Thursday, June 29, 2017
The Myanmar Times
The Myanmar Times

Commit-and-act approach expected among investors

Despite the 30 percent drop in FDI compared to the preceding year, the inward FDI in the financial year 2016-17 was moderately satisfactory, with US$6.6 billion. That amount mainly derived from the transport and communications sector.

The manufacturing sector attracted FDI totalling US$1.1 billion in fiscal year 2016-17. Photo - ShutterstockThe manufacturing sector attracted FDI totalling US$1.1 billion in fiscal year 2016-17. Photo - Shutterstock

The sector alone attracted US$3 billion FDI, making it the top sector in terms of FDI.

However, it is surprising that there was not a single dollar of FDI which flowed into the agriculture sector during the 2016-17 fiscal year. Why is that the case? Why isn’t Myanmar’s agriculture sector attracting foreign capital? What makes international investors hesitant to enter the sector? The FDI policy on agriculture needs to be thoroughly reviewed so the sector can develop robustly with foreign capital.

Other sectors which experienced the same fate in that year include mining, oil and gas, construction and industrial estates sectors. Power, energy and oil and gas sectors are usually the top spot for attracting FDI. In fact, it is the first time that transport and communications sector becomes the most attractive sector.

A US$1.8 billion FDI in 2013-14 was the historical peak for the manufacturing sector and this year’s total ended up with US$1.1 billion, a little lower than the peak. Significant rises in FDI compared to the previous year are also seen in numerous industries, such as livestock and fisheries, power, hotel and tourism and service sectors.

Myanmar enacted a new foreign investment law in late 2016. The new Myanmar Investment Law came into force on April 1, 2017, combining two older laws stipulated in 1988 and 2012 and merging two separate laws for foreigners and Myanmar citizens. The new legislation allows a more level-playing field between local and foreign investors, although some differences remain.

What is special about the latest investment law is the introduction of investment channelling which attempts to guide FDI flow to areas and sectors prioritised by the administration. The law does so by creating and categorising zones and investment promotion sectors.

There are three zones – zone 1 (least developed), zone 2 (moderately developed) and zone 3 (sufficiently developed) – and 20 sub-categories of investment promotion sectors.

According to the law, income tax exemption will no longer be automatic and will be granted only for FDI in sectors specified by the Myanmar Investment Commission (MIC). The exemption period will vary depending on the zone – seven years for zone 1, five years for zone 2 and three years for zone 3.

The classification of investment promotion businesses is rather broad and general, covering most sectors apart from some strategic resource-related ones such as oil and gas and mining activities. In other words, it can be seen as an FDI policy shift from being resource-dependent to non-resource-dependent by placing its focus on manufacturing and sectors which are labour-intensive.

Rakhine State, Kayah State, Kayin State and Chin State fall under the zone 1 category where investors can enjoy income tax exemption for seven years. Similarly, doing business in the major parts of Kachin State, Sagaing Region and Shan State can also enjoy the same level of tax relief.

All eight townships in Nay Pyi Taw territory and most townships in Bago, Tanintharyi, Mon and Ayeyarwady regions are ranked as zone 2 areas, which allow a five-year tax exemption.

For Magwe Region, 13 townships are in zone 1 and 12 are in zone 2; for Mandalay Region, two in zone 1, 13 in zone 2 and 14 in zone 3; for Yangon Region, 13 in zone 2 and 32 in zone 3.

The MIC has released an order to delegate new power to regional and state-level investment committees to grant endorsement to investment applications up to US$5 million.

There are also two types of MIC applications. In addition to MIC full permit, a new type of MIC endorsement is introduced, with a purpose to speed up the application process. The reconstitution of MIC is certainly a step towards decentralisation and greater efficiency.

There remain many questions, such as infrastructure support, difficulty in logistics, skilled labour and market access.

However, the new investment law, together with clearer investment policies, means that 2017 will no longer be a wait-and-see year. Instead, international investors are likely to change to a “commit-and-act” approach in Myanmar in this new fiscal year.