Growth and Investment Slowing in Myanmar
Stella Lyte
March , 2017

Despite all the forecasts from international bodies such as World Bank (WB), International Monetary fund (IMF), economic activity in Myanmar has slowed in 2016-2017. Growth is expected to moderate from 7.3 per cent in 2015-2016 to 6.5 per cent in 2016-2017. However, the pace of recovery in agriculture from last year’s floods was hampered by longstanding productivity constraints in the sector. Industrial output has also decelerated, including food processing, gas production, and construction activity. These developments underline the importance of policies to mitigate volatility and help prevent prolonged downturns, which are critical to sustaining inclusive growth and poverty reduction.

In addition, falling exports and slowing foreign investment inflows have enhanced external vulnerabilities. According to the World Bank, these have contributed to an overall balance of payments deficit in 2015-2016 (-0.7 per cent of GDP) and low foreign exchange reserves (2.5 months of imports at end March 2016). Falling exports were due to gas and agricultural commodities (60 per cent of export basket), which led to the current account deficit widening from 3.3 per cent of GDP in 2014-2015 to 4.8 per cent in 2015- 2016. There are no immediate concerns over external sustainability as an important share of the current account is financed from non-debt creating flows. Though fiscal and monetary policy discipline in the near- term and continued efforts to boost non-commodity exports over the medium to long-term will be essential to contain external vulnerabilities.

The government has faced increasingly constrained fiscal space due in part to external shocks, exchange rate pressures, and increased losses from State Enterprises. The public sector deficit in 2015-2016 nearly tripled to 3.2 per cent of GDP from 1.1 per cent in 2014-2015, and is expected to rise further to 4.5 percent of GDP in 2016-2017. The government adopted an amended budget in August, with efforts to cut spending whilst trying to protect priority areas such as education, health and agriculture. Capital spending cuts have borne a large share of fiscal adjustment efforts, which can help with short-term stability though could be detrimental to longer-term growth. According to World Bank’s economic reports, inflation began to moderate in H2 (second half) 2016 to 3.5 per cent in October (year-on-year), though this is in part a base effect from the preceding period of high inflation. Price pressures persisted throughout H1 (first half) 2016-2017. Nevertheless, despite the growth moderating since its peak of 48 per cent in 2012-2013, it remained high at 23 per cent in 2015- 2016 due in part to fiscal monetisation of the deficit, thereby fueling demand pressures and underlying inflation.

Another point to note is that rapid growth in credit to the private sector point to emerging banking sector risks. Private sector credit grew at 34 per cent in 2015-2016, compared to 36 per cent in 2014-2015, and 53 per cent the year before that. It is difficult to accurately assess the health of the banking system due to data constraints. However, emerging signs of risks include growing sector and borrower concentration of lending.

Nevertheless, the World Bank predicts Myanmar’s economy will grow an average of 7.1 per cent per year in the next three years, as inflation pressures are expected to ease up and private and public investments in infrastructure services and non-commodity sectors, such as light manufacturing and hospitality, are forecasted to rise.

While Myanmar’s outlook is relatively favourable, the country faces several macroeconomic risks to stable growth, according to the Bank’s latest edition of the Myanmar Economic Monitor. Those risks include a narrow production base, a more competitive global market, a lack of diversification in commodities, vulnerability to natural disasters, and higher prices for international commodities. “Policies to sustain stable and inclusive growth are critical for creating more opportunities for people to earn and have better jobs in Myanmar,” said World Bank Country Manager for Myanmar Abdoulaye Seck. “They are also important for reducing the high inflation that impacts the poor the most adversely.”