Thein Sein Ripe for Japanese Reward: New Loans to Burma

By Marwaan Macan Markar 12 April 2012

BANGKOK — Following the political reforms he has unleashed, Burmese President Thein Sein is on the cusp of reaping a financial harvest from Japan—new loans for development assistance.

A likely setting for the deal to be unveiled is an upcoming Japan-Mekong summit on April 21, when Thein Sein visits Tokyo to join government leaders from the four other Southeast Asian countries that share the Mekong River.

But a US $5 billion hurdle needs to be surmounted before Tokyo ends its decades-long suspension of loans to Burma: a decision on what to do about the amount the Burmese government owes Japan in unpaid debts from loans spanning from the late 1960s to the late 1980s.

Officials from Japan’s Finance Ministry and Foreign Ministry have been exploring a range of options to deal with the over $5 billion in unpaid debt that has to be paid back before a new tranche of loans from Japan can flow to Burma. The amount Burma owes Japan is the largest slice of its $11 billion in unpaid debt to foreign governments and international institutions. The amount it owes the World Bank, which has also suspended development loans for nearly two decades, is $789.2 million.

According to sources following the policy options being tabled, one school of thought favors Japan resuming loans to Burma by canceling the total or part of the debt. They are turning to a debt cancellation mechanism that was established by the trade and development board of the United Nations Conference on Trade and Development (UNCTAD- TDB) resolution in 1978 as a blueprint.

This view is up against another school of thought among government policy makers who are pushing for a “bridge loan” to help Burma repay its debt and qualify for new loans. This would rope in Japanese private banks, which would lend Burma the amount it needs to pay off its unpaid debts to Japan in order to break the ban on new loans until old debts have been cleared. It is also a debt-relief mechanism with precedents: six Japanese private banks loaned Vietnam $182.5 million in the early 1990s to help Hanoi pay Tokyo the debt it owed in order to qualify for new loans.

“Since public loans cannot be provided because of the overdue debt, there are no other options than mobilizing private money,” said Saturo Matsumoto, an expert on Japan-Burma ODA policies at Hosei University in Japan. “Some officials in the Finance Ministry seem to prefer the bridge loan because they feel ‘full cancellation’ could lead to moral hazard.”

And if a compromise is reached—opting for both debt relief mechanisms—one of the glaring stories of oppression during the years of Burma’s former junta leader, Snr-Gen Than Shwe, will cast a shadow: the attack by pro-junta goons on opposition icon Aung San Suu Kyi’s motorcade in Depayin on May 30, 2003, which killed close to 50 people.

“The Japanese government had pledged to cancel the debt that had matured in January 2003 based on the UNCTAD-TDB resolution. But the May 2003 violent attack against Aung San Suu Kyi’s motorcade stopped Japan from providing further debt relief,” Matsumoto said in an interview. “The issue is how much had matured in January 2003 and how much is overdue.”

“According to my sources, the [amount matured] is about $2 billion, while the [amount overdue] is $3 billion,” he revealed. “The bridge loan will be approximately $3 billion.”

Japanese activists, however, prefer the “bridge loan” option, since it gives them more leverage to monitor the conditions under which such a debt-relief package is given.

“My understanding is that Japan would like to see Burma undertake further serious political and economic reforms,” said Yuki Akimoto, co-director of the Burma Information Network—Japan, a Tokyo-based monitor of financial flows to Burma. “I would hope that the Japanese government, with support from Japanese civil society, would use such leverage to help ensure that reforms are made.”

Such a window to monitor the loan conditions would also give a pivotal role to Burmese activists in Rangoon and elsewhere in the country, Akimoto said in an interview. “By working with Japanese civil society, members of Burma’s civil society can help inform the Japanese government how the new loan is being used and whether political and economic reforms are in fact taking place.”

Talks between Tokyo and Naypyidaw to explore debt relief began in early December, following the visit to Burma that month by US Secretary of State Hillary Clinton. Her visit to engage with the reformist administration of Thein Sein lifted the pressure Washington had placed on Tokyo for decades to toe the tough, pro-Western line on Burma—including denying the country loans.

During the talks that involved officials from Japan’s Foreign Ministry, Burmese officials from the Ministry of National Planning and Economic Development were given a reminder of Japan’s Official Development Assistance (ODA) Charter, a 1992 document that compels Tokyo to take note of the loan recipient’s records on military spending and its commitments to advancing democracy, protecting human rights and promoting a market economy.

This charter marked a turning point from the loans-without-conditions of Japanese ODA that shaped Tokyo’s assistance to developing countries in the previous decades. Burma under Gen Ne Win’s dictatorship was a major beneficiary, since Japan gave its first loan in 1968. Between 1978 and 1988, Japanese loans to Burma reached an estimated $3.7 billion, accounting for nearly 70 percent of the country’s foreign development assistance.

But Burma’s crumbling economy through the 1980s, its inability to repay its loans and the brutal crackdown on the 1988 pro-democracy uprising, in which an estimated 3,000 people died, ended the strong ties that Burma and Japan had developed since the end of the Second World War. “The default on the loans came first. The defaults could have been renegotiated afterward, but the country’s politics made this impossible,” notes Sean Turnell, an associate professor in economics at Australia’s Macquarie University.

“The World Bank loans were mostly taken on in the late 1970s and the early 1980s, and the Japanese and the Asian Development Bank ones across a similar period,” he explained. “Much was built out of it—much of it wasteful, much no longer functioning—but it was mostly used.”