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p. 21 of 68 BACK | NEXT 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. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

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Myanmar

Growth in FY2001 was recorded at 11.1%. However, there are reasons to be concerned about prospects. Macroeconomic imbalances persist, and there are growing signs of problems at a structural level. The country faces a complex development agenda. In the short run, priority should be given to reducing fiscal deficits and realigning expenditure priorities. Agricultural liberalization offers potentially large benefits.

Macroeconomic Assessment

An objective assessment of economic developments in Myanmar is made difficult by poor quality data. Often, information is available only with a long lag, is incomplete, and is difficult to reconcile. Furthermore, many indicators are based on application of outdated statistical standards. The use of an official parity for the domestic currency (the kyat), which carries a vast premium over the market rate, to value public sector foreign exchange transactions, including those of state economic enterprises (SEEs), creates further interpretive difficulties.

The official estimate of GDP growth for FY2001 (ended 31 March 2002) is 11.1%. Strong economic performance in FY2001 follows on 3 years of rapid expansion. In FY2001, strong agricultural growth was complemented by fast industrial growth (including agroprocessing and gas production). On the demand side, royalties from gas production supported increased capital expenditures by SEEs. After the expansion of gas exports with major gas projects coming on stream in FY2000, exports continued to grow in FY2001.

The general picture of vigorous economic growth is, however, qualified by some other indicators. These point to falling yields for some key crops (including rice), reduced fertilizer production, continuing power shortages, and a reduction in cement production.

In FY2001, the fiscal deficit narrowed from FY2000's outcome. The deficit is estimated to be 6.6% of GDP, compared with 8.4% in FY2000. The improvement in the deficit position was entirely a consequence of reduced expenditures. Public sector revenues did not even keep pace with the expansion of income and fell below 5% of GDP. By the end of FY2001, total public sector debt as a proportion of GDP had risen to about 95%.

After a brief respite in FY2000, when consumer price inflation dipped below 4%, it accelerated to 56.8% by end-December 2002. In part, the acceleration can be traced to the large increase in public sector wages awarded in FY2002 that, to a large degree, was financed through central bank credit creation. In nominal terms, public sector credit grew by about 40%, and broad money by just over 45%, in both FY2000 and FY2001.

Historically, the dollar value of the kyat in the parallel market has been closely and inversely correlated with domestic inflation. By the close of FY2001, the parallel market exchange rate had depreciated by about 70% relative to its value at the start of the year. Interest rates, which are administratively determined, remained unchanged over the period.

Myanmar's balance-of-payments position remained weak in FY2001. The current account slipped into deficit after returning to a surplus in FY2000. At the same time, public sector imports increased as foreign exchange constraints were relaxed with the inflow of gas export revenues. Private capital inflows to Myanmar have all but evaporated in the face of international sanctions and domestic economic uncertainties. It is estimated that gross international reserves at the end of FY2001 were sufficient to cover about 2.3 months of imports. Total external debt was estimated to be just over $6 billion in FY2001 or about 73.4% of GDP, and, of this, $2.5 billion is in arrears following the suspension of payments to multilateral and bilateral creditors in 1997.

Policy Developments

Prospects for sustained reductions in poverty and broad-based improvements in the quality of life for the people of Myanmar are impaired by macroeconomic imbalances and impediments to structural adjustment. Despite recorded growth, there has been little change in the structure of the economy for more than a decade. There is also persuasive anecdotal evidence that, for a large number of people living in Myanmar, hardships are becoming more acute. A necessary if not in itself sufficient condition for pro-poor growth is the presence of a macroeconomic environment that allows markets to work efficiently, and that avoids the unfair and arbitrary redistributions of income that accompany high inflation.

Large fiscal deficits have underpinned perennially high inflation in Myanmar and the steep declines in the parallel market value of the kyat. The deficits are fueled by, on the one hand, large military expenditures and inefficient SEEs that receive direct budgetary support, and, on the other, by a poor track record in mobilizing public sector revenues. A pervasive system of implicit subsidies and taxes as well as the dual exchange rate system also contribute to fiscal stress.

The Government has now declared the objective of paring public sector deficits over a 5-year period. However, to achieve this, improved systems to plan coherently, and monitor and control expenditures must be put in place. Line ministries, SEEs, and other agencies must increasingly face the discipline of hard budget constraints. Equally important, in a context where real expenditures for the provision of basic social services are grossly inadequate, expenditure priorities need to be systematically realigned with development needs.

On the revenue side, revenue mobilization could be improved within the prevailing structure of taxes and levies, though efforts at revenue mobilization would be more likely to be successful if they were accompanied by structural reforms. In particular, the removal of administrative and other impediments to private sector activity and enterprise could generate large supply-side gains. In a context where comprehensive reforms are needed but implementation capacity is limited, efforts should initially focus on areas where the short-run costs of reform are likely to be small and benefits quick to materialize. This suggests that priority might be given to liberalizing the agriculture sector. In formulating and sequencing a longer-term reform program, Myanmar could usefully draw on the experience of other DMCs, particularly Viet Nam and the PRC.

Outlook for 2003-2004

The Government has targeted 6% GDP growth over the latest 5-year planning period. However, the immediate prospects for fast economic expansion are uncertain. Widespread flooding in 2002 is likely to have had an adverse impact on agricultural activity, which still accounts for over 40% of GDP. Also, yields of important agricultural crops have fallen recently against a backdrop of shortages of imported fertilizers and other inputs. Political and economic sanctions limit prospects for exports and FDI, and any significant easing of foreign exchange constraints is unlikely in the near future.

Over the medium term, the prospects for growth will, of course, depend crucially on policy choices. If macroeconomic imbalances and structural distortions persist, growth will undoubtedly suffer. If, however, a credible and sustained effort at reform were to begin, the prospects for sustainable economic expansion and poverty reduction would be good.

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