International lenders are stepping up their support for President Thein Sein’s new-look Myanmar after a wave of political and economic reforms helped remove it from the ranks of the world’s pariah nations. But questions remain about how much the Southeast Asian country really has changed as its armed forces continue to press ethnic Kachin rebels in the country’s conflict-racked north.The Paris Club, an informal grouping of creditor nations including France, Germany and the U.S., agreed Monday after hours of negotiations to relieve Myanmar of half the arrears it owes—unburdening the country, also known as Burma, of approximately $2.2 billion in debt. This followed an earlier announcement that the fledgling economy will start clearing almost $1 billion in arrears to the World Bank and the Asian Development Bank, financed by a bridge loan from the Japan Bank for International Cooperation, the Japanese government’s wholly owned financing arm.

Along with further concessions from Japan—which canceled half of the $6 billion in debt owed to it by Myanmar—and a similar move from Norway, which canceled all $534 million in arrears owed by Myanmar, the country is effectively relieved of more than 60% of its foreign debt. Myanmar’s debt is considered a stumbling block for investors looking to park their money in one of Southeast Asia’s most promising emerging markets.

The large amounts of debt relief, which analysts say was a better-than-expected deal for Myanmar’s government, will be seen as a stamp of approval of the country’s ambitious reform agenda, embarked on by the nominally civilian government under the leadership of Mr. Thein Sein.

The arrears are outstanding from decades ago, before international lenders pulled out in the late 1980s when Myanmar’s former military junta was hit with sanctions over human-rights abuses. Canceling them, analysts say, is a sign that the international community is willing to give the once-shunned nation a resounding second chance.

“The numbers here are really quite staggering,” said Sean Turnell, a Myanmar expert at Macquarie University in Sydney. “It is a sign of the goodwill that is there for Burma—they have got that fresh start that they wanted.”

Still, problems of violence between government forces and ethnic minority groups—particularly in the rebel stronghold of Kachin state, where clashes continue despite a government-proposed cease-fire earlier in the month—have led some to question whether support handed out to Myanmar is premature.

Observers in Laiza, the headquarters of the Kachin International Organization, said Monday that a key hilltop outpost protecting the town, Hka Ya Bhum, fell to government troops over the weekend after fierce fighting—an indication that military forces, known as the Tatmadaw, remain unwilling to give up on the offensive despite the announced cease-fire.

A spokesperson for the Myanmar government didn’t respond to a request for comment. The government has said that the army has continued fighting out of self-defense.

Concerns over continuing ethnic conflicts in Myanmar is unlikely to derail the debt-relief process, as the international community’s embrace of Myanmar’s reform continues to gain momentum, even as skeptics of reform say that traces of military-backed violence are still present in the new civilian government.

The ethnic rebel group, which controls large parts of Kachin State, has been fighting for decades for greater autonomy from the centrally controlled Myanmar government. Fighting resumed between the two groups in late 2011 after a 17-year cease-fire, close to Myanmar’s border with China. The exact reason for the escalation remains unclear. Earlier in January, reports of civilian deaths in the town and a potential refugee crisis prompted diplomatic criticism. China warned Myanmar against escalating the conflict along its border areas when stray shelling fell into the Chinese territory. The U.S., though saying it was “deeply troubled” by escalating tensions in Kachin state before the proposed cease-fire and urging both sides to re-engage in peace talks, has indicated that it doesn’t plan on reversing its policy of easing sanctions.

Since the unilaterally declared cease-fire just over a week ago, both government and rebel forces have accused each other of remaining skirmishes in the troubled state.

“Unfortunately there is a bit of a belief that [such fighting] will always go on,” said Mr. Turnell, labeling this as a “problematic view.”

He added, “There is a desire on the part of the Western world to wish the reform process ahead. The stakes are high.”

The optimism on Myanmar’s reform process also comes from countries closer by, notably Japan, which has lent significant support to the Southeast Asian nation in clearing its long-standing debt. Japanese officials spent months facilitating negotiations between the Asian Development Bank, the World Bank and Myanmar’s government, hoping to be at the forefront of Myanmar’s economic transformation.

The opportunity, analysts say, is a chance for Japan to regain influence in the region, reaping the benefits from massive infrastructure projects in the resource-rich country where China plays a major role. Earlier this month, Japan announced that it would extend ¥50 billion ($550 million) of new loans to the country, helping Myanmar finance development projects.

Political analyst Aung Naing Oo—himself a former exile of the military government—says Mr. Thein Sein’s government is “dealing with issues that have not been resolved for decades in Myanmar,” and that a conflict as “complex” as that with the Kachin rebels needs significant time and negotiation to resolve. Debt relief, he says, will “increase the government’s credibility” in resolving conflict and other outstanding issues facing Myanmar as it emerges from decades of authoritarian rule.

In the view of some economists, Myanmar is simply too poor and underdeveloped to be left out of the international economic community any longer. A recent government report estimates that the unemployment rate is approximately 37%, with more than one-quarter of the country’s 60 million people living below the poverty line.”It is a welcome event,” Changyong Rhee, chief economist for the Asian Development Bank, told The Wall Street Journal at the International Monetary Fund conference in Bangkok, speaking about Myanmar’s debt clearance. “You always have to give a low-income country another chance.”

—Bob Davis in Bangkok and Celine Fernandez in Kuala Lumpur contributed to this article.
Write to Shibani Mahtani at shibani.mahtani@wsj.com

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