Burmese Junta + IMF = Hyperinflation and street protests?
By Jon Fernquest[Introduction|Article]
[Reading Questions|Answers]
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Fuel prices shot up sharply in Burma's major cities as the Burmese government removed long-standing fuel subsidies two weeks ago.
Fuel is essential for transportation, running factories, generating electricity, and performing other essential activities
Prices of food shot up soon afterward, driven up by the fuel price hikes.
Transportation, food, and the cost of living have become even more problematic in a country that is already stretched to the limit.
Will this latest move by the ruling generals, thoroughly impervious to public opinion, push the country, hovering dangerously around subsistence levels, over the brink?
The essential irony of these radical and dislocating price hikes is that they appear to have been induced by the west, by IMF advocated elimination of longstanding fuel subsidies.
Most news coverage of the protests has ignored this fact, preferring to focus on the element of injustice and rage inherent in any street protest.
Larry Jagan's coverage in today's article goes straight to the heart of the matter and probes for answers to the question: Why?
The bitter policy medicine prescribed by the IMF for Southeast Asia after the 1997 Crisis later came under heavy fire by Nobel laureate Joseph Stiglitz in his books, including: Globalisation and its Dicontents (2002) and The Roaring Nineties (2003).
Now is it Burma's turn?
For further reading, check out the latest information on the Burmese economy at Burma Economic Watch by Sean Turnell of Macquarie University, Australia.
Also check out Sean Turnell's downloadable working papers.
Also Check out a freely downloadable report from a 2003 conference at Chulalongkorn that addresses the issue of Burmese migrant labour.
subsidies - money given to keep in operation (otherwise would stop operating since not self-supporting)
impervious to - cannot be penetrated or affected by
subsistence - having just enough food and money to survive
the brink - the edge, just before you fall over the edge, just before disaster
irony - say one thing, but (subtly) mean something else
dislocating - greatly disturb and prevent normal operation
induced by - caused by
inherent in - an important or core feature of
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What did the Burmese government do over the past two weeks to provoke protests in Yangon?
2. How common are street protests in Yangon? Why?
3. What have been the immediate effects of the fuel price hikes in Burma's cities?
4. What are the official estimates of how much prices have risen overall?
5. Why is such a sudden increase in prices more devastating in a poor country like Burma than it is in a richer country? (Express your opinion)
6. What budget items are or will be a major drain on the government budget?
7. What is the major source of government revenue that's financing the building of the new capital? Is it enough?
8. How has the Burmese government traditionally financed government budget deficits?
9. Why have the IMF and the World Bank pressed for economic liberalisation policies in Burma?
10. How has the goverment acted on IMF recommendations?
11. Who acted on the IMF recommendations?
12. How long have they been taking action?
13. What are some of the spending items that make for a large government budget?
14. What does the recent price hike in Burma have in common with the IMF's main tenents of economic liberalisation?
15. Are Burma's fuel prices greater or less than those of neighboring countries?
16. What broke the government's fuel subsidisation scheme?
17. Why could the planned privatisation of Burma's fuel distribution system have been a factor in the sudden reduction of subsidies and fuel price rise?
18. In what ways was the government decision to raise fuel prices rational?
19. In what ways was it irrational?
20. What important price are likely to occur in the near future?
21. Have the fuel price increases affected rural inhabitants?
22. Under what conditions would the price hikes have an effect on the rural farming sector?
Bangkok Post Article September 01, 2007
Liberalisation or suppression?
Rangoon's latest move to hike fuel prices could be the start of policy easing or a sign state coffers are nearly emptyLARRY JAGAN
Public protests against soaring inflation have rocked the Burmese regime over the past two weeks in the wake of the government's sudden increase in fuel prices. Small peaceful protest marches have continued in many parts of Burma's main commercial city, Rangoon. In the past week these demonstrations demanding lower fuel and food prices have spread to several other parts of the country.
These protests are very rare in Burma as the military regime keeps a tight grip on the population. But the numbers joining these marches have grown since more than a hundred people joined the first demonstration demanding that the government immediately lower fuel and food prices.
"The government has raised fuel prices without giving any prior notice, and due to this hike, all the people are suffering. Therefore, we, the 88 generation students, NLD members, University students, high school students and civilians are protesting and demanding an immediate roll back in the prices of fuel," said one of the protesters at the first march nearly two week's ago.
keeps a tight grip on - controls strictly
88 generation students - people who participated as students during the protests of 1988 in Burma that were a turning point in the country's political history
NLD - the National League for Democracy, the opposition party headed by Aungsan Suu Kyi
roll back - reversal (return to the prevous low price)
Bus fares and taxi charges doubled immediately in Rangoon, Mandalay and Moulmein. Already there is a substantially reduced service in many parts of Rangoon. Traffic generally in the city is substantially reduced as a result of the astronomic rise in the cost of black market petrol, which many Rangoon residents depend to fuel their cars.
The increase in bus fares will severely affect the poor, said a financial analyst in Rangoon, who did not want to be identified. Manual workers and day-labourers in the country's main cities, who earn less than 2,000 kyat ($2) a day, will now have to pay more than half their wage in travel costs, he said. In some cases it may even be as much as three-quarters of their daily income.
Already in Rangoon food prices have risen steeply. Rice has risen by nearly 10%, edible oils by 20%, meat (pork and mutton) by around 15%, garlic and eggs both by 50%, according to aid workers in Rangoon who monitor the local market. A plate of Burmese noodles has tripled in the last week, an aid worker said.
astronomic rise - very large increase in
black market - market where illegal goods are sold (such as gasoline/petrol that slips out of the official government network)
day-labourers - people who are hired temporarily by the day to do work (usually for dirty and dangerous work like construction at low wages)
mutton - sheep meat
An unofficial Consumer Price Index, maintained by a leading Burmese journal, based in Rangoon, based of a basket of essential commodities, showed a 35% increase after the fuel price increase.
"These price rises are crippling for most residents in Rangoon," a Burmese economist told the Bangkok Post. "They could hardly afford food before, now their weekly budget for essential foodstuffs is going to buy even less - their purchasing power has been reduced by more than 20% virtually overnight."
"It is difficult to fathom why the government has increased fuel prices, and why they have done it at this time," said a western diplomat based in Rangoon. "It can only mean the government is strapped for cash."
Consumer Price Index - a measure of prices paid by consumers, used to measure price inflation
purchasing power - how much your money can buy
virtually overnight - very quickly
difficult to fathom - difficult to understand
strapped for cash - have not money to spend
The Burmese government is reportedly finding it difficult to find the funds to finance the massive expenditure on the new capital Naypyidaw - some four hundred kilometres north of Rangoon. Now they are heavily committed to the construction a new internet and communications technology centre - along the lines of the US's Silicon Valley - known as Yadanapon Cyber City near the new capital. In fact many key ministries are to move here later this year.
"I have long suspected that the cost of building Naypyidaw was bleeding the government's coffers dry," a specialist on the Burma economy, Sean Turnell of Macquarie University of Australia, told the Bangkok Post.
"The government is acutely short of revenue. The cost of Napyidaw is itself absorbing more than the increase in income from gas revenues. On top that, there is the dramatic pay rises in government salaries of last year, as well as now the potentially large expenditure needed for the planned nuclear reactor," he said.
coffers - box for keeping money
acutely - suddenly and extremely
But many senior financial and business analysts in Rangoon believe the increase in fuel price, because of the withdrawal of government subsidies is part of the government's economic liberalisation policies recommended by the International Monetary Fund (IMF) and World Bank.
Over the past year the government has been trying to introduce a measure of financial regularity into government economic policy. The main aim has been to reduce government expenditure and increase government revenue.
The IMF and World Bank also warned the regime this time last year that if they did not reduce their extraordinarily high budget deficits - which they traditionally covered by literally printing money - economic development would suffer. They predicted an increase in inflation and a further erosion of living standards.
"Living standards are low, and inflation is increasing. The prospects for sustained growth in real incomes are constrained by inflation, structural rigidities, weak economic policies and low investment," the IMF team warned after a mission to the country last year.
economic liberalisation policies - reducing government control of the economy
erosion - slow and steady decrease (like dirt wearing away from water running over it)
living standards - quality of life (partly a function of what your salary can buy which shrinks under inflation)
There is no doubt that the country's economic tsar, the number two in the military regime, Gen Maung Aye has tried to implement some of the IMF's recommendations over the past two years or so. There has been an aggressive campaign to collect taxes, especially from small businesses. Earlier this year, the authorities mounted a major investigation into businesses suspected of tax evasion.
Some of Rangoon's biggest companies, including Max Myanmar, AA Pharmacy, the Peace Myanmar Group and International Beverage Trading, were targeted by the investigation. Several leading Burmese businessmen were arrested. But companies close to senior members of the military regime escaped scrutiny, according to business sources in Rangoon.
Last year, the IMF reported that Burma's revenue collection had risen slightly, and the budget deficit had dropped to around 4% of the gross domestic product or the National Income. "The tax revenue increases are real, but they're from such a low base they're more a 'promise' of a better fiscal future than one now," said Mr Turnell.
What is more critical, according to Burmese economists is for the junta to reduce government expenditure. But the regime cannot contemplate cutting back on military spending, the building of Naypyidaw and the new Cyber City, or the construction of bridges, dams and the nuclear reactor, so reducing government subsidies is the only option left.
tsar - high level leader with a lot of power
tax evasion - the crime of intentionally not paying taxes
scrutiny - investigation, a thorough examination of
from a low base - from a low starting point
The IMF also strongly advised the Burmese regime to reduce government subsidies, especially on fuel. It is one of the international financial body's main tenets - the liberalisation of the energy market.
Curiously the increase in fuel prices came just ahead of this year's IMF/World Bank annual mission to Burma. They arrived in Rangoon in the middle of last week and it may be no coincidence the government acted when it did.
The burden of maintaining the subsidies on fuel was also beginning to tell. The government has long been committed to keeping diesel prices artificially low. In fact even with the recent increases in diesel, gas and petrol prices, they remain the lowest in the region - and well below the market price for these fuels in Thailand.
But with the growing prosperity of the emerging middle class and senior military officers through corruption and kickbacks, the demand for diesel has increased over the year - hence the need to shell out every increasing amounts of money in subsidies at a time when the cost of importing diesel, petrol and gas is also increasing. This is putting increased pressure on the government's budget which cannot be paid from the revenue of existing gas and petroleum exports.
tenets - principles, beliefs
no coincidence - intentional, not due to chance
kickbacks - part of the value of a deal that is paid back to the government official how helped you get the deal
] shell out - spend money on
Some analysts in Rangoon also believe that the move was necessary part of the government's plans to privatise the country's fuel distribution system - as advocated by the IMF. Under the scheme retail outlets for diesel, petrol and gas would be sold to a major private company, which would buy the fuel products from the government at a wholesale price and sell it onto the public through this retail network.
This could only be a profitable venture for the prospective investor if the retail prices were higher than they are now. "The previous margin - between the government wholesale price and the retail price was too small because the price was unrealistically low because of the government's subsidises," a Burmese economist told the Bangkok Post on condition of anonymity. So this move may be part of the government's privatisation plans - and to help attract increased investment.
venture - business
advocated - argued for
prospective - potential, person who might become
margin - difference between prices
anonymity - not providing name (for privacy, to be safe)
privatisation - making a government run organisation into a privately run company
"The government did the right thing but the way it did it seems irrational," said a leading local (Burmese) financial expert who wanted to remain anonymous. "The government must stop all subsidies, but not without prior warning," he added. Consumers and the private sector in particular need time to adjust to the increase costs, he insisted.
While the increase in fuel prices over three weeks ago is bound to increase the hardship and suffering of the country's people, particularly the poor peasants, it reflects the commitment to introducing more sound economic policies.
"In the past, the Burmese government regularly just printed money when funds were needed, but over the last year or so there has been a greater effort to introduce fiscal responsibility into government economic policy," Mr Turnell told the Bangkok Post.
"Instead of simply printing money they have also tried to reduce expenditure on subsidies (on goods and fuel) and improve revenue collection."
irrational - without reason, not according to logic and common sense
reflects - shows
commitment - accepting a responsibility and promising to do something
fiscal responsibility - controlled, conservative, and transparent government spending
While food and transport prices have already soared, most observers in Rangoon believe it will only be a matter of time before the government also increases electricity rates. Burma's business community is clamouring for the government to consider increasing fuel imports for other sources, especially diesel from China.
So far the fuel crisis is confined to Rangoon and Mandalay, and is not dramatically affecting the rural population as they are dependent on the black market for their fuel supplies, according to observers in Rangoon. But they expect the black-market rates to be affected in the near future and that will really hurt the country's farming community.
clamouring - demanding in a noisy and unruly fashion
Answer Key:
1. What did the Burmese government do over the past two weeks to provoke protests in Yangon?
They suddenly increased fuel prices.
This caused a sudden jump in the price of all goods including food.
2. How common are street protests in Yangon? Why?
Not common at all, because the government strictly controls the lives of most people.
3. What have been the immediate effects of the fuel price hikes in Burma's cities?
a. Increased bus fares
b. Increased taxi fares
c. Reduced bus service.
d. Reduced traffic.
e. Huge increases in price of black market petrol.
f. Sharp increases in food prices.
4. What are the official estimates of how much prices have risen overall?
Around 35%. This is the increase in the Consumer Price Index (CPI) reported by a "leading Burmese journal."
5. Why is such a sudden increase in prices more devastating in a poor country like Burma than it is in a richer country? (Express your opinion)
If a family already almost did't earn enough to eat, than after such a price increase they probably now no longer earn enough to eat. Changes can have a higher impact when people live nearer to the "subsistence" level, the level at which they just barely have enough to eat.
6. What budget items are or will be a major drain on the government budget?
a. Building the new capital at Naypyidaw.
b. Yadanapon Cyber City, a new internet and communications technology centre
c. Planned nuclear reactor
d. Dramatic pay rises in government salaries last year.
7. What is the major source of government revenue that's financing the building of the new capital? Is it enough?
Increased income from gas revenues is being used up ("absorbed") in the building of the new capital, but it is not enough.
8. How has the Burmese government traditionally financed government budget deficits?
By increasing the money supply (printing more money).
9. Why have the IMF and the World Bank pressed for economic liberalisation policies in Burma?
The IMF (rather ironically) argued that if government deficits were not reduced, inflation would reduce already low living standards even further.
10. How has the goverment acted on IMF recommendations?
They have increased government revenue by a tax collection campaign that focussed on small businesses as well as some of the biggest companies in the country.
11. Who acted on the IMF recommendations?
"Number Two," as they say in Burma. General Maung Aye who is in charge of economic policy and second in command of the military regime ruling over Burma.
12. How long have they been taking action?
For the last two years.
13. What are some of the spending items that make for a large government budget?
a. Military spending.
b. The building of Naypyidaw.
c. The building of Cyber City.
d. Construction of bridges.
e. Construction of dams.
f. Construction of nuclear reactor.
14. What does the recent price hike in Burma have in common with the IMF's main tenents of economic liberalisation?
The price hike was a price hike on fuel and energy and the liberalisation of energy markets is a main tenet of the IMF.
15. Are Burma's fuel prices greater or less than those of neighboring countries?
Much less.
16. What broke the government's fuel subsidisation scheme?
Certain segments of society have experienced growing incomes recently. This has led to increased fuel usage, but every increment in usage in usage has to be paid for by increased government subsidies. Eventually the subsidies grow too large and the whole system reached a breaking point.
17. Why could the planned privatisation of Burma's fuel distribution system have been a factor in the sudden reduction of subsidies and fuel price rise?
The IMF has pushed for privatiseation of Burma's fuel distribution system, so that retail outlets for diesel, petrol, and gas would be privately owned.
Such a business would only be attractive and fetch a high price if market (unsubsidized) prices were being charged.
18. In what ways was the government decision to raise fuel prices rational?
It was part of an IMF initiated effort to reduce government subsidies and "introduce fiscal responsibility into government economic policy."
19. In what ways was it irrational?
It was not done in a transparent fashion. The subdidies were stopped without prior warning.
20 What important price are likely to occur in the near future?
Increases in electricity prices.
21. Have the fuel price increases affected rural inhabitants?
No, because they are dependent on black market fuel supplies.
22. Under what conditions would the price hikes have an effect on the rural farming sector?
If black market fuel prices increase sharply due to lifting fuel subsidies.
