ECONOMIC HEALTH CHECK
Myanmar Set for Economic Takeoff With Right Policies
IMF Survey online
May 7, 2012
- Myanmar faces historic opportunity to jump-start economic development
- Appropriate reforms could significantly accelerate growth, lift living standards
- Top priority is to establish macroeconomic stability beginning with exchange rate reform
Myanmar’s new government faces an historic opportunity to jump-start economic development, and lift living standards, says the IMF in its annual assessment of the Southeast Asian economy, which the government agreed to make public for the first time.
The IMF report acknowledges the progress that has already been made in economic reforms over recent months, including steps to reform the exchange rate. It says that with appropriate policies, including a stable macroeconomic framework, the previously isolated country could fulfill its considerable potential, and deliver inclusive and sustainable growth.
“Myanmar could see strong growth if it pursues the necessary reforms to take advantage of its rich natural resources, young labor force, and proximity to some of the world’s most dynamic economies, including China and India,” said Meral Karasulu, IMF mission chief for Myanmar.
Against the background of political and economic changes in the country, growth in Myanmar is picking up modestly. In the last year, GDP growth is estimated to have increased to 5.3 percent, and is expected to rise to 5½ percent in FY 2011/12, and 6 percent the following year.
Prioritizing reforms of the exchange rate regime
Myanmar has a complex exchange rate system with many restrictions that give rise to multiple exchange rates. This system increases transactions costs, discourages foreign direct investment and trade, encourages informal activity, and has put appreciation pressure on Myanmar’s currency.
Last month, the authorities took the first step toward exchange rate reform by adopting a managed floating regime.
With the help of the IMF, Myanmar plans to complete the process of exchange rate unification, including removing all exchange restrictions and eliminating multiple currency practices before their target date of end-2013 when the Southeast Asian Games are due to be held in the country.
Myanmar’s reform needs are wide-ranging and significant, and the IMF suggests the reform agenda will need to be appropriately paced.
“Drastic, over-reaching reforms in many policy areas may not be realistic, given the capacity constraints and the need to coordinate across various institutions,” said Karasulu.
The IMF economists believe that any rapid reforms on a large scale could make any potential mistakes very costly. Although planned reforms will take time to implement, prioritization is essential to deliver tangible benefits to the majority of the population, they say.
The International Monetary Fund, alongside other international financial institutions, is playing a large role in providing technical assistance, and working to ensure the most efficient delivery of assistance.
“With the recent reform momentum, there is clear evidence that the Fund’s advice is being actively sought and the IMF is already scaling up technical assistance in line with the authorities priorities,” said Karasulu.
Walking down the reform path
“Unleashing Myanmar’s high growth potential will require cross-cutting reforms and substantial technical assistance,” says the Article IV report. Over the medium term, the IMF economists say the country needs to remove obstacles to growth including by modernizing the financial sector, fostering private sector growth by removing barriers to trade and investment, improving business climate and boosting agricultural productivity.
The authorities in Myanmar are taking tentative steps down the reform path. Earlier this year, for the first time ever, the country’s budget was discussed in the new parliament. The IMF welcomed the move as an opportunity to redefine fiscal priorities and focus on reducing poverty, building human capital, and developing infrastructure.
Modernizing agriculture and the industrial sector
This reprioritization would help Myanmar narrow its large gap with other peers in social outcomes.
Myanmar’s economic growth is narrowly-based, and the economy largely depends on energy and agriculture.
Agricultural development is suppressed by poor access to credit, lack of private land ownership, and inadequate infrastructure and inputs. Lifting agricultural productivity will be essential for rural development and inclusive growth. The IMF believes that the planned land reform could provide an opportunity to jump start this process of development.
Industrialization is one of the priorities in the authorities’ new national economic plan. Up till now, despite its low wage advantage, the manufacturing sector has been stifled by poor infrastructure and know-how, low investment, and extensive administrative controls limiting private sector development.
Supporting the private sector
Cross-cutting reforms would be needed to support private sector development. A key priority is to reduce the cost of doing business and policy ambiguity by improving transparency, and improving infrastructure, says the IMF.
The financial sector has a large role to play in facilitating economic development, say IMF economists. Currently, Myanmar’s financial sector is small and repressed, with controls on financial intermediation. Modernization of the sector is essential to provide needed capital for development, and prepare the sector for membership of the ASEAN Economic Community.