Can Myanmar Profit From the Trade and Currency Wars?
By Naing Ko Ko 17 December 2018
Fiscal and monetary management in Myanmar are suffering amid global trade and investment uncertainty. The global trade and macroeconomic scene does not favor the transformation of Myanmar’s economic institutions. The state counselor’s team has been trying to treat the country’s monetary and fiscal problems with the assistance of development partners such as the World Bank, IMF and ADB due to the dearth of home-grown technocrats and economists.
Myanmar’s real GDP growth dropped slightly from 7 percent in 2015-16 to 5.9 percent in 2016-17 and then increased to 6.8 percent in 2017-18. The trade and currency wars between the U.S. and China have meanwhile created both winners and losers. The IMF, Bangladesh and Vietnam are winners. The WTO, powerless to settle the dispute, is a big loser.
A modern economy runs on taxes, yet Myanmar has one of the lowest tax collection rates in not only ASEAN but the world. The government budget fell from 10.1 percent of GDP in 2016-17 to 9.4 percent in 2018-19 (though the allocation for health and education rose slightly to 6 percent of GDP in 2017-18). Yet tax collection ranged from only 3 to 7 percent of GDP between 2012 and 2018. The country’s many armed groups and religious organizations have meanwhile been collecting their own taxes, levies and donations. Myanmar’s economy is based more on donations than taxes, savings and investment because there is no clear tax policy for a lack of talented tax economists.
Countless schools, streets, clinics, hospitals and streetlights in Myanmar are built with public donations and run on the power plants of armed groups, rather than by or with the state. An obvious reason for the state’s falling revenue is that few people trust the government’s tax policies. In Myanmar, trust is the scarcest commodity. The government needs to re-establish trust by improving its performance and tax system, in particular the horizontal or vertical tax systems, by hiring international experts over the next few years.
A bright spot of Myanmar’s public financial management is the fiscal discipline the government imposed in 2016-18. As a result, Myanmar’s fiscal deficit fell even though revenue declined slightly to 1.1 percent of GDP in 2017-18. According to World Bank data, the current account deficit has improved as the trade deficit declined from 5.5 percent of GDP ($ 3.5 billion) in 2016-17 to 2.6 percent of GDP ($ 1.7 billion) in 2017-18 due to rising garment exports. But the government will also need to address an inefficient bureaucracy, unprofitable state economic enterprises and electricity prices in the coming years.
Regarding monetary matters, the policies and actions of the Central Bank of Myanmar (CBM) improved in 2017-18, after U Soe Thein and U Bo Bo Nge were appointed deputy governors. It came out with the “Burmese Way to the Basel Principles” in July 2017. The CBM also stopped the practice of printing money to cover budget deficits in 2016-17 for the first time in the country’s modern history.
Now, amid the currency war between the U.S. and China, the Myanmar kyat has suffered, depreciating heavily against the U.S. dollar. The kyat fluctuated sharply from August to September — between 1,300 and 1,800 per dollar — before stabilizing in October at 1,550. The CBM has since gotten heavily involved in managing monetary policy, in particular in the foreign exchange market. The inflation rate rose from 5.9 percent to 8.2 percent in 2017-18 due to mounting fuel and commodity prices and a cooling real estate market.
The government was wrong to impose policies restricting trade for fear that re-exports to China would depreciate the kyat further. In the midst of a trade dispute between great powers, Myanmar, as a tiny economy, must adopt a smart trade strategy that includes bilateral currency swaps with regional countries. Myanmar requires an “economic foreign policy” to deal with the G20 economies and balance its trade with the main players of the international economic order.
Currently, foreign direct investment from the U.S. and EU is shrinking. The EU is threatening to reimpose economic sanction and to revoke trade benefits under its Generalized System of Preferences (GSP), while Myanmar has adopted a “Look East” policy and committed to the China-Myanmar Economic Corridor under Beijing’s Belt and Road Initiative. While allowing China access to the Bay of Bangle and Indian Ocean, Myanmar’s leaders would be wise to also pay attention to the country’s own energy security needs and its relationships in the Middle East and North Africa, home to more than 60 percent of the world’s petroleum reserves.
The European and U.S. markets, meanwhile, are meccas of consumerism and have great demand for international currencies and technology. Myanmar’s business community has to raise its ethical and regulatory standards, professionalism and trustworthiness to gain better access to their markets.
With respect to Myanmar’s labor market, a lack of investment in human capital over the past several decades has left the country’s workforce at a disadvantage compared with its neighbors. In the lead-up to the 2020 general elections, the government should focus on coming up with a better labor policy and creating jobs and business opportunities. There are now about 14 million young people in the country’s labor force; many of them will migrate to other countries for work if the government cannot come up with a better labor policy than the one it has.
In sum, to attract foreign capital, investment and technology, Myanmar must address the risks associated with the country’s politics, economy and reputation, including rampant corruption. Now is the right time for Myanmar’s leaders not to isolate themselves in Naypyitaw but to engage and build trust with the G20.
Naing Ko Ko is a PhD candidate at the School of Regulation and Global Governance at Australian National University.