Weekly Eleven Published on Monday, 02 March 2015 23:34
Myanmar borrowed about US$9.6 billion from 19 international financial institutions up to the end of 2013.
Myanmar was $5 billion in debt before 1988, when General Ne Win came to power, and $3 billion in debt from 1988 to 2011. Under the new government, Myanmar has borrowed nearly $1 billion. Thus, Myanmar’s debt has reached $9.6 billion. About $4 billion, or 42 per cent of these loans, came from the People’s Republic of China.
The interest rate on the loans from China is a 4.5 percent annually, so Myanmar will have to pay $180 million in interest to China for its loan of over US$4 billion every year.
Even under these circumstances, parliament approved a proposal to borrow $300 million from China Exim Bank at 4.5 per cent interest submitted by Cooperatives Minister Kyaw Hsan. The proposal was approved over the objections of two MPs from the opposition National League for Democracy (NLD).
The funds will be distributed by the cooperatives ministry to farmers around the country in the form of small loans.
For this loan, Myanmar will have to pay an additional interest of about $13.5 million to China every year.
Cooperatives Minister Kyaw Hsan has also been secretary of the central committee of the ruling Union Solidarity and Development Party (USDP) and is personally close to President Thein Sein. He is now the cooperatives minister. Most of the MPs from the USDP supported his proposal. Some suspect this loan will be spent on the USDP’s election campaign. The people must keep a close watch on how these loans are spent.
Furthermore, it is suspicious that the minister would pursue such an expensive loan when many international loans are available at interest rates as low as of 1 or 2 per cent.
It is still more disturbing that the Myanmar Foreign Trade Bank (MFTB) signed a loan contract for $300 million with China Exim Bank on behalf of the cooperatives ministry on November 14, 2014, without seeking the approval of the Union parliament in advance. The proposal to borrow the $300 million from China was submitted to parliament only on February 25, 2015. The ministry’s pursuit of the loan seems to have disregarded the authority of parliament.
The loan falls to the people
A recent government leak revealed that leaders of the previous military regime made a plan to borrow $30 billion from China before the new government took power for large-scale infrastructure projects.
The public was not informed of this plan or of the interest rate that the loan would come with. The new government also kept the plan a secret.
If the loan is ultimately disbursed, Myanmar will have to pay at least $180 million in interest to China annually.
When the cooperatives ministry borrows from China, it does not directly sign with China. The finance ministry has to give a guarantee to China. If the cooperatives ministry cannot pay off the loans, they will become part of the national debt, meaning the people of Myanmar will end up paying them off.
In addition to the high interest rate, the loans under the previous military regime came with strings. Equipment for infrastructure projects had to be bought at China’s asking price. Myanmar had to accept the interest rate. Myanmar is clearly at a disadvantage when it negotiates over loans with China.
Many factories under the control of the Ministry of Industry have had to take out Chinese loans to continue their operations. The debt has not yet been fully paid off. Many see these loans as useless because they prop up industries that operate at a loss to begin with. When the new government took power in Myanmar, some foreign countries wrote off Myanmar’s debt to them, but China did not.
Unless the ministry of cooperatives is able to pay off the debt, the people of Myanmar will have to do it. Dr Maung Maung Thein, the deputy minister for finance, also told the parliament on September 14 last year that foreign debts must be paid off using tax revenues.
This comes at a time when Myanmar farmers cannot even pay back small loans from local banks due to low crop yields and bad weather.
The exchange rate trap
The challenge of paying back loans to China is amplified by unfavourable exchange rates. When a ministry takes a $100 million loan from China Exim bank, the money flows into the MFTB, which disburses the funds to the Myanmar Economic Bank (MEB) in Myanmar currency. According to the current exchange rate, the MEB can disburse Ks over 97 billion to famers after exchanging $100 million for Myanmar currency.
Unfortunately, the ministry will have to repay loans to the Chinese bank in US dollars. Currently, the value of a dollar is trading at Ks 1043 at the market.
Thus, the ministry will have to pay Ks 104 billion in Myanmar currency to repay a $100 million loan, according to the current exchange rate.
We should raise a question whether or not Minister Kyaw Hsan has already taken account of the possible losses that may result from the currency exchange rate if the value of a dollar is Ks 1100 at the repayment period.
Minister Kyaw Hsan should also reveal whether his ministry has taken remedial measures to deal with such possible losses.
The people deserve to know these detail because the ministry will have to repay it with the use of state funds.
Loans and elections
Many fear that the disbursement of small loans to farmers using these large Chinese loans will be used as a tool by the USDP party to buy votes during Myanmar’s upcoming general elections. According to some sources, the cooperatives ministry has disbursed $100 million in loans to over one million farmers in 250 townships across the country. In addition, the ministry will offer an additional $400 million to millions of farmers across the country. This could win millions of votes for USDP.
Local and foreign independent observers should monitor whether strings are attached to these loans or not.
The President and Minister Kyaw Hsan will have to take responsibility if local and foreign independent election monitoring groups find electoral strings attached to loan distribution.
Myanmar could not repay foreign debts owed in the time of U Ne Win and former Senior General Than Shwe. The current government also takes out foreign loans. As many times as Myanmar’s government changes, unpaid debts pile up.
All in all, the people of Myanmar have a heavy burden to bear in the form of government debts.
