Myanmar slumps on the economic ropes

Supalak Ganjanakhundee, and Rungrawee C. Pinyorat, The Nation, Asia News Network, Bangkok

Sanctions imposed after the detention of Aung San Suu Kyi have exacerbated a crisis caused by widespread bank failures

One of the biggest challenges facing the newly appointed Burmese (of Myanmar) Prime Minister Khin Nyunt is to rescue the national economy from its deep crisis before public discontent over the downturn is translated into a force that could post a serious threat to the military-run regime.

The Burmese economy ran into trouble last year as a result of widespread flooding which seriously damaged agriculture, the sector that accounts for over 40 percent of gross domestic product.

Early this year the economy took an even deeper plunge when many financial institutions went into bankruptcy as a result of mismanagement. They took deposits illegally and lent to high-risk sectors money which then turned into non-performing loans.

Some non-bank financial institutions took money without limiting the annual interest rate on the deposit. Some went as high as 60 percent per annum, which is six times higher than the ceiling set by the Central Bank of Myanmar.

The acceptance of illegal deposits in some non-bank institutions soon affected the whole financial system as commercial banks copied the idea as an incentive to their customers. Some 20 private commercial banks, including Asian Wealth Bank, Yoma Bank, Myanmar Oriental Bank and Myanmar May Flower Bank, went into bankruptcy. Owners of these banks have close connections with leaders in the junta, including Than Shwe and Khin Nyunt.

Rumors going around Rangoon (Yangon) about the malaise in the banking system caused panic among depositors. The problem got out of control and quickly triggered a bank crisis in the country.

Prime Minister Khin Nyunt, then "secretary one" of the State Peace and Development Council (SPDC), attempted to mitigate public panic by calling on depositors to stop withdrawing money and to have confidence in the banking system.

The government did implement some measures in an attempt to improve the situation, including granting 25 billion kyat from the central bank to bail out commercial banks and issuing a regulation to limit maximum withdrawal per account to 100,000 kyat per week. Some small banks allowed each customer to withdraw only 50,000 kyat a week.

The then finance minister Khin Maung Thein, who was perceived as incompetent, was replaced by Hla Tun. Banks ceased to issue new credit cards and rejected payment with existing ones.However, such measures did not seem to work, and the banking crisis has continued.

Analysts believe the arrest of opposition leader Aung San Suu Kyi on May 30 had a direct connection with the economic crisis. The junta was afraid that the opposition would use economic problems as a pretext to galvanize public support and mobilize anti-government resentment to topple them.

On May 30 supporters of Aung San Suu Kyi violently clashed with pro-government thugs during a political tour in Burma's north, which resulted in the detention of dozens of National League for Democracy members. The arrest of Aung San Suu Kyi created bad publicity for the government, but the junta may have thought that the situation was severe enough to justify her arrest.

The junta's miscalculation has had a severe impact on Burma, both politically and economically. The arrest prompted international condemnation, and Western countries have imposed economic sanctions on the country to express their disapproval of her detention, while Japan has frozen aid.

Nevertheless the sanctions seem to hurt the people more than the government. The generals in the junta will be damaged by the sanctions but not so much as people in the cities like Rangoon and Mandalay.

The sanctions imposed upon Burma will hurt the more modern economic sectors such as banking, trading and manufacturing which form the driving engine of economic growth. The middle-class people in these sectors who have the potential to become a crucial force in bringing about political change are, ironically, the ones who are the worst hit.

Political and economic sanctions hamper the prospect of exports and foreign direct investment, according to a report by the Manila-based Asian Development Bank. A capital crunch as the result of a lack of exports and foreign investment has caused foreign-exchange constraints for Burma.

The kyat has already lost value against the U.S. dollar and baht since last year. The Burmese currency is officially fixed at six kyat to US$1, but the market rate is currently 1,020, down from some 800 at the beginning of the banking crisis late last year. The currency slid further after U.S. sanctions went into effect on August 28.

Economic sanctions will also have indirect effects upon the agricultural sector. When the dollar rate goes up, so does the price of the imports farmers need such as fertilizer, pesticides, tractors and other farm equipment. And it could raise the price of rice.

The rice price is one of the key factors which could be used to gauge popular discontent. When it goes up, it badly affects urban workers. Theoretically, economic hardship could lead to a chaotic situation and provide the basis for the masses to form themselves into an anti-government mob.

The new premier, Khin Nyunt, does not seem to have many options. The government is not capable of rehabilitating the banking system by itself, as it has no money. Among the few other options remaining, the premier needs, if he can, to push for the release of Aung San Suu Kyi to free his country from international pressure and sanctions.

Aung San Suu Kyi herself has no bearing on Burmese economy. Perhaps she also has no idea how to solve the ongoing economic crisis, but her release would persuade "hard-line" countries in the West to relax and allow the inflow of capital into the Burmese economy.