Report No. 14062-BA Myanmar Policies for Sustaining Economic Reform October 16, 1995 Country Operations Division Country Department I East Asia ancl Pacific Region Document of the World Bank CURRENCY EQUIVALENTS (Official Exchange Rate) Currency Unit = Kyat End-March 1995 - US$1.0 = Kvat 5.520 Kyat I.0 US$ 0 181 Averagc 1994 - US$1.0 = Kyat 5.975 Kvat 1.0 US$ 0. 167 Average 1993 - US$1.0 = Kyat 6.157 Kvat 1.0 = US$ 0.162 GLOSSARY OF ABBREVIATIONS CBM Central Bank of Mvanmar FDI Foreign Direct Investment FECs Foreign Exchangc Certificates FY Fiscal Ycar; in Mvanmar. runs from April I to March 3 1 GNFS Goods and Non-Factor Services GOM Government of Mvanmar HYVs High-vielding varieties iV Joint venture MAPT Mvanmar Agricultural Produce Trading MARDB Mvanmar Agricultural and Rural Development Bank MEB Myanma Economic Bank MEPE Myanmnar Electric Power Enterprise MFR Ministrv of Finance and Revenue MFTB Mvanmar Foreign Trade Bank MIC Mvanmar Investment Commission M'FNPED Ministry of National Planning and Economic Development MOA Ministry of Agriculture MOI Ministry of Industrv MOLF Ministrv of Livestock and Fisherics MPPE Mvanmar Petroleum Product Enterprise MTE IMvanma Timber Enterprise NEER Nomilal Effective Exchange Rate REER Real Effective Exchange Rate SDR Special Drawing Right SE Statc Enterprise SEE State Economic Enterprise SFA State Fund Account SLORC State Law and Order Restoration Council TVEs Tow-n and Village Enterprises UNDP Ulnited Nations Development Program VAT Value Added Tax YCDC Yangon City Development Committee MYANMAR: POLICIES FOR SUSTAINING ECONOMIC REFORM COUNTRY ECONOMIC REPORT TABLE OF CONTENTS EXECUTIVE SUMMARY ......................................... I-XV 1. POLICY REFORMS AND MACROECONOMIC ISSUES ................................................1 A. BACKGROUND ...........................................................................1..............1 B. THE REFORM PROGRAM ..............1 C. REcENT EcoNoMIc DEVELOPMENTS .4 D. MACROECONOMIC POLICY ISSUES ..... .....................1..................... 13 2. CHANGES IN THE INCENTIVE STRUCTURE .......... 24 A. BACKGROUND .......... 24 B. ExPANDING EXPORTS .......... 24 C. PROMOTING AGRICULTURE ........... 33 D. ENERGIZING TI-E PRIVATE SECTOR .......... 42 E. THE PRIORITIES FOR POLICY REFORM .......... 49 3. STATE ENTERPRISE REFORM AND PRIVATE SECTOR DEVELOPMENT .51 A. BACKGROUND .... 51 B. STRUCTURE AND PERFORMANCE OF THE STATE ENTERPRISE SECTOR .51 C. RECENT STATE ENTERPRISE REFORMS .60 D. DEEPENING STATE ENTERPRISE REFORM .67 BIBLIOGRAPHY .81 ANNEXES ....................................................................................................82 STATISTICAL APPENDIX .95 This report was prepared by a team led by Sudhir Shetty and consisting of Judy Lu, Ijaz Nabi and Dilip Ratha, with research assistance from Kaushik Rudra, and assistance in document processing from Dharshani de Silva and Jane Tameno. The cooperation and assistance of the Government of Myanmar were invaluable in preparing the report. TABLES IN TEXT I SUMMARY OF POLICY RECOMMENDATIONS ............................................................ XV 1.1 KEY EcoNoMic INDICATORS ............................................................ 5 1.2 INVESTMENT AND SAVING (% OF GDP) ............................................................ 7 1.3 SUMMARY OF BUDGETARY OPERATIONS (% OF GDP) ................................................ 8 1.4 MONETARY GROWVTH, INFLATION AND INFLATION AND INTEREST RATES .................. 10 1.5 SUmmARY BALANCE OF PAYMENTS .............................. .............................. 1 1.6 EXTERNAL DEBT AND ARREARS, FY91-95 ............................................................ 12 1.7 ECONOMIC AND FINANCIAL SUT3SIDIES TO CONSUMERS ............................................ 20 2.1 EXTERNAI. TRADE SHARES - SELECTED SOUTH AND EAST ASIA ECONOMIES, 1992 ............................................................ 25 2.2 DIVERSIFICATION Ol EXPIORTI S - SEI.ECTED SOUTH AND EAST ASIAN ECONOMIES ............................................................ 26 2.3 FERTILIZER UTILIZATION AND PADDY YIELD IN SELECTED ASIAN COUNTRIES .......... 35 2.4 PADDY PROCURFMENT ............................................................ 36 2.5 THE IMPACT OF PADDY PROCUREMENT AND EXPORT BAN ON FARM GATE PRICES ............................................................ 37 2.6 TAXES ON PADDY SECTIOR DUE TO PROCUREMENT AND EXPORT BAN ...................... 38 2.7 EFFECT OF REMOVING PADDY PRICE DISTORTIONS .................................................. 39 2.8 ECONOMIC SUBSIDY ON USE OF FERTILIZER (PER ACRE) ........................................... 40 2.9 SIMULATION OF RETURNS TO PADDY CULTIVATION - ALTERNATIVE POLICY SCENARIOS ............................................................ 40 2.10 PRIVATE SECTOR SHARE IN ECONOMIC ACTIVITY (PERCENT) . . 43 2.11 INFRASTRUCTURE PROVISION IN MYANMAR AND SOME COMPARISONS .. 46 2.12 FOREIGN CAPITAL IN EXISTING ENTERPRISES BY TYPE OF COLLABORATION .. ........... 47 3.1 SHARE OF PUBLIC AND PRIVATE SECTORS IN GDP SUBSECTOR (PERCENT) ........ ....... 52 3.2 PUBLIC & PRIVATE SECTOR EMPL.OYMENT ............................................................ 53 3.3 SIZE DISTRIBUTION OF ESTAI3I.ISHMENTS ............................................................ 54 3.4 SELECTED INDICAI ORS OF STA1TE ENTERPRISE OUTPUT .................... ........................ 55 3.5 CAPACITY lJTIILIZA I1ION RATIOS FOR SELECTED STATE INDUSTRIAL ENTERPRISES ............................................................ 55 3.6 CURRENT SURPLUS AND CAPI'TAL EXPEiNDITURE OF STATE ENTERPRISES .................. 56 3.7 LINKS BETWEEN S1TATE ENTEIRPRISES AND THE GOVERNMENT BUDGET ..................... 58 3.8 OFFICIAL AND FREE MARKET PRICES OF SELECTED COMMODITIES ........................... 61 3.9 PURCIHASE PRICES OF SELECTED AGRICULTURAL INPUTS ......................................... 62 FIGURES IN TEXT 1.1 OFFICIAL AND PARALLEL EXCHANGE RATES ................................................. 13 1.2 FISCAL DEFICIT, M2 GROWTH AND INFLATION RATE ............................................... 16 1.3 OFFICIAL AND PARALLEL RER ................................................ 17 2.1 EXPORTS AND IMPORTS BY SECTOR ................................................. 27 2.2 OFFICIAL NEER AND RER WITH 7 TRADING PARTNERS .......................................... 28 2.3 PARALLEL NEER AND RER WITH 7 TRADING PARTNERS ......................................... 29 BOXES IN TEXT 3.1 DIMENSION OF REFORMS IN SELECTED TRANSITION ECONOMIES ............. ............ 68-70 3.2 PRIVATIZATION METHODS IN TRANSITION ECONOMIES ............................................ 76 EXECUTIVE SUMMARY A. INTRODUCTION 1. A significant program of economic reforms has been instituted in Myanmar since the State Law and Order Restoration Council (SLORC) assumed power in late-1988. This shift in economic policies followed almost a quarter century of economic decline during which the prevalent development paradigm was termed "the Burmese way of socialism". Under that model, economic development was to be achieved through rapid industrialization and self sufficiency, and led by the State Enterprise (SE) sector. Economic performance under that policy regime was poor. During 1962-77, real GDP growvth barely kept up with population expansion and, as a result, living standards stagnated. Investment levels remained low, agricultural output grew slowly, and the economy grew more inward looking. The initial attempts at economic reform in the mid-1970s succeeded at first but could not be sustained due to macroeconomic and structural factors, which were reflected in widening budget and current account deficits, rising inflation, and stagnant agricultural output and exports. Faced with these serious external and internal imbalances in the early-1980s, the Government's stabilization attempts relied on tightening import controls, cutting public investment, and demonetization but were ineffective in reversing the economic decline. 2. Following the anti-government demonstrations of 1988, the SLORC assumed power and announced that many key aspects of the earlier model would be abandoned in its economic reform program. With over seven years having elapsed since those reforms were initiated, it is an opportune time to take stock. Specifically, this report examines the impacts of the policy changes, with a view to identifying the areas in which progress has been made, as well as the gaps that still remain in the program. This analysis would then underpin the report's recommendations concerning areas in which additional reforms are required and how these measures should be phased. 1 B. POLICY REFORMS AND RECENT ECONOMIC PERFORMANCE 3-. In the early-1980s, the pace of GDP growth slowed while external and internal imbalances worsened. As a share of GDP, the budget deficit in FY82-86 averaged over 8% while the current account deficit rose to over three-quarters of export earnings, and was financed primarily through external public- sector borrowings.2 These imbalances forced the Government to attempt actions aimed at stabilizing the economy. However, these measures consisted mainly of quantitative restraints on investment and imports. In this sense, they were focused on the symptoms of the problems rather than at addressing their underlying causes, which included the overvaluation of the Kyat, the continued bias against agriculture, the restrictions on private sector activity, and the inefficiency of the large state enterprise sector, particularly in industry. Without effective stabilization and adjustment efforts, the economic situation deteriorated sharply by the mid-1980s, with inflation worsening as well. Two rounds of demonetization were instituted in 1985 and 1987 to curb inflation, during each of which over half the currency in circulation was declared worthless. ' In keeping with this focus on the key macroeconomic and sectoral policy issues, this report does not directly deal with the important issue of designing strategies for poverty reduction. However, since sustained growth is a necessary condition for success in reducing poverty, the recommendations here set the stage for more detailed follow-up work, which would be undertaken when feasible. 2 The Government of Myanmar (GOM) fiscal year FY) runs from April 1 to March 31. The shorthand FY95, as used in this report, refers to the fiscal year ending March 31, 1995, i.e., 1994/95. ii However, these efforts did not succeed either, and during FY87-89, annual inflation averaged almost 20 percent (compared to about 4% in FY82-86). Moreover, both the budget deficit and the current account gap widened, while export earnings fell sharply. The Reform Proeram 4. It was in this context that the SLORC initiated its so-called "Open-Door" program of economic reforms in late-1988. These reforms aimed at expanding the role of the private sector, reducing the scope and extent of government intervention, and promoting integration with the world economy, and built on the liberalization of agricultural pricing and marketing in 1987. In this manner, the reform program was intended to transform the economy from one organized along socialist lines and dominated by the state sector to a market-oriented system. The initial measures focused on liberalizing regulations and enacting fiscal incentives for foreign investment. The reforms have since been broadened to include policies aimed at controlling public expenditures and monetary expansion; licensing private banks, extending investment incentives to local investors, and allowing the retention and trading of foreign exchange by private exporters. In many respects, therefore, the economic environment in Myanmar today differs from that before 1988. 5. Agricultural sector policies. The major reform in agricultural policies occurred in 1987 with the abolition of the system of forced government procurement of major crops and the liberalization of domestic marketing and processing. Although these steps were accompanied by the imposition of a higher land tax and a tax on grain trading, those taxes were soon rescinded. Moreover, formal government controls on farmers' cropping patterns were also eliminated in 1988. However, the government continues to procure albeit on a smaller scale than before, accounting in FY95 for about 11% of the total crop.3 Prices of some agricultural inputs supplied by the government, including fertilizers and mechanization services, have also been raised. Finally, extensive leasing of fallow land for cultivation and livestock breeding by private farmers has been undertaken since 1991. 6. Industrial sector policies. With the shift away from the "Burmese way of socialism" in 1988, the restrictions on private sector involvement in the industrial sector have been reduced progressively. Private firms are now allowed to operate in all industrial subsectors other than those specified as activities reserved for the state sector (such as teak extraction, mining of gems, oil and gas extraction, and power generation).4 With the acknowledgment of the expanded role of the private sector, the commercial tax was introduced in 1990 to replace the previous commodity and services tax, which applied only to SEs and cooperatives. The commercial tax, by contrast, applies to the sales (domestic and imported) of all enterprises, private and public. With the enactment of the Foreign Investment Law in late- 1988, foreign investors in Myanmar are now allowed to establish wholly-owned enterprises or enter into joint ventures with Myanma citizens in almost all subsectors. Even in subsectors reserved for state enterprises (SEs), foreign investment has been approved in several cases, particularly in mining and fisheries. A range of tax benefits and streamlined licensing procedures are also provided to foreign investors under the law (with additional exemptions for export-oriented enterprises) as are guarantees against nationalization and for the repatriation of capital and the foreign exchange component of profits. In 1994, most of these tax benefits available to foreign investors were also extended to local investors. Pricing 3 Although these sales are termed voluntary, this procurement occurs at below-market prices. The magnitude of such implicit taxation of paddy farmers is evaluated in Chapter 2. 4 Even these restrictions can be relaxed on a case-by-case basis, as noted below with respect to foreign investment. iii policies have also been liberalized with the removal of most formal price controls (except on energy products). 7. State enterprise reformns. State enterprises have been granted greater operational autonomy, in areas such as pricing, input procurement, and production. Regarding production, the enterprises can choose also whether to enter into agreements with private domestic or foreign investors whereby they produce on a consignment basis, lease their facilities to these investors, or enter into joint ventures with these firms. The goal of privatizing SEs in a more systematic manner has recently been announced although detailed implementation procedures are yet to be developed. In 1989, the outstanding credit to SEs was converted into non-interest bearing government equity, and since then, all financing to SEs is provided from the budget. 8. Trade and foreign exchange policies. At the core of the Government's "open door" policy in 1988 was the expansion of the role of the private sector in extemal trade. Border trade, which occurs across Myanmar's land borders and was previously illegal, was normalized (i.e. licenses or permits are required from the authorities). However, private sector exports of some commodities such as rice, teak and minerals continue to be prohibited. Foreign exchange control procedures have also been reformed. Since 1988, retention of foreign exchange earnings by exporters has been permitted, initially for 60 percent of export proceeds, and since 1989 for the entire proceeds. Moreover, these retained earnings can be deposited in foreign exchange accounts at the Myanmar Foreign Trade Bank (MFTB), and transfers are pernitted between these accounts.' In 1993, Foreign Exchange Certificates (FECs) were introduced by the Central Bank with an FEC equivalent to US$1. Residents can now acquire and trade FECs, and use them to open foreign exchange accounts. 9. Financial policies. Several banking laws were enacted in 1990 including the Central Bank Law, which empowers the Central Bank of Myanmar (CBM) to supervise and regulate the financial system, including the conduct of monetary policy, and the Financial Institutions Law, which provides the framework for the establishment and operation of a range of institutions including commercial banks, finance companies, and development banks. In an important break with the past, private domestic banks can also now be established. As of end-July 1995, 15 private banks were in operation, of which, 4 had also been granted licenses to transact in foreign exchange, and although foreign banks cannot operate yet, 28 have been licensed to establish representative offices. 5 Since these transactions are not officially recognized by the authorities, the exchange rates at which transfers occur are not recorded. iv Recent Economic Performance6 10. Growth trends. GDP growth has rebounded since FY90, averaging about 4.2% in FY90- 94 and rising to 6.8% in FY95, in contrast with the average decline of over 5% during FY86-88. But growth has been highly variable from year to year, and slower than in the early-1980s. This recent growth has extended to all sectors of the economy, although it has been most rapid in the primary sectors, particularly agriculture and forestry. Within the industrial sector, mining and construction have grown fastest, reflecting in part their response to the incentives now provided to foreign investment in these activities. Manufacturing growth has resumed but has remained variable due to its links to agricultural performance. 11. Investment and saving. Investment recovered during FY90-95, reflecting the increase in private investment that followed the implementation of tax incentives and liberalization measures, which more than made up for the continued fall in public investment. Savings have also recovered since FY90, reflecting the reduction in the dissaving of the public sector. However, despite this recovery, the consequent narrowing of the saving-investment gap relative to the early-1980s has been achieved entirely due to the fall in investment. The domestic saving rate now is actually lower than in the early-1980s, while gross investment has fallen to about 12% of GDP. 12. Fiscal trends. The composition of public sector revenues changed little during FY91-95, but the share of revenues to GDP continued to decline, and in FY95, was slightly over 7% compared to about 19% during the early-1980s. Tax revenues, which account for almost 60% of revenues, showed the same declining trend. Efforts to control expenditures in FY91 -95 have been more successful, and the cuts have been deepest in capital expenditures of SEs. The only expenditure category that has been protected from cuts has been defense which now accounts for over a third of total public expenditures. Reflecting the efforts at expenditure control, the fiscal deficit fell to 6% of GDP during FY90-94, from an average of over 10% in FY87-89. However, this improvement was reversed in FY95 when the deficit rose to 6.3% of GDP. The deficit has been financed by borrowing from the domestic banking system, and increasingly, since FY89, by the accrual of arrears on external debt. 13. Monetary growth and inflation. As the fiscal deficit fell in FY91-94, monetary growth slowed, particularly in FY94. However, with the widening of the fiscal deficit in FY95, monetary expansion accelerated once again. The private sector's share in domestic credit has grown but remains small -- about 14% in FY95. All interest rates -- deposit and lending -- are still controlled, and despite a small increase in some rates in 1992 and again in early-1995, these remain highly negative in real terms. Although measures were implemented to promote financial savings, its share in GDP has stagnated. At the consumer level (in Yangon), average annual inflation in FY95 fell to 22%. But, a clear downward trend is not yet apparent, and the average annual inflation rate during FY91-95 was much higher than in the early- 1980s. 14. External trends. During FY91 -95, the deficit on the current account improved, due mostly to higher remittances from Myanma citizens abroad, and increases in receipts from travel, owing to the removal of restrictions on tourism and the incentives provided to foreign investment in tourism. However, 6 The economic trends summarized here rely on official data from GOM sources, and should be interpreted with caution because they are based on the official exchange rate. Since the economic distortions that arise from the overvalued exchange rate are pervasive, a systematic attempt at adjusting the official data is beyond the scope of this report. However, apart from this problem, the quality and coverage of economic statistics appear no worse than in other low-income countries in East Asia. v despite more rapid export growth, the trade balance has improved little. Moreover, the direction of exports and their concentration among primary products have remained almost unchanged. But the composition of imports shifted sharply towards consumer goods (mainly food and durables), which now account for over 40% of all imports. The current account gap has been financed increasingly by accumulating arrears, which have doubled since FY91, to almost $1.5 billion. With the suspension of foreign aid since FY90, there have been substantial outflows of medium- and long-term capital since FY91. However, attracted by the changes in the foreign investment laws and tax incentives, foreign direct investment has averaged about $190 million annually in FY91-95. It has been concentrated in the oil and gas, mining, and hotels and tourism sectors. Finally, although the official exchange rate remains fixed at its 1977 level (vis-a-vis the SDR), a variety of arrangements have been instituted since 1988 to allow private sector transactions to occur at a far more depreciated parallel-market exchange rate. C. EVALUATION OF REFORMS 15. The GOM's economic reform program is distinguished from the development strategy followed for the quarter century since 1962 ty three clear features. The schemes to compensate for the overvaluation of the Kyat, such as foreign exchange retention, and the incentives provided to foreign investment aim at encouraging exports and integrating the Myanma economy with the rest of the world. The liberalization of agricultural pricing and marketing is intended to reduce the bias against agricultural production and allow farmers greater freedom of choice. And, removing restrictions on private-sector involvement in economic activity and encouraging the growth of private businesses are directed at facilitating the transition to a market-oriented economy. Along with these structural reforms, there have also been attempts at addressing the internal and external imbalances that afflicted the economy in the late- 1980s. Macroeconomic Stabilization 16. Stabilization has not vet been achieved. When economic reforms were initiated in the late- 1980s, severe macroeconomic problems characterized the Myanma economy, largely due to unsustainably large fiscal deficits. The situation has undoubtedly eased in some respects. The current account deficit has been reduced (as a share of exports), and consumer price inflation (year-on-year) has fallen. These improvements reflect the fall in the fiscal deficit from 13.7% of GDP in FY89 to 6.5% in FY95. 17. But despite this improvement, macroeconomic stability remains elusive, as indicated by continued internal and external imbalances. Inflation remains high and variable. The reduction in the fiscal deficit has been achieved entirely by cutting expenditures (current and capital) rather than by broadening the revenue base or improving the performance of SEs. In particular, the continued erosion of the revenue base can be seen by noting that the average ratio of government revenues in FY91-95 was half that in the early-1980s, with the contraction covering all components of revenue. And, the slowing of monetary growth until FY94 was accomplished mainly by limiting growth of credit to the private and cooperative sectors rather than by reducing the expansion of public-sector credit. 18. The current account gap also remains unsustainably large, as is evident from the continued build-up of extemal arrears. The main policy response to this external imbalance has been to allow the private sector's extemal transactions to be conducted at an exchange rate lower than the highly-overvalued official rate. By allowing the full retention of foreign exchange eamings by private exporters, and the trading of foreign exchange by domestic residents through foreign exchange accounts and FECs, there has been a de facto legalization of the parallel foreign exchange market with the goal of engineering a de facto vi devaluation. These measures have not restored external balance mainly because the official nominal exchange rate remains highly overvalued. And since the official rate still applies to all public-sector imports, a complex exchange rate system now exists, which segments the market for foreign exchange between the private and public sectors. The continued discrimination against the tradeables sectors (exports and import-substitutes) can be noted from the trends in the real exchange rate (RER) even after taking account of the parallel-market rate. A weighted-average RER (that uses the relative trade shares of the private and public sector) has appreciated by more than two-thirds even since 1989, implying that the bias against tradeables has worsened to this extent. 19. Why macroeconomic stability is essential. Hence, macroeconomic stabilization measures are still needed urgently. Without them, the reforms in sectoral policies that have been implemented, important as they are, will not be enough to bring forth a sustained growth response. The recent experience of the successful economies of East Asia illustrates clearly the importance of restoring and maintaining macroeconomic stability for sustained export-led growth. The key to doing this in most of these economies was the control of fiscal deficits to levels that could be financed without need for excessive monetary expansion. The need to establish a stable macroeconomic framework along with the implementation of sectoral policy reforms is borne out also in the economies that are currently making the transition from central planning. The dividends from pursuing aggressive macroeconomic stabilization early in the reform process are evident, for instance, from the recent experience of Viet Nam and Laos. Viet Nam's ambitious economic reform program, for instance, was initiated in 1989. It included stabilization measures such as unification and devaluation of the exchange rate (by over 70 percent in 1989), increases in deposit and lending interest rates to positive real levels, and reductions in fiscal expenditures through the streamlining of the military and the public sector. The resulting macroeconomic stability has contributed to higher investment and growth. The Incentive Structure 20. To achieve its goals, the reform program has attempted to alter the structure of incentives in the Myanma economy. The need for greater integration with the world economy through trade and investment links is explicitly acknowledged, with the main impetus for growth coming from exports rather than from import substitution. Hence, private exporters are now allowed to retain foreign exchange earnings from exports, while fiscal incentives are offered to foreign investors and to activities that generate foreign exchange. The importance of encouraging agricultural production, particularly paddy, has also been noted by eliminating the forced procurement of crops at below-market prices and government control over cropping decisions. Finally, the stringent restrictions on private-sector participation in economic activity have been reduced, and a range of fiscal incentives extended to domestic private businesses. Despite the many legislative measures that have been implemented, however, the earlier biases have not yet been redressed in all areas, and the picture that emerges is one of patchy reform rather than of coordinated systemic change. 21. The exchange rate system. The overvaluation of the official exchange rate has continued to erode the profitability of exports. Adjusting for Myanmar's higher inflation relative to its regional trading partners, the profitability of exporting at the official rate has fallen to less than a seventh of its 1985 level. To address this deterioration, private exporters are allowed to retain all the foreign exchange from exports, and to maintain foreign exchange-denominated deposits. Hence, all private-sector external trade is now conducted through the parallel market in foreign exchange. By expanding the scope of this market, it is hoped that the profitability of export production would be enhanced. However, estimates of the RER using the parallel rate shows that export profitability (vis-a-vis Myanrar's regional trading partners) has still declined to less than half its level a decade ago. The efforts to improve export vii profitability by expanding the scope of the parallel market are also problematic because they exclude the external transactions of the public sector, including SEs. Moreover, it raises transactions costs and risks for private exporters who must deal with a multiplicity of parallel-market exchange rates in an unofficial and unregulated market. 22. Other barriers to exports. The economic reforms have eliminated restrictions on private sector exports, with paddy, rice, teak, most minerals and pearls being the main exceptions. The most serious restraint is the continued ban on paddy and rice exports. This policy not only constitutes a continued bias against paddy farmers (see next para.); it also discriminates against the export product with the greatest potential. A recent export tax of 5% imposed on private and joint-venture exporters is another policy that worsens the anti-export bias. The segmentation of the foreign exchange market also remains a serious problem because private firms, including potential exporters, can import inputs only if they generate their own foreign exchange earnings or can find another private exporter. This system, with its attendant risks and transactions costs, restricts the access of potential exporters to imported inputs. And the costs of imports are raised even further by the requirement that all private-sector imports include a specified proportion of officially-designated priority goods. Finally, despite recent efforts at improving customs procedures, the quality of the infrastructure needed for external trade, including cargo handling, ports and warehousing facilities is poor while procedures are still cumbersome and private exporters receive little government support. Trade finance is also impossible to obtain due to the segmentation of the foreign exchange market. 23. Implicit taxation of paddy production. Since paddy is dominant in the agricultural sector, changes in the incentives for paddy production largely determine the sectoral incentives. While the liberalization of agricultural pricing and marketing in 1987-88 raised prices to paddy farmers, their implicit taxation through the structure of output and input prices, and export restrictions continues. The main policies by which these implicit taxes are levied are the paddy procurement system and the ban on private- sector paddy exports. About 11% of paddy production is procured by the government at below-market prices, thereby reducing farmgate prices by about 8%. However, paddy farmers are taxed even more because of the ban on private-sector exports of paddy and rice. Since the intemational price of rice is higher than domestic prices, this government monopoly means that the price received by paddy farmers is about a third lower than if they could export freely. 24. These implicit taxes mean that paddy farmers suffer large losses in income, which were more than double Myanmar's total tax collections in FY95. These distortions imply even larger medium- term losses because they discourage farmers from expanding output. The estimates presented in Chapter 2 point to increased yields per acre of about 10%, and higher farm output (in value terms) of over 35%, if the export ban were eliminated. A common justification for such implicit taxes is that many paddy farmers receive implicit subsidies on their fertilizer use. However, even taking account of these subsidies, paddy farmers' returns/acre would increase by 50 to 100% (even without taking account of the yield increase) if crop procurement and the export ban were eliminated in tandem with removal of the fertilizer subsidy. 25. Land tenure and cropping choice. Despite the reforms, the government still exercises substantial control ovcr the choices of farmers, especially on land designated for paddy, through their access to credit, irrigation, and fertilizer. Meanwhile, continued subsidies and other distortions (such as the exchange rate) mean that private-sector involvement in provision of inputs has not grown. Therefore, shortages of these inputs continue to constrain production. The ambiguity of land tenure also constrains agricultural productivity. The inability to trade or lease paddy land means that much of the cultivated land may not be operated efficiently or is left fallow. And, unclear use rights to land mean that farmers have viii little incentive to undertake investments such as erosion control, which yield returns only over the long term. 26. Private-sector access to credit. The availability of credit to domestic private businesses has improved since 1990 with the enactment of the Financial Institutions Law. The private sector's share in total domestic credit has now risen to about 14%, still far lower than its share of GDP or manufacturing value added. Moreover, continued large fiscal deficits mean that the credit demands of the public sector still crowd out private sector access. As the private sector grows, and its credit needs expand, its demands cannot be met unless the fiscal deficit can be controlled. Moreover, SEs are still treated differently from private businesses in that they are financed directly from the government budget. Those with operating deficits receive interest-free credit, which provides them a significant subsidy, and further impairs the ability of private businesses to compete effectively with them. 27. Access to infrastructure and public services. Apart from the inadequacies of Myanrar's physical infrastructure, private businesses have only limited access to these facilities and services compared to SEs and government departments. It appears to take private entrepreneurs considerably longer than SEs to obtain power, water and telephone connections, or to have goods cleared through the port and stored in warehouses. Apart from the advantages of incumbency enjoyed by SEs, the lack of formal interaction between representatives of the domestic private sector (such as the Myanma Chamber of Commerce) and key policvmakers is a contributing factor. And, the fuzziness of land ownership and use rights even in urban areas makes it difficult for private firms to acquire land and get access to public services. These relative advantages enjoyed by SEs in their access to infrastructure and public services can be seen also in the preference that foreign investors have shown to enter into partnerships with SEs rather than with domestic private firms. As of March 1995, less than 30% of FDI inflows that took the form of joint ventures was with the domestic private sector.7 28. Access to imports. Private businesses import inputs and machinery at the parallel market rate, while SEs do so at the official rate. In this sense, SEs get their imports at heavily-subsidized prices. But, given the extreme shortages of foreign exchange in the Myanma economy, the access of all businesses to imported inputs is impaired. The import requests of SEs are tightly controlled by the Ministry of Finance. However, those SEs that do receive permission to import raw materials and intermediates, obviously receive large scarcity rents on their imports. These subsidies to SEs also reduce the price incentives for expanded private participation in legitimate businesses. SEs, which use cost-plus pricing, set their prices at levels at which domestic manufacturing is unprofitable. Hence, private businesses are encouraged to concentrate in the trading and services sectors or to engage in unregistered (and small-scale) manufacturing. State Enterprise Reform 29. Since state ownership was among the main tenets of the "Burmese way of socialism", the SE sector played a central role in Myanmar's development strategy until the Government's economic reforms were initiated in the late-1980s. Its significance was greatest in sectors such as manufacturing, mining, communications, infrastructure, financial services, and trade, which were considered to be most critical to the emergence of a modem, industrialized economy. Given this starting point, the GOM has recognized the need to implement reforms aimed at rationalizing the role of SEs in the economy. 7 This share excludes joint ventures with quasi-official entities such as Myanma Economic Holdings and Yangon City Development Committee. ix 30. These reforms since 1989 have involved actions in several areas. A system of dual pricing has been adopted for outputs, which allows SEs to make sales at free-market prices once their procurement targets (of government sales at controlled prices) are met. For most crops used as industrial raw materials, official prices are now higher than that offered by private traders. SEs have been granted limited autonomy in decisions regarding contract and consignment production and marketing and distribution. Another focus of the reform efforts has been to transfer ownership and management of SEs to the private sector, foreign and domestic. While there has been little privatization, progress in expanding private-sector involvement has occurred through the establishment of new joint ventures (JVs) and production-sharing arrangements between SEs and private investors, and through leasing the facilities of SEs to private entrepreneurs. Most collaborations involve SEs with foreign investors from the United States and several East Asian countries, notably Singapore, Thailand, and Hong Kong. The bulk of these have been in oil and gas extraction, hotels and tourism, fisheries, and garments. Foreign investors have contributed capital, foreign exchange, management skills and access to new technology, while the SEs have offered access to natural resources, prime locations, and infrastructural advantages. The leasing of SE facilities has been the usual form of collaboration with local entrepreneurs, especially in the industrial sector. A high-level Privatization Commission was created earlier this year to oversee the detailed design and implementation of a privatization program. Of the 51 small establishments that were designated as initial candidates for privatization, 6 have been privatized using a tendering process. 31. While these reforms are noteworthy because they recognize the seriousness of the problems facing SEs, they do not go far enough in addressing the underlying policy distortions that constrain SE performance. For example, the impact of pricing and marketing reform has been limited because a large part of production is still subject to government procurement or inter-enterprise transfers, whose prices are still controlled. And, the complex pattern of cross-subsidies that arises from the dual pricing system and the overvalued exchange rate mean that the financial profitability of enterprises does not accurately reflect their economic viability. Similarly, the changes designed to enhance the autonomy of SEs do not go far enough, and in some respects, have actually had the opposite effect. Even where SEs have been granted greater flexibility, decisions are still centralized within the parent Ministries. And the allocation of investment funds and foreign exchange is actually more centralized than before 1989. The lack of progress in reforming the investment allocation system and exchange rate mechanism along with the maintenance of the procurement system means that SE managers still cannot be held accountable for the performance of their enterprises. So, the reforms have not changed SE behavior towards greater fiscal responsibility. The approach taken to privatization also has serious problems. It is not based on a clear delineation of the future roles of the private and public sectors. It risks diluting the full benefits of privatization because it is difficult for potential foreign investors to formn a clear sense of which enterprises will be sold, and which enterprises would be retained within the public sector. 32. In strengthening the program for SE reform in Myanmar, it is useful to look at the experiences of other transition economies. One important lesson is that successful programs combine changes in macroeconomic and pricing policies with targeted reforms. Macroeconomic and pricing reforms are necessary preconditions because they alter the environment in which SEs operate. All transition economies have implemented price liberalization and macroeconomic stabilization, although the pace of those efforts has ranged from rapid in Vietnam and the Czech Republic to gradual in China. Targeted reforms, such as privatization and restructuring, must also be based on a clear definition of the role and objectives of the SE sector. Hence, in all transition countries, except China, there has been rapid growth in the private sector, and even in China, it has translated into an expansion of the non-state sector, owned and controlled by local governments. Finally, all these reform programs have emphasized financial accountability. They have attempted, with varying success, to impose financial discipline (hard budget constraints) on the remaining SEs by cutting subsidies and liquidating loss-making enterprises. x D. THE REFORM AGENDA 33. This assessment of the scope and impact of the GOM's reform program points to the areas in which it needs to be deepened if sustained and balanced economic growth is to result. More needs to be done to achieve macroeconomic stabilization by reducing the fiscal and external imbalances to sustainable levels. The biases against exports and the continued transfers from the agricultural sector need to be reversed. And the role of SEs in the economy needs to be rationalized while the remaining biases against the domestic private sector are eliminated. This reform agenda is summarized in Table 1, which also shows the goals and proposed phasing of various measures. Restorine Macroeconomic Stability 34. Why adiustin, the exchange rate is critical. The essential step in restoring macroeconomic stability is a nominal adjustment of the exchange rate so as to unify it with the parallel rate. Doing this would help restore external and internal balance. By removing the tax on the tradeables sector due to overvaluation, it would encourage the production of exports and import substitutes. Hence, export growth would accelerate, especially of non-traditional products, while the strong pent-up demand for imports would fall. External balance would, therefore, improve. 35. Adjusting the official exchange rate would also help address the current fiscal difficulties because the recent efforts to compensate for overvaluation have perversely contributed to the narrowing of the revenue base. Import-related revenues such as customs duties and commercial taxes would rise since imports would be valued at a higher, more realistic exchange rate. Estimates in Chapter I indicate that the corresponding revenue increase (excluding the impact on external debt service) would exceed K50 billion even if import tariff rates were reduced substantially in conjunction with a devaluation. Adjusting the exchange rate would also eliminate the complex set of cross-subsidies in the economy, which currently deprive many SEs and government agencies of revenues. The largest of these impacts would be the economic subsidies that currently accrue 1O those with access to electricity, petroleum products, and fertilizers at official prices. The resulting revenue increase (with full pass through to consumers) is estimated at over K30 billion (roughly equivalent to current government revenues). Finally, an exchange rate adjustment would make it easier to improve tax compliance. At present, the unofficial economy outside the tax net has grown with the increased importance of the parallel foreign exchange market, which has blurred the line between legal and illegal economic activities. 36. If this nominal exchange rate adjustment is to help restore extemal balance, it must translate into a substantial real depreciation of the Kyat, which would require the maintenance of tight fiscal and monetary policies. To reduce credit demand, interest rates should also be raised to positive real levels. This step would ensure that the allocation of credit to the private sector is done on an economic basis, while an important source of subsidies to the SE sector is eliminated. Tightening the fiscal and monetary stance would also help deal with the fear of policymakers that a nominal devaluation would worsen inflation. And, the positive fiscal impacts of a devaluation should allow the authorities to tighten macroeconomic policies sufficiently to dampen inflationary pressures. Moreover, such apprehensions are exaggerated since for much of the population, a significant portion of the price adjustment has already taken place through the parallel market. The other fear concems the increase in the Kyat equivalent of external debt service. However, this increase is largely notional, since the real value of debt service in foreign exchange terms is obviously unchanged. And, because substantial arrears are already being accumulated, the situation can improve only with an increase in export eamings and the negotiation of debt rescheduling, both of which are more likely with a large devaluation. xi 37. The continued unwillingness to adjust the exchange rate also stems from the fear that influential groups in the population would lose as a result. The main losers would be those who have access to official imports either directly or indirectly through the resulting cross-subsidies. Those with direct access to cheap imports include many SEs, which receive underpriced inputs while exporting little, as well as groups in the population (mainly government officials and military personnel) who receive these products through government shops and rations. The indirect beneficiaries include consumers of petroleum products and electric power at official prices. While difficult to estimate precisely what part of the population currently benefits from these subsidies, it is likely to be only a small fraction, which is already better-off than the bulk of the population. Part of the impact of higher prices on groups such as civil servants, whose real incomes have been eroded over the past decade, could be offset with higher wages. And, in cases where subsidies are thought necessary, these should be provided directly and targeted much more narrowly than is possible, as at present, through the overvalued exchange rate. 38. Against the short-term losses of these groups should be weighed the gains to the economy from reforming the exchange rate system. Adjusting the exchange rate would encourage the production of exports and import-substitutes and employment in these activities would expand. It would also send a strong signal to foreign investors about the coherence of the ongoing economic reform efforts, and thereby help boost foreign investment flows, particularly into export sectors. By helping to reduce the fiscal deficit and better allocating credit demand, inflationary pressures could be better controlled. And by contributing to export growth while controlling import growth, it would reduce the need to accumulate further external arrears. By restoring the Myanma economy to a path of sustainable medium-term growth, these reforms, thus, have the potential to benefit far more people than those who would lose from its immediate impacts. 39. Too little attention has likewise been focused on the economic costs of continued inaction, particularly on the exchange rate. Without an exchange rate adjustment, both inflation and the ability to service external debt are likely to worsen. Inflationary pressures will continue unabated because, as argued before, no sustained improvement in the fiscal situation is possible without a broadening of the revenue base. The longer an exchange rate adjustment is postponed, the more the ability to raise revenues will diminish. The financial and operational condition of many SEs will also continue to worsen as they bear the burdens of the economic subsidies that are provided to a few consumers through the overvalued Kyat, which will increase the fiscal burden of the SE sector. Finally, the current account balance will worsen further without the elimination of the bias against tradeables due to overvaluation. Hence, external arrears will continue to increase. 40. The obvious conclusion from this counterfactual is that an eventual adjustment of the exchange rate is inevitable. Postponing that adjustment is likely only to delay the resumption of sustained growth of the Myanma economy, and, therefore, would impose large economic costs in terms of foregone output. A less costly alternative would be to acknowledge the pressing need to restore macroeconomic stability, and assign the central role in this strategy to an adjustment of the nominal exchange rate. The policy discussion could then shift, more fruitfully, to the questions of how such an adjustment would be accomplished and, as important, of how consistent fiscal and monetary policies could be pursued so that this nominal adjustment translates into a real depreciation. Reorientin! Incentives 41. Expanding exports. If the incentives for export production are to be improved, the main action required is an adjustment of the official exchange rate to a level closer to the parallel market rate. Despite the de facto devaluation of the Kyat with the recognition of the parallel market, the absolute profitability of export production has declined since 1989. Adjusting the official rate would also mean that xii private exporters would not face the risks and costs of transacting on the parallel market, while the managers of SEs would be encouraged to expand their exports. Apart from removing the export ban on paddy and rice (as discussed below), the requirement that private importers be required to import government-specified priority goods should also be eliminated. 42. Promoting agriculture. The key policy distortions that need to be eliminated are the ban on exports of paddy and rice, and the paddy procurement system. By reducing farmgate prices by about a third, such implicit taxation reduces farm incomes to the tune of over K46 billion. It also lowers paddy production by reducing its profitability. Thus, removing the export ban would not only encourage rural growth by increasing farm incomes; it would also result in additional production of about 1.9 million tons of paddy annually, much of which would be exported. Although the procurement system benefits urban consumers by providing them subsidized rice, it is highly regressive since the paddy farmers who are being taxed are poorer than the consumers who benefit. If targeted subsidies to rice consumers are considered desirable, other taxes to finance these would be less costly than an export ban. Action is also required to clarify the legal basis for private ownership and leasing of agricultural land, as well as to end government control over cropping choice and access to complementary inputs. Adjusting the official exchange rate would also encourage private-sector involvement in provision of fertilizers and seeds. 43. Reducing biases against private businesses. The ability of most private businesses to expand further and develop into potential exporters as well as credible competitors to SEs in domestic markets is compromised by the discrimination they still face. Therefore, steps must be taken to reduce the favored access of SEs. Specifically, the interest rate subsidies on borrowing and the exchange rate subsidies on imports that SEs enjoy (constrained as both are) should be eliminated by adjusting both "prices". The preferential access of SEs to such services as transportation, telecommunication, and electric power should be reduced with systematic government efforts to expand private-sector access to these. It would also be helpful in dealing with many of these constraints if the GOM formalized and broadened its dialogue with representatives of the domestic private sector. Private sector access to credit can be expanded if public-sector credit demand can be further reduced while positive real interest rates are used to allocate credit. Reformine the SE Sector 44. A reform strategy. An effective SE reform strategy in Myanmar would require actions in the following areas: (i) macroeconomic and sectoral policy reform; (ii) clarification of the role and objectives of the SE sector, which would enable a classification of enterprises into those that would be retained by the state in the medium term, and those that could be divested immediately; (iii) measures to privatize management or ownership of SEs, including actions with regard to labor retrenchment; (iv) steps for restructuring those SEs that are to be retained, including ways of improving their operational and financial performance; and, (v) actions aimed at supporting the development of strong domestic private enterprises. 45. Macroeconomic and sectoral policy reform. If the reform of SEs is to succeed, the adjustment of the exchange rate and interest rates to realistic levels, and price liberalization must be among the highest priorities. Macroeconomic reforms would allow the true picture regarding the financial and economic viability of enterprises to emerge. Similarly, until the prices at which SEs can purchase inputs and sell their outputs are liberalized, it is difficult to determine their economic viability. The other risk with attempting to divest SEs in such a controlled policy environment is that it may be necessary to offer offsetting subsidies and other fiscal benefits as sweeteners to attract potential buyers. The fiscal and distortionary effects of such incentives would reduce the gains from SE reform, and reform will be slow xiii and costly. In contrast, there is no better way to encourage confidence among foreign investors than by eliminating overvaluation and enhancing convertibility of the Kyat. 46. Clarifying the role of SEs. With the Myanma economy now based on markets rather than on state ownership, the role and the objectives of SEs has changed. This new role needs to be spelt out, and will determine, in large part, the extent to which divestiture is necessary, how restructuring of enterprises should proceed, and how fast privatization would need to proceed. While this report cannot detail the precise role that SEs would play in a market-oriented Myanma economy, there would be few areas of such an economy in which the presence of SEs would be essential. The only exceptions of any magnitude would be sectors characterized by large and lumpy capital investments and scale economies, such as electricity generation and distribution, and water supply and sewerage. In the rest of the industrial and service sector (as in the rest of the economy), the private sector (domestic and foreign) is quite capable of serving consumers more effectively and at lower cost than has been the experience with SEs. The government would devote its resources to supplying efficiently infrastructural services and public goods (such as education and health services), and to controlling monopolistic practices and ensuring compliance with environmental and social laws. Once the role of SEs in the economy is clarified, all existing enterprises should be classified according to whether or not they would be retained by the government in the medium term. 47. Privatization. An important lesson from other reforming economies is that the main goal of privatization efforts should be to maximize economic efficiency rather than the pursuit of other goals such as maximizing revenues from selling SEs, developing capital markets or broadening stock ownership among particular groups in the population. The main reason to emphasize large-scale privatization is that there is growing evidence from market-oriented and transition economies that ownership matters for productivity. This case is strengthened by the failure of most attempts to improve the performance of the SE sector through sector-wide restructuring programs. Reducing state ownership is also likely to be the only effective way of "leveling the playing field" between SEs and private-sector firms. Nevertheless, given the limited absorptive capacity and undeveloped capital markets in Myanmar, a successful privatization strategy should begin with small and relatively simple enterprises, whose viability is usually easy to determine. Not too much effort should go into the precise valuation of the assets of these small and medium SEs to be privatized in the initial phases. A combination of privatization techniques is also likely to be required to fit the range of enterprises. Liquidation of non-viable SEs will be needed as well and should be undertaken early in this process. Therefore, it is essential that an exit policy be formulated that allows liquidation of enterprises through bankruptcy proceedings. For medium-sized enterprises not included in the first phase of privatization, an useful interim measure would be to lease their facilities to private entrepreneurs. However, steps are necessary to allow for labor retrenchment so that the private lessors are free to make their own wage and employment decisions. 48. Restructuring SEs. For enterprises that are to be retained by the government in the medium-term, such as those involved in petroleum and gas exploration, electric power generation and distribution, and commercial banking, it is essential that the policy and institutional framework be revamped. Decision making within these SEs must be decentralized by granting their managers real autonomy in financial and operational matters. An important first step would be to separate their financial accounts from the State Fund Account. Subject to the implementation of a suitable regulatory framework to prevent the exercise of monopoly power, managers should be free to choose their output mix; sales prices, input sources, and wage and employment levels. One way to grant such autonomy is to introduce management contracts that specify explicit performance targets, as in China. The financial independence of SEs, and their incentives to focus on profits, could be enhanced by implementing a profit tax that allows enterprises to retain a part of their profits. However, along with greater autonomy, enterprises must also be xiv held accountable for their performance. This would require the imposition of a hard budget constraint, which in the Myanma context would require eliminating the implicit and explicit subsidies currently enjoyed by SEs on imports, credit and energy inputs. To ensure that SEs cannot escape hard budget constraints by defaulting on payments to other enterprises or on loans, it is essential also that bankruptcy be made a credible threat by implementing the necessary laws. 49. Private sector development. The recent reform experience of transition economies shows that rapid private sector development can ease the employment and output losses that are typically associated with the initial stages of SE reform. Removing burdensome restrictions and regulations on private sector operations can yield especially quick dividends. Policymakers in Myanmar should consider changing their approach to private sector development. More sustained action is required to remove the regulatory barriers to the establishment and operation of private firms. Clarifying urban land ownership and use rights, and improving the access of private firms to public services and infrastructure would be important steps in this direction. It is also necessary for a change in philosophy on the government's part. It should be recognized that with the shift to a market economy, the role of the government is not to control the pattern of economic activity but rather to support private-sector initiative and ensure that the "rules of the game" are followed. Hence, efforts should be made to develop institutions and mechanisms to support the private sector with information and infrastructure. Finally, dialogue and consultation with the private sector need to be enhanced in order to build the necessary consensus regarding reforms. F. CONCLUSION 50. The Government's ongoing economic reform program has changed many facets of the Myanma economy. To achieve the goals of expanding exports, encouraging agriculture, and promoting private-sector and foreign participation in economic activity, several new laws and regulations have been instituted. However, this report concludes that the pace of economic growth is still not rapid enough to compensate for the economic stagnation of the preceding quarter century, and its sustainability is uncertain. The current reform efforts are, therefore, unlikely to push the Myanma economy to a higher growth path on which the bulk of the population would enjoy substantially better living standards. 51. For a sustained growth response to emerge, this report concludes that economic reforms need to be deepened and extended in several policy areas. The most urgent need is to restore macroeconomic stability so as to establish the basis for sustained growth. In this context, the report's central recommendation is for a nominal devaluation of the official exchange rate. Adjusting the exchange rate is essential to tackling the unsustainably large macroeconomic imbalances with regard to the fiscal deficit and the current account gap. These distortions in macroeconomic policies, particularly the overvalued exchange rate and the deep cuts in non-military public expenditures, also have adverse distributional impacts. Unless they are addressed, it will be impossible to reduce poverty and achieve social development. Substantial gains in economic efficiency would also result if the ban on private-sector exports of paddy and rice were eliminated, and the scope of government paddy procurement were reduced. Reforming these paddy policies would also help reduce poverty and enhance equity because they imply large income transfers from the rural poor to the urban elites (including the military). Regarding private- sector participation, SEs still enjoy significant advantages in their access to key inputs and, thus, are also favored by foreign investors in establishing joint ventures. Hence, steps to establish a 'level playing field" between SEs and domestic private businesses should be a priority. Finally, if the role of the SE sector in the economy and its adverse fiscal impact are to be reduced, reforms would need to go further or be reoriented in several areas, including price liberalization, managerial and financial autonomy, and privatization. xv Table 1: Summary of Policy Recommendations Policy Actions Goals A. Immediate and Short-term Actions: Adjust official nominal exchange rate to unify with parallel rate Restore macroeconomic stability Improve profitability of export production Reduce subsidies to SEs and elites Raise interest rates to positive real levels Maintain macroeconomic stability Enhance and improve credit allocation to private sector Reduce subsidies to SEs Eliminate government-specified imports for private sector Improve access of exporters to imported inputs Eliminate ban on private-sector exports of paddy and rice, and Improve price incenbves for paddy production progressively eliminate paddy procurement Raise farm incomes Remove all remaining government controls (official and Improve incentives for agricultural production unofficial) on cropping choice and access of farmers to credit and irrigation Clarify urban land ownership and use rights Improve private-sector access to land and infrastructure services Liberalize output and input prices for SEs Enable enterprise-level reforms within SE sector Clarify role of SEs Enable the privatization, closure and restrucuring of SEs Privatize small and medium SEs without detailed valuation Establish credibility of SE reforms studies B. Medium-term Actions * Establish legal basis for private ownership and leasing of Enhance productivity growth in agriculture agricultural land * Reduce nominal tariffs and rationalize tariff structure Reduce anti-export bias * Broaden dialogue with private sector and expand provision of Encourage private-sector expansion support services to private sector * Develop and implement strategy to divest large SEs Reduce state ownership * Implement measures to increase autonomy and enhance Restructure the SE sector accountability of SEs to be retained * Identify and eliminate regulatory barriers to private sector Accelerate growth of pnvate businesses development 1. POLICY REFORMS AND MACROECONOMIC ISSUES A. BACKGROUND 1.1 A significant program of economic reforms has been instituted in Myanmar since the State Law and Order Restoration Council (SLORC) assumed power in late-1988. Since this report aims to take stock of these reforms, the next two sections of this Chapter set the stage by summarizing the key features of the Government's reform program, and reviewing recent macroeconomic developments. The rest of the Chapter then evaluates the progress made in restoring macroeconomic stability. 1.2 The shift in the GOM's policy stance came at the end of almost a quarter century of economic decline, which had accelerated during the 1980s. Since the military takeover in 1962, Myanmar had followed a development paradigm that emphasized state ownership and autarky, and was termed "the Burmese way of socialism". In this model, economic development was to be achieved through rapid industrialization and self sufficiency, and was to be led by the State Enterprise (SE) sector. Hence, there were large-scale nationalizations of enterprises in manufacturing, trade and finance so that the state exercised a virtual monopoly over most organized economic activity outside the agricultural sector. And while agricultural land continued to be operated largely by private farmers, the state owned all land and exercised significant control over output pricing and marketing, input supply, and cropping choice. 1.3 Economic performance under this policy regime was dismal. During 1962-77, real GDP growth barely kept up with population expansion and, as a result, living standards stagnated. Investment levels remained low, and with discrimination against the agricultural sector, agricultural output grew slowly despite the country's potential. With the emphasis on import substitution, the outward orientation of the economy decreased with exports falling during the early-1970s. These problems led to the first attempts at economic reform in the mid-1970s. Although those reforms produced encouraging results initially -- agricultural output and GDP growth increased, export growth resumed, and the tax base expanded during 1977-82 -- those improvements could not be sustained. The problems were both macroeconomic and structural. The exchange rate became progressively more overvalued, the fiscal deficit widened, and the role of the private sector remained tightly circumscribed. With widening external and internal imbalances in the early-1980s, the Government attempted to stabilize the economy by tightening import controls and cutting public investment. Growth slowed as a result even as inflation rose sharply with the increased monetization of the fiscal deficit. To control inflation, two rounds of demonetization were instituted -- in 1985 and 1987. These economic difficulties were followed by the anti-government demonstrations of 1988, and the subsequent takeover by the SLORC. B. THE REFORM PROGRAM 1.4 The genesis of the current economic reforms was the announcement by SLORC in late- 1988 of its intention to abandon the economic policies of its predecessors by liberalizing the economy, encouraging private participation, and promoting integration with the world economy. These reforms were to build on the liberalization of agricultural pricing and marketing policies, which had been instituted in 1987. The initial policy changes that were launched as part of the so-called "Open-Door" program after the SLORC took power in 1988 focused on liberalizing foreign investment regulations, including opening sectors such as timber extraction and mining, and enacting fiscal incentives. These measures have since been broadened to include such measures as: controlling public expenditures; slowing monetary expansion; -2- licensing private banks; extending investment incentives to local investors; and allowing the retention of foreign exchange by private exporters and the use of foreign exchange deposits by residents. 1.5 Agricultural sector policies. The major reform in agricultural policies occurred in 1987 with the abolition of the system of forced government procurement of major crops and the liberalization of domestic marketing and processing. Initially, controls on internal trade in industrial crops were retained, but these have since been liberalized as well. The abolition of forced procurement was accompanied by the imposition of a higher land tax and a tax on grain trading, but these taxes were soon rescinded. Moreover, formal government controls on farmers' cropping patterns were also eliminated in 1988. Despite these changes, informal controls on cropping choice on designated paddy lands appear to continue. And, the government continues to procure albeit on a smaller scale than before, accounting in FY95 for about 11% of the total crop.' Prices of some agricultural inputs supplied by the government, including fertilizers and mechanization services, have also been raised. Finally, extensive leasing of fallow land for cultivation or livestock breeding by private farmers has been undertaken since 1991. 1.6 Industrial sector policies. With the shift away from the "Burmese way of socialism" in 1988, the restrictions on private sector involvement in the industrial sector have been reduced progressively. The Private Industrial Enterprise Law was enacted in 1990 to govern establishment and operation of private enterprises in the industrial sector. Its provisions allow private firms to operate in all industrial subsectors other than those specified in the State-owned Economic Enterprises Law as activities reserved for the state sector (such as teak extraction, mining of gems, oil and gas extraction, and power generation).2 1.7 A key aspect of the Government's "open door policy" was the enactment of the Foreign Investment Law in late-1988. This law allows foreign investors in Myanmar to establish wholly-owned enterprises or enter into joint ventures with Myanma citizens. Foreign investment is allowed in almost all subsectors other than those reserved for the state sector. However, in practice, participation even in these reserved sectors, particularly mining and fisheries, has been approved in several cases. In the mining sector, a new law has been enacted that allows private sector participation in joint ventures. A range of tax benefits and streamlined licensing procedures are also provided to foreign investors under the law (with additional exemptions for export-oriented enterprises) as are guarantees against nationalization and for the repatriation of capital and the foreign exchange component of profits. In 1994, most of these tax benefits available to foreign investors were also extended to local investors through the Myanmar Citizens Investment Law. 1.8 Changes have also been made in pricing policies with the removal of most formal price controls (except on energy products). State enterprises (SEs) have been granted more operational autonomy, in areas such as pricing, input procurement, and production. Specifically, on production, the enterprises can choose also whether to enter into agreements with private domestic or foreign investors whereby they produce on a consignment basis, lease their facilities to these investors, or enter into joint ventures with these firms. The goal of privatizing SEs in a more systematic manner has recently been announced although detailed implementation procedures are yet to be developed. In 1989, the outstanding I Although these sales are termed voluntary, this procurement occurs at below-market prices, and the magnitude of such implicit taxation of paddy farmers is evaluated in Chapter 2. 2 Even these restrictions can be relaxed on a case-by-case basis, as noted below with respect to foreign investment. - 3 - credit to SEs was converted into non-interest bearing government equity, and since then, all financing to SEs (including working capital credit) is provided from the budget. 1.9 Trade and foreign exchange policies. Changes in many of these policies formed the core of the announcement of the Government's "open door" policy in 1988. In particular, the role of the private sector in external trade was expanded sharply. Border trade (which occurs across Myanmar's land borders, and was previously illegal) was normalized (i.e. licenses or permits are required from the authorities), and countertrade measures such as import first and consignment imports were introduced for SEs3. Although the role of the private sector in external trade has been broadened substantially, private sector exports of some commodities such as rice, teak and minerals continue to be prohibited. 1.10 Foreign exchange control procedures have also been reformed. Since 1988, retention of foreign exchange earnings by exporters has been permitted, initially for 60% of export proceeds, and since 1989 for the entire proceeds. Moreover, these retained earnings can be deposited in foreign exchange accounts at the Myanmar Foreign Trade Bank (MFTB), and transfers are pernitted between these accounts.4 In 1993, Foreign Exchange Certificates (FECs) were introduced by the Central Bank with an FEC equivalent to US$1. Residents can now acquire and trade FECs, and use them to open foreign exchange accounts, although a service charge of 10% applies to these transactions. 1.11 Financial policies. Several banking laws were enacted in 1990 including the Central Bank of Myanmar Law, the Financial Institutions Law, and the Myanmar Agricultural and Rural Development Bank Law. The Central Bank Law empowers the CBM to supervise and regulate the financial system, including the conduct of monetary policy. The Financial Institutions Law provides the framework for the establishment and operation of a range of institutions including commercial banks, finance companies, and development banks. In an important break with the past, private domestic banks can now be established. As of end-July 1995, 15 private banks were in operation, of which, 4 had also been granted licenses to transact in foreign exchange, and although foreign banks cannot operate yet, 28 had been given licenses to open representative offices. The other recent innovation in financial policies was the first public issue in 1993 of Treasury bonds in maturities of 5 and 7 years. 1.12 Tax policies. The main recent change in this area was the enactment of the Commercial Tax Law in 1990. The commercial tax has a broader base than the previous commodity and services tax, which applied only to SEs and cooperatives. The commercial tax, by contrast, applies to the sales (domestic and imported) of all enterprises, private and public. It also has provisions for duty drawbacks as with a VAT, although these provisions appear not to be used widely in practice. With the enactment of the Foreign Investment and Myanmar Citizens' Laws, a large number of tax exemptions are now granted to foreign and local investors. Specifically, foreign investors are exempt from corporate income taxes for at least three years with additional three-year exemptions (beyond the initial three-year period) possible for export-oriented production, customs duty and commercial taxes on imports of capital goods and 3 Under these schemes. SEs are allowed to sell imported goods in the domestic market. For consignment imports, such sales are made in foreign exchange, which proceeds are then paid to the foreign supplier. Under the import first scheme, the sales of imports is made either for foreign exchange or Kyats. The Kyat proceeds are then used to procure goods for export. which are then used to pay the supplier of the original imports. 4 Since these transactions are not officially recognized by the authorities, the exchange rates at which transfers occur are not recorded. - 4 - intermediates; and commercial taxes on exports. Local investors are provided similar exemptions for export-oriented enterprises. Summary Assessment 1.13 The GOM's economic reforms are aimed at transforming the economy from one organized along socialist lines and dominated by the state sector to a market-oriented system. Specifically, the reforms aim at increasing the outward orientation of the economy and its integration with the world economy, at expanding the role of the private sector, and at reducing the scope and extent of government intervention. 1.14 A number of new laws have been enacted and regulations instituted since 1988 to help in achieving these goals. Particularly noteworthy are the laws that eliminate the restrictions on private sector participation in industry and finance, encourage foreign investment, liberalize agricultural production, processing, pricing, and marketing, and allow retention and trading of foreign exchange by private exporters. Despite these changes, however, there are still constraints to the expansion of external trade, private sector participation, and the agricultural sector, and the reduction in the role of state enterprises in economic activity. Before these constraints are examined in greater detail in the rest of this Report, recent economic developments are reviewed, and the macroeconomic situation is assessed. C. RECENT ECONOMIC DEVELOPMENTS .15 This section reviews macroeconomic and sectoral developments in the period since 1989 as background to the policy discussion in the remainder of the report. Therefore, the trends in the main aggregates during this period of economic reform are summarized5. Also, these developments in the Myanma economy are contrasted with those during the mid-1980s so as to provide a more realistic perspective on the impacts of the reform program. Output and Demand Developments 1.16 GDP growth and sectoral shares. GDP growth has rebounded since FY90, following the economic collapse of FY87-89. Growth has averaged about 4.2% in FY90-94 and rose to 6.8% in FY95, compared to an average decline of 5.5% during FY87-89 (Table 1.1). However, even during this recent period, growth has been highly variable, rising to over 9% in FY93 but also declining slightly in FY92, reflecting poor agricultural performance owing to bad weather. Also, the average growth rate since FY90 has still been no higher than in the first half of the 1980s. Coupled with the sharp output drop in the late 1980s, real GDP in FY95, therefore, was only about 10% higher than in FY86, which is particularly disturbing since the population has grown by almost 20% since then. 5 The discussion of these trends is based on the official data, and their interpretation is problematic, since they are based on the official exchange rate. Given the highly overvalued exchange rate, adjusting the data for this and other distortions is not attempted here. Apart from these problems, the quality and coverage of economic statistics in Myanmar appears to be comparable or better than other low-income countries in East Asia. - 5 - Table 1.1: Key Economic Indicators FY82-86 FY87-89 FY90-94 FY 95 GDP growth (average %) 4.9 -5.5 4.2 6.8 Agriculture, livestock, fishery & forestry 5.1 -5.6 3.9 6.1 Industry 5.5 -9.4 8.8 9.0 Services 4.3 -4.0 3.2 6.8 Economic Structure (end-period, current prices %) Output shares: Agriculture, livestock, fishery & forestry 48.2 57.4 63.0 62.7 Industry 13.1 9.7 8.6 9.2 Services 38.7 32.9 28.4 28.1 Employment shares: Agriculture, livestock, fishery & forestry 65.9 65.2 68.6 67.8 Industry 10.8 8.8 9.7 10.8 Services 23.3 26.0 21.7 21.4 Export growth (gnfs, average %) -4.0 -3.7 18.2 19.4 Import growth (gnfs, average %) 1.0 -16.0 12.9 16.8 Savings-Investment Gap (average %) 6.0 2.8 0.7 0.2 GNS/GDP (average %) 12.8 9.6 12.1 11.9 GDI/GDP (average %) 18.8 12.3 12.8 12.1 Budget deficit/GDP (average %) a/ -8.3 -10.5 -5.8 -6.3 Curr. acct. deficit/Exports (average %) b/ -77.4 -87.9 -43.0 -30.4 Debt service obligations/Exports (average %) b/ 41.4 88.2 43.6 31.8 Inflation (average annual rate, %) 4.3 19.7 26.1 22.5 Real effective exchange rate (trade- weighted, end-period, % change) 8.5 9.8 24.3 21.7 a/ On commitment basis. b/ Exports of goods and non-factor services. Source: GOM; and staff estimates. - 6 - 1.17 The agricultural, fisheries and forestry sector continues to be dominant in the Myanma economy, and now accounts for over 63% of GDP and about 68% of employment (Table 1.1). Further, both shares have riseh since the mid-1980s, reflecting its smaller decline during FY86-88 and its more rapid expansion than the services sector since FY90 (Table 1.1). Part of this sectoral growth has come from the expansion in forestry due especially to increased timber extraction in FY90 and FY91. While agricultural output has grown, reflecting in part a response to the liberalization measures, the production of many crops has only just retumed to the levels of the mid-1980s. For instance, production of the main crop, paddy, only reached its peak of the mid-1980s in FY93. Hence, per capita agricultural output today is still below mid-1980 levels. 1.18 The recovery has also extended to the industrial and services sectors. The most rapid growth has been in subsectors such as mining and construction, in part because they were dislocated more during FY87-89, but also reflecting the response to the incentives now provided to foreign investment in mineral exploration and extraction, and tourism. The recovery in manufacturing activity has been more variable than in the other industrial subsectors because it still remains closely linked to agricultural performance. 1.19 Investment and Saving. Investment recovered during FY90-95 from its collapse (of almost a third) in FY89. This growth mainly reflects the increases in private investment, particularly in FY91 and FY92, which followed the implementation of investment incentives and liberalization measures. In contrast, the level of public investment has continued to fall in real terms. Savings have also recovered since FY90, reflecting primarily a reduction in the dissaving of the public sector. However, despite this recovery and the consequent narrowing of the saving-investment gap in FY90-95, the picture is less bright when the early-1980s are used as the benchmark. The smaller saving-investment gap relative to FY82-86 has been achieved entirely due to the fall in investment (Table 1.1). The average domestic saving rate is actually lower in FY90-95 than in the mid-1980s, while gross investment has fallen to about 12% of GDP, which is obviously inadequate for a country with Myanmar's needs for infrastructure and capital t6 equipment 6 The reasons for the lowv private saving rate (apart from low incomes) are not well understood. Table 1.2: Investment and Saving (% of GDP) FY91 FY92 FY93 FY94 FY95 Gross capital fonnation 13.4 15.3 13.5 12.1 12.1 Fixed investment 14.7 14.8 12.5 10.6 11.1 Public i 4.8 5.8 4.0 2.7 4.5 Private 9.9 9.0 8.5 7.9 6.6 National saving 11.3 14.4 13.1 11.7 11.9 Domestic saving 11.2 14.2 12.8 11.2 11.3 Public -3.2 -1.5 -1.5 -2.3 -2.1 Private 14.4 15.6 14.3 13.5 13.4 Foreign saving 2.0 0.9 0.5 0.4 0.2 a/ Budget data. Source: MNPED, Planning Dept., and staff estimates. Fiscal Developments 1.20 Revenue trends. The consolidated public sector budget, summarized below in Table 1.3, incorporates the accounts of the Union Government, the local authorities, and non-financial State Economic Enterprises (SEs). The composition of public sector revenues has shifted little during FY91-95, with taxes and SE contributions being the largest contributors, collectively contributing almost four-fifths of total receipts. Of tax revenues, about 80% comes from commercial taxes, income taxes, and customs duties, with commercial taxes raising the most revenues. Since FY90, the share of revenues to GDP has continued to decline and was 7.2% in FY95. A similar trend applied to tax revenues, whose share fell to 4.6% of GDP in FY94 from 6% in FY91. These declines are even more disturbing when viewed against their GDP shares in FY82-86, when total receipts and tax revenues averaged almost 19% and 9% of GDP, respectively. -8- Table 1.3: Summary of Budgetary Operations (% of GDP) FY91 FY92 FY93 FY94 FY95 (PA) (RE) Total receipts 10.0 9.8 8.3 7.7 7.2 Tax revenue 6.0 5.6 5.1 4.8 4.6 SEs' contributionsa/ 2.2 1.8 2.0 1.9 1.8 Other nontax revenue 1.8 2.4 1.3 1.0 0.8 Total expenditure 17.6 16.8 13.6 12.5 12.3 Current expenditure 12.6 10.9 9.4 9.8 8.3 Capital expenditure and net lending 5.0 5.9 4.2 2.7 4.0 Surplus/Deficit (_) b/ -7.6 -7.0 -5.3 -4.6 -6.3 Financing: Domestic loans 7.1 6.8 5.0 4.5 6.3 Foreign loans (net) -0.4 -0.5 -0.4 -0.3 -0.2 Change in arrears 0.9 0.7 0.7 0.4 0.2 a/ Non-financial state enterprises. b/ Balance on a commitment basis. Source: MFR, Budget Department. 1.21 Expenditure trends. Recent efforts to contain expenditures have been more successful than those to expand revenues. Although both current and capital expenditures have declined in FY91-95, the cuts have been sharper in capital expenditures.7 As a share of GDP, current expenditures have declined from about 13% in FY91 to 8.3% in FY95 (Table 1.3), while capital expenditures (Union Government and SEs) have fallen to 4.0% in FY95. The fall in capital expenditures has been particularly dramatic for SEs, where its GDP share is now less than 1%, compared to over 5% in FY88. The only category of expenditures that has been protected from cuts during this period has been defense whose share of total expenditures has risen to over 33% (from 21% in FY90), as has its GDP share (to 4.1% in FY94 from 7The breakdown of total expenditures into current and capital components is somewhat arbitrary. For instance, all defense expenditures were classified as current in GOM budgetary data before FY91. In Table 1.3 as well as the Appendix Tables, this classification has been followed even for more recent years so as to allow comparability across time periods. - 9 - 3.5% in FY90). Even public sector wage expenditures (excluding the military) have fallen during FY91-95 from about 46% of total expenditures to less than 37%. 1.22 The fiscal deficit. Reducing the fiscal deficit has been an important policy goal. Reflecting these efforts, the consolidated fiscal deficit averaged about 6% of GDP during FY91-95, falling from an average of 10.5% in FY87-89. However, the improvement that had occurred since FY91 was reversed in FY95 when the deficit increased to 6.3%. As the revenue and expenditure trends indicate, the problem is that the initial improvement reflected a larger than proportionate reduction in expenditures, especially capital spending. Rather than expanding, the revenue base has shrunk further, and these trends point to the problems (evident in FY95) in sustaining the smaller deficits. Over the period, the deficit has been financed by borrowing from the domestic banking system, and increasingly, since FY89, by the accrual of arrears on external debt (para. 1.28). These trends also contrast with the 1980s when foreign loans were used to finance a significant part of the deficit; in FY91-95, net foreign loans averaged outflows of about 0.4% of GDP. Monetary Trends and Inflation 1.23 Monetary growth. Since almost the entire fiscal deficit is financed by recourse to borrowing from the Central Bank, the decline in the fiscal deficit during FY91-94 was accompanied by a gradual slowing of monetary growth. The tightening of monetary policy was evident particularly in FY94 when total liquidity (M2) grew (on a year-to-year basis) by about 20%, compared to average annual growth of over 36% during FY90-93. However, the widening of the fiscal deficit in FY95 meant a reversal of this trend with an acceleration of monetary growth. While the volume of private sector credit (excluding cooperatives) has risen rapidly in conjunction with the economic liberalization, its share in domestic credit remains small (14% at end-FY95 -- Table 1.4). 1.24 Interest rates. All interest rates -- deposit and lending -- are still controlled, and despite a small increase in some rates in 1992, these remain highly negative in real terms (Table 1.4). Hence, despite several measures to promote financial savings, including increases in the number of bank branches through the new Rural Savings Mobilization Scheme, the sale of Treasury bonds to the public, and the licensing of private banks, the ratio of financial savings to GDP (measured as M2/GDP) has stagnated. With interest rates controlled in this manner, credit allocation decisions depend little on the levels of interest rates. - 10 - Table 1.4: Monetary Growth, Inflation and Interest Rates FY91 FY92 FY93 FY94 FY95 Growth rates (% change - end FY) Money Supply (M2) 45.6 30.9 34.1 22.8 39.1 Total Domestic Credit 31.2 25.7 26.4 15.6 27.6 Credit to public sector 21.3 22.0 18.8 18.4 28.3 Credit to private sector (excl. coops) 415.4 72.6 99.2 20.6 36.7 CPI inflation (annual average) 21.9 29.1 22.3 33.5 22.5 Food and beverages 25.4 32.6 22.9 39.9 18.1 Real interest rates (end period): Savings deposits a' -13.9 -19.1 -12.3 -23.5 -12.5 Working capital loans (private sector) -6.9 -12.6 -5.8 -17.0 -6.0 M2/GDP (%) 33.6 35.8 36.1 31.3 35.0 a/ Saving bank accounts' basic rates. Source. Central Bank of Myanmar; and staff estimates. 1.25 Inflation. The only consumer price index available in Myanmar applies to Yangon, and shows that the average inflation rate in FY95 fell to 22% from 34% in FY94.8 Despite this slowdown in the average inflation rate a clear downward trend is not yet apparent with inflation at the end of FY95 (compared to end-FY94) having risen to over 26%. Moreover, the average annual inflation rate during FY91 -95 has been much higher than the average rate in the early-1980s (Table 1.1). External Developments 1.26 Current account trends. During FY91-95, the deficit on the current account fell -- by almost a third in absolute terms, and about 50% of exports (Table 1.5). This improvement is attributable mainly to two factors. Net private transfers have risen four-fold since FY91, reflecting mainly higher remittances from Myanma citizens abroad. And, the deficit on the services account has moved into surplus due to about an eight-fold increase in receipts from travel, which are attributable directly to the relaxation of restrictions on tourism and to the incentives provided to foreign investors in tourism ventures. However, there has not been much improvement in the trade balance, which has grown to almost three-quarter billion dollars (although in relative terms, it fell slightly in FY95 to 91% of merchandise exports from over 100% in FY91). This trade imbalance has persisted despite average export growth in FY91-95 of almost 20% p.a.. The main reasons are that import growth has also been rapid, in large part because imports were compressed through stringent licensing throughout the 1980s (Table 1.1), and that the initial trade gap itself was large. 8 There are problems with this CPI even as an accurate measure of inflation in Yangon. Since it is based on an expenditure survey conducted in 1986, the consumption basket used is outdated, and so grossly underestimates the share of imported consumer goods. - l1l - Table 1.5: Summary Balance of Payments (In millions of US dollars) FY91 FY92 FY93 FY94 FY95 Resource Balance -541.2 -341.6 -301.7 -488.9 -547.2 Current Account Balance -526.1 -344.4 -275.3 -292.0 -340.5 As % of Exports (GNFS) -82.1 -57.4 -32.0 -31.1 -30.4 Foreign Direct Investment 219.0 248.6 137.5 96.2 244.5 Net Medium & Long-Term Borrowing -76.1 -150.3 -169.8 -151.7 -112.7 Official Grants 29.2 64.4 71.4 98.4 165.7 Other Capital (net) -5.5 -4.4 -3.8 -2.8 -3.3 Errors and Omissions (net) -9.7 -46.4 -38.5 5.4 4.8 Overall Balance -370.9 -232.5 -278.5 -246.5 -51.1 Exchange Rates (period average) Official nominal (KI$, FY) 6.215 6.275 6.078 6.108 5.8917 REER Index(1988=100)b' 143.8 183.4 215.8 295.0 334.8 a! Exports of GNFS less imports of GNFS. b/ Using official $/K, calendar-year average exchange rates. Source: Central Bank of Myanmar; and staff estimates. 1.27 Despite recent export growth, however, there has been no diversification into non- traditional exports. Almost all exports are still primary products, with pulses and beans, and teak accounting for the largest shares (Appendix Table 2.2). The main change in the pattern of exports has been the increase in the share of pulses and beans, which now accounts for almost a sixth of merchandise exports (from 4% in FY90).9 The composition of imports has shifted during FY91-95 with the share of consumer goods (mainly food and durables) having risen to over 41% of all imports (from about 35% in FY91). The share of intermediate goods has fallen sharply over this period. Finally, the policy changes since 1989 are reflected in the increased involvement of the private sector in extemal trade -- its shares have risen during FY91-95 from 42% to 64% for imports and has remained at about 45% for exports (Appendix Table 2.5). 1.28 The capital account. Inward capital flows since FY91 have not been adequate to offset current account deficits. Hence, accumulation of arrears has increasingly been the means used to finance the extemal deficit while maintaining adequate reserves. Since over 90% of the overall extemal deficit 9 Many observers believe that much of the recorded exports of pulses and beans, which is almost entirely private-sector controlled. actually consists of other commodities, including rice, whose exports remain public- sector monopolies. - 12 - during FY91-95 has been financed in this manner, total arrears outstanding on external debt more than doubled to almost $1.5 billion during this period. About three-quarters of these arrears are owed to bilateral official creditors (mainly Japan and Germany, which account for 87% of bilateral debt) with the remainder owed to private creditors, including suppliers' credits (Table 1.6). No arrears have been accumulated on multilateral debt, although it accounts for more than a quarter of total debt outstanding. Table 1.6: External Debt and Arrears, FY91-95S (In millions of U.S. dollars, end of period) FY91 FY92 FY93 FY94 FY95b/ Debt Outstanding 4,704 4,873 5,326 5,481 5,518 of which: Bilateral concessional 2,961 3,047 3,414 3,500 Multilateral concessional 1.234 1,258 1,306 1,355 Arrears (Stock) 587 809 1,103 1,344 1,482 Principal 356 538 763 997 1,094 of which, Bilateral 272 409 593 768 Interest 231 270 341 347 387 of which, Bilateral 169 204 287 282 a/ End of period. Change in arrears is from balance of payments and does not match change in arrears implied from stocks data due to valuation effects. b/ IMF staff estimates. Source: Central Bank of Myanmar; and IMF. 1.29 Foreign direct investment. With official aid since FY89 limited to a small amount of grants associated with UNDP assistance and debt relief from Japan, capital inflows have mainly taken the form of foreign direct investment (FDI). Attracted by the changes in the foreign investment laws and tax incentives, FDI has averaged over $150 million annually in FY91-95, and appears to have stabilized at about this level. These investments were concentrated initially in the oil and gas, and mining sectors, and have since shifted into the hotels and tourism sector (Appendix Tables 8.3 to 8.5). With this shift has also come a change in the form that these investments have taken. In the extractive industries, most of these inflows were on a production sharing basis. In FY95, however, the share of production-sharing contracts in actual investments fell to about half, while fully foreign-owned ventures and joint ventures rose in importance, because those are the preferred contractual forms for hotels and tourism. 1.30 Exchange rate trends. The official exchange rate of the Kyat against the SDR (1 SDR = K 8.51) has been maintained since 1977. However, a variety of arrangements have been instituted since 1988, which mean that most private sector transactions now occur at the parallel market rate. Hence, the trends in the parallel exchange rate are as relevant as those in the official rate. The trends in the official and parallel Kyat/$ exchange rate are shown in Figure 1.1. - 13 - Figure 1.1: Myanmar: Official and Parallel 20 Exchange Rates ,* 100 / 80 - K 60- ) *, 40 - 20 a) 0) @ § 9 - - Official rate -- -- Parallel rate Source: IMF and Pick's Currency Yearbook, World Currency Yearbook, and Currency Alert, various issues. D. MACROECONOMIC POLICY ISSUES 1.31 This section begins by discussing the importance of macroeconomic stability as an ingredient in the success of many East Asian economies, and as an integral part of economic reform programs in economies making a transition to market-oriented systems. The efforts of Myanmar in restoring stable macroeconomic conditions since 1988 are then evaluated. Finally, the seriousness of the remaining imbalances is analyzed, and approaches to resolving these are discussed. Why Macroeconomic Stability Matters 1.32 The evidence, particularly from the high-growth economies of East Asia, points overwhelmingly to the role of macroeconomic stability in establishing the foundation for sustained export- led growth.'° Macroeconomic stability as typically defined, refers to the combination of low inflation, manageable domestic public debt, and sustainable current account deficits. The high-growth East Asian countries were all able to maintain such economic conditions over long periods. Moreover, even when macroeconomic shocks disrupted stability, they were able and willing to adjust their macroeconomic and sectoral policies decisively so as to reduce the imbalances. For example, Korea responded to rising inflation after the oil shocks of the 1970s by cutting farm subsidies, restraining civil service salaries and freezing public expenditures. Similarly, Indonesia responded to deteriorating public finances when oil revenues fell in the mid- I 980s by cutting expenditures sharply so that the fiscal deficit improved from 4% to 1.3% of GDP in just three years. '0 As used in this Report. the lerm. "the East Asian high-growth economies" includes Indonesia; Korea; Malaysia; Singapore; Taiwan, China; and Thailand. - 14 - 1.33 Experience also shows that the main policy that allowed macroeconomic stability to be maintained in these successful economies was the control of fiscal deficits so that they could be financed without resorting to excessive monetary expansion. Where fiscal deficits were modest, they could be financed without adopting an expansionary monetary stance or building up high domestic and foreign debt. Inflation, therefore, was maintained at relatively low levels in these countries, and real appreciations of the exchange rate were avoided. Hence, these countries were largely able to avoid significant external imbalances. Inflation in the high-growth East Asian economies during 1961-91 averaged 7.5% annually, and none had average inflation rates higher than 13%. " 1.34 Conversely, where chronic macroeconomic imbalances occurred, as in many Latin American and African economies in the 1980s, large and unsustainable fiscal deficits were the principal contributing factor. As governments relied more on money creation to finance their deficits, inflation increased. This usually coincided with or followed the buildup of large and unserviceable domestic and foreign debt. And with higher inflation, and a reluctance to undertake nominal devaluations, real exchange rates appreciated. Hence, current account balances deteriorated, making the external debt situation even more untenable. Thus, Latin American economies, which averaged almost 200% inflation annually during 1961-91, were not surprisingly those affected most severely by the debt crisis of the mid-1980s. 1.35 This cross-country evidence on the importance of macroeconomic stability for long-term growth is unambiguous, and has a clear theoretical rationale. There are at least three reasons why sustained economic growth requires macroeconomic stability. First, relative prices, which guide resource allocation, are clearer when inflation is low and stable. This is true especially of the two most important economy-wide prices -- the exchange rate and interest rates. In turn, this clarity of price signals reduces uncertainty and fosters private investment. The second reason is that macroeconomic stability, particularly low inflation, contributes to higher public sector saving by broadening the tax base and increasing tax collections (the so-called Tanzi effect). High public saving supports growth by providing domestic resources for investment. Finally, stable macroeconomic conditions allow economies to be more outward oriented. Since the real exchange rate is not overly appreciated, import liberalization is more feasible, and does not result in large current account deficits. This openness, in tum, promotes growth by increasing efficiency and allowing technology transfer. 1.36 This dependence of sustained growth on macroeconomic stability is of particular relevance to countries like Myanmar that are in the midst of transforming their economies from state control to market orientation. An important question in designing such reform programs concerns the extent to which efforts to establish a stable macroeconomic framework should precede sectoral policy reforms. As noted, there are compelling reasons to focus on restoring macroeconomic stability at the outset of the reform effort. 1.37 A particularly instructive example in this regard is Viet Nam's experience with economic reforms since 1989.12 Faced with stagnant GDP growth in the 1980s and the imminent end to large aid flows from the former Soviet Union, Vietnam initiated an ambitious reform program ("doi moi" or renovation) in 1989. It included wide-ranging reforms of the agricultural sector, such as liberalization of pricing and marketing and abolition of collective farming, decontrol of non-agricultural prices, and removal " See, World Bank (1993), Chapter 3. 12 For details on the phasing and impacts of Vietnam's reform program, particularly its macroeconomic aspects, see Dollar (I994). - 15 - of trade restrictions on most products, including rice exports. Most striking, however, were the changes in policy aimed at restoring macroeconomic stability, which were made at the outset of the reform program itself. These steps included unification and devaluation of the exchange rate (by over 70% in 1989), increases in deposit and lending interest rates to positive real levels, and reductions in public expenditures through the streamlining of the military (over half a million soldiers were demobilized) and the public sector (by cutting budgetary subsidies to state enterprises, which resulted in layoffs of 800,000 employees in 1989-91). 1.38 The impact on Viet Nam's macroeconomic balances was inimediate and positive, with the fiscal deficit falling from over 11 % of GDP in 1989 to less than 4% in 1992. Consumer price inflation fell dramatically from over 70% in 1990 and 1991 to 17% in 1992, and about 5% in 1993. This macroeconomic stability has paved the way for growth to accelerate, with GDP growth averaging over 8% p.a. during 1992-94, compared to about 5% p.a. in 1986-88. Moreover, gross fixed investmnent has risen from about 11% to over 19% of GDP during 1990-93. The Need for Continued Stabilization 1.39 The preceding discussion raises the question of how far Myanmar has progressed in stabilizing macroeconomic conditions. The macroeconomic situation has undoubtedly improved in some respects compared to the late-1980s. The current account deficit fell, as a share of exports (GNFS), from about 67% in FY89 to 30% in FY95. And, consumer price inflation (year-on-year) has fallen during the period from 34% to about 26%. These improvements stem from the tightening of fiscal and monetary policies. The fiscal deficit has shrunk from 13.7% of GDP in FY89 to 6.3% in FY95. 1.40 However, despite these improvements, macroeconomic stability remains elusive as can be seen from the indicators of both internal and cxternal balance. Inflation remains high and variable. In the last five years, for instance, the inflation rate (year-on-year as well as the average annual rate) has fluctuated between 18% and 35%. While the fiscal deficit has fallen since FY89, this reduction was achieved entirely by cutting expenditures (current and capital) rather than by broadening the revenue base or improving the performance of SEs. Moreover, the deficit rose in FY95. And, the slowing of monetary growth until FY94 was accomplished mainly by limiting growth of credit to the private and cooperative sectors rather than by reducing the monetization of the fiscal deficit. 1.41 The persistence of external imbalances can be seen from the current account deficit, which has also been large and variable. During FY90-94, the current account gap averaged 43% of total export receipts (GNFS), rising as high as I 10% in FY91. Despite a further improvement in FY95, its unsustainability is clear from the continued build-up of external arrears. In FY94, for instance, almost 40% of the current account deficit was financed by accumulating arrears. Another sign that the external deficit is even more serious than is indicated by its recent improvement is its persistence despite the export recovery during FY90-95 (Table 1. 1) because import growth during this period has also been rapid. 1.42 This analysis shows that macroeconomic stabilization measures are still needed urgently in Myanmar if the current policy reforms are to be successful in restoring medium-term growth. Despite healthy GDP growth in the last two years, real GDP in FY95 was only about 10% larger than in FY86 -- an annual growth rate of only about 1.1 %, far below the population growth rate. For Myanmar to realize its potential, and to reverse the long period of economic stagnation, growth rates have to rise substantially. For this to occur, sustained macroeconomic stabilization, similar to that implemented by Vietnam in the late-1980s, is essential. Without macroeconomic stability, the reforms in sectoral policies that have been - 16 - implemented, important as they are, will not be enough to bring forth a sustained growth response. The remainder of this Chapter discusses the main stabilization issues that need to be faced. Fiscal Deficits and Macroeconomic Instability 1.43 The fiscal deficit is at the heart of continued macroeconomic instability in Myanmar. This gap would need to be reduced in a sustainable manner before lasting progress is possible on the macroeconomic front. The importance of reducing the fiscal deficit in Myanmar derives from the manner in which it is financed. Since the deficit is financed almost entirely by monetary creation, the process has contributed directly to inflation. And, high inflation, far higher than in most trading partners, has resulted in a real appreciation of the Kyat because the GOM has fixed its nominal value since 1977. This real appreciation, in tum, worsens the external current account deficit, forcing further accumulation of extemal arrears and even more stringent rationing of foreign exchange. 1.44 These relationships can be seen clearly by looking at the behavior of fiscal and monetary aggregates, and the real exchange rate in Myanmar over the last few years (Figure 1.2). Between FY91 and FY95, the fiscal deficit has averaged 6% of GDP p.a. and has been financed predominantly through the Central Bank's issuance of Treasury Bills, which translates directly into monetary expansion. The growth in money supply has, therefore, mirrored the fiscal deficit . Between FY91 and FY95, M2 growth (year- on-year) averaged over 37% p.a., rising as high as 45% in FY91, and even at its lowest rate in FY94, was 20%. Moreover, this monetary expansion was fueled by the growth of domestic credit, primarily the component to the public sector which averaged almost 25% in FY9 1-95. Figure 1.2: Fiscal Deficit, M2 Growth and Inflation Rate 50.0 45.01- 40.0 -v 35.0+ 30.0 - ___ - 25.0- . . -- - - @ 20.0 .- ffi 150- 10.0 15.0 10.0 0.0 - - ---.------ . FY90 FY91 FY92 FY93 FY94 FY95 r. . -. Fiscal deficft (% of GDP) - - ~goth rat . .... -nflation rate (end-period) Source: GOM; and staff estimates. - 17 - 1.45 During FY91-95, CPI inflation has averaged 34% annually, and its link to the fiscal deficit and monetary growth is clear (Figure 1.2). Because inflation has remained high, real interest rates on deposits and loans, despite recent increases, have remained at negative levels throughout the period (Table 1.4). With a fixed nominal exchange rate, high inflation has meant a sustained real appreciation of the Kyat (at the official rate) since 1985 (Figure 1.3). Moreover, a real appreciation of almost 40% has occurred even if the parallel exchange rate is substituted for the official rate. In light of these trends, the magnitude and persistence of the current account deficit (para. 1.26) is not surprising. Figure 1.3: Myanmar: Official and Parallel RER 500.0 400.0 -/ VI I LU lX 300.0 -. 200.0 0.0 -IfTh 100. D 0 0 OD 0 , a Off iciaI RER - - Parallel RER -.*.. Md avg RER Source: Staff Estimates Why the Current Approach is Not Working 1.46 Fiscal adjustments. Attempts to cut the fiscal deficit over the last decade have focused on cutting public expenditures, both current and capital (Table 1.3). Hence, the average ratio of expenditures to GDP fell from 26% during FY82-86 to 15% in FY90-94 and 12.5% in FY95. The largest part of this reduction (almost 6% of GDP) occurred in FY90, but the adjustment has continued, especially in FY93 and FY94. The GDP share of capital expenditures in FY95 was less than half of its FY88 share as were current expenditures. But these efforts were frustrated by the continuous contraction of the revenue base during the period (Table 1.3). The average ratio of government revenues fell from 18% in FY82-86 to 9% in FY90-94 and 7.2% in FY95. The biggest decline occurred in FY89, and reflected the sharp fall in GDP growth that year. But, the fall in revenue shares has continued since FY91, despite the economic recovery, and in FY95, was less than half its FY86 share of GDP. This shrinkage in the revenue base has also been comprehensive, covering all components of revenue. For example, in FY95, tax revenues were less than 5% of GDP, compared to over 8% in FY86; SE contributions have fallen to less than 2% of GDP; and other non-tax revenues are now less than I% of GDP. 1.47 Two conclusions emerge from these trends. It is clear that the fiscal adjustments that have been undertaken thus far will not be sustainable. Little scope remains to cut public expenditures further, - 18 - especially since infrastructural inadequacies mean that even lower capital expenditures will only hurt the prospects for medium-term growth. And, it is obvious that no long-term improvement in the fiscal position, and hence in the macroeconomic situation is possible without measures to expand the revenue base. Before examining ways to expand the revenue base, recent trends in the current account deficit are delineated. 1.48 Exchange rate management and external trade policies. Apart from administrative measures aimed at reducing public-sector imports, the GOM's policy response to continued external imbalance has been in three main areas. First, measures have been implemented so that the private sector's external transactions are undertaken at an exchange rate lower than the highly-overvalued official rate. These policies have included permitting the full retention of foreign exchange earnings by private exporters, the trading of foreign exchange by domestic residents through foreign exchange accounts and FECs. Hence, there has been a de facto legalization of the parallel foreign exchange market, and by allowing this rate to be market determined, the aim was to allow a de facto devaluation. The second set of actions has aimed at encouraging exports by liberalizing the environment for foreign investment. Hence, attractive incentives are now offered to foreign investment that is export-oriented or generates foreign exchange (as in tourism) -- both for joint ventures and fully foreign-owned enterprises. Finally, measures have been instituted that attempt to link the availability of imports by SEs to export production. The import first and consignment import schemes are examples of such schemes (see footnote 3). Encouraging SE exports was also the aim of creating foreign exchange revolving funds for eight ministries in late-1992. These funds supplement the annual foreign exchange allocations, and are intended to be used to finance essential imports, which could then be used to increase export production. 1.49 Although these measures were intended to reduce the external deficit, their positive impact is difficult to discern.3 The primary reason, of course, is that the official nominal exchange rate remains at its highly overvalued level, and this rate still applies to all public-sector imports. At this rate, which is about one-twentieth that in the parallel market, excess demand for imports is substantial. Moreover, the main effect of the complex exchange rate system in place has been to segment the market for foreign exchange between the private sector and public sector (which includes the SEs). Private exporters, who are allowed to retain most of their export receipts, are the main source of foreign exchange for private sector imports. Hence, the external account of the private sector is roughly in balance. However, the excess demand for public sector imports is balanced only by the administrative allocation of foreign exchange by the Ministry of Finance. 1.50 The trends in the REER illustrate this continued discrimination against the tradeables sectors. As Figure 1.3 shows, the REER (evaluated at the parallel rate) at end-1994 had appreciated about 40% since 1985. But since all public-sector transactions are still conducted at the official rate, the real exchange rate is not determined by the parallel rate alone. A weighted-average REER (with the relative trade shares of the private and public sector as the weights) is also shown in Figure 1.3. By this measure, the bias against tradeables has increased, not only since 1985 by more than three-fold, but also since 1989, by over two-thirds. Thus, the current approach of allowing a backdoor devaluation in the unofficial foreign exchange market has done little to restore external balance. The Role of the Exchange Rate in Restoring Macroeconomic Stability 1.51 Adjusting the official exchange rate by unifying it with the parallel rate is the first and most essential step in addressing external and internal imbalances that still afflict the Myanma economy. 13 The microeconomic effects of these measures is dealt with in Chapter 2. This discussion focuses on their impacts on external balance. - 19 - The link between the overvaluation of the Kyat and the external imbalances in the economy is straightforward. Overvaluation imposes a large tax on the tradeables sector (production of exports and import substitutes) while favoring the non-tradeables sector. As shown in Figure 1.3, the magnitude of this tax has been reduced somewhat but not eliminated by the authorities' efforts to push all private-sector external transactions to the de facto legal parallel market. The impact of this bias against tradeables production is evident in the lack of growth in exports other than traditional primary products that still account for almost all exports. It has also stunted the growth of import substituting activities, which is one reason that there remains such strong pent-up demand for imports, especially consumer-goods imports. Annual merchandise import growth (in value terms) has averaged about 25% during FY90-95, and consumer-goods imports account for over a third of all imports. 1.52 The manner in which the exchange rate distortion has contributed to the internal imbalances in the Myanma economy is as straightforward as well as more subtle. As was noted, the key factor at the center of the current fiscal difficulties is the narrowness of the revenue base. The overvaluation of the Kyat, and the subsequent efforts to compensate for it, has contributed to this problem in three ways. First, revenues from imports in the form of customs duties and commercial taxes have been reduced compared to the situation if the exchange rate were at a realistic level. Overvaluation has meant that the Kyat value of imports (on which basis, customs duties and commercial taxes are assessed) is understated by a factor of about twenty, thus depriving the government of revenues of this order. Taking account of this degree of overvaluation, the effective average nominal import tariff in Myanma is less than 3% with obvious implications for government revenues. 1.53 The second reason that overvaluation has shrunk the revenue base is that more and more economic activity has been effectively pushed into the parallel economy, where it is outside the tax net. As the official exchange rate has become more overvalued, it no longer signals the true price of foreign exchange, a better approximation of which is the parallel rate. Hence, a growing portion of the economy, particularly the emerging private sector, now uses the parallel rate in its transactions. But with the use of these multiple exchange rates and the complex transactions system of which they are part, tax evasion has become much easier because the valuation of imports is almost entirely discretionary. Moreover, by officially sanctioning, and even encouraging, the segmentation of the foreign exchange market, the GOM has spurred the expansion of the parallel economy. This unofficial recognition of the parallel market in foreign exchange has meant that the line between legal and illegal economic activities in Myanmar is increasingly blurred. In this situation, the ability of the tax authorities to collect taxes and customs duties is limited. Despite a series of well-publicized tax amnesties in recent years, tax compliance thus remains a major problem area. 1.54 Finally, the overvalued exchange rate deprives many SEs and government agencies of revenues because it is used to maintain a complex and intricate set of cross-subsidies in the economy. Through their access to imported products (inputs or consumer goods) at the official exchange rate, various groups in the population (including many SEs) are provided large economic subsidies. An example is the economic subsidy provided to farmers who receive imported urea at prices that reflect the official exchange rate. Similarly, while petroleum products and electric power are provided at prices that do not require financial subsidies (and hence have no direct budgetary impact), their pricing reflects large economic subsidies. In this situation, relative prices in the official market are meaningless, and because of extreme shortages at the subsidized prices, active black markets have developed. For instance, gasoline is rationed stringently for most of the population at the official price of K25/lmperial gallon. However, much of the demand for gasoline is met through the parallel market where the price in Yangon, for instance, is about K200AImperial gallon. These subsidies are estimated in Table 1.7, and include those for rice, which are - 20 - unrelated to exchange rate overvaluation, but whose sales (mainly to government employees and mnilitary personnel) at prices far below international prices imply large financial and economic subsidies. 14 Table 1.7: Economic and Financial Subsidies to Consumers (million Kyats) Financial Subsidy Economic Subsidy FY90 FY95 FY90 FY95 Rice 179 540 4520 10277 Gasoline - - 607 2594 Diesel - - 1879 6391 Electric Power - - 4392 16456 Fertilizer 151 - 2397 6073 Total 330 540 13795 41791 Share of Govt. Revenues(%) 2.5 1.7 91.0 128.6 Source: Staff estimates (Annex 1. 1) 1.55 Impacts of an exchange rate adjustment. Therefore, adjusting the nominal exchange rate to a more realistic level is essential to resolving the macroeconomic imbalances in the Myanma economy. If this nominal exchange rate adjustment is to help restore external balance, it must translate into a substantial real depreciation of the Kyat. Achieving that goal would require that the GOM maintain tight fiscal and monetary policies. A nominal exchange rate devaluation would help by reducing the fiscal deficit by generating additional revenues, and reducing some expenditures due to the elimination of cross-subsidies that arise from the valuation of government imports at the official exchange rate. If current efforts to control expenditures are maintained, this should enable a sustainable slowing of monetary growth, thereby reducing inflationary pressures, by raising public savings. With a real depreciation of the Kyat, the external deficit would shrink by encouraging the flow of resources into the production of exportables as well as import substitutes. Finally, by unifying the private- and public-sector markets for foreign exchange, the process of economic restructuring would be facilitated because SEs would face economic prices for their inputs and outputs. 1.56 The positive impacts of a real depreciation on the current account deficit are difficult to quantify precisely, and a qualitative discussion of these impacts is provided in Chapter 2. It is possible, however, to provide rough estimates of some of the revenue increases that would accompany a nominal exchange rate adjustment. Customs duties and commercial taxes levied on imports would rise roughly by about the factor of exchange rate adjustment since Kyat import prices would rise to this extent. This translates into a revenue increase of about K105 billion."5 The other positive revenue impact would come 1' Due to lack of data, implicit and explicit subsidies on edible oil, most of which is imported and sold to government employees and the military, are not estimated here. 1' Although this is a rough first-order approximation since demand for imports will fall when their prices rise to reflect the higher taxes. it gives a sense of the extent of revenue lost at present. This estimate also assumes that the - 21 - from eliminating the large economic subsidies that are provided to users of electricity, petroleum products, and fertilizers. These impacts are estimated in Annex 1.1, and in FY94 amounted to K16.5 billion on electric power, K9 billion on diesel and gasoline and K6. 1 billion on fertilizers. In sum, these economic subsidies (K31.5.6b) were almost as large as government revenues in FY95. Obviously, government expenditures made in foreign exchange would also rise following such an adjustment. Apart from the increase in external debt service (para. 1.63), the net would be zero since the consolidated public sector has balanced foreign exchange flows (in cash terms). Maintaining Tight Fiscal and Monetary Policies 1.57 To control inflationary pressures following an exchange rate adjustrnent, it is essential that fiscal control be maintained, and that monetary growth be slowed. In reducing the fiscal deficit, there is not much scope for increasing revenues beyond those associated with the exchange rate adjustment. The main reason is that the volume of financial subsidies, which are being provided through the budget are already quite small in relation to the deficit (Table 1.7). The key, therefore, is to adjust the exchange rate so as to be able to capture the economic subsidies associated with overvaluation. It will also be necessary to continue to control expenditures tightly. Again, since little scope exists to cut capital expenditures further, the emphasis should be on finding ways to cut defense expenditure, which is the only category that has been protected since the reform program began. Financing the deficit that remains in a non-inflationary manner depends crucially on the availability of external financing. 1.58 Cutting the fiscal deficit would also allow a slowdown in the growth of public-sector credit, which would facilitate the tightening of monetary conditions. Along with this tightening, it is essential that interest rates be raised to positive real levels. This step would ensure that the allocation of credit to the private sector is done on an economic basis rather than being rationed, as it is at present. This outcome would become increasingly important in the future as the role of the private sector in the Myanma economy and its share in domestic credit grow. Positive real interest rates would also help increase financial savings, thereby helping to finance the large investment needs of the economy. Finally, as explained in Chapter 3, eliminating the subsidies that flow to SEs through negative real interest rates is a critical part of successful SE reforms. 1.59 The fiscal deficit and SE finances. The direct impact of the poor financial performance of SEs on the fiscal deficit is limited."6 In fact, the GOM's presentation of the fiscal relationship shows that in recent years, the SE sector has been a net contributor to government revenues since its current surplus, which is computed after contributions to the government, has been larger than its capital expenditures. 1.60 However, (as detailed in Chapter 3), this accounting is incomplete mainly because it leaves out the many economic subsidies that flow to SEs through the exchange rate and the interest rate, and other cross-subsidies through controlled input and output prices. Since the importance of controlled prices has probably diminished with the reforms since 1989, the main economic subsidies that remain are those current tariff structure is maintained and that a third of current commercial tax revenues are related to imports. Since these assumptions imply a high average nominal tariff of about 52% (see Chapter 2), a more realistic scenario would combine an exchange rate adjustment with a decrease in tariff rates. However, even if effective tariffs were to rise to about 12% (compared to the current 2.5%), tariff revenues would rise by about K16 billion, and commercial tax receipts would increase by over K35 billion. 16 The relationship between the Government budget and SE finances is analyzed in greater detail in Chapter 3 (see paras. 3.15 to 3.18). - 22 - provided through the underpricing of energy, imported inputs and capital. The precise impact of these cross-subsidies on individual SEs is difficult to evaluate. However, in aggregate, they weaken the government budget because they deprive it of the potential revenue that could be generated if the prices of these inputs were increased to their economic levels. 1.61 But, while removing these subsidies by adjusting the prices of these inputs will increase public saving somewhat by reducing the fiscal deficit, their impact will be muted unless the process of SE reform itself is deepened. For example, raising prices of petroleum products will improve the finances of the SEs that import and distribute these, and contribute to higher public saving. However, it will also lead to a significant deterioration in the finances of most other SEs, which account for more than half the total consumption of these products. Unless steps are taken to ensure that those losses are not automatically transferred to the government budget, as they would at present, the net positive fiscal impact would be much reduced. Hence, any serious attempt at reducing the drain of SEs on the government budget would have to combine the removal of subsidies (by adjusting the exchange rate and interest rates) with SE reforms that enhance financial discipline by ensuring that enterprises face hard budget constraints. 1.62 Impacts on inflation and debt service. These arguments in favor of a large adjustment in the nominal value of the Kyat are well understood by most policymakers in Myanrar. Their reluctance to take this step, despite the willingness to pursue reforms in other areas, has stemmed mainly from the fear of two sets of adverse economic repercussions. Thefirst has been that a large devaluation would worsen inflationary pressures. By raising prices of imported inputs and consumer goods, especially for SEs, a devaluation would lead to an inflationarv spiral that would lower living standards, and could threaten political stability. This argument exaggerates the potential price impacts of a devaluation. The main reason is that, for the bulk of the population, a significant portion of the price adjustment to a Kyat devaluation has already taken place. Since almost all of the private sector's purchases of imported goods are made at the unofficial exchange rate, it is that value of the Kyat rather than the official rate, which has been relevant to their consumption for the last two or three years. The other reason to doubt that a large devaluation would seriously worsen inflationary pressures is because of its positive fiscal impacts, both directly as well as through SE finances (para. 1.60). The resultant fall in the fiscal deficit should allow the authorities to tighten monetary policy further, and consequently dampen inflationary pressures. 1.63 The second negative impact feared by policymakers is that on external debt. Obviously, a devaluation (especially of the order necessary) will increase the Kyat equivalent of external debt service payments substantially, and to this extent, increase the fiscal burden substantially. A rough estimate of this increase due to the first-round effect of unifying the official and parallel rates (at about KI 10/$) is about K. 37.1 billion. However, this impact, although huge, should not be used to postpone action on the exchange rate because the increase is largely notional. Despite the increase in Kyat terms, the foreign exchange value of debt service, which is its real value, is obviously unchanged. Moreover, as Table 1.6 showed, substantial arrears are already being accumulated, even with the overvalued Kyat, demonstrating that the situation is unsustainable unless export earnings can be increased and repayment terms modified on outstanding bilateral debt. These events are far more likely with a large devaluation than if the current situation is allowed to persist. 1.64 Winners and losers. Continued unwillingness to adjust the exchange rate also stems from the fear that some groups in the population would lose as a result. Any package of reforms involves winners and losers. What is relevant, however, is the extent to which the gains outweigh the losses. And, if macroeconomic stabilization measures are implemented forcefully, the potential gains in terms of economic growth and efficiency would be vastly greater than the losses. - 23 - 1.65 The main losers from adjustment of the exchange rate would be those who have access to official imports, either directly or indirectly through the resulting cross-subsidies. Those with direct access to cheap imports include many SEs, which receive underpriced inputs while exporting little, as well as sections of the population who (mainly government officials and military personnel) receive these products through government shops and rations. The indirect beneficiaries include consumers of petroleum products and electric power at official prices. While difficult to estimate precisely what part of the population receives these subsidies, it is unlikely to be a large proportion given that three-quarters of Myanmar's population is still rural. Similarly, those who gain the most from interest rate subsidies are SEs and consumers of their products. 1.66 Against the short-term losses of these groups should be weighed the gains to the economy from reforming the exchange rate and interest rate systems. Unifying the exchange rate system would encourage the production of exports and import-substitutes and employment in these activities would expand. It would also send a strong signal to foreign investors about the coherence of the ongoing economic reform efforts, and thereby help boost foreign investment flows, particularly into export sectors. By helping to reduce the fiscal deficit and better allocating credit demand, inflationary pressures could be better controlled. And by contributing to export growth while controlling import growth, it would reduce the need to accumulate further external arrears. By helping to restore the Myanma economy to a path of sustainable medium-term growth. these reforms, thus, have the potential to benefit far more people than those who would lose from its immediate impacts. The Costs of Inaction 1.67 While the adverse economic and political effects of macroeconomic reforms have been emphasized, too little attention has been focused on the economic costs of continued inaction, particularly on the exchange rate. Without an exchange rate adjustment, both inflation and the ability to service external debt are likely to worsen. Inflationary pressures will continue unabated because, as argued before, no sustained improvement in the fiscal situation is possible without a broadening of the revenue base. The longer an exchange rate adjustment is postponed, the more the ability to raise revenues will diminish. The financial and operational condition of many SEs will also continue to worsen as they bear the burdens of the economic subsidies that are provided to a few consumers through the overvalued Kyat. Finally, the current account balance will continue to worsen without the elimination of the bias against tradeables due to overvaluation. Hence, external arrears will continue to increase. 1.68 The obvious conclusion from this counterfactual is that an eventual adjustment of the exchange rate is inevitable. Postponing that adjustment is likely only to delay the resumption of sustained growth of the Myanma economy, and, therefore, would impose large economic costs in terms of foregone output. A less costly alternative would be to acknowledge the pressing need to restore macroeconomic stability, and assign the central role in this strategy to an adjustment of the nominal exchange rate and the interest rate. The policy discussion could then shift, more fruitfully, to the questions of how such adjustments would be accomplished and, as important, of how consistent fiscal and monetary policies could be pursued so that this nominal exchange rate adjustment translates into a real depreciation. - 24 - 2. CHANGES IN THIE INCENTIVE STRUCTURE A. BACKGROUND 2.1 The GOM's reform program has three clear features that distinguish it from the development strategy that was followed between 1962 and 1987. First, it aims to integrate the Myanma economy with the rest of the world through trade and investment links. This contrasts with the autarky that was emphasized in the previous period. Second, it seeks to recognize the importance of the agricultural sector in accelerating medium-term growth. Hence, the earlier biases against agricultural production in favor of the industrial sector are to be reduced. Finally, the role of the private sector in development would be emphasized. The many restrictions on private-sector involvement in economic activity are to be removed, and the role of the State Enterprises (SEs) in the economy is to be rationalized. 2.2 The aim of this Chapter is to assess the extent to which the recent reforms have altered the structure of incentives in these directions. The next section examines recent changes in the outward orientation of the Myanma economy. The focus is particularly on whether the reforms have reversed the previous bias against tradeables (exports and import-substitutes) through the overvaluation of the exchange rate. Section C analyzes the effects of the reforms in pricing and marketing on the agricultural sector. The emphasis is on assessing the effective taxation of paddy production, which is the most important part of Myanma's agricultural sector. The final Section examines how far the biases against the private sector, both domestic and foreign, have been removed. Particular attention is paid to whether the domestic private sector continue to have less-favored access to key inputs and services compared to SEs. B. EXPANDING EXPORTS 2.3 A key feature of the shift towards a market-oriented economy in Myaunar has been the acknowledgment of the need for greater integration with the world economy. Specifically, the main impetus for growth would come from the expansion of exports rather than, as in the past, from the pursuit of a policy aimed at import substitution and autarky. One aspect of these reforms intended to increase the openness of the Myanma economy has been the liberalization of the foreign investment regime (para. 1.29). These measures were among the first to be implemented as part of the GOM's "Open Door" economic reform program, and are discussed further in Section D of this Chapter, which deals with the role of the private sector. This section focuses mainly on the policy issues raised by the second set of reforms that have aimed at encouraging exports. These measures include allowing exporters to retain their foreign exchange earnings, and to trade these through foreign exchange accounts. Structure of External Trade and Recent Export Performance 2.4 Trade orientation. Despite the recent reforms, Myanmar remains an extremely closed economy. The shares of imports and exports to GDP in 1994 were each between 2% and 3%. The lack of outward orientation of the Myanma economy is in stark contrast to its neighbors, not only in East Asia but also in South Asia, which until recently have themselves not been exemplars of openness (Table 2.1). Moreover, there has been little increase in these trade shares since 1990 or even as far back to 1984. - 25 - Table 2.1: External Trade Shares - Selected South and East Asian Economies, 1993 Share of imports to GDP" Share of exports to GDP " (%) (%) Myanmar 3 2 Indonesia 26 28 Philippines 41 32 Thailand 41 37 Malaysia 75 80 Vietnam 32 28 India 11 11 Bangladesh 18 12 1/ Imports and exports of goods and non-factor services Source: World Bank 2.5 Structure and growth of exports. There continues to be little diversification in Myanmar's exports. As in 1970, merchandise exports are made up almost entirely of primary commodities (Appendix Table 2.2). This lack of diversification over the last quarter century differs from the other economies of East and South Asia, a major component of whose export success has been diversification away from primary products (Table 2.2). The export trend has changed in one respect though. Merchandise export growth, consisting mainly of agricultural and forestry products, has averaged over 14% annually in FY91- 95 compared to an annual average decline of over 8% in the early-1980s. - 26 - Table 2.2: Diversification of Exports - Selected South and East Asian Economies % Share of Primary Commodities "' 1970 1992 Myanmar 91.6 91.2 Indonesia 54.3 14.9 Philippines 69.8 18.8 Thailand 77.1 31.6 Malaysia 62.7 22.0 Vietnam b' 86.7 67.5 India 35.2 21.0 Bangladesh 35.0 18.2 a/ Excluding fuels, minerals and metals. b/ Data are for 1980 and 1992 instead of 1970 and 1992. Source: World Bank, World Development Report, 1994, and BESD database. 2.6 Export markets. There has also been little change since FY91 (or even a longer period) in the destinations for Myanmar's exports (Appendix Table 2.4). Neighboring countries are still the main markets. India, Singapore, Thailand and China collectively account for about 58% of exports. The share of industrial countries in exports has remained stagnant at about 10% to 12%, reflecting the rudimentary state of export infrastructure and support, which makes it difficult to reach those markets. 2.7 The major change in the structure of external trade since FY90 is the expansion of the role of the private sector. As private activity has expanded in the economy, much of it has gravitated towards foreign trade. Figure 2.1 shows that the private shares of imports and exports have risen sharply since FY90 at the expense of the state sector (including cooperatives).) Most private-sector imports are consumer goods and basic intermediates (such as cement) from neighboring countries while exports consist mainly of agricultural produce (such as pulses and beans), and timber. l These shares likely underestimate the true importance of the private sector in external trade since a large proportion of that trade probably goes unrecorded. - 27 - Figure 2.1: Myanmar: Exports and Imports by Sector 60 S ..: ..- -.--..-..... - -- X . --.. --.,-,... '.. - ,-, --::."- ;"'-'.,,..-'.,...-..... 40 ..... . 0 - : 1 : . . . . . .;. .... . : : :.:.:.:.:. :....::-::::'::::' ' >~~~~~~~~~~~~~~~~~~ . ... . . ... ....p _~~~. . . . . . . . . . . . . . . . . . _ 20 0 IN m ; LL LL LL LL - LL. O ------ -Private exports - - - - Public exports : --- - Private imports Public irports Source: MFR, Customs Department. The Policy Environment for Exports 2.8 While the GOM has publicly stated its commitment to export-led growth, the issue remains as to how much progress has been made in establishing a policy environment that is supportive to this goal. The experience of the past quarter century, especially from the export-oriented East Asian economies, points to four main determinants of export success: a competitive exchange rate; few export restrictions; easy availability of imported inputs; and access of exporters to supporting infrastructure and services. The impacts of the economic reforms in these policy areas is discussed below. The Exchange Rate System 2.9 The main determinant of whether the absolute profitability of export production has improved over time is the change in the exchange rate. An exchange rate that is consistently overvalued (in terms of the value of the Kyat) penalizes exporters. Hence. overvaluation over a long period signals to domestic producers that it is less profitable to produce for export markets than to focus on the domestic market. No amount of rhetoric about the importance of exports can compensate for this disincentive to exports, and over time, private businesses will respond by abandoning legal export activity. 2.10 Trends in the official exchange rate. Since 1977, the official exchange rate (Kyats in terns of the SDR) has been fixed at 8.51. Hence, the Kyat has appreciated at the official rate (relative to the $) from 8.47 to 5.98 kyats in 1994. The nominal effective exchange rate (NEER), which is weighted by the trade shares of Myanmar's seven largest Asian trading partners, shows a similar trend, with a slight appreciation during 1985-94 (Figure 2.2)2. 2 The seven trade partners are China. Hong Kong. India, Indonesia, Malaysia, Singapore and Thailand. - 28 - Figure 2.2: NEER and RER Trends with Official Rate - Major Regional Trading Partners 800.00 700.00 - - ° 600.00 r II' 500.00 / 400.00 * 300.00 - X 200.00 - . 100.00 0.001 I I I I 1 I rf _ __ _ _ __ __ E NEER---- ~ RERt Source: Staff estimates. 2.11 But these trends in the nominal rate understate dramatically the actual bias against export production due to this fixed exchange rate regime. The nominal rate leaves out the impact of differential inflation between Myanmar and its main trading partners. Since Myanmar's inflation rate in the last decade has been much higher than most of its trade partners, the disincentive to exports due to a nominal fixed exchange rate has been exacerbated. Between 1985-94, Myanmar's CPI level has risen to over twice the CPI level in China, four times the CPI level in Thailand, and five times that in Singapore. 2.12 Adjusting the nominal exchange rate to take account of differential inflation, the resulting measure -- the real exchange rate (RER) -- is the key indicator of the profitability of exporting from Myanmar.3 The trend in the RER (using the official rate), calculated with respect to a group of East Asian economies, is also shown in Figure 2.2. The dramatic appreciation in the RER shows just how unprofitable it has become since 1985 to export at the official rate. At end-1994, a Myanma exporter who was compensated at the official rate earned less than a seventh of the foreign exchange value for his merchandise relative to a decade earlier. Obviously, overvaluation of this magnitude would persuade anyone forced to use the official rate to switch away from export production. The sluggish performance of exports over the last decade is unsurprising given this incentive structure. A comparison of the trends in the RER and the NEER also shows how much the higher inflation rate (relative to its trading partners) has contributed to the erosion of export profitability. The NEER has appreciated only by about 60% during the last decade, while the RER has risen seven--fold. 2.13 The parallel exchange rate. The principal reform in the foreign exchange regime since FY90 has been the GOM's relaxation of the regulations concerning conversion of private sector export 3 The RER is computed as a trade-share weighted exchange rate adjusted by the differential CPIs in the various trading partners. Obviously, a number of such indices can be computed depending on how many trading partners are included. In this Section, seven Asian economies, which collectively account for about two-thirds of Myanmar's external trade, are included. On the other hand, the RER used in Chapter 1 was based on all trading partners. The smaller set of partners is chosen here to focus on Myanmar's competitiveness in the regional context. - 29 - earnings at the official rate. By allowing progressively more of these earnings to be retained legally by exporters (and since 1989, 100% retention has been permitted), the parallel market has been recognized de facto by the authorities.4 Although a parallel foreign exchange market has existed in Myanmar since the 1970s in response to sustained overvaluation of the Kyat, allowing retention and the use of foreign exchange-denominated deposits in the Myanma Foreign Trade Bank (MFTB) have meant that the size and depth of this market have grown considerably since FY90. Some estimates now place its share of the foreign exchange transactions at between 50% and 60% of the total. All trade conducted by the private sector is now carried out at the parallel exchange rate, and most domestic transactions are also denominated at the parallel rate. 2.14 The importance of the parallel market, and its recent growth, mean that the trends in the RER using the official exchange rate underestimate the true profitability of private sector exports. This view appears to underlie the GOM's recent attempts to expand the scope of this market. Before evaluating its validity, adjusted measures of the RER and NEER are shown in Figure 2.3 (for the same trading partners as in Figure 2.2). These estimates use the parallel exchange rate instead of the official rate. The extent of overvaluation of the Kyat falls considerably with this adjusted RER since the parallel rate, unlike the fixed official rate, has depreciated (in nominal tenns) since 1985, and particularly since 1989. However, there has been a real appreciation of the Kyat even at the parallel rate -- an exporter using the parallel rate received only about half of the Kyats (adjusted for inflation) in 1994 compared to his returns in 1985. As with the appreciation of the official rate, the impact of higher inflation in Myanmar is evident. While the parallel-market NEER depreciated almost to 40% of its original value, the parallel-market RER appreciated by over 100% during 1985-93. Figure 2.3: NEER and RER Trends with Parallel Rate - Major Regional Trading Partners 220.0 200.0 - 180.0 -- I 160.0 or X I I 140.0 .X | 120.0 100.0 80.0 n 60.0 40.0 ......... 20.0 0.0 + i 6 In eU D t- CD a) oo co coXa)c 10q j <.~~~~NER----NEER So?urce: Staff estimates 4 The retention ratio is 75 perceni for foreign exchange earnings from exports of factor and non-factor services, and inward remittances. - 30 - 2.15 Hence, the Kyat has appreciated in real terms even when the parallel- market exchange rate is used. Although the extent of appreciation is lower than when the official rate is used, the profitability of private-sector exports has still not recovered to its level of a decade ago. There are two other problems with the GOM's efforts to improve export profitability by expanding the scope of the parallel market. First, while private-sector trade is conducted at the parallel exchange rate, the official exchange rate is still used in valuing almost all the external transactions of the public sector -- both SEs and administrative departments. There has been no change in this system, and its means that the exports of the SE sector are undervalued substantially. Hence, even if SE managers were to become more profit- oriented, there would still be little incentive for them to make efforts to expand exports. 2.16 The second problem with this segmented exchange rate system from the perspective of the incentives for export is that it increases transactions costs for exporters. Since the parallel market is not recognized officially, a multiplicity of parallel market exchange rates exists at any time.5 Moreover, its unofficial status also means that it is unregulated, and therefore, transactions are risky and must be based on personal links rather than the arms-length relationships that exist in more organized markets. These risks are heightened in the context of Myanmar, where memories of two rounds of large-scale 6 demonetization in the 1980s remain vivid . For these reasons, allowing exporters to transact on an unofficial parallel market will not be enough to meet the authorities' goal of improving export profitability. W.hile access to the parallel market does reduce the tax on exports due to the overvaluation of the Kyat, the complexity and costs of conducting external trade in this way are so high as to make a substantial expansion of private-sector exports impossible. 2.17 The GOM has attempted to reduce some of these costs of transacting in the parallel market. It has created tradeable Foreign Exchange Certificates (FECs), each of which is equivalent to a dollar, and has allowed foreign exchange-denominated accounts in MFTB. However, the restrictions placed on these transactions has reduced their efficacy in easing external trade. Foreign exchange accounts may only be opened by Myanma citizens with FECs or with foreign currency accompanied by a Customs' export declaration. Hence, those who engage in border trade (and, therefore, lack the necessary Customs' declaration) must first acquire FECs in return for their foreign exchange in order to open these accounts, which are then subject to a 10% tax. While this tax exists ostensibly to discourage the conversion of foreign exchange proceeds from smuggling, it reduces the attractiveness of these accounts for many potential private exporters. Export Restrictions and Taxes 2.18 With the economic reforms, quantitative restrictions on private sector exports have been eliminated in most areas, the notable exceptions being paddy, rice, teak, most minerals and pearls. The most serious restraint is the continued ban on paddy and rice exports. The full impact of this prohibition on 5 For instance, a quasi-official publication aimed at foreign investors in Myanmar reported that in July-1994, parallel foreign exchange market rates were as follows, in Kyats (K): 1 FEC = K105.00; $1 (cash) = K110.00; for unofficial inward remittances ("Handis"), $1 = K115: in pricing imported durables, $1 = K120; for dollars available to import goods, $1 = K 135. 6 During each of these rounds of demonetization. in 1985 and 1987, about half the currency in circulation was declared worthless. - 31 - the paddy sector is dealt with below in the next section on agricultural incentives. However, the continued maintenance of this ban is incompatible with the movement towards free trade. By allowing rice exports only by government agencies, the price that farmers receive for paddy is, on average, a sixth lower than its export parity price, which is the price that the government agencies receive on rice exports. Hence, this ban allows the government, in effect, to tax paddy farmers to this extent (para. 2.42). This policy not only constitutes a continued bias against paddy farmers, it also discriminates against the sector of the economy with the greatest potential to expand exports in the short and medium term. The success of Viet Nam in expanding rice exports when it eliminated the export ban is instructive in this regard. 2.19 In December 1994, the commercial tax was amended to include a tax of 5% on the export earnings of all private-sector businesses (including joint ventures), which is payable in foreign currency. Despite its relatively low rate, this tax only worsens the anti-export bias already implied by the exchange rate system. Access to Imported Inputs 2.20 Evidence from countries that have successfully expanded exports indicates that ensuring access to imported inputs at world prices is just as important in encouraging exports as maintaining a competitive exchange rate. Obviously, imported inputs are cheap in Kyat terms when valued at the official exchange rate. However, the large excess demand for imports that arises in this context (without an adjustment of the official rate) can onlv be maintained by rationing the availability of foreign exchange. Since the economic reforms began, this rationing has operated by segmenting the foreign exchange market. The private sector has been allowed full retention of its export earnings but has no access to any of the foreign exchange available to the GOM.7 Hence, all private firms, including potential exporters, can import inputs only if they can generate their ow-n foreign exchange earnings or can locate another private exporter. While transfers from foreign exchange accounts are pernitted, these can only be made into existing accounts, not into new accounts -- a restriction that in practice reduces their usefulness. 2.21 The risks and transactions costs due to this segmentation have already been noted (para 2.17). Obviously, trade financing is not available in this context, while the access of potential exporters to imported inputs remains limited even through the parallel market. And the situation is exacerbated by the import licensing restrictions that remain. Even though private importers are not allocated any foreign exchange by the GOM, they are still required to import a proportion of items considered priority goods by the GOM (as specified on Schedule A of the regulation, including fertilizers, cooking oil, livestock and machinery), along with their own imports of non-prioritv items (specified in Schedule B) or other goods ("neutral items').8 Although these imports from Schedule A can then be sold by the private importer at any price (ostensibly including the parallel market), this requirement effectively increases import costs even further. Since importers are forced to source items about which they likely have little information, loss of specialization results, and importers cannot focus on locating the cheapest sources and most profitable mix ' The main official sources of foreign exchange are: the proceeds from exports by SEs, signature bonuses from mineral concessions, the 25% of foreign exchange service income and remittances that must be converted, and 10% of overseas Myanma workers' earnings. 8 For items on Schedule B, importers must import goods on Schedule A of the same value. For "neutral items", importers must import goods on Schedule A worth 50% of the value of the desired "neutral item" imports. - 32 - of their imports. The net result is that imported inputs for potential exporters are even more scarce and costly. 2.22 The overvalued exchange rate not only limits access to imported inputs; it also discriminates against the domestic production of many import substitutes. By keeping Kyat prices of imports low, overvaluation makes it unprofitable for domestic producers to enter into import-substituting activities. This effect on incentives over the long period that the Kyat has been overvalued is the main reason that import substitution industries have barely developed in Myanmar despite consistently high tariff protection (para 2.23). While imports are obviously not freely available at their low official-market prices, the incentives for producing import substitutes are still determined in part by those prices. And the existence of large scarcity rents associated with the resale of these imports means that it has been far more profitable to trade in these imports rather than attempt to produce them domestically. 2.23 In many countries making the transition to export-led growth, high and uneven tariffs constitute a major constraint on exporters' access to imported inputs at world prices. The misalignment of the exchange rate, and its attendant implications on the availability of imports, means that the tariff structure is a second-order problem for Myanmar at present. Since the assessable value of all imports (including private-sector imports) is calculated at the official exchange rate, it is so low, when evaluated at a realistic exchange rate, that the effective duty rate is much lower than the statutory rate. The trade- weighted average tariff rate in FY94 was about 52%.9 However, recognizing that all import values are understated about twenty-fold, the average effective tariff is about 2.5% -- easily among the lowest in the developing world. 2.24 However, the reform of import tariffs should be a priority once the misalignment of the exchange rate has been corrected. The current structure is excessively complex with 23 duty bands, which go as high as 500%, in addition to a number of specific duties. Also, the current average tariff is too high, compared for instance to Myanmar's neighbors. For instance, the highest nominal tariff in Vietnam is 200%, while the average unweighted tariff is about 12%, while the trade-weighted average tariff in China is 32%. '° When a realistic exchange rate policy is adopted, the current high and variable tariffs would protect production for the domestic market from imports. Hence, they would impart an anti-export bias to the structure of incentives and discourage exports by making it relatively more profitable to produce for the domestic market. The other lesson from neighboring economies in export promotion is to combine tariff reform with implementation of schemes that provide drawbacks and rebates of import duties on imported inputs used by exporters and this too should be a priority once an exchange rate adjustment has been accomplished. Support Services for Exporters 2.25 The final set of determinants of the efficacy of export promotion efforts is the quality of support that exporters receive in such areas as information, finance, and transportation. There have been efforts recently to address the problems faced by private exporters in some of these areas. For instance, the Customs Department has sought to facilitate private-sector exports by: reducing the necessary 9 This computation is based on import data for FY94, which were provided by the Customs Department. '0 Average tariffs are much lower in other East Asian countries, ranging in the early-1990s from less than 10% (unweighted average) in Malaysia to 28% (trade-weighted average) in Thailand. See, World Bank, (1994), for details. - 33 - documentation; allowing the use of provisional assessment and deferred control, which permits large importers to clear imports on the basis of their declared valuation; and, increasing its staff and upgrading their skills. 2.26 Despite these efforts, much more is required if the enabling environment in Myanmar is to improve sufficiently to enable rapid export growth. The adequacy and quality of the infrastructure needed for external trade are key problems. For instance, there are no bonded areas for exports that would facilitate the clearance of exports, while pre-inspection of cargo is possible only for public sector exports. Yangon port, which is the country's principal port, is congested and with little mechanization, has little capability to handle container cargo. Moreover, since preference is given to public-sector shipments, long waiting periods are common for private importers and exporters. 2.27 The segmentation of the foreign exchange market that has resulted from the misalignment of the exchange rate and the scarcity of foreign exchange have also meant that trade finance is almost impossible to obtain. MFTB, which is government-owned, essentially operates only as a foreign exchange clearing house for the private sector. It provides exporters such services as opening letters of credit, negotiating export bills and arranging transfers, but does not provide trade finance. While four of the recently-opened private banks have been licensed to deal in foreign exchange, they do not currently finance external trade due to the lack of foreign exchange. C. PROMOTING AGRICULTURE 2.28 In the past eight years, the system of socialist agricultural policies that had existed since 1962 has been dismantled progressively. The forced procurement of output of many crops (including paddy, maize, pulses and oilseeds) by the government was discontinued in 1987, and private trading of these was permitted. In 1988, government control over cropping decisions was relaxed substantially, and except on paddy land (see para.2.54), farmers are now free to make their own cropping decisions. Except for rice and some industrial crops, private exports of agricultural produce has also been permitted since 1988. Finally, private sector provision of agricultural inputs is also now allowed. 2.29 These reforms have altered substantially the policy context in which the agricultural sector operates. The degree of government control over cropping, pricing and marketing decisions of farmers has diminished. Private marketing of agricultural produce is now well-developed in domestic markets, as well as for exports of crops such as pulses and oilseeds. This section evaluates whether the bias against the agricultural sector that had existed under the previous policy regime has been eliminated due to these reforms. Structure and Recent Performance of the Agricultural Sector 2.30 The share of the agricultural sector in GDP has increased during FY91-95 and is now almost 55% (Appendix Table 1. 1). This increase reflects the more rapid recovery in agricultural output since the GOM initiated its reform measures. The importance of the agricultural sector is also evident in that it provides employment to almost two-thirds of the work-force (Appendix Table 10.1). 2.31 Of Myanmar's total land area, about 13% was cultivated in FY94 -- an increase of about 10% since FY89. Despite this increase in sown area, a substantial amount of land that is classified officially as either fallow (2% of total land in FY95) or as wasteland suitable for cultivation (12% in FY95) still remain uncultivated. These areas provide one indicator of the substantial untapped potential for agricultural expansion in Myanmar. Cultivation is carried out predominantly by small farms. In terms of - 34 - the number of farms, almost 87% are less than 10 acres, and these account for about 59% of the total cultivated area. Farms over 50 acres are less than I % of the total number and cultivate about 2% of total land. 2.32 The major crop is paddy, which in FY95 was cultivated on about 15.3 million acres, representing an increase of over a quarter compared to FY85 and FY90. The other main trend during FY91-95 was the doubling in the area under cultivation of pulses, which have now displaced sesame as the second-most widely cultivated crop (Appendix Table 9.1). However, in terms of the areas cultivated for the four most important crops (sesame and groundnuts are the others), only paddy and pulses have more than recovered to their FY85 levels. Similarly, for the two main industrial crops -- cotton and sugarcane -- the areas cultivated in FY95 were still far below their FY85 levels. Hence, much of the expansion in cultivated area since FY91, other than for paddy and pulses, has served only to regain the ground lost during FY85-89. 2.33 These trends are mirrored in the crop production and yield data. Until FY93, paddy production remained below its FY85 level, and by FY95, it was about 32% higher. The production of pulses rose spectacularly, by more than 130%, during FY85-95, after falling in the late-1980s. However, output levels of all other major crops, including groundnuts, cotton, and sugarcane are still below their FY85 levels, despite recent increases. Moreover, yields of all crops including paddy have remained stagnant (Appendix Table 9.2). 2.34 This brief overview of the Myanma agricultural sector illustrates its recent recovery but highlights even more starkly its unfulfilled potential. With its rich physical endowments, considerable scope still exists for a substantial expansion in agricultural output. Soils are generally fertile, rainfall in the main paddy-growing regions is plentiful, cropping intensities are low, and the supply of cultivable land is far from exhausted. The comparisons of yields and fertilizer utilization in Table 2.3 illustrate this potential for paddy. Even with the lowest intensity of fertilizer use in this group, Myanmnar's paddy yields are higher than in Thailand, Bangladesh, and India, and not much lower than in Sri Lanka and Viet Nam. Its inability to exploit this agricultural potential since the 1960s reflects mainly inappropriate policies, in output pricing and marketing, input supply and land tenure. - 35 - Table 2.3: Fertilizer Utilization and Paddy Yield In Selected Asian Countries Total Nutrients (kg per ha of Paddy Yield Country cropped land in 1992) a/ (Kg/ha, in 1993) Myanmar 7 3,055 Bangladesh 103 2,664 China 300 5,854 India 72 2,822 Thailand 54 2,128 Indonesia 115 4,333 Sri Lanka 96 3,135 Vietnam 135 3,429 a/ Total nutrients N+P+K; cropped land area refers to arable and permanent cropped land area (FAO estimates). Source: FAOFERT, BESD and FAO Production Yearbook, 1993. Government Intervention in the Paddy Sector 2.35 Since paddy is dominant in the Myanma economy in terms of both production and consumption, this analysis of the current incentive structure for agriculture will focus on paddy. As is discussed below, paddy cultivation continues to be discriminated against and removing these biases constitutes the key area for further policy reform in agriculture. 2.36 The liberalization of agricultural pricing and marketing in 1987-88 undoubtedly increased the prices being received by farmers. For paddy, in particular, it was estimated that farmers generally sawv increases of eight to ten-fold in farrngate prices during 1987-90." Since there has been no attempt to reestablish government control over agricultural marketing, this improvement in incentives has been maintained. However, the level of farmgate prices is an inadequate measure of the incentives facing agricultural producers because it does not take account of the extent to which farmgate prices are below the market price because of forced procurement and export restrictions. Nor does it examine the extent to which the government prescribes farmning choices to farmers or limits the security of their land tenure. 2.37 To take account of these factors, the discussion in this section focuses on three determinants of the incentive structure facing paddy farmers. The first is the implicit net taxation of farmers through the structure of output and input prices, and export restrictions. The main policies examined here are the government's paddy procurement policies, pricing of fertilizer, and the ban on private-sector paddy exports. Second, the land tenure situation is examined for paddy farmers. The focus is on the extent to which ownership and use rights to paddy land can be traded, leased and inherited. Finally, the freedom of paddy farmers to make choices regarding cropping patterns and input use is evaluated. The current situation in this regard is contrasted with that in the pre-reform era. " See Harrison (1990). - 36 - Implicit Taxation of the Paddy Sector 2.38 While private participation in paddy marketing is now widespread, and there appears to be little government control over the prices that private traders can offer, an elaborate paddy procurement system still operates. The paddy procured in this manner is either sold domestically (at subsidized prices) to military personnel and govemment employees through fair-price shops, or is exported.'2 2.39 Govemment procurement. Paddy is procured on behalf of the Government by the Myanmar Agricultural Produce Trading (MAPT) under the Ministry of Trade. In FY95, it procured an estimated 2.1 million tons of paddy, which was about 11% of total paddy output. Procurement by cooperative societies was substantial in the past but is now negligible. Trends in paddy procurement quantities, and average procurement prices are shown in Table 2.4. The prices at which paddy is purchased by private traders is also shown, and indicates that although the ratio of the Government procurement price to that paid by private traders in FY95 was higher than in FY91, it has fallen in recent years. Procurement is done under an advanced sales system whereby cultivators receive half the total value of the procured rice in advance, so that it can be used as working capital to purchase seed and fertilizer. Table 2.4: Paddy Procurement FY91 FY92 FY93 FY94 FY95 Quantities Procured Procurement by Govemment ('000 tons) 1504 1558 1649 1926 2087 Shareoftotaloutput(%) 10.8 11.8 11.1 11.5 11.1 Procurement by Cooperatives ('000 tons) 347 536 571 13 4 Share of total output (%) 2.5 4.1 3.9 0.1 0.02 Purchase Prices (Kyats/ton) Government a/ 2297 2320 2308 3553 3833 Cooperatives 2420 2420 3448 4491 3683 Private traders 2546 3564 4424 7045 7668 Ratio of price (govt./private traders) 0.9 0.65 0.52 0.50 0.50 a/ These purchase prices, and thus their ratio to the price offered by private traders, are higher than that shown in Table 2.5, which is more reliable since it was provided by MOA and MAPT officials. Source: MNPED, Planning Dept. 2.40 The procurement system lowers the average farmgate price received by the farmer relative to the average price paid by private paddy traders. This reduction varies slightly across the three principal paddy growing regions because while the paddy procurement price is fixed across regions, different amounts are procured in each region. The procurement amount is determined per acre, and varies from 5 12 It was reported to the mission that in 1994, for the first time, a portion of paddy exports was made by the Ministry of Agriculture (in addition to the usual agency under the Ministry of Trade -- the Myanmar Agricultural Produce Trading) and that those exports were procured at domestic market prices. - 37 - baskets/acre where traditional paddy varieties are grown, to 1 I baskets/acre in the other two regions in which rainfed high-yielding varieties and irrigated high-yielding varieties (HYV) are cultivated.'3 The impact of these variations in procurement amounts on the average farmgate prices for paddy in the three regions is shown in Table 2.5. Hence, the proportionate price reduction due to procurement alone varies from about 8% to 11%. Table 2.5: The Impact of Paddy Procurement and Export Ban on Farmgate Prices (Kyats per basket)"' Traditional HYV HYV Paddy Paddy Paddy (rainfed) (irrigated) Procurement price 70.0 70.0 70.0 Domestic market price 200.0 200.0 200.0 Export parity priceb/ 240.6 240.6 240.6 Average farmgate price after 184.5 175.2 179.0 procurement Price reduction (farmgate price relative 7.7 12.4 10.5 to domestic market price (%) Price reduction (domestic price relative 16.9 16.9 16.9 to export parity) (%) 1I basket of paddy = 46 lbs bt This estimate is based on the average 1994/95 price for rice (FOB Yangon) of $205/ton, and adjusts for transport and milling costs as indicated in Annex 2.1. Souirce: MOA, and staff estimates (Annex 2.1) 2.41 These estimates show that paddy procurement taxes farmners because it reduces the average price they receive. The total income loss to farmers due to procurement alone is estimated in Table 2.6, and exceeds Kyat 15.3 billion. The magnitude of this tax can be gauged by noting that it is almost seven times the total income tax yield in Myanmar, and over three-quarters of the total tax collections in FY94. Obviously, the land tax of Kyats I to 3/acre (on unirrigated land) and Kyats 10/acre (on irrigated land) that paddy farmers must pay is minuscule by comparison. 13 These and other data on the paddy sector in this section were provided to the mission by the Ministry of Agriculture. One basket of paddy is approximately 46 pounds. - 38 - Table 2.6: Taxes on Paddy Sector Due to Procurement and Export Ban Traditional HYV Paddy HYV Paddy Paddy (rainfed) (irrigated) Total harvested area (m.acres) 6 3 5 Output procured (baskets per acre) 5 11 11 Total quantity procured (m. baskets)a' 30 33 55 Income loss to farmers due to 3900 4290 7150 procurement (m. Kyat) Income loss to farmers due to export 10238 7029 13855 ban (m. Kyat) Total income loss to farmers (m. Kyat) 14138 11319 21005 a/ I basket of paddy = 46 lbs Source: MOA. and staff estimates (Annex 2.1) 2.42 But, large as it is, the implicit tax due to procurement is the lesser of the two taxes that paddy farmers bear. They are taxed even more -- because private-sector exports of paddy and rice are prohibited. While private traders in Myanmar can buy and sell paddy and rice in the domestic market, only the government can export these commodities. Since the international price of rice is higher than domestic prices, this government monopoly also constitutes a tax on farmers. An estimate of the resulting proportionate price reduction -- the difference between the export parity price and the domestic market price of rice -- is also shown in Table 2.5.'4 The export ban means that the domestic price received by paddy farmers is about 17% less than the export parity price. The income loss to farners of an export tax is also computed in Table 2.6, and is about twice as large as that due to procurement. The last line of Table 2.6 estimates the combined income loss for farmers from two interventions. Finally, the increase in output value (per acre) from eliminating these interventions is shown in Table 2.7, with output valued at the export parity price. 2.43 These interventions, thus, reduce farm incomes by lowering the farngate price of paddy. However, their medium-term effect is even greater because they are significant disincentives to farmers in making output and marketing decisions. The cross-country evidence from a recent study shows that crop procurement systems that tax farmers reduce farmn incomes and lower farm output.'5 In the 18 countries studied, government policies that taxed agriculture (such as procurement policies) reduced prices received by farmers, on average, by 30%. By reducing output, agricultural growth was about 1 to 2 percentage points lower anntallv. compared to the case without these interventions. The increase in paddy output in 14 However, it is reported that considerable smuggling of paddy and rice occurs across the land borders. The export parity price uses the average FOB Yangon price for rice, with assumptions based on updating of the estimates in Harrison (1990) for transport and milling costs. See Annex 2.1 for details. 1 See Krueger. Schiff and Valdes (eds.) (1991). - 39 - Myanrar that would result on this basis in the medium terrn from removing the two distortions is shown in Table 2.7. 16 Hence, the increase in yields per acre would be about 10%. Table 2.7: Effect of Removing Paddy Price Distortions Traditional HYV Paddy HYV Paddy Paddy (rainfed) (irrigated) Proportionate increase in output value" 30.4 37.3 34.4 (%) Proportionate increase in yield/acre (%) 9.9 9.9 9.9 1/ Assuming no yield increase Source: Staff estimates (Annex 2. 1) 2.44 While being taxed implicitly through these distortions, many paddy farmers also receive implicit subsidies on their use of purchased inputs. These subsidies must be evaluated in order to assess the net impact on farm incomes. Policvmakers often justifv taxation through crop procurement systems and export restrictions by pointing to the compensation that farmers receive through access to subsidized inputs. The most significant such subsidy in Myanmar is on fertilizer use. Of the three main fertilizers used, only urea is domestically produced although the urea sold to farmers is a composite of domestic production and imports. While fertilizer prices to farmners are higher than their border prices when evaluated at the official exchange rate, they are subsidized heavily when evaluated at the parallel market exchange rate. For instance, urea was sold in 1994/95 to farmers at K12,000/ton (following a large price increase in FY94), which reflects a subsidy of 48% relative to its import-parity price.'7 The economic subsidies per acre that accrue to farmers who use fertilizer in the various paddy growing regions (where fertilizer use varies) are summarized in Table 2.8. 16 See Annex 2.1 for the details of the methodology used. Also, since the output effect estimated here is the only the increased yield on land already being cultivated, the relevant price distortion is that of the domestic price relative to the export-parity price. The price distortion due to procurement does not affect paddy output in this scenario, only fann incomes. '' This subsidy is based on a parallel market exchange rate of $1 = Kyats 110. Fertilizer prices were raised in August 1995; the sales price for urea is now K 16,000/ton. - 40 - Table 2.8: Economic Subsidy on Use of Fertilizer (per acre) Traditional Paddy HYV Paddy HYV Paddy (rainfed) (irrigated) Application of fertilizer (bags)a' 0.5 1.5 1.5 Economic subsidy (Kyats) 555.0 1356.6 1356.6 a' 1 bag of fertilizer = 50 kgs Source: MOA, and staff estimates (Annex 2.1) 2.45 To evaluate the net impact of reforming pricing and export marketing interventions on returns to paddy farmners, therefore, the implicit tax on output must be compared to the subsidies provided on fertilizers. This is summarized in Table 2.9 by estimating the returns per acre on paddy production (with fertilizer use) in each of the paddy-growing regions." The current policy, at the top of the Table, shows the returns/acre with paddy procurement, an export ban and existing fertilizer subsidies. The rest of the Table shows farmers' net returns/acre as these interventions are removed. Hence, even if there were no output effects and if the fertilizer subsidy were eliminated, farmers' returns/acre would double or even triple, depending on the agro-climatic region, without crop procurement and the export ban. As farmers increased their output in response to improved price incentives, their gains would be even larger. Table 2.9: Simulation of Returns to Paddy Cultivation - Alternative Policy Scenarios (Kyats/acre) Traditional HYV Paddy HYV Paddy Paddy (rainfed) (irrigated) Current policy 2692 2631 6123 Elimination of price distortion and 4493.3 5047.2 8967.4 fertilizer subsidy (no output effect) Elimination of price distortion and 4577.4 5162.8 9104.1 fertilizer subsidy (with output Source: Staff estimates (Annex 2. 1) )8 This assessment is based on detailed information provided to the mission by the Ministry of Agriculture (MOA) on farming practices of representative farrners in the three principal ecological zones. Input and output data were provided on a per acre basis, and are shown in Annex 2.1. On this basis, returns per acre to paddy cultivation in each zone are computed under the existing policy of reduced output prices due to procurement and subsidized fertilizers (information on subsidies to credit and irrigation was not available but are substantial). - 41 - 2.46 Winners and losers from reform. Thus, paddy farmers would, unambiguously gain from a policy reform that simultaneously removed interventions on the input and output markets for paddy. Even without an expansion of cultivated area, their returns from paddy cultivation would more than double in all agro- climatic regions, even tripling in the rainfed HYV region (Table 2.9). The increases in paddy production would be huge -- about 1.9 million tons annually, with a substantial share of it exported. 2.47 The case against such reform is typically that those who are provided government- procured rice as well as urban consumers would lose because rice prices would increase to their export- parity levels. In Myanmar, the first group is particularly influential since it includes military personnel and civil servants. One important issue in this context, obviously is whether the income transfers that arise due to this implicit taxation of the paddy sector are justified on equity grounds. Since paddy farmers, on average, have lower incomes than the urban residents who receive the bulk of the subsidies through below- market sales of rice, the distributional impact of these implicit taxes is likely to be regressive while some of the rice provided at below-market prices does benefit the needy, they appear to benefit disproportionately little. If rice rations are to be justified on equity grounds, they need to be far better targeted at the poor rather than benefiting all civil servants and military personnel. And if it is thought that the real incomes of civil servants have fallen substantially in recent years, they should be compensated with a wage increase rather than by taxing paddy farmers. 2.48 However, the adverse impact of the paddy export ban on the economy goes beyond these regressive income transfers. As the preceding analysis has demonstrated, it also reduces paddy output by lowering the price received by farmers. Hence, the paddy sector produces below its potential, depriving farmers of additional income and the country of badly-needed export earnings. As Table 2.9 illustrates, considerable losses in economic efficiency result. The paddy procurement system and the export ban together mean that about 90% of the potential higher income of farmers is transferred to consumers. However, these implicit taxes also reduce paddy output because of the disincentive effect on farmers. This reduction in output is associated with a fall in net returns of about 3% of current returns from paddy cultivation, and is lost to the economy. Therefore, the part of the current consumer subsidy that is thought essential should be better targeted and would be far better financed in other ways. For instance, reducing subsidies on fertilizer alone would yield over K 6 billion annually (Table 1.7). And, raising prices on other inputs such as irrigation as well as raising land taxes would tax farmers without discouraging production as does the present system of implicit output taxes.'9 Cropping Choice and Access to Complementary Inputs 2.49 While farmers are free to make cropping choices on non-paddy land, their choice on land designated for paddy is limited.20 In areas where only a single paddy crop is possible annually, farmers must grow it during the paddy season although in the non-paddy season, they can cultivate any crops they choose. Access to many key inputs is still monopolized or largely controlled by government agencies. In the dry agro-climatic region, paddy cultivators are provided irrigation water at a nominal charge (10 Kyat/acre). Paddy cultivators also receive credit from the Myanmar Agricultural and Rural Development '9 This efficiency loss is actually an underestimate because it does not include the deadweight loss to the economy from this distortion. 20 In practice, however, this limitation may not be scrious since paddy land cannot easily be converted to other crops. However, the restriction of cropping choice by the government sends the wrong signals. - 42 - Bank (MARDB) at the rate of Kyats 1000/paddy acre (for high yield paddy) and Kyat 700/acre (for other paddy) or at an annual nominal interest rate of 18%. 2.50 There are two key problems with the present situation as it affects the incentives of farmers. First, the government still exercises substantial control over the decisions of farmers. For credit and fertilizer, this control is applied either directly through the provision of these inputs through government agencies. In other instances, the control is indirect, as with the pressure from the quasi-official village committees or access to irrigation water in dry areas to ensure that paddy is grown on the designated land. Similarly, no collateral is required on MARDB loans, but the endorsement of the village committee is required. In this sense, therefore, the autonomy of farmers in making cropping decisions is still impinged upon. 2.51 The second problem is that continued subsidies and other distortions have prevented the expansion of private-sector involvement in provision of inputs. Therefore, shortages of these inputs continue to constrain production. Large official subsidies on fertilizers and seeds mean that it is not profitable for the private sector to consider supplying these on a sustained basis. And, the lack of clear land rights as well as the provision of subsidized agricultural credit mean that private banks have little interest to diversify into such lending. Landownership and Use Rights 2.52 All agricultural land in Myanmar is owned by the state but cannot be confiscated by the government. Cultivators have use rights on land, which can be passed on to their sons for cultivation. If land is not cultivated by these successors, it reverts back to the state through the village committees. In addition, all land on which paddy can be grown is officially designated as paddy land (about half the total cultivated area). On paddy land, use rights cannot be rented or sold. Use rights to land not designated for paddy, which includes land used for plantations, orchards and non-paddy crops, can be traded or rented. 2.53 Such ambiguity of land tenure has two adverse effects on agricultural productivity that need to be addressed in the medium term. First, the inability to trade or lease paddy land means that much of the cultivated land may not be operated efficiently. Since transfers of use rights are difficult, if not impossible, land is either allowed to be fallow or is operated by farmers who lack the skills, motivation or access to complementary inputs. This constraint is an important reason that a large amount of good-quality land remains uncultivated. 2.54 The second adverse impact on productivity is because unclear use rights to land reduce the incentive of farmers to undertake long-term investments such as erosion control. Since it is difficult for farmers to determine whether they will be able to get the returns from such long-lived investments, most will opt not to make them. Evidence from Thailand, for instance, strongly supports this link between more secure land tenure and investments in land improvements.2' D. ENERGIZING THE PRIVATE SECTOR 2.55 The private sector in Myanmar is beginning to coalesce following the "Open Door" economic policies initiated by the GOM in 1988. In the quarter century that preceded these reforms, the role of the private sector outside agriculture was tightly controlled. In 1962, all medium and large-scale 21 See Feder et.al. (1988). - 43 - enterprises in the industrial and service sectors were either nationalized or forced to work as contractors to the state sector, and private-sector involvement in trading was prohibited for most products. Despite these restrictions, and minimal access to bank credit, foreign exchange and raw materials, many unregistered private establishments survived the period of socialism, and continued to account for significant shares of employment and output in many subsectors of the economy. The survival of these enterprises in that harsh economic climate testifies to the resilience of the private sector in Myanmar. It is on this strength that policy reforms need to build if the transition to a market-oriented economy is to be successful. 2.56 Since 1988, several pieces of legislation have been enacted to establish the legal foundations for private enterprise. Private-sector involvement in the economy was legitimized forrnally in 1987 when the government monopoly over domestic agricultural trade was lifted. Although the laws for foreign investment was liberalized early in the reform process by enacting the Foreign Investment Law in 1988 (para. 1.7 and 1.29), those benefits were not extended to Myanma investors until 1994 with the promulgation of the Myanmar Citizens Investment Law. This law enhances the access of the domestic private sector in areas such as obtaining insurance, hiring foreign technical experts, and entering into joint ventures with foreign investors. Moreover, the lawv extends to domestic investors many of the tax incentives and concessions that had previouslv been available only to foreign investors. Structure and Recent Performance of the Private Sector 2.57 The private sector plays an increasingly significant role in economic activity, as is evident from Table 2.10. It now accounts for over three-quarters of GDP, reflecting its dominant role in the agricultural, livestock and fisheries sector (over 90% of sectoral GDP). But private firms are also a major presence in manufacturing, transportation and trade. The private sector's share of fixed investment has also risen in recent years, and was more than half in FY94. Finally, the private sector accounts for over 90% of total employment -- again partly a reflection of its dominance in agriculture and trade. Table 2.10: Private Sector Share in Economic Activity (percent) FY 85 FY91 FY95 Share of GDP (constant 1985/86 prices) 61.1 74.2 76.4 Share of Gross Capital Formation (constant 1985/86 prices) n.a. 53.7 50.3 Share of Employment n.a. 91.4 92.0 Source MNPED and MFR 2.58 The importance of the private sector in manufacturing is also seen in its share in the number of establishments. Recent GOM estimates indicate that about 95% of all registered manufacturing factories and establishments are privately owvned. Moreover, private establishments account for over 90% of total establishments in all but three of the 13 main manufacturing subsectors. Over half of all private manufacturing and service establishments are in the food and beverages sector. The other important subsectors are clothing and apparel, mineral and petroleum products, construction materials, and maintenance and repairs. - 44 - 2.59 Despite their dominant share, almost all private establishments are small, employing less than 10 workers. In FY95, only 81 private establishments (of about 45,000) employed between 51-100 workers and another 43 employed over 100 workers. Hence, private establishments accounted only for a quarter of those that employed between 51 -100 workers, and less than a tenth of all establishments with over 100 workers. 2.60 The good news, therefore, is that a vibrant domestic private sector still exists in Myanmar. However, decades of control and discrimination have meant that it is made up of a large number of very small firms. Moreover, the continued dominance of the state sector in many activities has meant that it is not easy for private firms to expand. Finally, by virtue of their size and lack of experience, the private sector remains relatively unsophisticated, especially in comparison to private businesses in most other East and South Asian countries. 2.61 Foreiign direct investment. With the enactment of the Foreign Investment Law in 1988, the Myanma economy has been opened to foreign investment. Total foreign direct investment (FDI) flows during FY90-95 have totaled $871.5 million (see Appendix Tables 8.3 to 8.5 for details). These FDI flows have come from industrial countries as well as several East Asian countries. The largest sources of FDI during FY91 -95 have been the United States (31 %), the Netherlands (1 1%), Korea (11%), Japan (9%), and France (9%) with smaller shares from the United Kingdom, Thailand, and Singapore.22 The significance of these FDI flows can be seen by noting that, even at the overvalued official exchange rate, they account for almost 3% of gross investment during the period. Since all FDI flows are in foreign exchange, their true importance is several times larger. 2.62 The bulk of these FDI flows have gone into natural-resource sectors, which is not surprising in light of Myanmar's untapped natural wealth. About 85% of FDI has been in oil and gas exploration, and mining. The other significant sector into which FDI has flowed is hotels (10%), responding again to untapped potential and the GOM's desire to expand tourism. Manufacturing activities have received only about 5.5% of total FDI during FY91-95. Policy Issues in Leveling the Playing Field for Private Enterprises 2.63 Since private enterprises remain small and their capabilities relatively weak, significant policy efforts will have to be directed towards strengthening them if the private sector is to be capable of taking the lead in economic activity. An important aspect will be to strengthen institutions that provide support and promotional services to private enterprises as well as to reform regulatory requirements. Those issues will be analyzed in the next Chapter in evaluating the relative roles of the public and private sector. This Section focuses on assessing another key determinant of private sector development -- the extent to which domestic private enterprises operate on a "level playing field" with State Enterprises (SEs). Specifically, the focus is on the relative access of private enterprises and SEs to three sets of critical inputs -- credit, infrastructure and public services, and imports. 22 These shares refer to actual foreign investment rather than foreign investment approvals that signal only intentions to invest. Although actual investments from Singapore and Thailand have become more important in the last two years, FDI from the industrial countries remains significant. - 45 - Access to Credit 2.64 The availability of credit, both for working capital needs and for investment, is obviously critical to the operation of the private sector. Until the role of the private sector was legitimized, its access to credit was constrained severely. In FY91, for instance, credit to the private sector (excluding co- operatives) was less than 2% of total domestic credit. The few loans that were made to the private sector consisted mainly of personal and professional loans to individuals. 2.65 This situation began to improve in 1990 with the enactment of the Financial Institutions Law. The private sector's share in total domestic credit has risen continuously since FY90, and was about 14% in FY95. Similarly, the Myanma Economic Bank, the state-owned (and dominant) commercial bank now makes almost 40% of its total loans in FY95 to the private sector. The private sector's access to long- term credit to undertake capital investment, however, remains severely constrained. The current practice among commercial banks of rolling over loans to extend the term is both costly and time consuming. Outside the banking sector, the capital market is virtually non-existent. And the informal capital market offers only limited opportunities -- interest rates range between 3 to 5% per month and only short-term loans are made. 2.66 The Financial Institutions Law has also permitted the operation of domestically-owned private banks. Before 1962. Myanmar had 14 foreign and 10 domestic private banks, and these accounted for two-thirds of all deposits before they were nationalized. Since 1990, 15 private banks have been established and are currently in operation, and they now account for 7% of total deposits. Four of these banks are permitted to transact in foreign exchange, including the maintenance of foreign exchange deposits. The operation of private banks also helps improve the access of private businesses to credit since these banks are more likely to be run along commercial lines. However, domestic private banks still face a serious handicap because, unlike the state-owned banks, they must pay a 15% withholding tax on their savings deposits. 2.67 Despite these improvements, the availability of credit to private businesses is still squeezed by the efforts of the Central Bank to control the expansion of credit, which have been made more difficult &23 by the recent increase in the fiscal deficit. While private-sector credit (other than cooperatives) has expanded very rapidly since FY90 (and more rapidly than public-sector credit), that pace reflects mainly the small base on which those increases occurred. And, the rate of increase slowed substantially in FY95 (to about 37% from 73% in FY92 and almost 100% in FY93). These trends show that as the private sector expands, and its need for credit grows, these demands are unlikely to be met while curbing monetary growth satisfactorily unless the public sector's credit demands (primarily to finance the fiscal deficit) are reduced. 2.68 Apart from this general sense in which private sector credit demand is being crowded out by the needs of the public sector, there is another sense in which SEs are treated differently from private businesses. As discussed in greater detail in the next Chapter, since 1989, the working capital and investment needs of SEs are now financed directly from the government budget. Given the GOM's fiscal difficulties, the capital budgets of SEs are scrutinized closely. Nevertheless, those that run operating deficits receive interest-free credit. This system provides a significant subsidy (see Table 3.7 for estimates), and further impairs the ability of private businesses to compete effectively with the SE sector. 23 CBM officials explained that credit expansion was controlled not with quantitative credit ceilings but rather by using other monetary policy tools such as reserve requirements and liquidity ratios. - 46 - Access to Infrastructure and Public Services 2.69 Poor physical infrastructure. Adequate infrastructure, and equitable access to it, are essential to private-sector development. Years of neglect, lack of investment, and mismanagement have meant that Myanmar's infrastructure facilities are grossly inadequate to meet the needs of a modem industrial economy. Scarcity of power and energy supplies, poor transport networks and antiquated teleconmmunications facilities characterize the present situation. The comparisons of some indicators of infrastructure capacity illustrate just how far Myanmar must go to catch up with its neighbors in this regard (Table 2.11). Table 2.11: Infrastructure Provision in Selected Asian Countries Telephone Electricity Paved roads main lines Energy use production per million per thousand per capita per capita persons persons 1992 1992 1992 1992 (kgoe) (kwh.) (kms.) (number) Myanmar 42 61 210 2 Bangladesh 59 79 59 2 China 600 647 749 10 Indonesia 303 233 160 8 Thailand 614 1000 841 31 Viet Nam 100 139 187 2 Note: Data for Viet Nam on energy use per capita is for 1990; for China on paved roads is for 1990. Source: MNPED; World Bank, World Development Report. 1995 2.70 Unequal access. But even more problematic from the perspective of private businesses is that they have limited access to the little infrastructure that does exist compared to SEs and government departments. Systematic evidence on these problems is difficult to obtain but the Myanmar Chamber of Commerce, which is the oniv organization that represents domestic private businesses, provided some examples.24 These cases serve to indicate the dimensions of the problems faced. It usually takes private entrepreneurs a year or longer to obtain a telephone connection; to get a new water connection for an industrial site is near-impossible; while a new electricity connection is both difficult and expensive to secure. Similarly, SEs and government departments can get goods cleared through the port without delays and have access to warehousing facilities, unlike private businesses. 24 During the mission in November 1994, a short questionnaire was designed (Annex 2.2), with the goal of determining the severity of some of these and other constraints on private sector activity. Although the Chamber of Commerce agreed to distribute the survey to a sample of its members, only one response was communicated to the mission through the GOM. However, follow-up discussions with representatives of the Chamber of Commerce in August 1995 indicated little improvement had occurred in private-sector access to these services. - 47 - 2.71 There are three main reasons for such differential access between SEs and private businesses. First, most private businesses are small and relatively new while SEs have been a commanding presence in almost all areas of economic activity for the last three decades. Hence, the management of SEs has built up links to the public-sector providers of infrastructural and other services that is difficult for private businesses to match. 2.72 The second reason is that, despite the official rhetoric about encouraging private-sector growth, there is little formal dialogue and interaction between representatives of the private sector and key policymakers. Hence, it is difficult for the problems of private businesses regarding access to services to be aired and resolved. In contrast, since infrastructure services are provided by government departments and by SEs themselves, the problems of SEs are more easily dealt with. For example, despite the existence of the Chamber of Commerce, it is rarely consulted on policy issues that affect the domestic private sector or to determine the problems that face these businesses. Instead, it appears to be viewed as a quasi-public sector institution whose function should be to support government initiatives rather than to represent the interests of the private sector. 2.73 Finally, the lack of clarity of land ownership and use rights even in urban areas is a serious problem for private businesses trying to set up operations or expand. Acquiring even 3 to 4 acres of land to set up a factorv is a time-consuming and lengthv process. Obviously, SEs -- being state-owned - - do not face this problem, already being located or having claim to the best industrial sites in terms of both location and access to infrastructure services. Moreover, foreigners cannot lease or buy urban land from private Myanma citizens beyond 1 year -- another restriction that does not apply to SEs. 2.74 These relative advantages enjoyed by SEs in their access to infrastructure and public services can be inferred from another trend. Since FY90, when the foreign investment regulations were liberalized, foreign investors have shown a clear preference to enter into partnerships with SEs rather than with domestic private firms. As of March 1995. three-quarters of all FDI (in value terns) had taken the forn of either joint ventures or production-sharing arrangements with SEs. Only about 8% of FDI came in as joint ventures with the private sector (Table 2.12). Table 2.12: Foreign Capital In Existing Enterprises by Type of Collaboration ($ million) Type of Collaboration End-March 1995 100% Foreign owned 385.84 Joint-ventures, of which: 481.11 - with State Enterprises 304.83 - with Private Sector and Co-operatives 176.28 Other (Production Sharing Basis) 1370.20 Total 2237.15 I/ Includes $39.36 million with Myanma Economic Holdings and $1 million with Yangon City Development Committee. Source: MIC - 48 - 2.75 Of course, this preference also reflects factors besides differential access to infrastructure and services. The domestic private sector is made up mostly of small firms, which offer few opportunities for tie-ups with large foreign firms. The absence of a domestic capital market limits the participation of domestic private capital in joint ventures. And the interest of most foreign investors has been in areas such as oil and gas and mining, where domestic private involvement is non-existent. However, the privileged access that SEs continue to enjoy over scarce infrastructural services and prime locations of urban land is clearly an important consideration in the decisionmaking of foreign investors. Hence, despite its increasing role, FDI cannot play the important function, which it has in other East Asian economies, of strengthening domestic private businesses, and helping to make them competitive in world markets. Access to Imports 2.76 The private sector and the state sector in Myanmar conduct their extemal trade transactions under different exchange rate regimes (para. 2.14). Since the private sector has no access to foreign exchange from official sources, all its external transactions take place at the parallel market rate. Meanwhile, SEs and government departments conduct external transactions at the overvalued official rate. In this sense, therefore, private firms and SEs face widely-divergent prices for foreign exchange with imports being heavily subsidized to the latter. 2.77 Given the extreme shortages of foreign exchange in the Myanma economy, the access of all businesses to imported inputs is impaired. Although SEs face low import prices, their import requests are tightly controlled and closely scrutinized by the Ministry of Finance. Hence, the quantitative constraints they face in importing inputs is probably just as tight as it is for private firms. But the SEs that are granted permission to import raw materials and intermediates obviously receive large scarcity rents on such imports. Moreover, private importers, unlike SEs, are also forced to import so-called priority items as a proportion of other imports they desire (para. 2.21). This requirement raises costs because it implies a loss of specialization among importers. 2.78 Such subsidies to the imports of SEs pose another, more subtle, problem for private sector operations. Since prices of SE outputs are determined on a cost-plus basis, access to cheap imported inputs allows these prices to be set and maintained at artificially low levels. Since SEs still play a significant role in the industrial sector, this means that the price incentives for expanded private participation in legitimate businesses are muted. In such an environment, relative prices signal that domestic manufacturing is unprofitable, unless conducted on the parallel market. Hence, private investors are motivated to concentrate their energies on trading activities and the provision of services or to engage in unregistered (and small-scale) manufacturing. 2.79 An example of the impact of low import prices can be seen in the pricing of drugs by Myanma Pharmaceutical Industries. Its largest-selling product is an analgesic, which is priced (on a cost- plus basis) at about K30 per 100 tablets. In estimating this price, the value of imported raw materials in this product is imputed at K2.50. using the official exchange rate. If this import component is valued at the parallel market rate (of K 101$), the value of imported inputs would rise about 18-fold, and the cost-plus price (for 100 tablets) would rise two and a half times to about K75. - 49 - E. THE PRIORITIES FOR POLICY REFORM 2.80 This analysis shows that, although progress has been made in improving incentives in the desired directions, there are still three main areas remain where more needs to be done. Aggressively removing these remaining distortions in incentives is essential if a sufficiently strong supply response is to emerge through export growth, agricultural expansion, and a dynamic private sector. Exchange Rate and Trade Policies 2.81 In addition to the macroeconomic case for adjusting the nominal exchange rate to a more realistic level, the analysis here demonstrates the need for such an adjustment if the incentives for export production are to be improved. Despite the de facto devaluation of the Kyat that has been achieved through the recognition of the parallel market, the real effective exchange rate has still appreciated, thereby reducing the absolute profitability of export production. Moreover, the segmentation of the official and parallel foreign exchange markets raises transactions costs for potential private-sector exporters because of the risks inherent in parallel-market transactions and the multiplicity of exchange rates. Finally, all external transactions of SEs are still conducted at the official rate, which means that their managers have little incentive to expand exports. Adjusting the exchange rate would also assist in raising agricultural output by improving the incentives for private-sector involvement in providing agricultural inputs such as fertilizer and pesticide. Overvaluation currently means that it is uneconomic for the private sector to compete directly with public-sector imports of these inputs. 2.82 The main trade restriction that should be eliminated is the ban on exports of paddy and rice. This ban implies that the price received by paddy farmers is about a third lower than that dictated by international prices. Such implicit taxation reduces farm incomes to the tune of over K45 billion. It also lowers paddy production by reducing its profitability. Thus, removing the export ban would not only encourage rural growth by increasing farm incomes; it would also result in additional production of about 1.9 million tons of paddy annually. If targeted subsidies to rice consumers are considered desirable, these higher incomes and output would allow their provision in a less costly way than by prohibiting paddy exports. The other restriction on external trade that should be removed is the requirement that private importers blend priority items specified by the GOM (in Schedule A) with their own imports. This specification unnecessarily imposes costs on importers without addressing the underlying reasons for shortages of some imported raw materials and intermediates. Eliminating it would help enhance the transparency of trade policies. Land Ownership and Tenure 2.83 The lack of clear tenurial rights creates problems both in agriculture as well as for the expansion of private-sector activity in trade and industry. In agriculture, the uncertainty about inter- generational transfers reduces the incentives for land improvement, while the lack of a rental and sale market mean that substantial areas either remain fallow or are operated inefficiently. Inability to use land as collateral to get long-term credit, and lack of access to suitable industrial sites constitute major impediments to private-sector growth. 2.84 Hence, immediate steps are necessary to establish the legal basis for private ownership and rental of land both in rural and urban areas. With the acknowledgment that Myanmar is now a market- oriented economy must come the recognition that this is incompatible with state ownership of all land. Further, this recognition will have to go beyond the current implicit tolerance of land transfers and rentals - 50 - between private individuals in some sectors. Rather, in order to be transparent and reduce uncertainty, the clarification of land rights should take the form of well-defined private ownership and use rights. Paddy Procurement 2.85 Apart from removing the export ban, the other key reform that would improve the incentives for paddy production is the elimination of the paddy procurement system. Although the share of procurement has fallen since FY90, this system still reduces the price received by paddy farmers by about 10%, thus reducing farm incomes. Moreover, the system is regressive since subsidized rice benefits mostly urban consumers who are better off than the paddy farmers being taxed. Supporting the Private Sector 2.86 The removal of many of the restrictions on private-sector activity has helped encourage the growth of private businesses outside agriculture. However, most of these enterprises remain small, and their ability to expand further and develop into potential exporters as well as credible competitors to SEs in domestic markets is compromised by the many biases that still exist. Specifically, their access to credit is crowded out by the demands of the fiscal deficit, SEs continue to enjoy favored access to infrastructure and public services, and there are few support services aimed at potential exporters. 2.87 The priority for reform in this area is to take steps to reduce the favored access that SEs still enjoy relative to private firms. Specifically, the interest rate subsidies on borrowing and the exchange rate subsidies on imports that SEs enjoy (constrained as both are) should be eliminated by adjusting both "prices" appropriately. The advantages that flow to SEs in their access to such services as transportation, telecommunication, and electric power should be reduced with systematic government efforts to expand private-sector access to these. Ensuring better access to transport and storage facilities for exporters is of particular importance. To better deal with many of these constraints, it is also necessary for the GOM to broaden the dialogue with representatives of the domestic private sector. Private sector access to credit can be expanded if public-sector credit demand can be further reduced while positive real interest rates are used to allocate credit. Finally, if the exchange rate is adjusted, financial institutions would be more willing and able to provide trade finance to private exporters. - 51 - 3. STATE ENTERPRISE REFORM AND PRIVATE SECTOR DEVELOPMENT A. BACKGROUND 3.1 An important goal of the Government's reform program has been to improve the performance of the State Enterprise (SE) sector while supporting the development of the private sector. This Chapter examines the effectiveness of the measures intended to meet this objective. The next section provides the backdrop to the policy discussions by presenting various facets of the role of SEs in the Myanma economy. Their structure and sectoral contribution are assessed, various indicators of their recent performance are presented, and the links of the SE sector to the government budget are delineated. On this basis, the extent to which SEs contribute to the Government's fiscal problems is evaluated, and the constraints to improved SE performance are discussed. The recent reforms aimed at improving SE performance are summarized in Section C, and their effectiveness is evaluated. Particular attention is focused on the effect of these reforms on the operational and financial autonomy of SEs, as well as their operation along commercial lines. The last section describes the elements of a strategy to deepen SE reform and strengthen the private sector in Myanmar. The proposed approach builds on the recent experience in Myanmar as well as on the lessons from similar reform efforts in other economies that are making the transition to a market, including China, Vietnam, and the countries of Eastern and Central Europe. 3.2 The SE sector played a central role in Myanmar's development strategy until the Government's reform program was initiated in the late- 1 980s. State ownership was one of the main tenets of the "Burmese way of socialism". In practice, the coverage of the public sector was not uniform. Rather, its significance was greatest in sectors such as manufacturing, mining, commumcations, financial services, transport infrastructure, and trade that were thought to be most critical to the emergence of a modem, industrialized economy. Given this starting point, a comprehensive program of transition to a market economy must include a major component targeted at rationalizing the role of SEs and removing the barriers that still restrain private sector activity. As this Chapter documents, the GOM has taken some steps in this regard, which indicate its commitment to reducing the role of SEs in economic activity and expanding the scope of the private sector, domestic and foreign. Despite the progress that has been made, implementing these reforms involves difficult choices, and much remains to be done. Yet, if Myanmar's transition to a market economy is to be successful, the role and functioning of the SE sector must be reoriented and the scope for private sector involvement expanded. B. STRUCTURE AND PERFORMANCE OF THE STATE ENTERPRISE SECTOR Role of State Enterprises in the Economy 3.3 The public sector. The pervasive control of the public sector in critical sectors of the economy is clearly seen from its share of the sector in GDP by industry of origin (Table 3.1).1 While the public sector contributes about 22% of GDP, its role is largest in the services sector, where it accounts for over half of value added. It also still plays an important role in some parts of the industrial sector and in trade. I As with all data involving sectoral breakdowns of GDP, these shares should be interpreted with caution. - 52 - Finally, apart from forestry where its role is substantial, the public sector presence in other primary sectors -- agriculture, livestock and fishery -- is minuscule. Table 3.1: Share of Public and Private Sectors in GDP by Subsector (percent, at 1985/86 constant prices) Public Sector Private Sector" FY 85 FY 90 FY 95 FY 85 FY 90 FY 95 Agriculture, Livestock, Fishery & 2.6 2.2 1.4 97.4 97.8 98.6 Forestry Forestry 33.7 48.0 42.6 66.3 52.0 57.4 Industry 68.1 48.0 46.8 31.9 52.0 53.2 Mining 89.7 87.8 60.6 10.3 12.2 39.4 Manufacturing & processing 56.7 33.2 27.3 43.3 66.8 72.7 Construction 81.1 84.8 82.0 18.9 15.2 18.0 Services (excluding trade) 67.4 53.7 56.4 32.6 46.3 43.6 Transportation 36 34.2 39.4 64.0 65.8 60.6 Financial institutions 98.9 94.9 69.0 1.1 5.1 31.0 Trade 46.4 30.2 23.1 53.6 69.8 76.9 GDP (at market prices) 38.9 22.0 22.2 61.1 78.0 77.8 1/ Including cooperatives Source: MNPED. Planning Dept. 3.4 The overall public sector share in GDP has remained roughly constant between FY90 and FY95 (Table 3.1). At the sectoral level, however, the official statistics indicate a relative decrease in the public sector share in some sectors. Particularly notable declines were registered in the financial institutions, mining and forestry subsectors. In the latter two, this decrease is attributable to the establishment of joint ventures with foreign and domestic investors while the licensing of private banks accounts for the former. The share of the public sector in fixed investment has also fallen from 56% in FY90 to 47% in FY95. However, this investment is financed entirely from private and foreign saving, since public saving has consistently been negative (Appendix Table 1.8). 3.5 Since the public sector is concentrated in non-agricultural sectors that are relatively more capital-intensive, its share of employment is 8%, far less than its GDP share. However, this number is still large in absolute terms, almost a million workers (excluding casual labor) out of a total organized sector workforce of over 17 million (Table 3.2). Most of these workers are employed by the Union Government. Although the sectoral break-down of employment is not available, it appears that the public sector is - 53 - responsible for most of the non-agricultural employment. Since FY90, public sector employment has risen by about 2%, with the Union Government having increased its employment. Average public sector wages rose at about 9% annually during FY90-FY95. Since inflation averaged about 30% annually during this period, real wages have fallen sharply. Data on private sector wages are not available, but it is reported that they are far higher than in the public sector. Table 3.2: Public & Private Sector Employment FY90 FY95 Total employment ('OOOs) 15.221 17,230 Of which, percentage share of Public sector (including casual labor) 8.7 8.0 Private sector and cooperatives 91.3 92.0 Number of employees in public sector" ('OOOs) 862 877 Union Government 532 568 Local bodies 18 ** State enterprises 312 309 I/ Excludes the armed forces and casual labor ** Less than 1000 Source: MFR, Budget Department. 3.6 State Enterprises. Currently, there are 59 SEs that operate about 1800 factories and establishments, and these are affiliated to various line ministries (Annex 3.1). The largest number of SEs are in trade, industry and finance. The State Economic Enterprise (SEE) Law identifies the activities that are open exclusively to SEs (Annex 3.2). However, many of these enterprises, such as those under the Ministries of Industry 1 and 2, are in areas not reserved under the SEE law, which can also legally be undertaken by the private sector. 3.7 The SEs employ about 309,000 regular workers or about 35% of total public-sector employment. This number reflects a slight decline since FY90, which has been achieved mostly through attrition. Although average nominal wages of SE employees rose much faster in FY90-95 (about 16% annually) than for other govemment employees, these too have declined substantially in real terms. 3.8 The size distribution of SE and private-sector establishments is shown in Table 3.3. The dominance of SEs outside the agricultural sector is again evident. While the private sector is made up predominantly of small establishments employing less than ten workers, SEs account for over 95% of large establishments that employ more than 100 workers and about 80% of the medium-sized establishments (between 51-100 workers). - 54 - Table 3.3: Size Distribution of Industrial Establishments No.of FY85 FY89 FY95 Workers Public Private Total* Public Private Total* Public Private Total* Below 10 926 37025 38363 981 37965 39355 815 42925 44054 10-50 225 1840 2334 297 1824 2429 287 1863 2363 50-100 145 39 216 150 9 159 146 81 336 Over 100 438 6 444 426 4 430 427 43 474 Total 1734 38910 41357 1854 39802 42373 1675 44912 47227 * Includes co-operative establishments in addition to public and private-sector. Source: MNPED, Planning Department 3.9 The importance of SEs is also evident from the share of the state sector in external trade as well as tax collections. In FY95, the state sector accounted for about 53% of total exports and about 35% of total imports. Whereas all public sector exports are generated by SEs, it is estimated that they use between 50-55% of public sector imports. The share of SEs in total tax revenues in FY94 was about 41%, and included payments of commercial tax, customs duty, and income tax. 3.10 Hence, the public sector in Myanmar, and the SEs in particular, still remain a significant part of the economy. While the share of the public sector in GDP has fallen slightly since the GOM instituted its reform program in 1989, and the share of SEs in external trade and tax collections has declined, SEs still account for significant shares of output and employment especially in the non-agricultural sector. Recent Performance 3.11 Operational indicators. Although the performance of the SE sector has improved relative to FY89 when it bottomed out, it has not fully recovered to its level of a decade ago. Various indicators of production by SEs are shown in Table 3.4. The output index for all industries in FY94 was still about a third lower than in FY84. This pattern held also for the industries under Ministry of Industry No. I (MOI 1), which declined even more over the decade, and Ministry of Industry No. 2 (MOI 2). While output declined substantially, SE employment has not fallen by much. Hence, labor productivity has fallen. For example, in MOI(1), labor productivity in FY94 was two-thirds its level in FY90. - 55 - Table 3.4: Selected Indicators of State Enterprise Output FY 85 FY 90 FY 95 Oil and Natural Gas energy ('000 barrels of oil 15,280 12,181 13,124 equivalent) Cement ('000 tons) 423.5" 454.4 484.6 Urea fertilizer ('000 tons) 273.0" 192.0 235.0 Output of MOI (1) (Index: 1985/86 I100) 88.9 55.8 61.1 Output of MOI(2) (index: 1985/86= 100) 103.5 46.1 41.2 Average (all industries) (Index: 1985/86 = 100) 88.9 55.0 61.2 1/ These data refer to the calendar year 1985 Source: MNPED, MOI(I), MO1(2) 3.12 Another performance indicator of SEs -- capacity utilization is shown in Table 3.5. As with output levels, the average capacity utilization for all industries, as well as those in MOI(1) and MOI(2), has improved relative to FY90 but is still far below the performance achieved a decade ago. For all industries, average capital utilization in FY95 was only about 64% of its FY85 level. Moreover, this decline has occurred across the board in all but one of the enterprises within MOI(1) with only the ceramnic industries matching its FY84 level. Similar trends are apparent for exports. Although precise data on SE exports are not available, exports in FY94 of the seven enterprises under MOI(I) were about 11% lower (in Kyat terms) than in FY84, and less than I% higher than in FY90. This poor export performance reflects the fall in capacity utilization in these enterprises. Table 3.5: Capacity Utilization Ratios for Selected State Industrial Enterprises (percent) FY85 FY90 FY95 Average of Ministry of Industry No. (1) 67.0 43.9 52.1 M.O.I. (2): Myanmar Heavy Industry 61.3 20.0 21.4 Myanma Petrochemical Enterprise 65.6 29.7 39.3 Average of All Industries 66.0 36.3 42.0 Source: NMNPED, Planning Department. - 56 - 3.13 Financial performance. The pattern evident in these operational indicators is also apparent in the financial performance of SEs. Judging by the official data, SEs have collectively become increasingly non- profitable over the last decade (Table 3.6).2 They have registered current deficits, which have grown since FY92. Moreover, current deficits are pervasive with 14 of the 48 non-financial SEs having registered these at least once during FY91-95. These loss-making enterprises were spread across a range of subsectors, including agriculture and forestry, mining, trade and manufacturing. The financial performance of SEs obviously deteriorates even further when their capital expenditures are considered. Since FY90, capital expenditures of SEs have come directly as grants from the Government budget. The overall deficit of the SE sector thus widens with the inclusion of these capital expenditures (Table 3.6). Table 3.6: Current Surplus and Overall Balance of State Enterprises (m. Kyats) FY85 FY90 FY95 Rev. Current surplus a/ 1496 749 -3142 Capital expenditure 4489 3045 6123 Overall balance -2993 -2296 -9265 Overall balance (% of GDP) -5.6 -1.8 -2.1 a/ Current surplus is recorded on a cash basis before payments of interest but after contributions to the Union Government; includes all State Enterprises. Source: MFR. Budget Department. 3.14 Hence, the operational and financial performance of SEs continues to be poor despite recent improvements. In terms of output, labor productivity, capacity utilization, and profitability, SE performance remains far below the levels achieved in the mid-1980s, which were themselves problematic. Since the SEs remain an important part of the economy, the inability to improve their performance highlights the need to examine critically recent reform efforts in this area. State Enterprises and the Government Budget 3.15 The links between SE finances and the government budget are of particular importance in light of the poor performance of SEs and the continuing fiscal problems of the GOM. The significance of this relationship has increased since FY90 with the introduction of the State Fund Account (SFA). Under this system, which was intended to better control SE spending, the finances of all SEs are combined with those of 2 Although the available official data are not ideal due to exchange rate overvaluation, price controls, prevalence of barter arrangements among enterprises, and uneven accounting practices, they are used here because no other data are available. - 57 - administrative departments into a combined pool called the SFA. Since all revenues flow into this pool and all expenditures must be made from it, this system has meant that control over SE finances effectively has been transferred from the enterprises to the Union Government. Since they are owned by the government, they are obliged to surrender any surplus they generate, initially as a "contribution" that is budgeted at the start of each fiscal year and as the residual surplus if any remains at the end of the year. Similarly, SEs also receive a direct subsidy from the budget to the extent they accrue a current deficit at the end of the year. Finally, like administrative departments, their capital expenditures are made directly from the government budget. Apart from the link through the SFA, SEs contribute indirectly to government revenues through payments of commercial and income taxes and customs duties. 3.16 It is contended that the SE sector now constitutes a smaller drain on fiscal resources. This conclusion is based on the narrow estimate of the financial linkage between SEs and the consolidated public sector budget, which is shown at the top of Table 3.7 as the net contribution to the government. Contributions by SEs have grown since FY9 l. while the share of SE expenditure has remained stable. However, even by this measure, SEs were net contributors to the budget only in FY92 and FY93. In the last two fiscal years, SEs' net contributions to the budget have been negative. Another point worth noting is that SEs' contributions to the Government are unrelated to their current surplus or deficit. Their contributions were positive and rising even during FY92-94 when the current deficit of the SE sector was increasing (Table 3.7). 3.17 This narrow measure of SEs' net contributions also needs to be adjusted in two ways if it is to accurately reflect the interactions between the SE sector and the budget. First, the tax payments of SEs in the form of commercial taxes, income taxes and custom duties need to be added to their direct contributions. These payments are shown in the bottom half of Table 3.7, and are almost as large as their direct contributions.3 The second adjustment necessary is to reflect the fiscal impacts of the benefits that SEs receive from the government in the form of subsidized inputs (including capital). The most significant of these implicit subsidies is estimated in Table 3.7, and arise from subsidized access of SEs to electricity, and petroleum products.4 3 The commercial tax and incomc tax paid by SEEs is assumed to be equal to that of the state sector. SEEs' payment of custom duties are estimated by multiplying total custom duties by first the state sector share and then the share of SEEs in state sector imports. For details, see Annex 3.3. 4 Official prices of petroleum products remained constant for five years until they were increased in November 1994. Even then the revised prices fail to reflect the parallel market price. For example, gasoline sells at about Kyat 200/gallon in the parallel market, but the official price is only Kyat 25/gallon. Similarly, electricity is sold to private users at 6 times the price charged to public-sector users including the SEs. It should be noted, however, that these estimates do not take account of the implicit taxes on SEs through their sales of output at below-market prices because these are difficult to estimate. While including those transfers would obviously improve the financial picture of SEs, they would likely be offset by other subsidies to SEs, which are also not estimated here, including their access to subsidized imports (other than petroleum products) and free land. - 58 - Table 3.7: Links between State Enterprises and the Government Budget"' (million Kyats) FY91 FY92 FY93 FY94 FY95 (RE) SEs' payments to the government 3307 3342 4997 6636 7820 (as a share of total government receipts %) 22 18 24 24 24 SEs'contributions 3307 3342 4997 6636 7820 SEs' receipts from the government 4414 3283 4596 7608 9265 (as a share of total government expenditures %) 17 11 14 17 16 SEs' capital expenditures 3889 3276 3462 3373 6123 SEs' current deficit 525 7 1134 4235 3142 SEs' net contribution to the government -1107 59 401 -972 -1445 SEs' tax payments to govt. 3769 3442 4236 5411 6858 Commercial tax & income tax 3186 2853 3606 4694 6150 Customs duties 583 589 631 717 708 Implicit fuel and interest subsidies to SEs 4853 7891 10338 12810 13485 Subsidies on electricitv 3226 4783 6031 8046 7990 Subsidies on gasoline and diesel 954 2071 2887 2969 3050 Interest subsidies on investment grants 673 1037 1420 1795 2445 Net payments to govt. including interest -2191 -4390 -5701 -8371 -8072 subsidies As a share of budget deficit (%) 19 34 44 52 30 I/ Includes all State Enterprises. Source: MFR, Budget Department, and staff estimates (Annex 3.3) 3.18 These adjustments show that even if SEs are credited for their tax payments, it does not offset the large subsidies they continue to receive on their use of energy and capital inputs. By this measure, the net fiscal contribution of SEs is significantly negative -- about 52% of the fiscal deficit in FY94, a trend that worsened since FY92. And its reduction as a share of the fiscal deficit in FY95 reflects only the widening of the deficit itself. These subsidies are not explicit but rather arise through the provision of underpriced inputs at overvalued exchange rates and negative interest rates. Hence, the overall fiscal deficit does not reflect these subsidies. Nevertheless, their effect is felt indirectly on the budget by lowering the revenues of MPPE and MEPE -- the SEs that supply petroleum products and electricity.5 5 Adjusting the prices of these inputs, however, will not be sufficient to improve the fiscal picture if those higher prices translate into larger losses by SEs who use these inputs. As discussed below, it will require the imposition of hard budget constraints on SEs as well. But, eliminating these implicit subsidies is a necessary first step in stemming the financial drain that the SE sector currently imposes on the budget. - 59 - Have State Enterprises Performed Better in the Reform Period? 3.19 A judgment on whether the performance of SEs has improved depends on the time period that is considered. On some operational and financial indicators, SE performance in FY95 was better than in FY91 soon after the GOM instituted its reforms. However, that comparison is misleading because the period 1988-90 was especially difficult for the Myanma economy, and economic recovery began only in FY90. Hence, it is unsurprising that the situation today is not as bleak as in FY91. A more meaningful comparison would contrast the current situation of SEs with their performance a decade ago. When that benchmark is used, the real magnitude of the problems facing the SE sector becomes apparent. On every available performance measure, the SE sector, in general, as well as specific enterprises are doing much worse today than a decade ago. Their poor performance is especially striking given the context of overall economic recovery. 3.20 The one area which is often pointed to as a sign of improving SE performance - their positive contribution to the government budget -- is also misleading, as illustrated in Table 3.7. While the SE sector makes a positive financial contribution to the budget, a more complete accounting of the links between the budget and SE finances shows that these financial transfers are dwarfed once the capital outlays of SEs are taken into account along with the implicit subsidies that flow to some SEs through the underpricing of energy inputs and capital. For the Government's fiscal position to improve significantly, these subsidies would need to be reduced without the budget having to absorb any resulting SE losses. Before examining the refonns that are still required in order to make that 'possible, the constraints that limit SE performance are noted. 3.21 Constraints on SE performance. From interviews with SE managers, three main factors appear to account for the continued poor performance of SEs in Myanmar. First, almost all enterprises suffer from shortages of capital and foreign exchange. The adverse effects of these shortages are compounded by a second factor, which is the inability of SE managers to operate along strictly commercial lines. Managers have little autonomy in their decision making, into which non-commercial considerations constantly intrude. Finally, with the liberalization of private-sector activity and foreign exchange retention (and despite the remaining biases against the private sector), many SEs now face greater competition from domestic manufactures and imports. 3.22 The most important implications of these constraints on SE performance is that it limits their ability to import key inputs, including spare parts, and new capital equipment to replace their outdated machinery. The centralization of all capital budgeting and import decisions makes it even more difficult to make these choices in a timely manner. Hence, it is increasingly difficult for SEs to improve capacity utilization or to compete effectively with private producers or imports. Their lack of operational and financial autonomy means that SE managers have little incentive to control costs or look for innovative ways of improving performance. Whilc many SE managers continue to make such efforts, their perseverance in the face of stifling constraints and distorted incentives will not suffice. For sustained improvement, action is needed in several interrelated policy areas. 3.23 Policy reform is essential because without it the current constraints on SE performance will remain. For instance, while access to capital and imported inputs are obviously major factors in low capacity utilization in most SEs, merely increasing the availability of credit and foreign exchange without changing the incentive structure facing SE managers will do little to help improve the functioning of SEs over the medium term. The needed policy reforms cover three main areas. First, the prices that face SE managers must be set at more realistic levels so that they reflect market conditions. In particular, a more realistic exchange rate and - 60 - interest rate must be used in valuing, respectively, the external trade and investment of SEs, while their sales prices, even to other SEs should be liberalized. 3.24 Second, measures must be taken to enhance the financial and operational autonomy of SE managers. They should be allowed much greater latitude in making production, pricing, sales, recruitment, and investment choices along commercial lines. In return, SEs should face hard budget constraints that mean that their deficits would not automatically be covered from the government budget. The final policy area that needs attention is strategic, involving the need for the GOM to decide on the relative role of the private and public sectors in the economy. This delineation needs to go beyond the view that the private sector is important to medium-term development, by spelling out the sectors in which the continued presence for SEs is foreseen along with a rationale for this role. Before fleshing out the details of proposed reforms in each of these policy areas, the next Section examines the effectiveness of current reform efforts in addressing the main constraints on SE performance. C. RECENT STATE ENTERPRISE REFORMS 3.25 The efforts by the GOM since 1989 to reform the SE sector have involved actions on two main fronts. Measures have been undertaken to restructure enterprises by liberalizing the price-setting mechanism, increasing the autonomy of SE managers on operational and financial matters, and attempting to increase fiscal discipline among SEs. These actions have been accompanied by efforts, which have accelerated recently, to sell or lease some enterprises or facilities to private entrepreneurs. This section describes these reforms along with an assessment of their efficacy in addressing the policy issues noted previously. Pricing Reform 3.26 Output prices. Since FY90, there have been changes in the system for pricing SE output as well as the prices at which agro-industrial enterprises procure their agricultural raw materials. Before 1989, prices for SEs' outputs (to consumers as well as to other SEs) were strictly controlled at levels that were typically unrelated to production costs. This has now been replaced with a system of dual pricing. The ex- factory prices for output sold to the Government (to satisfy compulsory procurement targets) or to other SEs are still set on a cost-plus basis, and can be increased only if shown to be justified on the basis of cost increases. There is no evidence that there is any greater flexibility in granting price adjustments on such sales. Once the procurement targets are met, sales can be made at free-market prices either explicitly, or implicitly by making sales in foreign exchange. As Table 3.Y, shows for some industrial products, these prices are much higher than official prices. The gap between the free-market and official prices for gasoline and other petroleum products is also about eight-fold. For instance, MPPE is allowed to make about 10% of its gasoline and diesel sales (in volume terms) in foreign exchange at "mixed prices" that are a composite of foreign exchange (dollars) and Kyat, and are close to the free-market price 6 6 The "mixed price" for gasoline is ($1.32 + KIO.5) per gallon (Imperial), which works out to K156/gallon, if the dollar is evaluated at the parallel exchange rate (Kl 10/$). This price compares to the official price of K25/gallon, and a free-market price of K200/gallon. Similarly, for diesel, the mixed price is ($1.12+K5.8) per gallon (Imperial) or about K129/gallon at the parallel exchange rate. The official price of diesel is K20/gallon, and the free-market price is about K 1 60/gallon. - 61 - Table 3.8: Official and Free Market Prices of Selected Commodities (kyats) Commodity Unit 1987 1988 1989 1990 1991 1992 1993 1994 1995 Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. June Washing Soap Bar Official 2.0 6.5 8.0 8.0 8.0 9.0 9.0 9.0 9.0 Free 14.8 11.9 9.8 9.7 12.0 16.2 15.2 17.0 19.86 Matches Each Official 0.3 0.5 0.5 0.5 0.8 0.8 0.8 0.8 0.8 Free 1.0 1.0 1.0 1.3 1.3 1.8 2.0 2.0 2.0 Cigarettes 2ONos. Official 2.7 8.1 8.1 8.5 8.5 8.5 8.5 8.5 8.5 Free 36.1 16.5 18.0 18.0 26.2 30.2 24.2 30.2 34.0 Candles Pkt Official 1.5 1.5 1.5 4.2 4.5 4.5 4.5 4.5 4.5 Free 18.6 11.9 15.0 15.2 19.6 20.8 23.2 22.0 21.5 Vest (1/30) Each Official 7.2 10.3 10.3 10.3 10.3 24.8 24.8 24.8 24.8 Free 16.5 16.0 17.5 25.1 26.0 31.7 35.9 39.2 48.5 Long Cloth Yd Official 7.7 10.4 10.4 10.4 14.4 32.0 32.0 32.0 32.0 Free 16.0 16.5 19.3 26.0 35.3 47.5 41.9 43.8 48.0 Source: Central Statistical Organization - 62 - 3.27 Domestic input prices. Before 1989, all crops used as industrial raw materials were procured at official prices by the state, and made available at these prices to the SEs that used them. The liberalization of agricultural marketing has allowed the operation of private traders, and farners can choose to sell their produce to them. SEs must, therefore, now compete with private traders in purchasing the crops they use as industrial raw materials, and must do so at prices that are still set by the government. Table 3.9 compares these government procurement prices with those offered by private traders for three crops used as raw materials by SEs. In all these cases, the difference between the prices has narrowed since FY91, reflecting the difficulty that was initially faced by the SEs in procuring sufficient quantities. However, the government price for two of these three crops in FY95 was still much lower than that offered 7 by private traders. Table 3.9: Purchase Prices of Selected Agricultural Inputs (Kyats per metric ton) FY91 FY92 FY93 FY94 FY95 Cotton Government 13595 15257 15273 16503 22454 Private traders 16408 18329 17766 16737 22457 Jute Government 6835 7463 11501 10691 13723 Private traders 7349 11225 12224 12861 14208 Rubber Government 26993 40005 50892 59070 70057 Private traders 30871 40419 48004 52922 88203 Source: MNPED, Planning Department Operational Autonomv 3.28 In the pre-reform period. SE managers had little autonomy in making basic decisions concerning the operation of their enterprises. Decisions regarding output levels, product mix, marketing and distribution, external trade, employment and wages, and investments had to be approved by the supervising line ministries and often, also coordinated with other ministries. The reforms since 1989 have granted limited autonomy to SE managers in several areas, and the most significant of these are described below. 7 For the main food crops -- paddy, wheat and maize -- the government's procurement price in FY95 was also below that offered by private traders, by a factor of between 60% to 9%. - 63 - 3.29 Production. SEs are now allowed to use their facilities and equipment to or production on consignment basis for foreign or local entrepreneurs who furnish the raw materials. This method has grown in popularity, particularly with industrial SEs, because it has allowed them to obtain critical inputs (especially imports) and increase capacity utilization. For instance, during FY95, 27 factories under MOI (1) producing textiles and pharmaceuticals, operated under consignment basis. Eight of these were negotiated with foreign companies while the rest involved collaborations with local businessmen. The total value of output produced under such arrangements was K816 million in FY95. Since the commissions to SEs from these contracts are negotiated individually, consignment production also allows SE managers to circumvent the price controls that would otherwise apply to a portion of their output. Despite the increased flexibility due to this possibility, decisions concerning consignment production cannot be made by individual SE managers but rather must be referred to senior officials in the parent ministries. Apart from consignment production, SEs can also enter into joint ventures with foreign firms, establishing either new companies or converting existing factories. Under MOI(I) 10 such JVs have been established with the share of the SE varying from 45% to 65% of the equity, with this contribution taking the form of land and buildings. 3.30 Marketing and distribution. SE managers are now allowed to sell output at free-market prices once their enterprises' procurement targets have been met. In practice, however, low capacity utilization in most SEs means that their output levels are below the procurement targets or only slightly above them. Hence, little is sold at free-market prices, and managers do not actually have much discretion as to the distribution of output. For instance, Myanma General and Maintenance Industries (under MOI (I)) sold almost 78% of its FY95 output to government departments at controlled prices. Collectively, for the enterprises under MOI (1), the average share of output (in terms of value) sold to government departments was 46% in FY90 and, although declining, was still 40% in FY95. Moreover, all six of the enterprises under MOT (1) sold more than a sixth of the value of their output to government departments with three of the six enterprises selling over half their output in this manner.8 Another 14% of MOI(l) output value was accounted for bv inter-factory transactions, also at controlled prices. 3.31 Foreign exchange transactions. In 1993, a revolving fund of almost $60 million was established for the use of SEs under 8 ministries (MOI (1) and (2), Forestry, Hotels and Tourism, Livestock and Fisheries, Trade, Agriculture and Energy). This fund was intended as seed money to help the SEs generate additional foreign exchange. The foreign exchange earned by Ministries by using these allocations do not need to be surrendered, unlike other foreign exchange earnings. Moreover, whether or not the initial foreign exchange allocation is repaid is according to the discretion of the individual Ministries. While this allocation has enhanced the flexibility of SEs in making foreign exchange decisions it also means that Ministries and SEs would use it for more profitable activities while using centrally- allocated foreign exchange for less profitable ventures. The foreign exchange earnings from the other schemes that have been instituted since 1990 to encourage SEs to expand exports (para. 1.48) are treated like all other revenues of SEs, and are monitored and controlled centrally by the Ministry of Finance. 8 Since the prices on such sales are far lower than the free-market prices, the share of output (in physical terms) sold to government departments is even higher than is shown here. Also, these shares exclude sales to the government employees' cooperative and to the armed forces, which are also made at controlled prices. Such sales are particularly significant for Myanmar Pharmaceutical Industries, and collectively account for over 11% of the value of MOI(l) sales. - 64 - 3.32 Employment and wages. There has been little progress in expanding the role of enterprises in making decisions regarding employment and wage decisions. While employment in some SEs has fallen, these decreases have been the result of a centrally-mandated decision to reduce the workforce through attrition. For instance, the workforce employed by the enterprises of MOI (1) fell about 10% during FY90- 94. The reforms have not included any schemes to link performance and pay. A bonus system for managers that had been in place since the mid-1970s was discontinued in 1989 when salaries for all government personnel were raised. Financial Autonomy 3.33 Until 1989, SEs were financed under a working capital system. Each SE was allocated seed money from the government budget, and could then borrow the rest of its capital requirements from the Myanmar Economic Bank at nominal interest rates of between 5 and 8% p.a., depending on whether the financing was sought for investment or for working capital needs. In response to the rising debt burdens of SEs, the GOM decided at the start of FY90 to convert their debt to government equity. Simultaneously, a new system of financial management was established with the aim of exercising tighter control over SE finances. The finances of SEs were integrated with those of the administrative departments to form a centralized pool called the State Fund Account (SFA).9 3.34 The creation of the SFA has meant that SEs have little or no control any longer over their finances. Enterprises must deposit their receipts into the SFA (typically maintained by the MEB) and, like administrative departments, all their expenditures on current and capital accounts must be approved by the Budget Department. While the evaluation process for current expenditures is not very stringent, that for capital expenditures is a cumbersome process involving several ministries. SEs also can no longer borrow from commercial banks. Within the SFA, although separate accounts are maintained for each SEE for monitoring purposes, various pooling arrangements have been introduced since 1992 to allow transfer of funds from cash-surplus SEs to other enterprises. Fiscal Discipline 3.35 A major goal of pooling SE finances into the SFA was to instill greater discipline into the financial practices of these enterprises. While the SFA has increased scrutiny of expenditures, there is no evidence that the fiscal discipline imposed on unprofitable SEs has been strengthened. In fact, it appears to have had the opposite result. Since enterprises are now funded directly from the budget, these funds are not allocated according to any clear-cut criteria related to performance or need. For instance, Myanma Timber Enterprise (MTE), which is among the largest exporters in the economy, accounting for about a sixth of total exports in FY95, was able to import goods worth only about $4.5 million compared to its export earnings of over $150 million. Yet its managers consider lack of foreign exchange the main constraint in improving its capacity utilization, which languishes at about 60%. Moreover, the financial performance of individual SE is even less transparent than before because the SFA allows for funds to flow from cash- surplus to deficit enterprises. 9 The balance sheet of the SFA is maintained by the Central Bank. SEs account for between 60-70% of expenditures from the SFA. - 65 - Ownership and Management 3.36 Transferring the ownership and management of SEs to the private sector, foreign and domestic, has been viewed as an integral part of the GOM's efforts to reform the SE sector. Until 1995, privatization of functioning enterprises was limited to restoring small factories and establishments to their original owners from whom these were confiscated in the 1960s. Much of the progress in expanding private-sector involvement has come through the establishment of new joint ventures (JVs) and production- sharing arrangements between SEs and private investors, and through leasing the facilities of SEs to private entrepreneurs. In 1995, six establishments operated by SEs -- 4 cinemas and 2 workshops under MOI(2) -- were privatized (para. 3.39). 3.37 The main catalyst to establishing joint ventures and production-sharing contracts has been the enactment of the Foreign Investment Law in late-1988. This legislation opened up much of the Myanma economy to foreign investors. operating either as wholly-owned foreign companies or jointly with domestic firms, and offered significant fiscal incentives. Given the lack of information and uncertainty about the economy, manv investors have chosen to enter into JVs with already-established SEs. The foreign investors have contributed capital, foreign exchange, management skills and access to new technology, while the SEs have offered access to natural resources, prime locations, and infrastructural advantages. 3.38 Another form of private participation has been through the leasing of SE facilities to local entrepreneurs. Such leases are usually concluded on the basis of competitive bidding. Among the enterprises within MOI (1), for instance, 15 mills and factories have been leased out, and generated K43 million in FY94 in annual rental fees. Hence, almost 30% of the output of the Myanna Pharmaceutical Industries under MOI (1) is currently being produced by private entrepreneurs leasing its facilities. 3.39 In January 1995, the GOM announced the creation of a high-level Privatization Commission to oversee the detailed design and implementation of the program to privatize SEs. The Commission is being assisted by an Evaluation and Assessment Committee which will select the SEs to be privatized and conduct valuation of the assets of these SEs (especially land). The details of the methods of privatization are still being worked out but the Commission has identified 51 establishments to be privatized initially. Many of these are small establishments and workshops, but their composition shows an inclination to privatize commercial operations of SEs in areas where the private sector is already active.'° Of the 51 establishments that have been identified, 6 had been privatized by August 1995, using a tendering process. It is anticipated that 20 more of these establishments would be privatized by end-1995. Evaluation of SE Reforms 3.40 Although the reforms described above have altered many features of the operating environment for SEs, they have not effectively addressed the underlying policy distortions that have constrained the performance of SEs. This conclusion is not meant to dismiss the significance of many of '° Of the 51 establishments to be privatized, 18 factories and workshops are operated by SEs under MOI (1), 4 factories and workshops are under MOI (2), 4 factories are under the Ministry of Livestock Breeding and Fisheries (MOLF); 4 mills are under SEs of the Ministry of Trade; and 21 cinemas are operated by the Ministry of Information. - 66 - the actions that the GOM has taken, but rather to indicate that a long road lies ahead if SE reform in Myanmar is to be effective. 3.41 An example of the limitations of the current reforms is provided by the changes in pricing and marketing. The ability to sell a portion of their output in the free market has certainly improved the financial prospects for many SEs. However, as the data from the enterprises operated by MOI (1) show, the real impact of this step has been limited because a large share of production is still subject to government procurement or inter-enterprise transfers. The continued lack of adjustment of the official exchange rate, which is used in valuing all external trade transactions of SEs, also means that the ex- factory prices used as a basis for cost-plus pricing bear no relation to economic costs. Hence, many enterprises are still penalized by the complex pattern of cross-subsidies that arise from this system of price determination and marketing. Moreover, the financial profitability of enterprises in this situation provides no guidance as to their economic viability. For instance, the implicit subsidies on energy use and capital investment, which arise from the overvalued exchange rate and zero interest rate on borrowing, are excluded from the cost structures of enterprises. 3.42 Similarly, the changes designed to enhance the autonomy of SEs do not go far enough, and in some respects, have actually had the opposite effect. SEs do have more flexibility now in entering into transactions with private entrepreneurs to produce on consignment basis or even to lease their facilities to them. However, even these decisions are not left to SE managers but are centralized within the parent Ministries. And the allocation of investment funds and foreign exchange is actually more centralized now under the SFA than before 1989. All decisions on these matters are now made outside the enterprises on the basis of requests from the enterprises, which in aggregate are typically about 50% higher than the available amount." In sum, the operational and financial autonomy.of SE managers has shrunk, with control and oversight actually having become more centralized in their parent ministries. 3.43 The lack of progress in reforming the investment allocation system and exchange rate mechanism combined with the maintenance of the procurement system has meant that the informational content of prices, costs, and profits is as negligible today as it was before the reforms. Hence, it is still impossible to hold SE managers accountable for the performance of their enterprises. Not only is their role in making decisions limited; there are no clear indicators of good or bad performance in a situation where all prices are badly distorted. The obvious implication in this situation is that there are few incentives for SE managers to exercise fiscal discipline. And because the closure of loss-making enterprises has been ruled out, managers of SEs that make large losses can always blame the pricing and distribution system for their predicament, while knowing that the losses will be covered by the government budget. And, by assigning no value to foreign exchange and investment funds, the SFA worsens these managerial incentives to squander resources. Therefore, the reforms have not succeeded in making SE behavior more fiscally responsible. 3.44 As with price reform and autonomy, the progress that has been made toward privatization, while noteworthy when compared to the period before 1 989, masks serious problems in the approach that is being followed. As explained in greater detail in the following section, an important element of successful " For instance, all SE investment proposals are scrutinized by two inter-ministerial committees -- the Construction Coordination Committee chaired by the Minister of Construction, and the Equipment Control Committee, chaired by the Ministers of Industry (1) and (2). - 67 - privatization strategies in other formerly-socialist countries has been a clear definition of the future roles of the private and public sectors. This delineation serves as a blueprint based upon which the detailed design of the privatization exercise as well as other private sector development efforts can be formulated. The GOM's willingness to establish institutional mechanisms to help in privatization as well as to identify possible candidates is a good beginning. But, what is still missing is a detailed statement regarding the areas in which a continued SE role is envisaged. Hence, the rationale for the choice of the 51 enterprises to be privatized initially is unclear. Consequently, it is difficult for potential private investors to have a clear idea as to what else will be sold and when. The risk of this approach is, therefore, that it will result in a piecemeal transfonnation of the economy, in which the full benefits of privatization and the development of a vibrant private sector are not realized. D. DEEPENING STATE ENTERPRISE REFORM 3.45 The preceding discussion shows the gaps in the current efforts to reform SEs in Myanmar. In determining how to strengthen this program, it is important to first establish why the delineation of a clearer strategy is required in this area. An important lesson from efforts elsewhere to reform SEs is that successful programs includes several elements. On the one hand, macroeconomic and pricing policies need to be altered if these communicate the wrong signals to enterprises. Such changes in the enabling environment in which SEs operate are critical preconditions to undertaking more targeted SE reform. Those targeted policies, on the other hand, must be based on a clear definition of the role and objectives of the SE sector. Such an assessment at the very outsct of the reform effort allows clearer choices to be made as to which enterprises are to be retained in the public sector, and how the rest are to be divested or liquidated. In that context, decisions concerning privatization and the restructuring of enterprises can then be made more rationally. 3.46 These aspects of SE reform are well-illustrated by the experience of other transitional economies in Eastern Europe and East Asia. The key elements of these recent reforms are summarized in Box 3.1 for several of these countries, and contrasted with the Myanmar experience. These experiences show interesting similarities as well as differences in approach. While the transition strategies followed by these countries vary widely in terms of speed and sequencing, they share three common features. All the reforms aimed at price liberalization and macroeconomic stabilization, although the pace of those efforts was rapid in Vietnam and the forner Czechoslovakia but more gradual (and almost stop-go) in China. And, all of them emphasized efforts to encourage the establishment and expansion of new, non-state sector firms. In all countries, except China, this meant rapid growth in the private sector, and even in China, it translated into an expansion of the non-state sector, owned and controlled by local governments. Finally, all these reform programs emphasized financial accountability. They have attempted, with varying success, to impose financial discipline (hard budget constraints) on the remaining SEs by cutting subsidies and liquidating loss-making enterprises. - 68 - Box 3.1: Dimension of Reforms In Selected Transition Economies Viet Nam | China Poland Hungary Czech Republic Myanar Overanfl Reform |Comprehensive |Initiated in 197S| Partial reforms in 198 1; (Initiated in 1968; |Comprehensive |Partial reforms in 1989 reforms initiated in 1989 |reforms deepened in 1993 |comprehensive reforms in 1990 |deepened in 1991 reforms in 1991 |Enabline Environment | Price lIberalization Sweeping reforms Almost comprehensive by |Rapid liberalization in 1989- More than 90% free from More than 85% free. rapid Preliminary l1992 |90; large initial increases in administrative controls. |progress but less than Poland. administered prices. Most I prices now market-determined. | |Exchange rate policy Unification and major de- Devaluation in 1978; 46% devaluation in Jan. 1990 14% devaluation 51 % devaluation to a Nominal exchange rate pegged, and currency |valuation in 1989. (Unification ofexch. rate (peg; 16% devaluation |to crawling peg in Jan. i991. |crawling peg in Oct-l 990; |to SDR; extremely high convertlbitlty | in Jan. 1994 afler 51% |to crawling peg in May 1991 |The forint is now convertible |current account convertibility; |R?aNlI market. devaluation | |on current account other than |capital account still restricted (tourism. |Interest rate policy |Sharp rise to real positive (Lending rate slightly (More than 3-fold increase to Big fluctuations. Negative |Doubled in Jan- I 99 1; loan |Highly negative in real levels in 1989, slightly negative in | 8*Yte close to 0 in real |real positive levels by May | in real terms most of the rates positive from mid- (terms 1994 terms. 1990. time. 1991 Competiton poltcy Little progress, although Competition law in Competition law passed. No change extensive competition among place. TVEs. Trade Uberaliztion Removal of non-tariff restrictions, Open door policy for foreign Radical reforms in 1990; Progressive liberalization. Drastic reduction in tariffs; Little reform but still high tariffs. Also taxes investors, control on imports. some reapplication of Few quantitative restrictions few quantitative restrictions on some cxports. Fcw quantitative tariffs. maintained remain.. restrictions remain. a I I I~~~~~~~~~ - 69 - Viet Nan China Poland Hungary Czech. Mya r Privatization Small scale privatization Significant restitution None Extremely rapid growth in Moderately rapid private Smallscale privatization Limited lease of SE facilities and and liquidation private sector; rapid privati- sector growth; Privatization and restitution essentially JVs with foreign companies;. zation of small enterprises. complicated by restitution completed, rapid PSD limited privatization initiated. Large-scale pnvatization None None 12% of 8772 etiterpises 569 out of 2000 privatized Successful voucher privati- None privatized in 1993;600 zation of much of industry. targeted for mass privatization Foreign ownership of through commercialization. land restricted. Social safety nets Lump sum severance pay Mostly provided by enter- Payroll tax to finance Expensive welfare system Insurance based system in Old age pension for govt instead of tnemployment prises in the fomi of pension. Social Insurance Fhnd. supported by govt. budget. 1993 with contributions employees. Little social benefits. pension scheme Recent attempts so move from employers and from security for private sector. to a need-based system. workers Enterprise Restructurint Hard budget constraints Drastic cut in subsidies and Explicit subsidies reduced, Subsidies cut. Tight control on subsidies, Bank credit and subsidies Centralized budgeting subsidized credit. but extensive soft credit to Restructuring of non- but rollovers and gradual to enterprises tightly cont- system with too many enterprises. performing enterprise workout of bank debt. rolled. financial cushions loans initiated 1994. Change in fiscal balance -2.1 (1989-90) 10.5 (1989-90) -3 -1.6 in furst year (as % of ODP) Percentage change in 43 -28 -52 ratio subsidies/GDP, (first year of reform) Managerial autonomy Considerable freedom in Considerable freedom in Comprehensive but subject Comprehensive Comnprehertsive Limited output mix and sale, purchase output mix and sale, purchase to worker influence. of inputs, hiring and faring, of inuta hiring d firing. determining wages detemining w-ag Conracts systan for managers - 70 - Viet Namn ChiUa ! Poland i Hungary 1 Czech. Myanmar Profit remittance rTaxation of profits instead Taxati oaxation of profits Taxation of profits Taxation of profits 1100 percent of profit remittance jinstead ofprofit remitnance e l Worker lav-offs About 800.000 workers laid off. j isignificant Very high. Approximately Very high Very high No firing or lay-offs fired or retrenched due to 30% fall in industrial labor liquidation and merger during 1990-93. of state enterprises. Formal exit: bankruptcy Liquidation or merger of Little progress Bankruptcy law in place. Bankruptcy law applied to Bankruptcy law. in place No action inefficient SEs. large nos. of companies. Few actions. Wage Controls on SEs Tax hased on wage bill Tax based on wage bill Tax based on wage bill in Tax based on wage bill, Tax based on wage Centrally controlled 1990, on average wage relaxed in 1992. bill. thereafter Souirce: Balcerowitz and Gelb (1994), EBRD Transition Report, 1994. - 71 - 3.47 These similarities are especially pertinent in the context of Myannar's current SE reforms. As has already been shown earlier in this report, macroeconomic stability has not been restored. The key "prices" in the economy -- the exchange rate and the interest rate -- are still badly distorted with serious impacts on the operating environment of SEs and their finances. Moreover, the links between the SE sector and the government are still very strong, in financial and operational terms. The reforms to date have done little to enable SEs develop a more "arm's length" relationship with the government. And, finally, the current approach appears to stress selective privatization as a solution to the problems of the SE sector with little attention to the other elements of SE reform. In this sense, the approach thus far is ad hoc, and would be more effective if greater attention were focused on fleshing out a more complete approach, and on phasing different measures. Elements of an SE Reform Strategv 3.48 An effective SE reform strategy in the Myanma context would require actions in the following areas: (i) reforms of macroeconomic and sectoral policies to help define the environment in which SEs operate; (ii) clarification of the role and objectives of the SE sector, which would enable a classification of enterprises into those that would be retained by the state in the medium term, and those that could be divested immediately; (iii) measures to privatize management or ownership of SEs, including actions with regard to labor retrenchment; (iv) steps for restructuring those SEs that are to be retained, including ways of improving their operational and financial performance; and (v) actions aimed at supporting the development of strong domestic private enterprises that can replace SEs and ease the transition. In the rest of this section, recommendations in these areas are fleshed out along with the recent experiences of other countries that are restructuring their state-owned enterprises. Macroeconomic and Sectoral Policy Reform 3.49 The importance of stabilizing the macroeconomy and of restoring prices to their function as signals of scarcity to the success of SE reform is clear both from theory and cross-country experience. Macroeconomic reformns -- in particular, the adjustment of the exchange rate and interest rates to realistic levels -- would allow the true picture regarding the financial and economic viability of enterprises to emerge. Without such adjustment, the financial statements of SEs are unreliable because the key prices in the economy are wrong, and because many are recipients of large implicit subsidies through the underpricing of foreign exchange and capital. Similarly, until the prices at which SEs can purchase inputs and sell their outputs are liberalized. it is difficult to determine their economic viability. The other risk with attempting to divest SEs in such a controlled policy environment is that it may be necessary to offer offsetting subsidies and other fiscal benefits sweeteners to attract potential buyers. The fiscal and distortionary effects of such incentives would reduce the gains from SE reform. In contrast, there is no better way to encourage confidence among foreign investors than by eliminating overvaluation and enhancing convertibility of the currency. 3.50 The recent experience of successful reform in transitional economies supports this view. Most of them began their reforms with highiv-overvalued exchange rates, negative interest rates, and controlled prices. Almost all devalued their currencies substantially at the outset (Box 3.1). Poland and the former Czechoslovakia, for instance, devalued by almost 50% in 1990 before switching to a crawling- peg system of exchange rate determination. Similarly, Viet Nam's devaluation of almost 70% in 1989 almost completely eliminated the parallel-market premium. And, although China only unified its exchange rates in early-1994, its official nominal exchange rate had been devalued by over 500% since 1978, thereby - 72 - greatly reducing its overvaluation. The pattern is similar with interest rate liberalization. Poland, the former Czechoslovakia and Viet Nam all raised their interest rates sharply to positive real levels in 1989 and 1990. Even in China, interest rates have been only slightly negative in real termis. Finally, price liberalization has been undertaken extensively in all these economies including Viet Nam and China. 3.51 The lessons for Myanmar are straightforward. If the reform of SEs is to succeed, complementary changes in macroeconomic and sectoral policies must be among the highest priorities. Even apart from the stabilization case for an adjustment of the official exchange rate and the restoration of interest rates to positive real levels, the ultimate success of SE reforms depends on those actions. This assertion is not to imply that no progress can be made on restructuring SEs in the absence of macroeconomic and pricing reform. Rather, the risk of such incomplete reform would be that whatever progress is made will be slow and costly. In privatizing SEs, for instance, it is possible that buyers (likely foreign firms) can be found for the most attractive divestiture candidates. But, with the large distortions that remain at the macroeconomic and microeconomic level, these potential purchasers will face much uncertainty about future profits and costs. Therefore, they will seek guarantees and subsidies, open and hidden, to assure them of acceptable returns. If such protections are widely granted, as they will have to be, it will mean that the inefficiency of the SE sector would only have been replaced by that of protected private enterprises. 3.52 The main adverse consequence from such reforms that is feared by policymakers in Myanmar is rising inflation. Undoubtedly, adjusting administered prices, including interest rates and the exchange rate, will result in a one-time increase in the price level. However, experience from other reforming economies indicates that, with proper macroeconomic management and sustained reforms, inflationary pressures can be controlled. For instance, a tight fiscal and monetary stance brought the inflation rate in Viet Nam down from almost 400% in end-1988 to 35% in end-1989. Similarly, in Czechoslovakia, the inflation rate was reduced to less than 20% within the first year of reforms. And, the situation may be even more favorable for Myanmar on several counts. The public sector is a much smaller part of the economy, in terms of output and employment, than was the case in China and in Eastern Europe, and no larger than in Viet Nam. And, much of the price adjustment has already occurred in Myanmar through the parallel exchange rate market (para. 1.62). On both counts, therefore, the direct and indirect impacts, such as a wage-price spiral and cost-push effects, of price liberalization would be dampened. Clarification of the Role of SEs 3.53 With the reforms since 1989, the Myanma economy is now based on markets rather than on state ownership. This shift in paradigm obviously means the role and the objectives of SEs has changed. The restructuring of SEs would be facilitated if their new role in a market-oriented economy is spelt out. Specifically, the goals of SEs in this changed economic environment need to be clarified before specific details of their restructuring can be worked out. Those goals will deternine, in large part, the extent to which divestiture is necessary, how restructuring of enterprises should proceed, and how fast privatization would need to proceed. 3.54 While this report cannot detail the precise role that SEs would play in a market-oriented Myanma economy, a general observation is relevant. Judging by the GOM's statements, it is fully committed to the transformation of the economy into one that is led by the private sector and is integrated with the world economy. Given that vision, the role of the SE sector would be relatively minor. It is - 73 - difficult to think of many areas of the economy in which SEs would be required. The only possible exceptions of many magnitude would be sectors in which large and lumpy capital investments and scale economies, such as electricity generation and distribution, and water supply and sewerage.12 In the rest of the industrial and service sector (as in the rest of the economy), the private sector (domestic and foreign) is quite capable of serving consumers more effectively and at lower cost than has been the experience with SEs. This is not to imply that the government would play no role in economic activity. Rather it would devote its resources to supplying efficiently the infrastructural services and public goods (such as education and health services) for which it would still be responsible. And, it would be referee for economic activity ensuring that businesses do not behave as monopolists, and that environmental and social laws are obeyed. 3.55 Policymakers in Myanmar have to decide whether this division of labor between the private and public sectors, is one with which they are comfortable. While this vision rests on the experience of many countries, industrial and developing, its promise in terms of efficiency does not mean that the transition from the current situation will be smooth or easy. As with any other wrenching change, there will be losers just as there will be winners. But as economic reformers in many other transitional economies have decided, the potential gains far outweigh the losses. In Eastern Europe and Viet Nam, for instance, economic reformers decided early in the reform process that the ultimate goal of their economic restructuring was a predominantly private-market economy. In that context, substantial privatization of SEs and private-sector development measures were obviously emphasized. China, on the other hand, decided to maintain its state ownership of SEs. Therefore, its reforms have been aimed at creating "socialist market" that mimics competitive conditions without privatization. 3.56 Once the role of SEs in the economy and their goals are clarified, the next step for SE reform is to classify all existing enterprises on the basis of whether or not they should be retained by the government in the medium term. Of those that are to be divested, their viability in a reformed policy environment will need to be assessed so as to decide on how best to divest them. These are tasks that the GOM needs to begin immediately, using the newly-created institutions it has established to assist in privatization. While precise decisions regarding the viability of many enterprises (and the value of their assets) may be difficult at the outset due to the distortions that currently exist, the cases at either extreme will be relatively easy to identify, i.e., those are clearly viable, and those that are obviously uneconomic. Privatization 3.57 An important lesson from other reforming countries is that privatization efforts should be aimed primarily at maximizing economic benefits. After all, enhancing economic efficiency is the main reason for wanting to reform the economy in general, and to restructure the SE sector in particular. Accepting this goal means that the design and phasing of privatization efforts should not be dictated by other objectives such as generating the most money from sales of SEs or developing capital markets or broadening stock ownership among the population or in particular groups of the population. Hence, SE assets should not be disposed of on terms that impose costs on other parts of the economy. Specifically, it 12 Even in these sectors, it is possible to have efficient service provision by regulated private firms. Many countries, industrial and developing (including several in East Asia), have moved to this model or are in the process of moving towards it by privatizing or corporatizing their public utilities. - 74 - is critical that some purchasers not be given special privileges, such as fiscal incentives or import protection, on the grounds that their acquisition of the enterprises would help attain non-economic goals. 3.58 Without a detailed analysis of the businesses in which individual enterprises are involved and of their economic viability, which is beyond the scope of this report, precisely which enterprises would be retained in the public sector cannot be identified. However, it is probable that, if the test of economic efficiency is applied, the public sector would eventually divest itself of most existing SEs. There are no compelling reasons for public-sector involvement in (and, in several cases, monopoly over) such areas as textiles, pharmaceuticals and machine tools production, or in operating departnent stores, and breeding livestock. 3.59 Why privatize rather than restructure first. There are several reasons to emphasize large- scale privatization in attempting to improve the performance of the SE sector. First, there is growing evidence from a number of economies, both market-oriented and transitional, to support the contention than ownership matters. For example, although profits continued to decline in most Polish firms in 1992, the smallest declines occurred in firms that had been privatized through sales, auctions or public offerings. Employment losses were also the smallest in genuinely privatized firms while they were the highest in commercialized SEs. And, even partial privatization has led to considerable restructuring within enterprises. In China, although SEs have improved their performance due to restructuring, the annual productivity growth recorded by the non-state town and village enterprises (TVEs) during 1980-92 was more than twice as rapid.3 Even stronger support emerges from a recent study that evaluates twelve cases of privatization in Chile, Malaysia, Mexico, and the U.K.. It concludes that in eleven of these enterprises, domestic welfare improved substantially, mainly because of increased investment and productivity gains in the privatized firms.14 3.60 The case for privatizing ownership quickly to enhance economic efficiency is strengthened by two other factors. First, evidence from a range of countries (mixed economies and transitional economies) shows that attempts to improve the performance of the SE sector through sector-wide restructuring programs have succeeded rarely. In part, this reflects the detailed information needed to design and implement such programs, which is typically not available in transition economies. Also, it is probable that "insiders" who have the best information on the enterprises would adversely influence the implementation of restructuring. In Hungary and China, for example, managers and workers of SEs being restructured have claimed disproportionate amounts in wage payments, thereby reducing the funds available for investment. 3.61 Experience shows that the other problem in restructuring extensively before privatization is the difficulty of imposing hard budget constraints on large numbers of SEs during this process. In China and Poland, this has led to the need for frequent bail-outs, and associated fiscal difficulties. Finally, the will to persevere with these enterprise-level reforms usually falters once the immediate crisis in SE finances 13 The evidence for Poland is from a survey of 55 privatized finns conducted in mid-1992. For details, see Dabrowski, J., et. al. (1992). For China, see Jefferson and Rawski (1994). 14 For a summary of these results, see Kikeri (et.al.), (1992). - 75 - has passed. For example, in China, a restructuring program for SEs improved performance of some enterprises, but about a third of all SEs still make losses, accounting for a sixth of public expenditures. 3.62 The second factor that argues in favor of less state ownership is that this approach is typically the only practical way of "leveling the playing field" between SEs and private-sector firns. As Chapter 2 documented, a major constraint to private-sector activity outside agriculture and trade in Myanmar is the continued bias against private firms and in favor of SEs in allocating credit and imports, and in access to infrastructure. While some steps can be taken in reducing these advantages, experience shows that these biases are difficult to uproot in economies like Myanmar where the private sector has long been assigned a peripheral role and SEs have been dominant. In this situation, the only effective way of improving private-sector access is by reducing the direct involvement of the public sector in economic activity. 3.63 Privatization in Myanmar. The design of a successful privatization strategy must take account of the initial conditions of the country as well of the SE sector. Several aspects of the current situation in Myanmar are particularly relevant because they limit what is possible. The most important constraints are limited absorptive capacity and undeveloped capital markets. Due to low savings rates, and a weak domestic private sector, there is unlikely to be much demand among local investors for the enterprises being privatized. The absence of a stock market means that the sale of SEs through public issues of shares is not possible. Moreover, the financial condition of many of the enterprises is weak and the existing cross-subsidies and controls make it difficult to evaluate their true financial condition. And most SEs, even in manufacturing, are effectively shielded from competition. For economic efficiency, their divestiture must be accompanied by measure to promote competition. However, given its direct involvement in economic activity, the GOM currently lacks the capacity to design and implement such regulatory policies effectively. 3.64 These initial conditions have four main implications for the pace and sequencing, and form of privatization efforts in Myanmar. First, privatization should begin with small and relatively simple enterprises. In these cases, their viability is usually easy to ascertain. Their capitalization would be such that buyers can be identified quickly. And, if mistakes are made in the privatization transaction, the overall economic impacts are likely to be limited. This approach was followed, for example in Viet Nam, which rapidly privatized (or restored to the former owners) large numbers of small enterprises. To accelerate this process for small firms, the managers and workers of the enterprises could be allowed to initiate the liquidation process as is being proposed in Poland. 3.65 Second, care should be taken that too much effort does not go into the precise valuation of assets for the small and medium SEs that would be privatized in the initial phases of privatization.'5 In part, this conclusion stems from the difficulty of such a valuation exercise in Myanmar because prices are distorted so badly. Further, for the types and sizes of enterprises that would be covered initially, even if there is systematic undervaluation of SE assets in these sales (and there is no reason to believe there should be), it would probably be more than offset by the gains from initiating and completing the process quickly. The emphasis should be on transferring these assets rapidly out of the state sector and into private hands. If too much time and effort are spent on valuation, the costs can be excessive, both of the valuation exercise itself and from the continued SE losses that will affect the government budget. 15 Part of the current delays in quickly disposing of even the 51 establishments identified for privatization in Myanmar appears to stem from the process of valuing their assets, especially land. - 76 - 3.66 Third, a combination of privatization techniques will be necessary to fit the range of enterprises. Some of the privatization methods used in transition economies are summarized in Box 3.2. If mass privatization is chosen as a viable option, a decision would need to be made between issuing vouchers (as in Czechoslovakia and Russia), and whether to corporatize (or commercialize) the enterprises before selling shares to the public (as in Hungary and Poland). The main advantage of voucher privatization is that it can be implemented rapidly and does not require prior restructuring of enterprises or large savings in the private sector. While it has been successfully implemented in Czechoslovakia, the problem is that (without reserving a portion of stock for a single large owner), it might dilute control too much. Corporatization, however, would require prior restructuring of enterprises, which as noted earlier could be costly and ineffective. Box 3.2: Privatization Methods in Transition Economies Mass Privatization: This method is suitable for large-sized enterprises, irrespective of their financial condition and was done through distribution of vouchers to eligible citizens, for a nominal price in the former Czechoslovakia and for free in Russia. Investment Privatization Funds in the Czech Republic (and voucher investment funds in Russia) collected vouchers from citizens and invested these in SEs slated for privatization. The original voucher holders then became shareholders in the investment funds when privatization was complete. It was very successful in the Czech Republic, but in Russia the use of preferential stock ownership options resulted in insiders taking over many enterprises. Commercialization or Corporatization: This is suitable for preparing large and medium-sized firms in good financial condition for mass privatization. In Poland, 450 selected enterprises will be converted into joint-stock companies and their shares will be transferred to 20 newly established national investment funds. In Hungary in 1992, all SEs were compulsorily corporatized and their shares were transferred to the State Property Agency which oversaw sale of enterprises. Spontaneous privatization or liquidation: This is useful for small enterprises in good financial condition. Assets can be sold or auctioned, used as contribution to the equity of a new company, or leased for a fixed period. In Poland, this process is to be initiated by management and workers' councils of SEs. Bankruptcy Liquidation: This is necessary for enterprises facing financial difficulties. It has been attempted in Poland, Hlungarv and Viet Nam. Restitution and Reprivatization: This has been used typically for small enterprises that were nationalized by the former communist governments where these are to be returned to the original owners. This has been implemented in the former Czechoslovakia, Poland, Hungary and Viet Nam. - 77 - 3.67 Finally, the essential role of liquidating non-viable SEs early in this process needs to be recognized by policymakers. It is obviously easier to privatize profit-making enterprises, and tempting to postpone action on those suffering losses. Given the poor financial and operational health of many SEs in Myanmar, the latter will find it difficult to compete effectively with domestic and import competition in a liberalized and unsubsidized environment. And the obsolescence of their capital equipment and excess employment mean that they will not be attractive candidates for acquisition by private entrepreneurs. Unless arrangements are made to liquidate these enterprises quickly, they will drain the budget even more. And the entire SE reform process would be threatened if this fiscal impact is dealt with by reintroducing subsidies to rescue these enterprises. Therefore, it is essential to formulate an exit policy and allow liquidation of enterprises through bankruptcy proceedings. 3.68 Also, for medium-sized enterprises that are not included in the first phase of privatization, an useful interim measure would be to lease their facilities to private entrepreneurs. Such leases are already being used for some factories by some enterprises of MOI (1) and MOLF, and their application could be broadened. The investors who lease the SEs would then be granted complete operational and financial autonomy in return for the payment of a fixed fee, which could be renegotiated periodically. Again, labor retrenchment is an issue that would need to be worked out because the lessors of the facilities should be free to make their own wage and employment decisions. 3.69 An important policy issue that would need to be dealt with if liquidations of enterprises are to be politically feasible is the design of measures to provide severance payments to workers who lose jobs. The problem may be more manageable in Myanmar compared to many other transition economies because overstaffing in SEs appears not to be as serious. And, as the experience of Viet Nam shows, a significant share of workers laid off by the liquidation of SEs (almost 800,000 in Viet Nam) would find alternative employment quickly if private-sector growth accelerates. Currently, since no labor retrenchment has occurred, no severance pay scheme exist. Although many transition economies have financed unemployment benefits by taxing wages, it would be better if Myanmar followed the lead of Viet Nam, where lump-sum severance payments are made to workers who are laid off due to liquidation of SEs. 3.70 In sum, therefore, a well-designed privatization program offers Myanmar the opportunity to enhance efficiency in its industrial and service sectors. It is important, however, that this program not place too many constraints on potential buyers either in terms of their qualifications or future operation of the enterprise. And, it is essential that the pace and composition reflect the realities of the Myanma economy and of the financial and operational health of the enterprises being privatized. Finally, it needs to be recognized explicitly by policymakers that privatization is only one way of encouraging the involvement of private firms. Experience from Eastern Europe and China has shown that far more important, in some respects, are actions aimed at making it easier for the private sector to establish and operate new businesses, and steps that promote competition within the economy. These measures are discussed in the concluding section of this Chapter. Restructuring SEs 3.71 Not all SEs in Myanmar can or should be divested by the government in the short and medium-term -- several large enterprises such as those involved in petroleum and gas exploration, electric power generation and distribution, and commercial banking will be retained. To manage these enterprises better, it is important that the policy and institutional framework within which they operate be revamped. Two elements of reform are key -- autonomy and accountability. - 78 - 3.72 Managerial and financial autonomy. Decentralizing decision making within the SEs to be retained by granting real autonomy in financial and operational matters to managers is essential for improving SE performance. Managers should be free to choose their output mix, make choices regarding outputs and inputs and decide on hiring and firing workers. Without being able to make such basic decisions, SEs will find it hard to survive without continued government support. An essential precondition for increasing the financial autonomy of SEs is that the centralized budget system based on the SFA must be replaced by a system of separate accounts for each enterprise. 3.73 One way to grant managers greater autonomy is to introduce management contracts that specify explicit performance targets. In China, this system contributed greatly to the improved performance of the SE sector in the 1980s. Another reform, which would enhance the financial independence of SEs, would be to implement a profit tax for SEs. Such a tax wouli- allow SEs to retain a part of their profits rather than having to remit all their profits to the budget, as with the current system. This step, which has also been implemented in China, would provide SE managers an incentive to increase profits by improving efficiency as well as providing them retained earnings with which to finance investment. Unlike the situation in which capital expenditures are allocated from the budget, this would ensure that only well-performing firms have access to investment funds. 3.74 Financial discipline. However, granting SEs greater autonomy without making them more accountable for their performance would be disastrous. The most important mechanism by which such discipline would be enhanced is the imposition of a hard budget constraint. The first step would be to eliminate the implicit and explicit subsidies currently enjoyed by SEs. In Myanmar, this would mean adjusting the exchange rate so that SE imports are not underpriced, increasing interest rates on SE loans to positive real levels, raising the prices of energy to SEs to the same levels as for private firms, and reducing the exemptions that most SEs currently enjoy on import tariffs and commercial taxes. Elimninating financial and economic subsidies was among the first reforms introduced in the successful transition economies of Eastern Europe. 3.75 However, input subsidies are only one aspect of soft budgets for SEs. Enterprises can also avoid attempts to impose financial discipline by defaulting on loans and interest payments to the banking sector. This has been a major problem in Poland and China where a large portion of bank debt is concentrated in loss-making, inefficient enterprises. Similarly, SEs can default on payments to other enterprises. Such inter-enterprise arrears have been particularly severe in Russia and Romania. To ensure that SEs cannot escape hard budget constraints through defaults, it is essential that bankruptcy is made a credible threat to their managements. While implementation has proven difficult in practice, many transition economies have enacted bankruptcv lawvs for SEs, and this step should receive priority in Myanmar. Private Sector Development 3.76 Among the lessons from the reform experience of transition economies is the importance of measures to support the growth and expansion of the private sector. Rapid private sector development can ease the employment and output losses that are typically associated with the initial stages of SE reform. Moreover, removing burdensome restrictions and regulations on private sector operations can yield quick and dramatic dividends. For example, many countries in Eastern and Central Europe lifted their onerous controls over the establishment, expansion and operation of private firms at the outset of their reforms. The response was immediate: in 1990, over half a million private single proprietorships were registered in - 79 - Poland, and a comparable number of applications were received in the former Czechoslovakia. The number of private firms has, therefore risen dramatically in many of these economies. During 1989-93, the number of sole proprietorships rose twelve-fold in the former Czechoslovakia, two and a half times in Hungary, and more than doubled in Poland. The number of registered private sector companies also rose sharply, to more than 75,000 in each of these three countries. Consequently, the private sector now contributes significantly to GDP and total employment. In the former Czechoslovakia, the private sector share of GDP has risen to over a third, compared to under 5% in 1989, while in Hungary and Poland, it is even more important, contributing almost half of GDP. The same success is evident in Viet Nam's efforts. The share of the private sector in employment nearly doubled, to about a third, during 1989-92. 3.77 This evidence suggests that policymakers should consider two sets of changes in the approach to private sector development. First, more sustained efforts are required to remove the regulatory barriers to the establishment and operation of private firms. Clarifying land ownership and use rights, and improving the access of private firms to public services and infrastructure, as recommended in Chapter 2, would be important steps in this direction. Although the legal procedures involved in registering and operating private businesses appear simple and straightforward at present, limited access to services and industrial sites means that, in reality, the process is far more cumbersome.16 The GOM should, therefore, work with private-sector representatives, such as the Myanmar Chamber of Commerce, in identifying the regulatory and legal constraints on private businesses. 3.78 The second change necessary is one of philosophy. It is unsurprising, in light of Myanmar's previous economic system, that many policymakers perceive the need to control and monitor private sector activity closely. This attitude needs to change with the reorientation of the economy to one that will be led by private sector activity. In such an economy, the direction and pace of economic activity will be dictated largely by the decisions and choices of private sector firms and consumers. The role of the govermnent in this situation would be regulatory and supportive, not controlling and coercive. The "rules of the game" would need to be spelt out and enforced, and institutions developed to support private-sector initiative. An important aspect of the regulatory role would be to promote competition, not only between private-sector businesses, but also between these firms and the remaining SEs. 3.79 A particular gap in this regard in Myanmar is with providing support services to private finrms. For example, the Yangon City Development Committee (YCDC) was formed as a municipal corporation in 1990 and is the largest local-government institution. YCDC views its role mainly in terms of providing permits for buildings, and water and sanitation facilities, and collecting a range of local taxes, within the municipal area as well as being involved directly in economic activity by, for instance, entering into joint ventures to establish hotels. It plays virtually no role in providing support services to the private sector either in the form of information or by constructing industrial estates where private firms can have better access to infrastructure. Similar institutions in successful South-East Asian countries have viewed the provision of such support as an important component of their responsibilities. Broadening the role of local institutions such as YCDC to the provision of promotional and support service to the private sector, while limiting its direct participation in economic activity, is a key area for reform. 16 For example, while the registration of a new private industrial enterprise only costs K75,000, the factory must already be in place before it can be registered. With limited access to land and credit, building the factory itself may be near impossible. - 80 - 3.80 The other aspect that needs improvement to help private sector development efforts is the GOM's interaction with the private sector. As noted in Chapter 2, the lack of dialogue at present contributes to the persistence of many of the problems faced by private firms. It is, therefore, essential that mechanisms be established through which a dialogue concerning policy and institutional reforms can be conducted with representatives of the private sector, domestic and foreign. Such consultation has been an important ingredient in the economic success of such countries as Korea, Thailand, and Indonesia, because it helps build the consensus necessary to formulate and implement a medium-term development strategy. - 81 - BIBLIOGRAPHY Balcerowicz, H. and A. Gelb., "Policy Lessons from Early Reformers," paper prepared for the Sixth Annual World Bank Conference on Development Economics, 1994. Dawbrowski, J., M. Federowicz, and J. Szomburg, "Privatization of the Polish State Owned Enterprises," The Gdansk Institute for Market Economies, 1992. Dollar, D., "Macroeconomic Management and the Transition to the Market in Vietnam," Journal of Comparative Economics, Vol.18, pp.357-375, 1994. European Bank for Reconstruction and Development (EBRD), Transition Report: Economic Transition in Eastem and the Former Soviet Union, 1994. Feder, G., T. Onchan, Y. Chalamwong, and C. Hongladarom, Land Policies and Farm Productivity in Thailand, 1988. Harrison, P.M., "Myanmar: A Review of the Agricultural Sector," Background paper prepared for the World Bank Country Economic Memorandum, June 1990. Jefferson, G., and T. Rawski, "Enterprise Reforms in Chinese Industry," Journal of Economic Perspectives, Vol. 8, pp. 47-70, 1994. Kikeri, S., J. Nellis, and M. Shirley, Privatization: The Lessons of Experience, World Bank, 1992. Krueger, A.O., M. Schiff, and A. Valdes (eds.), The Political Economy of Agricultural Pricing Policy, World Bank, 1991. UNDP, Report MYA/86/012, pp. 29-32, 1992. World Bank, The East Asian Miracle: Economic Growth and Public Policy, 1993. East Asia's Trade and Investment, 1994. - 82 - Annex 1. I Page I of 3 Energy Subsidies - FY90 to FY95 FY90 FY91 FY92 FY93 . FY94 FY95 Gasoline Official retail (per liter) a/ 3.52 3.52 3.52 3.52 3.52 5.50 CIF 1.12 0.97 0.86 0.93 0.77 0.88 Unit financial subsidy - - -- -- - -- CIF(parallelexch.rate)b/ 7.02 7.64 11.31 14.98 14.31 16.47 Unit economic subsidy 3.50 4.12 7.79 11.46 10.79 10.97 Consumption(millionliters)c/ 173.16 176.80 201.80 204.60 278.90 236.44 Total finl subsidy - -- -- -- - - Total econ. subsidy (K. million) 606.68 729.19 1572.70 2345.03 3009.93 2594.32 Diesel Officialretail (per liter) a/ 2.31 2.31 2.31 2.31 2.31 4.40 CIF 1.15 1.00 1.04 1.10 0.90 0.83 Unit financial subsidy -- - -- - -- -- CIF (parallel exch. rate) b/ 7.24 7.90 13.66 17.69 16.69 15.51 Unit economic subsidy 4.93 5.59 11.35 15.38 14.38 11.11 Consumption (million liters) c/ 380.87 389.96 444.50 398.23 435.74 575.37 Total fin'l subsidy -- - - -- -- Total econ. subsidy (K. million) 1879.07 2178.95 5044.68 6125.26 6267.18 6390.93 Electric power Average tariffs (Kyat per Kwh) 0.49 0.49 0.50 0.50 0.50 0.90 Unit supply cost (Kyat per Kwh) 0.42 0.46 0.52 0.53 0.55 0.66 Unit fin'l subsidy (Kyat per Kwh) - - 0.02 0.03 0.05 -- CIF (parallel exch. rate) d/ 3.23 3.72 6.42 7.95 9.05 8.80 Unit economic subsidy 2.74 3.23 5.92 7.45 8.55 7.90 Consumption (million Kwh.) 1601.00 1675.00 1677.00 1831.00 2032.00 2083.00 Total fin'l subsidy (K. million) - - 28.51 45.78 103.63 -- Total econ. subsidy (K. million) 4392.18 5403.22 9926.16 13643.88 17371.57 16455.70 a/ I bbl. = 159.6 liters; I Imperial gallon = 4.545 liters; b/ Uses parallel exchange rate for end of previous calendar year, and year-end crude prices CIF Yangon; c/ Actual consumption of gasoline and diesel for 89/90; and 92/93 onwards; for other years, 89/90 shares are applied to actual total consumption of petroleum products; d/ Assumes unit supply cost of S0.08/Kwh., and parallel exchange rate for end of previous calendar year; Source: Ministry of Energy, MEPE, and staff estimates. - 83 - Annex 1. I Page 2 of 3 Fertilizer Subsidies - FY90 to FY95 FY90 FY91 FY92 Fv93 FY94 FY95 Urea (per ton) Official retail 2160 2160 2160 2160 12000 12000 Prodn. and distn. cost (domestic) 2602 3248 3699 4072 4410 4413 Unit financial subsidy (Kyat) 442 1088 1539 1912 -- - Import parity price a/ 11753 14183 26463 35654 25881 25242 Unit economic subsidy 9593 12023 24303 33494 13881 13242 Consumption ('000 tons) 192 143 144 135 336 311 Total fin'l subsidy (K'000) 84864 155584 221616 258120 -- -- Totalecon. subsidy(Kmillion) 1842 1719 3500 4522 4664 4118 TSP (per ton) Official retail 1900 3400 5000 5000 8000 8000 Import and distn. cost 3916 3975 n.a 3807 3971 4186 Unit financial subsidy 2016 575 -- -- -- -- Import parity price a/ 18728 17410 n.a 29463 25487 24850 Unit economic subsidy 16828 14010 n.a 24463 17487 16850 Consumption ('000 tons) 33 20 -- 47 33 116 Total fin'l subsidy (K '000) 66528 11500 n.a -- -- -- Total econ. subsidy (K million) 555.32 280.19 n.a 1149.78 577.05 1954.60 a/ Applies parallel exchange rate at end of previous calendar year to S import parity price in FY94 and FY95 or to import component of cost in previous years; Source: Ministry of Agriculture, and staff estimates. - 84 - Annex 1. I Page 3 of 3 Rice Consumption Subsidies - FY90 to FY95 FY90 FY91 FY92 FY93 FY94 FY95 Rice Official retail price (per pyi) a/ 5.20 7.00 8.00 14.00 14.00 14.00 Official retail price (per ton) 2444.44 3290.60 3760.68 6581.20 6581.20 6962.09 Procurement price (incl. transp.) 2592.24 4278.93 4524.50 5186.66 7390.52 7565.03 Unit financial subsidy 147.79 988.33 763.82 -1394.53 809.32 602.94 Parallel market price (per ton) 6176.92 4254.27 8414.53 14022.65 16490.60 18432.05 Unit economic subsidy b/ 3732.48 963.68 4653.85 7441.45 9909.40 11469.96 Total subsidized sales ('000 tons) 1211.00 1099.00 1244.00 1421.00 1139.00 896.00 Total fin'l subsidy (million K) 178.98 1086.17 950.19 -1981.63 921.82 540.23 Total econ. subsidy ('million K) 4520.03 1059.08 5789.38 10574.30 11286.81 10277.08 Memorandum item: Rice procurement (per ton): Paddy price (govt.) 1235 2297 2320 2308 3553 3833 Paddy price (coops.) 2376 2420 2420 3448 4491 3683 Paddy price (pvt. traders) 2738 2564 3564 4424 7045 7668 Procurement amount (govt.) 1313 1504 1558 1649 1926 2087 Procurement amount (coops.) 169 347 536 571 13 4 Av. procurement price (paddy) 1365.11 2320.06 2345.60 2601.22 3559.29 3832.71 Av. procurement price (rice) 2275.19 3866.76 3909.33 4335.36 5932.15 6387.86 Milling costs c/ 115.00 149.50 194.35 252.66 328.45 426.99 Transport costs d/ 202.05 262.66 341.46 443.90 577.07 750.19 Procurement price 2592.24 4278.93 4445.14 5031.91 6837.67 7565.03 Residual private paddy procurement 536.33 -19.33 -20.67 148.33 -40.67 -597.67 Adjusted procurement price (paddy) 2046.98 3411.94 Adjusted procurement price (rice) e/ 3411.63 5686.56 Adjusted unit fin'l subsidy -967.19 894.64 Adjusted total fin'l subsidy ('000 K) -1171.27 1271.28 Notes: a/ I Pyi = 4.68 pounds; For FY95, official retail price is K25/Pyi for sales by cooperatives (= 66,000 tons) b/ Estimated as difference between parallel market price and official retail price c/ Milling costs assumed at K. 115/ton (Harrison, 1990); inflation rate of 30 percent d/ Transport costs assumed at K120/ton from farm to mill, and 320 km. at $0.04/ton.km. e/ Difference between procurement amount at official prices and requirement assumed procured at private traders' prices. Source: Ministry of Agriculture, Ministry of National Planning and Development, and staff estimates. - 85 - Annex 2.1 Page 1 of 2 Impact of Procurement and Export Ban on Returns to Paddy Cultivation (Kyats per acre) a/ Traditional Paddy HYV Paddy HYV Paddy Rainfed Irrigated Credit 300 400 400 Seed 150 150 150 Family labor 1567 2660 1180 Hired labor 887 1259 1355 Animal power 1550 1550 1550 Tractor power 300 300 300 Fertilizer 300 1150 1150 Subsidies and taxes Fertilizer 555.00 1356.63 1356.63 Land tax 4.00 4.00 4.00 Production cost 5058 7473 6089 Output Yield (baskets) b/ 42.00 57.67 68.21 Marketed quantity 37.00 46.67 57.21 Domestic market price 200 200 200 Value of marketed output 7400 9334 11442 Price Effect of Procurement and Export Ban Quantity procured (baskets) 5 11 11 Procurement price 70 70 70 Value of procured quantity 350 770 770 Av. farmgate price (per basket) 184.52 175.20 179.04 Price reduction (farmgate price rel. to dom. mkt. price) (%) 7.74 12.40 10.48 Export parity price c/ 240.63 240.63 240.63 Price reduction (dom. price rel. to exp. parity) (%) 16.88 16.88 16.88 Output and Income Effects of Procurement and Export Ban Increase in output with removal of export ban (%) d/ 9.86 9.86 9.86 Output without export ban (baskets) 46.14 63.36 74.94 Effects of Policies on Output Value (assuming no yield Increase) Value of output (at export parity price; no procurement) 10106.25 13876.84 16413.03 Value of output (with export ban; no procurement) 8400.00 11534.00 13642.00 Value of output (with export ban and procurement) 7750.00 10104.00 12212.00 Inc. in output value without export ban and procurement (%) 30.40 37.34 34.40 Loss in income due to procurement 650 1430 1430 Loss in income due to export ban 1706.25 2342.84 2771.03 Total loss in income (per acre) 2356.25 3772.84 4201.03 - 86 - Annex 2.1 Page 2 of 2 Impact of Procurement and Export Ban on Returns to Paddy Cultivation (Kyats per acre) a/ Traditional Paddy HYV Paddy HYV Paddy Rainfed Irrigated Effects on Profit per Acre to Paddy Production Profit with current policies and fertilizer subsidy 2692.00 2631.00 6123.00 Profit (at export parity price; no procurement; fertilizer subsidy maintained) 5048.25 6403.84 10324.03 Increase in profit (%) 87.53 143.40 68.61 Profit (at export parity price; no procurement; no fertilizer subsidy) 4493.25 5047.22 8967.41 Increase in profit (%) 66.91 91.84 46.45 Additional profit due to yield increase (at export parity price) e/ 84.15 115.54 136.66 Profit (at export parity orice; no procurement; fertilizer subsidy maintained; with output effect) 5132.40 6519.38 10460.69 Profit (at export parity price; no procurement; no fertilizer subsidy; with output effect) 4577.40 5162.76 9104.06 Increase in profit (%) 70.04 96.23 48.69 a/ All data are for 1994/95 season. b/ One basket of paddy = 46 lbs. c/ Assumes 0.6 conversion ratio from paddy to rice; exchange rate of K110/$; and, Yangon FOB price of $205/ton of rice; and transport and milling costs of $30/ton (based on Harrison 1990); d/ Assumes that a 1 percent reduction in price distortion (relative to the border price) results in a 0.58% increase in output. Since reliable estimates are not available for Myanmar, this output elasticity is the same as that estimated by Siamwalla et. al., in Krueger et. al. (ed.), for paddy production in Thailand. e/ This estimate of producers' surplus assumes a linear domestic demand function for paddy. Source: Ministry of Agriculture and staff estimates. - 87 - Annex 2.2 TABLES3.XLS Page 1 of 4 Annex 111.4 The World Bank Ouestionnaire for Private Businesses The purpose of this questionnaire is to better understand the conditions under which private businesses like yours operate. This study will assist the World Bank in assessing the present situation concerning private sector development. The information obtained here w%ill be treated strictly confidentially, and neither your name nor the name of your firm will be used in any documents or papers. 1. BASIC INFORMATION ABOUT THE COMPANY Name of enterprise Year of start-up Location of firm Branch of industry Main items produced or services provided Today: In the past What is your firm's legal status? 1. Single proprietorship 2. Partnership 3. Limited liability company 4. Other (specify) Do you lease equipment/factories from the government? Yes No If so, which Ministry are these leased from? 11. OPERATIONS Full-time Part-time (a) How many people were employed by your firm when it was first started? (b) How many people are employed now? What are your annual sales/turnover? kyats What are your firm's annual operating costs? _ kyats (approximately) What is the level of your firm's fixed assets? kyats What percentage of your inputs are 1. produced by the domestic private sector % 2. produced by the state sector % 3. imported % What percentage of your sales are 1. to the domestic private sector % Page 1 Sheet7 - 88 - Annex 2.2 TABLES3.XLS Page 2 of 4 2. to state enterprises % 3. to government departments % 4. exported % What part of your imports are financed from vour oNvn export earnings? % If you import inputs or goods, how much time does it take to clear goods through customs? days On average, how much do import tariffs add to the cost of your imported goods? % If you export, how much time does it take to clear goods for export? _ _days On average, how much do your country's duties add to the price of your product? % Why don't you produce more than you do? (Please give the three main reasons with "I," indicating the most important reason, "2" the second most important, and a `3" the third.) Limited access to foreign exchange Other restrictions on imports Restrictions on exports Scarcity of electricitv Scarcity of water Availability and quality of telephone connection Quality of road and port facilities Shortage of skilled workers Lack of credit for investment Lack of credit for working capital High cost of credit Controls on output price Competition is too strong Other (please specifv) How severe are each of the following problems for the development of your enterprise? (I=no obstacle, 2=minor obstacle, 3=moderate. 4=major, 5=severe obstacle) No obstacle Moderate Severe obstacle Limited access to foreign exchange 1 2 3 4 5 Other restrictions on imports 1 2 3 4 5 Restrictions on exports 1 2 3 4 5 ..... continued on next page Continued from previous page....) No obstacle Moderate Severe obstacle Scarcity of electricitv 1 2 3 4 5 Scarcity of water 1 2 3 4 5 Availability/quality of telephone connection 1 2 3 4 5 Quality of road and port facilities 1 2 3 4 5 Shortage of skilled workers 1 2 3 4 5 Lack of credit for investment 1 2 3 4 5 Lack of credit for working capital 1 2 3 4 5 High cost of credit 1 2 3 4 5 Controls on output price 1 2 3 4 5 Competition is too strong 1 2 3 4 5 Other (please specify) 1 2 3 4 5 Page 2 Sheet7 - 89 - Annex 2.2 TABLES3.XLS Page 3 of 4 III. REGULATION In registering your business when you began operations. how much time passed from when you decided to register to completion of the registration process? weeks What was the approximate total cost of registration including licensing fees and official and unofficial payments? kvats (Note vear of registration) How long did it take your business to get telephone connections? weeks How long did it take your business to get water connections? weeks In starting your business, which government requirements were the most difficult to meet? I1. 2. 3. In operating your business, in which agencies did vou encounter the greatest difficulties? ALgencv Nature of Difficultv 2.__ _ 3. In total, approximately what percent of your time and vour emplovees' timne is spent in daealing with taxes and other governunent regulations or officials? % Is it possible for you to lay off workers? Yes No If yes, how many workers in your business have vou lad off over the last year? persons What pavments or incentives are required to fire or lav off a worker? (in salaries) H ow long does the process take. from beginning to end? (weeeks) As a percentage of your firmn's total sales. what are * our payrnents of the following taxes? a. Customs duty b. Income tax c. Profit tax d. Other (specify) As a share of your annual sales, how much would y,ou be willing to pay to avoid each of these following regulations? a. Import licensing % b. Foreign exchange licensing % c. Regulations on land use % What rights do you have to the land you are occupving? a. Ownership deed b. Lease (rental rate kvatlsq. ft.) c. Other (specify) IV. GENERAL QUESTIONS What percentage of your investment is financed from the following sources? a. own funds % b. Myanmar Economic Bank % Page 3 Sheet7 - 90 - Annex 2.2 TABLES3.XLS Page 4 of 4 c. Myanmar Investment and Commercial Bank % d. Informal credit market % e. other (specifv) % In y our opinion, what part of the Mvanmar economv is now private? % Of the manufactunng, trading and service sectors. what percent would you estimate is now pnrvate? % If the state enterprises were to be privatized, would vou be prepared to buy them? If not, why not? What impact would an adjustment of the official kyat exchange rate have on your business? (Please circle your answer and provide a brief explanation below) a. Positively b. Negativelv c. Little or no impact THANK YOU FOR YOUR ASSISTANCE. THE QUESTIONNAIRE ENDS HERE. Page 4 Sheet7 -91- Annex 3.1 Page 1 of 2 List of State Economic Enterprises Under Various Ministries Ministry of Information 1. Printing and Publishing Enterprise 2. News and Periodical Enterprise 3. Motion Picture Enterprise Ministry of Labor 4. Social Security Board Ministrv of Forest 5. Myanma Timber Enterprise Ministry of Agriculture 6. Myanma Agriculture Enterprise 7. Myanma Farms Enterprise 8. Myanma Jute Industries 9. Myanma Cotton and Sericulture Enterprise 10. Myanma Sugar Cane Enterprise 11. Myanna Plantation Crops Enterprise Ministry of Livestock Breeding and Fisheries 12. Lives Stock Foodstuff and Milk Products Enterprise Ministry of Mines 13. No. (I) Mining Enterprise 14. No. (2) Mining Enterprise 15. No. (3) Mining Enterprise 16. Myanma Gems Enterprise 17. Myanma Salt and Marine Chemical Enterprise 18. Myanma Pearl Enterprise Ministry of Industry (1) 19.Myanma Textile Industries 20.Myanma Foodstuff Industries 21. Myanma Pharmaceutical Industries 22.Myanma Ceramic Industries 23.Myanma Paper and Chemical Industries 24.Myanma General and Maintenance Industries Ministry of Industrv (2) 25.Technical Services 26.Myanma Heavy industries Ministry of Energy 27.Myanma Oil and Gas Enterprise 28.Myanma Petrochemical Enterprise 29.Myanma Petroleum Products Enterprise 30.Myanma Electric Power Enterprise 3/16/95 C:\MMRCEM94\ANNEX3-1.XLSSheet1 - 92 - Annex 3.1 Page 2 of 2 Ministry of Construction 31.Public Works Ministr, of Transport 32.lnland Water Transport 33.Myanma Five Star Line 34.Myanma Ports Authority 35.Myanma Shipyards 36.Myanma Airways Ministry of Railways 37.Myanma Railways 38.Road Transport Ministrv of Communications, Post and Telegraphs 39.Myanma Posts and Telecommunications Ministry of Trade 40.My inma Agricultural Produce Trading 41.General Merchandise Trading 42.Myanma Department Stores 43.Stationery, Printing and Photographic Store Trading 44.Medicines and Medical Equipment Trading 45.Vehicles, Machinery and Equipment Trading 46.Construccion and Electrical Stores Trading 47.Inspeccion and Agency Services 48.Myanma Export and Import Services Ministry of Hotel and Tourism Services 49.Myanma Hotel and Tourism Services 50.Restaurant and Beverage Enterprise Ministrv of Co-operatives 51 .Co-operative Export Import Enterprise Ministrv of Planning & Finance 52.Central Bank of Myanmar 53.Myanma Economic Bank 54.Myanma Investment and Commercial Bank 55.Myanma Foreign Trade Bank 56.Myanma Agricultural and Rural Development Bank 57.Myanma Small Loan 58.Myanma Insurance 59.Security Printing Works Source: Budget Department. 3/16/95 C:\MMRCEM94\ANNEX3-1.XLSSheet1 - 93 - Annex 3.2 Page I of I Activities Defined Under the State Economic Enterprise Law* I. Extraction and sale of teak 2. Cultivation of forest plantations 3. Exploration, extraction and sale of petroleum and natural gas 4. Exploration, extraction and sale of pearls, jade and precious stones 5. Fisheries reserved for research by the Government 6. Postal and telecommunication services 7. Air and rail transport services 8. Banking and insurance 9. Broadcasting 10. Exploration, extraction and sale of metals 11. Electricity generation and distribution services 12. Manufacture of products relating to defense and national security * Generally closed to foreign investment unless special permission is obtained. Source: GOM. 3/16/95 C:\MMRCEM94\ANNEX3-1.XLSSheetI - 94 - Annex 3.3 Page I of I Selected Subsidies to SEs - FY91 to FY95 FY91 FY92 FY93 FY94 FY95 Gasoline Official retail (per liter) a! 3.52 3.52 3.52 3.52 5.50 CIF(parallelexch. rate)b/ 7.64 11.31 14.98 14.31 16.47 Unit economic subsidy 4.12 7.79 11.46 10.79 10.97 Consumption (million liters) c/ 28.47 27.57 31.16 32.36 36.09 Total econ. subsidy (K. million) 117.44 214.83 357.09 349.24 395.97 Diesel Official retail (per liter) a/ 2.31 2.31 2.31 2.31 4.40 CIF (parallel exch. rate) b/ 7.90 13.66 17.69 16.69 15.51 Uniteconomicsubsidy 5.59 11.35 15.38 14.38 11.11 Consumption (million liters) c/ 149.76 163.55 164.46 182.16 238.95 Total econ. subsidy (K. million) 836.79 1856.16 2529.62 2620.02 2654.18 Electric power Average tariffs (Kyat per Kwh) 0.40 0.50 0.50 0.50 0.50 CIF (parallel exch. rate) d/ 3.72 6.42 7.95 9.05 8.80 Unit economic subsidy 3.32 5.92 7.45 8.55 8.30 Consumption (million Kwh.) e/ 972.69 808.03 809.35 941.18 962.50 Total econ. subsidy (K. million) 3226.22 4782.73 6030.95 8046.15 7989.72 Credit Investment grants (K. million) 3378 3276 3462 3373 6123 Accumulated debt (K. million) 6423 9699 13161 16534 22657 Interest subsidy (K. million) f/ 672.75 1037.18 1419.82 1795.38 2445.24 a! 1 bbl. = 159.6 liters; 1 Imperial gallon = 4.545 liters; b/ Uses parallel exchange rate for end of previous calendar year, and year-end crude prices CIF Yangon; c/ Assumes half of total consumption of gasoline and diesel by ministries; d/ Assumes unit supply cost of $0.08/Kwh., and parallel exchange rate for end of previous calendar year; e/ Estimated total government consumption less use by government departments and for street lighting and for temporar f/ Assumes interest rate of 10 percent p.a. on accumulated principal and interest since FY90; Source: Ministry of Energy; Budget Department (MFR); and staff estimates. 10/10/95 C:\MMRCEM94\ANNEX33R.XLSSheetl - 95 - STATISTICAL APPENDIX APPENDIX TABLES 1. National Accounts 1.1 GDP By Industrial Origin at Current Market Prices 1.2 GDP By Industrial Origin at Constant 1985/86 Prices 1.3 Deflators by Industrial Origin (1985/86=100) 1.4 GDP By Expenditure Category at Current Market Prices 1.5 GDP By Expenditure Category at Constant 1985/86 Prices 1.6 GDP Deflators by Expenditure Category (1985/86=100) 1.7 Allocation of Public Capital Expenditure 1.8 Investment and Saving 2. Balance of Payments 2.1 Balance of Payments 2.2 Merchandise Exports 2.3 Imports by Major Categories 2.4 Direction of Trade 2.5 Exports and Imports by Sector 2.6 International Reserves 2.7 Services Account 3. External Debt 3.1 External Medium- and Long-Term Public Debt and Debt Service Payments 3.2 Medium and Long-Term External Public Debt by Creditors as of March 31, 1994 3.3 External Debt and Arrears 4. Public Finance 4.1 Summary of Consolidated Non-financial Public Sector Operations 4.2 Government Current Revenue 4.3 Union Government Current Expenditure 4.4 Union Government Capital Expenditure 5. Money and Credit 5.1 Monetary Survey 5.2 Selected Interest Rates - 96 - 6. Industry 6.1 Capacity Utilization Ratios, and Output and Capacity Indices for Selected Industrial Enterprises 6.2 Production, Trade, and Consumption of Oil and Natural Gas 6.3 Generation and Consumption of Electricity 7. Prices 7.1 Yangon Consumer Price Index 7.2 Official and Free Market Prices of Selected Goods 8. State Owned and Private Entervrises 8.1 Budget of the State Economic Enterprises 8.2 Sectoral Breakdown of SEEs' Current Surplus and Capital Expenditure 8.3 Approved and Actual Foreign Direct Investment Inflows 8.4 Foreign Direct Investment by Country 8.5 Foreign Direct Investment by Industry 9. Azriculture and Forestry 9.1 Sown Area for Major Crops 9.2 Output and Yield of Major Crops 9.3 Production and Utilization of Teak and Hardwood 10. Population. Employment and Waaes in the Public Sector 10.1 Employment and Population 10.2 Employment and Wages in the Public Sector - 97 - Table 1.1: GDP By Industrial Origin (at Current Market Prices) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Estimated (In millions of kyats) Agriculture, Livestock, fishery & forestry 71,069 87,000 109,888 150,901 221,985 273,270 Agriculture 58,867 70,326 90,421 126,114 190,047 239,024 Livestock & fishery 10,139 13,978 16,409 21,165 27,731 29,989 Forestry 2,063 2,696 3,058 3,622 4,207 4,257 Industry 13,692 16,009 18,398 23,553 29,992 40,603 Mining 988 1,036 1,158 1,305 1,706 2,040 Manufacturing & processing 10,731 11,824 13,059 17,278 22,426 29,935 Power 435 386 318 463 649 1,178 Construction 1,538 2,763 3,863 4,507 5,211 7,450 Services 39,905 48,932 58,516 74,941 99,356 122,554 Transportation 3,028 3,693 4,224 4,671 5,372 6,668 Communications 318 352 743 932 1,042 1,070 Financial institutions 222 270 318 367 516 694 Social and administrative services 5,747 6,024 6,413 6,692 8,528 9,385 Rental and other services 3,434 4,051 5,178 5,823 6,949 7,233 Trade 27,156 34,542 41,640 56,456 76,949 97,504 GDP (at market prices) 124,666 151,941 186,802 249,395 351,333 436,427 (In percent of GDP) Agriculture, Livestock, fishery & forestry 57.0 57.3 58.8 60.5 63.2 62.6 Agriculture 47.2 46.3 48.4 50.6 54.1 54.8 Livestock & fishery 8.1 9.2 8.8 8.5 7.9 6.9 Forestry 1.7 1.8 1.6 1.5 1.2 1.0 Industry 11.0 10.5 9.8 9.4 8.5 9.3 Mining 0.8 0.7 0.6 0.5 0.5 0.5 Manufacturing & processing 8.6 7.8 7.0 6.9 6.4 6.9 Power 0.3 0.3 0.2 0.2 0.2 0.3 Construction 1.2 1.8 2.1 1.8 1.5 1.7 Services 32.0 32.2 31.3 30.0 28.3 28.1 Transportation 2.4 2.4 2.3 1.9 1.5 1.5 Communications 0.3 0.2 0.4 0.4 0.3 0.2 Financial institutions 0.2 0.2 0.2 0.1 0.1 0.2 Social and administrative services 4.6 4.0 3.4 2.7 2.4 2.2 Rental and other services 2.8 2.7 2.8 2.3 2.0 1.7 Trade 21.8 22.7 22.3 22.6 21.9 22.3 GDP (at market prices) 100.0 100.0 100.0 100.0 100.0 100.0 Source: Planning Department, MNPED. - 98 - Table 1.2: GDP By Industrial Origin (at Constant 1985/86 prices) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Estimated (In millions of kyats) Agriculture, Livestock, fishery & forestry 23,589 24,022 23,451 25,915 27,013 28,664 Agriculture 19,089 19,470 18,708 21,029 22,009 23,595 Livestock & fishery 3,630 3,610 3,817 3,990 4,110 4,300 Forestry 870 942 926 896 894 769 Industry 6,240 6,583 6,683 7,530 8,434 9,189 Mining 449 443 492 590 719 810 Manufacturing & processing 4,555 4,560 4,376 4,850 5,323 5,799 Power 323 340 363 475 588 601 Construction 913 1,240 1,452 1,615 1,804 1,979 Services 19,054 19,655 19,799 21,312 22,554 24,097 Transportation 1,841 1,906 2,017 2,200 2,377 2,497 Communications 347 361 421 530 580 610 Financial institutions 229 268 315 363 498 670 Social and administrative services 3,287 3,426 3,574 3,678 3,859 4,046 Rental and other services 2,232 2,309 2,368 2,454 2,543 2,636 Trade 11,118 11,385 11,104 12,087 12,697 13,638 GDP (at market prices) 48,883 50,260 49,933 54,757 58,001 61,950 (Percent change) Agriculture, Livestock, fishery & forestry 4.4 1.8 -2.4 10.5 4.2 6.1 Agriculture 5.2 2.0 -3.9 12.4 4.7 7.2 Livestock & fishery -4.0 -0.6 5.7 4.5 3.0 4.6 Forestry 28.5 8.3 -1.7 -3.2 -0.2 -14.0 Industry 15.4 5.5 1.5 12.7 12.0 9.0 Mining 30.5 -1.3 11.1 19.9 21.9 12.7 Manufacturing & processing 11.3 0.1 -4.0 10.8 9.8 8.9 Power 14.1 5.3 6.8 30.9 23.8 2.2 Construction 32.7 35.8 17.1 11.2 11.7 9.7 Services -0.4 3.2 0.7 7.6 5.8 6.8 Transportation 9.7 3.5 5.8 9.1 8.0 5.0 Communications 11.6 4.0 16.6 25.9 9.4 5.2 Financial institutions -85.7 17.0 17.5 15.2 37.2 34.5 Social and administrative services 17.9 4.2 4.3 2.9 4.9 4.8 Rental and other services 1.5 3.4 2.6 3.6 3.6 3.7 Trade 5.3 2.4 -2.5 8.9 5.0 7.4 GDP (at market prices) 3.7 2.8 -0.7 9.7 5.9 6.8 Source: Planning Department, MNPED. - 99 - Table 1.3: Deflators by Industrial Origin (1985/86 =100) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Estimated (1985/86= 100) Agriculture, Livestock, fishery & forestry 301.3 362.2 468.6 582.3 821.8 953.4 Agriculture 308.4 361.2 483.3 599.7 863.5 1013.0 Livestock & fishery 279.3 387.2 429.9 530.5 674.7 697.4 Forestry 237.1 286.2 330.2 404.2 470.6 553.6 Industry 219.4 243.2 275.3 312.8 355.6 441.9 Mining 220.0 233.9 235.4 221.2 237.3 251.9 Manufacturing & processing 235.6 259.3 298.4 356.2 421.3 516.2 Power 134.7 113.5 87.6 97.5 110.4 196.0 Construction 168.5 222.8 266.0 279.1 288.9 376.5 Services 209.4 249.0 295.6 351.6 440.5 508.6 Transportation 164.5 193.8 209.4 212.3 226.0 267.0 Communications 91.6 97.5 176.5 175.8 179.7 175.4 Financial institutions 96.9 100.7 101.0 101.1 103.6 103.6 Social and administrative services 174.8 175.8 179.4 181.9 221.0 232.0 Rental and other services 153.9 175.4 218.7 237.3 273.3 274.4 Trade 244.3 303.4 375.0 467.1 606.0 714.9 GDP (at market prices) 255.0 302.3 374.1 455.5 605.7 704.5 (Rate of Change, %) Agriculture, Livestock, fishery & forestry 55.6 20.2 29.4 24.3 41.1 16.0 Agriculture 51.2 17.1 33.8 24.1 44.0 17.3 Livestock & fishery 81.7 38.6 11.0 23.4 27.2 3.4 Forestry 71.3 20.7 15.4 22.4 16.4 17.6 Industry 60.6 10.8 13.2 13.6 13.7 24.3 Mining 47.8 6.3 0.6 -6.0 7.3 6.1 Manufacturing & processing 68.5 10.1 15.1 19.4 18.3 22.5 Power 18.7 -15.7 -22.8 11.3 13.2 77.6 Construction 39.1 32.3 19.4 4.9 3.5 30.3 Services 59.6 18.9 18.7 19.0 25.3 15.5 Transportation 43.1 17.8 8.1 1.4 6.4 18.2 Communications -8.4 6.4 81.0 -0.4 2.2 -2.4 Financial institutions 1.1 3.9 0.2 0.1 2.5 0.0 Social and administrative services 62.6 0.6 2.0 1.4 21.5 5.0 Rental and other services 35.8 14.0 24.6 8.5 15.2 0.4 Trade 62.7 24.2 23.6 24.6 29.8 18.0 GDP (at market prices) 57.7 18.5 23.7 21.7 33.0 16.3 Source: Planning Department, MNPED; and staff estimates. - 100 - Table 1.4: GDP By Expenditure Category (At Current Prices) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Estimated (Million Kyats) Consumption a/ 113,446 134,982 160,343 217,451 311,871 386,921 Gross investment 11,501 20,323 28,603 33,785 42,469 52,745 Fixed investment 11,827 22,318 27,571 31,184 37,258 48,377 Public b/ 5,895 7,280 10,762 10,004 9,628 19,676 Private 5,932 15,038 16,809 21,180 27,630 28,701 Changes in stocks -326 -1,995 1,032 2,601 5,211 4,368 Gross domestic expenditure 124,947 155,305 188,946 251,236 354,340 439,666 Net exports of goods and nonfactor services -281 -3,364 -2,144 -1,841 -3,007 -3,239 Exports of goods and nonfactor services c/ 3,658 3,984 3,771 5,225 5,731 6,596 Imports of goods and nonfactor services c/ 3,939 7,348 5,915 7,067 8,737 9,834 GDP at market prices 124,666 151,941 186,802 249,395 351,333 436,427 (Share in GDP) Consumption a/ 91.0 88.8 85.8 87.2 88.8 88.7 Gross investment 9.2 13.4 15.3 13.5 12.1 12.1 Fixed investment 9.5 14.7 14.8 12.5 10.6 11.1 Public b/ 4.7 4.8 5.8 4.0 2.7 4.5 Private 4.8 9.9 9.0 8.5 7.9 6.6 Changes in stocks -0.3 -1.3 0.6 1.0 1.5 1.0 Gross domestic expenditure 100.2 102.2 101.1 100.7 100.9 100.7 Net exports of goods and nonfactor services -0.2 -2.2 -1.1 -0.7 -0.9 -0.7 Exports of goods and nonfactor services c/ 2.9 2.6 2.0 2.1 1.6 1.5 Imports of goods and nonfactor services c/ 3.2 4.8 3.2 2.8 2.5 2.3 GDP at market prices 100.0 100.0 100.0 100.0 100.0 100.0 a/ Residual item. b/ Budget data. c/ Balance of payments data converted at official exchange rate. Sources: Planning Department, MNPED; and staff estimates. - 101 - Table 1.5: GDP By Expenditure Category (At Constant 1985/86 Prices) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Estimated (Million Kyats) Consumption a/ 41,825 42,199 40,315 43,543 46,755 49,632 Gross investment 6,376 8,235 9,540 9,663 10,448 12,329 Fixed investment 6,453 8,852 9,188 9,250 10,236 11,936 Public 3,592 4,101 4,226 4,231 4,400 5,930 Private 2,861 4,751 4,962 5,019 5,836 6,006 Changes in stocks -77 -617 352 413 212 393 Gross domestic expenditure 48,201 50,434 49,855 53,206 57,203 61,961 Net exports of goods and nonfactor services 682 -174 78 1,551 798 -11 Exports of goods and nonfactor services bl 3,528 4,038 3,926 5,381 6,229 6,063 Imports of goods and nonfactor services b/ 2,846 4,212 3,848 3,830 5,431 6,074 GDP at market prices 48,883 50,260 49,933 54,757 58,001 61,950 (Percentage change) Consumption a/ 1.9 0.9 -4.5 8.0 7.4 6.2 Gross investment -0.7 29.2 15.8 1.3 8.1 18.0 Fixed investment 19.5 37.2 3.8 0.7 10.7 16.6 Public 8.5 14.2 3.0 0.1 4.0 34.8 Private 37.0 66.1 4.4 1.1 16.3 2.9 Gross domestic expenditure 1.5 4.6 -1.1 6.7 7.5 8.3 Exports of goods and nonfactor services b/ 27.7 14.5 -2.8 37.1 15.8 -2.7 Imports of goods and nonfactor services b/ -8.5 48.0 -8.6 -0.5 41.8 11.8 GDP at market prices 3.7 2.8 -0.7 9.7 5.9 6.8 Note: Data for 1980/81-1982/83 are estimated by using the GDP deflators. a! Residual item. b/ From balance of payments data, converted at official exchange rate. Sources: Planning Dep., MNPED; and staff estimates. - 102 - Table 1.6: GDP Deflators by Expenditure Category (1985/86 = 100) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Estimated (1985/86 = 100) Consumption 271.2 319.9 397.7 499.4 667.0 779.6 Gross investment 180.4 246.8 299.8 349.6 406.5 427.8 Fixed investment 183.3 252.1 300.1 337.1 364.0 405.3 Public 164.1 177.5 254.7 236.4 218.8 331.8 Private 207.3 316.5 338.8 422.0 473.4 477.9 Changes in stocks 423.4 323.3 293.2 629.8 2458.0 1111.5 Gross domestic expenditure 259.2 307.9 379.0 472.2 619.4 709.6 Exports of goods and nonfactor services 103.7 98.7 96.1 97.1 92.0 108.8 Imports of goods and nonfactor services 138.4 174.5 153.7 184.5 160.9 161.9 GDP at market prices 255.0 302.3 374.1 455.5 605.7 704.5 (Rate of Change, %l Consumption 64.3 17.9 24.3 25.6 33.6 16.9 Gross investment 18.7 36.8 21.5 16.6 16.3 5.2 Fixed investment 35.6 37.6 19.0 12.3 8.0 11.4 Public 23.9 8.2 43.5 -7.2 -7.5 51.6 Private 48.8 52.7 7.0 24.6 12.2 0.9 Changes in stocks Gross domestic expenditure 58.7 18.8 23.1 24.6 31.2 14.6 Exports of goods and nonfactor services 20.5 -4.8 -2.6 1.1 -5.3 18.2 Imports of goods and nonfactor services 16.6 26.1 -11.9 20.0 -12.8 0.6 GDP at market prices 57.7 18.5 23.7 21.7 33.0 16.3 Sources: Planning Dep., MNPED; and staff estimates. - 103 - Table 1.7: Allocation of Public Capital Expenditure 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Estimated Productive sectors 49.7 33.0 31.8 33.6 28.1 39.6 Agriculture 7.5 5.3 4.3 6.6 7.5 12.5 Livestock and fishery 1.2 1.0 1.3 1.0 0.6 0.3 Forestry 3.3 1.9 1.1 1.4 1.3 0.8 Mining 6.8 1.8 1.4 1.3 1.2 1.5 Manufacturing and processing 10.7 6.1 3.9 4.9 2.3 1.6 Power 9.8 6.9 4.5 5.0 3.7 4.5 Construction 10.3 10.1 15.3 13.4 11.6 18.5 Services 46.8 64.3 64.1 62.6 69.2 57.8 Transportation and communication 13.1 12.2 10.1 9.5 11.1 14.6 Financial institutions 0.5 1.4 1.3 1.6 1.8 2.1 Social services 8.8 21.0 24.6 22.1 13.8 13.1 Other a/ 24.3 29.6 28.0 29.4 42.4 28.0 Trade 3.5 2.7 4.1 3.8 2.6 2.6 Total (current Kyat millions) 5895.0 7280.0 10762.0 10004.0 9628.0 19676.0 a/ Including defense. Source: Planning Department, MNPED. - 104 - Table 1.8: Investment and Saving 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Prov. Estimated (In millions of kyats at current prices) Gross capital formation 11,501 20,323 28,603 33,785 42,469 52,745 Fixed investment 11,827 22,318 27,571 31,184 37,258 48,377 Public a/ 5,895 7,280 10,762 10,004 9,628 19,676 Private 5,932 15,038 16,809 21,180 27,630 28,701 Change in stocks -326 -1,995 1,032 2,601 5,211 4,368 National saving 11,267 17,225 26,835 32,562 41,231 51,718 Domestic saving 11,214 16,952 26,445 31,939 39,467 49,532 Public a/ -4,662 -4,918 -2,770 -3,630 -7,929 -8,994 Private 15,876 21,870 29,215 35,569 47,396 58,526 Net factor income plus net unrequited transfers from abroad b/ 53 273 390 623 1,764 2,186 Foreign saving b/ 234 3,098 1,768 1,244 1,238 1,027 (In percent of GDP) Gross capital formation 9.2 13.4 15.3 13.5 12.1 12.1 Fixed investment 9.5 14.7 14.8 12.5 10.6 11.1 Public 4.7 4.8 5.8 4.0 2.7 4.5 Private 4.8 9.9 9.0 8.5 7.9 6.6 National saving 9.0 11.3 14.4 13.1 11.7 11.9 Domestic saving 9.0 11.2 14.2 12.8 11.2 11.3 Public -3.7 -3.2 -1.5 -1.5 -2.3 -2.1 Private 12.7 14.4 15.6 14.3 13.5 13.4 Foreign saving b/ 0.2 2.0 0.9 0.5 0.4 0.2 a! Budget data. b/ Balance of payments data converted at official exchange rate. Source: World Bank and IMF staff estimates. - 105 - Table 2.1: Balance of Payments fin millions of US dollars) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Provy act. Provisional Trade balance -119.1 -492.3 -411.7 -419.5 -606.0 -737.0 Exports, mainly f.o.b. 423.5 477.3 430.6 590.7 696.0 810.0 Of which: border trade 139.6 78.0 101.0 104.3 74.6 73.3 Imports, mainly f.o.b. 542.6 969.6 842.3 1010.2 1302.0 1547.0 Of which: border trade 157.1 230.8 259.9 216.7 189.0 111.0 Service balance -12.8 -110.3 -15.4 22.4 41.0 86.0 Receipts 140.9 190.3 179.6 274.4 247.0 315.0 Payments 153.7 300.6 195.0 252.0 206.0 229.0 Of which: interest due 102.0 88.0 95.0 101.0 81.0 110.0 Private transfers (net) 54.4 76.5 82.7 122.0 273.0 312.0 Current account balance -77.5 -526.1 -344.4 -275.1 -292.0 -339.0 Nonmonetary capital movements 336.6 164.9 158.0 34.7 39.0 296.0 Official grants 29.2 29.2 64.4 71.4 98.0 166.0 LT capital inflows 307.4 135.7 93.6 -36.7 -59.0 130.0 Foreign direct investment 19.7 219.0 248.6 137.5 96.0 245.0 Net LT borrowing -16.2 -76.1 -150.6 -170.2 -152.0 -112.0 Disbursements 134.8 121.9 61.4 80.8 89.0 134.0 Repayments due 151.0 198.0 212.0 251.0 241.0 246.0 Other capital, net 309.7 -5.5 -4.4 -4.0 -3.0 -3.0 Trust Fund (net) -5.8 -1.7 - - - - Errors and Omissions (net) 13.9 -9.7 -46.0 -39.0 5.0 -5.0 Overall balance 273.0 -370.9 -232.4 -279.4 -248.0 -48.0 Accumulation of arrears 74.0 216.3 218.0 295.1 214.0 137.0 Monetary movements -347.0 154.6 14.4 -1 5.7 32.0 -50.0 Gross reserves -346.0 155.4 14.6 10.0 32.0 -87.0 Use of Fund credit, net Other liabilities -1.0 -0.8 -0.2 -25.7 0.0 37.0 Memorandum items: Current account balance/GDP -0.4 -2.2 -1.2 -0.7 -0.5 -0.5 Gross reserves (end of period) 466.7 311.3 296.7 286.7 254.7 341.7 (In months of merchandise imports) (10.3) (3.9) (4.2) (3.4) (2.3) (2.7) Conversion exchange rate Period average: Kyats/US$ 6.6273 6.2154 6.2749 6.0775 6.1084 5.8917 End period: Kyats/US$ 6.4139 5.9023 6.1196 6.2008 6.1356 5.7600 Source: Central Bank of Myanmar. - 106 - Table 2.2: Merchandise Exports (Value in millions of U.S. dollars: volume in thousands of metric tons) al 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Exports, mainly f.o.b. 423.5 477.3 430.6 590.7 692.1 878.8 Unit value 89.0 93.9 95.1 82.6 79.6 88.5 Volume 146.7 156.8 139.6 220.6 269.6 282.2 Rice and rice products 40.2 27.7 40.0 41.0 43.8 197.1 Unit value 238.6 207.0 218.5 206.2 167.8 190.6 Volume 168.5 133.8 183.1 198.8 261.1 1,033.9 Teak 120.4 119.0 106.4 103.6 121.3 123.5 Unit value 526.7 473.0 619.3 537.6 551.1 972.4 Volume 228.6 251.6 171.8 192.7 220.1 127.0 Basemetalsandores 10.2 11.5 7.7 4.5 4.8 6.8 Unit value 359.1 351.7 235.5 203.6 191.2 213.2 Volume 28.4 32.7 32.7 22.1 25.1 31.9 Pulses and beans 18.6 82.9 68.4 109.7 118.6 133.3 Unit value 331.5 426.2 350.4 244.2 230.6 325.0 Volume 56.1 194.5 195.2 449.3 514.3 410.2 Fishandfishproducts 3.7 5.8 5.6 7.2 3.8 9.1 Unit value 513.9 500.0 543.7 533.3 808.5 2,022.2 Volume 7.2 11.6 10.3 13.5 4.7 4.5 Hardwood 14.0 41.7 42.0 52.6 81.8 19.2 Unit value 100.3 114.4 135.7 162.2 168.5 340.4 Volume 139.6 364.4 309.5 324.2 485.5 56.4 Rubber 1.3 0.5 5.4 11.6 15.0 20.5 Unit value 764.7 625.0 658.5 651.7 657.9 861.3 Volume(00 cubic tons) 1.7 0.8 8.2 17.8 22.8 23.8 Animal feedstuffs. 2.3 1.9 2.2 4.4 6.2 1.4 Unit value 78.5 74.5 80.3 100.5 101.3 162.8 Volume 29.3 25.5 27.4 43.8 61.2 8.6 Other (mostly agro-based) b/ 212.8 186.3 152.9 256.1 296.8 367.9 Ofwhich:Bordertradec/ (139.6) (77.5) (100.7) (104.3) (78.8) (77.0) a/ Export value is measured on a payments basis for rice,teak, beans,rubber,and metal ores.AII others are on a shipment basis. b/ Includes only exports by the government agency (Myanma Timber Enterprises).Private exports through the border are included in the item 'Other', and are estimated to be as large as the official exports. c/ Private sector exports only. Source: Central Statistical Organization. - 107 - Table 2.3: Imports by Major Categories (In millions of U.S. dollars) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Imports, mainly c.i.f. 512.3 888.6 850.5 882.8 1297.1 1547.4 Capital goods 161.7 306.7 249.9 288.0 454.6 631.5 Construction materials 37.7 80.4 65.6 97.2 83.1 Machinery 59.9 148.7 75.1 65.0 134.9 Transportation 54.0 64.4 101.7 119.0 223.3 Other 10.1 13.2 7.5 6.8 13.3 Intermediate goods 154.7 267.2 243.2 185.6 348.4 386.9 Raw materials 88.5 171.8 165.3 125.8 297.5 Tools and spare parts 66.2 95.4 77.9 59.8 50.4 Fuels - - - 0.5 Consumer goods 195.9 314.7 357.4 409.2 494.1 529.0 Food 4.4 17.5 26.8 100.7 137.7 Durable goods 11.9 37.2 35.5 38.0 39.0 Textiles 3.5 5.5 6.2 9.2 27.8 Medicines 11.3 15.1 19.3 2.2 3.9 Other 164.8 239.4 269.6 259.1 285.7 (Percentage share in total imports) Capital goods 31.6 34.5 29.4 32.6 35.0 40.8 Intermediate goods 30.2 30.1 28.6 21.0 26.9 25.0 Consumer goods 38.2 35.4 42.0 46.4 38.1 34.2 a/ IMF staff estimates. Source: Central Statistical Organization - 108 - Table 2.4: Direction of Trade (As percent of total exports and imports) 1990/91 1991/92 1992/93 1993/94 Exports Imports Exports Imports Exports Imports Exports Imports Industrial countries 10.8 40.6 9.4 37.3 9.7 38.2 11.8 35.7 European Community 3.1 10.6 2.2 10.8 2.9 4.6 2.9 5.7 Of which: Germanya/ (0.8) (3.3) (1. 1) (5.5) (].8) (2.1) 1.2 3.1 United Kingdom (0.2) (2.7) (0.1) (1.8) (0.3) (0.9) 0.5 0.7 Japan 7.5 16.3 6.5 21.1 4.1 28.6 4.4 25.5 United States 0.1 12.3 0.4 3.1 2.0 4.2 3.7 3.5 Other 0.1 1.4 0.3 1.6 0.7 0.8 0.8 0.9 Asia (except Japan) 86.2 53.8 86.4 59.6 79.5 57.2 79.0 61.2 China 13.4 21.8 15.0 16.8 9.3 17.7 5.0 15.9 Hong Kong 8.4 0.6 7.4 0.5 9.0 0.7 10.7 1.7 Indonesia - 0.3 1.8 1.0 0.4 2.2 1.7 4.1 India 17.7 0.7 11.1 2.8 16.8 2.3 15.0 3.6 Korea 0.5 3.6 0.8 3.3 0.8 3.3 0.9 3.7 Malaysia 1.4 7.0 1.3 6.8 1.6 6.1 2.3 7.2 Singapore 28.6 9.7 23.3 12.4 16.5 10.7 19.4 10.3 Thailand 13.1 10.1 19.6 14.8 16.4 13.0 17.4 10.9 Other 3.1 - 6.1 1.2 8.7 1.2 6.6 3.8 Africa and Middle East 2.1 1.8 3.5 0.9 4.5 2.1 5.1 1.6 Other 0.9 3.8 0.7 2.9 6.3 2.5 4.1 1.6 Memorandum item: Asia (including Japan) 93.7 70.1 92.9 80.7 83.6 85.8 83.4 86.7 a/ Until 1990, the (former) Federal Republic of Germany. Source: Central Statistical Organization. - 109 - Table 2.5: Exports and Imports by Sector (In millons of kyats) 1991/92 1992/93 1993/94 (P.A) 1994/95 (Prov.) Amount % Amount % Amount % Amount % Exports 2702.0 100.0 3590.0 100.0 4071.2 100.0 5405.0 100.0 Private sector 1467.0 54.3 1914.7 53.3 2192.7 53.9 2463.9 45.6 Cooperative sector 64.0 2.4 79.6 2.2 90.5 2.2 96.0 1.8 Public sector 1171.0 43.3 1595.7 44.4 1788.0 43.9 2845.1 52.6 Imports 5285.5 100.0 6139.5 100.0 7218.2 100.0 9118.0 100.0 Private sector 2873.8 54.4 3275.2 53.3 4339.1 60.1 5824.5 63.9 Cooperative sector 49.9 0.9 69.6 1.1 73.0 1.0 66.6 0.7 Public sector 2361.8 44.7 2794.7 45.5 2806.1 38.9 3226.9 35.4 a/ Border trade is included. Source: Customs Department - 110 - Table 2.6: International Reserves (End of period, in millions of U.S. dollars) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Prov. Net international reserves 414.9 260.3 245.9 260.3 228.2 315.3 Assets 466.7 311.3 296.8 285.5 253.6 340.7 Gold 11.7 12.7 12.2 12.1 12.2 13.0 SDRs 0.6 0.8 1.3 0.0 0.2 0.1 IMF position Foreign exchange 454.4 297.8 283.3 273.4 241.2 327.6 Liabilities 51.8 51.0 50.9 25.2 25.4 25.4 Fund credit Other 51.8 51.0 50.9 25.2 25.4 25.4 Memorandum item: Gross reserves (in months of merchandise imports) 10.3 3.9 4.2 3.4 2.3 2.6 Source: Central Bank of Myanmar and IMF staff estimates. - 111 - Table 2.7: Services Account (In mllons of U.S. dollars) 1989190 1990/91 1991/92 1992/93 1993/94 1994/95 P.A. Prov. Receipts 140.9 190.3 179.7 274.5 246.7 314.9 Nonfactor services 128.4 163.7 170.4 269.1 242.2 309.5 Transportation & insurance 9.0 9.1 4.0 3.1 4.9 7.8 Travel 17.2 24.4 35.4 116.6 117.9 169.7 Government services 9.8 12.1 13.2 12.7 15.6 17.1 Other 92.4 118.1 117.8 136.7 103.8 114.9 Factor services (Investment income) 12.5 26.6 9.3 5.4 4.5 5.4 Payments 153.6 231.7 156.0 182.1 199.8 188.2 Nonfactor services 51.7 212.6 100.4 152.6 128.4 122.2 Transportation & insurance 14.8 19.6 24.1 20.3 20.5 23.2 Travel 6.3 9.1 9.5 10.2 13.6 16.5 Government services 6.7 15.2 19.4 9.3 16.7 14.6 Other 23.9 168.7 47.4 112.8 77.6 67.9 Factor services due 101.9 19.1 55.6 29.5 71.4 66.0 of which: Actual payment 58.5 19.1 55.6 30.6 74.8 68.9 Net receipts -12.7 -41.4 23.7 92.4 46.9 126.7 Private transfers net 54.4 76.5 82.7 122.0 273.4 311.6 Source: Central Bank of Myanmar. - 112 - Table 3.1: External Medium- and Long-Term Public Debt, and Debt Service Payments (In millions of U.S. dollars) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Total debt outstanding (end of period) 4,221 4,704 4,874 5,326 5,481 5,518 Fund credit Other credit b/ 4,045 4,444 4,557 4,974 5,134 5,118 Concessional loans 3,792 4,195 4,305 4,720 4,855 Bilateral 2,735 2,961 3,047 3,414 3,500 Multilateral 1,057 1,234 1,258 1,306 1,355 Nonconcessional loans 253 249 252 254 280 Short-term (incl. interest arrears) 176 260 317 352 347 Debt-service payments (cash basis) b/ 182 70 88 57 108 218 Amortization 121 51 33 27 33 150 Interest payments 59 19 56 31 75 69 Fund credit - - - - - - Debt-service payments (due) b/ 253 286 306 351 322 356 Amortization 151 198 212 251 268 246 Interest payments 102 88 95 101 81 110 Fund credit Total debt outstanding/GDP (%) 22.7 19.3 16.5 13.1 9.6 7.4 Total debt outstanding/exports of goods & non-factor services (%) 764.8 733.9 811.0 619.4 584.2 492.9 Debt service ratio 1%) c/ 45.8 44.6 50.9 40.8 34.3 31.8 (Percent of total) Total debt outstanding (end of period) 100.0 100.0 100.0 100.0 100.0 100.0 Fund credit Other credit b/ 95.8 94.5 93.5 93.4 93.7 92.8 Concessional loans 89.8 89.2 88.3 88.6 88.6 Bilateral 64.8 62.9 62.5 64.1 63.9 Multilateral 25.0 26.2 25.8 24.5 24.7 Nonconcessional loans 6.0 5.3 5.2 4.8 5.1 a/ Data on debt service payments (cash basis) differ from those implied by commitments and arrears data in the balance of payments. b/ Including Trust Fund loans and excluding arrears on principal repayments. c/ Ratio of debt service payments due and exports of goods and non-factor services. Source: IMF staff estimates. - 113 - Table 3.2: Medium and Long-Term External Public Debt by Creditors as of March 31, 1994 a! (Million Kyats) Debt Outstanding Percent (Disbursed) Share Bilateral loans 21,702.9 69.9 China 451.4 1.5 Czechoslovakia (former) 750.6 2.4 Denmark 263.6 0.8 Germany b/ 2,930.2 9.4 Japan 16,957.9 54.6 Yugoslavia c/ 127.1 0.4 Other 222.1 0.7 Multilateral loans 7,076.4 22.8 Asian Development Bank 2,192.6 7.1 European Community 0.0 IDA 4,731.9 15.2 IMF Trust Fund 0.0 Other 151.9 0.5 Suppliers' credits 1,463.6 4.7 Japan 566.4 1.8 Netherlands 19.9 0.1 Urnited Kingdom 17.8 0.1 Yugoslavia c/ 85.5 0.3 Germany 456.3 1.5 Others 317.7 1.0 Financial institutions 800.3 2.6 Austria 232.1 0.7 France 387.6 1.2 United Kingdom 150.9 0.5 Other 29.7 0.1 Total (excluding Fund credit) 31,043.2 100.0 a! Including arrears on principal repayments. b/ Former Federal Republic of Germany. c/ Federal Republic of Yugoslavia (Serbia/Montenegro). Source: Budget Department. - 114 - Table 3.3: External Debt and Arrears a/ (In millions of U.S. dollars) 1991/92 1992/93 1993/94 1994/95 Change in arrears 218.1 294.2 214.0 137.4 Principal 179.0 224.0 207.9 96.7 Interest 39.1 70.2 6.1 40.7 Stock of arrears Total 808.8 1103.2 1344.1 1481.5 Principal 538.4 762.6 997.4 1094.1 Interest 270.4 340.6 346.7 387.4 Bilateral 613.1 880.2 1050.3 Principal 409.2 593.4 768.0 Interest 203.9 286.8 282.3 Private creditors (incl. suppliers' credits) 195.7 223.0 293.8 Principal 129.2 169.2 229.4 Interest 66.5 53.8 64.4 a/ End of period. Change in arrears from balance of payments and does not match change in arrears implied from stocks data, due to valuation effects. Source: IMF staff estimates. - 115 - Table 4.1: Summary of Consolidated Non-financial Public Sector Operations 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Prov.Act. RE (In millions of kyats) Receipts 13,548 15,166 18,281 20,664 27,828 32,554 Union Government 10,840 13,543 15,879 20,651 27,813 32,539 Tax revenue 5,336 9,058 10,548 12,563 17,036 20,327 SEEs' contributions 2,142 3,307 3,342 4,997 6,636 7,820 Other nontax revenue 3,168 911 1,584 2,656 3,539 3,415 Foreign grants 194 267 405 435 602 977 Local authorities a/ 986 1,623 2,402 13 15 15 SEEs' current surplus 1,722 0 0 0 0 0 Expenditures 20,630 26,704 31,346 33,605 43,900 59,849 Current expenditures 14,620 19,150 20,356 23,309 34,282 36,182 Union Government 13,992 17,951 18,542 20,753 27,774 30,772 Local authorities a/ 628 1,064 908 6 8 10 SEEs' current deficit 0 135 906 2,550 6,500 5,400 Capital expenditures 5,859 7,123 10,611 9,814 9,403 17,679 Union Government 2,203 2,874 6,586 6,539 6,302 11,827 Local authorities a/ 647 517 900 3 1 2 SEEs 3,009 3,732 3,125 3,272 3,100 5,850 Lending minus repayments 151 431 379 482 215 588 Unidentified expenditures 0 0 0 0 0 5400 Balance on a commitment basis -7,082 -11,538 -13,065 -12,941 -16,072 -27,295 Financing 7,082 11,538 13,065 12,941 16,072 27,295 Foreign loans (net) -120 -575 -951 -1,053 -927 -666 Foreign loans (gross) 894 657 386 486 546 787 Amortization due -1,014 -1,232 -1,337 -1,539 -1,473 -1,453 Change in arrears 548 1,337 1,297 1,771 1,307 811 Domesticfinancing 6,654 10,776 12,719 12,223 15,692 27,150 Bank 6,660 10,777 12,719 12,223 15,692 27,150 Nonbank -6 -1 0 0 0 0 (In percent of GDP) Memorandum items: Total receipts 10.9 10.0 9.8 8.3 8.2 7.5 Excluding grants 10.7 9.8 9.6 8.2 8.0 7.2 Of which: Tax revenue 4.3 6.0 5.6 5.1 5.0 4.7 Total expenditure 16.5 17.6 16.8 13.6 12.9 13.7 Current expenditure 11.7 12.6 10.9 9.4 10.1 8.3 Capital expenditure and net lending 4.8 5.0 5.9 4.2 2.8 4.2 Balance on commitment basis -5.7 -7.6 -7.0 -5.2 -4.7 -6.3 Domestic bank financing 5.3 7.1 6.8 4.9 4.6 6.2 Foreign loans (net) -0.1 -0.4 -0.5 -0.4 -0.3 -0.2 Change in arrears 0.4 0.9 0.7 0.7 0.4 0.2 (Percentage change) Total receipts 100.2 11.9 20.5 13.0 34.7 57.5 Excluding grants 111.9 11.6 20.0 13.2 34.6 57.6 Total expenditure 20.1 29.4 17.4 7.2 30.6 61.8 Current expenditure a/ 13.0 31.0 6.3 14.5 47.1 56.5 Capital expenditure and net lending 41.4 25.7 45.5 -6.3 -6.6 77.4 a/ Starting 1 992/93, data exclude larger municipalities which were granted budgetary autonomy. Source: Budget Department and staff estimates. 10/5/95 C:\MMRCEM94\PUBFIN.XLS - 116 - Table 4.2: Government Revenue (In millions of Kyats) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Particular (PA) (RE) Domestic Revenue 13354 14899 17876 20229 27226 31577 - Taxes and duties 5336 9058 10548 12563 17036 20327 Income tax 899 2854 2001 3181 4641 7102 Custom duties 1367 2032 2639 2771 3938 4015 Commercial taxes 4088 5333 5995 Commodities and services tax a/ 2317 3194 3909 - - - Excise and excise duties 12 13 21 46 76 68 Taxes on use of State Property 326 362 725 887 1155 947 Other taxes 415 603 1253 1590 1893 2200 - Contribution from SEEs 2142 3307 3342 4997 6636 7820 - Local authorities' revenue b/ 986 1623 2402 13 15 15 - SEEs' current surplus 1722 - - - - - - Other 3168 911 1584 2656 3539 3415 Foreign Grant 194 267 405 435 602 977 Total 13548 15166 18281 20664 27828 32554 Memorandum Items: (Percent in total revenue) Tax Revenue 39.4 59.7 57.7 60.8 61.2 62.4 Tax on income 6.6 18.8 10.9 15.4 16.7 21.8 Commercial taxes 17.1 21.1 21.4 19.8 19.2 18.4 Tax on property use 2.4 2.4 4.0 4.3 4.2 2.9 Customs duties 10.1 13.4 14.4 13.4 14.2 12.3 Contributions from SEEs 15.8 21.8 18.3 24.2 23.8 24.0 a/ Replaced by commercial tax since April 1990. b/ Starting 1992/93, data exclude larger municipalities. Source: Budget Department. 10/5/95 C:\MMRCEM94\CURREV.XLS - 117 - Table 4.3: Union Government Current Expenditure a/ (In millions of Kyats) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Particular (PA) (RE) General Services 2016 2028 2047 2088 2479 2693 SLORC etc. 354 461 385 403 548 591 Home Affairs 1517 1382 1445 1430 1655 1815 Information 82 110 143 176 185 190 Foreign Affairs 63 75 74 79 91 97 Defence b/ 4332 6877 6086 9127 13884 14133 Economic Services 2035 2537 2609 2869 2898 4916 Argriculture and Forestry 908 959 994 1171 1508 2203 Industry 26 30 27 25 29 43 Mines 44 45 42 42 46 49 Transport and Communication 113 115 110 113 135 156 Public Works and Housing 552 942 967 995 602 1819 Trade 10 12 12 15 17 24 Co-Operatives 198 232 214 211 239 246 Planning and Finance 184 202 243 297 322 376 Social Services 4534 4111 5490 5569 6830 7012 Education 2699 2890 3588 3579 4470 4436 Health 668 662 692 791 885 925 Pension and Gratuities 1106 480 1041 1036 1231 1277 Labor 18 24 25 25 31 33 Social Welfare 43 55 144 138 213 341 Other c/ 392 1848 1712 483 1198 1370 External Interest Due 683 550 598 617 485 648 Total 13992 17951 18542 20753 27774 30772 (Percent in total) Memorandum Items: General Services 14.4 11.3 11.0 10.1 8.9 8.8 Defense 31.0 38.3 32.8 44.0 50.0 45.9 Economic Services 14.5 14.1 14.1 13.8 10.4 16.0 Social Services 32.4 22.9 29.6 26.8 24.6 22.8 External Interest Due 4.9 3.1 3.2 3.0 1.7 2.1 a/ On a cash basis, except for interest obligations. b/ All defense expenditure is classified as current expenditure, which was the convention followed by the government until 1991/92. c/ Includes contributions to international organizations, the Reserve Fund, and unallocated current expenditure. Source: Budget Department - 118 - Table 4.4: Union Government Capital Expenditure (In millions of Kyats) 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 (PA) (RE) General Services a/ 186 427 903 836 478 967 Economic services 1384 1509 2698 2957 3563 7589 Agriculture & forestry 536 550 483 790 1179 2712 Industry 50 44 25 33 32 22 Mines 6 9 2 2 2 7 Transportation & communications 80 88 249 242 537 746 Public works and housing 660 746 1825 1756 1748 3973 Planning & finance 52 72 114 134 65 129 Social services 391 912 2411 2437 1763 2190 Education 248 475 1222 1157 976 1249 Health 143 437 1189 1280 787 941 Other 242 26 574 309 498 1081 Total 2203 2874 6586 6539 6302 11827 Memorandum Items: General Services 8.4 14.9 13.7 12.8 7.6 8.2 Defence - - 0.0 0.0 0.0 Economic Services 62.8 52.5 41.0 45.2 56.5 64.2 Social Services 17.7 31.7 36.6 37.3 28.0 18.5 a/Includes SLORC from 1992/93 onwards. Source: Budget Department. - 119 - Table 5.1: Monetary Survey (At end March) 1990 1991 1992 1993 1994 1995 (In millions of kyats) Net foreign assets 2661 1537 1505 1600 1400 1900 Domestic credit 49155 64474 81071 102523 118446 151150 Union Government (net) a/ 46345 56222 68592 81515 96446 123800 Private sector 2810 8252 12479 21008 22000 27350 Cooperatives 2069 4433 5886 7876 6933 Rest of private sector 741 3819 6593 13132 15668 Total assets 51816 66011 82576 104123 119846 153050 Total liquidity 35021 51006 66791 89579 109900 152900 Money 25300 38918 52307 70428 84400 116000 Of which: Foreign currency denominated deposits 283 719 867 1300 1000 1200 Quasi-money 9721 12088 14484 19151 25500 36900 Net other liabilities 16795 15005 15785 14604 9900 100 Total liabilities 51816 66011 82576 104183 119800 153000 Memorandum items: M1/GDP (%) 20.3 25.6 28.0 28.2 24.0 26.6 M2/GDP (%) 28.1 33.6 35.8 35.9 31.3 35.0 Currency in circulation 23218 35140 46584 63871 76700 10600 Foreign exchange certificates in circulation ('000 US$) -- -- -- -- 2546 6691 a/ The bulk of outstanding credit to SEEs was swapped for government equity at the end of March 1989. Source: Data provided by the Myanma authorities; and IMF staff estimates. - 120 - Table 5.2: Selected Interest Rates (In percent per annum) 1990 1991 1992 1993 1994 1995 End of Period Centralbankrate 11.0 11.0 11.0 11.0 11.0 12.5g/ Treasury bills and bonds Three-month treasury bills 4.0 4.0 4.0 4.0 4.0 4.0 Three-year treasury bonds 10.0 10.0 10.0 10.0 10.0 10.0 Five-year treasury bonds 10.5 10.5 10.5 10.5 10.5 10.5 Deposit rates Call deposits 3.0 3.0 3.0 3.0 3.0 3.0 Fixed deposits Three months 8.5 8.5 8.5 8.5 8.5 9.5 h/ Six months 9.0 9.0 9.0 9.0 9.0 10.0 h/ Nine months 9.5 9.5 9.5 9.5 9.5 10.5 h/ Saving bank accounts Basic rate 8.0 8.0 10.0 10.0 10.0 10.0 Premium on three-year 2.0 2.0 minimum balance Saving certificates Twelve-year maturity 10.9 10.9 12.0 12.0 12.0 12.0 Lending rates Working capital loans Financial loans Term loans Cooperatives Working capital loans a/ 15.0 15.0 16.5 16.5 16.5 17.5 Term loans 12.0 12.0 15.0 e/ 15.0 e/ 15.0 e/ 15.0 e/ Paddy loans 15.0 4.0 f/ 4.0 f 4.0 f/ 4.0 f 4.0 fl 6.0 6.0 6.0 6.0 6.0 8.0 8.0 8.0 8.0 8.0 Private sector Agriculture To village banks b/ 13.0 13.0 13.0 13.0 13.0 13.0 To farmers c/ 18.0 18.0 18.0 18.0 18.0 18.0 Car purchase loans 15.0 15.0 15.0 15.0 15.0 15.0 House repair and other loans 5.0 d/ 5.0 d/ 5.0 d/ 5.0 d/ 5.0 d/ 5.0 d/ Small personal loans 36.0 36.0 36.0 36.0 36.0 37.0 Working capital loans a/ 15.0 15.0 16.5 16.5 16.5 16.5 Terms loans 12.0 12.0 14.5 e/ 14.5 e/ 14.5 e/ 14.5 e/ a/ Overdrafts are charged 0.5 percent above loan rates. b/ Lending rate of the Myanmar Agricultural and Rural Development Bank. c/ Relending rate of village banks. d/ Interest free for housing loans for government employees, starting from April 1990, others continued to pay 15 percent in 1990-9 1. e/ Mid-term loan 15 percent, long-term loan 14.5 percent. f/ Within first year 4 percent, second year 6 percent, third year 8 percent. g/ Effective from January 1, 1995. h/ Effective from April 1, 1995. Source: Central Bank of Myanmar and Myanmar Economic Bank - 121 - Table 6.1: Capacity Utilization Ratios, and Output and Capacity Indices for Selected Industrial Enterprises (In percent for indices 1985/86=100) 1990/91 1991/92 1992/93 1993/94 1994/95 Ministry of Industry (No. 1) Foodstuff industries Capacity utilization ratio 31.8 50.8 58.9 50.0 57.1 Output index 43.7 47.1 59.9 56.1 64.7 Capacity index 76.4 67.1 56.5 62.3 59.2 Textile industries Capacity utilization ratio 32.7 47.5 43.3 41.0 40.5 Output index 60.1 53.8 51.6 48.6 48.4 Capacity index 134.3 82.4 78.4 78.1 78.6 Jute industries Capacity utilization ratio 35.5 24.2 42.1 47.0 47.4 Output index 61.0 51.2 68.2 75.8 76.5 Capacity index 73.0 89.7 68.7 68.5 68.5 Ceramic industries Capacity utilization ratio 69.7 57.2 55.4 63.1 72.8 Output index 105.7 83.0 81.3 92.7 105.3 Capacity index 91.3 89.6 88.0 88.0 88.0 Pharnaccutical and household industries Capacity utilization ratio 35.1 41.7 44.7 36.1 52.0 Output index 43.5 31.6 37.0 28.5 40.7 Capacity index 97.5 98.4 59.4 63.0 62.4 Metal industries Capacity utilization ratio 25.1 23.9 35.7 Output index 73.8 82.2 60.6 Capacity index 99.8 99.8 100.0 General and Maintenance Industries a/ Capacity utilization ratio 37.2 29.0 31.4 37.1 30.5 Output index 66.8 54.9 41.2 45.2 38.5 Capacity index 108.7 94.4 79.0 91.4 76.2 General industries Capacity utilization ratio 42.5 41.0 Output index 50.7 44.3 Capacity index 69.2 69.2 Paper and Chemical Industries Capacity utilization ratio 60.4 68.9 72.0 71.7 67.1 Output index 67.2 77.2 85.9 82.5 81.2 Capacity index 83.7 84.9 82.0 79.0 83.2 10/5/95 C: \MMRCEM94\CAPACITY.XLS 1 OF 2 - 122 - Table 6.1: Capacity Utilization Ratios, and Output and Capacity Indices for Selected Industrial Enterprises (In percent for indices 1985186=100) 1990/91 1991/92 1992/93 1993/94 1994/95 Average of Ministry of Industry No. (1) Capacity utilization ratio 37.2 44.2 49.7 47.9 52.1 Output index 56.8 54.7 57.4 55.7 61.1 Capacity index 97.2 83.5 69.7 71.2 70.6 Ministiy of Industry No. (2) Myanmar Heavy Industry Capacity utilization ratio 20.4 14.6 12.7 19.9 21.4 Output index 38.8 28.1 26.6 42.9 41.2 Capacity index 103.5 105.0 114.4 117.3 104.7 Ministry of Energy Chemical Enterprise Myanmar Petrol Capacity utilization ratio 27.8 26.4 26.9 32.2 39.3 Output index 72.0 72.0 68.6 82.3 100.4 Capacity index 112.7 112.7 112.7 112.7 112.7 Average of All Industries Capacity utilization ratio 32.6 35.0 35.8 37.6 42.0 Output index 56.3 53.2 52.7 55.9 61.2 Capacity index 100.4 91.2 83.9 85.8 83.0 a/ Myanmar Metal Industries and Myanmar General Industries aialganated into Myanmar General and Maintenance Industries in 1993/94. Source: Planning Department, MNPED, and MOI (1) and (2). 10/5/95 C:\MMRCEM94\CAPACITY.XLS 2 OF 2 - 123 - Table 6.2: Production, Trade, and Consumption of Oil and Natural Gas (In thousands of barrels) a/ 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 EsL Total production (incrudeoilequivalent) 12,181 10,934 10,788 10,087 11,703 13,124 Crude oil b/ 5,545 5,312 5,477 5,358 5,231 5,040 Natural gas c/ 6,636 5,622 5,311 4,729 6,472 8,084 Utilization Domestic consumption d/ 11,414 10,797 9,984 9,284 10,902 12,291 Crude oil 4,778 5,175 4,673 4,555 4,430 4,207 Natural gas c/ 6,636 5,622 5,311 4,729 6,472 8,084 Electricity generation (3385) (3124) (2378) (3262) (4,115) (5,009) Trade Exports oil products (in crude oil equivalent) 767 137 804 803 801 833 a/ One barrel = 42 U.S. gallons. b/ Including imports. c/ In crude oil equivalent; the conversion factor used is I million cu. ft. of natural gas = 167 barrels of crude oil (I million BTUs = 1,000 cu. ft. of natural gas). d/ Including changes in stock. Sources: Energy Planning Department, Ministry of Energy. - 124 - Table 6.3: Generation and Consumption of Electricity, (In million of kilowatt hours) a/ 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Est. Electricity generation a/ 2,494 2,643 2,676 3,007 3,385 3,500 Hydroelectricty 1,144 1,248 1,238 1,530 1,705 1,583 Steam 25 28 26 25 34 45 Gas 1,293 1,293 1,366 1,402 1,595 1,820 Diesel 32 74 46 50 51 52 Total consumption 1,601 1,675 1,677 1,831 2,032 2,083 Domestic 571 629 672 771 883 914 Industrial 805 787 727 769 829 841 Hospitals, offices, schools, etc. 183 214 229 238 263 267 Other 42 45 49 53 57 61 Losses b/ 870 935 978 1,125 1,297 1,332 Memorandum items: Length of electric power Iines of MEPE (miles) 11,171 11,642 11,757 12,054 12,105 12,126 Electric generating capacity c/ 793 804 810 807 810 845 Of which: Hydroelectric (258) (258) (260) (288) (290) (298) Unit sales price (in pyas) d/ 48.7 49.1 50.1 50.2 49.6 91.4 Unit cost (in pyas) d/ 41.9 45.8 51.8 52.7 54.5 65.7 Ratio of losses to gene- ration (in percent) 34.88 35.38 36.55 37.41 38.32 38.06 a/ Units generated by the Myannar Electric Power Enterprise (MEPE) only; limited generation of power by plants located in some enterprises is not included. b/ Includes losses in generation, transmission, and distribution. c/ In megawatts. d/ 100 pyas = I kyat. Source: Energy Planning Department, Ministry of Energy. - 125 - Table 7.1: Yangon Consumer Price Index Weights 1990/91 1991/92 1992/93 1993/94 1994/95 1995 March (1986=100; annual average, end of month) All items 100.0 233.7 301.8 369.1 493.0 603.7 673.9 Food and beverages 64.9 256.8 340.6 418.7 585.8 691.9 768.8 Tobacco 2.3 167.1 192.8 243.9 273.2 296.7 314.7 Fuel and light 8.8 221.1 281.9 353.1 419.9 669.5 761.1 Clothing 7.1 184.9 230.6 310.7 351.1 398.0 423.3 House rent 3.1 142.4 198.0 220.5 256.4 315.8 359.6 Other 13.8 189.7 209.9 230.3 256.1 367.4 430.8 (Annual average percentage change) All itemns 21.9 29.1 22.3 33.6 22.5 11.6 Food and beverages 25.5 32.6 22.9 39.9 18.1 11.1 Tobacco 9.0 15.4 26.5 12.0 8.6 6.1 Fuel and light 20.9 27.5 25.3 18.9 59.5 13.7 Clothing 26.0 24.7 34.7 13.0 13.4 6.4 House rent 22.8 39.0 11.4 16.3 23.2 13.9 Other 3.8 10.6 9.7 11.2 43.4 17.3 Source: Central Statistical Organization. - 126 - Table 7.2: Offrcial and Free Market Prices of Selected Goods. (Indices: December 1986= 100; Prices in Kyats) 1990 1991 1992 1993 1994 1995 Actual Pnces June (June 1995) Rice Official 341.5 390.2 682.9 682.9 1,171.0 1,171.0 24.00 Free 193.0 381.7 636.0 750.0 836.0 1,096.0 51.41 Sugar Official 297.6 321.4 321.4 345.2 345.2 536.0 45.00 Free 194.8 227.9 225.7 250.0 417.0 415.0 110.49 Towels Official 182.5 182.5 182.5 182.5 Free 204.8 213.3 356.3 411.0 521.0 642.0 115.58 Washing Soap Official 400.0 400.0 450.0 450.0 450.0 450.0 9.00 Free 134.7 166.7 224.4 212.0 236.0 276.0 19.68 Matches Official 294.1 441.2 441.2 441.2 441.2 441.2 0.75 Free 192.3 192.3 281.5 308.0 308.0 308.0 2.00 Cigarettes Official 314.8 314.8 314.8 314.8 314.8 314.8 8.50 Free 160.0 233.2 268.2 215.0 268.0 302.0 34.03 Candles Official 289.7 310.3 310.3 310.3 310.3 310.3 4.50 Free 86.5 112.1 119.0 132.0 126.0 123.0 21.48 Vest(1/30) Official 143.4 143.4 346.9 346.9 346.9 346.9 24.80 Free 181.7 188.6 229.7 260.0 284.0 351.0 48.50 Long Cloth Official 134.4 187.0 415.6 415.6 415.6 415.6 32.00 Free 165.4 224.1 302.0 266.0 278.0 305.0 48.00 (Percent change) Rice Official 14.3 75.0 0.0 71.5 0.0 Free 97.8 66.6 -29.6 11.5 31.1 Sugar Official 8.0 0.0 7.4 0.0 55.3 Free 17.0 -1.0 7.1 66.8 -0.5 Towels Official 0.0 0.0 0.0 Free 4.2 67.0 -0.7 26.8 23.2 Washing Soap Official 0.0 12.5 0.0 0.0 0.0 Free 23.8 34.6 -7.7 11.3 16.9 Matches Official 50.0 0.0 0.0 0.0 0.0 Free 0.0 46.4 -73.8 0.0 0.0 Cigarettes Official 0.0 0.0 0.0 0.0 0.0 Free 45.8 15.0 -13.0 24.7 12.7 Candles Official 7.1 0.0 0.0 0.0 0.0 Free 29.6 6.2 9.4 -4.5 -2.4 Vest(1/30) Official 0.0 141.9 0.0 0.0 0.0 Free 3.8 21.8 1.4 9.2 23.6 Long Cloth Official 39.1 122.2 0.0 0.0 0.0 Free 35.5 34.8 -4.2 4.5 9.7 Source: Central Statistical Organization 10/6/95 C:\MMRCEM94\PRICES.XLS - 127 - Table 8.1: Budget of the State Economic Enterprises (In millions of Kyats) 1992/93 1993/94 1994/95 Particular (PA) (PA) (RE) CurrentRevenue 42,859 52,310 82,118 Agriculture and Forestry 2,731 6,436 16,619 Fisheries and Pearl 1,217 1,402 1,080 Industrial 10,468 12,050 12,770 Mineral 1,645 2,069 2,664 Construction 4,905 5,159 9,188 Power 903 928 1,918 Transport 4,088 4,739 5,264 Trade Council 12,826 13,131 24,769 Other 4,076 6,396 7,846 Current Expenditure 43,993 56,545 85,260 Agriculture and Forestry 3,893 7,187 17,441 Fisheries and Pearl 2,126 2,107 1,043 Industrial 9,383 10,961 11,596 Mineral 1,775 2,080 2,860 Construction 4,796 5,406 9,135 Power 737 656 1,365 Transport 3,419 3,863 5,371 Trade Council 13,584 18,263 29,667 Other 4,280 6,022 6,782 Capital Expenditure 3,696 3,373 6,123 Agriculture and Forestry 492 330 416 Fisheries and Pearl 83 67 7 Industrial 384 228 283 Mineral 119 186 348 Construction 50 77 266 Power 785 585 1,019 Transport 1,030 1,212 2,595 Trade Council 489 379 570 Other 264 309 619 Current Surplus (+)/Deficit(-) -1,134 -4,235 -3,142 Overall Surplus(+)lDeficit(-) -4,830 -7,608 -9,265 Source: Budget Department, MFR. 10/6/95 C: \MMRCEM94\SEE.XLS - 128 - Table 8.2: Sectoral Breakdown of SEEs' Current Surplus and Capital Expenditure a/ 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 IPA) (RE) (In millions of kyats) Agriculture and forestry Current surplus (164.0) (681.0) (454.0) (1,162.0) (751.0) (822.0) Capital expenditure 332.0 531.0 362.0 492.0 330.0 416.0 Fisheries and pearls Current surplus 25.0 1 5.0 (93.0) (909.0) (705.0) 37.0 Capital expenditure 58.0 112.0 104.0 83.0 67.0 7.0 Industrial Current surplus 1,282.0 546.0 865.0 1,085.0 1,089.0 1,174.0 Capital expenditure 502.0 662.0 297.0 384.0 228.0 283.0 Minerals Current surplus 27.0 (337.0) (8.0) (130.0) (11.0) (196.0) Capital expenditure 447.0 373.0 182.0 119.0 186.0 348.0 Construction Current surplus 202.0 (67.0) 42.0 109.0 (247.0) 53.0 Capital expenditure 20.0 32.0 73.0 50.0 77.0 266.0 Power Current surplus 72.0 226.0 163.0 166.0 272.0 553.0 Capital expenditure 645.0 981.0 556.0 785.0 585.0 1,019.0 Transport Current surplus 429.0 306.0 873.0 669.0 876.0 (107.0) Capital expenditure 785.0 1,704.0 1,012.0 1,030.0 1,212.0 2,595.0 Trade council Current surplus 43.0 (720.0) (1,841.0) (758.0) (5,132.0) (4,898.0) Capital expenditure 231.0 322.0 533.0 489.0 379.0 570.0 Other Current surplus (1,167.0) 187.0 446.0 (204.0) 374.0 1,064.0 Capital expenditure 80.0 226.0 228.0 264.0 309.0 619.0 Total SEEs Current surplus 749.0 (525.0) (7.0) (1,134.0) (4,235.0) (3,142.0) Capital expenditure b/ 3,100.0 4,943.0 3,347.0 3,696.0 3,373.0 6,123.0 Overall balance (2,351.0) (5,468.0) (3,354.0) (4,830.0) (7,608.0) (9,265.0) Memorandum items: (In percent GDP) Total SEEs Current surplus 0.6 -0.4 0.0 -0.5 -1.2 -0.7 Capital expenditure 2.5 3.3 1.9 1.5 1.0 1.4 Overall balance -1.9 -3.7 -1.9 -1.9 -2.2 -2.1 a/ Current surplus is recorded on a cash basis before payments of interest but after contributions to the Union Government. b/ Gross capital expenditure excluding capital revenue. Source: Budget Department, MFR. 10/6/95 C:\MMRCEM94\SEEPERF.XLS Table 8.3: Approved and Actual Foreign Direct Investment Inflows 1990/91 1991/92 1992/93 1993/94 1994/95 Approved a/ Actual b/ Approved a/ Actual b/ Approved a/ Actual b/ Approved a/ Actual b/ Approved a/ Actual b/ (In millions of U.S. dollars) Solely foreign-owned venture 78.5 7.7 - 0.3 - 0.3 238.2 13.1 246.9 24.7 Joint venture 131.2 21.2 5.9 6.4 25.9 19.8 99.0 11.9 65 32.6 Other (Production Sharing Basis) 70.9 196.2 - 228.4 77.9 128.9 40.4 66.7 1040 57.3 Total 280.6 225.1 5.9 235.1 103.8 149.0 377.6 91.7 1351.9 114.6 (Percent of total) Solely foreign-owned venture 28.0 3.4 0.0 0.1 0.0 0.2 63.1 14.3 18.3 21.6 Joint venture 46.8 9.4 100.0 2.7 25.0 13.3 26.2 13.0 4.8 28.4 Other (Production Sharing Basis) 25.3 87.2 0.0 97.2 75.0 86.5 10.7 72.7 76.9 50.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 a/ Projects approved by the Foreign Investment Commission under the provisions of the 1988 Foreign Investment Law; those permits that have been withdrawn or cancelled are adjusted. b/ Investment actually disbursed r'. Table 8.4: Foreign Direct Investment by Country 1990/91 1991/92 1992/93 1993/94 1994/95 Approved a/ Actual b/ Approved a/ Actual b/ Approved al Actual b/ Approved a/ Actual b/ Approved ai Actual b/ (In millions of U.S. dollars) Australia - 18.0 - 13.2 2.0 0.6 0.0 0.0 1.0 0.0 Bangladesh 3.0 2.9 - - - - 0.0 0.0 0.0 0.1 China - - - - 0.4 - 0.7 0.1 4.4 0.1 Canada - 8.3 - 11.9 - 10.8 0.0 0.0 0.0 0.0 France - - - - 10.0 27.1 0.0 24.7 455.0 25.0 Hong Kong 11.4 1.3 0.6 - 14.3 3.3 30.9 1.5 6.1 6.5 Japan 60.0 32.3 0.7 31.0 0.5 5.7 0.0 1.0 0.0 0.5 Republic of Korea 3.3 40.9 4.0 38.0 - 7.3 3.1 2.0 0.2 0.6 Macau - - - - 2.4 - 0.0 1.6 0.0 0.4 Malaysia - - - - 8.6 1.4 45.2 1.8 1 5.8 0.5 The Netherlands - 26.0 - 40.2 - 25.0 0.0 0.0 3.0 0.1 Phillipine - - - - - - 0.0 0.0 6.7 3.0 Singapore 5.3 2.2 - 3.5 23.2 1.2 228.8 6.1 55.1 29.8 Sri Lanka - - - - - - 0.0 0.0 1.0 0.0 Thailand 96.9 19.6 0.6 - 8.9 1.0 41.3 9.0 199.8 15.0 U.K. 26.5 13.3 - 13.9 4.0 13.4 8.1 10.5 599.8 16.6 U.S.A. 74.2 60.3 - 83.4 29.5 52.2 19.5 33.4 4.0 16.4 Total 280.6 225.1 5.9 235.1 103.8 149.0 377.6 91.7 1,351.9 114.6 (Percent of total) Australia - - - 5.6 1.9 0.4 0.0 0.0 0.1 0.0 Bangladesh 1.1 1.3 - - - - 0.0 0.0 0.0 0.1 China - - - - 0.4 - 0.2 0.1 0.3 0.1 Canada - 3.7 - 5.1 - 7.2 0.0 0.0 0.0 0.0 France - - - - 9.6 18.2 0.0 26.9 33.7 21.8 Hong Kong 4.1 0.6 10.2 - 13.8 2.2 8.2 1.6 0.5 5.7 Japan 21.4 14.3 11.9 13.2 0.5 3.8 0.0 1.1 0.0 0.4 Republic of Korea 1.2 18.2 67.8 16.2 - 4.9 0.8 2.2 0.0 0.5 Macau - - - - 2.3 0.0 1.7 0.0 0.3 Malaysia - - - - 8.3 0.9 12.0 2.0 1.2 0.4 The Netherlands - 11.6 - 17.1 - 16.8 0.0 0.0 0.2 0.1 Phillipine - - - - 0.0 0.0 0.5 2.6 Singapore 1.9 1.0 - 1.5 22.4 0.8 60.6 6.7 4.1 26.0 Sri Lanka - - - - - . 0.0 0.0 0.1 0.0 Thailand 34.5 8.7 10.2 - 8.6 0.7 10.9 9.8 14.8 13.1 U.K. 9.4 5.9 - 5.9 3.9 9.0 2.1 11.5 44.4 14.5 U.S.A. 26.4 26.8 - 35.5 28.4 35.0 5.2 36.4 0.3 14.3 Total 100.0 92.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 a/ Projects approved by the Foreign Investment Commission under the provisions of the 1988 Foreign Investment Law; those permits that have been withdrawn or cancelled are adjusted. b/ Investment actually disbursed on projects approved under the Foreign Investment Law. Source: Myanmar Investment Commission. 10/6/95 C:\MMRCEM94\FDICTRY.XLS Table 8.5: Foreign Direct Investment by Industry 1990/91 1991/92 1992/93 1993/94 1994/95 Approved a/ Actual b/ Approved a/ Actual b/ Approved a/ Actual b/ Approved a/ Actual b/ Approved a/ Actual b/ fIn millions of U.S. dollars) Agriculture - - - - 2.7 - - 0.1 - Manufacturing 42.7 18.0 5.9 0.8 13.3 9.5 18.2 4.3 76.3 11.9 Oil and Gas 19.1 178.1 - 228.4 44.5 128.7 19.5 66.5 1039.5 47.4 Mining 55.1 18.3 3.2 33.4 0.4 20.9 0.2 0.5 9.9 Fishery 77.3 3.0 - - 5.9 - 7.6 0.5 148.2 6.8 Hotel and Tourism 86.4 7.7 - 2.7 3.0 9.4 311.4 20.1 86.1 37.6 Transport - - - - 1.0 1.0 - - 1.3 1 Total 280.6 225.1 5.9 235.1 103.8 149.0 377.6 91.7 1351.9 114.6 a/ Projects approved by the Foreign Investment Commission under the provisions of the 1 988 Foreign Investment Law; those permits that have been withdrawn or cancelled are adjusted. b/ Investment actually disbursed on projects approved under the Foreign Investment Law. Source: Myanmar Investment Commission. W 10/6/95 C:\MMRCEM94\FDINDU.XLS - 132 - Table 9.1: Sown Area for Major Crops (In thousands of hectares) 1990/91 1991/92 1992/93 1993/94 1994/95 Est. Paddy 4,945 4,830 5,133 5,674 6,131 Wheat 150 154 151 125 127 Maize 141 140 156 150 163 Pulses 1,000 1,265 1,497 1,519 1,800 Groundnut 554 510 494 487 487 Sesame 1,324 1,289 1,367 1,299 1,297 Sunflower 163 146 156 121 161 Cotton 156 172 168 144 204 Jute 37 36 55 33 39 Rubber 77 76 78 83 90 Sugarcane 92 113 117 99 137 Myanma tobacco 32 40 38 32 33 Virginia tobacco 2 4 3 5 3 Other 1,454 1,515 1,594 1,614 1,654 Total 10,127 10,290 11,007 11,385 12,326 Indices of sown area; 1989/90=100 Paddy 101.4 99.0 105.2 116.3 125.7 Wheat 105.6 108.5 106.3 88.0 89.4 Maize 106.0 105.3 117.3 112.8 122.6 Pulses 116.8 147.8 174.9 177.5 210.3 Groundnut 99.3 91.4 88.5 87.3 87.3 Sesame 103.6 100.9 107.0 101.6 101.5 Sunflower 102.5 91.8 98.1 76.1 101.3 Cotton 102.0 112.4 109.8 94.1 133.3 Jute 102.8 100.0 152.8 91.7 108.3 Rubber 101.3 100.0 102.6 109.2 118.4 Sugarcane 103.4 127.0 131.5 111.2 153.9 Myamma tobacco 110.3 137.9 131.0 110.3 113.8 Virginia tobacco 100.0 200.0 150.0 250.0 150.0 Other 99.5 103.6 109.0 110.4 113.1 Total 102.8 104.4 111.7 115.6 125.1 Source: Planning Department, Ministry of Agriculture. 10/6/95 C:\MMRCEM94\SOWNAREA.XLS - 133 - Table 9.2: Output and Yield of Major Crops 1990/91 1991/92 1992/93 1993/94 1994/95 Est. Output '000 metric tons) Paddy 13969 13201 14837 16760 18813 Wheat 123 143 139 108 114 Maize 187 191 208 204 255 Pulses 552 720 889 870 1127 Groundnut 472 378 433 431 453 Sesame 216 171 237 223 272 Sunflower 96 87 96 83 115 Cotton 62 63 68 43 105 Jute 24 22 39 27 35 Sugarcane 2105 2431 3410 2849 2375 Myanma tobacco 43 53 50 47 47 Virginia tobacco 10 17 11 23 14 Rubber 15 15 16 16 17 Yield (kg per ha. of harvested area) Paddy 2934 2885 2934 3054 3110 Wheat 904 974 953 948 896 Maize 1495 1540 1518 1534 1606 Pulses 641 663 659 642 695 Groundnut 892 808 893 925 956 Sesame 217 212 239 236 251 Sunflower 661 655 667 747 757 Cotton 431 410 433 352 542 Jute 956 833 816 888 949 Sugarcane (mt per ha) 43 44 45 45 45 Myanma tobacco 1327 1358 1315 1445 1446 Virginia tobacco 4745 4790 4239 4256 4215 Rubber 369 373 375 381 389 Yield Indices 1989/90 100 Paddy 100.6 98.9 100.6 104.7 106.7 Wheat 94.7 102.0 99.8 99.3 93.8 Maize 94.7 97.5 96.1 97.2 101.7 Pulses 99.8 103.3 102.6 100.0 108.3 Groundnut 101.9 92.3 102.1 105.7 109.3 Sesame 96.9 94.6 106.7 105.4 112.1 Sunflower 99.2 98.3 100.2 112.2 113.7 Cotton 97.3 92.6 97.7 79.5 122.3 Jute 88.6 77.2 75.6 82.3 88.0 Sugarcane 0.1 0.1 0.1 0.1 0.1 Myanma tobacco 98.7 101.0 97.8 107.5 107.6 Virginia tobacco 98.6 99.6 88.1 88.5 87.6 Rubber 100.0 101.1 101.6 103.3 105.4 Source: Planning Department, Ministry of Agriculture. 10/6/95 C:\MMRCEM94\YIELD.XLS - 134 - Table 9.3: Production and Utilization of Teak and Hardwood (In thousands of cubic tons) a/ 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Provisional Teak (logs) Production 391 440 362 341 333 260 Of which: By foreign companies 165) (143) 1102) (62) i78) (10) Utilization 412 371 300 319 292 260 Sawmills 161 132 135 152 96 106 Local use 48 14 21 1 1 14 Exports b/ 203 225 144 166 195 140 Of which: By foreign companies (65) (143) (102) (62) (78) (10) Change in stocks -21 69 62 22 41 0 Hardwood (logs) c/ Production 530 648 653 624 711 526 Of which: By foreign companies (124) (327) (258) (211) (314) (26) Utilization 470 627 552 492 615 526 Sawmills 255 227 217 222 229 328 Local use 58 55 66 29 10 72 Exports b/ 157 345 269 241 376 126 Of which: By foreign companies (124) (327) (258) (211) (314) (26) Change in stocks 59 21 101 132 96 0 a/ A cubic ton is defined as 12 inches x 12 inches x 50 feet. b/ Exports of logs only. c/ These data refer to production of hardwood by the public sector; private sector production is excluded. Source: Planning Dept., Ministry of Forestry. 10/6/95 C:\MMRCEM94\TEAK.XLS - 135 - Table 10.1: Employment and Population 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Estimated (Percent of total) Total Employment 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture 66.2 65.6 65.7 65.5 65.2 64.5 Livestock and fishery 2.4 2.3 2.3 2.3 2.3 2.3 Forestry 1.1 1.2 1.1 1.1 1.1 1.1 Mining 0.5 0.5 0.5 0.5 0.5 0.6 Manufacturing and processing 7.5 7.2 7.0 7.3 7.4 8.2 Construction 1.1 1.2 1.8 1.7 1.7 1.9 Power 0.1 0.1 0.1 0.1 0.1 0.1 Transportation and communications 2.5 2.5 2.5 2.5 2.5 2.5 Social services 2.6 3.5 3.2 3.2 3.2 3.2 Administration 3.7 4.1 4.4 4.3 4.4 4.3 Trade 9.2 8.9 8.5 8.5 8.6 9.7 Other 3.0 3.0 3.0 2.9 2.9 1.7 Employment by sector Public sector a/ 8.7 8.6 8.6 8.4 8.2 8.0 Private sector and cooperatives 91.3 91.4 91.4 91.6 91.8 92.0 Total employment (in thousands) 15,221 15,737 16,007 16,469 16,817 17,230 Growth rate (%) -(5.08) (3.39) (1.72) (2.89) (2.11) (2.46) Total labor force (in thousands) b/ n.a. 16,530 16,955 17,391 17,838 18,296 Urban n.a. 3,700 3,795 3,892 3,992 4,094 Rural n.a. 12,830 13,160 13,499 13,846 14,202 Unemployment rate (%) n.a. 4.8 5.6 5.3 5.7 5.8 Population (in thousands) c/ 40,034 40,786 41,552 42,333 43,116 43,922 Growth rate (%) (1.88) (1.88) (1.88) (1.88) (1.85) (1.87) a/ Including casual labor. b/ Data for 1990/91 are from Myanmar Labor Force Survey, 1990. c/ Data for mid-fiscal year. Source: Planning Department and Labor Department. 10/6/95 C:\MMR\EMP.XLS - 136 - Table 10.2: Employment and Wages in the Public Sector 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Estimated (In thousands) Number of employees 862 891 897 874 877 877 Union Government 532 550 558 561 568 568 Local bodies 18 18 18 0 0 0 State economic enterprises 312 323 321 313 309 309 (In millions of kyats) Public sector wage and pension bill 9,244 9,669 9,758 10,813 14,131 15,697 Wage and salaries 8,634 8,964 9,023 9,756 12,806 14,196 Union Government 5,420 5,617 5,704 5,206 6,750 7127 Local bodies 144 150 150 3 3 4 State economic enterprises 3,070 3,197 3,169 4,547 6,053 7065 Pension and gratuities 610 705 735 1,057 1,325 1,501 Union Government 327 396 397 720 890 1001 Local bodies 14 15 17 0 0 0 State economic enterprises 269 294 321 337 435 500 (In kyats) Annual wage per employee 10,016 10,061 10,059 11,161 14,600 16,185 Union Government 10,188 10,213 10,222 9,280 11,884 12,548 Local bodies 8,000 8,333 8,333 .. State economic enterprises 9,840 9,898 9,872 14,527 19,589 22,864 Annual wage and pension per employee 10,724 10,849 10,879 11,162 14,602 16,187 Union Government 10,803 10,939 10,929 9,280 11,883 12,547 Local bodies 8,778 9,015 9,125 6,000 6,000 8,000 State economic enterprises 10,702 10,780 10,892 14,527 19,589 22,864 Source: Budget Department. 10/6/95 C:\MMRCEM94\WAGE.XLS NOTES MAP SECTION 96- L0 r ~~ ~ ~~~~92 ~ 00 00 2~~~~~~~~~~~~~~~~~~~~2 2.' 85mgLol r TE ) Or Hkni,0~~~{f S F4/Fo 2 jo!~ ~ ) I-'{j , /5SAAt'0