Myanmar became a member of ASEAN on 23 July 1997 with the aim of increasing its regional and international ties. Since then Myanmar has made much progress engaging in regional cooperation in the various sectors. In 1998, Myanmar signed the Framework Agreement on ASEAN Investment Area. As a member of ASEAN, Myanmar is taking part in the FTA negotiations with its dialogue partners for the investment chapter.
Myanmar has implemented the Common Effective Preferential Tariff (CEPT) Scheme since 1998 and Myanmar removed the Temporary Exclusion List (TEL) in industrial sector since 2003. For ASEAN Investment Liberalisation, Myanmar will phase out the TEL in agriculture, forestry, mining and services incidental to manufacturing on 1st January 2015 for ASEAN investors, and in 2020 for non-ASEAN investors.
For service liberalisation, Myanmar has gradually liberalised seven sectors. The areas include tourism, telecommunication, financial services, maritime, transport, air transport, construction and business services. For financial liberalization, cautious steps havebeen taken in the financial sector. Before the 1997 crisis, several MoUs have been signed to form joint-venture banks between Myanmar and the foreign banks, and plan is afoot to allow foreign banks to open bank branches and conduct bank operation in Myanmar. However, due to the crisis of 1997, the JV banks have not materialised as yet. Two sub-sectors of the insurance services, namely, the Average and Loss adjustment and Actuarial Services, are to be liberalised for ASEAN, Korea and China.
Myanmar has also signed the Investment Promotion and Protection Agreement with Philippines on 17th February 1998, Vietnam on 15th February
2000, China on 12th December 2001 and Lao PDR on 13th May 2003, respectively.
3.4.1 Current Account and Capital Account Liberalisation
As Myanmar is an Article XIV member of the IMF, Myanmar exercises foreign exchange control over its BOP and current account transactions. Myanmar’s exchange rate is officially pegged to the SDR. 1SDR is equivalent to 8.50847 kyat. However, Myanmar liberalised its current account and capital account to a certain extent. State approval is needed for all capital transactions. In January 1989, permission has been granted to all Myanmar citizens for them to open foreigncurrency account with the Myanma Foreign T r a d e Bank, with regard to foreign exchange they have received on account of pensions and compensations received from abroad, services rendered to foreign government, international organisations and companies, and rentals received from house, motor vehicles.
Private registered importers are allowed to open foreign currency accounts at the Myanma Foreign Trade Bank from their export proceeds. In addition, with their foreign currency holdings, exporters are entitled to import under valid import licenses issued by the Ministry of Commerce. The proceeds from exports must be fully repatriated.
The liberalisation measures undertaken for foreign exchange transactions are as follows:
(a) Myanmar nationals are allowed to open foreign currency accounts who earn foreign ‘exchange;
(b) Private exporters are allowed to retain 100 % of export earnings in their foreign currency account;
(c) Private services receipts and transfers are allowed in foreign-currency account locally;
(d) Foreign companies operating in Myanmar can pay the wages and salaries of their employees in foreign exchange;
(e) In 1993, the Central Bank of Myanmar issued foreign exchange certificates (FECs) against hard currencies at the rate of 1 FEC = US$ 1 initially for the convenience of foreign visitors and subsequently for investors in
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Myanmar. Any person can accept, use and hold FECs freely in Myanmar, and people are allowed to open foreign exchange accounts with FECs with the banks; and
(g) Authorised dealer licenses and money changer licenses are issued to state- owned banks and public enterprises while FEC changer licenses are issued to private businesses.
100% retention of foreign exchange is allowed to foreign investors who bring foreign exchange into Myanmar, and who generate foreign exchange income in Myanmar. Myanmar citizen investors who earn foreign exchange earnings are also eligible for this retention incentive.
To encourage foreign investments and stabilise the exchange rate, such measures have been taken.
4. Issues and Challenges Regarding FDI and Private Investment
Theoretically, the availability of credit financing encourages investment in the private sector and it is also an important factor in private investment. During the socialist period from 1962 to 1988, medium- and large-scale enterprises were nationalised and many capital-intensive industries were state-owned. However, most of the private sector firms were small. This reflected the challenges that private sector firms face in expanding, including a lack of access to credit.
After 1988 Myanmar allowed the private sector to participate in the economy. The non-agricultural private sector activity picked up from 1989 onwards with the liberalisation measures and the opening of the economy to sole foreign- ownership and joint-venture companies. However, access to credit, and specifically access to foreign exchange credit, is a problem faced by the private sector due to fact that Myanmar practices foreign exchange control and control over capital accounts. Foreign borrowings by the private sector are not allowed. The lack of access to long-term credit is another obstacle in doing business.
Individuals or families operate most of the micro-enterprises. The Myanma Economic Bank and the Myanma Investment and Commercial Bank provide short-term and long-term loans only with security. Therefore, smaller enterprises face a similar case of the lack of access to credit. The only option is borrowing from local moneylenders, who charge high interest rate. A few micro-enterprises lending programmes are run by the NGOs. Smaller entrepreneurs face difficulties
in maintaining sufficient working capital and accessing finance for capital formation.
Although agriculture remains the largest sector in terms of private-sector output and employment, only one state-owned bank, the Myanma Agricultural and Rural Development Bank, and some private banks that have set up branches in townships, lend agricultural loans with low interest to farmers. Furthermore, land cannot be used as collateral, for the state owns all the land and farmers possess only use rights. Use rights for land cannot be used as collateral for loans from formal banks. The lack of access to credit is the challenge that the private sector firms face in expanding their activities.
The exchange rate can influence the level of private sector investment as it is one of the components that determine the real cost of imports. Regarding the exchange rate for Myanmar, the government maintains an official exchange rate pegged at about 6 kyats per US dollar. Since 1993 foreign exchange certificates (FEC) have been issued against the hard currency at the rate of 1 FEC = 1 US$ to help solve the problem of exchange rate difference between the official rate and the market rate. Although the official rate remained at its pegged rate, the parallel- market rate resulted in de-facto devaluation.
During 1980-1997, before the crisis, the official exchange rate was in a depreciating trend, due to the mismanagement of the economy to a large extent for about two and one half decades following the adoption of the centrally- planned economic system. A currency devaluation increases the real cost of purchasing imported goods, thereby reducing the profitability of the private sector and creating the possibility of causing investment to decline. However, after the post crisis, the downward trend of the exchange rate was reversed from the impact of pursuing more liberalised policies. One obvious factor was a surge in exports earnings from the natural gas projects. Natural gas exports came to constitute some 30% of total export earnings in 2002/03. The overvalued official exchange rate impedes agricultural and private sector development. It also creates incentives for rent-seeking activities.
The gap between the official rate and the market-determined parallel exchange rate became wide creating uncertainties and risks for traders and investors, and exchange control places impediments in attracting foreign direct investment. This is not attractive to the foreign direct investment. Presently Myanmar’s private sector is constrained from further expansion due to the lack of a formal market for share trading. Treasury bond issuance is still not significant because it is not popular with the general public who has yet to understand it
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better. Although the government has carried out privatisation through a variety of strategies, investors show lack of interest and reluctance to widen private sector ownership. The absence of foreign banks is also one of the reasons that reduces the attraction of Myanmar as an investment destination to foreign investors.
Finally, in the absence of international assistance for more than two decades, Myanmar was compelled to rely mainly on her own resources to implement infrastructure development and reforms, which have caused continued government budget deficit, inflation and low investor confidence.