For. Econ Trends Report, Main   Business and Econ in Burma
Burma Fund WebIndex

US Embassy Rangoon, Foreign Economic Trends Report, 1997,

Part 1 of 3 

Section 2, FETR 1997  Economic trends and outlook

Section 3, FETR 1997 

FOREIGN ECONOMIC TRENDS REPORT: BURMA, 1997

 This report is a public document, prepared in June 1997 and released in September 1997 by American Embassy Rangoon. All statistics in this report are unofficial Embassy estimates, not official U.S. Government statistics. That is, they are compiled and reviewed only by Embassy officials, not by U.S. Government officials in Washington, even though they largely originate from the Government of Burma, from the governments of Burma’s trading partners, or from such international financial institutions as the IMF and World Bank, as indicated by source notations in the appended statistical tables, and by the section on sources and data.

Similar reports are prepared and distributed to the public annually, separately or as part of an annual Country Commercial Guide, by most American embassies throughout the world, in compliance with standing instructions from, and following a standard format specified by, the U.S. Departments of State and Commerce.

This report is intended chiefly for economists and financiers; except for its first section, "Major trends and outlook," it is highly technical and sometimes redundant, intended to server largely as a reference work. This Embassy’s Country Commercial Guide, which is substantially identical but shorter and less technical, may be more useful to other business people.

Feedback from readers often helps American embassies to correct or otherwise improve such reports. Comments on this report are welcomed, and may be addressed to: American Embassy Rangoon, c/o The U.S. Department of State, Washington, D.C., 20521-4250, U.S.A.

The American Embassy in Rangoon is located at 581 Merchant Street, in downtown Rangoon. Its economic and commercial section is open to the public from 8:30 AM to 11:30 AM every Monday through Friday, except Burmese and American holidays. However, meeting with an American officer may be facilitated by making an appointment in advance. The Embassy's telephone numbers are 95-1-282055 through 282059; its telefax number is 95-1-280409.

CONTENTS

Executive summary .......................................................................... page 1

I. Economic trends and outlook ................................... page 4

-- Major trends and outlook ................................................. 4

-- Major trends...................................................................... 4

-- 1996/97 economic performance ........................................ 8

-- Economic outlook ............................................................ 10

-- Principal growth sectors ................................................... 12

-- Tourism ............................................................................. 12

-- Defense ........................................................................... 15

-- Agriculture ........................................................................ 19

-- Paddy (unmilled rice) cultivation ...................................... 20

-- State procurement of paddy ............................................. 24

- Rice exports ....................................................................... 25

-- Beans and pulses .............................................................. 27

-- Remaining structural issues in the agricultural sector ...... 29

-- Living conditions in the agricultural sector ..................... 30

-- The government’s role in the economy ............................. 32

-- Historical background ...................................................... 33

-- The extent and limits of economic liberalization since 1988 ..... 33

-- Fiscal developments ......................................................... 35

-- Non-financial expenditures ............................................... 36

-- Non-financial receipts ........................................................ 38

-- Fiscal balances .................................................................. 41

-- External financing .............................................................. 43

-- Domestic financing ............................................................ 45

-- Errors and omissions .......................................................... 47

-- Monetary developments .................................................... 47

-- The exchange rate regime ................................................ 48

-- Exchange rate movements ................................................. 49

-- Recorded money supply growth ..................................... 51

-- Recorded money supply composition .................................. 53

-- Recorded domestic credit and domestic reserves ................ 53

-- Recorded net foreign assets (foreign reserves) .................... 54

-- Aggregate price inflation ................................................... 55

-- Balance of payments ...................................................... 57

-- Merchandise trade data and balances ................................ 57

-- Recorded merchandise exports ............................................ 58

-- Recorded merchandise imports ............................................. 60

-- Non-factor services trade ...................................................... 62

-- The overall trade balance ..................................................... 62

-- Unrequited private transfers (workers’ remittances) ................ 64

-- Foreign direct investment ........................................................ 65

-- Other recorded cash financial inflows: grants, loans and other .. 66

-- External debt, debt service, arrears and debt relief .................. 67

-- Aggregate external accounts: the flow of funds ....................... 70

-- Errors and omissions: unrecorded external flows .............. 71

-- Narcotics exports and other foreign exchange rents

and their real exchange rate effects ....................................... 72

-- Infrastructure situation ................................................................. 76

-- Human infrastructure: education and health ............................... 76

-- Physical infrastructure ............................................................ 77

-- Use of uncompensated labor in infrastructure projects .............. 79

-- Major infrastructural projects .................................................. 82

II. Political environment ................................................ 85

-- Nature of the bilateral relationship with the United States ........ 85

-- American concerns: human rights violations, narcotics exports .. 85

-- U.S. Government activities and policies ..................................... 88

-- Private investment, trade and travel ................................... 90

-- U.S. direct investment in Burma .......................................... 91

-- U.S. exports to Burma ...................................................... 92

-- U.S. imports from Burma .................................................... 93

-- Travel and migration ......................................................... 94

-- Major political issues affecting the business climate .............. 96

-- Brief synopsis of the political system,

schedule for elections, and orientation of major political parties.............. 96

-- Note on sources, data and method ................................. 97

-- Recent improvements in publicly available economic data ..... 97

-- Remaining flaws in the publicly available economic data ....... 99

-- The statistical basis and methodology of this report ................ 103

List of commonly used abbreviations.................................................... 109

Appendix: Statistical Tables ...................................................... 110

-- Table A: Socio-economic profile ............................................... 112

-- Tables B.1.a - B.3.c: National income accounts (GDP and GNP) . 113

-- Table C: Aggregate price indicators ............................ 122

-- Tables D 1.a - D.6: Balance of payments accounts ............ 123

-- Tables E.1.a - E.2: Monetary accounts ............................... 138

-- Tables F.1 - F.2.b: Flow of funds accounts ............................. 141

-- Tables G.1.a - G.6: Public sector finance accounts.............. 144

EXECUTIVE SUMMARY

Burma, renamed Myanmar by the military State Law and Order Restoration Council (SLORC) that has ruled it since 1988, is a resource-rich but poor country with a population estimated by its government at 47 million. Most of recorded GDP derives from agriculture. Although economic data are incomplete and distorted, annual per capita GDP may be between US $200 and $300 on a money basis, perhaps $600 to $900 on a purchasing power parity basis. Burma's principal legal merchandise exports are wood, beans and pulses, fish, garments, precious stones, and rice. Burma is also the world’s leading producer and supplier of opiates. Most heroin consumed in the United States in believed to originate from Burma; other U.S.-Burma trade is relatively small, consisting mostly of Burmese garment exports to the U.S. and perhaps $10 million worth of Burmese travel services consumed by U.S. visitors.

Burma's economy stagnated under policies of state socialism and national self-sufficiency during the 1962-88 military dictatorship of General Ne Win. From 1988 to 1993, the SLORC partially liberalized economic activity and reduced obstacles to foreign trade and investment, inducing substantial albeit unevenly distributed real growth. Since 1993, the pace of economic reform has slowed, with the state continuing to monopolize some major exports and to own 58 firms that dominate many sectors of the non-farm economy. From 1993 to 1996, liberalization was reversed in the rural economy, as the Government of Burma (GOB) applied increasing coercion in an unsuccessful effort to boost state-monopolized rice exports by multiple-cropping and expanding irrigation, but resumed again in 1997.

The GOB’s chronically large fiscal deficits were the main obstacle to continued economic liberalization, as well as the main cause of Burma’s chronically high money supply growth and price inflation. These deficits were caused in part by low and declining tax revenues and overreliance on non tax receipts. They were also caused in part by high defense spending, apparently equivalent to at least half of central government spending and to 8% to 10% of recorded GDP, that has funded a doubling of armed forces personnel despite the the the signing of cease-fires with most internal insurgent groups. Since 1995, increased spending on public works has also contributed to the deficit.

As liberalization slowed, so did growth. GOB data suggest that recorded money GDP grew in real terms by 7.5% in fiscal year (FY) 94/95, 6.9% in FY 95/96, and 5.8% in FY 96/97. Although these figures may overstate real GDP growth, the recent slowing of growth that they indicate is largely genuine and likely to continue absent substantial further economic or political liberalization. During the mid-1990s, an illusion of sustained rapid economic growth was created by consumption growth much in excess of GDP growth. This reflected a widening of the recorded trade deficit -- to 20% of recorded GDP in FY 95/96 -- financed largely by increased workers’ remittances and by increased unrecorded net foreign exchange inflows apparently caused largely by increased domestic retention of narcotics export receipts. These foreign exchange rental inflows caused the real exchange rate to appreciate during the mid-1990s, discouraging production of non-narcotics exports and import-substitutes.

Since 1995, merchandise exports have stagnated and public sector exports have declined, resulting, since early 1996, in a foreign exchange shortage concentrated in the public sector. In response, the GOB has printed kyat to buy dollars, restricted private imports while spending private sector foreign reserves for public sector imports, accelerated sales of real estate and mineral exploration rights for foreign currency, and borrowed foreign exchange on commercial terms from foreign investors and import suppliers while not paying much of its large prior external debt service obligations. During FY 96/97, the GOB’s fiscal deficit grew relative to recorded GDP; money supply growth and price inflation accelerated; and foreign reserves fell to less than one month’s import coverage. Severe flooding in July and August that damaged the rice crop is likely to further exacerbate inflation. In the long run, prospective natural gas export receipts may improve Burma’s balance of payments situation insofar as they are invested in producing exports and import substitutes. In the short or medium term the will not, partly because they are already largely effectively obligated until well into the next decade. The GOB appears to have no immediate prospect of regaining access to significant amount of concessional external financing from sources other than the Government of China.

On the other hand, since 1989, the real incomes of most farmers have increased, although some urban workers, notably including government officials, have decreased. Since 1993, the GOB has launched conservation measures to curtail unsustainable logging in areas it controls, and has launched numerous public works projects to improve Burma’s woefully inadequate physical infrastructure. From 1993 to 1995, this increase in infrastructure building was accomplished in part by a large increase in uncompensated rural labor. However, since mid-1996, the GOB appears to have curtailed this practice somewhat, at least in central Burma, relying increasingly on imported heavy construction machinery to build regional irrigation works, and on army labor to build railroads. During FY 96/97, the GOB’s financial difficulties induced it to adopt less coercive rice production and procurement practices, and to restrain the growth of its defense expenditures. And during FY 96/97, for the first time since FY 92/93, the real exchange rate did not appreciate.

The persistence of an official exchange rate at which Burma’s currency, the kyat, is now worth about 30 times more than at the market exchange rate, facilitates official rent-seeking, but does not greatly misallocate resources or retard growth, since few transactions occur at prices reflecting the official exchange rate. However, the GOB’s practice of equating kyat-denominated and foreign-currency-denominated transactions at the official rate in its national accounts distorts those accounts and reduces economic transparency. New attempts to deal with the market rate of foreign exchange and of import licenses have created problems both for Burmese and foreign traders.

Burma remains the world’s largest producer of opiates with a potential annual production of 2,500 tons. In recent years it appears that an immensely large percentage of profits from the narcotics trade have stayed ashore. The government has reached cease fire agreements with ethnic minority groups involved in narcotics trafficking and with narcotraffickers and has encouraged them to systematically invest in infrastructure and other domestic projects. Burmese import division growth in excess of production and export grown in the mid-1990s appears to have been fueled largely by increases in workers remittances and domestically returned narcotics receipts. Though we lack adequate information to quantify these amounts, narcotics proceeds are still known to be invested also in Thailand and other countries in the region.

The deterioration of public education since the onset of military rule in the 1960s will affect growth and development for years to come. This has accelerated since 1988, as the SLORC has reduced real spending on education and health. Between two-thirds and three-quarters of Burmese school children drop out before fifth grade, and primary school enrollment has declined in recent years, apparently largely in response to rising formal and informal school fees. School at all levels were closed for much of 1997 out of apparent GOB concern that students might publicly protest to challenge GOB policies, as they did in October and December 1996.

Public concern in the U.S. and other countries about the GOB’s human rights abuses, its suppression of Burma’s pro-democracy movement since 1988, and its failure to suppress narcotics trafficking, poses diverse political risks and obstacles to firms doing business in or with Burma, and has induced many foreign firms to discontinue or restrict their activities. Since 1988, the GOB has lost access to most foreign aid, including financial assistance from the international financial institutions, which the U.S. Government is required by law to oppose. The governments of the U.S. and of E.U. member states grant no GSP tariff preference to imports of Burmese origin, provide no preferential financing in support of exports to Burma or investments in Burma, and grant no licenses to export military equipment to Burma. Since 1994, ten U.S. cities, one county and one state have enacted laws barring their governments from buying goods or services from firms that invest in or buy from Burma. Since May 1997, the U.S. Government has prohibited new investment in Burma by U.S. firms and nationals, and is the only government to have applied such legal constraints on its business relations with Burma. Consumer opposition in the U.S. and some other countries to the military government’s refusal to honor its pledge since 1988 to transition to a multiparty democracy has also discouraged U.S. and other countries’ private sector to do business with Burma.

I. ECONOMIC TRENDS AND OUTLOOK

Major trends and outlook.

Major trends.

During the four years following the advent, in 1988, of the pro-democracy movement’s challenge to military rule, the Government of Burma (GOB), under reconstituted military leadership called the State Law and Order Restoration Council (SLORC), undertook diverse structural reforms that partially liberalized Burma’s previously state-socialist and externally closed economy. In conjunction with a partial liberalization of external trade, the GOB implemented a gradual de facto currency devaluation that was largely completed in early 1993, when the GOB stopped requiring the exportation of domestic goods and services purchased with kyat (Burma’s national currency) at the market exchange rate. In response to these liberalization measures, Burma’s recorded GDP, and recorded exports in particular, grew rapidly during the early 1990s. The real market value of the kyat (the real exchange rate) remained roughly stable, with the rate of domestic price inflation in excess of U.S. price inflation approximating the rate of nominal kyat depreciation relative to the U.S. dollar.

However, after early 1993 the pace of structural economic liberalization slowed, virtually to a halt. In some respects, GOB economic policy became less liberal. In an effort to increase state-monopolized rice exports, the GOB increasingly intervened in farmers’ production choices; it also made increasing use of uncompensated corvee labor on physical infrastructure construction projects, including greatly expanded construction of irrigation works to facilitate increased rice production and exports. In 1994 and 1995, much of Burma’s gem and jade production was put under the control of UMEH, a military holding company, and new taxes were briefly imposed on most private exports.

Economic reform foundered on the GOB’s fiscal problems, especially its foreign currency deficits, which were exacerbated by the SLORC’s political problems. In the wake of the 1988 challenge to military rule by the pro-democracy movement, the SLORC undertook a sustained expansion of the armed forces, whose primary mission remained internal security, from about 175,000 men in 1988 to about 350,000 in 1997. Meanwhile, defense expenditures increased in real terms and as a share of all central government expenditures, and consisted increasingly of expenditures for defense imports, which grew relative to public sector export receipts. During the mid-1990s, total defense spending appears to have been equivalent to between 8% and 10% of recorded GDP, and defense operating expenditures appear to have exceeded non-defense central government operating expenditures. During the early 1990s, the GOB managed to decrease the economic role of the state while increasing its military expenditures only by cutting real health, education and personnel expenditures, by ceasing to service most of its external debt, and by drawing down state foreign exchange reserves obtained from the sale of diplomatic real estate in downtown Tokyo in 1989, at the height of the Japanese real estate bubble. However, by the end of FY 92/93, the GOB’s own foreign reserves (i.e., total foreign reserves in excess of domestic private sector claims on them) had been drawn down to US $43 million from $370 million at the end of FY 89/90. Meanwhile, the GOB’s reduction of public sector wages had eroded its ability to collect tax revenues, largely offsetting its cuts in non-defense spending, and its suppression of Burma’s pro-democracy movement had deprived it of access to most sources of concessional external financing. Rather than curtail its defense spending and defense imports, the GOB sought to increase its non-tax receipts, and in particular its foreign exchange receipts from its monopolies on wood and rice exports.

During the mid-1990s, as structural liberalization faltered, recorded export growth and GDP growth slowed. However, imports and consumption continued to grow rapidly. The share of recorded GDP to which the recorded merchandise and non-factor service trade deficit was equivalent increased steadily from 5.3% in FY 92/93 to 20.0% in FY 95/96. The share of recorded GDP to which consumption (calculated as a residual, not directly observed) was equivalent grew steadily from 83.0% in FY 91/92 to 95.8% in FY 95/96. During these years, real consumption in the recorded economy (discounted by the GOB’s Rangoon consumer price index) grew at an average annual rate of 9.0%, whereas real recorded GDP (discounted by the GOB’s GDP deflator) grew at average annual rate of 5.4%. Since an apparent increase in the value of narcotics exports and unrecorded travel service exports appears to have been largely offset by an apparent increase in unrecorded payments for defense imports, and since unrecorded private merchandise trade not involving narcotics exports probably balances, this increase in the recorded trade deficit appears to have been largely real, reflecting a widening of the total trade deficit. The resulting import-fueled growth in consumption, greatly in excess of growth in recorded domestic production, created an illusion of sustained rapid economic growth that tended to mislead casual observers.

Some of the increase in consumption relative to production and in imports relative to exports was paid for by a large increase in net unrequited private transfers -- apparently workers’ remittances -- from abroad, which were equivalent to between 6% and 7% of recorded GDP during the mid-1990s. However, much of it was paid for by a large increase in the unrecorded net foreign exchange inflows indicated by the net errors and omissions in the recorded balance of payments; allowing for unrecorded foreign exchange outflows in the form of unrecorded payments for defense imports and defense-related external debt service, gross unrecorded foreign exchange inflows, which appear to have been small during the early 1990s, appear to have been equivalent to more than 10% of recorded GDP by FY 95/96. The preponderance of this increase in unrecorded foreign exchange inflows appears to have been caused by increased domestic retention of narcotics export receipts, of which there is abundant anecdotal evidence. There appears to have been no increase in the volume of narcotics exports during the mid-1990s, although opiates appear to have remained Burma’s most valuable category of exports. However, domestic retention of narcotics export receipts, like workers’ remittances, was greatly stimulated by the GOB’s partial exchange rate regime liberalization of early 1993, which allowed foreign currency to be converted into kyat at the market exchange rate rather than at the official exchange rate for domestic consumption of domestically produced goods and services. Already, during the late 1980s and early 1990s, the SLORC had discontinued the GOB’s previous practice of confiscating bank deposits that could not be shown to have been legally earned, and had negotiated cease-fires in place with some minority ethnic group armies engaged in narcotics cultivation and exportation; during the mid-1990s, diverse businesses affiliated with these organizations began to flourish openly in Rangoon.

The increased inflows of foreign exchange rents -- workers’ remittances and narcotics export receipts -- appear to have been largely responsible for rapid appreciation of the real market value of the kyat during the mid-1990s. During FY 93/94 through FY 95/96, domestic prices rose at an average rate of at least 25% a year, but the nominal market exchange rate remained in the vicinity of 120 kyat per U.S. dollar. This appreciation of the real exchange rate tended to discourage production of non-narcotics exports and import-substitutes. During the mid-1990s, private firms producing import substitutes found it increasingly difficult to compete with imports, and many failed, contributing to a slowing of economic growth in upper Burma, where such firms were concentrated. In Rangoon, many Burmese businesspeople in export-oriented and import-substituting industries complained of the increasing difficulty of competing with firms affiliated and allegedly funded by narcotics-cultivating and exporting organizations. Thus, increased inflows of worker’s remittances and narcotics export receipts may have had adverse indirect effects on the balance of payments.

Meanwhile, the GOB was only briefly successful in its efforts to increase the public sector’s receipts, and its foreign currency receipts in particular. GOB-recorded receipts from the exportation of forest products, a state monopoly, stagnated after FY 93/94, when the GOB expelled Thai and Malaysian contractors for excessive harvesting and clear-cutting. A brief quadrupling of state-monopolized rice exports in FY 94/95 proved unsustainable, due largely to non-cooperation by the farmers of lower Burma, for whom dry season cultivation of privately exportable beans and pulses was more profitable than the multiple-cropping of rice that the SLORC tried to force them to practice during the mid-1990s. Public sector merchandise export receipts appear to have fallen from US $584 million in FY 94/95 to $359 million in FY 95/96 and around $330 million in FY 96/97 -- not much more than the average of $250 million a year achieved during the early 1990s. Meanwhile, from FY 92/93 to FY 96/97, the C.I.F. value of GOB-recorded public sector merchandise imports (apparently including growing imports of inputs into domestic defense production) grew from $400 million to an estimated $670 million, and GOB expenditures for unrecorded imports of finished defense goods are estimated to have grown from $77 million to $178 million. Consequently, the public sector experienced an acute and worsening shortage of foreign exchange during the mid-1990s.

During the early and mid-1990s, the share of recorded GDP to which gross recorded investment was equivalent ranged from 19% to 24%, being highest in FY 90/91, FY 91/92 and FY 95/96 and lowest in FY 92/93 through FY 94/95. The variations in the level of recorded investment relative to recorded GDP are due largely to (a) unusually large direct foreign investment, chiefly in the oil and gas sector, during the peak years; and (b) understatement of public investment during FY 92/93 through FY 94/95, due to increased GOB use of uncompensated corvee labor, equivalent to perhaps 3% of GDP, during those years.

Burma’s national accounts, including its GDP expenditure accounts, may be less indicative than those of most other countries, because Burma’s unrecorded economy appears extraordinarily large relative to its recorded economy. (See the discussion of data flaws in the section on sources, data, and methods, below.) However, the direction of the biases in the recorded GDP expenditure accounts is readily apparent. The unrecorded economy is almost certainly characterized by proportionally higher savings, lower consumption, and lower investment than the recorded economy; most of Burma’s savings and private credit go through an informal banking system because real interest rates are negative and credit is rationed in the formal banking system; investment, by contrast, tends to be hard to hide, and incentives to hide it tend to be limited. Although unrecorded non-narcotics trade may roughly balance, the unrecorded economy, unlike the recorded economy, almost certainly has a positive external trade balance, due to large unrecorded narcotics exports for which receipts are typically in the form of foreign currency or offshore deposits rather than foreign merchandise. Consequently, Burma’s economy is almost certainly characterized by proportionally higher savings, lower consumption and investment, and more balanced external trade, than is implied by the best available data (Table B.3.c). Given the tiny net domestic savings (4.3% of GDP in FY 95/96) and the huge trade deficit (20.0% of GDP in FY 95/96) indicated by the best available data, this is hardly surprising.

During the 1990s, the growth of the recorded broad money supply was somewhat slower than the growth of recorded GDP in current kyat terms. Since there is no reason to believe that the velocity of transactions really increased, this suggests that the unrecorded money supply, including foreign currencies, gold, gems and deposits in the large informal banking system, may have grown more rapidly than the recorded money supply. Interest rates in the formal banking system have usually been negative in real terms, and the kyat has been relatively ineffective as a store of value.

During the early 1990s, when liberalization was still proceeding, some of the rapid growth of Burma's recorded economy may have taken place at the expense of its unrecorded economy. In particular, liberalization diverted considerable external trade from smuggling across the Thai border to recorded trade through Rangoon, Burma’s only significant international seaport. In addition, some of the growth in recorded GDP appears to have been achieved by extension of central government control over border areas inhabited by ethnic minorities. Since 1989, successful military offensives against some ethnic insurgencies and cease-fire agreements with others have increased the set of economic actors, activities and resources that the GOB can monitor and potentially tax. Consequently, total GDP may have grown less rapidly than recorded GDP during the early 1990s; conversely, the deceleration of GDP growth from the early 1990s to the mid-1990s may be less than the best available data indicate.

Burma’s economic growth during the 1990s has been unevenly distributed across both regions and social classes. Growth appears to have been greatest in Rangoon and northern Shan State, and negligible in such peripheral regions as Mon State, due largely to the diversion of trade from the Thai border to the port of Rangoon and to the Chinese border by trade liberalization during the early 1990s. Real disposable farm incomes have clearly risen since 1989 in most of Burma in response to the partial liberalization of agricultural production and marketing of the late 1980s and early 1900s. However, the real incomes of many urban Burmese, including government employees, have declined, although this decline appears to have been mitigated by a widely alleged increase in official corruption. Throughout Burma, the perception is widespread that the benefits of recent growth have accrued disproportionately to military officers and a small commercial elite in which individuals with ties to narcotics traffickers are increasingly prominent. However, the validity of these subjective impressions is difficult to ascertain; although some data about income distribution during the mid-1990s are commercially available from market research firms, there are no comparable data for the early 1990s or late 1980s.

Since 1994, growing public concern in North America and Europe about political conditions and narcotics trafficking in Burma has posed increasing other-market political risks to firms that import from or invest in Burma. This concern, as manifested in private and government consumer boycotts, and in the E.U.’s withdrawal of GSP import preferences and the U.S. Government’s prohibition of investment in Burma by U.S. firms in early 1997, appears to have deterred investment in export-oriented labor-intensive manufacturing, and to have slowed the growth of Burma’s fledgling export-oriented garment assembly industry.

1996/97 economic performance

The growth of Burma’s economy during FY 96/97 cannot yet be assessed with confidence; although exchange-rate-adjustment of provisional GOB data suggests that the recorded economy may have grown by 5.9%, finalized data may imply a lower growth rate.

UNCTAD merchandise trade data for FY 96/97 are not yet available. However, provisional GOB data indicate that recorded merchandise export receipts declined, in current dollar terms. The results of "Visit Myanmar Year," a GOB tourism-promotion campaign, were mixed: the growth in foreign arrivals by sea and air, although substantial, decelerated, and travel service export receipts per foreign visitor may have been reduced by price-cutting caused by a glut of newly-built hotel facilities in Rangoon.

During FY 96/97 macroeconomic instability increased conspicuously. The salient economic development was a worsening foreign exchange shortage, concentrated in the public sector, due largely to a second consecutive year of low public sector exports. Unsuccessful in a late 1995 bid to regain access to concessional external financing through a resumption of IMF programming, the GOB had exhausted the public sector’s own foreign reserves by early 1996. By the end of March 1996, Burma’s foreign exchange reserves had already fallen to $302 million, about $40 million less than the face value of private sector claims on those reserves in the forms of foreign-currency-denominated private deposits in domestic Burmese banks and foreign-currency-denominated banknotes (Foreign Exchange Certificates or "FECs") in circulation. The GOB financed the public sector’s foreign exchange deficit in four ways:

-- First, from April to July 1996, the GOB purchased the private sector’s foreign reserves at the market exchange rate. These GOB purchases of the private sector’s foreign exchange, which continued until July 1996, were paid for by an increase in kyat in circulation, which the GOB largely borrowed from the central bank. This resulted in a 30% nominal depreciation of the market value of the kyat against the U.S. dollar from April to July 1996.

-- Second, since July 1996, the GOB has limited private sector imports by restricting both issuances of import licenses and openings of letters of credit. This enabled the GOB to use substantial foreign reserves owned by the private sector to fund public sector imports and debt service, without paying for the use of that foreign exchange. By September 1996, the most recent month for which complete monetary data are available, Burma’s foreign reserves had been drawn down to $206 million, about $176 million less than the face value of domestic private claims on them, i.e., foreign-currency-denominated deposits in domestic banks and FECs in circulation. That is, the GOB had spent about $176 million of the domestic private sector’s foreign reserves, and had depleted Burma’s foreign reserves to about 55% of the value of domestic private claims on those reserves. Thus the GOB effectively transferred its own foreign exchange shortage to Burma’s private sector.

-- Third, since FY 95/96, the GOB has accelerated its sales of assets in exchange for foreign currency. It has sold off blocks of downtown Rangoon, increased the volume and reportedly reduced the price of its sales of mineral exploration rights to foreign firms, and created two new categories of approved foreign investment (real estate development and industrial parks) that generated large up-front "signature bonus" receipts of foreign exchange for the GOB.

-- Fourth, since late 1996, the GOB has increasingly borrowed on commercial terms from foreign private and parastatal non-bank firms including major foreign direct investors. These appear to be the first private external loans that the GOB has ever received, repayment of which was not guaranteed by any foreign government or its export financing parastatal. Rather, these loans are said to be explicitly or implicitly secured by the GOB’s expected future receipts of about $150 million a year, from exports of natural gas from the offshore Yadana field starting in mid-1998. These prospective gas export receipts already appear to be effectively obligated by this borrowing and by investment project commitments until well into the next decade. In no fiscal year during the 1990s has the GOB paid more than 41% of its external debt service obligations, net of debt relief, and its ability to service additional external debt during the coming decade appears highly questionable, notwithstanding prospective receipts from natural gas exports from the Yadana and Yetagun fields.

The GOB appears to have no immediate prospect of regaining access to concessional external financing from sources other than the Government of China, its foremost aid donor and arms supplier.

The GOB’s imposition of import controls appears at least to have slowed and may have arrested the growth of Burma’s recorded trade deficit. Exchange-rate-adjusted GOB data suggest that the merchandise and non-factor service trade deficit may have increased from 15.0% of recorded GDP in FY 95/96 to 18.7% in FY 96/97. UNCTAD merchandise trade data suggest that this trade deficit had already reached 20.0% of recorded GDP in FY 95/96.

The GOB’s tax receipts appear to have continued to decline relative to recorded GDP, despite an increase in effective import tariff rates in June 1996. Exchange-rate-adjusted provisional data suggest that the GOB’s recorded overall obligations-basis fiscal deficit grew from about 11% of recorded GDP in FY 95/96 to about 14% in FY 96/97, and that its recorded overall cash-basis fiscal deficit grew to about 10% of recorded GDP. However, these figures do not include unrecorded domestic financing such as depletion of foreign reserves, which appears to have been equivalent to about 2% of GDP in FY 96/97.

Inflation accelerated during FY 96/97, due both to the GOB’s increased domestic deficit financing and to accelerated import price inflation caused by the foreign exchange shortage. The GOB’s main published indicator of inflation, the Rangoon consumer price index, was 31.5% higher at the end of December 1996 than it had been a year earlier. However, the previously rapid appreciation of the real exchange rate was halted, although not reversed; the nominal depreciation of the kyat relative to the U.S. dollar approximated price inflation in Burma in excess of price inflation in the U.S.

The GOB’s external arrears continued to accumulate; the proportion of its known external debt service obligations that the GOB paid, net of debt relief, appears to have diminished from 41% in FY 95/96 to less than one-third in FY 96/97. During FY 96/97, the GOB began to borrow massively on commercial terms from foreign private and parastatal firms, most which had investments in Burma, in order to pay for public sector imports.

Nevertheless, the GOB was unable to import enough fertilizer and diesel fuel to prevent rice production and hence rice exports from declining. The GOB’s current five-year plan, drawn up in 1995, envisioned state-monopolized rice exports climbing from 1.0 mmt in FY 95/96 to 3.0 mmt in FY 2000/2001, and serving as the public sector’s main source of foreign exchange. However, rice exports were only 8% of the planned target level of 1,500 mmt in FY 96/97. During FY 96/97, the SLORC publicly retreated from its policy of trying to boost state-monopolized rice exports, and modestly liberalized its rice production and procurement policies.

Disbursements of direct foreign investment appear to have remained in excess of US $300 million for the second consecutive year, due chiefly to development of the offshore Yadana natural gas field. Foreign investment disbursements appear to have continued to be concentrated in the oil and gas sector, due in part to growing international political pressures that effectively deterred foreign investment in the manufacturing sector. Several foreign investors withdrew from Burma, at least partly in response to this pressure. Peregrine Capital also withdrew, citing the absence of investment banking opportunities due to virtual cessation of parastatal privatization. However, the Government of Japan resumed guaranteeing repayment of loans to finance investments in Burma by Japanese firms.

The GOB appears to have curtailed its internationally-condemned use of uncompensated labor in public works projects, at least in central Burma, during FY 96/97, although its use of such labor appears still to have remained much greater than it was before 1993. It also increased its efforts against narcotics trafficking, albeit from a low base. To supplement the declining real wages of public sector employees, the GOB permitted the quasi-private publication of weekly tabloids under license to the "employees’ welfare associations" of its various ministries -- the first tentative move toward press liberalization since the SLORC was constituted. Apparently due largely to its financial problems, the GOB seems to have reduced its real defense expenditures and its defense imports for the first time since FY 91/92, although it apparently remains committed to the goal of expanding its armed forces by an additional 35%, to 475,000 men. It has also kept most universities closed since widespread student demonstrations in December 1996. Some high schools were also closed, and as of the end of June 1997, primary, middle and high schools have not yet re-opened for the 1997 school year, which normally starts in the first week of June.

Economic outlook

In the short and medium term, the growth of Burma’s recorded economy may continue to decelerate, and serious fiscal and balance of payments problems may persist, in the absence of substantial further liberalization of Burma’s economic and political structures.

In early FY 97/98, public sector exports were reduced even below early FY 96/97 levels by shortages of imported inputs into rice production, caused by Burma’s continuing foreign exchange shortage. Capital flight in response to the GOB’s imposition of import controls appears to have exacerbated that shortage, leading to renewed nominal depreciation of the kyat and obliging the GOB to accelerate its borrowing on commercial terms from foreign non-bank firms. However, continued expansion of external borrowing on commercial terms may prove unsustainable; the GOB’s external debt service performance is already poor, much of the GOB’s prospective natural gas export receipts appear already to have been effectively obligated well into the coming decade, and no other major sources of increased public sector foreign exchange receipts appear to be in prospect.

At present, GOB economic policy appears to consist of little more than waiting for these natural gas export receipts, and borrowing against them to pay for current public sector imports and external debt service. GOB economic policy makers have indicated to the foreign press, foreign businesspeople, and international financial authorities that their medium-term economic hopes hinge largely on prospective gas export receipts rather than on renewed economic liberalization. However, because these receipts will be foreign exchange rents, achieved at little cost in domestic resources, they are likely to improve Burma’s balance of payments situation only insofar as they are invested in the production of exports or import substitutes. The GOB has obligated much of its first three years of receipts from Yadana field exports to fund construction of import-substituting urea plants and in electricity plants through the "three in one" project. (See the discussion of U.S. investment in Burma in the section on the nature of the bilateral relationship, below.) However, insofar as the GOB also continues to use much of these receipts to pay for public sector imports of non-capital goods and debt service, they are likely to cause an appreciation of the real market value of the kyat (the real exchange rate), which in turn will induce a shifting of domestic resources away from production of exports and import substitutes to production of internationally non-tradable goods for domestic consumption.

During the mid-1990s, increasing inflows of workers’ remittances and, apparently, of narcotics export receipts already caused appreciation of the real exchange rate, discouraging domestic production of exports and import-substitutes. In the absence of greatly increased GOB efforts against narcotics trafficking and of political and economic reforms that might curtail the growth of Burma’s diaspora, these effects appear likely to persist, and to be compounded by the advent of natural gas export receipts. Consequently, the development of other exports may increasingly depend -- as it already largely does -- on foreign investment and government intervention.

The chronic decline of real public sector wages, if not arrested, may continue to erode the GOB’s internal revenue collection ability, and to foster pervasive economic rent-seeking by officials. The GOB’s goal of expanding its armed forces to 475,000 men, if not abandoned, will continue to strain public sector finances and impede structural economic liberalization.

In the absence of substantial political liberalization, the thoroughly undemocratic character of Burma’s government, which is egregious by regional as well as international standards, may continue to constrain growth. Private and governmental consumer boycotts in sympathy with Burma’s repressed pro-democracy movement may continue to restrict the access of Burmese-origin goods to the North American and European markets, and to discourage investment in labor-intensive export-oriented manufacturing industries. The increase in defense spending driven by the GOB’s fear of its own people may continue, the GOB’s efforts to collect internal revenues may continue to be impeded by its lack of popular support, and access to concessional external financing from both foreign governments and international financial institutions may remain extremely limited, perpetuating the GOB’s large fiscal deficits and obliging the GOB to continue to rely on inflationary domestic financing and on costly non-concessional external financing of those deficits. Most importantly, the absence of low-cost mechanisms whereby Burma’s people might replace rulers with records of poor economic governance may continue to perpetuate such governance, as it has for most of the past 35 years, during which the only period of relatively good economic governance, from mid-1988 to early 1993, immediately followed the pro-democracy movement’s 1988 challenge to military rule.

Long term growth prospects are dimmed by the GOB’s continuing failure to allocate sufficient resources to education at all levels. Even if political and economic liberalization were vigorously and promptly pursued, and even if regained access to concessional external financing were to accelerate physical infrastructure development, shortages of both skilled and semi-skilled labor would constrain growth in the medium and long run.

The GOB has been invited to join the Association of Southeast Asian Nations (ASEAN), in which it already has observer status, in 1997. The direct economic consequences of its accession are likely to be limited. The GOB already complied with the only economic requirements for ASEAN membership in June 1996, when it lowered its nominal tariff rates to below ASEAN-mandated ceilings, while simultaneously raising its effective tariff rates by changing the exchange rate used to evaluate imports for customs assessment purposes.

Sources, data and method.

-- Recent improvements in publicly available economic data

Since mid-1995, publicly available information on Burma's economy has greatly improved.

In 1995, the International Monetary Fund (IMF) and the World Bank, of which the GOB is a member, implemented new policies of increased transparency. These new policies entail routine publication of periodic and occasional reports on member countries' economies, circulation of which had previously been restricted to the staffs of these international financial institutions (IFIs) and officials of their member governments.

In October 1995, the World Bank published a 150-page report entitled, Myanmar: Policies for Sustaining Economic Reform, presenting the findings of World Bank technical missions that visited Burma between November 1994 and September 1995 (hereafter cited as "WB/PSER"). In December 1995 and May 1997, the IMF published hundred-page reports, prepared in October 1995 and February 1997, entitled, Myanmar - Recent Economic Developments, consisting of the descriptive background information appended to the IMF staff's October 1995 and February 1997 reports to the IMF Board of Executive Directors on the Article IV consultations between the GOB and IMF technical missions that visited Burma in August 1995 and November 1996 (hereafter cited as "IMF/RED/95" and "IMF/RED/97"). The statistical tables in these reports are in many respects more complete, more current, and more usefully formatted than published GOB economic statistics. In particular, they provide some kinds of current data on the GOB's internal and external financing, on external financial flows (including disbursed as distinct from approved foreign direct investment), on monetary aggregates, and on services trade that are not available in any GOB publications.

The GOB periodically issues various publications, in both Burmese- and English-language versions, containing national economic data. Among the most useful of these are four publications of broad scope, prepared by the Central Statistical Organization (CSO) of the Ministry of National Planning and Economic Development, which contain some data not presented in the above-mentioned IMF and World Bank reports:

-- Review of the Financial, Economic and Social Conditions, published annually, two to three months after the close of the fiscal year. It provides detailed sectoral input and output data, as well as cursory national accounts, fiscal and balance of payments data, for the past and recent previous fiscal years, as well as selected planning targets for the coming fiscal year. (Hereafter cited as "GOB/RFESC".)

-- Selected Monthly Economic Indicators, published every two months, provides selected annual and monthly data, extending up to three months before the publication date, on external trade, production, consumer prices, money supply, exchange rates, tax revenues, foreign investment, and transportation and tourism. (Hereafter "GOB/SMEI.")

-- Statistical Abstract, published annually, most recently in 1996, provides data on social conditions, such as media, crime and education, government finances including defense spending, and consumer prices outside Rangoon, in addition to information published in the "GOB Annual Review." (Hereafter "GOB/SA/96.")

-- Statistical Yearbook ("GOB/SY"), published most recently in 1995, provides in greater detail, including some regional disaggregation, but with a longer lag time, the same broad range of statistics provided by the Statistical Abstract.

Since 1995, the GOB's published economic data have improved in several respects. Much of the data in GOB/RFESC have become more current, covering the fiscal year just ended. Publication of the GOB/SY, suspended since 1978, has resumed. The CSO has inaugurated a new annual publication, Foreign Trade Statistics of Myanmar, which disaggregates declared legal merchandise trade by country of origin or destination and international Harmonized Commodity Description and Coding System categories; however, these data have been several years out of date when published. The Ministry of Agriculture has resumed, for the first time since 1990, releasing its own statistical publications on the agricultural sector, including a twelve-volume English-language "Report on Myanmar Agriculture Census, 1993."

The IMF’s quarterly and annually published Direction of Trade Statistics (IMF/DOTS), and various commercial economic database services, such as the Centre Français du Commerce Extérieur in Paris and Australia National University’s International Economic Database (ANU/IEDB) in Canberra, provide data on Burma’s external merchandise trade, based on trade data reported to the COMTRADE databank of the United Nations Commission on Trade and Development (UNCTAD) by the governments of other countries that trade with Burma. These data are substantially more complete than the GOB’s merchandise trade data, but require careful interpretation, preferably based on multiple sources.

The IMF’s monthly International Financial Statistics (IMF/IFS) provides the most current publicly available information on Burma’s foreign reserves; otherwise, its pages on "Myanmar" are largely blank for recent years, reflecting the failure of recent GOB economic data to meet IMF quality standards. The World Bank's annually published World Debt Tables (WB/WDT) provide in some respects the most complete, although not the most current, publicly available data on Burma's external debt. The United Nations Development Programme's (UNDP) annual Development Cooperation Report on Myanmar may be the best publicly available source of information on non-military external assistance to the GOB. It and other UNDP reports, and various UNICEF reports including UNICEF's Annual Report on Myanmar, are excellent sources of information about social and human infrastructure development, including basic health and education.

-- Remaining flaws in the publicly available economic data

However, not only the GOB's public economic statistics, but all publicly available statistics on Burma's economy are flawed in a variety of respects, of which the following eight are salient:

-- (1) General incompleteness. Burma’s national income (GDP and GNP) accounts are grossly incomplete.

In Burma’s domestic non-farm economy, underreporting of economic activity is widespread, driven by tax evasion that is facilitated both by grossly inadequate government wages and by the unpopularity of the SLORC. Since the legal banking system offers negative real interest rates and lends chiefly to the government, which now also restricts private foreign exchange outflows, many private financial transactions are handled by a large informal banking system that offers positive real interest rates and has well-developed transnational capabilities. GDP statistics also exclude substantial uncompensated "people’s contributions," mostly of labor, to public sector construction projects. There is a large unrecorded money supply, consisting largely of gold, gems, and U.S. and Chinese paper currencies, as well as kyat- and foreign-currency-denominated deposits in the informal banking system.

The contrast between GOB and UNCTAD merchandise trade data (Tables D.2.a[1] through D.2.b[5]) shows that, for most recent years, GOB data record only about three-fourths of the value of the exports that other countries’ data record as imports of Burmese origin. For some recent years, most notably FY 95/96, GOB data also record imports worth substantially less than the values that other countries’ data record for exports shipped to Burma. Moreover, even the UNCTAD data, being based on the customs records of the governments of Burma’s trading partners, fail to capture trade that evades the customs not only of Burma, but also of its trading partners. Such trade includes Burma’s large unrecorded exports of opiates (Table D.5) and recently also of amphetamines, and apparently also Burma’s imports of finished military goods (Table G.5).

Even using UNCTAD data to value merchandise trade, the per capita recorded money GDP figure implied for recent years by exchange-rate-adjusted recorded GDP (ARGDP) and by GOB population estimates is around US $100 a year -- lower, by a factor of at least two, than that of almost any other country. Even allowing for probable slight undervaluation of the kyat at the market exchange rate, and for substantial apparent overcounting of the population, this is clearly far too low, given that PPP-basis per capita GDP is generally estimated to be in excess of US $600, and that the cash economy extends throughout the country. All this suggests that the unrecorded economy could be comparable in size to the recorded economy.

-- (2) Exchange rate distortion. Burma's national accounts, as published by the GOB and most other sources, are pervasively distorted by the GOB’s practice of converting foreign-currency-denominated (external sector) transactions into kyat at the official rate. The preponderance of kyat-denominated (internal sector) transactions occur at prices reflecting the exchange rate in a foreign exchange market that has been fully legal since 1995 and which the GOB tacitly tolerated even before 1995. (See the discussion of the exchange rate regime in the section on monetary developments, below.) Since the kyat was worth more at the official rate than at the market rate by a factor that increased from about eight in FY 89/90 to about 27 in FY 96/97, external sector transactions (imports, exports, net unrequited foreign transfers, foreign grants, foreign borrowing, foreign debt service, and direct foreign investment) and hence Burma’s trade, balance of payments and savings deficits have been greatly and increasingly undervalued relative to recorded GDP in the GOB’s national accounts (compare Tables B.3.a and B.3.b, also Tables F.1 and F.2.a). Since the public sector is heavily engaged in the external sector, this practice also seriously distorts GOB public sector financial accounts, causing the public sector’s recorded receipts, expenditures and fiscal deficits to be substantially understated relative to recorded GDP (compare Tables G.1.b and G.2). Furthermore, since much of the recorded money supply consists of foreign-currency-denominated deposits and banknotes, this practice also distorts the monetary aggregates (compare Tables E.1.a and E.1.b).

-- (3) Defense-related omissions. As the IMF states publicly every month in its International Financial Statistics, some defense imports are excluded from the GOB's (and hence also from the IMF's and the World Bank's) merchandise import and balance of payments (BOP) accounts. Financing of military imports appears to be omitted from long-term loan disbursements in the capital account. External debt incurred in connection with military imports, as well as defense-related external debt service obligations and payments, appear to be omitted from the GOB's statistics on external debt. For example, GOB statistics (Table D.4) show the GOB's outstanding official debt to China as only US $73 million as of March 1994; however, during FY 90/91 through FY 93/94, the GOB imported several hundreds of millions of dollars worth of military equipment and services from China, most of it believed to be concessionally financed. Moreover, in recent years, the GOB’s statistics on its defense operating expenditures (published in IMF/RED/97) have been incomplete and understated, as the IMF points out in IMF/RED/97 (p. 18n). All these defense-related omissions tend to cause understatement of the GOB’s external debt and external debt service obligations and payments, of its foreign borrowing, of its capital account and overall BOP deficits, and of the public sector’s expenditure, external financing, and fiscal deficits.

-- (4) Overstatement of debt service payments. The publicly available data on the GOB’s external debt service performance is seriously distorted by non-standard accounting for debt relief from the Government of Japan (GOJ), the GOB’s largest recorded external creditor. Debt service payments from the GOB to the GOJ are promptly given back to the GOB as import credits. However, these give-backs are not subtracted from the GOB’s debt service payments in IMF and World Bank statistics on Burma’s external debt (on which the GOB itself publishes no data). For the mid-1990s, during which such GOJ debt relief was large and increasing, this makes the GOB’s external debt service performance appear to have been better, by a large and increasing amount, than it really was (Table D.4). This does not distort the overall BOP accounts (Tables D.1) and the flow of funds accounts (Tables F), where the GOJ debt relief is included in the "foreign grants" account, offsetting the distortion of the amortization and interest (debt service) payment accounts. However, this does distort the national income accounts, by understating net factor income (cash basis), and, hence, the amount by which gross national product (GNP) exceeds GDP. Furthermore, the practice (in IMF/RED97 and 95 and WB/SPER) of including GOJ debt relief in both "foreign grants" and as "external debt service payments" rather than as external financing in public sector budget accounts distorts those accounts by overstating non-financial receipts and understating both the cash-basis operating deficit and the overall obligation-basis deficit. Since GOJ debt relief merely reduces the GOB’s external arrears without increasing its purchasing power, it should be counted not as a non-financial receipt, but rather as non-cash external financing. Since the debt service payments given back through GOJ debt relief are not in fact paid in any economically meaningful sense, they should not be included among the "external debt service payments" that differentiate the GOB’s cash-basis operating deficit from its overall cash-basis deficit; rather, they should be included in the debt service payment obligations in excess of debt service disbursements that differentiate the overall obligations-basis deficit from the overall cash-basis deficit.

-- (5) Omission of NFS trade from GDP expenditure accounts. Trade in non-factor services (NFS) is not included in the trade balance in the GOB’s accounting of expenditure on GDP. Although the trade balance entry in the GDP expenditure accounts is mislabelled as including NFS in IMF/RED/95, IMF/RED/97 and WB/PSER, in fact it includes only merchandise exports (F.O.B. terms, shipments basis) and merchandise imports (C.I.F. terms, arrivals basis), as is evident from the identity of the GDP expenditure and merchandise trade accounts in GOB/RFESC. Since Burma has had an NFS trade surplus in most recent years, this omission has tended to overstate the recorded merchandise and NFS trade deficit, and hence to understate consumption and overstate net domestic savings (both calculated as residuals), in the GDP expenditure accounts.

-- (6) Overstatement of GDP growth for FY 92/93. The GOB’s national accounts for FY 92/93, imply an extraordinarily high real unadjusted recorded GDP growth rate of 9.7% -- which turns out to be even higher, indeed implausibly high, in exchange-rate-adjusted terms (compare Tables B.1.a, B.1.b and B.1.c).

Most of this ostensible unadjusted recorded GDP growth for FY 92/93 is due to recorded real growth of 12% in agricultural production, chiefly reflecting a 12.4% recorded increase in the production (by weight) of rice, Burma’s staple crop. As in described in the section on agriculture, below, the rice production figures for FY 92/93 and subsequent years were recognized during 1995 and 1996 to be inflated; the overstatement of rice production appears to be greatest for FY 92/93, the first year of a GOB campaign to boost state-monopolized rice exports. Recognizing this, the GOB, in early 1997, revised its rice production and hence its GDP figures downward for FY 94/95 and 95/96, but it has not revised its already "final" figures for FY 92/93 and 93/94. This causes real recorded GDP growth to be substantially overstated for FY 92/93, and slightly understated for FY 93/94 and for FY 94/95 -- although recorded GDP growth would still be slowing during the period even after any plausible correction for these errors.

As is described in the section on tourism, below, the entry for travel service export receipts recorded by the GOB for FY 92/93 (US $117 million) also appears about two times too large, relative both to the preceding and following years’ travel receipts, and in terms of the per capita receipts per foreign visit (excluding overland arrivals on tourist visas) that it implies. This, too, tends to overstate GDP -- more in exchange-rate-adjusted terms than in unadjusted terms.

The external debt service payment disbursements recorded by the GOB for FY 92/93 (US $58 million) appear substantially too small. This figure is less than the sum of debt service known to have been paid to (and given back by) the Government of Japan, plus payments owed to the World Bank and the Asian Development Bank, to which the GOB has never accumulated significant arrears. However, this has no implications for GDP accounting.

-- (7) Overstatement of capital imports for some recent years. Comparison of GOB data on the composition of Burma's merchandise imports (Table D.2.a[4]) with UNCTAD data on the composition of merchandise shipped to Burma from other countries, as reported to the U.N. by the governments of those countries (Table D.2.b[5]), indicates that the GOB data for FY 92/93 and FY 93/94 substantially overstates the value of capital goods imports, thereby tending to make investment appear greater than it really was (compare Tables B.2.b and B.2.c). This, in turn, tends to understate consumption and overstate net domestic savings (both calculated as residuals), in the GDP expenditure accounts. Why this discrepancy exists for FY 92/93 and FY 93/94, and only for those years, is unclear.

-- (8) Optimistic bias in non-final figures. As is pointed out in IMF/RED/97, the provisionally estimated figures for the most recent year, both in GOB publications and in other publications based largely on GOB data, such as the IMF/RED reports, are based in part on planning targets, and therefore tend to be systematically biased in an optimistic direction, pending revision into semi-final estimates and final statistics.

In addition to these eight data problems, the services trade account (Table D.3) contains apparent anomalies. There are large year-to-year fluctuations in the unspecified "other" service import payments, the causes of which are unknown. The large "other" non-service export receipts since FY 90/91 consist largely of "signature bonuses" paid to the GOB by foreign investors upon receiving approval to invest. These payments, essentially purchases of investment options, might more appropriately be recorded in the BOP accounts as capital inflows, where they would have no effect on GDP and GDP expenditure accounting.

-- The statistical basis and methodology of this report

The quantitative analysis presented in this report, and most figures cited in it, derive largely from the statistical tables appended to it. Each table’s data sources are noted at the bottom of the table. Where figures cited in the text do not derive from these tables, their sources, when publicly available, are indicated in footnotes or in parenthetical notes in the text.

Nearly all statistics presented in most tables appended to this report are based on (1) GOB data, as presented in either GOB, IMF or World Bank publications; (2) World Bank data on Burma's external debt, based on information supplied by Burma's external creditors as well as by the GOB; (3) data on merchandise trade with Burma reported to UNCTAD by the governments of countries with which Burma trades; and (4) the Embassy's monthly observations of the parallel market kyat/dollar exchange rate. The exceptions are Tables D.5, on the opiates sector, which is based largely on U.S. Government publications; Table G.5, on exchange-rate-adjusted defense expenditures, which is based in part on Embassy estimates of defense imports; and Table G.6.a, on prison quarry output, which is based on an exhibit in the GOB’s Defense Services Museum. In the statistical tables, Embassy estimates of independent entries that are not fully determined by public-source data are printed in boldface type.

The statistical tables appended to this report cope as follows with the eight salient defects, listed in the previous sub-section, in the published data on Burma's economy:

-- (1) General incompleteness.

This report can do nothing to remedy the incompleteness of the GOB’s national income accounts with respect either to Burma’s domestic economy, or to its external trade in services -- except to maintain, throughout, a terminological distinction between "recorded GDP" and an unobservable but presumably much larger "GDP."

However, this report does present, in addition to the GOB’s external merchandise trade data (Tables D.2.a[1-4]), more complete data on Burma’s external merchandise trade, based on data reported to UNCTAD’s COMTRADE databank by the governments of countries with which Burma trades (Tables D.2.b[1-5]). This report’s presentation of the UNCTAD trade data is based on detailed comparison of UNCTAD data as presented by three sources: a published source, IMF/DOTS; a commercial trade database service, ANU/IEBD; and a trade database service internal to the U.S. Government. This presentation includes an allowance for omissions due to incomplete reportage or non-reportage to UNCTAD by some countries (mostly in Africa) to which Burma has shipped substantial exports (mostly rice); this allowance, an Embassy estimate based in part on the Embassy records of the direction of rice exports for the most recent years and on data on the direction of rice exports in GOB/SY for previous years, is explicit in Table D.2.b(1).

This report also presents not only BOP accounts and national income accounts based on the GOB’s merchandise trade data (Tables D.1.a and B.1-3.a-b), but also BOP accounts and national income accounts based on this UNCTAD merchandise trade data (Tables D.1.b. and B.1-3.c). Because the UNCTAD data derive from merchandise trade with Burma recorded by the customs services of Burma’s trading partners:

-- (a) they may meaningfully and usefully be combined and compared with GOB-recorded BOP and national income accounts data, as in Tables D.1.b. and B.1-3.c; and

-- (b) they are, by definition, no less complete, on average, than the merchandise trade data of Burma’s trading partners, so any remaining large omissions in the merchandise trade data must be related to trade that is not recorded by Burma’s trading partners, e.g., narcotics trafficking and trade in military goods.

Since UNCTAD merchandise trade data are on a calendar year basis, this report aggregates and compares the GOB data for a GOB fiscal year (April 1 through March 31) with UNCTAD data for the previous calendar year. However, any distortions that this may cause should be relatively small due to the 75% temporal overlap, and should be free of any systematic bias.

-- (2) Exchange rate distortion.

This report (like this Embassy’s 1996 Foreign Economic Trends Report) corrects, in so far as possible, the distortions in Burma’s national accounts created by the GOB's practice of recording foreign-currency-denominated transactions at the official exchange rate, although most kyat-denominated transactions occur at prices fully reflecting the market exchange rate. It presents the national income, public sector finance and monetary accounts both in the exchange-rate-unadjusted form given by GOB and IMF publications (Tables B.1-3.a, E.1.a, G.1.a-b and G.4) and in an exchange-rate-adjusted form that corrects, in so far as possible, for these distortions (Tables B.1-3.b-c, E.1.b, E.2, G.2, G.3 and G.5). This exchange-rate-adjustment is made by equating dollars and kyat at the market rate rather than the official rate; in kyat-denominated accounts, this is done by subtracting foreign-currency-denominated entries at the official rate, and adding them back in at the market rate.

The GOB has never published any data on the market exchange rate, despite having legalized it for an increasing range of transactions since 1990. The FY period-average and period-end values for the market exchange rate (Tables B.1-3.b and E.1.b) used in this report to exchange-rate-adjust Burma’s national accounts are based on monthly Embassy observations of the prices at which U.S. dollars (not FEC) are offered by high-volume market-makers in downtown Rangoon; the FY period-average rate values (Tables B.1-3.b) are simple averages of these observations. The bid-ask spread in this market has generally been less than one percent, except in periods of exceptional price volatility, reflecting little or no official effort to suppress nominally illegal private trading in foreign currency. (The spread in bank transfer rates has been larger.) Since the GOB’s introduction of the FEC in February 1993, the kyat price at which FEC are offered (now legally) by market-makers in downtown Rangoon has rarely deviated by more than one percent from the dollar offer price, except during periods of exceptional volatility. The FEC has sometimes sold for slightly more than a dollar, sometimes slightly less; there was no systematic discount or premium until early 1997, when the FEC began to sell consistently at a one or two percent discount to the dollar.

The exchange-rate-adjustment of recorded GDP is problematic. For a country whose currency is not an international medium of exchange, GDP may be disaggregated into foreign- and domestic-currency-denominated transactions as follows:

GDP = D + X - Mi, where

D = domestic production of finished goods and services for domestic consumption;

X = exports of goods and non-factor services produced during the current period; and

Mi = "intermediate" imports in the national accounting sense of goods and services imported

and resold by firms, or used by firms as inputs to make other goods sold to consumers

during the current period, as distinct from imports of capital goods and of goods imported

by their ultimate consumers.

D is domestic-currency-denominated; X and Mi are foreign-currency-denominated. In the case of contemporary Burma, X and Mi should be equated with D at the market exchange rate: no private import supplier will accept payment in kyat at the official rate, and no export supplier is either willing or constrained to accept payment in kyat at the official rate. Thus, the GOB’s GDP figures tend to be understated due to their booking of exports at the official rate; however, they tend to be overstated due to their booking of intermediate imports at the official rate. To exchange-rate-adjust the GOB’s GDP figures, two corrections are necessary:

-- (a) exports (X) must be subtracted from unadjusted GDP at the official rate, then added back in at the much greater market rate; and

-- (b) intermediate imports in the national accounting sense (Mi) must be added to unadjusted GDP at the official rate, then subtracted out again at the much greater market rate.

However, there are no published data on the value of intermediate imports in the national accounting sense. Estimating their value is problematic. They clearly include most imports of intermediate imports in the conventional sense (raw materials, tools and spare parts), and exclude capital goods. They exclude goods and services that are both imported and consumed by the public sector; but there are no data quantifying such imports. However, in Burma, intermediate imports seem to constitute a smaller proportion of private consumer imports than in some other countries. For example, in Burma, although almost all cars are imported, they are generally imported by their ultimate consumers, with distributors acting as agents rather than principals, in order to evade a sales tax known as the commercial tax; consequently, cars appear not to be intermediate imports in the national accounting sense. Moreover, for exchange-rate-adjustment purposes, one should exclude from intermediate imports the limited set of goods -- some fertilizer and some refined petroleum products -- that the public sector imports and sells directly to ultimate consumers at prices reflecting the official rate of exchange. Accordingly, in light of what is known about the composition of Burma’s merchandise imports (Tables D.2.a[4] and D.2.b[5]), this report, in exchange-rate-adjusting the GOB’s GDP statistics, estimates the value of intermediate imports at 40% of the value of imports of merchandise (F.O.B.) and non-factor services (Tables B.1-3.b-c).

The exchange-rate-adjustment of recorded GDP is further complicated by the discrepancies between the GOB and UNCTAD values for merchandise exports and imports. This report offers one set of exchange-rate-adjusted GDP accounts based on GOB merchandise trade data (Tables B.1-3.b), and another based on UNCTAD merchandise trade data (Tables B.1-3.c). However, because the UNCTAD data appear more complete than the GOB data on merchandise trade, the term "adjusted recorded GDP" and its abbreviation, "ARGDP," are used in this report to denote recorded GDP exchange-rate-adjusted on the basis of UNCTAD merchandise trade data, unless otherwise indicated.

Given the sensitivity of ARGDP to the value of intermediate imports, which can be estimated only crudely, relatively little importance should be given to any single year’s ARGDP growth rate. Longer-term trends are more indicative. Nevertheless, the usefulness of exchange-rate-adjusting the national accounts lies not in what it tells us about the growth of recorded GDP, but in what it tells us about the importance of the outside world to Burma’s economy. It reveals the magnitude of foreign trade, transfers, financing and investment relative to recorded GDP, and hence the size of the trade, financial, BOP and fiscal deficits relative to recorded GDP. It also reveals the importance of foreign-currency-denominated receipts, expenditures and financing in the public sector budget, and hence the size of the public sector relative to recorded GDP.

ARGDP figures are useful chiefly as points of reference to which other exchange-rate-adjusted data can meaningfully be compared, and their usefulness for this purpose is only slightly diminished by the problematic aspects of estimating ARGDP. For example, errors as large as ten percent in estimating ARGDP could cause Burma’s deficit in recorded trade in goods and non-factor services for FY 95/96 to account for anywhere from 22% to 18% of expenditure on recorded GDP based on UNCTAD merchandise trade data (Table B.3.c), or anywhere from 13.5% to 16.5% of expenditure on recorded GDP based on GOB merchandise trade data (Table B.3.b). Although disturbing, possible errors of this magnitude are trifling in comparison with the insight, provided by the exchange rate adjustment, that this trade deficit is vastly greater relative to recorded GDP than the 0.8% of recorded GDP shown by exchange-rate-unadjusted accounts (Table B.3.a).

Unfortunately, the exchange-rate-adjustment of the public finance accounts is incomplete, because the available data do not permit the identification of all foreign-currency-denominated public sector receipts, expenditures and financing (Table G.2). Consequently, public sector receipts, expenditures and financing probably remain understated even after the fullest exchange-rate-adjustment that the available data permit (Tables G.3 and G.5).

-- (3) Defense-related omissions. Table G.4 gives estimates of exchange-rate-unadjusted defense spending for FY 94/95 and 95/96 that are more complete than those published by the GOB; Tables G.1 through G.3 use them in calculating total public sector expenditures. Table G.5 gives estimates of up-front payments for defense imports (apparently much less than the market value of those imports), and uses them to calculate a comprehensively exchange-rate-adjusted estimate of public sector expenditures.

-- (4) Overstatement of debt service payments.

Table D.4 shows GOB-recorded debt service disbursements, both gross and net of debt relief from the Government of Japan (GOJ). It gives the ratio of debt service payments disbursed to debt service payments due, both gross and net of that debt relief.

The interest portion of this debt relief should be added to the factor services trade balance into the "net factor income (cash basis)" account in the calculation of GNP, since GDP should not be reduced by the amount of factor service payments that were not really paid in any economically meaningful sense. Because no disaggregation of the value of GOJ debt relief into amortization and interest seems to be publicly available, half the value of the debt relief is assumed to be interest, and is added to the factor services trade balance (Table D.3) to yield the estimates for "recorded net factor income (cash basis)" in Tables B.1-3.b-c. (A value of US $ 20 million is assumed for GOJ debt relief for FY 89/90; the Embassy has no data on GOJ debt relief for that year.) This increases the amount by which recorded GNP exceeds recorded GDP. This also increases the accuracy of the figure for GNP unless at least 75% of the value of debt relief is amortization.

In this report’s presentation of the public sector budget accounts (Tables G.1.a, G.1.b, G.2 and G.3), GOJ debt relief is excluded both from the "foreign grants" entry in the non-financial receipts accounts, from the "external debt service due" that differentiates the cash-basis operating deficit from the "external debt service paid" and differentiates the cash-basis operating deficit from the overall cash-basis deficit in Tables G.2 and G.3. Instead, it is counted, along with external arrears, both as non-cash external financing and as external debt service obligations in excess of external debt service disbursements. This treatment of external debt relief is commonly observed in IMF budget accounting for governments that receive such relief. Relative to the budget accounting in IMF/RED/95, it decreases receipts and increases both the cash-basis operating deficit and the overall obligations-basis deficit, without affecting the overall cash-basis deficit. In exchange-rate-adjusted budget accounts, these differences are significant, and this treatment of GOJ debt service is necessary to avoid giving two incorrect impressions: that foreign grants are the source of a large portion of the GOB’s purchasing power, and that the GOB’s overall cash-basis deficits consist chiefly of external debt service disbursements rather than operating deficits.

-- (5) Omission of NFS trade from GDP expenditure accounts. In accounting for expenditure on GDP in Tables B.1.a through B.3.c, the non-factor services (NFS) trade balance (from Table 3) is added to the BOP-basis merchandise trade balance (from Table D.1.a or D.1.b) to yield the value for "recorded balance of external trade." For the years in which the GOB recorded a surplus in NFS trade (all but FY 90/91), this increases the value of consumption and decreases the value of net national savings, both calculated as residuals, relative to accounting that follows the GOB’s practice of omitting NFS trade from its GDP expenditure accounting.

-- (6) Overstatement of GDP growth for FY 92/93. This report’s service export accounts (Table D.3) give an estimate of travel service exports for FY 92/93 that is about $57 million less than the figure in GOB accounts; besides increasing the trade deficit, this decreases recorded GDP growth for FY 92/93, and increases GDP growth for FY 93/94, by about 2% in exchange-rate-adjusted terms. However, this report’s national income accounts do not correct the overstatement of agricultural production and recorded GDP caused by the GOB’s unusually large overstatement of rice production for FY 92/93, and its apparently smaller overstatement of rice production for FY 93/94. Consequently, GDP growth remains substantially overstated for FY 92/93, and slightly understated for FY 93/94 and FY 94/95. For want of correct data, this report’s external debt accounts (Table D.4) also do not correct for the apparent understatement of debt service disbursements for FY 92/93.

-- (7) Overstatement of capital imports for some recent years. The exchange-rate-adjustment of fixed investment in the GDP expenditure accounts (Tables B.1-3.b-c) proceeds by subtracting the C.I.F. value of capital goods imports at the official rate, and adding them back at the much greater market rate. In calculating expenditure on ARGDP based on GOB trade data (Tables B.1-3.b), this report uses GOB data on capital imports (from Table D.2.a[4]) to exchange-rate-adjust investment. In calculating expenditure on ARGDP based on UNCTAD trade data (Tables B.1-3.c), this report uses UNCTAD data on capital imports (from Table D.2.b[5]) to exchange-rate-adjust investment. For FY 92/93 and FY 93/94, UNCTAD data show substantially lower capital imports than GOB data, implying less investment, and hence greater consumption and lower net domestic savings (both calculated as residuals).

-- (8) Optimistic bias in non-final figures. The headings of the statistical tables appended to this report indicate the years for which figures are not yet final, and thus may be optimistically biased. However, this report refrains from substituting its own estimates for published GOB figures that are not yet final, with two notable exceptions. First, based in part on information from some of the GOB’s major external creditors, Table D.4 offers lower estimates for FY 96/97 debt service disbursements, and higher estimates of recent arrears and debt accumulations, than the GOB figures cited in IMF/RED/97. Second, based largely on publicly available although not yet officially published information about levels of Japanese debt relief, Tables D.1 and Tables F offer a lower estimate of foreign grants than the figures in IMF/RED/97. In addition, based on published information about levels of Japanese debt relief and U.N. agency grants, this report revises upward the GOB’s final statistic for external grants for FY 94/95.

In sum, this report tries to offer as useful a presentation of Burma’s national accounts as the available data permit. Nevertheless, due to the serious flaws in the data, these accounts remain inadequate to serve as a basis either for structural adjustment planning or for financial programming.

Principal growth sectors

In addition to the three growth sectors -- defense, tourism and agriculture -- discussed in this section, two other important growth sectors, natural gas production and export-oriented garment assembly, are discussed below, in the discussion of merchandise exports in the section on balance of payments, and in the discussions of U.S. investments and imports in the section on the nature of the bilateral relationship. Export-oriented fishing and seafood production, including shrimp farming, is another leading growth industry, as is indicated by both GOB and UNCTAD data (Tables D.2.a[3] and D.2.b[5]).

Tourism

Foreign tourism appears to have been one of Burma's two fastest-growing major industries during the 1990s -- the other being export-oriented garment assembly.

The statistics on foreign tourism receipts in GOB publications (GOB/RFESC and, until recently, GOB/SMEI) appear discordant and show such receipts declining for several recent years, despite an ever-growing stream of foreign visitors. However, GOB services trade data published in recent IMF and World Bank country reports (Table D.3) show that Burma's recorded receipts from travel service exports increased steadily from US $18 million in GOB FY 89/90 to an estimated $164 million in FY 95/96, at an average annual rate of 44.5% in current dollar terms. This growth apparently slowed to about 14% in FY 95/96, and appears likely to have remained relatively slow in FY 96/97. This recent slowdown is due largely to overcapacity and price-cutting created by the GOB’s intervention to boost investment in the industry as part of its "Visit Myanmar Year 1996" campaign. However, it is also due in part to an apparent slowing of the growth both of foreign business visits and of tourist visits from some Western democracies.

According to GOB/SMEI, the number of GOB-recorded foreign visits to Burma (including business visits) rose steadily from 26,012 in FY 91/92 to 170,143 in FY 95/96, an average annual increase of 60%. The number of legal foreign tourist visits rose from 7,947 in FY 91/92 to 120,205 in FY 95/96, an average annual increase of 97%.

Having created a Ministry of Hotels and Tourism in 1992, the SLORC, in 1994, designated 1996 as "Visit Myanmar Year" and announced the goal of attracting 500,000 foreign visits. In 1995, the GOB, recognizing that this goal might prove unattainable, postponed the start of "Visit Myanmar Year" to the start of the peak tourist season in November 1996, and lowered its foreign visits target to 250,000. Since the GOB recorded 219,321 during the first nine months of FY 96/97, this revised target is quite likely to be reached.

However, the GOB figures for both total foreign visits and foreign tourist visits include, after FY 91/92, many arrivals by land on tourist visas. These overland arrivals generate few service export receipts, were not counted before FY 92/93, and were sharply decreased during 1995 by the GOB’s closure of the Thai border. Consequently, the number of recorded foreign visits, excluding arrivals by land on tourist visas, is a better and more consistent indicator of demand for Burma’s travel service exports. (Overland arrivals on non-tourists visas also generate relatively small travel service export receipts per foreign visits, but the GOB does not publish data on them.) The number of such visits grew from 26,012 in FY 91/92 to 133,344 in FY 95/96 -- an average annual increase of 50%. The number of recorded foreign tourist visits, excluding arrivals by land, grew from 7,949 in FY 91/92 to 83,406 in FY 95/96, an average annual increase of 80%. From FY 94/95 to FY 95/96, the number of recorded foreign visits, excluding overland arrivals on tourist visas, increased by 54%, and the number of recorded foreign tourist visits, excluding arrivals by land, increased by 66%.

The growth of demand appears to have slowed during the past year. During the first nine months of FY 96/97, the number of recorded foreign visits, excluding overland arrivals on tourist visas, was 119,010, up only 39% from 85,558 during the first nine months of FY 95/96. There were 77,296 recorded tourist arrivals by sea and air during the first nine months of FY 96/97, up only 53% from 50,437 during the first nine months of FY 95/96.

The deceleration of the growth of recorded tourist arrivals by sea and air from the first nine months of FY 95/96 to the first nine months of FY 96/97 was due largely to a sharp slowing in the growth of tourist visits by citizens of some Western democracies: recorded tourist visits by Americans rose only 15%, from 3,029 to 3,476; recorded tourist arrivals by British citizens rose only 12%, from 2,673 to 3,006; recorded tourist visits by Canadians rose only 26%, from 498 to 627; recorded tourist visits by Italians rose only 14%, from 2,361 to 2,697; recorded tourist visits by Swiss rose only 5%, from 1,034 to 1,086; and, according to travel industry sources, tourist visits by Dutch and Scandinavians also grew slowly if at all. This slowing of the growth of tourist visits by citizens of some Western democracies was caused chiefly by a politically-motivated international consumer boycott of travel to Burma, which induced many international travel businesses to stop advertising and/or selling tourism to Burma. Concerns about the safety of travel to Burma, due to recently unprecedented student demonstrations, anti-Muslim riots and violence against political leaders, may also have contributed. However, recorded tourists visits by French, Germans, Japanese, Koreans and Thais continued to grow rapidly.

The deceleration during FY 96/97 of the growth of all recorded foreign visits, excluding overland arrivals on tourist visas, is due not only to the slowing of the growth of tourist visits, but also to a slowing of the growth of non-tourist visits, which consist largely of business visits. Recorded foreign non-tourist visits, which had grown by 31% from FY 92/93 (21,716) to FY 93/94 (28,483), by 29% from FY 93/94 to FY 94/95 (36,641), and by 36% from FY 94/95 to FY 95/96 (49,938), grew by only 19% from the first nine months of FY 95/96 (35,121) to the first nine months of FY 96/97 (41,714). This slowdown in the growth of foreign non-tourist visits is said by industry sources to be due chiefly to a marked slowing in the growth of foreign business visits. It appears to reflect a decline in optimism during late FY 95/96 and FY 96/97, among the international business press and business community, about medium-term prospects for Burma’s economy, and about business opportunities in Burma.

Assuming that tourist arrivals by land generated negligible travel service export earnings, the above-cited data on travel export receipts and foreign arrivals jointly imply that average recorded travel service export receipts per recorded foreign visit, excluding overland arrivals on tourist visas, were about US $1,360 in FY 91/92, $3,430 in FY 92/93, $2,130 in FY 93/94, $1,660 in FY 94/95, and $1,230 in FY 95/96. The increase in average recorded receipts per sea and air arrival from FY 91/92 to FY 93/94 appears to be due largely to the GOB's decision, in February 1993, to allow domestic goods and services to be bought with kyat (or FEC) exchanged for dollars at the parallel market rate rather than the official rate.

The above-cited spike in average recorded receipts per foreign visit excluding overland arrivals on tourist visas in FY 92/93 appears illusory. It is caused by an entry of US $117 million for FY 92/93 travel service export receipts in GOB services trade data as published by recent IMF and World Bank country reports (Table D.3). This figure implies 230% growth in travel export receipts from FY 91/92 to FY 92/93, followed by virtually no growth in travel export receipts from FY 92/93 to FY 93/94 -- as well as implying the anomalous spike in receipts per foreign air or sea visit cited above. American Embassy Rangoon estimates travel export receipts for FY 92/93 at about US $60 million, a figure that implies both a fairly smooth growth of export receipts from FY 91/92 to FY 93/94, and average travel export receipts per foreign visit (excluding overland arrivals with tourist visas) of about US $1,760, which is near the mid-point of the range for other recent years. This Embassy estimate is incorporated throughout this report’s statistical appendices.

The causes of the decline in recorded receipts per foreign visit excluding overland tourist arrivals from FY 93/94 to FY 95/96 are not entirely clear. There was little if any price-cutting by suppliers or down-market shift in demand. This decline may merely reflect increasing numbers of overland arrivals on visas other than tourist visas by individuals who spend relatively little on travel services; for example, visits by Chinese businesspeople are said to have increased greatly. There may have been an increase in underreporting of travel service export receipts. However, some industry sources suggest that there may in fact have been a decline in recorded receipts per air or sea arrival, caused by a shortening of the average duration of foreign visits, reflecting the growing proportion of foreign visitors arriving in fast-paced multi-country group tours.

Since 1989, Burma's tourism infrastructure has rapidly expanded and improved in quality. From 1989 to December 1996, the number of hotels, motels and inns increased from 22 (all state-owned), with a total of 978 rooms (GOB/SY), to 402 (mostly private), with perhaps 10,000 rooms. The fleet of civil aircraft operating in Burma expanded rapidly in 1994, when Burma imported US $ 157 million worth of aircraft and aircraft engines, making aircraft and parts the country's most valuable category of known imports (Table D.2.b[5]). The recorded disbursed foreign direct investment in the hotels-and-tourism sector increased steadily from US $2.7 million in FY 91/92 to an estimated $70.7 million in FY 95/96 (Table D.6).

Despite this rapid expansion of facilities, the supply of international-quality hotels outside Rangoon and of both international and domestic civil air transportation remains inadequate to meet demand during the peak tourism season (November through March). The shortage of international air transportation facilities, in particular the absence of any airports with runways long and strong enough to accommodate jumbo jets like Boeing 747s, may be a bottleneck that constrains peak-season demand for other tourism export services, such as hotel and restaurant services. This shortage is largely attributable to the GOB’s loss of access, since 1990, to bilateral and multilateral concessional external financing for physical infrastructure projects, due to international concerns about its record with respect to democratization and human rights. For example, although the GOB has been able to lengthen the runway at Rangoon’s international airport to accommodate mid-sized jets, the Government of Japan, since 1990, has suspended disbursements for a project to lengthen that runway to accommodate jumbo jets. The GOB has tried to relax this constraint by allowing direct international flights into Mandalay, where the runway is being lengthened with Chinese technical assistance and a new airport is being built with private Thai financing guaranteed by the Government of Thailand’s export-import bank. The GOB is also building a new international "Hanthawaddy" Airport near Pegu, about 40 miles northeast of Rangoon.

However, a large surplus of international-class hotel facilities in Rangoon developed during FY 95/96 and 96/97. This gross overcapacity has caused widespread and substantial price cutting, even during the FY 96/97 peak season. Because of this price-cutting in the largest travel services subsector in Burma’s principal foreign travel destination, tourism export receipts are likely to have grown more slowly, during FY 96/97, than the number of foreign visits. Many international-quality hotels in Rangoon appear to be operating at a loss; they are virtually empty most of the time. Since new international-quality hotels continue to be built, this situation may persist for several years, even assuming no further slowing in the growth of foreign visits.

This overcapacity, created almost entirely by private investment, was widely predicted as early as 1994. Nevertheless, both domestic and foreign investors continued to build hotels in Rangoon; very few cancelled or postponed construction. Many appear to have done this in deference to the perceived wishes of the SLORC, as expressed in its "Visit Myanmar Year 1996" campaign. Many investors seem to have been prepared to accept short-term losses as an investment in the SLORC’s goodwill, which is generally and realistically regarded as indispensable to large-scale business success in Burma.

Although most of Burma’s private hotels are neither known nor credibly alleged to have any financial connection with narcotraffickers, some of Rangoon’s new international-quality hotels were built with funds from individuals and firms that have had close ties to opiate-growing or opiate-exporting organizations. For such organizations, relations with the SLORC are critical to the viability of their main line of business, which is sufficiently profitable to render large losses in side businesses acceptable. Moreover, any means of legitimizing narcotics trafficking income typically costs money, in Burma as in other countries; loss-making hotels may be little if any worse than other alternatives for this purpose.

Since 1992, Burmese military authorities have spruced up Burma's main tourist attractions by renovating buildings, whitewashing pagodas, building new roads or widening existing roads, and relocating low-income housing areas. As international human rights groups have alleged, many Burmese have been forced to contribute either uncompensated labor or cash to tourism infrastructure construction projects. Some people have been relocated without notice. A new rail link to Pagan from the main Rangoon-Mandalay trunk line was built, reportedly with the use of forced labor, in order to facilitate tourism to Pagan. The dredging of the moat around Mandalay Palace was accomplished through massive use of forced labor. However, use of uncompensated civilian labor in at least some kinds of transportation infr