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Govt signals economic reform but illegal foreign currency market, poor infrastructure are barriers
By FELDA CHAY
30 March 2012
As reform fever grips Myanmar - with a parliamentary by-election due this Sunday and the road to foreign investments likely to be widened in April - the whole world wants a piece of it. But entrepreneurs in search of opportunities would do well to remember that some gold rushes end in tears, if one is not careful.
The government seems determined to open up, but many obstacles stand in the way. Changes to the Foreign Investment Law (FIL) were passed in Parliament late last week, but few seem to know exactly what is on the table.
Kelvin Chia Yangon Ltd, a commercial law firm that is the oldest foreign legal consultancy based in Yangon, said: ‘From what we know, it is expected that a five-year income tax holiday will be provided in the amended law (instead of the current three years). Also, it is anticipated that the amended law will make it explicit that foreign companies permitted to invest in Myanmar may be wholly foreign-owned, with a 35 per cent minimum foreign shareholding requirement in cases of joint ventures with local companies.’
Foreign investors may be allowed to lease land not just from the government, but also private citizens.
But the law firm added: ‘It is best to await an official copy (of the amended law) in order to accurately ascertain the contents.’
One lawyer who has dealings in Myanmar would like to see foreigners being allowed to take part in trading activities, from which they have been kept away since 2002. ‘Allowing foreign firms to set up trading companies in Myanmar would be what I would consider a major change, but there is nothing in the (new) FIL that allows it,’ he said.
To add to the confusion, an official from Myanmar’s Ministry of National Planning & Economic Development had told BT in February that the FIL would allow foreign companies to trade domestically.
‘The existing FIL does not allow any foreign investors to sell their products domestically but our new FIL is not only for exports, but also there is import substitution, so that (foreign) investors can sell their products domestically,’ said Aung Naing Oo, deputy director-general of the ministry’s Directorate of Investment & Company Administration.
The illegal foreign currency exchange market also seems to overshadow the official one.
Currently, Myanmar has an official rate where its currency, the kyat, is pegged to the US dollar at US$1 to 6.3 kyats. In the parallel market, however, US$1 may fetch 800 or so kyats. This creates distortions for foreign investors, as the official exchange rate is used in public sector external transactions, and Myanmar law requires that all capital brought into its economy has to be converted into the local currency using the official exchange rate. Foreign businessmen have cried foul and a state-run newspaper reported that a managed float system will be adopted next week.
Mr Aung Naing Oo said that the government realised there was a problem, and sought the help of the International Monetary Fund to unify its exchange rate system. In the meantime, he said, a notification was passed last year that ‘allows foreign investors to convert their money at the market prevailing price’.
On the ground, however, a different picture is painted.
Said Kelvin Chia Partnership: ‘At present, and to our knowledge, the official exchange rate is still being used by state-owned banks for calculating the US dollar equivalent of kyat-denominated amounts. In any case, we should have more clarity on this issue.’
One Singapore businessman who has operations in Myanmar is not very hopeful. ‘The informal market is quite big here. In fact, the bulk of trade here is informal, so it’s not going to be easy to get rid of the black market currency exchanges, which the informal market uses.’
Others point to a practically non-existent capital market, a lack of insurance firms and how there are no provisions under Myanmar law for foreigners to set up local borrowing facilities. Credit cards are rarely used in the country, while its telecommunications system is patchy, at best.
Still, the government is strongly committed to overhauling the economy. Said Mr Aung Naing Oo: ‘There will be no U-turn for Myanmar. . . Everything will get better and better politically and economically.’
The next few months will be key. As one businessman put it: ‘We should all wait for April, when the parliamentary by-elections happen with Aung San Suu Kyi running, and when the changes to the FIL and the exchange rate are expected to kick in.
‘After that, we will see what happens.’