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1/9)WORLD_BANK:POLICIES FOR SUSTAIN



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/* -------------" Policies for Economic Reform 1/9 "------------ */

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MYANMAR: POLICIES FOR SUSTAINING ECONOMIC REFORM (1/9)

WORLD BANK Report No. 14062-BA, October 16, 1995.

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 i economic policies followed
almost a quarter century of economic decline during which the
prevalent development paradigm was termed "the Burmese way to
socialism". Under that model, economic development was to be
achieved through rapid industralisation and self sufficiency, and
led by the State Enterprise (SE) sector. Economic performance under
that policy regime was poor. During 1962-77, real GDP growth 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 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^M
seven years having elapsed since those reforms were initiated, it is^M
an opportune time to take stock. Specifically, this report examines^M
the impacts of the policy changes, with a view to identifying the^M
areas in which progress has been made, as well as the gaps that^M
still remain in the program. This analysis would then underpin the^M
report's recommendations concerning areas in which additional^M
reforms are required and how these measures should be phased[1].^M
^M
B. POLICY REFORMS AND RECENT ECONOMIC PERFORMANCE^M
^M
3. In the early-1980s, the pace of GDP growth slowed while external^M
and internal imbalances worsened. As a share of GDP. the budget^M
deficit in FY82086 averaged over 8% while the current account^M
deficit rose to over three-quarters of export earnings, and was^M
financed primarily through external public sector borrowings [2].^M
These imbalances forced the Government to attempt actions aimed at^M
stabilizing the economy. However, these measures consisted mainly of^M
quantitative restraints on investment and imports. In this sense,^M
they were focused on the symptoms of the problems rather than^M
addressing their underlying causes, which included the overvaluation^M
of the Kyat, the continued bias against agriculture, the^M
restrictions on private sector activity, and the inefficiency of the^M
large state enterprise sector, particularly in industry. Without^M
effective stabilization and adjustment efforts, the economic^M
situation deteriorated sharply by the mid-1980s, with inflation^M
worsening as well. Two rounds of demonetization were instituted in^M
1985 and 1987 to curb inflation, during each of which over half the^M
currency in circulation was declared worthless. However, these^M
efforts did not succeed either, and during FY87-89, annual inflation^M
averaged almost 20 percent (compared to about 4% in FY82-86).^M
Moreover, both the budget deficit and the current account gap^M
widened, while export earning fell sharply.^M
^M
THE REFORM PROGRAM^M
^M
4. It was in this context that the SLORC initiated its so-called^M
"Open-Door" program of economic reforms in late-1988. These reforms^M
aimed at expanding the role of the private sector, reducing the^M
scope and extent of government intervention, and promoting^M
integration with the world economy, and built on the liberalization^M
of agricultural pricing and marketing in 1987. In this manner, the^M
reform program was intended to transform the economy from one^M
organized along socialist lines and dominated by the state sector to^M
a market-oriented system. The initial measures focused on^M
liberalizing regulations and enacting fiscal incentives for foreign^M
investment. The reforms have since been broadened to include^M
policies aimed at controlling public expenditures and monetary^M
expansion; licensing private banks, extending investment incentives^M
to local investors, and allowing the retention and trading of^M
foreign exchange by private exporters. In many respects, therefore,^M
the economic environment in Myanmar today differs from that before^M
1988.^M
^M
5. AGRICULTURAL SECTOR POLICIES. The major reform in agricultural^M
policies occurred in 1987 with the abolition of the system of forced^M
government procurement of major crops and the liberalization of^M
domestic marketing the processing. Although these steps were^M
accompanied by the imposition of a higher land tax and a tax on^M
grain trading, those taxes were soon rescinded. Moreover, formal^M
government controls on farmers' cropping patterns were also^M
eliminated in 1988. However, the government continues to procure^M
albeit on a smaller scale than before, accounting in FY 95 for about^M
11% of the total crop [3]. Prices of some agricultural inputs^M
supplied by the government, including fertilizers and mechanization^M
services have also been raised. Finally, extensive leasing of follow^M
land for cultivation and livestock breeding by private farmers has^M
been undertaken since 1991.^M
^M
6. INDUSTRIAL SECTOR POLICIES. With the shift away from the "Burmese^M
ways to socialism" in 1988, the restrictions on private sector^M
involvement in the industrial sector have been reduced^M
progressively. Private firms are not allowed to operate in all^M
industrial subsectors other than those specified as activities^M
reserved for the state sector ( such as teak extraction, mining of^M
gems, oil and gas extraction, and power generation [4]). With the^M
acknowledgment of the expanded role of the private sector, the^M
commercial tax was introduced in 1990 to replace the previous^M
commodity and services tax, which applied only to SEs and^M
cooperatives. The commercial tax, by contrast, applies to the sales^M
(domestic and imported) of all enterprises, private and public. With^M
enactment of the Foreign Investment Law in late 1988, foreign^M
investors in Myanmar are now allowed to establish wholly-owned^M
enterprises or enter into joint ventures with Myanma citizens in^M
almost all subsectors. Even in subsectors reserved for state^M
enterprises (SEs), foreign investment has been approved in several^M
cases, particularly in mining and fisheries. A range of tax benefits^M
and streamlined licensing procedures are also provided to foreign^M
investors under the law (with additional exemptions for^M
export-oriented enterprises) as are guarantees against^M
nationalization and for the repatriation of capital and foreign^M
exchange component of profits. In 1994, most of these tax benefits^M
available to foreign investors were also extended to local^M
investors. Pricing policies have also been liberalized with the^M
removal of most formal price controls (except on energy products).^M
^M
7. STATE ENTERPRISE REFORMS. State enterprise have been granted^M
greater operational autonomy, in areas such as pricing, input^M
procurement, and production. Regarding production, the enterprises^M
can choose also whether to enter into agreements with private^M
domestic or foreign investors whereby they produce on a consignment^M
basis, lease their facilities to these investors, or enter into^M
joint ventures with these firms. The goal of privatizing SEs in a^M
more systematic manner has recently been announced although detailed^M
implementation procedures are yet to be developed. IN 1989, the^M
outstanding credit to SEs was converted into non-interest bearing^M
government equity, and since then, all financing to SEs is provided^M
from the budget.^M
^M
8. TRADE AND FOREIGN EXCHANGE POLICIES.  At the core of the^M
Government's "open door" policy in 1988 was the expansion of the^M
role of private sectors in external trade. Border t4ade, which^M
occurs across Myanmar's land borders and was previously illegal, was^M
normalized (i.e. licenses or permits are required from the^M
authorities). However, private sector exports of some commodities^M
such as rice, teak and minerals continue to be prohibited. Foreign^M
exchange control procedures have also been reformed. Since 1988,^M
retention of foreign exchange earnings by exporters has been^M
permitted, initially for 60 percent of export proceeds, and since^M
1989 for the entire proceeds. Moreover, these retained earnings can^M
be deposited in foreign exchange accounts at the Myanmar Foreign^M
Trade Bank (MFTB), and transfers are permitted between these^M
accounts [5]. IN 1993, Foreign Exchange Certificates (FECs) were^M
introduced by the Central Bank with an FEC equivalent to US$1.^M
Residents can now acquire the trade FECs, and use them to open^M
foreign exchange accounts.^M
^M
9. FINANCIAL POLICIES. Several banking laws were enacted in 1990^M
including the Central Bank Law, which empowers the Central Bank of^M
Myanmar (CBM) to supervise and regulate the financial system,^M
including the conduct of monetary policy, and the Financial^M
Institutions Law, which provides the framework for the establishment^M
and operation of a range of institutions including commercial banks,^M
finance companies, and development banks. In an important break with^M
the past, private domestic banks can also now be established. As of^M
end-July 1995, 15 private banks were in operation, of which, 4 had^M
also been granted licenses to transact in foreign exchange, and^M
although foreign banks cannot operate yet, 28 have been licensed to^M
establish representative offices.^M
^M
FOOTNOTES:^M
^M
[1] In keeping with this focus on the key macroeconomic and sectoral^M
policy issues, this report does not directly deal with the important^M
issues of designing strategies for poverty reduction. However, since^M
sustained growth is a necessary condition for success in reducing^M
poverty, the recommendations here set the stage for more detailed^M
follow-up work, which would be undertaken when feasible.^M
^M
[2] The Government of Myanmar(GOM) fiscal year(FY) runs from April1^M
to March 31. The shorthand FY95, as used in this report, refers to^M
the fiscal year ending March 31, 1995, i.e. 1994/95.^M
^M
[3] Although the sales are termed voluntary, this procurement occurs^M
at below-market prices. The magnitude of such implicit taxation of^M
paddy farmers is evaluated in Chapter 2.^M
^M
[4] Even these restrictions can be relaxed on a case-by-case basis,^M
as noted below with respect to foreign investment.^M
^M
[5] Since these transactions are not officially recognized by the^M
authorities, the exchange rates at which transfers occur are not^M
recorded.^M
^M
(2/9) RECENT ECONOMIC PERFORMANCE^M

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