1 Myanmar - looking to realise its full potential By Sajini Jesudason ...

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percent for the 2012/2013 financial year. The International Monetary Fund (IMF), World Bank and ADB all forecast growth at 6 percent or greater in 2013 based on ongoing reforms, higher gas exports and increased foreign investment in the energy sector (hydro, gas and oil). Much of Myanmar's current economic activity is based on energy and agriculture. The ADB estimates the agricultural sector at close to 40 percent of GDP but some private sector analysts estimate it to be closer to 70 percent. Much of the country's population is in the rural sector. There has been little or no urbanisation since the 1960s.The gains of the natural resource sector have not translated into reinvestment in poorer agriculture-based rural areas, with little electrification or infrastructure investment. The financial sector is rudimentary, and the banking sector both underdeveloped and constrained by severe institutional limitations. Like the GDP data, official inflation data is also understated. Official data is based on 1986 prices of a consumption basket covering only the capital, and was reset to zero in 2006 giving a current CPI of 7 percent, a figure consistent with IMF and ADB estimates. However, underlying inflation is undoubtedly higher, as money supply growth is persistently over 30 percent (IMF), reflecting that the fiscal deficit is funded by printing money. Myanmar is in need of the classic monetary reform, it is a transition economy and faces the difficulty of building a monetary system from scratch. The Central Bank sits within the Ministry of Finance and has the primary function of monitoring the fiscal position, funding government spending (monetising the fiscal deficits). Legislation is under way to create a Central Bank Act that will give the Central Bank much needed autonomy. Currently the key instruments available to the Central Bank are interest rates and limited ability to use reserve requirement ratio and open market operations. In April, the Central Bank instituted a managed float of the kyat thus unifying the various private, government/official and black market rates. This has allowed the currency to be bought and sold in a band either side of a rate set by the Central Bank. The currency reform removed at a stroke major distortions that were both micro and macro in nature. However, keeping the real exchange rate at a level that supports the competitiveness of domestic producers may be difficult given the inflow of capital designated for the resource sector. East Asian countries have traditionally relied on an undervalued currency to create employment and a competitive export sector. But the heavy capital inflows expected from foreign interest in resources could lead to significant real currency appreciation. Myanmar must be prepared to run a trade deficit to offset the capital inflow, something that carries its own risk given the experience elsewhere in ASEAN during the Asian Crisis. Due to sanctions, Myanmar's trading partners have been largely regional. The four most significant are China, India, Thailand and Singapore. Because of distortions associated with the previous exchange rate regime, the official trade data is unreliable. However, data for the top four trading partners show a rapidly deteriorating external deficit not captured in official data. In particular, Myanmar is running an increasingly large bilateral deficit with China. Based on the 2
China trade data, Myanmar ran a deficit of US$3.5 billion in 2011. This appears set to widen in 2012. A significant portion of Myanmar's exports are in power (natural gas, oil and mining) followed by agricultural products – rice, corn and pulses. Total exports in 2010/11 were US$9 billion (IMF estimates), which is minor compared with its ASEAN neighbours. Machinery, transport and, increasingly, power are the key import products, but restrictive and rent seeking import/export licensing arrangements significantly distort the sector. The buy-back of power from China and Thailand costs less than independent generation of power. Consumer durables from China are a significant component of goods imported in the unofficial cross-border market. IMF estimates for 2010/2011 imports are US$8 billion. However, both import and export figures fail to capture the unofficial trade that occurs along the borders with various neighbours. The existence of significant border trade with China and Thailand suggests import reform and removal of licensing is a reform priority as well. Foreign exchange reserves have been sufficient to cover around six and a half months of imports, but foreign debt is at US$9 billion, owed primarily to Japan. The ADB has recently returned for dialogue with Myanmar after the non-service of loans since 1988. Restructuring the current arrears is a matter of increasing urgency. The key question is where then should reform begin? What is clear is that the government must focus on reforms that generate quick wins, raise incomes and reduce poverty. After a visit in early 2012, Joseph Stiglitz argued that the exchange rate and fiscal and financial reform were key priorities, together with creating a competitive business environment and infrastructure spending. Vikram Nerhu refers to a similar five essential priorities – fiscal viability, development of private enterprise, trade liberalisation, clearing of debt arrears and the development of natural resources. Stiglitz puts the most immediate importance on agriculture, arguing strongly for extensive reforms in this sector. Given the dominance of agriculture in the economy, reforms in this sector are vital for equitable growth. These include price reforms for farmers, land reform and ownership and incentives for small-scale farming coupled with access to credit and technology. However, Stiglitz does warn of the country’s limited institutional capacity to manage this reform. China – the most successful development model in history – prioritised agricultural and price reform as a fundamental first step, which quickly raised incomes and reduced poverty. But in much of the East Asia/Southeast Asia model, low-cost manufacturing was the engine of economic take-off. The current dominance of China makes the East Asian model harder for Myanmar to copy competitively, so agriculture is even more important than previously imagined. 3
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1 Myanmar - looking to realise its full potential By Sajini Jesudason ...

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