Edwin Vanderbruggen | 7 August 2015
A new draft of the Public Debt Management Law (the Draft Law), which is not yet in force, is aimed at restating and clarifying some of the existing rules with respect to Government loans, bonds and guarantees. The Draft Law replaces the practically irrelevant (but strictly speaking still operative) Government Securities Act of 1920. The Draft Law sets forth who within the Government has the authority to borrow money and what for. A section is reserved for Government bonds, which seems to have been one of the main reasons to prepare this law. The Draft Law also restates the rules with respect to borrowing by divisions, municipalities and state-owned enterprises (SOE). We take a first look at the new rules, and ask ourselves how investors and lenders may be impacted.
Which Government organization may borrow money?
The Union Government Law 2010 placed the authority to “negotiate, decide and conclude” financing squarely with the Union Government, which comprises (i) the President of the Union; (ii) the Vice Presidents of the Union, (iii) the Union Ministers and (iv) the Attorney General of the Union. This is confirmed on a more specific basis in the annual Union Budget Laws (UBL) which typically provide in a chapter on external financing. However, Pyidaungsu Hluttaw (the bicameral National Assembly). approval is normally required for the budget itself, including its entries for external financing (see below). In reality, the Government’s authority to obtain financing is delegated to the Ministry of Finance (formerly, Ministry of Finance and Revenue) (MOF). This is specifically provided in the SBLs. The Minister of Finance and the Deputy Ministers of Finance play a major role in approving any type of finance or guarantee.One of the departments of the MOF, the Union Budget Office (UBO) or also referred to as the Budget Department compiles, analyzes and administers the budgets from the various organizations.The SBO has ten sections, three of which follow a line of organizations which produce budgets, notably the Ministries and Departments Budget Section, the State Economic Enterprises Budget Section and the Municipalities Budget Section The Draft Law does not really change that. S. 3 Draft Law now states explicitly that “the Minister of Finance is the only person authorized to borrow money domestically or overseas or to issue Government bonds”. The Draft Law also states that such authority is, as was previously provided under each yearly Union Budget Law, subject to that Union Budget Law. Hat has changed is that now there is a legal basis separate from the yearly Union Budget Law, which in theory could provide differently on the subject each year, for the Government’s authority to borrow money with approval by the National Assembly.
Can states and regions obtain external financing by themselves?
The Constitution 2008 provides that Myanmar’s states and regions have their own budgets which are approved by their respective state or region legislatures. Nevertheless, “the Union Government will include and verify the budgets from Ministries and organizations at a state or region level” (s. 230 Constitution). The state and region budgets are in fact wholly integrated into the Union budgets, which is not surprising since nearly all tax revenue collected nationwide goes into the national treasury and not directly to the states or regions. Only the land revenue tax and a few other minor local taxes are not paid into the national budget (Schedule 5 of the Constitution 2008). The Draft Law now states clearly in s. 30 that states and regions may indeed raise finance themselves, but only in accordance with the Union Budget Law as approved by the National Assembly, and after permission from the Government. Other sections of the Draft Law, notably s. 20 and 21 Draft Law, raise the possibility that instead of states and regions borrowing externally with Government permission and National Assembly sanction, the Union would raise money itself and on-lend this to the states and regions. This might be a more likely scenario given the fact that the Union also controls the outlays made to the states and regions. Anyway, the crux is that, yes, states and regions may indeed borrow money. There is no mention of any “state or region bonds”, in the Draft Law though. This seems to be the exclusive domain of the Union. In all cases, the state and region concerned is legally bound to (1) obtain union Government approval and (2) to include the loan and the project for which the money was raised in the Union Budget, which requires National Assembly approval.
Must the National Assembly approve individual loans or bonds?
With each UBL, the National Assembly authorizes the Union Government to “obtain loans” or “issue bonds”. The National Assembly need not be involved with negotiating the terms and conditions, as this matter is also authorized to the Government. The UBL does refer that the Union Government may agree to “reasonable interest rates” which raises some doubt on the how this may be determined. In practice, the National Assembly does not interfere with interest rates. The Draft Law provides that nevertheless, the agreement may only be signed “after such agreement has been approved by the Government” (s. 16 Draft Law). However, the National Assembly is involved insofar it needs to discuss and approve the State budget in relation to which the loans pertain. The Constitution provides that the Union Government drafts the budget and prepares a bill on that basis each year (s. 221 Constitution), after coordinating with the Financial Commission. The Financial Commission is chaired by the President of the Union, and the two vice-chairman are two Vice Presidents. The Financial Commission also counts the Attorney General, the Auditor General and the Chief Ministers of the Regions and States as members. The secretary of the Financial Commission is the Union Minister for the Ministry Finance. The Union Government will “include and verify” the budgets from the different Union Ministries and the budgets of other organizations which exist at Union level (s. 230 Constitution), as well as Ministries and organizations at a state or region level. All these budgets are submitted to the Financial Commission which will issue a recommendation including on the permitting of loans (s. 230 c) i) Constitution). A budget bill is then submitted by the President for approval to the National Assembly in accord with the provisions of the Constitution (s. 103 Constitution).
How can the Government issue a guarantee for a project?
The Draft Law contains a special chapter dedicated to guarantees. It provides that “the Minister of Finance may issue guarantees and other forms of guarantee for loans to any person, association of persons or projects in accordance with such stipulations as may be approved by the Government and the Pyidaungsu Hluttaw” (s. 23 Draft Law). Ministers of other ministries may also give guarantee, but only if specifically mandated by the Minister of Finance. This means that, for example, the Ministry of Transport or the Ministry of Electric Power are unable to issue a guarantee for an infrastructure or a power project by themselves unless the Minister of Finance has granted them the specific authority to do so. The power of the Government to issue guarantees for projects or for that matter for debts of SOEs is under the Draft Law limited to instances where the National Assembly has approved the matter. The Draft Law does not state which degree of detail is required for the National Assembly’s approval. Is an individual approval of the exact terms of the guarantee required? Presently, that is not how it’s done. The current practice has been that the National Assembly approves a project in general terms and allows the Government to provide guarantees in connection with that project. In s. 12 of the UBL 2012, for example, it is stated that:
“The Minister of the Ministry of Finance may, on behalf of the Union, furnish guarantees for taking of loans under this Chapter III”.
In other words, the reference in the UBL is made to loans or guarantees in connection with projects or expenditure identified in the Union budget, not in general. The UBL does not provide a legal basis for the Union Government to issue guarantees for projects which are not provided for in the Union budget.