Since Myanmar started opening its economy, foreign investment and expertise have been flowing in, aiding efforts to plug gaps in infrastructure, technology, and skills. But much more needs to be done.
A lot has been happening in Myanmar since it started opening up its economy. Foreign investment and expertise have been flowing in, aiding the government’s efforts to plug the massive gaps in infrastructure, technology, and skills. Help also has been coming in from bodies such as the International Monetary Fund (IMF) and the World Bank to establish sound institutions. Encouragingly, policymakers have set the wheels in motion to create an independent central bank, develop credible statistics, and establish a stock market. But this is just a start. Much more needs to be done to create a healthy market economy.
A good year for growth
According to the IMF, Myanmar’s GDP grew 8.25 percent in the fiscal year 2013–14, up from 7.30 percent in 2012–13.1 The economy benefitted from rising investments, driven by inflows of foreign direct investment (FDI) and the government’s infrastructure development efforts. According to a report by the Economist Intelligence Unit, FDI inflows were $3.2 billion in the first 11 months of 2013–14, a huge rise from $1.4 billion for the whole of 2012–13.2 Natural gas exports are also aiding the economy; estimates put Myanmar’s natural gas exports at $3.6 billion a year.3 Tourism has also benefitted from reforms. There were 2 million foreign tourist arrivals in Myanmar in 2013, almost double the number in 2012.
Foreign investments to remain strong in 2014–15
Foreign investments in Myanmar are likely to gather pace this fiscal year. The authorities are likely to allocate banking licenses to as many as 10 foreign banks by September to start limited operations in the country. Investments will also flow into the oil and gas sector with the recent granting of offshore licenses. In telecommunications, Norway’s Telenor and Qatar’s Ooredoo have won licenses to build and operate a national wireless network in Myanmar for 15 years. The opening of the telecom sector will also drive mobile phone penetration, which currently is very low at 9 percent. FDI will also continue to flow into hotels and tourism given strong growth in the sector and the acute shortage of hotel rooms. Figures for 2014–15 will likely end up much higher than the $432 million inflows between April 2013 and February 2014.
Inflation is a worry
According to the World Bank, average annual inflation went up to 5.8 percent in 2013–14 from 2.8 percent in 2012–13.4 Rising aggregate demand amid infrastructure bottlenecks has been a key reason behind increasing inflation. High liquidity growth has not helped either, with both broad money and credit growing in double digits. Meanwhile, food prices have gone up due to floods, while hikes in public sector salaries have unleashed wage-push inflationary factors. The scenario is not likely to improve much in the near term. Adding to pressure on consumer prices will be a rise in global energy prices and a weak Burmese kyat. And with electricity tariffs rising sharply from April 1, inflation is likely to go up to 6.5–7.0 percent in 2014–15.
Fiscal and external balances will be in deficit
The pressure on the kyat will continue given the high current account deficit. In fact, the deficit is expected to deteriorate in the medium term; estimates by the IMF put the figure at above 5 percent of GDP over 2014–18.5 Although higher hydrocarbon output will aid the current account during this period, its impact will be offset by rising imports of capital goods due to foreign investments and infrastructure development. Meanwhile, the government’s fiscal health will remain a worry despite earnings from auctions and licenses. While earnings from hydrocarbons are set to rise, the government’s expenditure will also increase given infrastructure development and social welfare objectives. Thankfully, foreign aid will continue, unless there is a reversal of economic and political reforms.
Challenges in creating sound institutions
Myanmar needs to move fast to create a sound macroeconomic management mechanism. On the fiscal side, it needs to widen the tax base and make tax collection more efficient. A government bond market will also help, not only to raise funds but to prevent monetization of the fiscal deficit. The latter will lend credibility to monetary policy. After some positive moves since mid-2013, the government’s recent decision to appoint a former military-era governor has raised some concerns. Meanwhile, the country’s aim to establish its first stock exchange before October 2015 has run into legislative delays. Even if it opens on time, only a few companies might be able to float on the exchange.
Poor skills, infrastructure, and contracts enforcement
Arguably, one of the biggest difficulties in creating institutions and developing businesses in Myanmar is the dearth of skilled individuals. Years of economic isolation and neglect of human capital formation have meant that the government, its global advisors, and private businesses are not finding people with the right skills. Poor infrastructure and outdated technology are other key impediments. In the World Economic Forum’s global competitiveness ratings, Myanmar ranks 141 among 148 countries in infrastructure; its rank in technological readiness is worse at 148.6 Poor enforcement of contracts is another problem, both for domestic and foreign businesses. In the World Bank’s ease of doing business rankings, Myanmar ranks 188 among 189 countries in enforcing contracts and 182 in protecting investors.7
A need for greater transparency
Economic reforms will not mean much without greater transparency. As the country opens up key sectors to private businesses, it needs to avoid any opacity in the process. This is especially true for natural resources. While the granting of telecom licenses has received praise, the awarding of contracts for offshore oil and gas exploration has raised eyebrows. For example, Global Witness, an international NGO, has pointed to corporate secrecy in some of the firms that have been granted contracts.8 Perhaps a good first step to promoting transparency in business would be to repeal the archaic Myanmar Companies Act. Greater clarity, including briefings, on major policy decisions could be another step. That would also help stem uncertainty among private businesses. Most importantly, Myanmar needs to meticulously implement the key requirements under the Extractive Industries Transparency Initiative, of which it is a candidate country.
The transformation of an economy that has spent five decades in isolation is not expected to be easy.
No going back on reforms
The transformation of an economy that has spent five decades in isolation is not expected to be easy. But, despite the problems, the journey so far has been encouraging, and the government needs to carry forward the momentum in partnership with the international community. Most importantly, it must try to establish a stable, inclusive, and democratic political structure—without which its achievements since 2011 could be reversed. Arguably, the biggest test for the current rulers will be the national elections of 2015. The eyes of the world will be on Myanmar. It cannot afford to fail.
EndnotesView all endnotes
- International Monetary Fund, “Statement by the IMF Mission to Myanmar,” June 2014; International Monetary Fund, “Statement by the IMF Mission to Myanmar for the second review of staff-monitored program,” January 2014.
- Economist Intelligence Unit, “Country report: Myanmar,” July 2014.
- Asian Development Bank, “Myanmar: Economy,” July 2014.
- Myanmar Times, “Inflation a growing problem, says World Bank,” April 2014.
- International Monetary Fund, “World economic outlook database,” July 2014.
- World Economic Forum, The global competitiveness report 2013-2014, July 2014.
- World Bank, “Ease of doing business in Myanmar (2014),” July 2014.
- Global Witness, “Real winners of Myanmar’s oil and gas blocks remain hidden,” June 2014.