Military-Initiated Steel Project Costing Myanmar Govt $345,000 in Daily Loan Payments to China

By Nan Lwin 20 February 2020

YANGON—The Myanmar government is paying nearly 500 million kyats (US$345,000) a day to China to service a loan taken out by a military-backed conglomerate to operate a loss-making steel factory in Mandalay Region.

Acting Mandalay Chief Minister U Zarni Aung said on Wednesday that the conglomerate, Myanmar Economic Corporation (MEC), borrowed nearly 1.1 billion euros (1.72 trillion kyats) from state-owned China Development Bank (CDB) in 2010 to operate the No. 1 Steel Mill project in Myingyan Township.

“Currently, the total debt including interest exceeds 1.615 billion euros,” the acting chief minister said in the Mandalay regional parliament.

The revelation came as the acting chief minister was responding to a lawmaker’s question about the loan’s unusually high interest rates, which were mentioned in a recent report issued by the region’s auditor-general.

U Zarni Aung said Myanmar paid CDB a total of 315,271.12 euros daily, including interest, during the 2018-19 fiscal year. The daily amount declined to 306,056.55 euros in FY2019-20.

He said the repayments, including principal and interest, amounted to around 500 millions kyats a day.

The acting chief minister said the previous government transferred ownership the factory to the Industry Ministry in 2012. When the current government took power it became responsible for the project, which continues to require huge debt repayments despite no longer being operational.

According to the Mandalay regional auditor-general’s report for April to September 2018, the project was formerly known as Myanmar Steel Corporation (No.4) (Myingyan), and loan agreements were signed between Myanmar Foreign Trade Bank (MFTB) and CDB in July 2010 and June 2011. According to the General Statistical Report, of the borrowed money, 566.97 million euros were spent during the period of MEC ownership and 475.37 million euros during the Ministry of Industry period.

According to U Zarni Aung, the project is now under the direct control of the Ministry of Planning, Finance and Industry.

MEC started building the steel mill in May 2005, under the military regime, on a 1,043-acre (422-hectare) plot of land in Myingyan. The entire project was to be built in three phases at an estimated cost of 1.24 billion euros. The first phase commenced operations in March 2010. Technical know-how was supplied by Italy and Russia, but to fund the project the military turned to CDB, a Beijing-based state-owned bank.

The company initially planned for the facility to produce a number of finished steel products including rails, but its output was limited to billets and slab steel, and those were only distributed to MEC itself. In 2017, the Ministry of Planning and Finance ordered the facility’s operations suspended after its air separation plant broke down, according to the Mandalay auditor-general’s report. Meanwhile, the government continues to make the daily repayments.

According to the report, interest payments began at the start of FY2015-16. The loan repayment period for Phase 2 of the project runs from FY2015-16 to 2030-31. The period for both Phase 2A and Phase 3 is FY2017-18 to 2032-33.

The interest rate and commitment fees total 4.5 percent for Phase 2. The rate for both Phase 2A and Phase 3 is 5 percent, and payment protection insurance will incur a charge of 0.5 percent of the outstanding loan.

Regional lawmaker Daw Nyein Thet Nwe pointed out that the interest rate on the loan is extremely high.

She said the loan was agreed by military-run MEC, but after the project started making a loss, the company transferred ownership of the factory to the government.

The public is now bearing the burden of repaying the loan, the lawmaker pointed out.

MEC is one of two major conglomerates and holding companies operated by the Myanmar military, providing it with a major revenue stream. MEC runs numerous businesses in fields such as banking and finance, information technology, tobacco, communications, construction, entertainment/tourism, food and beverage products, health and beauty products, health services, industrial estates, international trade, manufacturing, media, retail and transport. MEC is on the United States’ list of sanctioned companies due to its affiliation with the military.

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