ALTHOUGH Myanmar’s economic growth remains strong, it needs to address emerging challenges to macroeconomic stability, say World Bank economists.
Sudhir Shetty, the Bank’s chief economist for East Asia and the Pacific, said yesterday at a video press conference on the launch of the new “East Asia and Pacific Economic Update”, a report on the region’s economies which is published twice yearly, that Myanmar needs to take inflation very seriously and to have an appropriate fiscal policy in place.
However, he said the nation’s economy would not be affected by geopolitical issues like the conflicts in the South China Sea.
“If I were an investor, I would look at the bright side, and would also be cautious” (about investing in Myanmar), he said.
The report estimates that Myanmar’s real gross domestic product will grow by an average 8.2 per cent per year over the medium term, as the agricultural sector is expected to bounce back despite recent flooding. The services sector including transport, distribution, information technology, communications, and logistics will the main driver of growth over the short to medium term.
Habib Rab, senior country economist at World Bank Myanmar, foresees the light-manufacturing sector as a long-term key driver of growth, thanks to the rising interest in the garment sector.
He said that in the short and medium terms, it might be difficult for manufacturing to be the main driver of the economy as the costs of production are still quite high because of electricity and land prices. “But as the services sector starts to grow, the costs of doing business will begin to decline.”
Despite the optimism, Rab urged the government to address the risks and challenges without delay.
The expansion of the public sector, increased capital inflows, and rapid growth in private-sector credit are posing policy and institutional challenges for economic stability.
External developments such as exchange-rate pressures, gas prices, climatic variation and natural disasters should also be mediated through maintaining exchange-rate stability, improved revenue mobilisation, managing gas receipts to protect spending on public services from gas-revenue volatility, and strengthening the fiscal framework for state enterprises to reduce their fiscal burden.
The country economist said that on the revenue side, Myanmar needed to make the tax-administration system more efficient, more risk-based, more transparent and simple so that taxpayers can pay taxes more easily.
The tax department should focus on outreach activities to explain the importance of paying taxes. On the expenditure side, he suggested reducing the fiscal burdens of the state-owned economic enterprises (SEEs).
“Now, SEEs are facing a lot of competition, so losses are gradually growing … The power sector is facing more expenditure pressures. In terms of SEEs, how to manage the fiscal relation in a more effective manner is a potential area of priority that we see the government needs to tackle,” he said.
He also stressed the need to address inflationary pressures that have remained strong over the |first quarter of fiscal year 2016-17, with monthly inflation averaging |1.5 per cent over this period, |and reaching 10 per cent in July. |This was largely driven by food prices.
Rab said inflation might affect not only investors’ sentiment about the macroeconomic environment in Myanmar but also consumer demands.
“We expect the inflationary pressures to continue, and that affects production costs. We need to ensure the cost of production remains manageable. If general levels of prices of goods and services are increasing, then consumption in the economy might decline. This may also affect economic growth negatively,” he said.
Rab said Myanmar should find alternative ways of financing the budget deficit rather than printing money to finance the priorities of government expenditures.
The other ways could be introducing or expanding treasury-bond options, or external financing such as by borrowing from international organisations or development partners or other sources.
The economist suggested increasing agricultural productivity, having a prudent monetary policy in place, increasing liquidity in the market, strengthening fiscal disciplines, managing rapid economic growth, and maintaining exchange-rate flexibility.
“Given that foreign-exchange reserves are currently relatively low, we think it is fine to allow the exchange rate to depreciate a |little bit. When the exchange rate depreciates, the cost of imports increases.
“But that is not necessarily a big driver of inflation in Myanmar.
The positive side of allowing exchange-rate flexibility is that it enables your export industry to become more competitive. Allowing foreign-exchange flexibility is a good thing,” he said.