Myanmar Economy—World Bank Update—October 2017

Myanmar Economy—World Bank Update—October 2017

The World Bank has just published its latest update on the East Asia Pacific economies. In it, it has summarized (on pages 129 to 131) its most recent thoughts on Myanmar.

The World Bank expects real GDP growth in 2016/17 to have slowed to 5.9% compared to 7% in 2015/16. The macroeconomic environment “has remained relatively stable” but investment has slowed because the private sector has been awaiting greater clarity in the government’s economic agenda, and the public sector remains fiscally constrained.

Growth in 2017/18 is projected to recover to 6.4%.

In 2016/17, inflation pressures have eased and the current and fiscal deficits have narrowed. In 2017/18, the inflation rate is expected to drop further. The public sector deficit is projected at 4.3% of GDP, lower than the 5.9% in the 2017/18 budget. The current account deficit is expected to widen to 6.8% of GDP because of a continued decline in gas receipts and a pick-up in investment related imports.

The Bank cautions that the decline on global gas prices calls for continued fiscal and monetary discipline. It warns that “the economic impact of recent insecurity in Rakhine State may be substantial” and suggests that “accelerating private and public investment are high priorities.”

Summary of the Outlook

An expected recovery in agriculture activity is the main driver behind faster economic growth in the current year. Higher agricultural output should also take some pressure off inflation in the short term. In the long run, it should support to higher rural incomes and declining poverty.

Other areas of the economy highlighted as having potential include infrastructure construction (power, telecoms and housing), as well as hospitality and financial services.

Except for a short spike coinciding with a sharply depreciating Kyat, food price pressures eased in 2016/17. Overall, the CPI averaged 6.8% compared to 10% in 2016/16. Inflation is expected to decline to 5.2% by year-end 2017/18. It is forecast to hold at around 5% in the subsequent two years.

Annual growth in money stock slowed from 26% in 2015/16 to 19% in 2016/17. In part, this reflects the policy of limiting Central Bank financing of the Union Budget. Growth in credit to the private sector remained high at 33%.

The World Bank comments that the improvement in the fiscal deficit (from 4.4% of GDP in 2015/16 to 3% in 2016/17) has recently had more to do with cuts in expenditure than improvements in revenue collection. (Revenue collection at below 11% of GDP remains significantly below potential and regional peers.) Looking forward, it expects a gradual reprioritization of public investments, government revenue reforms, and higher concessional loan disbursements to help ease fiscal constraints. A fiscal deficit of around 4.5% of GDP is forecast for FY 2017 through to FY 2019.

The trade deficit (8.5% of GDP in 2016/17) has been under pressure as gas export receipts have been in decline. The World Bank has also noted that demand for merchandise imports has been picking up, while demand for investment goods has contracted sharply. Looking forward, it expects the current account deficit, which fell from 7.2% of GDP in 2015/16 to 5.3% in 2016/17, to widen again as gas prices remain subdued and investment-related imports are expected to pick up.

Risks and Challenges

In its report, the World Bank has highlighted a number of potential challenges facing the economy:

Low gas prices could impact significantly on fiscal and export balances, and exacerbate financing pressures. A recent import ban by India on pulses and beans may affect exports and farmers’ incomes.

The 2017/18 budget proposes rebalancing expenditures towards higher quality investments and services that benefit the poor, but unless revenue efforts and cash management reforms accelerate, it will be difficult to eliminate central bank financing of the deficit and related pressure on inflation.

Continued monetary discipline and exchange rate flexibility are important as consumer imports continue to grow fast. The impact of Rakhine insecurity may be substantial if it deters investors.

Appropriate implementation of recently adopted prudential regulations are critical for financial sector stability, as lending to agriculture, manufacturing and construction have increased sharply and concerns over credit concentration and asset quality persist.

Accelerating investments in productive capital are critical to long-term growth and job creation. Structural reform is important for domestic value addition, job creation and managing import demand, as well as capturing foreign investment flows.

With respect to future economic strategy, priorities for the government include cost reflective electricity tariffs (with protection of vulnerable groups) to promote financial viability of the power sector; implementation of the Regulation on Credit Information Reporting Systems to improve lending decisions; and adoption and implementation of the Companies Act.

This note and the charts contained in it are adapted from the Myanmar section from the World Bank’s report “Balancing Act”, East Asia and Pacific Economic Update (October 2017). The full report is available on the World Bank’s website. Please refer to this for details, and for notes on chart source data.

Last modified: 9 November 2017