Myanmar’s economy is expected to grow at an average rate of 8.25 percent in the next few years led by rising gas production and investment, however, fiscal risks still lurk for the budding economy, the International Monetary Fund (IMF) said.
The Washington, DC-based lender said the Southeast Asian nation’s medium and long-term prospects remain strong, but it will require sustained policy and institutional reforms as the authorities’ capacity gets strained.
“Recent strong economic growth has been driven by construction, manufacturing and services, and supported by agriculture. The continued process in the economic reform program also provided the backdrop for strong growth,” Yu Ching Wong, IMF resident representative in Myanmar, told Myanmar Business Today.
However, she said while the economic outlook is favourable, limited macroeconomic management capacity and thin external and fiscal buffers pose risks for the economy.
“The Central Bank of Myanmar (CBM) with its newly gained autonomous status is still developing its monetary policy tools and framework. Myanmar also remains vulnerable to external shocks as international reserves are still low,” she said.
International reserves held by the CBM increased to $4.5 billion by end-March, covering 2.75 months of prospective imports, IMF said. However, a rule of thumb usually followed by central banks is to at least hold an amount of foreign currency equivalent to three months of imports.
Wong said fiscal strains are building as tax exemptions increase at the same time as expenditure pressures, while increasing external borrowing for off-budget operations is also raising risks.
Myanmar’s underlying fiscal deficit in 2013/14 is estimated at 3 percent of GDP and is forecast to widen to around 5.5 percent of GDP in 2014/15, but should decline below 5 percent of GDP in the medium term, IMF said.
The lender said inflation is expected to remain under control at around 6 percent over the medium term, the same level as its April 2014 level.
Foreign banks’ entry
Wong said that the entry of foreign banks will burden the growing supervisory capacity and challenge monetary and exchange rate management, particularly in the face of continuing demand-side pressures on inflation.
The CBM on October 1 dished out banking licences to nine foreign banks from Japan, Singapore, Thailand, Malaysia, China and Australia.
“Foreign banks will trigger a sea-change in the banking and financial markets. This should be used as an opportunity to modernise the domestic financial sector by fostering cooperation and learning in a competitive environment,” Wong told Myanmar Business Today.
“At the same time, the impending entry of foreign banks brings forward the need for far-reaching policy reforms so that a modern regulatory regime is in place before the new banks commence operations.”
She said the CBM needs to define a unified, rules-based and transparent regulatory regime for foreign and domestic banks.
“In addition to implementing prudential and monetary reforms already in train, policies on lending and deposits in foreign exchange; capital account flows; and foreign exchange reserve and liquidity requirements will need to be developed urgently.
“These policies need to focus on containing macroeconomic risks and preserving the stability of the financial system, especially in light of continued rapid credit growth.”
Policy recommendations
The IMF commended the authorities for the continued progress with their economic reform program, and recommended further efforts to reinforce policy and institutional frameworks and pursue structural reforms.
“To achieve rapid, sustainable and inclusive growth, it is vital to maintain near-term macroeconomic stability while building sound institutional and policy frameworks to manage the budget and financial sector,” Wong said, adding that so far, good progress has been made in terms of unifying exchange rates, establishing an autonomous central bank and maintaining fiscal control.
“Capacity constraints have, however, influenced the pace of structural reform. Myanmar’s long-term prospects remain strong, but require sustained policy and institutional reforms,” Wong said.
“There is still a long way to go.”
