Economic Health Check
Myanmar’s Growth Momentum Strong, but Maintaining Stability Is Key
September 18, 2015
- Myanmar’s economic growth forecast at 8.5 percent this year
- Policy tightening needed to address increased vulnerabilities
- Continued structural reforms and capacity building key to sustainable growth
Economic growth remains strong in Myanmar, but signs of overheating have emerged due to supply bottlenecks and loose financial conditions, according to the IMF in its annual assessment of one of Asia’s fastest-growing economies.
The economy is expected to grow by 8.5 percent this year and at a similar pace in 2016, fueled by the strong growth momentum and expansionary macroeconomic policies. The projected increase in the fiscal deficit—amounting to almost 2 percent of GDP—is expected to provide an expansionary stimulus and contribute to strong GDP growth.
The report identifies the country’s huge development potential. “Myanmar has made impressive strides in economic reform, including in the dismantling of trade barriers and the opening of the banking sector,” said the IMF’s mission chief for Myanmar, Yongzheng Yang.
“With continued economic reforms and foreign direct investment, the country’s economic prospects look favorable,” he added.
Increasing vulnerabilities under loose monetary, fiscal conditions
However, the report says loose financial conditions are heightening macroeconomic imbalances, with rising inflation, persistent depreciation pressure of the kyat, the domestic currency, and a widening current account deficit.
The fiscal deficit is projected to rise to 4.8 percent of GDP in 2015/16 from about 3 percent in 2014/15 while credit to the private sector is expected to increase by 45 percent this year.
The fast credit growth coupled with strong domestic demand pushed inflation to 8 percent last May and prices are expected to rise further, especially given the impact of the recent floods on agricultural production.
The increase in the current account deficit, which stood at over 6 percent of GDP last year, largely reflects a rapidly rising trade deficit driven by strong import demand. Since late 2014, the kyat has come under significant depreciation pressure with its value against the U.S. dollar declining by around 20 percent. As a result, foreign reserves remain low, covering less than three months of imports, well below the estimated adequate level of five to six months of imports for Myanmar.
Externally, risks to growth and stability have grown recently. Declining natural gas prices and slowing growth in China could impact Myanmar’s economy given the importance of this commodity and the role of the world’s second largest economy to Myanmar’s external trade.
Maintaining macroeconomic stability
“The authorities need to tighten monetary and fiscal policies, maintain exchange rate flexibility, and enforce prudential measures to address the underlying causes of the growing macroeconomic imbalances,” Yang said.
The authorities have been making progress in developing and using market-based policy tools, including the scaling up of deposit auctions and the introduction of treasury bill auctions.
The Central Bank of Myanmar’s recent move to close the exchange rate gap between formal and informal markets was a major step forward. But the report says there is more to do.
The report suggests that the authorities need to cut fiscal deficit through revenue mobilization and expenditure reprioritization, reduce direct deficit financing by the central bank, withdraw more liquidity through deposit auctions and bank reserve requirements, and ensure continued exchange rate flexibility.
On financial sector, the report stresses enforcing prudential measures to slow credit growth while modernizing the regulatory and supervisory framework to safeguard financial stability, particularly in view of the entry into the country of nine foreign banks this year.
Continued structural reform and capacity building are crucial
Myanmar’s undiversified economy is vulnerable to shocks, including commodity prices, external demand, and natural disasters, suggests the report.
“To enhance resilience and external competitiveness, and thereby achieve sustainable growth, Myanmar needs to push forward with structural reforms,” said Yang. These reforms need to be aimed at improving the business environment, transforming the industrial structure toward manufacturing, and upgrading infrastructure, particularly in the area of electricity and transport. To successfully carry out these reforms, Myanmar will need to continue to beef up its capacity-building efforts.
Myanmar’s strategic location in a dynamic region, together with its relatively young labor force, lower labor cost, and large domestic market means the country stands to benefit from an ongoing relocation of foreign direct investment, which is being accelerated by the Association of Southeast Asian Nations (ASEAN) Economic Community Initiative.
The changing external and internal landscapes could provide significant opportunities for Myanmar to strengthen its overall competitiveness, attract foreign direct investment (FDI) inflows, and develop a labor-intensive manufacturing industry.
More reforms to the regulatory framework, together with continued macroeconomic stability, would be key to attracting further foreign and domestic investment.