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Myanmar Crisis

Myanmar economists urge curbs on junta's hard currency access

Report says sanctions will reduce military's revenue by up to $2bn

Army troops in tanks take part in a parade on Armed Forces Day in Naypyitaw on March 27.   © Reuters

YANGON/BANGKOK -- Sanctions and other measures to curb the Myanmar junta's access to foreign currency are the main financial pressure points that could force the regime to shift its spending priorities and reduce expenditures on military hardware and other requirements, a group of Myanmar-focused economists argue in a briefing paper on the military's finances.

The paper, which was not publicly issued and was authored by Independent Economists for Myanmar (IEM), a group that includes economists who were working in the country, gives a brief overview of the regime's finances since the Feb. 1 coup. It highlights the junta's vulnerability to disruptions in earnings from sectors such as natural gas and gemstones.

The authors conclude that targeting the junta's sources of hard currency with international sanctions could reduce its revenues by roughly $2 billion annually.

"Such actions, and preventing military businesses from accessing foreign inputs, could help pressure the military to compromise on its own needs" and change its spending priorities towards public service needs, IEM says in the report. Such sanctions could hit the junta's foreign assets such as those generated from natural gas, mining, forestry, shipping and airlines "by freezing deposits linked to state-owned Myanma Foreign Trade Bank and Myanma Investment and Commercial Bank," it noted.

Based on official data previously accessible on government websites, and records under the ousted National League for Democracy government, the authors estimate the military, through its grip on state finances, controls foreign currency reserves of at least $4 billion, or "roughly two-thirds of Myanmar's stock of foreign currency." It also controls about half of the remaining inflows following the collapse of several sectors that generated foreign currency, such as textiles and tourism, the report notes.

The largest inflows of foreign currency to the military are earned from natural gas, jade, metallic minerals, land rentals, telecommunications fees, and perhaps from businesses involved in trade -- which includes port fees, transport and logistics companies. These bring in around $2.5 billion per year. "The military also likely retains its ability to borrow from sympathetic creditors," the report says.

Jade and gems, widely regarded as a key source of military revenues, remain a top source of hard currency income for senior military officials and their families, although they also profit from substantial domestic interests in a range of other sectors, the report notes. While total profits from the two sectors amount to billions of dollars a year, official export data suggests a modest trade of roughly $250 million to $1.8 billion per year, with 2014 as an outlier, with $12 billion in jade and gems exported that year, according to the United Nations trade statistics database Comtrade.

"However independent estimates suggest a jade trade that is three to 14 times higher than official figures in an average year (not including 2014) due to undervaluation and smuggling to the Chinese border. Similarly, 60% to 80% of gemstones produced in Myanmar bypass the formal trading and export system," the report says.

Since the Feb. 1 military takeover, the collapse of the country's mainstay garment export and tourism industries have left about half the remaining sources of foreign currency, including jade and natural gas, under the junta's control.

Natural gas remains a steady source of foreign exchange, including fees and taxes collected from foreign oil and gas producers. Myanmar has exploration and production licensing agreements with companies including Thailand's PTT Exploration, France's Total, Chevron of the U.S., China's CNOOC and South Korea's Posco Daewoo.

Activists protest in front of Total headquarters in Paris on March 25: Royalties paid by the French oil company and others are a big source of foreign currency for the junta.   © Reuters

While U.N. statistics show $3.3 billion in exports last year for the category, including natural gas shipped by pipeline, accounting for 20% of Myanmar's exports by value, that figure includes fees to both the state and contractors and production costs. According to IEM, based on figures under the Extractive Industry Transparency Initiative, the global standard adopted by Myanmar under the former Thein Sein government, in 2017-18, oil and gas generated about $1 billion in foreign currency for the state.

While these sources provide the military with enough foreign currency to cover its own requirements as an institution over the medium term, "it does not adequately cover public services or private-sector needs," the report says.

"Even without forceful targeted sanctions in place, the military is already being forced to choose between its own priorities and providing financing to import the fuel and equipment needed to generate electricity, and [the] food, fertilizers and medications people need to survive," it adds.

Myanmar imports roughly $28 billion of goods and services in an average year, including $3 billion worth of fuel, $1.2 billion of meat and vegetables, $1 billion of cooking oil and more than $500 million of medications, the authors note.

Reflecting the economic fallout from the COVID-19 lockdown measures in 2020, exports have shrunk by more than 20% and imports by more than 35% since October 2020, according to IEM. Before the coup, the textile and footwear industries generated a quarter of all foreign currency inflows to the country, a source that has all but dried up since Feb. 1. The natural resource sector -- mainly natural gas but also metallic minerals, gems and forestry products -- accounted for another quarter.

"Capital inflows into the domestic banking sector (now negligible due to financial sector vulnerabilities), foreign borrowing (more expensive due to higher risk premia) and donor funding (partly suspended) represented another quarter, filling the trade deficit," the report reads.

"In short, without new foreign currency inflows, the military will soon need to ration foreign currency," the report says. "The regime will need to choose between purchasing fuel, medication, equipment and food for itself, and providing foreign exchange liquidity for the rest of the population. Official state media [have] already signaled as much, suggesting that Myanmar needs to produce more palm oil, food, 'personal goods,' and hydro- and solar power to 'cut spending on foreign exchange'," the report adds.

In a separate note, Fitch Solutions, a subsidiary of the global credit ratings group, underlined the squeeze on the junta's access to foreign currency, warning that Myanmar's infrastructure and construction sector will face a sharp downturn in the coming year. Apart from the drop in construction activity due to the coup and COVID-19 lockdowns, the sector, which is heavily dependent on imported materials, will struggle to cover import costs.

The Myanmar military displays equipment during the country's National Day parade on April 27: A report by independent economists suggests the army is running low on cash.    © Reuters

In a note issued on Thursday, Fitch forecast that the construction sector will contract by about an annual 44% in real terms this year, with only marginal growth expected in subsequent years.

Further pressure on the country's foreign currency inflows will lead to a collapse in foreign direct investments, Fitch says, warning of "significant disruptions for construction activity.

"Ongoing nationwide protests and labor strikes have resulted in connectivity and supply-chain disruptions, and in some cases, direct work stoppages due to the lack of workers," it says. The disruptions have been exacerbated by paralysis in the banking sector, it adds. "The majority of local construction workers are typically paid daily wages in cash, but many construction sites are now struggling with cash shortages, as access to money remains limited."

The Fitch note chimes with the IEM findings in highlighting potential pressure on hard currency supplies to cover imports of vital materials.

"If the State Administrative Council (SAC) continues to prioritize military goods and services, it will lead to immense popular suffering over the coming months," the IEM economists warn, highlighting divergent views over the aim of anti-coup protesters to deny the junta economic stability.

"The military has already starved public services and the private sector of foreign exchange, so further reductions in its access to foreign currency are likely to predominantly impact the military rather than civilians," the authors write.

Interestingly, the report does not distinguish between the state, that is the SAC, and the military, which has effectively taken over the state. While the junta could, in theory, seize state revenue by force, this has not happened, said a Yangon-based analyst: "Equating the state with the military risks creating a false sense of military control of the economy. In reality, many entities and agencies are not merged into the military structure," he told Nikkei Asia.

However, one of the report's authors, speaking on condition of anonymity, said economists should no longer distinguish between the state and the military. "Immediately after the Feb. 1 coup, the cabinet seemed to be pursuing economic reform, so it was reasonable to distinguish between the military and the government," he said. "Since then, it has become evident that the SAC is making all decisions, even drafting central bank directives. For instance, an independent government would make forex available for fuel and medical imports in this crisis, but the SAC is not allowing this."

"The Internal Revenue Department, for example, is under military authority, and state revenue is now distributed by military officials, so there is no way one can assume they have not merged," the economist added.

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