Myanmar is now one of the fastest-growing economies in Asia Pacific, with a key geostrategic location, abundant natural resources and a youthful population underpinning its progress. It is also a country that has achieved much in a relatively short period of time, after only setting out on the path of liberalisation and democratisation back in 2011-12. Since then GDP, personal incomes, international trade and standards of living have improved significantly. Cities such as Yangon and Mandalay have experienced booms in real estate and construction, while the national grid has expanded, and transport and logistics networks have widened and deepened. The wholesale and retail sector is becoming a major driving force of the economy, and the financial and manufacturing sectors are undergoing liberalisation and diversification.
At the same time, however, Myanmar faces major challenges, both external and internal. The country finds itself trading in a world where the US-China trade war, a global economic slowdown, and weak oil and gas prices all have an impact. Meanwhile, the international fallout from the ongoing strife in Rakhine State continues, illustrating the domestic challenges faced by a country grappling with its heritage and trying to achieve sustainable peace between its different ethnic and regional groups.
Elsewhere, while there has been progress in areas such as the reform of corporate governance, opening sectors to competition and foreign ownership, transparency and financial inclusion, more remains to be done. Yet, as the country readies for the 2020 general elections, there is wide expectation that Myanmar will continue to reform, whatever the outcome.
Country Snapshot
The total population stood at 54.4m in November 2019, according to the Ministry of Labour, Immigration and Population, with World Bank statistics showing Myanmar’s GDP per capita at $1326 in 2018. The population is predominantly rural, with the World Bank estimating that 69.4% of people lived in the countryside in 2018. Agriculture is the biggest employer in Myanmar, providing jobs for around 56% of the workforce, but this is declining.
Some 25% of the population live below the poverty line, according to the World Bank – a considerable decline from 48% in 2005 – with rural areas seeing 2.7 times the poverty rate of urban ones. Electricity coverage is low: 50% of households had access to it in December 2019, according to the Ministry of Electricity and Energy. Nevertheless, the national grid is rolling out fast, with targets of 55% coverage by FY 2020/21 and 100% by 2030. Power remains a major concern for businesses, however, as demand is currently outstripping new supply, which has obliged the government to enact emergency measures to boost power generation in 2019-20 (see Energy chapter).
Three cities dominate the urban scene: Yangon, with some 4.5m residents; Mandalay, with around 1.2m; and Naypyidaw, which is home to some 1.16m people. The population is also young, with around 28% between 10 and 24 years old. The age-dependency ratio – the percentage of the population dependent on those of working age – was at 47.4% in 2018, according to the World Bank; the corresponding figure for the UK, for example, was 56.4%.
The country’s geography, a combination of central plains around major rivers, hemmed in by rugged mountain and forested areas, means that the population is also widely dispersed and sometimes difficult to reach. Rivers have traditionally been used as the means of communication and trade. The country also has 17 border crossings with its five neighbouring states: Bangladesh, India, China, Laos and Thailand, although these crossings are generally in some of the more inaccessible parts of the country.
Economic Activity
According to the most recent data available from the Ministry of Planning, Finance and Industry (MPFI), Myanmar’s GDP stood at MMK32.5trn ($21.2bn) in the six months between April and September 2018. This transition period was the result of the government changing the country’s fiscal year in 2018, which now runs from October 1 to September 30. GDP broke down into MMK6.7trn ($4.3bn; 20.6%) from the agriculture sector, MMK11.4trn ($7.5bn; 35.1%) from industry and MMK14.4trn ($9.4bn; 44.3%) from services.
In agriculture, the largest segment by value was livestock and fisheries, which produced 49.9% of the total. In industry, the top-three segments were processing and manufacturing (59.9%), construction (15.3%) and energy (15%), while in services, trade (41.4%), transportation (30.8%), and social and administrative services (10.3%) were the largest contributors.
Structural Heritage
Myanmar’s economy has gone through several major changes since independence from the British Empire in 1948. In 1963-64 a comprehensive nationalisation programme was enacted, with Myanmar becoming a socialist state. This lasted until 1988, when the then-ruling military junta began a policy of liberalisation. This began with agriculture, as farmers were allowed to grow and export all crops except paddy and rice, until these were also liberalised in 2004. The country also opened up partly to foreign investment, with a 35% maximum stake in local companies now allowed for foreign entities under the 2017 Companies Law. The political opening that began in 2010 was followed by further reform, first under President U Thein Sein and then, after elections in 2015, by the National League for Democracy (NLD) and its state counsellor and de-facto head of government, Daw Aung San Suu Kyi.
Despite the dissolution of the junta in 2011, the heritage of nationalisation lives on. The state is still a major force in the economy via state-owned enterprises (SOEs) and government ministries, while the military operates two large conglomerates, the Union of Myanmar Economic Holdings and the Myanmar Economic Corporation. SOEs, which were overseen by the Ministry of Industry (MoI), employ around 145,000 people and collect over 12% of GDP in fiscal revenue, according to a 2018 report from McKinsey. However, a recent estimate suggested that only four out of 57 state factories were currently profitable. Indeed, the MoI reported that it is losing some MMK300bn-400bn ($195.6m-260.8m) per year from its SOEs, raising the question of privatisation. In part to tackle this problem, the MoI and the Ministry of Planning and Finance (MOPF) were merged into a new entity – the MPFI – approved by Parliament in November 2019. Both ministries were headed by U Soe Win at that time.
Plans & Programmes
In August 2018 the government launched the Myanmar Sustainable Development Plan (MSDP), which runs until 2030, and aims to bring together many existing national and regional schemes for economic and social advancement. The plan is built on three pillars: peace and stability; prosperity and partnership; and people and planet. These break down into five further goals, with those under the first pillar being peace, national reconciliation, security and good governance; and economic stability and strengthened macroeconomic management. The second pillar has the goal of job creation and private sector-led growth, while pillar three’s goals are human resources and social development; and natural resources and the environment.
Each of the MSDP’s goals has a number of strategies and action plans attached to it, which give specific tasks to government departments, agencies and other bodies. The plan also aligns with regional agreements Myanmar is a signatory to, including the Greater Mekong Subregion strategic framework, and organisations of which it is a member, such as ASEAN. The plan is also in keeping with Myanmar’s Sustainable Development Goals and the 12-point 2016 Economic Policy of the Union of Myanmar, which highlights private sector-led growth, a balanced economy, financial stability and the rapid development of infrastructure.
The MSDP’s first pillar goals highlight a key characteristic of the economy, which is that Myanmar has long suffered from a series of internal armed conflicts. “Economic reform and transition in Myanmar run up against political transition and conflict resolution,” Hans Anand Beck, lead economist for Myanmar at the World Bank, told OBG. “They are all related.” Therefore, one of the country’s key recent achievements was the signing of the Nationwide Ceasefire Agreement (NCA) in 2015, bringing a number of these conflicts to an end. Yet, certain groups remain out of the agreement, while some territories, particularly along the frontiers, lie largely under the de-facto control of armed ethnic organisations.
The MPFI has been designated as home for the MSDP Implementation Unit, with the latter body consisting of the National Economic Coordination Committee, the Development Assistance Coordination Committee and a number of other high-level bodies. The implementation unit also has the task of attracting and securing funds for the plan, both domestically and internationally.
Doing Business
Micro-, small and medium-sized enterprises constitute the backbone of Myanmar’s economy, and around 90% of all firms fall within these categories. Many of these businesses have not been fully integrated into the formal economy, with a 2017 MOPF survey, conducted by the University of Copenhagen and the UN University, showing that only 3.5% had registered with the Directorate of Investment and Company Information (DICA) – the national business licensing body. Many also lie outside the formal financial system, a UN Capital Development Fund survey from the Making Access Possible initiative showed. Indeed, in 2018, 17% of adults used more than one formal financial product and 48% of adults used formal providers for financial services. In 2014 these figures stood at 6% and 30%, respectively, and are the result of major efforts to boost financial inclusion, with microfinance and mobile banking both bringing more businesses and individuals into the financial system and formal economy (see Banking chapter).
The financial sector itself is the responsibility of the MPFI’s Financial Regulation Department, with the Central Bank of Myanmar (CBM) also playing a role. Since 2012 the CBM has administered a managed float exchange rate regime, involving a weighted average exchange rate, calculated with reference to the interbank market. The CBM also fixes banks’ interest rates and product portfolios. In the future, reforms rolled out by the CBM with IMF assistance will aim to fix a single policy interest rate – as the CBM itself moves towards more complete independence.
Performance
Myanmar has experienced strong economic growth in recent years, with nominal GDP standing at $66.7bn in FY 2017/18. Statistics from the ASEAN+3 Macroeconomic Research Office (AMRO) show 7% GDP growth in FY 2015/16, followed by 5.9% in FY 2016/17, 6.8% in FY 2017/18 and 6.5% in the six-month 2018 transition period.
Most of the recent growth has taken place in the industry and services sectors, with subdued agricultural production accounting for much of the slowdown in 2018, along with the impact of weaker exchange rates on import costs. Industrial output growth stood at 9.4% in FY 2017/18, while services grew by 8.3% and agriculture expanded by 1.3%. China has put some limitations – such as tax increases – on Myanmar agri-products, leading some exporters to send goods via Laos, which creates distortion in border trade and can complicate payments. Furthermore, despite benefitting from high soil fertility and a wide range of environments, the agriculture sector is widely susceptible to climatic events. The Global Climate Risk Index 2019 placed Myanmar as the third-most affected country in the world by weather-related damage, with monsoon flooding and periodic typhoons from the Bay of Bengal sometimes dramatically impacting the country, as Cyclone Nargis did in 2018. Meanwhile, lower demand for paddy and rice from China and the EU impacted production, as did the hike in fuel costs for farmers, which resulted from the weakening exchange rate.
That rate depreciated from MMK1222:$1 in FY 2015/16 to MMK1414:$1 in the 2018 intermediate period, and to an average of MMK1541:$1 in the first half of 2019. The currency did appreciate slightly in the second half of the year, with the rate on December 4, 2019 standing at MM1499:$1.
The depreciation was one of the main reasons for a recent rise in inflation. While 2017 saw the consumer price index up 4%, 2018 saw a 5.9% increase, while the Asian Development Bank forecasts 8% for 2019. This is also the result of the November 2018 rise in fuel prices, while electricity prices also increased in July 2019. Core inflation – excluding food and fuel prices – was stable, however, at around 6.5% during the first half of FY 2018/19, according to the World Bank.
Yet, while the kyat did suffer from a strengthening US dollar in 2018, this pressure began to ease as US monetary policy loosened, with the CBM then able to build up its foreign exchange reserves. These increased from $5.3bn in September 2018 to $5.8bn in April 2019, according to the AMRO. The CBM aims to maintain its reserves at an amount equivalent to three months of imports. Imports totalled more than $4.7bn between October 2018 and January 2019, according to the Ministry of Commerce (MoC).
Trade Balance
Trade figures have historically expressed a positive picture since liberalisation. Annual average export growth stood at 9% between FY 2012/13 and FY 2017/18, while imports grew by 14.1% per annum over the same period. Total trade volume was a little more than $35bn in FY 2018/2019, with exports at $16.9bn and imports at $18bn, resulting in a $1.1bn deficit, according to the MoC. While Myanmar recorded a surplus of $21.7m in the second half of the 2018 transition period, the deficit returned during the first quarter of FY 2018/19, as exports – especially industrial finished products – fell. This category includes natural gas, which is responsible for 54% of Myanmar’s total exports, while agriculture as a whole accounts for around 20% and minerals for 8%.
Total imports have also been falling in recent times, but at a slower rate than exports. The chief import category is petroleum products, which account for 50.7% of total intermediate goods imports. This line item grew by 7.2% from the July-September 2018 period to the first quarter of FY 2018/19, while consumer goods and investment product imports declined by 21.7% and 6.8%, respectively. While private consumption represents around half of GDP, these import figures point to a softening of aggregate demand. Government expenditure, meanwhile, was estimated by the IMF at 19.7% of GDP in FY 2017/18, down from 21.3% in FY 2016/17 and 23.9% in FY 2015/16.
Current Account
The trade deficit has negatively impacted the current account (CA) balance. Indeed, in FY 2015/16 the CA stood at -5.2% of GDP, falling to -4.3% in FY 2016/17, before rising again to -4.7% in FY 2017/18, according to the IMF.
With the CA deficit, total external debt has risen in turn, standing at 21.2% of GDP in FY 2015/16, 19.4% in FY 2016/17 and 26.9% in FY 2017/18. Total public debt was estimated by the IMF at 38.5% of GDP in FY 2017/2018, with 59.1% of this domestic and consisting mostly of T-bills and T-bonds. There has been a planned shift in recent years from direct CBM financing of the deficit to Treasury bills and Treasury bonds auctions, with the World Bank stating that domestic financing needs were almost fully met through these tools in the first two months of FY 2018/19. Meanwhile, total private external debt was estimated at 12.3% of GDP in FY 2017/18. Myanmar’s largest external bilateral creditors are China and Japan.
Cash Flows
Inflows of foreign direct investment (FDI) and remittances from overseas have helped counter the trade deficit; however, net FDI has also been declining in recent years. World Bank figures show that it peaked in 2015, at $6.8bn, then fell to $5.2bn in 2016, rose back to $6bn in 2017, then fell again to $1.8bn in 2018. Events such as unrest in Rakhine State and the global economic slowdown are widely held responsible for this. Meanwhile, DICA figures show that cumulative FDI between 1988 and 2017 was $26.4bn. Oil and gas was the top recipient with 39.36% of total FDI, or $10.4bn, followed by telecoms, which, at $4.4bn, received 16.81% of total FDI, and manufacturing with $2.8bn, or 10.67%.
Remittances have traditionally been difficult to assess accurately, given the existence of an informal network known as hundi or hawala. An October 2017 report by the International Growth Centre (IGC), suggested that around 3.1m Myanmar nationals were officially living abroad, remitting about 5% of the country’s GDP in 2015, or $3.5bn. However, the IGC also noted that, unofficially, remittances might have been more than double that – $8bn, or 13% of GDP that year. Bringing such a large inflow into the formal sector is therefore a key part of financial reform, with the government announcing in November 2019 that it would start issuing remittance licences to businesses, enabling them to conduct transactions up to $1000. Licence-holding businesses will have to open an escrow account with a licensed bank, thus bringing them under the regulatory spotlight.
Fiscal Policy
Myanmar’s government has followed prudent fiscal policies in recent times, with the budget deficit less than expected in FY 2017/18, at 2.5% of GDP. That financial year saw a drop in government revenue, both from taxes and SOEs, but under-execution of the budget overcompensated for this decline. In FY 2018/19 a fiscal stimulus boosted the annual budget, which rose from MMK20.59trn ($13.4bn) to MMK24.72trn ($16.1bn), yet this too saw under-execution, with around 20% less being spent than planned in the first half of the financial year, according to the World Bank.
This has now been superseded by the FY 2019/20 budget, which entered into force on October 1, 2019 and sets expenditure at MMK35.2trn ($23bn) until the end of September 2020. This widens the budget deficit to 5.7% of GDP, or MMK6.7trn ($4.4bn).
The new budget acknowledges the emergency in power generation, setting aside some MMK8.09trn ($5.3bn) for electricity and energy – a figure up 28% on the previous fiscal year. Planning and finance are the second-largest line item, at MMK7.3trn ($4.8bn), followed by defence at MMK3.39trn ($2.2bn) and education at MMK2.69trn ($1.8bn) – some 19% more than the previous year’s budget. Acknowledging the priority given to infrastructure development in the MSDP, transport and communications – at MMK1.67trn ($1.1bn) – is up 25% year-on-year (y-o-y).
Increased spending is also going hand-in-hand with structural reforms aimed at raising revenue and ensuring greater efficiencies in delivery. The new Union Tax Law, passed in September 2019, targets the first of these goals to bring more revenue into the registered economy (see analysis). Other reforms, such as in the insurance and banking sectors, increase liberalisation by bringing more foreign investment and expertise into the economy (see Insurance and Banking chapters). The establishment of the online Project Bank also targets greater efficiency and transparency in government tendering, with public-private partnerships seen as a way of reducing the fiscal burden on the state (see Trade & Investment chapter). Electronic budget submissions will also be introduced by the MPFI’s Budget Department and Planning Department in FY 2019/20.
Monetary Policy
Under the 2013 CBM Law, the CBM has responsibility for preserving domestic price and monetary stability. Now moving towards complete independence, the IMF team stationed in Myanmar is encouraging the CBM to pursue active monetary policy. In alignment with the MSDP and other government bodies, the CBM is also working to achieve greater financial sector liberalisation.
In previous years the CBM has implemented a reserve money targeting framework, given the lack of secondary bond markets and other channels to control liquidity. The CBM has used interest rates, minimum reserve requirements for banks and, more recently, open market operations as its policy instruments. With these methods, it has achieved M2 broad money supply status, all the while reducing direct CBM financing of the fiscal deficit from 25% in FY 2017/18 to zero in FY 2018/19 thanks to the issuance of Treasury bonds and bills. As a result, reserve money growth slowed to 4.6% in the 2018 transition period, compared to 6% in FY 2017/18.
Meanwhile, since the enactment of the Financial Institutions Law in 2016, the CBM has issued a series of prudential regulations. These have required banks to strengthen their balance sheets and their risk management practices. One outcome of this has been the moderation of credit growth. By November 2017 it had slowed to 22.1%, falling to a further 18.2% in November 2018. This was partly offset by the partial opening of the sector to foreign banks in early 2019. Lending remains concentrated in a few sectors, with 68.5% of total loans in the first quarter of FY 2018/19 going to trade, construction, services and agriculture. Real estate loans saw 200% y-o-y growth in the first quarter of FY 2018/19, supported in part by the CBM allowing banks to issue more home loans.
The CBM also sets interest rates for banks and microfinance institutions. As of November 2019 the rate for loans made with CBM-specified collateral was 13%, the minimum deposit rate was fixed at 8% and the CBM rate was 10%. In an effort to broaden financial inclusion, the CBM also allowed loans to be advanced without collateral, mandating a 16% interest rate for such borrowing, starting from February 2019.
Outlook
While Myanmar’s economy has good medium- and long-term prospects, it is likely to experience a number of headwinds in the short term. Externally, there will be the continuing fallout from the instability in Rakhine State, which may further depress trade with Europe and North America in particular, along with the uncertainties of the US-China trade war and the global economic slowdown.
Maintaining positive relationships with regional neighbours will also benefit Myanmar in the near future. China will continue to be a major economic force, with the gradual rollout of projects under the China-Myanmar Economic Corridor, which stretches from the Chinese border along the Ayeyarwady River before forking to Kyaukpyu and Yangon. Japan has a major investment role in the Thilawa special economic zone and participates in regional connectivity projects, while India is an important player in the development of the India-Myanmar-Thailand trilateral highway, which should be completed in 2021.
Internally, general elections will take place in 2020, with the NLD favourites for re-election, but potentially with a reduced majority. The stability of the NCA and addressing a range of other domestic security challenges will be critical to national economic development, while the implementation of the MSDP is crucial for attracting foreign and domestic investment.
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