* Cautious reforms gather pace ahead of Asian summit
* New economic adviser close to Suu Kyi, bridging divide
* Myanmar seeking IMF help to sort out forex system
* Cronies and elite poised to benefit from investments
* Dam suspension shows govt’s new responsiveness to people
By Aung Hla Tun and Jason Szep
YANGON, Oct 14 (Reuters) - In a remote prison in Myanmar’s northernmost state, comedian and dissident Maung Thura nearly lost touch with the world. His parents died. He was forbidden contact with relatives for more than a year.
So when guards startled him awake at 5:30 a.m. on a cool Wednesday morning to free him and about 200 other political prisoners in a rare amnesty, he was ecstatic. He could see his two children again. One of the world’s most reclusive and autocratic states may finally be changing, he thought.
But his excitement soon gave way to anger, he said. Nearly 2,000 fellow activists remained in jail in the former British colony also known as Burma, including 18 in his prison in the city of Myitkyina.
“If they really want national reconciliation, they should release all political prisoners,” said Maung Thura, better known by his stage name Zarganar, in an interview in Yangon after reuniting with his family about 1,480 km (920 miles) south of the prison.
Is Myanmar really opening up, he asked, echoing a question asked widely of an authoritarian state at the strategic crossroads of Asia, which shows signs of ending a half-century of isolation.
The answer, according to diplomats and lawmakers close to Myanmar’s leadership, appears to be yes. Reforms that gathered speed this year are likely to continue and possibly accelerate, even if this week’s release of prisoners was disappointingly small.
Recent overtures by the government have included calls for peace with ethnic minority groups, some tolerance of criticism, an easing of media controls and more communication with Nobel Peace Prize laureate Aung San Suu Kyi, who was released last year from 15 years of house arrest.
“We talk to them privately and encourage them to continue with reforms but we also suggest they do so at a realistic pace,” said a foreign minister of a Southeast Asian nation who communicates with Myanmar’s leaders regularly under the ASEAN regional forum.
“If they go too fast and change too much at once, there is a risk that it could backfire, and all the changes that they have made would be unwound,” said the minister who declined to be identified by name or nation due to the sensitivity of diplomatic communications with Myanmar.
He and other Southeast Asian diplomats expect the 10-member Association of South East Asian Nations to approve at their summit next month in Bali Myanmar’s bid to take its rotating presidency in 2014, two years ahead of schedule, giving the new government some long-sought international recognition.
Reasons behind the wave of reforms are varied.
A local currency crisis is forcing the government to seek urgent help from multilateral institutions. Populist anger is rising over neighbour and historic rival China’s expanding economic influence. And Western sanctions are no longer merely a nuisance. They have begun to bite.
The government, say those familiar with its thinking, has begun to covet U.S. and European investments as a counterweight to billions of dollars of Chinese money flowing into its energy industry -- from natural gas to hydro-power and pipeline projects that cater almost exclusively to energy-thirsty China.
Sanctions, they add, also keep some of the Burmese elite’s children out of American schools -- a frustration that has grown more acute among a new generation.
And, crucially, since the army nominally handed over of power to a civilian parliament in the first elections in two decades, President Thein Sein has defied sceptics by reaching out to pro-democracy leader Suu Kyi, daughter of assassinated independence hero General Aung San.
Thein Sein, a retired general and first civilian head of state in half a century, surprised Suu Kyi’s supporters by appointing one of her friends, U Myint, as chief economic adviser, a step that more than any other could yield reforms in months ahead, say economists who track the country.
U Myint is a dramatic break from decades of staid autocrats and policy blunders by military juntas since a 1962 coup.
The former senior U.N. economist has been openly critical of the former junta, and is a colourful personality, singing and strumming guitar at a World AIDS Day performance in December at Suu Kyi’s party headquarters.
The 73-year-old reformer is well regarded on both sides of the political divide, a bridge between pro-democracy forces and conservative former generals who dominate parliament. Recently he called for a crackdown on graft, a bold step in a country ranked second on Transparency International’s 2010 list of most corrupt nations, worse than Afghanistan.
His views on Myanmar’s currency, the kyat, offer a glimpse into a nation desperate for help. They alone form perhaps the strongest argument for why more reforms are likely.
While the currency is pegged at six kyat to a dollar, it changes hands unofficially at about 850, up about 15 percent this year on sales of natural gas, jade and gems, a surge of foreign investment from China and swelling private capital from neighbouring countries and the Middle East.
U Myint sees trouble ahead if the largely Chinese-investment fuelled black-market rate keeps rising. In a paper presented to the government in June, he warned it could destabilise Myanmar and urged the government to reach out to the International Monetary Fund for help.
“If the exchange rate continues to appreciate unchecked, a stage will be reached when earnings from exports in local currency are no longer able to cover costs of production, huge losses are incurred, and enterprises have to close down,” he wrote, according to a translation of his paper seen by Reuters.
Workers could lose jobs, farmers and fishermen will struggle to sell produce, he said. “The economic, social and political consequences of this chain of events can be serious,” he added.
Bread-and-butter issues have been known to turn violent in Myanmar. The biggest and bloodiest uprisings against military rule, in 1988 and 2007, were sparked by discontent over soaring inflation and fuel prices.
The IMF and World Bank cut ties to Myanmar years ago in response to rights abuses. An IMF team will visit this month to study how to unify the official and unofficial exchange rates. But more reforms -- economic and social -- are likely to be the price of their full support.
“The key event will be the re-engagement of the World Bank and the multilateral organisations,” said Douglas Clayton, a former hedge fund manager who is now chief executive and managing partner of Leopard Capital, a private-equity fund focused on emerging Asian markets and backed by overseas investors.
“At some point it will be very hard for the West to justify continuing economic sanctions against a country that is undergoing reform,” said Clayton.
He sees opportunities “in almost every sector” if sanctions come down -- from manufacturing to infrastructure and agriculture in a country that just over 50 years ago was one of Asia’s rising stars, the world’s top rice exporter and a major energy producer with a well-educated workforce.
Government sources say U Myint is set to roll out more financial reforms, including allowing some private and semi-government banks to handle foreign currencies, reviewing foreign investment laws and clearing the way for three state-owned banks to open overseas branches.
The pricier currency also points to deeper changes
Mynamar’s wealthy converted dollars into kyat