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Asian Development Outlook 2004 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia
Myanmar GDP growth was officially reported at 10% for FY2002, but other indicators suggest that it was well below potential. Major problems, such as continuing budget deficits caused by subsidies to weak state enterprises and underinvestment in social areas, are yet to be addressed. Medium-term prospects are limited, but solid gains could be made over the longer term once the macroeconomic imbalances and structural issues are resolved. Economic Assessment According to the official estimate, GDP grew by 10.0% in FY2002 (ended 31 March 2003); growth was estimated at slightly over 10% in FY2003. The stronger areas of expansion in FY2002 were energy, mining, construction, and manufacturing. However, in FY2003 Myanmar faced several problems that constrained growth, including a hardening of international trade and investment sanctions that hurt exports of textiles and other goods and led to the closure of some garment factories. Troubles in the banking sector, shortages of certain imports and of power, and slower growth in fixed investment also hindered the economy. Weaknesses in the data make an objective assessment of the economy difficult. Information is often incomplete, delayed, and difficult to reconcile. For example, GDP is officially estimated to have grown by 10% or more in each of the past 3 fiscal years, yet some essential factors of production, such as sown land area and the use of fertilizer, pesticides, crude oil, and natural gas, have been flat or declined for at least part of that period. Electricity generation in FY2002 was lower than in FY2000. A more modest growth scenario is also suggested by official figures on the growth of agricultural production, which slowed to 2.9% in FY2002 from 8.1% in FY2001. The fiscal deficit, which is largely financed through central bank credit creation because of a low level of revenues, was targeted to narrow to 2.5% of GDP in FY2002 from 5.9% in FY2001, but provisional figures indicated that the target was not met, hitting 4.1% of GDP. More than 60% of the overall deficit was caused by the deficits of state economic enterprises. The current expenditures of such enterprises were higher than the Government’s total spending. The capital expenditures of these enterprises in recent years have been less than 10% of their total expenditures, which helps explain a sharp slowdown in fixed investment. The continuing need for government subsidies stems from delays in the privatization of state enterprises, as well as repeated expenditure overruns and supplementary budgets. Myanmar’s inflation rate slowed to a still-high 24% in September 2003 from 57.0% at end-2002. Supply constraints contributed to price increases for items such as food, and some panic buying of essential goods was seen in early 2003 when the Government imposed limits on cash withdrawals during a period of turmoil in the financial system. The ability to use monetary policy to control inflation is constrained by the monetizing of the budget deficit and a policy of keeping nominal interest rates fairly stable. With high inflation, this meant that real interest rates were negative in 2003. The financial sector troubles in early 2003 were apparently caused by the collapse of private finance companies, which took deposits from the public. The problem spread to some private banks and sparked runs by depositors. The crisis later subsided, but the cash withdrawal limits and a call by some banks for the early repayment of loans meant that confidence in the financial system has not been fully restored. A stronger regulatory framework for the banking system and a strategy to identify and resolve the problem banks seem necessary to restore such confidence. Myanmar’s balance of payments was in surplus by $94.3 million in FY2002, according to official data, but was in deficit by $38 million in the first 6 months of FY2003. Export growth in dollar terms had slowed in FY2002, and in FY2003 it would have been hurt by trade sanctions and a credit crunch caused by the banking crisis. However, stronger demand from the neighboring markets of PRC, India, and Thailand would have lessened the impact of sanctions somewhat. Private capital inflows remained low. Foreign exchange reserves at end-FY2002 covered 3.5 months of imports. Policy Developments The Government announced important changes to its rice trading policy in 2003 in an effort to encourage rice exports and help farmers: the rice trade was opened to all nationals; the Government will not buy rice from farmers and will not allow any private monopoly to develop in rice trading; and prices will be set by the market. However, rice exports will be allowed only when there is a surplus over domestic requirements. Myanmar also introduced a law to combat money laundering and issued a notification in December to implement the law. These measures, while welcome, do not address the macroeconomic imbalances and impediments to structural adjustment that limit sustained economic growth and reductions in poverty. Large budget deficits stemming from subsidies to state enterprises and from the funding of the deficits by central bank monetization underpin high inflation and cause underinvestment in areas such as health, education, and social welfare. Public sector spending on health declined to just 0.3% of GDP in FY2002 from about 1% a decade earlier, while spending on education also declined as a share of GDP. Major cuts in subsidies to state enterprises would enable Myanmar to spend more in these social development areas, which would reduce poverty and enhance productivity; ending the delays to the privatization of state enterprises would reduce the need for subsidies. Fiscal revenues could be increased by valuing imports for customs duty at the market exchange rate rather than at the official rate, phasing out tax exemptions, increasing user charges, and stepping up collection of excise taxes. Other changes required include moves toward a unified exchange rate, since the dual exchange rate (in which the ratio of the parallel rate to the official rate is about 125:1) distorts both the economy and the official statistics, and restricts the country’s gains from international trade. Strengthening the statistical system itself would allow a more accurate assessment of economic performance and assist in formulating appropriate economic policies. The encouragement of more private sector activity could produce rapid results, especially on the supply side, and would stimulate investment, while the need to strengthen the banking system has become more pressing with the decline of confidence seen in 2003. Finally, basic infrastructure, such as roads, railways, and air transportation, must receive more investment if economic performance is to improve. Outlook for 2004-2005 In view of the very limited reform agenda apparent at this time, growth prospects in the medium term are limited. International sanctions look likely to continue curbing exports and FDI. Insufficient investment in social areas and the slowdown in fixed investment suggest less than satisfactory reductions in poverty. The longer-term prospects for sustained growth are good, but only if the Government moves toward policies that reduce the macroeconomic imbalances and structural distortions.
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