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p. 30 of 77 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions I. Developing Asia and the world II. Economic trends and prospects in developing Asia East Asia Southeast Asia Cambodia Indonesia Lao People's Democratic Republic Malaysia Myanmar Philippines Singapore Thailand Viet Nam South Asia Central Asia The Pacific III. Promoting competition for long-term development Statistical appendix

Asian Development Outlook 2005 : II. Economic trends and prospects in developing Asia : Southeast Asia

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Myanmar

GDP growth was officially estimated at low double-digit rates in FY2003 and the target for FY2004 was at a similar high level. However, rapid growth was not corroborated by the performance of inputs such as power and fertilizer. The economy underperforms because of macroeconomic imbalances and structural problems that include a wide fiscal deficit due to losses by SOEs and a dual exchange rate system.

Macroeconomic assessment of 2004

Official estimates put GDP growth at 13.8% in FY2003 (ended 31 March 2004), up from 12.0% in FY2002 (revised up from an earlier estimate of 10.0%). Growth in agriculture in FY2003 was estimated at 11.7%, industry at 20.7%, and services at 14.5%. Consumption accelerated by 12.6% and investment by 24.1%, according to the official figures. The impact of trade and investment sanctions imposed by the US and other governments was particularly evident in foreign trade, with exports and imports of goods and services declining by 30.0% and 22.5%, respectively. For FY2004, GDP growth was targeted at 12.6% with the agriculture sector the main source of growth.

However, the trends in essential inputs to production, such as power and fertilizer, indicate that actual GDP growth rates could be much lower than the official estimates. Also, high inflation in recent years and lagging nominal income levels do not suggest strong growth in real national output.

Deficiencies in data, in terms of reliability, comparability, completeness, and timeliness, make an objective assessment of the economy difficult and affect the ability of the authorities to formulate policies. For example, dual exchange rates and the large gap between the parallel and official exchange rates distort the official statistics.

The official estimate of poverty incidence at almost 23% in 1997 suggests that poverty is not as widespread as in other countries with a comparable level of per capita income. However, a fall in spending on social services such as health, education, and social welfare relative to GDP indicates that the poor are receiving less assistance. In FY2003, spending on social services was 1.3% of GDP, down from 5.7% in FY1990.

Government spending and tax revenues both surged by 52% in FY2003, and the overall fiscal deficit widened from 3.6% of GDP in FY2002 to 4.9%. The deficit is largely financed through central bank credit creation, which results in macroeconomic and fiscal instability. Subsidies to SOEs to cover their losses accounted for about 38% of the budget deficit in FY2003, although this was down from 50-93% of the budget between FY1998 and FY2002. The tax revenue system was strengthened by raising the exchange rate used to value imports for tariff purposes, a reduction in tax evasion, and steps toward a value-added tax system.

Inflation decelerated from 54.0% in March 2003 to 2.3% in June 2004, but then turned up to almost 7% in October 2004. A temporary ban on rice exports to increase the supply of rice for domestic consumption seemed to contribute to the fall in inflation in early 2004. However, the ban hurt incomes of rural households as well as national foreign-exchange earnings. It also delayed the liberalization of trade and agriculture.

Developments in the financial sector point to progress in recovering from a banking crisis in 2003 and to a restoration of confidence in the banking system: two private banks opened branches over the course of FY2003; three major banks resumed operations in February 2004; and three private cooperative banks merged in June 2004. Growth in broad money (M2) picked up from just 3.7% in September 2003 to 11.0% in March 2004 and then rose sharply to 30.5% in September.

Sanctions have hit FDI levels as FDI fell by 33% from the previous year’s level to $128.1 million in FY2003. Over 5 years, FDI has fallen by 81%.

Macroeconomic policy developments

While the moves to mobilize greater tax revenues have had a positive impact, much more needs to be achieved before the Government has adequate funding for crucial social and economic investment. New measures for generating revenues, widening the tax base, and further reducing tax exemptions and evasion should be considered. On the expenditure side, reductions in budgetary transfers to SOEs would help stabilize the fiscal position. Subsidies to the SOEs could be cut if more serious efforts were made to privatize some of them. Rigorous cost-benefit analysis of projects would ensure better targeting of government resources.

The dual exchange rate, under which the ratio of the kyat-US dollar parallel rate to the official rate has widened to about 150:1, contributes to fiscal deficits and fosters corruption. This provides an imperative for moving toward a unified exchange rate. Also, the adoption of a flexible interest rate regime would strengthen the regulation of monetary aggregates by the central bank. Complete recovery from the 2003 banking crisis is likely to require a more prudential regulatory framework for the sector in consonance with international best practices.

Strengthening the agriculture sector should be a key goal since it accounts for a major share in the country’s GDP, and since about 70% of the population live in rural areas. Policy measures worthy of consideration are the further liberalization of the sector, including the removal of the temporary ban on exports of rice and increasing the accessibility of credit to rural households. More generally, sustained growth requires greater investment in basic infrastructure and an improved environment in which the private sector can develop.

In the area of external relations, several agreements were concluded with neighboring countries. The Government adopted a framework agreement for a free trade area under the BIMST-EC grouping that involves Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan, and Nepal. This aims to fast-track tariff reductions among these countries. Other agreements were concluded with PRC, India, and Thailand to provide Myanmar with credit facilities and economic and technical cooperation. The Government also lifted a restriction that limited its rubber exports to 55% of production, in an effort to encourage exports.

Outlook for 2005-2007 and medium-term trends

With a limited reform agenda, the medium-term growth prospects are expected to be quite modest compared with the official double-digit targets. While the growth in government revenues is set to continue, it may still be inadequate to offset rising expenditures. Moreover, continued monetization of the fiscal deficit is likely to cause inflationary pressures and jeopardize fiscal stability. Growth prospects remain diminished by sanctions and the related contraction in trade, aid, and FDI. Advances against poverty are hindered by the lack of funding for social spending and the often high inflation rate that exceeds growth in incomes.

The export of natural gas in recent years and possibilities for expanding gas exports through construction of pipelines are important developments. Natural gas constituted about a quarter of total exports in FY2003 and the first 4 months of FY2004. Exploration planned both onshore and offshore may further increase the potential of this industry.

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