Currently, a large share of government revenues is directly or indirectly related to natural resources, in particular gas. The government benefits from a broad range of revenues from oil and gas projects, including entitlements, royalties, allocations of shares, transport fees, transit fees, training and education funds, and income taxes. Precise figures on the total value of such revenues have yet to be made publicly available, but it is known that the contribution of the two major gas projects (Yadana and Yedagun) to government revenues was about $2 billion in FY2003, had risen to $3.6 billion in FY2010, and today is significantly larger. By comparison, in FY2012, total tax revenues were about
$3.5 billion and total revenues (including transfers from SEEs to the union government and other SEE receipts) were about $11.1 billion. Some of the revenues from oil and gas projects are passed on to the union government and some are retained by SEEs such as the Myanmar Oil and Gas Enterprise.
Whatever the exact numbers, there is no doubt that at this stage in Myanmar’s economic and social development, natural resources are a vital source of revenues to finance much-needed reforms and investments in the social sectors and infrastructure. However, effective management of these flows will be crucial in avoiding the “resource curse/Dutch disease” (Box 4) and ensuring sustained and equitable growth, fostering peace and social cohesion while avoiding macroeconomic instability (Isham et al. 2005). This will involve ensuring that the depletion of the natural resource stock is matched with an increase in the country’s stock of infrastructure, human and physical capital, which in turn will boost production, employment, and innovation in other sectors of the economy. It will also be important to address the macroeconomic risks posed by the conspicuous size of the extractive industry and the overreliance on a less predictable source of revenues.
Box 4: Resource Curse
The term Resource Curse describes “the puzzling paradox suggesting that resource-rich countries tend to grow more slowly than resource-poor ones” (Brunnschweiler and Bulte 2008), e.g., Angola, Nigeria, Sudan, and Congo. International experience and economic theory outline several dynamics underlying these missed growth potentials. The most common are:
1. Volatility in commodity prices
Volatility in international commodity prices might translate into volatility of public revenues and GDP and increase the risk of macroeconomic crises.
2. Low economic diversification
High profitability of the extractive industry in developing countries might result in the scarce stock of capital being crowded out of other economic sectors, most notably manufacturing. The result is an economic structure characterized by little diversification and, hence, more exposed to world price fluctuations and shocks.
3. Social instability and conflict
Struggles over the ownership of natural resources have often resulted in social instability and civil war between neighboring countries or ethnic factions within a state.
4. Dutch disease
When world prices rise sharply or significant new reserves of natural resources are discovered, countries might be affected by a phenomenon that has come to be known as Dutch disease. A surge in the inflow of foreign currency can generate intense real appreciation of the domestic currency, depressing nonextractive export-oriented industries and generating inflation.
5. Intertemporal allocation of spending
Finally, both public and private sectors’ spending choices might be skewed toward the present in resource-rich countries. Total size of reserves might be unknown, boosting optimism and current spending. Moreover, political dynamics might distort the intertemporal allocation of resources toward consumption, leaving too little capital or a too high stock of debt to the future government.
GDP = gross domestic product.
Sources: Auty 1998, Van der Ploeg and Venables 2013.
Experience from other countries suggests that there are three important dimensions to an effective strategy for managing the revenues from natural resources. First is increased transparency and accountability for revenue flows from extractive industries. In this regard, the intention of the government and the private sector to commit to the EITI will be important in allowing better contracts to be designed, ensuring fair fiscal treatment of profits, and fostering inclusiveness through improved accountability. Second is the importance of carefully considering the macroeconomic and fiscal implications of different strategies for investing and saving the revenues from natural resources. In Myanmar’s case, there are major unexploited investment opportunities, but the country also faces absorptive capacity constraints, the possibility of Dutch disease and price uncertainties. All these considerations need to be taken into account using a sustainable investing or other analytic tool, such as the tool developed by the IMF, that takes into account in a macroeconomic model, factors including the productivity of public investment, absorptive capacity, fiscal and capital sustainability, Dutch disease effects, and volatility in natural resource revenues. Finally, and depending on the absolute level of revenues in the future, it may be important for Myanmar to consider instruments, such as Stabilization and Sovereign Wealth Funds, which in other country contexts have proven extremely successful in reducing the exposure to macroeconomic risk and fostering investment (Box 5).
Box 5: Natural Resource Management, International Experience
Chile has perhaps one of the most successful experiences in terms of natural resource management. The country controls more than 40% of the world’s copper market, but its economy has managed to remain fairly stable and to diversify greatly over time. There have been two key ingredients that make Chile such an interesting case study. The first element was clear and transparent fiscal rules, which made government spending less procyclical and more sustainable. The second element was a Stabilization Fund, used to save resource revenues during windfalls and raise public savings, stimulating private savings and investment.
Botswana is another very successful resource-rich country. Although it is heavily dependent on the diamond trade, the country “has been one of the fastest growing in the world over the last 50 years.” The most striking feature of the country’s natural resource management strategy is the way in which natural resource revenues are handled. If resource revenues are employed for the funding of state projects, these have to pass very strict social cost–benefit analysis. These revenues are also channeled into the Community-based Natural Resources Management, an institution devoted to rural development, community mobilization, and institutional and enterprise development
Sources: Van der Ploeg and Venables 2013, Botswana Community-Based Natural Resources Management Support Programme website.
B. State-Owned Enterprises
Reform of Myanmar’s Union Business Organizations, also known as SEEs, has been ongoing for some time. More than 700 SEEs have been privatized since the late 1990s and today, there are only 44 SEEs, of which 40 are “budgetary units”6 and 4 are “autonomous units” in the process of being corporatized.7
In aggregate, however, the remaining SEEs are still very large (gross revenues are expected to exceed
9 trillion kyats or $9 billion in FY2014) and cover a wide range of sectors, including extraction of natural resources (almost half of total SEE activity), power, telecommunications, and industry.8 In aggregate, they are also very profitable (revenues are expected to exceed expenditures by about 700 billion kyats in FY2014), although this figure should be treated carefully as there are significant differences in balances across ministries, and many ministries with negative balances, implying that there are still many loss-making SEEs.9 The SEEs primarily contribute to the Union’s budget through two fiscal instruments. The first is the profit tax applicable to all enterprises (both public and private) at a 25% rate. The second instrument is a form of Union Dividend, consisting in a direct transfer of 20% of the profits of SEEs to the government budget. The remaining share is either used to self-finance investment, or is transferred to the Union.