Myanmar economy loosing steam, reforms urgently needed

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Myanmar, until recently perceived as the new tiger cub success story of Southeast Asia after the country’s “soft opening” in 2011 under then-president Thein Sein, is increasingly struggling with slowing economic growth and swelling fiscal and current account deficits in the past two years under the National League for Democracy government of former democracy icon Aung San Suu Kyi.

Myanmar’s fiscal deficit has substantially increased to 4.8 per cent of GDP in the country’s 2016-17 fiscal year from 3.2 per cent in 2015-16. The fiscal deficit was 1.2 per cent of GDP in 2014-15 under the former Union Solidarity and Development Party government of Thein Sein.

If growth slows further, Myanmar’s fiscal deficit could increase beyond 5 per cent of GDP, the limit set by the International Monetary Fund for a country’s economic health. This leaves the current government with a very narrow leeway to increase spending and implement the promised reforms in education, healthcare and infrastructure.

Another problem is Myanmar’s weakening currency, the kyat, which has led to a drop in value of exports in US dollar terms and thus to a rising trade deficit. In 2016-17, Myanmar’s trade deficit stood at around $5.5 billion, with exports lagging behind imports at $11.6 billion and $17.2 billion, respectively, data from the Ministry of Commerce shows. In comparison, the trade deficit stood at $5.4 billion in 2015-16 and $4.9 billion in 2014-15.

Foreign direct investments under the new government have also fallen. In 2016-17, foreign direct investments totaled some $7 billion, down from more than $9 billion in the previous year. Many investors are reportedly on the sidelines waiting for clues about the economic road map of Suu Kyi’s government.

Meanwhile, the Union of Myanmar Federation of Chambers of Commerce and Industry acknowledged that Myanmar’s economy needs a boost and suggested reforms such as the amendment of custom duty and tax regulations, the improvement of bureaucratic procedures and reduction of various barriers for businesses, as well as better control of exchange rate and inflation by laying down a clear framework for monetary and fiscal policy, actions that the current government stands accused of having delayed for too long.

Sean Turnell, an Australian economist and senior economic advisor to the Myanmar government, said at the Myanmar Banking & Payments Conference in Yangon on July 24 that appropriate measures to improve the economy would be to stop funding the deficits by borrowing from the central bank – which equals the printing of fresh money which, in turn, devaluates the kyat further -, and instead to develop a bond market and build a proper bond auction system to offset the fiscal deficit.

Turnell also suggested floating the kyat in order to stabilise the trade deficit, as well as widen the scope of taxation and of tax collection. Currently, Myanmar collects the least amount of taxes in ASEAN, just under eight per cent of GDP compared to its neighbours, where tax revenues amount to over ten per cent of GDP.

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Reading Time: 2 minutes

Myanmar, until recently perceived as the new tiger cub success story of Southeast Asia after the country’s “soft opening” in 2011 under then-president Thein Sein, is increasingly struggling with slowing economic growth and swelling fiscal and current account deficits in the past two years under the National League for Democracy government of former democracy icon Aung San Suu Kyi.

Reading Time: 2 minutes

Myanmar, until recently perceived as the new tiger cub success story of Southeast Asia after the country’s “soft opening” in 2011 under then-president Thein Sein, is increasingly struggling with slowing economic growth and swelling fiscal and current account deficits in the past two years under the National League for Democracy government of former democracy icon Aung San Suu Kyi.

Myanmar’s fiscal deficit has substantially increased to 4.8 per cent of GDP in the country’s 2016-17 fiscal year from 3.2 per cent in 2015-16. The fiscal deficit was 1.2 per cent of GDP in 2014-15 under the former Union Solidarity and Development Party government of Thein Sein.

If growth slows further, Myanmar’s fiscal deficit could increase beyond 5 per cent of GDP, the limit set by the International Monetary Fund for a country’s economic health. This leaves the current government with a very narrow leeway to increase spending and implement the promised reforms in education, healthcare and infrastructure.

Another problem is Myanmar’s weakening currency, the kyat, which has led to a drop in value of exports in US dollar terms and thus to a rising trade deficit. In 2016-17, Myanmar’s trade deficit stood at around $5.5 billion, with exports lagging behind imports at $11.6 billion and $17.2 billion, respectively, data from the Ministry of Commerce shows. In comparison, the trade deficit stood at $5.4 billion in 2015-16 and $4.9 billion in 2014-15.

Foreign direct investments under the new government have also fallen. In 2016-17, foreign direct investments totaled some $7 billion, down from more than $9 billion in the previous year. Many investors are reportedly on the sidelines waiting for clues about the economic road map of Suu Kyi’s government.

Meanwhile, the Union of Myanmar Federation of Chambers of Commerce and Industry acknowledged that Myanmar’s economy needs a boost and suggested reforms such as the amendment of custom duty and tax regulations, the improvement of bureaucratic procedures and reduction of various barriers for businesses, as well as better control of exchange rate and inflation by laying down a clear framework for monetary and fiscal policy, actions that the current government stands accused of having delayed for too long.

Sean Turnell, an Australian economist and senior economic advisor to the Myanmar government, said at the Myanmar Banking & Payments Conference in Yangon on July 24 that appropriate measures to improve the economy would be to stop funding the deficits by borrowing from the central bank – which equals the printing of fresh money which, in turn, devaluates the kyat further -, and instead to develop a bond market and build a proper bond auction system to offset the fiscal deficit.

Turnell also suggested floating the kyat in order to stabilise the trade deficit, as well as widen the scope of taxation and of tax collection. Currently, Myanmar collects the least amount of taxes in ASEAN, just under eight per cent of GDP compared to its neighbours, where tax revenues amount to over ten per cent of GDP.

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