The World Bank's Latest Report on Myanmar: 5 Takeaways on Growth and Risks
By Nan Lwin 17 October 2019
YANGON—The World Bank’s latest forecast predicts that Myanmar will see positive growth, risks and challenges in the short- to mid-term future. The forecast highlights the country’s growing GDP and reductions to poverty as well as increasing inflation and fiscal deficits.
The World Bank’s “Weathering Growing Risks” report for East Asia and the Pacific, released on Friday, identifies risks to Myanmar’s future growth, including internal and external factors such as natural disasters, the Rakhine crisis, global trade policy uncertainty and the economic slowdown in China.
Five major takeaways from the report include predictions on GDP growth, inflation, deficits, poverty reduction and risks to the economy.
The report forecasts that Myanmar’s GDP growth is expected to pick up gradually to 6.8 percent in the 2021-22 fiscal year, driven by investment in the manufacturing, insurance and construction sectors.
In the 2018-19 fiscal year, Myanmar’s GDP growth slowed to 6.5 percent from 6.8 percent in 2017-2018, reportedly due to a slowdown in the services sector.
According to the World Bank, the industrial sector, which represents 29 percent of the economy, is expected to continue to grow, driven by new investments in manufacturing.
The ongoing reforms to strengthen the financial and tourism sectors are expected to encourage further private investment, according to the World Bank.
In May, the Central Bank of Myanmar tightened the interest rate margin on credit card and microfinance lending, a move that is expected to slow down high-risk consumer lending. In addition, the Ministry of Planning and Finance lowered interest rate caps for microfinance institutions, encouraging micro-businesses to invest and expand the non-resource economy.
Myanmar has also relaxed visa restrictions for passport holders from six EU countries in a bid to boost tourism. The government also moved to expand its tax base by collecting commercial taxes on mobile phones and accessories. Moreover, the government has restored advance income taxes on trade following a one-year exemption.
The World Bank also pointed out that inflationary pressures are expected to remain high in Myanmar, predicting that the inflation rate would be between 7 and 8.5 percent in the medium term (between one and three years), driven by the supply-side constraints and pass-through effects from increasing electricity tariffs.
The bank said headline inflation is expected to jump to 8.4 percent in the 2018-19 fiscal year, from 5.4 percent in the 2017-18 fiscal year. In June, year-on-year inflation reached 9.5 percent, reflecting rising food and transport prices, including the effect from the recent increase in energy tariffs.
According to a monthly report by the Myanmar Statistical Information Service (MSIS), a department of the Planning and Finance Ministry, the rapid increase in inflation in Myanmar over the past few years is due to three significant factors: the depreciation of the kyat against the US dollar, flooding and rising petrol costs.
Myanmar’s annual inflation rate stood at 10.59 percent when the National League for Democracy government took office in July 2016 but declined to 4.91 percent by July 2017. In 2018, however, the economy was hit by rapid inflation due to the sharp depreciation of the kyat against the US dollar.
During the seven months from January to July this year, the inflation rate saw another significant increase, rising from 5.02 percent at the end of 2018 to 8.35 percent due to the continued depreciation of the kyat and the imposition of higher electricity tariffs.
During Daw Aung San Suu Kyi’s administration, the consumer price index—which measures the average change over time in the price of a basket of consumer goods and services—has also risen significantly, meaning people must pay more to cover their basic expenses each year. In July 2019, Myanmar’s CPI stood at nearly 160, by far the highest level under Daw Aung San Suu Kyi’s administration.
The World Bank’s report warned that the impact of the inflationary pressures from supply shocks needs to be monitored, as poorer households tend to devote a high share of monthly expenditure to food.
The World Bank also pointed out that an increase in electricity tariff is expected to affect poor and near-poor households proportionately less than better-off households, given that prices remain low for households with more limited electricity consumption.
It also highlighted that it is important to monitor the actual impact of the increased tariffs on vulnerable households and take preemptive actions to protect their welfare.
Myanmar remains one of the lowest-income countries in Southeast Asia: the minimum wage is 4,800 kyats (roughly US$3.31) per day, or $72 per month (assuming 22 working days).
The World Bank forecasted that the fiscal deficit is expected to increase modestly in the 2021-22 fiscal year due to weak revenue mobilization.
According to the World Bank, revenue collection is projected to stagnate in the medium term, though tax policies and administrative reforms are accelerating.
The Myanmar government has increased spending in the energy, education and health sectors and moved to reduce subsidy burdens but the impact of declining revenues on the deficits is likely to still be counterbalanced by continued challenges in budget execution, the report said.
The current account deficit has narrowed due to a decline in import growth while exports eased to 12 percent in the 2018-19 fiscal year (October-March) from 15 percent in the same period in the previous year. Approved foreign direct investment increased to $3.2 billion in the third quarter (July-September) of the 2018-19 fiscal year from $2 billion in the same period last year.
The bank also said international reserves have accumulated to $5.4 billion as of February this year, up slightly from $5.3 billion in December of last year. The budget deficit is projected to be 3.5 percent for 2018-19, which is lower than the original budget target of 5.4 percent of GDP, driven by significant underspending.
The original budget deficit target was underpinned by a planned increase in capital expenditure, from 4.3 percent of GDP in 2017-18 to 5.4 percent of GDP in 2018-19. However, the World Bank said this is unlikely to materialize as budget execution remains a challenge.
The World Bank’s report also said that Myanmar’s positive trend in poverty reduction is expected to continue due to strong growth. The poverty rate halved from 48 to 25 percent between 2005 and 2017, based on the national poverty line.
However, poverty in Myanmar is 2.7 times higher in rural areas than in urban areas and limited agricultural growth suggests that poor agricultural households continue to see slower progress, the World Bank said.
The bank forecasted that the expected pick-up in manufacturing and construction could further accelerate poverty declines in urban areas, by providing low-skill employment opportunities for members of poor households.
Downside risks and challenges
The World Bank said downside risks dominate Myanmar’s economic outlook due to both internal and external factors, including natural disasters, the Rakhine crisis, global trade policy uncertainty and the economic slowdown in China.
According to the World Bank, the agriculture sector is highly exposed to natural disasters and fluctuations in demand from major trading partners, and supply shocks could ripple through supply chains involving businesses from farms to trading companies.
The report warned that frequent disasters can create considerable fiscal pressures and the government needs to have sufficient fiscal buffers and financing instruments available to respond appropriately to future shocks.
From July to August this year, a total of 150,000 people were displaced due to monsoon floods that also destroyed thousands of agriculture plantations across Myanmar.
Every year, Myanmar is hit by severe flooding during the monsoon season that also results in landslides and extensive damage to paddy fields, farmland and infrastructure across the country.
According to Relief Web, an information site run by the UN Office for the Coordination of Humanitarian Affairs, Myanmar ranks second out of 187 countries in an index of global climate risk and ninth out of 191 countries in an index of risk management, which measures risk of humanitarian crises and disasters.
Another internal risk factor is persistent domestic conflicts including the Rakhine crisis that affect investor sentiment and tourism-related services in the country. These conflicts, and the ethnic cleansing of the Rohingya in particular, also create uncertainty as the EU considers revoking Myanmar’s preferential trade status.
The World Bank also said that external factors such as prolonged trade tensions between China and the US would continue to hurt investment growth, given high levels of uncertainty surrounding the global trade policy environment, especially as China is Myanmar’s largest export destination.
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