02 Feb Myanmar Economic Monitor, December 2016
Economic activity in Myanmar has slowed in 2016-2017 with growth expected to moderate to 6.5% from 7.3% the previous year.
- The government has carefully navigated a difficult economic and security environment in its first six months in office. It has taken steps to maintain fiscal prudence, which have helped ease pressure on monetary growth, and is proceeding on important financial sector and business environment reforms.
- The pace of recovery in agriculture from last yearâ€™s floods was hampered by longstanding productivity constraints in the sector. Industrial output, including food processing, construction activity, and gas production has also decelerated.
- Falling exports due to gas and agricultural commodities, and slowing foreign investments have contributed to growing external economic pressures.
- Public investments remain constrained by a narrowing fiscal space due in part to external shocks and increased losses from state enterprises.
- The public sector deficit in 2015-2016 increased to 3.2% of GDP compared to 1.1% the previous year, and is expected to grow further to 4.5% of GDP in 2016-2017. The government cut spending, while trying to maintain support to priority areas such as education and health.
- Inflation in Myanmar stayed elevated throughout the first half of 2016, largely due to supply constraints linked to Cyclone Komen. Although inflation has started to abate in the second half of 2016, the total supply of money in circulation continued to grow, fueling demand pressures and underlying inflation.
- Economic growth is projected to average 7.1% per year over the next three years. Private and public investments in infrastructure services (e.g. power, transportation) and non-commodity sectors (e.g. light manufacturing, hospitality) is expected to pick up subject to continued macroeconomic stability, progress on structural reforms and expansion of critical services.
- Inflationary pressures are expected to ease relative to 2015-2016 due to a general slowdown in aggregate demand and efforts to reduce fiscal monetization, averaging 8.9% over the course of 2016-2017.
- The current account deficit is projected to expand further over the medium-term due to a combination of slowing gas exports, slowing demand in China, and large investment-related import needs. However, strong foreign direct investment (FDI) flows are projected to remain a stable source of financing for the overall balance of payments, and its deficit should thus moderate in 2016/17.
- Risks to Myanmarâ€™s economic outlook:
- Low gas prices that could increase fiscal and external imbalances, and exacerbate financing pressures;
- Myanmarâ€™s relatively narrow production base, increased exposure to competition, relative dependence on primary commodities;
- Vulnerability to natural disasters pose risks to stable growth;
- Lack of clarity or delays in policy implementation could prolong economic downturns;
- A challenging external environment may make it more difficult for Myanmar to take advantage of new export markets.
Economic Policy Priorities
- An overarching priority for the new administration is to further strengthen the clarity, communication and credibility of economic policies. One option could be to develop an economic vision, and complementing this with regular reporting on near term economic policies and conditions to help anchor economic expectations and sustain investor confidence.
- The Medium-Term Fiscal Framework could help set out a strategy for balancing fiscal prudence with the need to expand public services in the coming years.
- Greater fiscal discipline and the expansion of the government securitiesâ€™ market are expected to reduce pressures on monetary policy.
- Increasing flexibility of monetary discipline and exchange rate can alleviate external pressures.
- The Central Bank of Myanmar policy rate could play a bigger role in managing inflation, and mitigating financial sector risks as monetary policy capacity develops.
- Implementing the new Financial Institutions Law (2016) through issuance of prudential regulations could be critical for financial sector stability.