MYANMAR ECONOMIC MONITOR OCTOBER 2015 MYANMAR ECONOMIC MONITOR: Staying the Course on Economic Reforms October 2015 MYANMAR ECONOMIC MONITOR OCTOBER 2015 The Myanmar Economic Monitor (MEM) aims to periodically take stock of economic developments and highlight economic prospects and policy priorities in Myanmar. The MEM draws on available data reported by the Government of Myanmar1 and additional information collected as part of the World Bank Group’s regular economic monitoring and policy dialogue. The MEM team is very grateful to the Ministry of Finance, the Ministry of National Planning and Economic Development, the Ministry of Commerce, the Central Statistical Organization, the Central Bank of Myanmar, and the Directorate of Investment and Company Administration for excellent collaboration, and to Ulrich Zachau (Country Director, South East Asia Country Management Unit), Sudhir Shetty (Chief Economist, East Asia and Pacific Region), and Ahmad Ahsan (Lead Economist, EAP Chief Economist’s Office) for their review and advice. The MEM was prepared under the overall guidance of Mathew A. Verghis (Manager, Macroeconomics and Fiscal Management Global Practice), Abdoulaye Seck (Country Manager for the World Bank in Myanmar), and Shabih Mohib (Program Leader, South East Asia Country Management Unit) by a team including: Alexandra Drees-Gross Senior Financial Specialist Finance and Markets Alex Sienaert Country Economist Macroeconomics and Fiscal Management Charles Schneider Senior Operations Officer Trade and Competitiveness Espen Beer Prydz Economist DEC Poverty and Inequality Habib Rab Senior Economist/Team Lead Macroeconomics and Fiscal Management Jason Pellmar Senior Investment Officer International Finance Corporation Julie Earne Senior Operations Officer International Finance Corporation May Thet Zin Economist/Co- Team Lead Macroeconomics and Fiscal Management Nang Htay Htay Financial Sector Specialist Finance and Markets Nagavalli Annamalai Lead Counsel Finance and Markets Puja Dutta Senior Economist Social Protection Reena Badiani-Magnusson Senior Poverty Economist Poverty Sergiy Zorya Senior Economist Agriculture Sjamsu Rahardja Senior Trade Economist Trade and Competitiveness Tenzin Dolma Norbhu Program Coordinator Transport and ICT The team is grateful to Kyaw Soe Lynn and Meriem Gray from EXT for their support and guidance on publication and outreach. Views expressed in the MEM are those of the authors and do not necessarily reflect the views of the World Bank Group, its Executive Directors or the countries they represent. 1 Please see “Myanmar Staff Report for the 2015 Article IV Consultation-Informational Annex: Statistical Issues” for IMF data adequacy assessment. MYANMAR ECONOMIC MONITOR OCTOBER 2015 Abbreviations BIS Bank for International Settlements WBG World Bank Group CBM Central Bank of Myanmar WDI World Development Indicators CEIC CEIC Data IFS International Finance Statistics CSO Central Statistical Organization IMF International Monetary Fund DICA Directorate of Investment and Company kWh Kilowatt hour Administration EU European Union MMcf Million cubic feet FAO Food and Agriculture Organization MOAI Ministry of Agriculture and Irrigation FDI Foreign Direct Investment MOGE Myanmar Oil and Gas Enterprise GDP Gross Domestic Product REER Real Effective Exchange Rate GOM Government of Myanmar USDA United States Department of Agriculture MYANMAR ECONOMIC MONITOR OCTOBER 2015 Contents Executive Summary 1 Real Sector 4 Continued Recovery In Growth 4 Public Consumption And Private Investment Driving Growth 4 Services Expanding Rapidly 5 Growing Investment In Manufacturing And Industry 6 Rebound In Agriculture 7 Floods Impacting Agriculture And Relatively Worse Off Households 8 Foreign Trade And Investment 12 Growing Current And Trade Account Deficits 12 Slowing Goods Exports 13 Fast Growing Goods Imports 14 Concentration Of Trading Partners 15 Increased FDI Commitments 15 Inflation, Monetary And Exchange Rate 18 Rising Inflationary Pressures 18 Moderate Growth In Reserve Money 19 Strong Growth In Money Stock 20 Rapid Rise In Private Sector Credit 21 Exchange Rate Pressures 22 Fiscal Policy 28 Fundamental Shifts In The Union Budget 28 Relatively Prudent Fiscal Stance 28 Improving Revenue Performance 29 Aligning Spending With Development Priorities 30 Economic Outlook 32 Growth And Inflation Outlook Affected By Floods And Slowing Investment 32 Maintaining Fiscal Discipline 35 Heightened Pressure On The External Accounts 35 Policy Watch 38 Maintaining Exchange Rate Flexibility and Monetary Discipline 38 Strengthening Public Debt Management 38 More Attention To Non-Rice Agriculture 39 Options For Managing The Minimum Wage Policy 39 Strengthening The Business Environment 41 Promoting Financial Inclusion 42 Improving Banking Supervision 44 MYANMAR ECONOMIC MONITOR OCTOBER 2015 List of Figures Figure 1. Real GDP growth 2011-2014 (%) 4 Figure 2. Real GDP growth (average for 5 years after liberalization) 4 Figure 3. Sector contribution to real GDP growth 5 Figure 4. Contribution to service sector growth (%) 5 Figure 5. Merchandise trade after liberalization (% of GDP) 6 Figure 6. Trade facilitation services (tonnage) 6 Figure 7. Crude oil (barrels ‘000) 7 Figure 8. Cement production (Ton) 7 Figure 9. Sector growth rate (%) 8 Figure 10. Sector share of GDP 2010 vs 2014 8 Figure 11. Rice wholesale prices in Myanmar and Vietnam (US$/ton) 8 Figure 12. Agriculture growth and income per farmer 9 Figure 13. Townships affected by the floods 10 Figure 14. Welfare index among townships affected by floods 10 Figure 15. Trade account (US$ m) 12 Figure 16. Government vs. private imports 12 Figure 17. Goods exports (US$ m) 13 Figure 18. Contribution to export growth (% yoy) 13 Figure 19. Share of goods exports in the first 11 month of 2014/15 (%) 14 Figure 20. Rice production and exports (2014/15) 14 Figure 21. Contribution to import growth (% yoy) 15 Figure 22. Fuel pump price 2014-15 15 Figure 23. Bilateral trade (US$ m) 16 Figure 24. Bilateral trade and exchange rate: Singapore 16 Figure 25. Number and value (US$ m) of FDI projects (Mar 2014-Feb 2015) 16 Figure 26. FDI by country (2014-15) 16 Figure 27. Contribution to yearly inflation (%) 18 Figure 28. Contribution to monthly inflation (%) 18 Figure 29. Inflation in selected countries in the region (yoy %) 18 Figure 30. Contribution to yearly food inflation (%) 19 Figure 31. International food and fuel prices (% change) 19 Figure 32. Non-food inflation drivers (% yoy) 19 Figure 33. CBM Assets and Reserve Money 20 Figure 34. CBM Net Domestic Assets 20 Figure 35. CBM Net Domestic Assets (% change qoq) 20 Figure 36. Monetary aggregates (Jan 2013 = 100) 21 Figure 37. Annual contribution to growth in Broad Money M2 (percentage points) 21 Figure 38. Commercial Bank Assets (MMK Billion) 21 Figure 39. Interest rates (%) 21 Figure 40. Capital Adequacy of Private Banks 22 Figure 41. Commercial bank lending by sector (% share) 22 Figure 42. Banking sector liquidity (loans/deposits) 23 Figure 43. Nominal exchange rate (US$ vs. Local currency) (% change, yoy) 23 Figure 44. Official and parallel exchange rates 23 Figure 45. Real Effective Exchange Rates 24 Figure 46. Gross reserves (US$ billion cumulative change) 24 MYANMAR ECONOMIC MONITOR OCTOBER 2015 List of Figures Figure 47. Aggregate revenue, expenditure and balance 28 Figure 48. Fiscal balances (% of GDP) 28 Figure 49. Government receipts (% of GDP) 29 Figure 50. Taxes and duties (% of GDP) 29 Figure 51. Functional breakdown (% of GDP) 30 Figure 52. Social services breakdown (% of GDP) 30 Figure 53. Recurrent and capital spending 31 Figure 54. Recurrent breakdown 14/15 and 15/16 BE 31 Figure 55. Myanmar-China trade (US$ m) 36 Figure 56. Exchange rate (Kyats/Renminbi) 36 Figure 57. Top imports from China 36 Figure 58. Top exports to China 36 List of Tables Table 1: Selected economic indicators, projections 2015-2017 33 Table 2: Basic set indicators on financial inclusion 43 List of Boxes Box 1. Myanmar classified as Lower Middle Income in 2014/15 based on GNI per capita 11 Box 2. Exchange rate liberalization in transition economies 26 Box 3. Macroeconomic impact of floods 34 Box 4: Institutional arrangements for implementing minimum wage policy 40 Box 5. Key features of draft Banking and Financial Institutions Law 45 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Executive Summary Recent Developments 1 Myanmar grew at an estimated 8.5 percent in real terms in 2014/15. Economic reforms have supported consumer and investor 4 Inflationary pressures increased over the course of 2014/15, largely on account of food prices, with CPI rising by 7.5 percent in the year confidence despite ongoing business environment to end March 2015, reaching just over 10 percent and socio-political challenges. Public consumption in the year to July 2015 due to supply pressures and private investment on the demand side, and and a weakening Kyat. Although the price of rice, the services sector on the production side were beans and pulses in 2014/15 were stable in line the main drivers of growth. Agricultural output with international developments, the price of picked up in 2014/15 after two years of sluggish processed foods had increased. Rising food prices growth. Output in manufacturing and industry has are anticipated to particularly affect urban poor been strong thanks to gas in particular. There has households and poor rural households who are been growing investment in light manufacturing, net-purchasers of food. which slowed in early 2015/16 together with 5 Reserve construction activity linked in part to the upcoming money remained relatively stable till period of political transition. the end of 2014 though overall money supply grew rapidly on account of credit to the private 2 The economic impact of the floods that hit sector. Banking sector exposure to vulnerabilities Myanmar in July 2015 is still being assessed, is limited by its low level of development, but but will likely adversely affect the main rice strengthening banking supervision remains a crop this year. According to preliminary analysis of priority to avoid a build-up of risks. The exchange Census data, the areas most affected by the floods rate depreciated by around 20 percent in nominal are those where people were relatively worse off. terms in the year to August 2015 due to a general strengthening of the US Dollar, a growing current 3 Strong demand for investment-related capital imports has widened the current account account deficit, and slowing foreign investment inflows in the run up to the elections. Recent deficit in 2014/15 to over 6 percent of GDP. Export efforts by the Central Bank to maintain exchange fortunes remain closely linked to gas (around rate flexibility by allowing further depreciation of 40 percent of merchandise exports), which the Kyat have helped to curtail the parallel market. helped offset a drop in forestry exports last year. 6 Agriculture trade was strong thanks to a rebound Estimates of Union Budget outturn for in the output of beans, pulses and rice. The drop 2014/15 signal continued efforts at trying in international commodity prices helped reduce to maintain a prudent fiscal stance in the import costs of refined oil, though had not yet face of growing public service demands. The fully fed through to gas prices in the first quarter general government budget deficit is estimated of 2015/16. at 4 percent of GDP for 2014/15. Strong revenue performance was in part due to a windfall from telecom license receipts. Though reforms in tax EXECUTIVE SUMMARY | 1 MYANMAR ECONOMIC MONITOR OCTOBER 2015 administration – including the introduction of US Federal Reserve’s eventual decision to raise self-assessment and the establishment of a Large interest rates could further strengthen the US Taxpayers’ Office – are also beginning to pay off Dollar and place added pressure on the exchange in terms of higher revenue collections. Spending rate. on social sectors and economic services continued to trend up as a share of GDP in the 2015/16 Budget. These budget shifts aim in part to reduce household spending on education and health, and 9 Economic growth is expected to pick up over the medium-term, assuming continued progress on economic reforms and a smooth to support human development outcomes among transition. The agriculture sector should bounce poorer households. back rapidly, and services should continue to grow at a strong pace thanks to further expansion Economic Outlook of telecommunications and banking services in particular. Manufacturing and industry are also 7 Economic growth in 2015/16 is expected expected to pick up post elections, particularly to moderate to 6.5 percent in real terms, as recent investments in light manufacturing though this is subject to revision as more details (e.g. garments) begin their operations in newly come in on the impact of the floods. Agriculture established economic zones. growth will drop on account of the floods, and investment in manufacturing and industry will likely remain slower over the course of the political 10 Whilst medium-term growth prospects remain strong, addressing the impact of transition. Inflation in 2015/16 is projected to the floods on poor households will be a increase to 11.3 percent (period average) due to challenge. The floods have hit two of the poorest a combination of supply pressures caused by the States in Myanmar, namely Rakhine and Chin, floods and currency depreciation. which have been declared as natural disaster zones. Loss of livelihoods has been compounded 8 Fiscal policy is expected to remain broadly by loss of assets and reduced access to social on track, but the current account will come services. This will require a strong public sector under further pressure due to import demand for response. post-flood rehabilitation and slowing agricultural exports. Myanmar will also face a number of Policy Watch challenges from the external environment. 11 Slowing growth in China could adversely affect The Policy Watch in this Myanmar the demand for Myanmar’s merchandize exports. Economic Monitor covers a few Low international commodity prices will affect gas selected priority issues closely related exports, though these could be offset by higher to Myanmar’s overall economic developments output from Shwe and Zawtika fields that came on and outlook. Other, broader economic and social stream two years ago, and also higher Kyat earnings policy issues that are also central for inclusive and from gas as a result of currency depreciation. The sustainable growth (such as education, health, See for example the World Bank Systematic Country Diagnostic for Myanmar 3 EXECUTIVE SUMMARY | 2 MYANMAR ECONOMIC MONITOR OCTOBER 2015 rural development, energy, water, environment, or social development) are (or will be) covered in separate publications2 and/or future issues of the MEM. 12 Addressing short-term macroeconomic challenges will require continued efforts at maintaining exchange rate flexibility supported by fiscal and monetary discipline. The Central Bank of Myanmar’s recent stance to have greater flexibility in the Kyat-Dollar exchange rate is a positive move. In the short-term, exchange rate flexibility will be important given structural shifts in trade, evolving capacity to carry out open market operations, and limited foreign reserves. To control growth in money supply it will be important to implement new prudential regulations in the banking sector (see below) and ensure a gradual elimination of monetary financing of the budget deficit. 13 Strong growth prospects assume continued progress on structural reforms. The recent adoption of a minimum wage needs to be supported by strong institutional arrangements to ensure efficient labor markets. Other structural reforms include adoption of legislation to strengthen the business environment (e.g. the Investment Law and the Companies Law), modernize the banking sector (Banking and Financial Institutions Law), and strengthen public debt management (Public Debt Law). Efforts to address access to finance is another priority. This remains a big constraint, particularly for poorer households who have more limited sources of collateral and limited access to formal financial institutions. See for example the World Bank Systematic Country Diagnostic for Myanmar 2 EXECUTIVE SUMMARY | 3 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Real Sector Continued Recovery In Growth Figure 1. Real GDP Growth 2011-2014 (%) 1 Myanmar’s economy grew at an estimated 8.5 percent in real terms in 2014/15. This 9 8.5 8.0 8.0 8.5 8.5 8.5 compares favorably to other countries in the Real GDP growth (%) 8 region (Figure 1) and reflects pent up demand 7.3 7.4 7.5 7.5 7.1 and continued rebound in economic activity 7.3 7.0 supported by reforms adopted since the country 7 6.2 began to open up in 2010/11. This period has 6.5 6.0 seen significant challenges including border 6 5.9 5.4 5.2 conflicts, peace negotiations, preparation for the 5.5 upcoming political transition, a difficult business 5 2011 2012 2013 2014 environment, and major infrastructure gaps. The overall trajectory of economic reforms, however, Cambodia Lao PDR Vietnam Myanmar has provided positive signals that have supported private consumer and investor confidence. Source: GOM, WB Staff Estimates, WDI 2 Myanmar’s growth record since 2010/11 is comparable to other high performing Figure 2. Real GDP Growth (average for 5 years after liberalization) countries in the five-year period following the start of economic liberalization. Myanmar has 10% grown at an average of 7 percent per annum since 9% 2010/11. Countries such as Korea, Vietnam, China, 8% Real GDP growth (%) and others also grew between 6 and 10 percent 7% when they began opening up (Figure 2). Robust 6% growth in these countries was sustained by rapid 5% 9.9% 8.7% 8.5% 8.3% expansion of manufacturing and exports. The 4% 8.2% 7.7% 7.3% 7.1% 3% 6.3% recent spurt in investments, together with rapid 6.0% 2% growth in supporting services such as transport, 1% telecommunications and banking suggests that 0% Myanmar could also have a similar growth TWN IDN THA MOZ CHN VNM KOR MMR MYS IND trajectory if reforms and public services can be sustained. Source: WDI Public Consumption And Private capital investment. Whilst public investment needs Investment Driving Growth remain large (e.g. in power and transportation), capital spending in recent years as a share of total 3 There has been a gradual shift in the drivers of growth on the demand side. Private spending has also been high. Therefore some rebalancing to make space for recurrent spending consumption has remained high and relatively in the social sectors is essential for growth. At stable, whilst public consumption has picked the same time, reforming public investment up rapidly. This reflects government spending management will gradually help to promote more on public services and a rebalancing away from efficient and better targeted public investments. REAL SECTOR | 4 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Figure 3. Sector Contribution to Real GDP Growth Figure 4. Contribution to Service Sector Growth (%) Agriculture Transportation Communications Financial 8.5% Industry Social and admin Rentals and other Trade Services 12% 7.5% 2.2% Real service sector growth 6.5% 4.2% 4.2% 10% 2.8% Real GDP growth 5.5% 2.9% 4.5% 8% 4.5% 3.4% 3.4% 3.5% 6% 3.2% 2.5% 5.1% 2.5% 2.2% 4% 0.5% 4.3% 1.5% 2.2% 2.7% 1.8% 2% 4.0% 3.7% 0.5% 1.2% 0.6% 2.6% - 0.2% 1.8% -0.5% 2011/12 2012/13 2013/14 2014/15 0% 2011/12 2012/13 2013/14 2014/15 Source: GOM, WB Staff Estimates Source: GOM, WB Staff Estimates 4 The falling share of public investment has been offset by rapid growth in private contributed to falling costs and rapidly increasing access to telecommunications services.4 investment. Private investments have averaged roughly between 20 and 30 percent of GDP in recent years, which is significant for a country at 6 Telecommunications operators have continued to expand coverage in the early Myanmar’s stage of development. This reflects part of 2015/16. Efforts are being made to extend important new private construction activity services to previously unserved areas, and in particularly in major urban centers such as particular to ensure that flood affected parts of Yangon and Mandalay, and a pick-up in foreign the country are receiving the services they need. and domestic private investment across services, In addition, growth in core telecommunications manufacturing and industry. Net exports have services has attracted other licensees to provide had a slight negative contribution to economic growth. This may change over the coming years as Myanmar continues to integrate in the global economy and exports begin to take off, until which domestic demand will continue to be the big driver of growth. 3 Ooredoo Myanmar and Telenor Myanmar won operating and spectrum licenses in June 2013 following an open Services Expanding Rapidly competition. A Telecommunications Law was passed in October 2013, licenses were formally awarded in January 5 The positive impact of ongoing reforms is 2014, and both operators launched their services in August September 2014. reflected in the robust growth of the services 4 The cost of SIM cards has dropped from $250 in February sector. Services contributed just over 4 percentage 2013 to around $1 today. Calling costs have fallen from Kyat points of overall growth in 2014/15 (Figure 3). A big 50 per minute to around Kyat 20 per minute. A variety of driver of this was telecommunications (Figure 4), data packages have been introduced, as well as international SMS. International long distance costs have which expanded rapidly thanks to new investments fallen (e.g. the cost of a one minute call to Singapore has and fast growing consumption as a result of market fallen from US$1 to Cents 20 or less). Penetration rate liberalization.3 The resulting competition and (mobile phones per 100 people) went from less than 10% in investment in the telecommunications sector have February 2014 to 50% as of June 2015. REAL SECTOR | 5 MYANMAR ECONOMIC MONITOR OCTOBER 2015 network infrastructure (e.g. fiber optic installation, on gas earnings in the first quarter of 2015/16 tower companies) and network services (e.g. suggest that output remains strong and that internet services). the potential impact of falling international commodity prices have not yet filtered through 7 Growth in transport services has also to gas export earnings. Whilst Myanmar is not increased thanks to expanding internal and a major oil producer, available data shows that external trade. The transportation sector crude oil output continued its downward trend contributed to around a third of overall service (Figure 7). This could be linked to substitution sector expansion in the past four years. External for cheaper imports or inadequate investment merchandise trade as a share of GDP in Myanmar affecting production capacity. Figure 5. Merchandise Trade After Liberalization Figure 6. Trade Facilitation Services (Tonnage) (% of GDP) Shipping trade (unloading) Shipping trade (loading) 160 150 Coastal trading (loading) Coastal trading (unloading) China 140 20,000 Coastal trading (tons) Shipping trade (tons) Indonesia 130 600 120 India 110 Korea 500 15,000 100 Vietnam 16,012 % of GDP 90 400 80 Myanmar 70 10,000 12,520 300 60 10,244 8,865 50 200 40 5,000 30 5,328 100 20 4,267 4,883 3,376 10 0 0 0 2011/12 2012/13 2013/14 2014/15 Source: WDI, WB Staff Estimates Source: GOM, WB Staff Estimates averaged around 40 percent, similar to other countries in their early phase of liberalization 9 The construction sector also grew at around 8 percent in 2014/15 despite some (Figure 5), contributing to domestic freight slowdown in larger projects. Office retail and handling and other trade logistics services (Figure condominium space in major cities remain hot 6). Transportation networks have been affected but projects have come up against a slowdown in by flood damage to roads and bridges in early pre-sales and concerns over potential overbuild, 2015/16, though preliminary indications are that particularly for condominiums. The construction the main corridors (namely Yangon to Mandalay, boom has contributed to growing activity in the then North to China) are not as severely impacted. area of building materials. Although domestic cement production has been on a downward Growing Investment In trend in recent years, it picked up again in 2014/15 (Figure 8). An estimated 40 percent of Myanmar’s Manufacturing And Industry demand for cement is met by imports. To improve domestic cement production, the government in 8 Manufacturing and industry output remained strong at over 8 percent in 2013 began to privatize its cement plants under the Ministry of Industry. Myanmar Jidong Cement 2014/15 thanks in big part to natural resources. and Myanmar Conch Cement were among the Gas in particular was a big driver of manufacturing winning bidders. In addition, Thailand’s Siam and industry growth in 2014/15. Press reports Cement is also building a large greenfield plant. REAL SECTOR | 6 MYANMAR ECONOMIC MONITOR OCTOBER 2015 10 Heavy industry and mining aside, Myanmar has attracted strong investor Figure 7. Crude Oil (Barrels ‘000) interest in light manufacturing. This is reflected 650 in both domestic and foreign investment figures. 3-month moving Prior to 2011, foreign direct investment (FDI) went 600 average mainly to natural resources: around 40 percent to Barrels (‘000) 550 hydro, 30 percent to gas, and another 8 percent for mining. Since 2012/13, the balance has started 500 to shift with a rapid increase in the number and value of projects going into light manufacturing. 450 The garments sector in particular is seeing large investments from Korea, Hong Kong and investors 400 based out of Singapore. Myanmar already has a base in garments production. Investors are 350 7/2014 10/2014 1/2015 10/2012 4/2013 7/2013 10/2013 1/2014 4/2014 1/2013 4/2011 7/2011 10/2011 1/2012 4/2012 7/2012 relocating from other parts of the region given competitive labor costs and new markets afforded Source: WDI, WB Staff Estimates by the EU General Systems of Preferences. Domestic investors are looking to expand their Figure 8. Cement Production (Ton) current facilities as well as to establish greenfield factories. 55,000 11 Investment activity in more recent months has begun to slow down. A lot 50,000 45,000 of mega construction projects (e.g. hydropower, 40,000 (Ton) road construction) are moving more slowly than 35,000 expected. It will be important to keep advancing 30,000 key reforms (see Policy Watch below) to sustain 25,000 the confidence of investors. 20,000 15,000 Rebound in Agriculture 10,000 4/2011 7/2011 10/2011 1/2012 4/2012 7/2012 10/2012 1/2013 4/2013 7/2013 10/2013 1/2014 4/2014 7/2014 10/2014 1/2015 12 Agriculture output picked up in 2014/15 after two years of sluggish growth (Figure 9), which contributed to a Source: GOM, gradual shift in the sector composition of GDP in favor of services and industry (Figure 10). Real growth in the agriculture sector is estimated to have increased from 3.6 percent in 2013/14 to 5.6 percent in 2014/15. Agriculture contributed around 1.8 percentage points in overall growth in 2014/15. The recovery is attributed in large part to increased crop output from 0.6 percent real growth in 2013/14 to 4.2 percent in 2014/15. Crops account for just under three quarters of agriculture value added. Livestock and fisheries, which account for around a quarter of agriculture output, grew at 7.2 percent. REAL SECTOR | 7 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Figure 9. Sector Growth Rate (%) Figure 10. Sector Share of GDP 2010 vs 2014 14.0% 11.8% Agriculture 10.5% 10.5% Industrial Sector 12.0% 9.4% Services and trade 11.4% Real sector growth (%) 10.0% 10.2% 31% 8.0% 8.8% 8.0% 41% 37% 37% 6.0% 5.6% Agriculture Industry 4.0% Services 3.6% 26% 2.0% 1.7% 26% -0.7% 0.0% 29% 2011/12 2012/13 2013/14 2014/15 29% -2.0% Source: GOM, WB Staff Estimates Source: GOM, WB Staff Estimates 13 Within crop production, rice output increased in 2014/15 though Figure 11. Rice Wholesale Prices in Myanmar and name (US$/ Ton) productivity remains low. Rice production is 500 estimated to have increased from 18.7 million tons Yangon/ MM in 2013/14 to 19.7 million tons in 2014/15.5 Around An Giang/VIET Dong Thap/VIET 54 percent of the country’s sown areas is planted 450 with paddy, but paddy yields in Myanmar remain among the lowest in the region, adversely affecting US$/ton 400 overall growth, farmer income and poverty reduction (Figure 12). Well managed irrigation schemes can yield around 4 tons per hectare (ha) 350 but most fields average around 2.5 tons per ha in Myanmar. In contrast, the average per ha yield in 300 Thailand is 2.9 tons; in the Philippines, 3.7 tons; Jan-15 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 May-15 and in Vietnam, 5.6 tons. Source: FAO GIEWS 14 Real rice prices in Yangon followed the path of the past two years, seasonally Floods Impacting Agriculture And fluctuating around the mean of Kyat 150,000 per Relatively Worse Off Households ton. They roughly follow prices in Vietnam, which is Myanmar’s closest competitor on the world rice market, but they continue to be volatile (Figure 11). This is a result of large seasonality (most rice is 15 Whilst the full impact of the floods is still being assessed, preliminary indications are that the agriculture sector will harvested from October to December) and the low be severely affected. It is estimated that around production relative to disappearance (domestic 1.29 million acres of farmland (roughly 4 percent consumption plus export)6. Aside from rice, the production of beans and pulses, which account for around 50 percent of value added in crops, grew 5 The alternative estimate of the US Department of by 4.4 percent in 2014/15. Agriculture (USDA) estimates production growth at 5.4 percent. USDA reports rice production to increase from 11.9 million tons in 2013/14 to 12.6 million tons in 2014/15. REAL SECTOR | 8 MYANMAR ECONOMIC MONITOR OCTOBER 2015 16 Figure 12. Agriculture growth and income per farmer The vast majority of the population (2011-2014) affected by the floods is concentrated 5 3000 in 5 States and Regions, some of which are also 4.2 important areas of agriculture production. The five Agriculture GDP per farmer ($) Ag GDP growth % 2500 States and Regions are Ayeyarwady, Bago, Magwe, Agriculture GDP growth (%) 4 2,428 3.2 Ag GDP $/farmer 2000 Rakhine and Sagaing. Preliminary analysis shows 3 2.7 2.6 2.6 that the share of affected population ranges from 1,674 1.9 1500 3.6 percent in Bago to 8.2 percent in Ayeyarwady.9 2 Ayeyarwady is the second most populated State 1000 1,127 or Region in Myanmar after Yangon, increasing 986 1 914 500 the likelihood of natural disasters affecting a large number of people. Less densely populated Chin 0 0 State has also been affected quite severely relative China Vietnam India Thailand Myanmar Cambodia to its population size, with 4% of its population impacted by the floods. Source: WDI and WB Staff Estimates of total sown area) have been damaged, including 687,200 acres of rice paddy and other crops.7 The 17 Preliminary estimates show that more than half of the affected population is concentrated in 18 townships with more than loss of income for the 1.1 million people affected 30,000 affected persons. Figure 13 maps out the by the floods and extensive damage to critical townships that were affected by the floods. Of 330 infrastructure linking farms to markets will have townships, 131 are registered in the data used as negative multiplier effects on supply of agriculture having affected populations. The majority of these produce. The flooding will negatively affect the affected townships have fewer than 5,000 affected main rice crop (harvested in October-December), people recorded. which according to the FAO is currently at early reproductive stage.8 6 Although the rice stocks to disappearance ratio in Myanmar increased from 4.2 percent in 2014/15 from 3.6 percent in 2013/14, it remained much below the commonly believed safe ratio of 15 percent, which is considered sufficient to keep price volatility low. 7 UN OCHA, “Myanmar: Floods Emergency – Situation Report No. 3 (as of 11 August 2015) 8 FAO, “GIEWS Country Briefs,” August 10, 2015 9 This analysis draws upon the listing of flood affected townships from MIMU/OCHA, dated 20th August. This data was combined with population level information from the Population and Housing Census of Myanmar. As such, the analysis captures a depiction of the socio-economic and demographic characteristics of the flood affected townships prior to any flood impact. It should be noted that the townships listed affected are likely to vary substantially in the degree to which they were impacted by the floods. It is also important to note that the analysis draws upon township level socio-economic characteristics, and therefore is only representative of households enumerated in the census. REAL SECTOR | 9 MYANMAR ECONOMIC MONITOR OCTOBER 2015 18 The areas that were most affected by the floods were relatively worse off prior to not among the most flood affected in terms of absolute population affected. A comparison of the the flooding, as captured by a composite welfare 65 most affected townships10 with those that were score from the Census data (Figure 14). The floods less or not affected by the flooding shows that the are therefore affecting a population that was severely affected townships were relatively worse ex-ante vulnerable to poverty. This is especially off prior to the flooding than the rest.11 true for Rakhine and Chin, although these are Figure 13. Townships Affected By The Floods Figure 14. Welfare Index Among Townships Affected By Floods Lighter areas are relatively less well off. 10 These are townships with more than 5000 affected households. 11 The composite welfare score was constructed using a range of household characteristics that vary across better and worse off households (such as housing structures, water and sanitation, household assets such as communications and transportation, and household demographics). The characteristics of welfare were chosen by examining the correlates of poverty from the Integrated Household Living Conditions Assessment Report (Government of Myanmar, UNDP, UNICEF and SIDA, 2011, “Integrated Household Living Conditions Assessment Survey in Myanmar, 2009-10: Technical Report”). The welfare index was then constructed using principal components analysis. A caveat of the approach used is that it is conducted using township level aggregates; since welfare is measured at a household level and aggregated up, this approach would ideally be conducted at a household level. REAL SECTOR | 10 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Box 1. Myanmar classified as Lower Middle Income based on GNI per capita Myanmar’s per capita Gross National Income (GNI)12 in 2014, published by the World Bank in July 2015, stood at US$ 1,270. Economies with a GNI per capita of $1,045 or less in 2014 are defined as low-income; those with per capita GNI of between $1,045 and $12,736 are classified as middle-income; and countries with a per capita GNI of $12,736 or more are classified as high-income. Lower-middle-income and up- per-middle-income economies are separated at a GNI per capita of $4,125. GNI is a measure of overall income in an economy plus net receipts of primary income (e.g. employee compensation, property income) from abroad. It is a measure of the overall economic output of a country. GNI per capita can be large in natural resource dependent countries, which may at the same time have high levels of poverty. Myanmar was above the low income country threshold in 2014 with a GNI per capita of $1,270 thanks to rapid growth in recent years, including a boom in the gas sector, combined with an increase in net factor income from abroad. GNI is not a comprehensive measure of the economy and poverty, it needs to be considered along with other development indicators to decide the best course of policy action to deliver growth that will elimi- nate extreme poverty and boost shared prosperity. Countries that are close to the threshold as in the case of Myanmar may also be vulnerable to falling back to low income status. Myanmar has a long road ahead in sustaining economic growth and moving up the middle-income chain whilst ensuring that the poor are benefiting from that growth. Rising GNI has important implications for mobilization of government revenue to fund much needed pub- lic services for the poor. In the near term, Myanmar should not be affected in terms of access to conces- sional financing given large development needs. 12 GNI per capita (formerly GNP per capita) is the gross national income, converted to U.S. dollars using the World Bank Atlas method, divided by the midyear population. REAL SECTOR | 11 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Foreign Trade And Investment Growing Current And Trade Account Figure 16. Government vs. Private Imports (US$ m and % change yoy) Deficits Prvt imports (% change yoy) Gov imports (% change yoy) 19 Myanmar’s current account deficit in Prvt imports 1400 Gov imports 6 2014/15 widened on the back of rapidly growing FDI-related capital imports. The current 1200 5 Imports US$m Imports % change yoy account deficit is estimated to have increased from 1000 4 5.6 percent of GDP in 2013/14 to 6.3 percent of GDP 800 3 % change in 2014/15, driven by a growing trade deficit, which 2 600 is estimated to have increased from 4.5 percent of US$m 1 400 GDP in 2013/14 to 8.3 percent in 2014/15 (Figure 0 15). The services account is estimated to have 200 -1 posted a small surplus in 2014/15 thanks to fees 0 -2 2/2013 4/2013 6/2013 8/2013 2/2014 4/2014 6/2014 8/2014 2/2015 and royalties from the telecommunications and 10/2013 12/2013 10/2014 12/2014 gas sectors respectively; a 35 percent increase in foreign visitor arrivals linked to both tourism and Source: GOM, WB Staff Estimates business; and an associated jump in domestic air travel by non-residents. 20 The large current account deficit has posed short-term challenges, though investment related imports also bode well for Figure 15. Trade Account (US$ m) future productivity. Although foreign investment 3500 0 flows have helped to contain some of the 3000 -100 short-term pressures on Myanmar’s overall -200 external position, recent months have seen a 2500 -300 slight slowdown in investment partly linked to Imports US$m Exports US$m 2000 -400 the upcoming elections This combined with 1500 -500 exchange rate pressures linked to the general -600 strengthening of the US Dollar has weighed on 1000 -700 foreign exchange reserves, which at end-March 500 -800 2015 were reported at around 3 months of import 0 -900 cover.13 However, a big part of what is driving the 10/2014 11/2014 12/2014 1/2014 2/2014 3/2014 4/2014 5/2014 6/2014 7/2014 8/2014 9/2014 1/2015 2/2015 current account deficit in the short-term is going towards strengthening Myanmar’s productive Exports Imports Trade balance base, including its tradable sector. Although public sector imports have increased rapidly with Source: GOM, WB Staff Estimates fiscal expansion, most of the import demand comes from the private sector (Figure 16). Policy responses should therefore take into account the nature of the current growth in imports to ensure that these do not stifle investment. 13 IMF, “IMF Executive Board Completes 2015 Article IV Consultation with Myanmar,” Press Release No 15/428, September 18, 2015 FOREIGN TRADE AND INVESTMENT | 12 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Slowing Goods Exports 23 Myanmar’s gas exports do not seem to have yet been affected by the sharp drop 21 The slowdown in goods exports is partly due to a drop in export of forestry in international commodity prices. There are two possible reasons for this. The first is that gas prices products. Forestry exports in the first 11 months of are revised every three months by taking the last 2014/15 fell to US$65 million from US$ 750 million 12 months’ average of heavy fuel prices and a over the same period in the previous year (Figure series of production cost indices. This means that 17). This follows a ban imposed by the government there would be a lag between the drop in heavy on the export of raw timber logs, which accounted fuel prices that started in the summer of 2014 and for close to 90 percent of forestry exports. The ban the feedthrough to Myanmar’s gas prices. The has been effective since April 1, 2014 as part of second is that total gas production increased in the government’s efforts to promote conservation 2014/15 thanks to expanded output from Shwe in light of widespread concerns on over-logging. and Zawtika fields, which began production 2 years Until the ban, Myanmar was the only country to ago. Higher output could therefore have helped to export unprocessed teak logs from natural forests. offset any drop in gas prices to date. 22 Gas exports remained strong in 2014/15, helping to offset the loss from forestry. 24 Agriculture exports remained strong at around a quarter of total exports Gas exports increased by 43 percent in nominal including a pick-up in rice exports (Figure 19). terms from US$3 billion in the first 11 months of The quantity of rice exports increased by around 2013/14 to an estimated US$4.3 billion over the 18 percent, from 1.7 million tons in 2013/14 to Figure 17. Goods Exports (US$ m) Figure 18. Contribution to Export Growth (% yoy) Agriculture and fisheries Forestry products Agriculture and fisheries Minerals Gas Forestry products Garments Others 1400 Minerals Export growth (%yoy) 45% Contribution (percentage points) Gas 60% 1200 Garments 25% 40% 1000 20% 5% 800 US$ million 0% 600 -15% -20% 400 -35% -40% 200 -60% -55% 0 1/2015 2/2015 2/2014 3/2014 4/2014 5/2014 6/2014 7/2014 8/2014 9/2014 10/2014 11/2014 12/2014 2/2014 3/2014 4/2014 1/2015 5/2014 2/2015 6/2014 7/2014 8/2014 9/2014 10/2014 11/2014 12/2014 Source: GOM, WB Staff Estimates Source: GOM, WB Staff Estimates same period in 2014/15. Nearly all gas production around 2 million tons in 2014/15 according to from Myanmar is exported to China and Thailand. the USDA. Rice exports account for 6 percent of At 42 percent share of total goods’ exports in total formal exports, but the true share of rice in 2014/15, gas remains one of the big drivers of total exports is much higher as more than half of Myanmar’s overall trade fortunes (Figure 18). it is sold unofficially across the border to China. China from time to time bans rice imports from Myanmar, though informal rice trade continues. FOREIGN TRADE AND INVESTMENT | 13 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Figure 19. Share of goods exports in the first 11 Figure 20. Rice production and exports (2014/15) month of 2014/15 (%) 35,000 Export, ‘000 tons Forestry Others Agriculture products 1% Rice production, ‘000 tons 14% 30,000 and fisheries Garments 23% 25,000 8% 20,000 28,050 18,750 Tons Minerals 15,000 12% 10,000 Gas 12,600 42% 11,000 5,000 6,700 4,700 0 1,850 1,100 Vietnam Thailand Myanmar Cambodia Source: GOM, WB Staff Estimates Source: USDA, WDI, WB Staff Estimates 25 Rice exports to the EU, where Myanmar enjoyed preferential tariff rates, also percent compared to the same period last year. Media reports from the annual gems emporium increased, albeit from a low base. It grew by indicate that sales proceeds at this year’s about 80 percent during September 2014 to April emporium in July declined by 63 percent to US$1 2015 compared to the same period last year. It billion compared to record sales last year. This is should be noted, however, that despite the recent linked to disruption in extraction due to ongoing growth in rice exports, Myanmar remains a small conflict in jade producing areas but could also be exporter compared to its peers. Myanmar’s rice due slowing demand in China. exports were less than 30 percent of Vietnam’s and less than 20 percent of Thailand’s rice exports (Figure 20). Maize exports were up 32 percent due 27 Garment exports continue to grow, albeit slowly. In the first 11 months of to strong demand from China. Beans and pulses 2014/15, garment exports totaled US$875 million grew thanks to strong demand from India, which (8 percent of total goods exports) compared to absorbs 80 percent of Myanmar’s beans and US$800 million over the same period last year. pulses exports. Meanwhile Myanmar’s fisheries’ Surprisingly, the import of cotton and fabric exports declined by 14 percent as equipment and declined by 19 percent in the same period. The infrastructure capacity constraints in the sector slow pick up may be due to a combination of kept production below domestic demand. uncertainties in potential new markets such as the EU and the US, and new investments not yet 26 The official exports of minerals, including gems, slowed down in 2014/15 having begun production. and early 2015/16. In the first 11 months of the Fast Growing Goods Imports fiscal year, mineral exports rose to around US$1.4 billion (12 percent of goods exports) compared to US$ 1.1 billion over the same period last year. 28 The rapid growth in imports has been driven by the purchase of capital Within minerals, jade contributed around 8% of machinery (Figure 21). In the first 11 Myanmar’s total exports between September months of 2014/15, the share of machinery in 2014 and February 2015. Over this period, official total imports was around 37 percent, amounting statistics show that jade exports declined by 38 to US$4.6 billion, similar to the same period in FOREIGN TRADE AND INVESTMENT | 14 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Figure 21. Contribution to Import Growth (% yoy) Figure 22. Fuel pump price 2014-15 (Kyat/ gallon equivalent) Machinery Food and beverage 4350 Intermediates Base metals Contribution (percentage points) and yoy growth Light manufactures Refined oil 3850 Fabric Others Import growth (% yoy) Kvyat/gallon 3350 110% 2850 2350 60% 1850 10% 1350 May June August March April February November February January July March December September October January -40% 2/2014 3/2014 4/2014 5/2014 6/2014 7/2014 8/2014 9/2014 1/2015 2/2015 10/2014 11/2014 12/2014 Singapore 92 Ron Myanmar 92 Ron Singapore Diesel Myanmar Diesel Source: GOM, WB Staff Estimates Source: The Voice, WB Staff Estimates the previous year. The import of base metals also remained at a comparable level of around US$1.4 Concentration of Trading Partners billion. Capital goods and intermediate inputs have 30 averaged around three quarters of total imports Myanmar’s trade has almost entirely in the last two years, reflecting rapid growth in been confined to its neighbors private sector investment demand. The import of though it is gradually beginning to consumables such as food and beverage, and light diversify. International sanctions have meant manufactures, have remained relatively low and that Myanmar’s current trade pattern—focused steady at around 5 and 7 percent of total imports mainly on South Asia and East Asia region—does respectively. not reflect its true potential (Figure 23). China and Thailand account for around three quarters 29 The contribution of refined oil in import growth declined in 2014/15, thanks to falling international commodity prices. Myanmar’s exports, which are largely driven by gas. With the exception of Thailand, Hong Kong, India and the UK, Myanmar has a deficit with most In April 2014, refined oil contributed nearly half of of its principal trading partners. Outside of China, year-on-year import growth; in February 2015 it the largest source of imports for Myanmar is had a negative contribution to year-on-year import Singapore, which is a major source of Myanmar’s growth. Myanmar imports most of its refined oil refined oil imports. from Singapore. Fuel pump prices began to fall sooner in Singapore, whilst remaining relatively Increased FDI Commitments sticky in Myanmar even after accounting for 31 transportation and other trade costs (Figure 22). Foreign Direct Investment commitments Concerns at the time were expressed about the lack rose very sharply in 2014/15. of competition in the retail market for petroleum. Commitments went from around US$3.2 Since November-December 2014, however, there billion in 2013/14 to around US$8 billion in was a significant downward adjustment, including 2014/15. Around 40 percent of this was driven after the issue was raised in the parliament.14 by investment commitments in the gas sector, which picked up rapidly following agreement 14 The Voice, “Will Fuel Price Actually be Lowered,” March 30-April 5, 2015 on 20 Production Sharing Contracts in 2014/15. FOREIGN TRADE AND INVESTMENT | 15 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Commitments in telecommunication and in earlier years. The telecommunications sector manufacturing sectors (20 percent each) also grew for example saw major inflow of FDI in the first rapidly, totaling in excess of US$1.5 billion each in five months of 2014/15, totaling an estimated 2014/15. US$ 3.32 billion (i.e. inclusive of commitments from earlier years). In the manufacturing sector, 32 There will be a lag between this jump in commitments and actual disbursement around 70 percent of FDI commitments is for garments, which is also expected to have started of foreign investments. This is partly due to disbursing. In the garments sector, disbursement investment slowdown but also due the long lead and construction activities usually start within six time before investments in some sectors such months of project approval. as gas can really take off. Therefore some of the disbursements in 2014/15 reflect commitments Figure 23. Bilateral Trade (US$ m) Figure 24. Bilateral Trade And Exchange Rate: 6000 3000 Singapore Fig. 24 4000 Exports (Mar14-Feb15) 2000 Imports (Mar14-Feb15) Exports (US$ m) Imports (US$ m) MMK per Sing$ Trade balance 1000 2000 130 800 0 30 790 Kyat/Singapore $ 0 US$m -70 780 -1000 US$m US$m -2000 -170 770 -2000 -270 760 -4000 -3000 -370 750 -6000 -4000 -470 740 Japan Singapore India UK Malaysia China Hong Kong Thailand Indonesia Germany South Korea US -570 730 3/1/2014 4/1/2014 5/1/2014 6/1/2014 7/1/2014 8/1/2014 9/1/2014 1/1/2015 2/1/2015 11/1/2014 12/1/2014 10/1/2014 Source: GOM, WB Staff Estimates Source: GOM, CEIC, WB Staff Estimates Figure 25. Number And Value (Us$ M) Of Fdi Projects Figure 26. FDI by Country (2014-15) (Mar 2014-Feb 2015) 180 5000 Singapore Number of new FDI projects in 2014/15 160 4000 140 Vietnam Investment value ($ million) Manufacturing 120 Canada Oil and Gas $3,222m 3000 Netherlands $1720m 100 Hotel and Tourism $360m India Transport $1966m Real Estate 1,048m 80 UK 2000 Agriculture $40m Other $242m 60 Thailand Fisheries $87m Power $40m 40 1000 Hong Kong 20 Japan China South Korea Others 0 0 0 20 40 60 Mining $6m -20 Number of enterprises Source: CEIC, DICA, WB Staff Estimates Source: CEIC, DICA, WB Staff Estimates FOREIGN TRADE AND INVESTMENT | 16 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Inflation, Monetary And Exchange Rate Rising Inflationary Pressures Figure 28. Contribution to monthly inflation (%) Non Food Food Monthly inflation 33 Inflationary pressures increased in 2014/15 and have remained high in the 2.3 first half of 2015/16. Consumer price inflation in the year ending March 2014/15 reached 7.5 1.8 Percentage contribution percent compared to 6.3 percent in the previous 1.3 year (Figure 27). Inflation had slowed in the first half of 2014/15, but accelerated very rapidly in 0.8 November 2014 when the Consumer Price Index (CPI) increased by around 2.4 percent. Monthly 0.3 inflation declined thereafter, before picking up again in April 2015 (Figure 28), reaching around 10 -0.2 2/2014 3/2014 1/2015 4/2014 2/2015 3/2015 5/2014 4/2015 6/2014 7/2014 5/2015 8/2014 9/2014 10/2014 11/2014 12/2014 percent in the year to July 2015. This is in contrast to most countries in the region where headline inflation has dropped sharply over the course of Source: GOM, WB Staff Estimates Figure 27. Contribution to yearly inflation (%) Figure 29. Inflation in selected countries in the region (yoy %) 8.0 Non Food Food Vietnam Thailand Philippines 7.0 Year on Year inflation Malaysia Laos PDR Indonesia China Myanmar 6.0 8.5 Percentage contribution 5.0 6.5 yoy % change 4.0 3.0 4.5 2.0 2.5 1.0 0.0 0.5 12/2014 2/2014 3/2014 4/2014 5/2014 6/2014 7/2014 8/2014 9/2014 10/2014 11/2014 1/2015 2/2015 3/2015 4/2015 5/2015 4/2015 5/2015 3/2015 9/2014 10/2014 11/2014 12/2014 1/2015 2/2015 7/2014 8/2014 6/2014 3/2014 4/2014 5/2014 2/2014 -1.5 Source: GOM, WB Staff Estimates Source: CEIC, WB Staff Estimates 2014/15. With the exception of Indonesia, year- on-year inflation in May 2015 was at 2 percent 34 Food items have been the big drivers of inflation in Myanmar in 2014/15 or below (Figure 29). Lower oil prices have and early 2015/16. Food constitutes around 68 contributed to falling headline inflation in the percent of the CPI basket. The contribution of region, though core inflation (i.e. excluding food rice, fish and meat has either fallen or remained and energy) has remained relatively stable.15 steady since November 2014 (Figure 30). This is 15 The World Bank Group, “Global Economic Prospects: The Global Economy in Transition,” June 2015 INFLATION, MONETARY AND EXCHANGE RATE | 17 MYANMAR ECONOMIC MONITOR OCTOBER 2015 consistent with international food prices (Figure in Myanmar. These needs were, and still largely 31) and growth in agriculture in Myanmar. The are, met through the sale of short-term Treasury big drivers of food price inflation since November Bills (3-month) to CBM (monetary financing) and 2014 were processed foods and to some extent Figure 31. International food and fuel prices fruits and vegetables (“other food” in Figure 30). (% change) The contribution of cooking oil also picked up. 5% Part of this is linked to the nominal depreciation of the Kyat because edible oil and milk products -5% constitute the largest share of food imports. -15% However, domestic supply constraints in the face yoy % change of rapidly rising consumption of processed foods is -25% Food prices also likely to be a big factor. -35% Fuel prices 35 Non-food inflation was driven mostly by housing costs (Figure 32). This reflects -45% the ongoing pressures on the rental market -55% particularly through the big increase in demand 2014M4 2014M5 2014M6 2014M7 2014M8 2014M9 2015M1 2015M2 2015M3 2015M4 2015M5 2015M6 2014M10 2014M11 2014M12 for both residential and commercial space coming from foreign investors and donors in particular. Source: WB commodity price data Figure 30. Contribution to yearly food inflation (%) Figure 32. Non-food inflation drivers (% yoy) Rice Cooking Oil Clothing&Apparel Housing 7.00 Fish Meat Egg Other Food Fuel&Light Misc Goods&Services Percentage points contribution Education Medicine Percentage points contribution 6.00 3.00 Conveyance Cleansing Non food 5.00 2.00 4.00 3.00 1.00 2.00 1.00 0.00 0.00 -1.00 -1.00 2/2014 3/2014 4/2014 5/2014 6/2014 7/2014 8/2014 9/2014 1/2015 2/2015 3/2015 4/2015 5/2015 10/2014 11/2014 12/2014 2/2014 3/2014 4/2014 5/2014 6/2014 7/2014 8/2014 9/2014 1/2015 2/2015 3/2015 4/2015 5/2015 10/2014 11/2014 12/2014 Source: GOM, WB Staff Estimates Source: GOM, WB Staff Estimates This should moderate in the coming years with subscription of medium-term Treasury Bonds (2, 3 completion of ongoing real estate projects. and 5-year) by commercial banks. A policy priority Transportation prices have also declined since the for the government has been to reduce the highly end of 2014 thanks to falling fuel prices. inflationary monetary financing of the budget. Moderate Growth in Reserve Money 37 Reserve money declined in end 2014 likely due to back-loaded government 36 Public sector financing needs have historically been a big driver of reserve spending but also improved fiscal performance (Figure 33). This is reflected in falling Net Claims on money growth and a major contributor to inflation Government (monetary financing) in the latter part INFLATION, MONETARY AND EXCHANGE RATE | 18 MYANMAR ECONOMIC MONITOR OCTOBER 2015 of 2014 (Figure 34), which tends to pick up by the 2013/14, money supply was primarily driven by last quarter of the fiscal year due to back-loaded public sector demand. In 2013/2014, trade and government spending (Figure 35). Nonetheless, investment related foreign exchange inflows led monetization of the budget deficit is also expected to a big rise in Net Foreign Assets. In addition to to have declined in 2014/15 as the government this, credit to the private sector has been growing diversifies sources of financing towards medium- very rapidly at around 50 percent year on year in term Treasury Bonds, Treasury Bill auctions both 2012/2013 and 2013/2014 (Figure 37), and (starting in January 2015), and increased access to at around 36 percent in 2014/15. foreign borrowing on concessional terms. Figure 33. CBM Assets and Reserve Money Figure 34. CBM Net Domestic Assets (MMK Billions, monthly) (MMK Billion, eom) Net Claims on Government 12500 Claims on Commercial Banks Net claims on government (MMK Billions) 9000 10500 900 8500 Claims on commercial banks 8500 800 MMK billions 6500 8000 Net Foreign Assets 700 4500 Net Domestic Assets 7500 Reserve Money 600 2500 7000 500 500 3/2014 5/2014 7/2014 9/2014 9/2013 11/2013 1/2014 7/2013 1/2013 3/2013 5/2013 6500 400 -1500 5/2014 7/2014 9/2014 11/2013 1/2014 3/2014 9/2013 1/2013 3/2013 5/2013 7/2013 Source: CBM, CEIC, IMF/IFS Source: CBM, CEIC, IMF/IFS Strong Growth in Money Stock Figure 35. CBM Net Domestic Assets (% change qoq) 38 Despite moderate growth in reserve 30% money, the overall growth in money stock 20% (M2) has remained strong in line with growing domestic demand. The level of money stock grew qoq % change 10% by 33 percent in 2013/2014 in nominal terms compared to a five-year peak of 48 percent growth 0% in 2012/13. In the year to November 2014, money supply grew by 21 percent and is expected to have -10% Net Domestic Assets picked up further by the end of the fiscal year due Net Claims on Government to Net Claims on Government. The ratio of money -20% Reserve Money stock to reserve money (money multiplier) has 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 kept growing since the beginning of the 2014/15 fiscal year (Figure 36). Source: CBM, CEIC, IMF/IFS 39 The contribution to growth in money stock has gradually shifted over the course of the past two years (Figure 37). Prior to INFLATION, MONETARY AND EXCHANGE RATE | 19 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Rapid Rise In Private Sector Credit 41 Officially, the CBM reports that the banking sector is well-capitalized. The 40 Rapid rise in private sector credit has been on the back of a historically low base of financial intermediation. Interest rates capital adequacy ratio was just over 20% by the end of the 2014/15 fiscal year, well-above the minimum 10 percent (Figure 40). The non-performing loan are not yet applied as policy instruments to affect (NPL) ratio of private banks is reported at around credit growth, despite partial relaxation of controls 2 percent. However, it is essential to note that in 2014. The CBM policy rate has remained fixed commercial banks do not yet follow international at 10 percent since January 2012. Deposit and standards of accounting, which may mean lending rates for commercial banks are also weaker asset quality than currently implied by administratively determined (Figure 39). these ratios, and transparency in data reporting Figure 36. Monetary aggregates (Jan 2013 = 100) Figure 38. Commercial Bank Assets (MMK Billion) 150.0 2.6 145.0 Reserve Money 7,000 2.5 Broad Money M2 Claims on Central Bank 140.0 2.4 Money multiplier Net Claims on Central Government 135.0 5,000 2.3 Claims on Nonfinancial Public Corporations Money multiplier 130.0 Claims on Private Sector MMK billions 2.2 125.0 3,000 2.1 120.0 2.0 1,000 115.0 110.0 1.9 105.0 1.8 -1,000 100.0 1.7 7/2014 9/2014 11/2014 9/2013 11/2013 1/2014 3/2014 5/2014 5/2013 7/2013 1/2013 3/2013 -3,000 4/2010 2/2011 12/2011 10/2012 8/2013 6/2014 12/2006 10/2007 8/2008 6/2009 12/2001 10/2002 8/2003 6/2004 4/2005 2/2006 Source: CBM, CEIC, IMF/IFS, WB Staff Estimates Source: CBM, CEIC, IMF/IFS Figure 37. Annual contribution to growth in Broad Figure 39. Interest rates (%) Money M2 (percentage points) NFA Net Claims on Gov Contribution (percentage points) 40 Private sector credit 55% 35 Other credit 13% 30 Other items (net) Max Min 45% 25 Interest rates 20 35% 36 6% 15 11% 8 8 8 25% 14% 10 3% 45% 13 12% 5 10 10 10 10 10 9 9 3% 5 4 15% 31% 0 22% 25% Deposit (3 M) Lending (Small Personal) Deposit (6 M) Lending (Agri) CBM Policy Deposit (9 M) Lending (working cap) T Bond 5-yr T-Bond 3-yr T-Bond 2-yr T Bill (3 M) 14% 16% 5% -5% 10% -15% 2009 2010 2011 2012 2013 2014 Source: CBM, CEIC, IMF/IFS, WB Staff Estimates Source: CBM, CEIC, IMF/IFS INFLATION, MONETARY AND EXCHANGE RATE | 20 MYANMAR ECONOMIC MONITOR OCTOBER 2015 remains a challenge. As such, an important reform Figure 40. Capital Adequacy of Private Banks priority, which is already underway, is improving asset classification requirements and the quality of data from banks, moving gradually towards Risk Weighted Asset Capital international good practices. 30 Capital and risk weighted asset (MMK mil) Capital Adequacy Ratio (%) 6,000 25 42 The Capital adequacy (%) 5,000 banking sector is very small with 25.0 24.8 20 23.2 22.8 limited lending activities that tend to 4,000 21.5 21.3 19.8 21.4 limit exposure to sector vulnerabilities. There is 3,000 15 limited sectoral concentration in lending (Figure 2,000 10 41). Trade finance with limited credit default risk 1,000 5 accounts for around a third of lending. Lending - - for the rapidly growing construction and real Q1 13/14 Q2 13/14 Q3 13/14 Q4 13/14 Q1 14/15 Q2 14/15 Q3 14/15 Q4 14/15 estate sectors, which tend to be higher risk, are relatively low. Lending growth has exceeded growth in deposits, which nonetheless was strong Source: CBM at 20 percent in the year ending 2014/15. The loan to deposit ratio of the banking sector was at 55 Figure 41. Commercial bank lending by sector percent. (% share) 43 Agriculture Manufacturing Trade Transportation The financial sector is modernizing slowly Construction Services Real Estate Others with new entrants. A total of nine new international banking licenses were issued during 100% in 2015 to a cohort of largely pan Asian banks. These 14% 13% 13% 12% 10% 11% foreign banks will focus on wholesale lending to 80% 12% 10% 12% 12% 12% foreign firms and are now allowed to intermediate 60% 15% % share retail deposits. A number of foreign micro-finance 30% 31% 33% institutions (MFI) have entered the market. These 40% 34% MFIs will help modernize the microfinance sector 20% 13% 13% 13% 15% as they operate using a sustainable business model 20% 19% 17% 9% with new products, risk management policies and 0% Q1 2014/15 Q2 2014/15 Q3 2014/15 Q4 2014/15 procedures, and modern core banking systems. Source: CBM Exchange Rate Pressures are above this cut off, and offers that are below 44 The liberalization of Myanmar’s external accounts have put pressure on its the cut off. The cut off rate in the daily auctions is in turn the official reference rate set by the CBM. relatively recent exchange rate reforms. The CBM Authorized dealers and licensed money changers initiated daily foreign exchange auctions in 2012 to are allowed to trade US Dollars within a band of help develop an official foreign exchange market, +/- 0.8 percent of the official reference rate. In and eliminate multiple and parallel exchange 2013, the government also introduced a foreign rates. Under the auction system, the CBM exchange interbank market to complement the invites bids to purchase and offers to sell foreign auctions by allowing commercial banks to trade exchange from 11 commercial banks. The CBM foreign exchange among themselves. sets a cut off exchange rate and accepts bids that INFLATION, MONETARY AND EXCHANGE RATE | 21 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Figure 42. Banking sector liquidity (loans/deposits) which are weighing on capital inflows to emerging markets in Asia. This is in contrast to continued easing in major economies such as the Euro Area Loans/Deposits Deposits (% change yoy) Loans (% change yoy) and Japan, as well as structural trends, including 62% reduced US oil imports. 57% 60% 55% 46 51% 50% In Myanmar, the situation was Loans / deposits 50% compounded by a growing current 40% account deficit and slowing foreign investment 30% 31% 33% 36% inflows discussed above. The excess demand for 20% 25% foreign exchange in the auctions in November 10% 20% 20% 19% 2014 led to the reemergence of a parallel exchange rate. Importers were willing to pay 1-1.5 percent 0% Q1 2014/15 Q2 2014/15 Q3 2014/15 Q4 2014/15 above the reference rate, which was adjusting only gradually to growing demands. Although the Source: CBM gap narrowed in January and February, it picked Figure 43. Nominal exchange rate (US$ vs. Local cur- Figure 44. Official and Parallel Exchange Rates rency) (% change, yoy) 17% 16% Local currency 12% yoy % change 12% depreciation 12% 7% 4% 3% 2% 3% -4% 2014M06 2014M07 2014M08 2014M09 2014M10 2014M11 2014M12 2015M01 2015M02 2015M03 2015M04 2015M05 2015M06 Indonesia Myanmar Malaysia Philippines Thailand Vietnam Source: CEIC, WB Staff Estimates Source: CEIC, www.naungmoon.com, WB Staff Estimates 45 The general strengthening of the US Dollar since mid-2014 has put downward up again, reaching 4 percent in March. This led the CBM to make an important adjustment to the pressure on the Kyat-Dollar exchange rate (Figure reference rate from Kyat 1030/US$ in February to 44). The US Dollar has appreciated significantly Kyat 1080/US$ by end April, Kyat 1090/US$ by end against most currencies. For example, in the May and closer to Kyat 1120/US$ by end of June. year to June 2015 the Indonesian Rupiah fell 12 The Kyat has therefore depreciated by nearly 12 percent against the US Dollar in nominal terms, percent in nominal terms against the US Dollar and the Malaysian Ringgit 16 percent (Figure 43). between June 2014 and June 2015. The general rise in the Dollar is attributable to the approaching normalization of US monetary policy, including an eventual increase in interest rates, INFLATION, MONETARY AND EXCHANGE RATE | 22 MYANMAR ECONOMIC MONITOR OCTOBER 2015 47 Despite the depreciation of the Kyat and other Asian currencies against the US which as noted above is around the time when CBM adjusted the Kyat-US Dollar reference rate. Dollar, external competitiveness was hampered by Similar to the examples of Indonesia and Malaysia appreciating Real Effective Exchange Rates (REER) above, this adjustment was important to maintain (Figure 45). The REER is an index of the domestic Myanmar’s external competitiveness. currency with currencies of all trading partners, adjusted for trade weights and relative inflation. When considering the REER, Malaysia’s Ringgit 49 Monetary authorities in the region have generally maintained exchange rate depreciated by only 1.4 percent in the year to May flexibility against the US Dollar’s appreciating (compared to 16 percent nominal depreciation trend since 2014. Official gross reserves of the against the US Dollar in the year to June), while ASEAN-5 were 4.9 percent lower in May 2015 Indonesia’s Rupiah actually appreciated in real than at the start of the US Dollar appreciation terms against its trading partners over this period, trend in June 2014. This decline is comparatively by 2.3 percent (compared to 12 percent nominal modest, demonstrating that Asian central banks depreciation against the US Dollar in the year to have tended to avoid selling reserves to prop up June). In such cases, maintaining a fixed exchange their currencies against the US Dollar, preferring rate against the US Dollar would have impeded instead to preserve (and where possible, international competitiveness even further. reinforce) reserve buffers (Figure 46). Only Thailand and Malaysia seem to have significantly drawn down on their reserves. Maintaining this Figure 45. Real Effective Exchange Rates Figure 46. Gross reserves (US$ billion cumulative change) 130.0 60 50 120.0 US$ billion (cumulative change) 40 Myanmar REER index 110.0 China 30 Indonesia Malaysia 20 100.0 Philippines 10 90.0 0 -10 80.0 Jul-14 Indonesia Malaysia Philippines Jan-15 Jun-14 Oct-14 Apr-15 Sep-14 Aug-14 Feb-15 Dec-14 Nov-14 Mar-15 May-15 May-14 -20 Thailand Singapore Vietnam Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Source: BIS, WB Staff Estimates Source: BIS, WB Staff Estimates 48 Myanmar also experienced some REER appreciation between November 2014 flexible stance has allowed the currencies of other commodity exporters in the region (like Malaysia and March 2015 (Figure 45). Over this period, and Indonesia) to absorb some of the shock from the Kyat appreciated in nominal terms against lower global commodity prices and demand, currencies of major trading partners including notably including hydrocarbons, without which Japan, Malaysia, Korea, Indonesia, and Singapore. the drag on domestic profits, household incomes, It is also around this time that relative prices public revenues and, ultimately, economic growth between Myanmar and its trading partners began would have been greater. to diverge (Figure 29). Between March and May 2015, the REER for Myanmar depreciated slightly, INFLATION, MONETARY AND EXCHANGE RATE | 23 MYANMAR ECONOMIC MONITOR OCTOBER 2015 50 CBM’s recent stance to have greater flexibility in the Kyat-Dollar exchange rate foreign exchange can lead to emergence and/ or growth in the parallel market; increased is a positive move. This has helped to close the gap speculative trading; undervaluation in the parallel between the official reference rate and the parallel market as people begin to hoard foreign exchange market in August and early September 2015 (Figure as a store of wealth; and harmful impact on 44). The CBM’s instruction in May to ensure that investment and growth due to lack of foreign government transactions are carried out in Kyat exchange for imported capital and intermediate was also appropriate. However, administrative goods. Whilst exchange rate pressures are likely measures introduced in May to impose limits on to remain over the short-term (see discussion on US Dollar withdrawals have sent worrying signals economic outlook and policy watch), these need to the market. The parallel market responded by to be addressed through complementary reforms selling US Dollars at a higher price (i.e. beyond the that maintain fiscal and monetary policy discipline 0.8 percent limit) due to excess demand at the to manage pressures on the current account. official rate. Speculation started as traders would purchase US Dollars at the official rate and sell at a higher price on the parallel market. Media reports indicated that households held on to US Dollars as a store of wealth. There were also indications that banks and currency traders were not willing to release US Dollars, presumably in the expectation that the Kyat may depreciate more, which became a self-fulfilling prophecy. 51 Administrative measures to control foreign exchange transactions can be counterproductive as illustrated by examples from elsewhere. Experience from other countries that liberalized their exchange rates (Box 2) suggest that administrative controls on INFLATION, MONETARY AND EXCHANGE RATE | 24 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Box 2. Exchange Rate Liberalization in Transition Economies16 Centrally planned economies in Central and Eastern Europe began their transition to market oriented institutions in the early 1990s. This included price and exchange rate liberalization (Roaf et al, 2014). Choosing a suitable exchange rate regime that could induce a correct set of relative prices and effectively control inflation in an open economy was a major concern for policymakers (Desai, 1998). These countries adopted various exchange rate regimes: fully floating, managed float, independent float, crawling peg, and peg. Soon after liberalization, most countries experience real appreciation of their currencies. According to Desai (1998), this was linked to initial undervaluation of the nominal exchange rates in the immediate period after the exchange rate was floated. Real appreciation may also be explained by a surge in productivity and income in the tradable sector following liberalization, which leads to increased demand for and relative prices of non-tradables (Halpern and Wyplosz, 2001). Halpern and Wyplosz argue that this process is unavoidable for a developing economy. Few if any countries had fully floating exchange rates. Exchange rate or managed floats were used as nominal anchors for managing inflation. These were effective in countries that had supporting measures in terms of ensuring fiscal and monetary discipline. Poland and Czechoslovakia were able to stabilize prices whilst others could not manage inflationary expectations due to lack of credibility of the exchange rate anchor. Several Sub-Saharan African countries also undertook fundamental reforms in the 1980s and early 1990s to liberalize their international trade and foreign exchange rate regimes. A study by Maehle et al (2013) looks at the experience of seven of these countries.17 Prior to liberalization, many of the countries experienced parallel exchange markets with a maximum premium of 4,200 percent in Ghana and 2,100 percent in Uganda during the 1980-84 period. In that same period, real GDP per capita was either in decline or stagnant. There were extensive administrative controls on and rationing of foreign exchange. The reform period posed a number of challenges. There were instances of sharp currency depreciation, high inflation, and large fiscal and current account deficits. Mozambique for about nine years saw increased inflation and currency depreciation from monetary expansion, supply shocks and continued large fiscal deficits (Maehle et al, 2013). When faced with external shocks during the reform process, some countries tried to fix the exchange rate without supportive fiscal and monetary policies. Malawi employed stop and go exchange rate policies to manage external shocks and used informal administrative procedures to fix the exchange rate when its reserves were low. Malawi’s administrative controls included rationing foreign exchange and surrender requirement on export proceeds. Tanzania, on other hand, gradually removed surrender requirement and export proceeds over five years as it switched from a peg to a unified managed float successfully. The gradual removal of controls and complete elimination of them happened despite Tanzania facing high depreciation during the reform process. Maehle et al (2013) concluded that attempts to fix the nominal exchange rate through administrative means at levels that were inconsistent with the underlying fundamentals and fiscal and monetary policies are used, an increasingly overvalued exchange rate and foreign exchange shortages forced the authorities to either resort to increasingly damaging controls and rationing, or to undertake large ad hoc evaluations, which can have devastating effects on growth and poverty reduction. Economies in the case study benefited the most when reform efforts to liberalize foreign exchange market are sustained despite external shocks, inflation, currency appreciation and depreciation. INFLATION, MONETARY AND EXCHANGE RATE | 25 MYANMAR ECONOMIC MONITOR OCTOBER 2015 16 References: (i) Desai, P. (1998). “Macroeconomic Fragility and Exchange Rate Vulnerability: A Cautionary Record of Transition Economies.” Journal of Comparative Economics, 26, 621-641; (ii) Fomby, T., Ikeda, Y., and Loayza, N (2009). “The Growth After math of Natural Disasters”. World Bank Policy Research Working Paper 5002; (iii) Halpern, L. and Wyplosz, A. (2001). “Econom ic Transformation and Real Exchange Rates in the 2000s: The Balassa-Samuelson Connection.” Economic Survey of Europe, No. 1. Chapter 6; (iv) Maehle, N., Haimanot, T. and Khachatryan, A. (2013). “Exchange Rate Liberalization in Selected Sub-Saharan African Countries: Successes, Failures, and Lessons.” IMF Working Paper, 23, 346-57; (v) Roaf, James., Atoyan, Ruben., Joshi, Bikas., Krogulski, Krzysztof., and an IMF staff team (2014). “25 Years of Transition: Post-Communist Europe and the IMF.” Washington, D.C. International Monetary Fund. 17 Countries in the case study are Ghana, Mozambique, Tanzania, Uganda, Zambia, Kenya, and Malawi. Real GDP per capita data available through 2010. INFLATION, MONETARY AND EXCHANGE RATE | 26 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Fiscal Policy Fundamental Shifts In The Union has undergone significant rebalancing – the share Budget of social services (e.g. education, health) in total spending has increased from 10 to 33 percent between 2009 and 2014; and the share of capital 52 The Union Budget18 has undergone fundamental shifts in the past three years in line with government objectives to fill spending has fallen from 63 to 38 percent. important gaps in public service delivery. Decades Relatively Prudent Fiscal Stance of government underspending on the back of a very low revenue base previously contributed to poor economic and social outcomes. Since 2011, one 53 The 2014/15 general government deficit outturn points to continued efforts at off revenue measures including the adjustment maintaining a relatively prudent fiscal stance. The to the exchange rate, which led to a level change deficit outturn is estimated at 4 of GDP compared in government receipts, and revenue windfalls to 6 percent in the 2014/15 Budget Estimate (BE) (e.g. from telecom licensing fees in 2014/15) (Figure 47). This is thanks to better than expected have helped to finance increased spending whilst revenue collection (11.9 percent of GDP outturn maintaining a relatively prudent fiscal stance. vs. 9.7 percent in the budget). The general Efforts to strengthen tax administration and government deficit is expected to expand to 4.9 expand the revenue base have also contributed to percent of GDP in 2015/16 due to lower revenue improved revenue collections, which went from and a slight increase in non-interest spending, in around 6 to 11 percent of GDP between 2009 and particular government wages. This is illustrated 2014. The composition of government spending by a widening primary deficit (overall balance Figure 47. Aggregate Revenue, Expenditure And Figure 48. Fiscal balances (% of GDP) Balance (% Of Gdp) 15.7 15.8 3.0 16.0 14.7 - 14.1 2.8 14.0 1.0 2.2 (1.0) Revenue and expenditure (% of GDP) 11.9 0.1 0.1 Fiscal balances (% of GDP) 12.0 10.8 (1.0) Overall balance (% of GDP) (2.0) (3.3) 9.7 9.9 (4.0) 10.0 (4.9) (3.0) (6.0) (3.0) 8.0 (3.3) (1.9) (4.0) (5.0) (4.0) (2.6) 6.0 (4.9) (5.0) (7.0) (3.6) 4.0 (4.7) (6.0) (6.0) (9.0) 2.0 - (7.0) (11.0) 2013/14 PA 2014/15 BE 2014/15 RE 2015/16 BE 2013/14 PA 2014/15 BE 2014/15 RE 2015/16 BE Revenue Expenditure Overall balance Overall balance Current balance Primary balance Source: MOF, WB Staff Estimates19 Source: MOF, WB Staff Estimates 18 This section covers the Union Budget excluding SEE operations. The Union Budget is the equivalent of the general government (i.e. central and sub-national authorities that are engaged in non-market, non- production public service delivery). 19 Abbreviation: BE = Budget Estimates, RE = Revised Estimates, PA = Preliminary Actuals FISCAL POLICY | 27 MYANMAR ECONOMIC MONITOR OCTOBER 2015 excluding interest payments), which is estimated further gains from exchange rate impacts on Kyat to increase from 2.1 to 3.5 percent of GDP (Figure denominated gas receipts, which together with 48). Despite continued growth in spending, higher production could offset any drop in gas the government maintains a recurrent surplus prices. Despite these, at around 10 percent, the (recurrent revenue less recurrent expenditure), tax to GDP ratio in Myanmar remains below the estimated at 2.2 percent of GDP in 2014/15. ASEAN average, which is closer to 14 percent of GDP. 54 The 2015/16 Union Budget Law (UBL) places a cap on the absolute amount of Figure 49. Government receipts (% of GDP) new borrowing permitted for the year. The cap is at Kyat 3.9 trillion, which covers borrowing by the Taxes and duties SEE contributions Other domestic Grants public sector as a whole. This includes SEEs and 14.0 Government receipts (% of GDP) external loans approved by the Parliament. Based 0.4 on available data, net financing from external 12.0 0.1 1.3 0.3 sources is expected to increase in 2015/16, as is 10.0 1.1 0.3 0.8 0.8 0.8 financing from longer-term treasury bonds. As 8.0 1.4 0.8 1.0 discussed above, monetary financing is expected 6.0 to decrease slightly. This is an important move 9.4 towards diversifying financing mix away from 4.0 8.1 7.7 8.1 short-term, costly, domestic borrowing. The 2.0 government is working on developing a borrowing - plan for future years to maintain a sound mix in 2013/14 PA 2014/15 BE 2014/15 RE 2015/16 BE its debt portfolio and public debt at sustainable levels. Source: MOF, WB Staff Estimates Improving Revenue Performance Figure 50. Taxes and duties (% of GDP) 55 Revenue performance was strong in 2014/15 with outturn estimated to be 3.5 Income tax 23 percent higher than what was expected in Taxes anmd duties (% of GDP) the original budget. This is largely due to higher 3.0 Custom duties taxes and duties collections, which account for 2.5 more than three quarters of total revenue. Within 2.0 Commercial taxes this, taxes on use of state property jumped by 2 1.5 percentage points of GDP due to telecom licensing Tax on use of state receipts. As the windfall from telecom licensing 1.0 property begins to recede, general government revenue is 0.5 Other taxes expected to fall in 2015/16 to around 9.9 percent - of GDP from an estimated 11.9 percent of GDP in 2013/14 2014/15 2014/15 2015/16 PA BE RE BE 2014/15 (Figure 49). The decline is projected to be partially offset by higher collection of income Source: MOF, WB Staff Estimates and commercial taxes (Figure 50). This may be due to some reduction in tax exemptions, particularly in the services sector, which was instituted in the 2015/16 Tax Law. There may be also be FISCAL POLICY | 28 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Figure 51 . Functional Breakdown (% Of GDP) Figure 52. Social Services Breakdown (% Of GDP) Education Health Pension General services Defense Economic services Social services Labor Social welfare Others 2.50 5.00 4.13 1.98 2.02 4.06 1.91 3.74 3.77 1.82 Spending (% of GDP) Spending (% of GDP) 2.00 4.00 3.81 3.89 3.90 3.00 3.55 1.50 1.18 1.16 3.15 1.07 1.03 2.92 2.69 1.00 2.00 2.41 0.93 0.71 0.66 1.32 1.26 1.16 0.50 0.51 1.00 0.71 0.02 0.02 0.02 0.01 0.02 0.06 0.06 0.10 - - 2013/14 PA 2014/15 BE 2014/15 RE 2015/16 BE 2013/14 PA 2014/15 BE 2014/15 RE 2015/16 BE Source: MOF, WB Staff Estimates Source: MOF, WB Staff Estimates 56 Receipts from SEEs (income tax, commercial tax and other contributions) 58 Social sector and economic services spending continue to trend up as a share account for around a quarter of general of GDP in the 2015/16 Budget (Figure 51). Social government revenue. Overall receipts are services for the first time constitutes the largest expected to increase slightly from an estimated share of the UBL (3.9 percent of GDP compared 2.5 percent of GDP in 2014/15 to 2.8 percent to 3.77 percent for defense). There is also a sharp of GDP in 2015/16, which nonetheless remains decline in spending on general public services (1.26 lower than collections in 2013/14 at 3.3 percent percent of GDP in 2014/15 to 0.71 percent). Whilst of GDP. Income tax, commercial tax and other defense spending remains high compared to other contributions by the Myanmar Oil and Gas countries, it continues to trend down both as a Enterprise (MOGE) accounts for nearly 11 percent share of GDP and as a share of the budget. of all general government receipts. Aligning Spending With 59 Within social sectors, pensions have seen the biggest increase, albeit from a low base (from an estimated 0.66 percent of GDP in Development Priorities 2014/15 to 0.93 percent in 2015/16). Spending on education and health are both expected to remain 57 Despite better than expected revenue, general government spending outturn as at similar levels in terms of share of GDP in the 2015/16 UBL. Pensions will see a major increase a share of GDP in 2014/15 was close to what was linked to the increase in civil service salaries. estimated in the Budget. This helped narrow the Health will see a slight decline in real terms, after a general government deficit. Despite the declining nearly nine fold increase between 2009 and 2013. trend as a share of the Budget, defense spending outturn as a share of GDP was higher than what was planned, as was spending on social services. Estimates also show a very slight underspend in 60 There is continued adjustment of spending away from capital towards recurrent spending (ratio of capital to recurrent the capital budget, which was offset by slightly expected to decline from 1 in 2014/15 to 0.8 in higher recurrent spending. 2015/16) (Figure 53). This is partially associated FISCAL POLICY | 29 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Figure 53. Recurrent And Capital Spending Figure 54. Recurrent Breakdown 14/15 And 15/16 BE (% Of GDP And Ratio) (% Share) 7.00 1.20 100 1.10 90 18.6 6.00 1.02 1.00 0.98 36.4 32.0 80 Capital/recurrent ratio 5.00 Spending (% of GDP) 0.79 0.80 70 Investment 4.00 60 0.60 56.6 Other Recurrent % share 6.38 50 3.00 5.91 6.07 5.42 45.5 40 Wages 0.40 51.6 2.00 30 1.00 0.20 20 5.95 6.01 5.97 5.02 10 22.5 24.8 - 12.0 2013/14 PA 2014/15 BE 2014/15 RE 2015/16 BE 0 2014/15 2015/16 LIC Avg Recurrent Capital Capital/recurrent ratio Source: MOF, WB Staff Estimates Source: MOF, WB Staff Estimates with declining capital spending linked to the establishment of Nay Pyi Taw. Nonetheless, at 62 Fiscal transfers to States/Regions will increase by 19 percent in nominal terms nearly 40 percent of the overall budget, capital between the 2014/15 UBL and the 2015/16 UBL. spending remains high compared to other At the moment, central spending accounts for countries as a share of total spending. Recurrent over 90 percent of all spending in States/Regions. spending is expected to increase from 5.9 percent States/Regions have as of yet limited assignment of GDP in the 2014/15 UBL to around 6.4 percent of spending responsibilities. A better picture of of GDP in 2015/16. Non-wage recurrent spending spending across States/Regions would require is expected to decline between 2014/15 and data on central spending in States/Regions. 2015/16, though the public sector wage bill will nearly double (Figure 54). 61 The increase in the wage bill in Myanmar does not pose an immediate concern. The wage bill can have important implications for the overall fiscal stance and the government’s ability to implement counter-cyclical policies. Upward or downward adjustments to government spending during periods of economic recession or boom respectively become more difficult if non-discretionary spending on wages take up a large share of total expenditure. The general government wage bill (i.e. excluding SEEs) is around 28 percent of recurrent spending, which is slightly lower than other Lower Middle Income Countries (37 percent). Going forward however, any increase should be linked to medium-term fiscal sustainability and to pay and grading reform/ performance considerations. FISCAL POLICY | 30 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Economic Outlook Growth And Inflation Outlook Affected around US$15 billion in the coming 15 years, By Floods And Slowing Investment and Telenor Myanmar around US$5 billion in the coming 5 years. In addition, in July 2014, 63 Economic growth is expected to moderate to 6.5 percent in real terms in 2015/16, though this is subject to review as the state owned incumbent, Myanmar Post and Telecommunications (MPT) partnered with Japan’s KDDI Corporation and Sumitomo Corporation, who more details come in on the impact of the floods. pledged to invest US$2 billion. Tourist arrivals are Agriculture growth in particular is expected to slow not expected to be badly affected by the floods. to 1 percent in real terms. Four of the five most Whilst some may be deterred, the main tourist affected States or Regions – namely Ayeyawaddy, destinations have not been affected, and numbers Sagaing, Magway, and Bago – are also the top four are expected to pick up after the rainy season in sources of agriculture output in Myanmar. Whilst the last quarter of 2015. the extent of affected areas is still being analyzed, Sagaing and Magway in particular have suffered important damage and have been declared natural disaster zones. 66 Economic growth is expected to pick up and remain strong over the medium- term. Agriculture output is projected to bounce back quickly in 2016/17. Manufacturing and 64 Whilst output in manufacturing and industry are not expected to be affected industry investments are also expected to come on stream in the newly established industrial by the floods, there are indications that new parks and SEZ. The Thilawa SEZ, an hour’s drive investments are moving more slowly in the outside of Yangon, is already partially operational. run up to the elections. Much of Myanmar’s Around 40 companies have signed up for the manufacturing activities are highly concentrated 400-hectare initial phase, with operations in around Yangon and to some extent Mandalay, bottle manufacturing, auto parts, electronics which have not been as badly affected by and garments. Thilawa is the closest of the SEZs the floods.20 Together, both regions account to the primary market, Yangon, and will have roughly for over a third of national output. captive power generation along with all the other Although the establishment of industrial parks requisite ancillary infrastructure and thus is well and Special Economic Zones (SEZ) holds the placed to secure new investments. The Dawei SEZ, promise of attracting investment in a range of owned by the Myanmar and Thai governments, light manufacturing areas, some investors are is also underway with new Japanese investment, reportedly biding their time until key legislations targeting garments, textiles, food and beverages, are adopted. Some examples include adoption and electronics. of the Investment Law discussed further below, which will provide greater clarity and transparency over the business regulatory environment. 67 Output from the garments sector is expected to start gathering pace in 2015/16 and subsequent years. There have been 65 The services sector in 2015/16 is expected to continue growing at a healthy pace. some industry concerns more recently due to irregular power supply and recent disagreements Telecommunications services are set to expand further. The recent surge in growth has been on the back of a low base. In reality there are still 20 Kudo, T, and Kumagai, S, “Two-Polar Growth Strategy in major gaps to fill in terms of telecommunications Myanmar: Seeking High and Balanced Development”, UDA services. Ooredoo Myanmar plans to invest Discussion Paper 371, November 2012 ECONOMIC OUTLOOK | 31 MYANMAR ECONOMIC MONITOR OCTOBER 2015 over the introduction of a minimum wage. increased cost of imports, particularly processed Nonetheless, both foreign and domestic investors foods and other necessities coming from China have over the past year looked to expand their and Thailand in particular. current facilities as well as to establish greenfield factories. Domestic investors are also seeking to develop garment factory industrial parks, primarily 69 Whilst the medium-term growth outlook remains positive, the floods have hit two in Yangon and NPT, together with dormitories to of the poorest States in Myanmar. The States house the large labor force required and vocational of Rakhine and Chin (together with Sagaing and training schools to ensure their employees have Magway), the two poorest among all States and the right skills. A number of international garment Regions in terms of the headcount incidence, have sector investors with operations in China have also also been declared as natural disaster zones by expressed interest in relocating operations due to the government.21 The government estimates that labor cost advantages. in Rakhine alone, around 210,000 acres of rice paddy was destroyed and 20,000 livestock lost. 68 Inflation is expected to pick up further reaching an average of 11.3 percent Loss of livelihoods has been compounded by loss of assets and access to social services including over the course of 2015/16. Part of this will be clean water, sanitation, health and education. driven by the impact of the floods on supply of The government with support from UN agencies, agriculture produce to local markets. There are Non-Governmental Organizations, bilateral donors already reports of sharp increases in the price and philanthropists are engaged in a massive of rice, beans and pulses. Inflationary pressures humanitarian operation to address the most are likely to be further compounded further by urgent needs. Table 1: Selected Economic Indicators, Projections 2015-2017 1, 2 2013/14 2014/15 e 2015/16 f 2016/17 f 2017/18 f Real gross domestic product 8.5 8.5 6.5 7.8 8.5 GDP, at market prices 14.4 15.6 18.6 17.0 15.3 Agriculture 9.3 12.6 12.4 13.4 12.2 Industry 17.5 15.9 18.0 17.2 15.9 Services 16.6 17.8 23.6 19.3 17.0 CPI Inflation, period average 5.7 5.9 11.3 8.5 6.3 Current account balance, % GDP -5.3 -6.3 -7.9 -7.0 -5.6 Exports, goods & services 10.4 23.4 26.7 27.2 24.8 Imports, goods & services 15.6 26.0 31.4 21.4 18.5 Fiscal balance, % of GDP 3 -3.3 -4.0 -4.9 -4.6 -3.7 Revenue (% of GDP) 10.8 11.9 9.9 10.6 11.5 Expenditure (% of GDP) 14.1 15.8 14.8 15.2 15.2 e = estimate, f = forecast 1/ In annual percentage change, unless otherwise noted 2/ Fiscal year, April 1 - March 31 3/ General government 21 Reliefweb, “Myanmar: Floods and Landslides – Jul 2015”; Government of Myanmar, UNDP, UNICEF and SIDA 2011, “Integrated Household and Living Conditions Survey in Myanmar, 2009-10: Technical report” ECONOMIC OUTLOOK | 32 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Box 3. Macroeconomic Impact of Floods The macroeconomic impact of natural disasters has attracted new economic research. Socio-economic preconditions and the specific type of natural disasters will of course influence macroeconomic outcomes in the aftermath of disasters. But the research also points to opposing views on whether natural disasters have any macroeconomic impact at all, with some finding that disasters have little implication for economic growth.22 A recent study using data covering 87 countries over the period 1960-2007 finds that floods (unlike droughts, earthquakes and storms) tend to have a positive effect on economic growth over the medium- term.23 Agriculture tends to pick up more quickly in the year after the flood, and non-agriculture growth tends to follow. The cumulative mean effect of floods on GDP growth is 0.5 percentage points. Whilst the transmission mechanisms are not clear, the paper suggests that these could include factors such as: increased primary output inducing a later expansion of processed goods (e.g. cotton and textile). Regardless of medium-term recovery, the immediate macroeconomic shock of flooding can be very significant as illustrated by recent disasters. The 2014 floods to have hit Bosnia and Herzegovina are estimated to have caused the equivalent of nearly 15 percent of GDP in damages and 5.6 percent of GDP in losses. Agriculture exports suffered due to crop destruction, the current account deficit widened rapidly and the economy went into recession. In Serbia, damages amounted to around 2.7 percent of GDP and losses amounted to 2 percent of GDP. The hardest hit economic sectors were energy, mining, and agriculture but significant damages were also inflicted on transport infrastructure (roads, bridges and railways).24 The 2011 floods that hit Pakistan causes damages estimated at 1.6 percent of GDP. The floods affected major agricultural areas, thereby leading to overall deceleration in growth despite lower impact on services and industry. Inflationary pressures from earlier commodity prices shocks were further exacerbated due to the impact of floods on agriculture supply with inflation remaining in double digits. The fiscal deficit was estimated to have increased form 6 percent of GDP to 6.4 percent of GDP following. The current account deficit was expected to increase from 0.8 percent of GDP to 1.4 percent due to the impact of floods on the cotton crop, which adversely affected exports, and increased imports needed to cover agricultural supply loss and construction material.25 The 2011 floods in Thailand caused around 11 percent of GDP in total damage and loss. The manufacturing sector bore roughly 70 percent of this. At the time, it was estimated that the floods would reduce real GDP growth in 2011 by 1.1 percent from pre-flood projections, though would recover the following year thanks to reconstruction efforts started in 2012. The current account surplus fell from over US$ 20 billion to around US$ 12 billion due to falling manufacturing exports and lower tourism. Lower manufacturing activity also meant a decline in government revenue. However a relatively prudent fiscal stance in the run up to 2011 enabled the government to absorb the fiscal shock. 26 22 Hochrainer, S, “Assessing the Macroeconomic Impacts of Natural Disasters: Are there Any?” in WB Policy Research Working Paper 4968, June 2009 23 Fomby, T, Ikeda, Y, and Loayza, N, “The Growth Aftermath of Natural Disasters,” in WB Policy Research Working Paper 5002, July 2009 24 WB, “Coping with Floods, Strengthening Growth,” South East Europe Regular Economic Report (January 2015) 25 ADB, WB, Gov of Pakistan, “2011 Pakistan Floods: Preliminary Damage and Needs Assessment,” 2011 26 WB et al, “Thai Flood 2011: Rapid Assessment for Resilient Recovery and Reconstruction Planning,” 2011 ECONOMIC OUTLOOK | 33 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Maintaining Fiscal Discipline to domestic spending.27 China’s stock market has suffered major shocks between June and August 70 The government is expected to maintain the general government budget deficit to below 5 percent of GDP in 2015/16. Although 2015. Large investments in the run up to June saw a major reversal leading to a 30 percent drop in the Shanghai index in early June. The authorities revenue is projected to decline, ongoing reforms intervened through cuts in interest rates and to tax administration and collections from the other measures to prop up the markets. In August, service and manufacturing sectors should enable China devalued the Renminbi on two occasions in the government to meet its 2015/16 revenue a bid to enhance external competitiveness. These target even with any impact from the floods, developments have fed into: a drop in international which will affect mostly the agriculture sector. commodity prices due to concerns over slowing One important risk to this outlook is the potential demand from China; downturns in other major impact of international commodity prices on stock markets given the extent to which global Myanmar’s gas receipts. A drop in gas prices of companies depend on Chinese demand; and a 16 percent in 2015/16 would still allow for strong flight to safety as investors look to US government spending growth, but any sustained decline would securities as stable investment thereby leading to require important spending adjustments even further appreciation of the US Dollar. assuming steady growth in output. At the same time, the drop in gas prices could also be offset by the positive impact of currency depreciation on 73 Myanmar has strong trade and investment links to China. Between a quarter and Kyat denominated earnings. On the expenditure a third of cumulative foreign investments in side, external grants and concessional lending Myanmar are from China. In 2014/15, China had will help to partially offset the humanitarian and 38 new FDI projects accounting for 15 percent reconstruction costs associated with the floods. of total FDI commitments ($530 million) for the year. According to official statistics, in 2014 China Heightened Pressure on accounted for around 37 percent of Myanmar’s The External Accounts exports, and 31 percent of Myanmar’s imports. Myanmar represents a very small share of China’s 71 There is likely to be continued pressure on the current account. Import demand total trade: 0.8 percent of total imports and 0.4 percent of total exports in 2014. Around half of this trade was earlier estimated to be with the is projected to increase in light of humanitarian and reconstruction-related needs. This will likely bordering Yunan Province.28 only partially be offset by gas exports and possibly some pick up in garments exports. Despite a drop in prices, gas exports are expected to remain 74 Myanmar’s trade deficit with China has been growing in recent years (Figure 55). relatively stable thanks to growing output over the Official statistics show that it increased from $350 medium-term. Agricultural exports will decline billion in 2012, to $600 billion in 2013, reaching due to the flood impact and in light of domestic $1 billion in 2014. This is linked to FDI-related food security concerns, which only recently led to capital imports, which exceeded increased gas a lifting of a moratorium on rice exports. sales through a new cross-country pipeline linked to offshore blocks in Rakhine State that came on 72 Recent developments in China have far reaching consequences, including stream in 2014. The Kyat has depreciated by over 27 WB, “China Economic Update,” July 3 2015 potentially for Myanmar. Growth in China is 28 Steinberg, D, Fan, H, “Modern China-Myanmar Relations: moderating, estimated at 7.4 percent in 2014, Dilemmas of Mutual Dependence,” (2012) and rebalancing gradually from manufacturing to services, investment to consumption, and exports ECONOMIC OUTLOOK | 34 MYANMAR ECONOMIC MONITOR OCTOBER 2015 40 percent against the Renminbi between January 2013 and July 2015 (Figure 56). 76 The impact of China on commodity prices will likely put pressure on Myanmar’s exports. There may be some effect on exports at 75 Slowing growth in China could affect Myanmar through trade channels even the margins from the general decline in demand in China. The recent sharp drop in sales at the annual if the recent stock market turmoil is unlikely to gems emporium could be a symptom of this. have any direct implications. The demand for But despite policy tightening in energy-intensive capital goods, which dominate imports from China, sectors and overcapacity in key heavy industries, are likely to remain high (Figure 57). Myanmar the quantity of Myanmar’s mineral fuels and oil exports to China, which are dominated by natural exports to China are not likely to be affected since resources, including gems (Figure 58), however, only 0.4 percent of total mineral fuels and oil that may decline. This would have a moderate impact China imports were from Myanmar in 2014. The on growth, which will continue to be dominated impact on exports could be compounded by the by domestic demand over the medium-term. recent clamping on illegal timber and gems trade. Figure 55. Myanmar-China trade (US$ m) Figure 57. Top imports from China Capital machinery Vehicle Exports to China Imports from China Electrical Metal related 750 Trade balance 70 Metals Gems 550 Im p o r t s f r o m C h in a ( % s h a r e ) 60 350 50 150 US$m 40 -50 30 -250 20 -450 10 -650 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 0 2010 2011 2012 2013 2014 Source: DICA Source: Comtrade Figure 56. Exchange rate (Kyats/Renminbi) Figure 58. Top exports to China 200 Wood Minerals Gems Rubber 190 Fuel and oil Fish Metals 100 180 Kyat/Renminbi 90 170 80 Exports to China (% share) 70 160 60 50 150 40 140 30 20 130 10 Jan-13 Jan-14 Jan-15 Sep-14 Nov-13 Nov-14 Mar-13 Mar-14 Mar-15 May-13 May-14 May-15 Jul-13 Sep-13 Jul-14 Jul-15 0 2010 2011 2012 2013 2014 Source: GOM Source: Comtrade ECONOMIC OUTLOOK | 35 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Policy Watch 77 The Policy Watch in this Myanmar Economic Monitor covers a few selected result of depreciation; however many FDI firms faced constraints in their ability to import capital priority issues closely related to Myanmar’s overall machinery and other goods to establish and economic developments and outlook. Other, expand their production base. In addition, given broader economic and social policy issues that are that a number of these FDI firms also produce also central for inclusive and sustainable growth for the export market, recent foreign exchange (such as education, health, rural development, controls could create concerns over access to and energy, water, environment, or social development) repatriation of profits earned in foreign currency. are (or will be) covered in separate publications29 and/or future issues of the MEM. 80 These developments call for continued strengthening of monetary policy capacity. Liberalization of external accounts have Maintaining Exchange Rate prompted foreign exchange interventions, which Flexibility And Monetary Discipline impact on money supply. The sale of foreign exchange reserves to prop up the exchange rate 78 CBM n light of the above external pressures, I would do well in continuing to in 2013/14 would have contracted money supply, and impacted on domestic demand. Similarly maintain flexibility in the Kyat. This could include recent downward pressure on the Kyat and widening the band of +/- 0.8 percent around concurrent efforts to shore up foreign exchange the reference rate. In the short-term, efforts at reserves would have required sterilization to avoid defending the currency by drawing on foreign inflationary pressure. These assume of course exchange reserves will not be sustainable. Reserves that foreign exchange intervention is warranted at end March were estimated at around three in the first place. In the short-term, exchange months of import cover, which does not provide rate flexibility will be important given structural much buffer against pressures on the currency. shifts in trade, evolving capacity to carry out open Further depletion of reserves would increase market operations, and limited foreign reserves. external vulnerability and Myanmar’s ability to sustainably finance its current account deficit. Any Strengthening Public Debt effort at managing exchange rate volatility needs to be supported by fiscal and monetary discipline Management to ensure stability and competitiveness. 81 An important milestone in the 79 The costs of maintaining administrative controls on the exchange rate are likely government’s fiscal management reforms is the draft Public Debt Law that was recently submitted to the Parliament. The Public Debt Law to be greater than the benefits. As discussed above, some nominal depreciation is important offers an important opportunity to strengthen the for external competitiveness particularly with overall framework for public debt management by rising inflation in Myanmar. There is otherwise clarifying roles and responsibilities, in particular the the real risk of the tradable sector suffering from authority to borrow; setting out clear objectives for under-investment. Many import dependent debt management, including the need to develop firms faced huge pressures as they were not able to access foreign exchange to carry out their business. Businesses that are trading imports in 29 See for example the World Bank Systematic Country the domestic market will face higher costs as a Diagnostic for Myanmar POLICY WATCH | 36 MYANMAR ECONOMIC MONITOR OCTOBER 2015 a strategy to achieve those objectives; establishing Myanma Agricultural Development Bank provided reporting requirements and accountabilities of Kyat 1,159 billion of loans, twice as much as in the principal debt management authority towards 2012/13 (Kyat 558 billion), according to MOAI. parliament. Most of these loans went for paddy production. The Ministry of Cooperatives also borrowed 82 An important part of the upcoming Public Debt Law is to ensure that the authority heavily to provide agricultural loans, mainly for rice, resulting in its debt service obligations to borrow is clearly assigned to one principal debt increasing from Kyat 7 billion in 2014/15 to Kyat management entity. In particular, the Ministry 45 billion in 2015/16 (see below section on fiscal of Finance should be responsible for preparing developments). and implementing the government’s borrowing strategy. This would include assessing different financing mix and making recommendations 85 Greater attention to agriculture development would help non-rice as needed to the Cabinet and the Parliament to boost Myanmar’s growth, reduce risk to price ensure that the proposed mix is consistent with fluctuations and help to tackle poverty. Overall the overall borrowing plan and strategy. agriculture growth in Myanmar has lagged behind peer countries, despite the country’s lower base 83 The government recently instated closer Ministry of Finance oversight and of agriculture output and income per farmer (Figure 12). Myanmar’s agriculture output is control over these borrowing decisions. The draft below potential not least because non-rice crops, Public Debt Law should help to formalize this. In and livestock and fisheries, are suffering from 2015/16, the Ministry of Construction accounted low public goods provision. Although production for nearly a third of Kyat 970 billion in planned growth in these sectors has been faster than rice external borrowing. Current policies also allow in recent years, neglect in public programs and line ministries to directly service loan obligations poor access to finance hamper opportunities for through funds that are appropriated through the diversification of the rice-based farming systems UBL for this purpose. The Public Debt Law should and for higher exports. This is particularly evident assign debt servicing responsibility to the Ministry for beans and pulses, in which Myanmar has a of Finance. particular comparative advantage. Addressing these constraints would help expand agriculture More Attention To Non-Rice Agriculture output and help reduce poverty. 84 Agriculture policy in Myanmar remains heavily focused on rice, which is regarded Options For Managing The Minimum Wage Policy as a strategic commodity. In May 2015, the MOAI launched the Myanmar Rice Sector Development Strategy, which aims to strengthen rice exports through higher value and climate-smarter 86 The introduction of a minimum wage has generated much debate. The minimum paddy production, enhanced efficiency of value wage policy of Myanmar was first introduced with chains, and improved rice quality. This strategy the enactment of the Minimum Wages Act, 1949. complements the National Export Strategy 2015- In 2013, the government passed a new Law on 2019 launched in March 2015. Although there Minimum Wages which established the creation of are no direct farm output and input subsidies for a National Committee to set minimum wage levels rice, or any other products in Myanmar, public for different sectors. In August 2015, after several programs such as those in irrigation, seeds, rounds of negotiations, a new minimum wage rate extension, mechanization, and subsidized loans of 3600 Kyats ($USD2.8) per day for all sectors and are heavily biased towards rice. In 2013/14, the industries (excluding small businesses employing POLICY WATCH | 37 MYANMAR ECONOMIC MONITOR OCTOBER 2015 less than 15 workers) was approved. Box 4 summarizes some insights from other countries on institutional arrangements for minimum wage policy that may be relevant for Myanmar. 30 Box 4. Institutional Arrangements For Implementing Minimum Wage Policy Set a clear (single) objective for the minimum wage policy linked to addressing labor market imperfections: Empirical evidence shows that the impact of minimum wages on poverty is limited. Higher minimum wage can help workers escape poverty, but also push others into poverty when workers lose their jobs due to higher minimum wages. A minimum wage can be appropriate for addressing labor market imperfections for example when employers use market power to keep wages below what would prevail if there were competition. Keep a simple structure and avoid complex systems with multiple rates: Countries vary widely with respect to the complexity of the system. For example, Indonesia and Mexico set multiple levels across regions, sectors and/or occupational categories, while South Korea, Brazil, and Colombia legislate one single minimum wage that applies to all workers. Although having multiple wages appears desirable, evidence indicates that overly complex systems are difficult to enforce. In the case of Myanmar, the policy rightly limits differentiation. Agree on the key principles and comprehensive criteria for the fixing the minimum wage level: It is important to agree on a comprehensive list of criteria and indicators. These typically include: cost of living/consumer prices, productivity, enterprise capacity to pay, producer prices, competitiveness, income inequality, immigration, informal economy, unemployment, GDP growth, among others. It is also important for the law to take into account wage structures. For instance, in Myanmar, the notified minimum wage is for standard eight-hour work day; it does not mention overtime compensation which forms the bulk of the take-home wage in many sectors, including garments. Determine the policy tool and process for future adjustments of the minimum wage: Designing a policy tool that takes into account different economic and social criteria will enable Myanmar’s National Minimum Wage Committee to derive a suitable range, which can serve as the basis for negotiation between the negotiating parties. In the UK, for example, the Low Pay Commission conducts a thorough analysis of quantitative indicators and high-quality impact evaluations, complemented by extensive consultations. This allows adjustments whilst minimizing detrimental consequences on employment and wages. It is crucial to make some collection efforts to ensure that the information is timely available for negotiations. The process should be time-bound and involve all negotiating parties, including independent technical experts to represent public interest. Strengthen enforcement and monitoring capacity: Though only a small fraction of the labor force in Myanmar will be covered by the new minimum wage, it will be important to strengthen enforcement and monitoring capacity to ensure compliance with the regulation. 30 Del Carpio, X., L. Pabon. (2014). Minimum Wage Policy: Lessons with a Focus on the ASEAN Region. January 2014. World Bank document. 87864-EAP; Pabon, L. (2015). Background note on Minimum Wage Policy in Myanmar, manuscript. POLICY WATCH | 38 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Strengthening The Business Environment 89 DICA is also preparing a new Companies Law to modernize and strengthen corporate governance practices. The Companies 87 Sustaining growth over the medium-term will require continued strengthening Act is an important piece of legislation that regulates how companies are formed and managed. of the business environment and opening up of It contains provisions on key matters such as the the space for investment. Although Myanmar registration of companies, the management and scores poorly in the World Bank Group’s annual conduct of companies’ affairs, financial reporting Doing Business Report and the Myanmar and audit requirements for companies, share Investment Climate Assessment, the government capital and capital raising matters, duties of is implementing reforms to reduce administrative directors and winding up of companies. A key issue burden on the private sector. To oversee and addressed in the law that affects investment in coordinate this process, a Special Task Force for the country is the definition of a foreign company Business and Trade Promotion, chaired by the provided in the law. Currently, a single share Minister of Commerce, has been established. One owned by a foreign investors classifies a company of its functions is to coordinate the government’s as foreign, thereby restricting land ownership. participation in the recently established Myanmar The law seeks to establish a threshold investment Business Forum (MBF), a public-private dialogue amount by foreigners in a local company before it process designed to improve the ability of the is classified as a foreign company. This will allow private sector to participate in the policy process. foreign equity investment in local companies Under the MBF, six Working Groups on agriculture, without requiring joint-venture arrangements manufacturing and trade, infrastructure, natural and enable Myanmar companies to raise equity resources, finance and banking and tourism, have capital from abroad. This provision will also enable been established by the private sector. Discussions foreign participation in future capital markets in the MBF are helping to inform fundamental laws once established. currently under preparation. 88 One of these is the new Myanmar Investment Law being prepared by 90 Steps are also being taken to address patronage and state capture. Some improvement is seen as public competitive the Directorate for Investment and Company tendering of major projects in telecommunications, Administration (DICA). The Investment Law aims electricity generation, and oil/gas have been to streamline investment entry and approval successfully executed. The recently adopted procedures, and strengthen investor protection by Competition Law provides for the protection of guaranteeing access to key resources such as land, public interest from monopolistic acts, speculation labor and capital and by ensuring due process in goods or services, control of unfair competition, and good governance in regulating investment. prevention of abuse of dominant position and By creating a more conducive investment climate economic concentration. The law establishes a and level playing field, the Government hopes to Competition Commission as a regulatory body attract greater and more diversified investment in with investigative and adjudicative powers and Myanmar while at the same time better targeting addresses the three standard pillars of competition investment incentives to meet this objective. A law (agreements that restrain competition, draft of the law was posted on the DICA website abuse of dominance and mergers) as well as and public consultations have been held with the unfair trade practices. The law also establishes a private sector and civil society to obtain feedback comprehensive penalty regime with the potential and comments. for private damages, conviction of senior managers POLICY WATCH | 39 MYANMAR ECONOMIC MONITOR OCTOBER 2015 and a leniency policy. Effective implementation of the private sector due to the numerous inspections the law and the establishment of the Competition carried out by different government agencies in an Commission will require significant efforts on the uncoordinated fashion. part of the Government before the impact of the legislation can be felt in the economy and by investors. 93 Registering property in Myanmar is a cumbersome and expensive process. According to the World Bank’s Doing Business 91 Despite these improvements, more work remains in improving the business Report, it takes 113 days, 6 procedures, and costs 7.2 percent of the property value. As a result of environment. According to the results of the World the high cost of transferring title, many land Bank Group Doing Business Report issued in 2014, transactions take place based on a notarized Myanmar ranks 177 of 189 in the overall ease of contract of sale, which is attached to the land doing business. While Myanmar ranked 189 in title but does not transfer title within the land starting a business in the 2014 report reforms registry. The result is that significant blocks of land have been announced regarding the elimination of are ‘owned’ by individuals whose names are not the minimum capital requirement for local firms on the land title. This creates difficulties for using and to speed up the issuance of the incorporation such land as collateral with banks and frequently certificate. In addition to streamlining procedures results in land tenure disputes. for entry of businesses, the government has also made significant improvements in relaxing Promoting Financial Inclusion constraints faced by ongoing business operations. The abolition of the export first policy where firms need to access foreign exchange and the removal 94 Access to finance is the most frequently identified obstacle to business in of licensing requirements on many import and Myanmar. According to the 2014 Myanmar export products, has significantly improved the Investment Climate Assessment, a lack of access operating environment for ongoing business finance is a more significant constraint than access operations. to land, electricity, and access to skilled workforce. In addition, access to finance is one of the most 92 Constraints remain in other areas. Myanmar ranks 185 in the 2014 Doing frequently identified main obstacles in all three broad industry sub-sectors, namely manufacturing Business report in enforcing contracts due to the (23 percent), the retail trade (36 percent) and the time and cost of resolving commercial disputes services sub-sector (14 percent). through the court system. The Government is preparing an Arbitration Law to provide an alternative dispute resolution mechanism to 95 Financial inclusion has therefore been a top priority at the highest levels of speed up contract enforcement. The Doing government. This contributed to the enactment Business report also shows that the time and cost of the 2011 Microfinance Law which created a of obtaining construction permits is very high distinct Microfinance Sector. It established specific with Myanmar ranking 130 of 189 and requiring regulations and a new regulatory body, the 13 procedures and 128 days. In addition, it is not Financial Regulatory Department (FRD) located very easy for businesses to exit, where Myanmar in the Ministry of Finance responsible to license ranks 160 out of 189 on Resolving Insolvency. and supervise licensed MFIs. The 2011 Law comes The Enterprise Survey carried out in 2014 as part with a set of explicit socio-economic objectives: of the Investment Climate Assessment identified reducing poverty of grass-root people, creating business inspections as a constraint in the eyes of job opportunities, cultivating saving habits, POLICY WATCH | 40 MYANMAR ECONOMIC MONITOR OCTOBER 2015 supporting cottage industries, fostering SMEs, provider, only 6% make use of more providing support for diversification of income than one regulated financial product generating activities of farmers, though there class (a combination of credit, savings, remain elements of the regulations that inhibit insurance and payments) and only 5% rather than support these objectives. have a bank account in their name. Among formal a products, credit has 96 Policy makers have also been actively pursuing the opportunity around mobile financial services. To advance this effort the deepest reach (19% formal access), payments at 9.8%, savings at 6% and insurance at 3%. In terms of women, the CBM passed a Mobile Banking Directive in data from the Central Bank of Myanmar December 2013 which allowed banks to offer indicates only 2% of women having an basic mobile financial services. While this measure account at a formal institution.31 is helpful in some respects, it only permits banks to lead in the provision of basic accounts and ii) High levels of informality throughout payments. The key unfinished step is to pass economy: There are high levels of regulation that would allow non-banks, particularly informality throughout the economy mobile network operators, to establish special with a pervasive unregulated financial purpose mobile financial service companies. The sector constituting the largest source CBM is preparing a draft regulation to address this of lending. An estimated 9.2 million issue. adults have a loan from an unregulated financial services provider with an 97 Despite these efforts, the financial sector has started from a very low base in terms estimated total outstanding debt as high as K 5.4 trillion (USD 5.7 billion).32 This of formal financial sector provision, including: is primarily due to lack of credit forcing people to turn to money lenders. i) Myanmar population is thinly-served by financial services: Although 30% of iii) Farmers’ access to some formal credit adults use at least one financial service and lack access to formal insurance from a regulated financial service products: In Myanmar farmers make Table 2: Basic Set Indicators On Financial Inclusion % of adults with an account at a formal financial institution 5% % of adults with at least one loan outstanding from a regulated financial institution 19% % of adults with at least one insurance product from a regulated financial institution 3% % of formal SMEs with an account at a formal financial institution 17% % of SMEs with an outstanding loan or line of credit 4% Source: MAP Making Access Possible Myanmar Country Diagnostic 2013 31 The Role of Finance in Women Economic Empowerment in the ASEAN Region. (2014). Dr. Sandar Oo. 32 MAP synthesis report P. 14 POLICY WATCH | 41 MYANMAR ECONOMIC MONITOR OCTOBER 2015 up two-thirds of the labor force. The autonomous from government in 2013, is the Myanmar Agricultural Development primary regulator and supervisor of commercial Bank (MADB)33, is the largest single banks. The new Financial Reporting Department in provider of credit by number of clients MOF mentioned above is mandated to supervise currently serving an estimated 2 not only micro-finance institutions, but also million farmers but the levels of credit insurance companies, lottery, state-owned banks, provided is insufficient forcing farmers and other non-bank financial intermediaries. In to use informal sources of credit. Only addition, in 2014 a new Securities Commission was 2% of farmers use regulated insurance created to oversee the incipient securities market. products and most rely on their savings, help from family and friends or informal moneylenders to offset the consequences of risks such as death of 100 The three financial sector supervisory bodies face various challenges due to institutional and human resource family member, illness or crop failure. capacity constraints. Supervision focuses primarily on compliance with laws and regulations, not iv) Formal SMEs lack access to formal to identify, monitor and manage existing and credit: Though 17 % of formal Small and potential risks in the financial system. Efforts are Medium Enterprises34 have an account underway to upgrade financial sector supervision at a formal financial institution only 4% in Myanmar with the assistance of the IMF, of make use of credit from regulated neighboring central banks, the WBG and other providers, 22% from unregulated development agencies. Given the current starting lenders and the rest rely on family point, it will take several years before Myanmar savings and retained earnings to fund can be compliant with best international practices. business expansion. 98 To address some of the above and other challenge, the government has developed 101 An important strengthening step banking towards sector supervision is the draft Bank and two key strategic plans: the Myanmar Financial Financial Institutions Law prepared by CBM and Inclusion Roadmap and the Myanmar Financial being debated by the Parliament. The BFI Law Sector Development Strategy, 2015-2020. The should provide the much needed legal framework Roadmap proposes interventions that primarily for an open and market-based financial sector. relate to capacity and knowledge-building Myanmar’s current financial institutions law initiatives, corporate reform and modernization suffers from serious gaps in both the structure programs, consumer protection and financial and contents required for it to be implemented literacy initiatives, infrastructure enablement consistently, transparently, and effectively. The projects, and proposed research projects. A time proposed new BFI Law takes into consideration horizon of up to five years has been envisaged the aforesaid gaps, current problems in the for the full impact to be realized. The FSDS aims to provide a comprehensive set of sequenced actions to build a larger, more efficient, and more 33 MADB is a state-owned bank with 14 regional offices, 169 branches and 44 agency offices with 3357 staff provid competitive financial system. ing short term and long-term credit to over 2 million farm ers. MADB is authorized to lend to state owned agricultural Improving Banking Supervision organizations, livestock organizations, corporations, private entrepreneurs, village banks, farmers and farm laborers. 99 Continued strengthening of banking supervision rightly remains a government 34 Formal enterprises are enterprises that are considered regulated or licensed to operate. This segment represents priority. The CBM, which became adults who are self-employed and own and operate their own enterprises. POLICY WATCH | 42 MYANMAR ECONOMIC MONITOR OCTOBER 2015 implementation and enforcement faced by the CBM, and the future direction of the banking system. Importantly, it also defines the scope of power of the CBM adequately, marks the perimeter of exercise of discretion, sets out clear procedures to guide and ensures consistency. It aims to provide a sound legal framework for the implementation of the Basel Core Principles and its passage is expected to fundamentally change the operating environment for banking in Myanmar. Some of the salient features are summarized in below: Box 5. Key Features Of Draft Banking And Financial Institutions Law Clear definitions of the types of institutions which are subject to regulation by the CBM and their scope of activities. Hence, the new FI Law rationalizes the definition of “banking business” (removing the artificial distinction between commercial banks and development banks and using duration of deposit) so as to provide a sound footing for the conduct of banking business. Under the FI law, banking business is rationalized in line with accepted banking norms. Non-bank financial institutions regulation. The law provides for options to provide oversight and if needed regulation of the non-bank financial institution business such as – money remittance, leasing, factoring, e-money and credit card business. A light touch registration system is created for non-bank financial to enable CBM to collect data and information. However, CBM can bring these NBFIs within the regulatory purview of the FI Law if they pose systemic risks as well threat to financial stability. The FI Law also provides a framework for monitoring and dealing with a third category of exempted institutions such as Agriculture Bank, Rural Development Bank, Microfinance Institutions etc., which fall under the authority of another regulator and law. The CBM will have the necessary power with the approval of Ministry of Finance to bring these institutions under FI law if it is in the interest of the public and stability of the financial system. Licensing. The new FI law provides for adequate framework for licensing of banks. The new FI law sets out the minimum conditions for licensing, the procedures and the powers of CBM to carry out the licensing function effectively. The new FI law also deals with the licensing of foreign banks either as branches and subsidiary. It also includes a clear list of permitted banking business activities is necessary in the FI Law to ensure banks are able to carry on a broad range of activities including securities and insurance subject to these activities being regulated by the respective laws. Sound statutory basis for the prudential supervision of banks. In line with BCP standards, the authority of CBM to develop and utilize prudential regulations and requirements to control the different types of risks inherent in banking business is clearly provided in the new FI Law. CBM has power to enter into arrangements with foreign supervisory authorities and domestic authorities for cooperation and exchange of information. Powers of the state bank to take prompt corrective actions. The new law provides a graduated approach to the enforcement of prudential requirements, culminating in bank resolution measures such as bank rehabilitation, liquidation and cancellation of the banking license. Accordingly, the FI Law prescribes a gradual sequence of enforcement measures, escalating in intrusiveness. Bank resolution measures and insolvency provisions. The new FI Law introduces a logical sequence of resolution measures, which would begin with an order suspending the business of the bank, or alternatively placing the bank under administration and appointing an administrator to take control of a failing bank, and would culminate in the liquidation of the bank and the cancellation of its license. In line with international good practices and given the current state of insolvency law in Myanmar, the new FI law provides for a comprehensive framework for bank and non-bank financial institutions resolution. Payment System. To supplement the provisions in the CBM law, the new FI law provides more detailed provision to enable CBM to amongst other things, formulate payment system policy, operate and license payment system, ensure finality of payment, co-operate with private sector and designate payment systems POLICY WATCH | 43 MYANMAR ECONOMIC MONITOR OCTOBER 2015 Yangon Office No.57, Pyay Road 6 1/2 Mile, Hlaing Township, Yangon, Myanmar Tel +95 1 654824 Email myanmar@worldbank.org