- By Khin Maung Nyo (Economist)
Outlook and assessment of Asian Development Bank (ADB) is centered over six-month period during the transition to new fiscal year in Myanmar. During the past six months under reference, the current account deficit was sliding with the inflation running in high tempo.
Meanwhile, ADB expects Myanmar’s economy to resume growth this year and continue to expand in the next as the tourism industry and related businesses are in the upswing to spur and stimulate the foreign investment.
The current account deficit for this fiscal year and the next are expected to get sharp, while the inflation for this year is reduced with the expected rise in the next year.
Transitional budget means the period from 1 April 2018 to 30 September 2018, witnessing the rise in the exports, the downswing in the domestic purchasing power, and the dollar market stepped up. Due to the fall in value of Myanmar currency, the export percentage rose to 19 per cent in 2018 from previous 10.5 per cent ending 31 March 2017.
In the backdrop of slow growth of income with compounded inflation rate, the domestic consumption is sluggish.
From January to August 2018, the tourism industry saw 1 per cent increase due to incoming globe-trotters from Asian Continent despite the actual decreased of tourists from the United States, Europe and Oceania.
With regards to investment in the country, the assessment of ADB was of the view that the government spending and distribution were considered lesser favorable to draw interest of foreign investors and the slower pace of foreign investment paradigm.
The approval of foreign investment hits 4.1 billion dollars from April to September 2017, but it stagnated at 1.8 billion dollars in 2018.
With the fine weather embracing in 2018 fiscal year, the agricultural sector speeded up faster, but the industrial sector and service sector were remained unfortunate.
Last year, higher international oil prices and kyat depreciation against the U.S. dollar drove up inflation from 4 per cent to 7.1 per cent. However, inflation is expected to rise again in 2020 to 7.5 per cent as Myanmar’s economic growth gains momentum.
Weaker income growth seems to have capped private consumption growth amid strong inflationary pressures; inflation jumped in part due to higher oil prices and the depreciation of the kyat, following the Central Bank’s decision to remove the trading band for the currency.
From April to September, the value of kyat was down to 16.7 per cent, citing reasons on the ups and downs of exchange rates fluctuation being regularized and put under framework of trading band on currency by the Central Bank had been rescind in August 2018.
While the domestic buying power is lethargic, the imports from abroad have exhausted. (When the dollar market is elevated, the import value of goods also went up high).
In 2017, the imports value stood at 9.3 per cent increase, however, this year saw only 5.5 per cent increase, resulting with downswing of trade.
With regards to the service industry, the inflow remained net, however, due to the trade deficit, the current accounts that stood at 4.7 per cent of the GDP in 2017 fiscal year has slipped away to 2.0 per cent of the GDP.
In 2018 fiscal year, the government reserved funds have the capability to cover three months imports.
In connection with the government budgeting, the ADB was of the view that the government tends to spend profusely over the large projects in 2018 and pointed out that the reform to public financial management should aim for greater fiscal prudence, transparency, and efficiency.
It should also include strengthened treasury functions, more systematic public investment planning and implementation, and the adoption of appropriate accounting and auditing standards to make public spending more productive.
The 2018 fiscal year coincided with the rainy season resulting with difficulties in the implementation of larger projects. In the pragmatic approach, the spending did not incur as have earlier expected, and the figure remained as 4.5 per cent of the GDP.
Regarding the monetary policy, the exchange rate mechanism is moving in term of flexible reform with the appropriate functioning of the banks procedures. The possible risk factors in financial issues have been taken up in watchfulness in advance.
The year 2018 saw the rise of 18.2 per cent in the deposit of cash and legal tender notes compared to previous year, and that the loans accorded and facilitated to private banks went upswing to 23.7 per cent compared to previous year.
The ADB views the economic prospect of Myanmar as unfavorable due to outside circumstances, and that it also views the economy of China as inauspicious. However, as the retail trade, the wholesale trade and insurance business have been opened up for investment in the country, the local and foreign investments are likely to increase. The newly enacted company law tends to increase the investment.
The Asian Development Outlook 2019 forecasts Myanmar’s economy to grow by 6.6 per cent in 2019 and by (6.8) per cent in 2020. Last year, Myanmar’s growth slowed to 6.2 per cent, down from 6.8 per cent in 2017.
The ADB said foreign direct investment (FDI) approvals in Myanmar nearly doubled from $823 million between October 2017 and January 2018 to about $1.5 billion over the same period a year on. The growth came from Singapore and other Asian investors taking larger stakes in the country’s manufacturing and service sectors.
The ADB reported that the recent policy measures to standardize FDI application and implementation procedures have further strengthen prospects for FDI inflows in the near term.
Its report said growth in the service sector is expected to reach 9 per cent this year if tourism revives at the beginning of the dry season in October and that other sectors should also see some growth. However, growth in agriculture was projected to slow from (2) per cent during April–September 2018 to (0.5) per cent this year following floods in mid-2018 that likely affected harvests, especially of rice in November. Due to poor anticipation in agriculture sector, the industrial sector in 2019 is expected to rise only (8.2) per cent.
For the sustainable development, the inflation rate must be controlled as the impact should pull up the rate of dollar, and the kyat value would be down.
The report said inflation was expected to ease to 6.8 per cent this year as international oil prices soften. Last year, higher international oil prices and kyat depreciation against the U.S. dollar drove up inflation from 4 per cent to 7.1 percent. Moreover, inflation is expected to rise again in 2020 to 7.5 per cent as Myanmar’s economic growth gains momentum.
Current fiscal year as well as next, the export trade would likely to fall, as the government investment projects and other investment plans would require more imports resulting with trade deficits.
According to the report, the trade deficit is expected to widen this year and next as export earnings weaken and imports strengthen on the back of growing investment, particularly by the government. It said that even if net service receipts improve with a pickup in trade and tourism-related business, the current account deficit was forecast to widen to 4 per cent this year and 5 per cent the next. Myanmar’s monetary and fiscal policies are moving in the right direction for the stability of the economy, and that the budget deficit is likely to remain static at 4.5 per cent of GDP. The Central Bank could beef up one fifth of the budget deficit.
With a view to stabilize the financial situation in the country and to avoid from intervention by the Central Bank by 2020, the strategy, plan and policies are being taken up and working liberally with regards to fiscal issues.
The ADB also warned of the risks to an otherwise bright outlook, including the possible withdrawal of the European Union’s trade preferences for Myanmar, the effect on exports of a slowdown in the major economies, domestic conflicts, and the slow progress in implementing economic reforms. According to the report, external risk would increase if the European Union withdraws Myanmar’s privileges under the Generalized System of Preferences (GSP), affecting 10 percent of exports from Myanmar. Domestic risks may include uninspiring progress on economic reform and communal tensions flaring in conflict-affected areas.
Challenges on policies
The government has continued to reform since April 2016, announcing a number of strategic planning initiatives such as the Myanmar Sustainable Development Plan 2018–2030; National Education Strategic Plan 2016–2021; Myanmar National Health Plan 2017–2021; and the Myanmar National Social Protection Strategic Plan – NSPSP (2014).
The ADB also suggested that building on these initiatives, the country needs to accelerate reform which will contribute to inclusive development.
The report concluded that Myanmar could become more competitive by further strengthening its legal and regulatory framework toward improving the business and investment climate, which would also encourage integration into regional and global value chains.
The report added that Myanmar’s monetary and fiscal policies are moving in the right direction and it called on people to take advantage of the resources available in the country. With strong and appropriate administrative paradigm, it is to be supplemented with responsibility and accountability which is under the purview of international assistance.
The country is still receiving a lot of concessional assistance, and the effective use of such concessional ODA (official development assistance) including the exceptional financial resources will lead to improvements in infrastructure in social services delivery, of which the country is in real need.
Reference: ADB- Asian Development Outlook 2019
(Translated by UMT (Ahlon)