later officially announced that General Khin Nyunt, who was also head of military intelligence, had been permitted to retire for “health reasons”. There had been increasing signs recently of growing tension between General Khin Nyunt and the chairman of the SPDC, Senior General Than Shwe, who is also commander-in-chief of the armed forces. This was primarily attributed to differences over how to proceed with reforms and how to deal with Aung San Suu Kyi, the leader of the opposition National League for Democracy (NLD), who has been under house-arrest since May 2003. However, conflict between the armed forces and the military intelligence has also tested relations between General Khin Nyunt and Senior General Than Shwe. Compared with General Khin Nyunt, Senior General Than Shwe and his allies take an even more hardline approach to dealing with the NLD and other opposition groups. General Khin Nyunt’s replacement as prime minister is the hardline Lieutenant-General Soe Win, who replaced General Khin Nyunt as secretary-1 in August 2003. Lieutenant-General Soe Win is believed to have had a key role in orchestrating an attack on Aung San Suu Kyi and her convoy in May 2003, in which around 70 people may have been killed.

The junta drops its Prior to the ousting of General Khin Nyunt, the SPDC reshuffled its cabinet on fo reign mini ster September 18th, removing the foreign minister, Win Aung. The SPDC gave no reason for its decision, merely stating that Win Aung and his deputy, Khin Maung Win, had been “allowed to retire” (the euphemism usually used by the junta for dismissal). Major-General Nyan Win replaced Win Aung as foreign

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minister, and Colonel Maung Myint was appointed as deputy foreign minister. In a number of other changes, the agriculture minister, Major-General Nyunt Tin, was removed from his post and replaced by Major-General Htay Oo (formerly the minister of co-operatives); Colonel Zaw Min took over as minister of co-operatives; and the transport minister, Major-General Hla Myint Swe, was removed and replaced by Major-General Thein Swe, from the prime minister’s office. The commerce minister, Brigadier-General Pyi Sone, was moved into the prime minister’s office, and was replaced by Brigadier-General Tin Naing Thein. The labour minister, Tin Winn, was also appointed as a minister to the prime minister’s office, in addition to keeping his existing role. The removal of Win Aung came only days before he was expected to attend the annual UN General Assembly meeting and less than three weeks before the Asia-Europe Meeting (ASEM, an informal forum for dialogue between EU member states and a number of Asian countries) in Vietnam. It is possible that the SPDC blamed Win Aung for failing to gain the backing of foreign detractors for its reform “road map”, and also for failing to prevent the US and the EU from stepping up their use of sanctions against the regime. In 2003 the SPDC unveiled a road map outlining limited political reforms, the first step being the setting up of a National Convention (NC) to draft a new constitution (Myanmar’s constitution was suspended by the military in 1988). However, the main opposition party, the NLD, was not consulted about these plans, which seem aimed at keeping the generals in power. (There has been no election in Myanmar since 1990; the NLD won an overwhelming majority, but the junta refused to recognise or implement the result.) Win Aung had been in the unenviable position of trying to justify the SPDC’s continued detention of key political prisonersincluding Aung San Suu Kyiwhile the convention was sitting.

Hardliners appear to be The replacement of General Khin Nyunt and Win Aung with Lieutenant- gaining ground General Soe Win and Major-General Nyan Win respectively signals that hardliners within the SPDC are driving decision-making. Before Major-General Nyan Win’s recent appointment to the government, he served as deputy-head of military training in Yangon. Although he is a member of the NC organising committee, he has little political experience and appears to have no diplomatic credentials. The fact that Major-General Nyan Win is from the military is not unusualWin Aung was a colonel prior to resigning to take up the post of ambassador to the UK, before he became foreign minister. However, Major- General Nyan Win is widely believed to be close to Senior General Than Shwe, whereas Win Aung was regarded as a close ally of General Khin Nyunt.

The NLD campaigns for release In July the NLD began a bold public campaign centring on a petition calling for of political prisoners the release of all political prisoners and the reopening of all NLD offices. Many NLD offices were briefly allowed to open in 2002 and 2003, but were then shut down again following the May 30th 2003 attacks on Aung San Suu Kyi and her supporters. By early August NLD officials reported that 3,000 signatures had been collected in the capital, Yangon, alone, despite intimidation by the authorities. However, in August NLD officials stated that their first bid to use the courts to force the regime to release Aung San Suu Kyi and Tin Oo from

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house-arrest had failed, when the Yangon divisional court rejected the NLD’s submission on a technicality. Later, in mid-October, the Supreme Court dismissed the NLD’s lawsuits on the basis that they were not relevant under the country’s criminal code. The junta’s tight control over the media and the lack of freedom of assembly make it difficult for opposition groups to organise any political activities. The military regularly arrests opposition members and uses many other forms of harassment and intimidation. There appears to have been an increase in harassment of NLD members following the start of the NLD’s latest campaign. Several NLD members from Mandalay, Sagaing and Magwe Divisions were detained in August, and two NLD members elected in 1990 were arrested and charged with a variety of non-political offences. On September 24th four NLD members were jailed for seven years after a secret trial; they were charged with sending statements about Myanmar to overseas groups.

The UN urges faster progress In August the UN secretary-general, Kofi Annan, again called on the junta to on reforms release Aung San Suu Kyi and to begin meaningful talks with ethnic and other opposition groups. Mr Annan warned that the junta’s convention would lack any credibility with the international communityincluding Myanmar’s Asian neighboursif the views of the country’s opposition political and ethnic groups were ignored. The SPDC issued a relatively mild statement welcoming Mr Annan’s comments, but the regime has still not renewed permission for the UN special envoy to Myanmar, Razali Ismail, to visit the country. In September Mr Ismail stated that there would be no change in Myanmar unless its fellow members of the Association of South-East Asian Nations (ASEAN) intervened.

Ethnic groups’ demands may One of the major questions to be determined in any future constitution for be ignored at the convention Myanmar is the degree of self-determination to be granted to areas in which ethnic minorities preponderate. In the May-July convention session 13 ethnic groups that have ceasefire agreements with the government reportedly presented papers outlining ideas for a federal system, to which the regime has so far made no response. Ethnic political groupsboth with and without ceasefire agreementswant to see an end to the junta’s brutal suppression of ethnic minorities, and wish to see ethnic areas being granted a considerable degree of autonomy. Failure to reach an acceptable compromise on this complex issue will result in continued civil conflict in Myanmar’s border states, several of which have been wracked by fighting for more than 50 years. The SPDC and the Karen National Union (KNU), the largest group still actively fighting against the SPDC, had planned a third round of ceasefire talks to be held in October. Earlier plans to meet were delayed, possibly because of continued clashes between the two sides. KNU officials indicated that the discussions would focus on confidence-building measures and were not likely to lead to a formal ceasefire agreement at this stage. Another ethnic political group, the Karenni National Progressive Party, also appears to be on the brink of opening talks with the SPDC.

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Despite ASEM compromise, In September the EU and Asian members of the ASEM forum finally reached the EU tightens restrictions an agreement that allowed the planned summit to go ahead in Vietnam in October. A series of preparatory meetings earlier in the year were cancelled owing to EU objections to Myanmar’s participation. However, a compromise was reached when EU members agreed to attend provided that the SPDC sent a lower-level government representative. Although the EU agreed to attend the ASEM summit with officials from Myanmar in attendance, on September 13th the EU Council (the EU’s main decision-making body) set a deadline of October 8th (the start of the ASEM gathering) for the SPDC to release Aung San Suu Kyi and relax restrictions on the NLD. The EU said that, if the junta did not comply, it would step up the measures it had already taken against the regime. The SPDC did not comply, and the EU subsequently imposed tighter measures against the junta, including a visa ban preventing all high-ranking military members or their families from travelling to the EU (previously this ban was applied to SPDC members only). In addition, all EU states will be required to vote against loans to Myanmar by multilateral financial institutions, and EU companies will be banned from making any loans or equities available to state- owned enterprises from Myanmar.

ASEAN is losing patience ASEAN members staunchly defended Myanmar’s right to take part in the ASEM with the junta meeting. Behind the scenes, however, the patience of ASEAN member governments with the junta is starting to wear thin. In mid-September Indonesia’s special envoy to Myanmar, Ali Alatas, commented that progress in Myanmar had been slower than hoped. (Diplomatic relations between Myanmar and Indonesia cooled in July, when it appeared that bugging devices had been placed in the Indonesian embassy in Yangon.) In August the then prime minister, General Khin Nyunt, went on another round of ASEAN visits, touring Laos, Vietnam and Cambodia, in a bid to shore up support. Although Malaysia and Indonesia have been more critical of Myanmar recently, Myanmar’s ties with Thailand are going through a warmer phase. Thailand has signed a raft of crossborder investment agreements this year. In late July Thailand’s prime minister, Thaksin Shinawatra, stated that another round of multilateral talks with the SPDCthe so-called Bangkok processwould take place after the NC opened again, although no date was set. The first round of talks was held in December 2003; the second round, planned for April, was cancelled after the SPDC pulled out.

The US keeps up the pressure The US secretary of state, Colin Powell, has made it clear that the US will keep up pressure on the SPDC until Aung San Suu Kyi and all political groups are able to take part in the reform process. In July two US senators began campaigning for the expulsion of Myanmar’s ambassador to the US (the US currently does not have an ambassador in Yangon, although it maintains an embassy there). In September the Senate (the upper house of the US Congress) unanimously passed a resolution stating that the junta’s military build-up, its policies towards ethnic minorities and its involvement in the narcotics trade posed a threat to regional security; the resolution called for the UN Security Council to take action against the regime.

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The SPDC tries to boost wider Despite the US decision to extend its sanctions and the EU’s recent tightening of regional ties measures against the junta, the SPDC has regional allies. A state-run newspaper, The New Light of Myanmar, has commented that close relations with China provided a counterweight to Western countries. In July General Khin Nyunt made an official visit to China. During the visit more than ten agreements were signed covering a wide range of investment projects and economic assistance by China, including a new industrial park as well as debt rescheduling between China Export and Credit Insurance Corporation and Myanmar’s Ministry of Finance. The junta also continues its efforts to boost economic ties with its neighbours in South Asia. In July Win Aung visited India, and in the past few months India has provided US$56m in credit to upgrade the Yangon-Mandalay railway line, in addition to other investments in oil-refining and port facilities. Senior General Than Shwe has scheduled a trip to India in late October, when a number of agreements will be signed, including one on bilateral co-operation against terrorism. The junta also seeks to encourage trade with Bangladesh, and to promote investment from Bangladesh in Myanmar’s agricultural sector.

Economic policy

No meaningful economic The SPDC has for years ignored the country’s deepening economic crisis, and in reforms are introduced the past few months this trend has continued. Major problems include a massive public-sector deficit, rapid money supply growth, high inflation and a weak balance-of-payments position. According to the latest available figures, there were some improvements in the first few months of 2004; inflation and money supply growth slowed, and international reserves rose. However, these improvements have not been the direct result of positive policy changes by the SPDC. Rather, the changes largely reflect the tightening of credit following the troubles in banking system in early 2003bank lending to the private sector had fallen by almost 44% year on year at the end of March 2004. As savings and deposits have been pulled out of banks, money supply growth has slowed, although the junta has continued to monetise its budget deficit. Slower money supply growth combined with weakening demand in fiscal year 2003/04 (April-March) in turn helped to bring down inflation. The junta did help to reduce inflation by banning all rice exports for six months from January, a move that caused rice prices to fall sharply. However, although this contributed to a fall in inflation, the incomes and livelihoods of the country’s farmers were severely affected.

The SPDC’s policy focuses on In August General Shwe Mann, one of the top members of the SPDC, said in boosting farm exports the state-run newspaper, The New Light of Myanmar, that traders would be permitted to export a range of agricultural commodities, including coffee, tea, pepper, chillies, cotton and rubber. Since the late 1980s the junta has been edging towards a liberalisation of domestic and international trade in key crops. However, progress has been patchy. Most recently, the junta announced a liberalisation of exports of rice and several other key crops in April 2003. A number of traders entered the market, but the junta backtracked with almost

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no warning, banning all exports of rice, cotton, sesame, maize and pulses in January-July 2004. As a result, traders are likely to be sceptical about the SPDC’s latest announcement, particularly because the junta has stated that exports will be permitted only when there is a domestic surplus (suggesting that the junta will backtrack when it becomes concerned about domestic price rises). In September the deputy executive director of the UN World Food Programme (WFP), Sheila Sisulu, stated that the junta’s restrictions on domestic agricultural trade were “impoverishing” people in the northern Shan State and Rakhine State (the two areas in which the WFP is providing food aid). State restrictions on the domestic and international trade of some crops hurts farmers, who have to sell their produce to state bodies at below-market prices. Ms Sisulu called on the SPDC to make reforms that she said were “obvious and necessary”.

Tax revenue is rising, but the The only regular data on the budget produced by the SPDC cover central budget deficit is high government tax revenue. This rose strongly in 2003/04, jumping by 51.6% year on year to Kt166.1bn (US$28.6bn at the official exchange rate, but only around US$175m at the free-market rate), largely in line with increases in income and profit tax. In view of the fact that there were signs that many sectors of the economy were slowing in 2003/04, it is not clear why income and profit tax rose sharply during this period. Despite this strong growth in revenue, there is no suggestion that the junta has managed to cut the budget demands of the state-owned enterprises. Until this happens, and until the junta cuts its off- budget military spending, the public-sector deficit will remain high. Moreover, without political reform the junta will be unable to access the international financial assistance for which it is eligible as a very low income country.

Central government tax revenue (Kt m unless otherwise indicated; fiscal years Apr-Mar) 2001/02 2002/03 2003/04 % changea Tax revenue 77,675 109.576 166.066 51.6 Commodities & services tax 32,719 47,039 59,415 26.3 Income tax 21,511 36,084 69,898 93.7 Profit tax 8,376 11,058 22,483 103.3 Customs tax 5,857 4,691 3,961 -15.6 Lottery & stamp duty 9,212 10,704 10,309 -3.7 a 2003/04 compared with 2002/03. Source: Central Statistical Organisation, Selected Monthly Economic Indicators.

There has been no change in nominal interest rates in recent months, with nominal six-month bank deposit and state-enterprise lending rates remaining at 9.5% and 15% respectively. However, slowing inflation brought real lending interest rates into positive territory during the first quarter of 2004. Interest rates have been steeply negative in real terms for several years. For example, inflation averaged 36.6% in 2003, but lending rates remained unchanged at 15%. The SPDC is reluctant to change interest rates because it continues to monetise its large public-sector deficit. Although real deposit rates were only marginally negative in the first quarter of 2004, nominal deposit rates would have to be raised, or inflation enter a sustained low period, before there were any marked increase in bank deposits. This reflects the fact that the public’s confidence in the banking system remains weak.

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Interest rates (%) 2002 2003 2004 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central bank ratea 10.0 10.0 10.0 10.0 9.0 9.0 9.0 9.0 Deposit rate (6-month) 9.5 9.5 9.5 9.5 9.5 9.5 9.5 9.5 Lending 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.

The domestic economy

Output and demand

The economy is probably The complete lack of official GDP data for the past few years makes it difficult contracting to estimate GDP growth trends. However, there are indications that the economy contracted in real terms in fiscal year 2003/04 (April-March). On an output basis, proxy indicators tend to confirm that industrial activity slowed during this period (the junta does not produce an industrial production index). For example, revised figures for electricity sold by the state-owned Myanma Electric Power Enterprise (MEPE) indicated that total sales fell by 37.7% year on year to 3.3bn kwh in 2003/04, with a 36.8% year-on-year drop in sales to industrial units. Another important indicator, credit to the private sector, also paints a gloomy picture. Credit to the private sector had dropped by 43.8% year on year at the end of March 2004. In addition, the export-oriented manufacturing sector was severely affected by tighter sanctions imposed by the US in mid-2003; garment exports dropped by 35% year on year in 2003/04, and perhaps one-third of the country’s garment manufacturers may have closed, at least temporarily. Output growth in the small but fast-growing mining and energy sector is also likely to have levelled off in 2003/04; major projects are now on stream, and the heady growth of the past few years has come to an end. As a result of these trends, manufacturing and industrial output is likely to have slumped in 2003/04.

Output of state-owned enterprises (tonnes unless otherwise stated) 2002 2003 2004 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtra Cotton yarn (‘000 lb) 2,398 2,074 1,744 2,363 1,759 1,774 Cotton fabrics (‘000 yards) 4,980 4,114 3,872 3,514 3,580 3,533 Paper 5,974 5,481 3,908 4,587 4,320 4,991 Cement 123,300 136,904 141,871 141,270 151,460 148,307 Sugar 25,519 48,226 1,732 – 36,578 15,751 Natural gas (m cu ft) 85,176 83,261 86,645 87,546 88,589 87,075 Crude oil (‘000 barrels) 1,764 1,739 1,836 1,855 1,771 1,700 a Provisional data. Source: Central Statistical Organisation, Selected Monthly Economic Indicators.

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Few foreign investors show According to official data, foreign direct investment (FDI) approvals totalled interest in Myanmar US$91.2m in 2003/04, up by 4.9% year on year. This increase was driven by investments in the oil and gas industry and the transport sector. Despite this recent rise, FDI approvals remain low by historical standards. According to revised historical data, FDI approvals peaked at US$2.8bn in 1996/97, slid to US$1bn in 1997/98, and then fell sharply to under US$100m per year for all but one of the following six years. Reflecting this slide in approvals, and the fact that many approved projects never get off the ground, actual FDI inflows fell steadily in 1997-2001, according to the latest available data from the IMF. Foreign investor interest in Myanmar has been dampened by a wide range of factors, including: US sanctions banning investment in Myanmar and preventing all imports from Myanmar; effective and widespread international consumer boycotts targeting foreign investors in Myanmar; and a difficult business environment owing to widespread corruption, an erratic policy environment and one of the world’s worst records on labour rights.

Foreign direct investment (US$ m) 2002/03 2003/04 Main sources South Korea 0.3 34.9 UK – 27.0 Thailand – 22.0 Hong Kong 12.9 3.0 China – 2.8 Canada – 1.5 Malaysia 62.2 – Main sectors Oil & gas 44.0 54.3 Transport – 30.0 Manufacturing 13.2 2.8 Agriculture & fisheries 26.4 2.6 Mining 3.4 1.5

Source: Central Statistical Organisation, Selected Monthly Economic Indicators.

Employment, wages and prices

Falling rice prices bring a drop According to data from the Central Statistical Organisation, consumer price in inflation inflation dropped into single figures in the first quarter of 2004, averaging 9.6% year on year, compared with 18.7% in the previous quarter and 36.6% in 2003 as a whole. On a quarter-on-quarter basis, prices fell by an average of 1.5% in the first quarter of 2004. This slowdown was driven by falling food prices; food prices (which have the heaviest weighting in the index) dropped by 3.1% quarter on quarter in the first quarter. The price of rice (the country’s most important staple) dropped sharply in early 2004 after the junta imposed an unexpected ban on all rice exports. Overall, food prices still rose year on year in the first quarter, up by a modest 5.3% compared with nearly 68% in the first quarter of 2003. Prices in all other subsectors continued to rise in the first quarter of 2004. Prices in the clothing subsector rose by 23.5% year on year, and fuel prices rose by

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24.9%. Fuel prices are being driven up by stubbornly high global crude oil prices, as Myanmar is dependent on imports of refined fuels. The real rise in fuel prices may be higher than the official figures suggest. The junta has a rationing system for fuel that is supposed to maintain supply and keep prices at a set level. However, in reality the system has spawned a large black market in which fuel trades at prices much higher than the state’s price.

Consumer prices (period averages) 2002 2003 2004 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr General index (1997=100) 308.9 346.2 369.5 393.3 403.2 411.0 405.0 % change, year on year 57.8 59.3 58.3 47.9 30.5 18.7 9.6 Food index 324.7 369.1 388.2 403.8 414.2 422.0 408.9 % change, year on year 72.3 73.4 67.9 49.9 27.6 14.3 5.3

Source: Central Statistical Organisation, Selected Monthly Economic Indicators.

Financial indicators

The kyat remains under The highly overvalued official exchange averaged Kt5.8:US$1 in July, around the pressure same level recorded in 2003. There is a huge margin between the official exchange rate and the free-market rate, which averaged around Kt850:US$1 during the first half of the year. The kyat came under pressure in June, when the junta increased taxes on imported goods and devalued the exchange rates used to calculate customs duties, but it has since traded in the range of Kt920-950:US$1.

Money supply growth Prior to the banking crisis in early 2003, money supply growth had been rapid, picks up owing to the junta’s continued monetisation of its massive public-sector deficit. Although the banking crisis resulted in a sharp slowdown in money supply growth, the pace of growth picked up in the first quarter of 2004. Broad money supply (M2) had risen by 11% year on year at the end of March, compared with only 1.4% year on year at the end of 2003. The upturn in the first quarter of 2004 was driven by a 15.2% year-on-year expansion in narrow money (M1). Quasi-money (which includes time, savings and foreign-exchange deposits) continued to fall, dropping by 0.4% year on year. However, a degree of confidence in the banking sector does appear to be returning; quasi-money rose by 7.2% quarter on quarter in the first quarter of 2004, suggesting that savers had started to return to the stricken banks. However, confidence will take some time to recover fully.

Private-sector credit tightening Domestic credit also picked up in the first quarter of 2004, rising by 14.5% year continues on year at the end of March, up from a 5.9% year-on-year increase at the end of 2003. The government was largely insulated from the liquidity crisis of 2003; growth in credit to the central government did slow but remained strong, at 38.7% year on year at the end of 2003. This trend continued into 2004, with growth in credit to the central government up by 35% year on year at the end of the first quarter. Credit to the private sector, by contrast, contracted sharply. Credit to the private sector dropped by 30.9% in the first quarter 2004 compared

with the level outstanding at the end of 2003. The state sector has always enjoyed much easier access to credit, and it is now squeezing out the private sector. The central government accounted for 81% of all credit at the end of March 2004, up from 58% at end-2003. The private sector’s share of overall credit has more than halved since the bank crisis hit, dropping from 37.8% at the end of 2002 to 18.7% by the end of the first quarter of 2004.

Money supply and credit (Kt bn unless otherwise indicated; end-period) 2002 2003 2004 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Narrow money (M1) 852.9 958.1 1,009.5 1,129.8 1,126.4 1,128.6 1,186.1 1,301.7 % change, year on year 40.3 46.4 44.0 34.6 32.1 17.8 17.5 15.2 Quasi-money 487.3 512.5 541.3 415.9 371.5 395.8 386.3 414.2 Broad money (M2) 1324.2 1470.6 1550.8 1545.7 1497.8 1524.4 1572.4 1715.9 % change, year on year 35.6 37.1 34.6 18.4 13.1 3.7 1.4 11 Total credit 1371.1 1512.0 1613.4 1560.6 1567.8 1640.2 1707.8 1787.2 Claims on central government 871.5 885.5 935.1 1074.1 1149.5 1235.1 1297.1 1450.2 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 23.4 66.7 69.2 3.7 22.0 37.0 68.1 3.6 Claims on private sector 476.2 559.7 609.1 482.8 396.2 368.1 342.5 333.4

Source: IMF, International Financial Statistics.

Sectoral trends

Rice production disappoints Rice output is expected to fall this year. Rice farmers were hit by the collapse in prices in early 2004 that followed the junta’s six-month ban on all rice exports. In addition, heavy monsoon rains brought severe flooding in a number of areas in August and September, including the important rice-growing area of Irrawaddy Division. The floods will reduce the main monsoon rice crop for 2004/05 (monsoon rice is generally planted in July and August and harvested before the end of the year). The UN Food and Agriculture Organisation is forecasting a 6.5% fall in paddy production in 2004 to 23m tonnes, from an estimated 24.6m tonnes in 2003.

Garment manufacturers Boosted by an inflow of foreign investment, Myanmar developed a small continue to suffer export-oriented garment sector in the 1990s, and garments were the country’s second-largest export earner by 2003. However, US sanctions banning all imports from Myanmar from mid-2003 have hit the garment sector hard (garments accounted for the bulk of Myanmar’s exports to the US). Estimates vary regarding the number of garment factories and their employees before sanctions and since they were introduced. Some figures suggest there were around 350,000 workers before the sanctions (although this figure could be an overestimate), and in April 2004 the US State Department estimated that between 40,000 and 60,000 garment sector workers had lost their jobs since sanctions were applied. In terms of overall export revenue from garments, there has been a sharp contraction in recent months; in the first quarter of 2004 revenue plunged by nearly 50% year on year. However, Myanmar has continued exporting garments to other major markets, including some EU countries. In addition, there are claims that products made in Myanmar

are simply being relabelled and shipped through third countries before entering the US.

Garment export revenue Kt m 800

700

600

500

400

300

200

100

0 Q1 Q2 Q3 Q4 Q1 2003 04 Source: Central Statistical Organisation, Selected Monthly Economic Indicators.

New gas finds could result in South Korea’s Daewoo International, which heads a consortium developing the major investments major new offshore gasfield known as Shwe area Block A-1, is expected to continue exploration during the remainder of 2004. Daewoo committed US$54m in exploration from mid-2004 for one year. Reserves in Block A-1 have so far been estimated at 4trn-6trn cu ft, and commercial production is expected to begin around 2010. However, in August Daewoo announced that, if reserves reach 8trn cu ft or more, it would consider investing US$3bn to develop a liquefied natural gas (LNG) processing plant in Myanmar, with work starting as early as 2005. If this project goes ahead it will be a major investment for Myanmar; signing bonuses and later investment inflows would boost current transfers and FDI inflows, lifting foreign-exchange reserves. However, the test wells may not reveal the required reserves, and Daewoo has yet to confirm a buyer for the gas; possible markets for the gas are South Korea and India. Two state-owned Indian firms, the Oil and Natural Gas Commission (ONGC) Videsh and the Gas Authority of India (GAIL), each have stakes in the block. They are negotiating to take a stake in the A-3 block (adjacent to A-1), which is currently held by Daewoo; output from both blocks could then be exported to India. In August the junta’s Myanmar Oil and Gas Enterprise (MOGE) and Thailand’s PTT Exploration & Production (PTTEP) signed a memorandum of under- standing on a production-sharing contract on two more blocks, M-3 and M-4. PTTEP already has a stake in the country’s two large offshore gasfields, Yadana and Yetagun, and signed a production-sharing contract to explore two further blocks, M-7 and M-9, in late 2003. PTTEP expects to invest at least US$18m in exploration of the M-3 and M-4 blocks alone over the next four years.

Chinese firms will undertake Myanmar’s telecommunications are underdeveloped, but there are plans for telecoms expansion project some expansion. The state-owned Myanma Posts and Telecommunications (MPT, the country’s sole telecoms operator) has signed a deal for a Chinese- funded mobile switching centre, which will enable the network to handle 100,000 more landline connections and around 38,000 extra mobile con-

nections. In June 2004 MPT signed agreements worth a total of US$42m for the work, which will be undertaken by two Chinese-based firms, Alcatel Shanghai Bell and ZTE Corp. To take up the new capacity, around 95,000 new mobile units and more than 38,000 land lines will be offered for sale from late 2004. Mobile units will be offered at a price equivalent to around US$1,500, which greatly exceeds the purchasing power of most of the population. According to figures from the Central Statistical Organisation, at the end of fiscal year 2001/02 (April-March) there were only 307,056 landline telephones in Myanmar for a population of over 51m. Around one-half of the telephones were in the capital, Yangon. Myanmar’s first Global System for Mobile Communications (GSM) mobile phone service was launched in 2002 with networks in Yangon and Mandalay, and by 2003 the number of cell phones totalled around 63,000. The latest increases will benefit only Yangon and Mandalay, and telephones look set to remain scarce in the rest of the country.

The Internet networks According to a telecoms industry body, the International Telecommunications remain limited Union (ITU), Myanmar still has the lowest number of Internet users per head in Asia. The ITU estimates that the number of Internet users in Myanmar stood at just 5.3 per 10,000 people in 2003, compared with 32 in Cambodia, 18 in Laos and 430 in Vietnam. However, there are plans for expansion. Thailand’s Shinawatra Satellite (ShinSat) has agreed a deal to expand broadband Internet services and telephony offered by Bagan Cybertech (one of two Internet service providers, whose owners have links to the ruling military junta, the State Peace and Development Council). ShinSat will offer increased links via its iPSTAR satellite from 2005 (ShinSat already provides around 1,000 iPSTAR user terminals), while the junta is also investing in a modest fibre-optic cable network. However, most of the country will continue to have very limited access to the Internet. Furthermore, the cost of accessing the Internet remains prohibitively high for the vast majority of the population. The fact that many Internet sites are blocked and that e-mail is closely scrutinised by the military also deters potential users.

Some investment is directed at The poor state of the country’s infrastructure is still a problem for business infrastructure projects operations. In July the Export-Import Bank of India announced that a US$56m loan would be provided to Myanmar to fund upgrading work on the outdated Yangon-Mandalay railway line. Indian Railways will complete the work, which includes repairs to the track and the import of new coaches and engines. Over the longer term, Myanmar’s patchy road network is also likely to see some foreign investment. China’s efforts to find routes via which to export goods from its southern Yunnan province are driving plans for a number of regional road projects crossing Myanmar. In August China and Bangladesh discussed plans for such a road link, and the Federation of Indian Export Organisations has also raised the idea of a road from Assam via Myanmar into Yunnan.

Tourist arrivals are falling Tourist arrivals in the first quarter of 2004 dropped by 4.3% year on year to 94,950, and in 2003/04 as a whole arrivals dropped by 10.6% to around 270,000, partly reflecting the impact of the outbreak of Severe Acute Respiratory Syndrome (SARS), which reduced tourist arrivals throughout South-

east Asia. Another major contributing factor in the drop in arrivals is the continuation of a worldwide tourism boycott of Myanmar, organised by a number of pro-democracy campaign groups. Myanmar’s tourism sector will remain far below its potential because of international concern over the junta’s abuse of human rights. While these problems persist, it is unlikely that plans for a second international carrier, announced in July, will help to boost arrivals. Myanmar’s sole international carrier at the moment is Myanma Airways International (MAI). Myanma Airways (the largest domestic carrier), the Ministry of Transport and other investors plan to launch a second international airline, Air Myanmar, before the end of 2004, with potential routes including Sydney and Singapore.

Tourist arrivals 2002 2003 2004 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Arrivals (no.) 99,309 99,228 35,391 48,260 90,604 94,950 % change, year on year n/a n/a n/a -14.6 -8.8 -4.3

Source: Central Statistical Organisation, Selected Monthly Economic Indicators.

Foreign trade and payments

The trade surplus contracts In 2002-03 Myanmar posted rare merchandise trade surpluses, in line with a sharply in early 2004 sharp rise in export revenue in 2002 and shrinking imports in both years. This trend appears to have come to an end. In the first quarter of 2004 imports picked up by 23.8% year on year to around Kt3.6bn (US$614m at the overvalued official exchange rate, or around US$3.8m at the free-market rate). During the same period exports fell by 21.6% to around Kt3.7bn. As a result, the merchandise trade surplus was pared down to only Kt14.6m (US$2.5m at the official exchange rate, or around US$15,400 at the free-market rate). Exports were hampered by a number of factors, primarily a US ban on imports from Myanmar, which was initially imposed in mid-2003 and was subsequently extended for another year. In the first quarter of 2004 export revenue from sales of natural gas and garments plunged by 31.6% and 48.9% year on year respectively. Exports of several other important commodities, including fish products, rubber and rice, all fell year on year in the first quarter. Rice exports were hit by the junta’s own policies: all rice exports were banned for six months from January 2004. However, exports of teak, pulses and metals picked up fairly strongly.

Import bill rises in line with Imports rose by a robust 22.8% year on year in the first quarter of 2004, largely high oil prices because of the rising cost of refined mineral oil imports. The value of refined mineral oil imports, the second-largest import item, rose to Kt526.9m in the first quarter, compared with only Kt100.9m in the year-earlier period. Although Myanmar has modest onshore and offshore reserves of crude oil, its refining capacity is limited. Imports of fabrics dropped by 41.1% year on year to Kt227.1m in the first quarter of the year. Myanmar has a domestic cotton industry, but relies on imports for many synthetic fabrics. However, demand has fallen sharply because of the fall

in garment exports following the sanctions placed on Myanmar by the US. Imports of machinery and transport equipment, electrical machinery and base metals rose year on year in the first quarter, despite fairly weak domestic and foreign investment levels. High world oil prices had the knock-on effect of boosting the price of plastics, but because of sluggish investment and manufacturing the value of plastics imports still fell by 24.9% year on year in the first quarter.

Key exports and imports (Kt m unless otherwise indicated) Jan-Mar 2003 2004 % changea Exports Gas 3,933.0 982.1 -31.6 Teak & other hardwoods 1,977.9 514.3 13.0 Garments 2,328.7 374.3 -48.9 Pulses 1,612.7 493.3 30.9 Prawns, fish & fish products 963.6 230.5 -9.8 Metals & ores 298.2 107.2 60.2 Rubber 105.7 34.3 -15.9 Rice 330.5 4.6 -97.7 Total exports incl others 15,123.0 3,658.0 -21.6 Imports Machinery & transport equipment 2,471.5 845.3 60.8 Refined mineral oil 1,357.2 526.9 422.2 Synthetic & woven fabrics 1,544.6 227.1 -41.1 Base metals & manufactures 935.5 475.4 131.5 Electrical machinery 639.9 201.7 1.7 Plastics 643.4 136.2 -24.9 Total imports incl others 12,720.7 3,643.4 22.8 Trade balance 2,402.3 14.6 -99.4 a January-March 2004 compared with year-earlier period. Source: Central Statistical Organisation, Selected Monthly Economic Indicators

Exports and imports Kt m Exports Imports 3,000 3,000 Government Government 2,500 2,500 Private Private 2,000 2,000

1,500 1,500

1,000 1,000

500 500

0 0 Q1 Q2 Q3 Q4 Q1 Q1 Q2 Q3 Q4 Q1 2003 04 2003 04 Source: Central Statistical Organisation, Selected Monthly Economic Indicators.

Imports by the private sector dropped by 8.2% year on year in the first quarter of 2004, with the private sector’s share of total imports falling to 59% from 79% in the year-earlier period, reflecting the prolonged impact of the tightening of

credit on the private sector. Imports by the government sector rose sharply, jumping to Kt1.5bn in the first quarter, from Kt613m in the year-earlier period.

Exports to the US collapse The drop in exports in the first quarter of 2004 reflects falling exports to Thailand and the collapse of exports to the US. Despite the US ban on imports from Myanmar, in the first quarter of 2004 the Central Statistical Organisation recorded revenue of around Kt3m from exports to the US. The ban has nevertheless been effective: exports to the US totalled Kt668m in the year- earlier period. Exports to Thailand, which is the country’s largest export destination because of natural gas sales, were also down sharply in the first quarter, dropping by 27% year on year to Kt1.3bn. However, more up-to-date figures from Thailand reveal that Myanmar’s exports to Thailand rose to US$784m in January-August compared with US$497m in the year-earlier period, according to the Bank of Thailand (Thailand’s central bank).

Trade with Thailand (US$ m unless otherwise indicated) Jan-Aug Jan-Aug 2001 2002 2003 2003 2004 % change, year on year Exports to Thailand 805 902 907 497 784 57.7 Imports from Thailand 356 323 439 283 417 47.3 Balance 449 579 468 214 367 71.5

Sources: Bank of Thailand.

Reserves slip further Although total international reserves (including gold) slipped further in May, falling to US$618m from a high of US$693m in March, the level of reserves remains fairly high compared with previous years. However, the reserves position is fragile, with reserves sufficient to cover less than three months of imports. The level of reserves also remains vulnerable to international measures, such as tighter sanctions on investment and trade. A modest improvement in the merchandise trade balance and some continued foreign investment inflows helped to strengthen reserves until early 2004, but the contraction in exports and the expansion in imports in the first quarter has contributed to the recent downward trend.

International liquidity (US$ m; end-period) 2003 2004 Dec Jan Feb Mar Apr May Foreign exchange 550.1 559.7 573.8 681.4 614.8 606.0 SDRs & IMF reserve position 0.1 0.3 – – 0.3 0.1 Gold (national valuation) 12.0 12.0 12.0 12.0 11.8 11.9 Total international reserves 562.2 572.0 585.8 693.4 626.9 618.0

Source: IMF, International Financial Statistics.