MYANMAR ECONOMIC MONITOR MAY 2016 MYANMAR ECONOMIC MONITOR: Growing Economic Vulnerabilities May 2016 MYANMAR ECONOMIC MONITOR MAY 2016 MYANMAR ECONOMIC MONITOR MAY 2016 The Myanmar Economic Monitor (MEM) periodically takes stock of economic developments and highlights economic prospects and policy priorities in Myanmar. The MEM draws on available data reported by the Government of Myanmar 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 Planning and Finance, the Ministry of Commerce and the Central Bank of Myanmar for their excellent collaboration, and to Ulrich Zachau (Country Director, South East Asia Country Management Unit), Sudhir Shetty (Chief Economist, East Asia and Pacific Region), Ahmad Ahsan (Lead Economist, EAP Chief Economist’s Office), and Frederico Gil Sander (Senior Country Economist, Macroeconomics and Fiscal Management Global Practice) 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 core team led by Habib Rab (Senior Country Economist, MFM GP) and including: Alexandra Drees-Gross (Senior Finance Specialist, Finance and Markets Global Practice); Kiatipong Ariyapruchya (Senior Country Economist, MFM GP); May Thet Zin (Country Economist, MFM GP); Sergiy Zorya (Senior Economist, Agriculture Global Practice); and Rome Chavapricha (Senior Energy Specialist, Energy Global Practice). The team is very grateful for advice and contributions from: Vikram Kumar (Country Manager, IFC); Jason Brett Pellmar (Senior Investment Officer, IFC); Sjamsu Rahardja (Senior Trade Economist, Trade and Competitiveness Global Practice); Tenzin Dolma Norbhu (Program Coordinator, Transport and ICT); Andrea Fitri Woodhouse (Senior Social Development Specialist, Social Development Global Practice); Corey Pattison (Consultant, Social Development Global Practice); Nang Htay Htay (Financial Sector Specialist, F&M GP); Myoe Myint (Energy Specialist, Energy GP). The team had to the opportunity to discuss recent economic developments with several business associations and private businesses and appreciates very much their time. The team thanks Kyaw Soe Lynn and Nurani Oktavia Robelus from EXT for their support and guidance on publication and outreach. The preparation of the MEM was generously supported through the Myanmar Partnership Multi-Donor Trust Fund by the UK Department for International Development, the Australian Department of Foreign Affairs and Trade, and the Kingdom of Denmark. 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; the Government of Myanmar; the UK Department for International Development; the Australian Department of Foreign Affairs and Trade; and the Kingdom of Denmark. MYANMAR ECONOMIC MONITOR MAY 2016 Abbreviations CBM Central Bank of Myanmar MADB Myanma Agriculture Development Bank CEIC CEIC Data MEPE Myanmar Electric Power Enterprise CPI Consumer Price Index MFTB Myanma Foreign Trade Bank CSO Central Statistical Organization MICB Myanma Investment and Commercial Bank DICA Directorate of Investment and Company MMcf Million cubic feet Administration EAP East Asia and Pacific MALI Ministry of Agriculture, Livestock and Irrigation ESIA Environment and Social Impact Analysis MOC Ministry of Commerce EU European Union MOGE Myanmar Oil and Gas Enterprise FAO Food and Agriculture Organization NEER Nominal Effective Exchange Rate FDI Foreign Direct Investment QSEM Qualitative Social and Economic Monitoring FOB Free on Board REER Real Effective Exchange Rate GDP Gross Domestic Product SEE State Economic Enterprise GOM Government of Myanmar SEZ Special Economic Zone IFS International Finance Statistics SOB State Owned Bank IMF International Monetary Fund USDA United States Department of Agriculture kWh Kilowatt hour WBG World Bank Group LIFT Livelihoods and Food Security Trust Fund WDI World Development Indicators MYANMAR ECONOMIC MONITOR MAY 2016 Contents Executive summary 1 Economic growth 4 Challenging external environment 4 Demand easing over the short-term 4 Agriculture affected by floods 5 Domestic manufacturing facing more competition 7 Expansion of essential services 10 Structural change and labor migration 10 Foreign Trade and Investment 15 Growing trade deficit 15 Contraction in exports 16 Deceleration in imports 19 Fiscal Policy 23 Growing fiscal stress in 2015-2016 23 Monetary financing pressures 24 Adjusting to declining windfall payments 28 Adjustments to government expenditures 29 Growing operational deficit of State Economic Enterprises 29 Inflation, monetary and exchange rate 32 Growing inflationary pressures 32 Slight deceleration in overall money growth 34 Recent exchange rate developments 34 Foreign exchange transactions 34 Economic outlook 39 Gradual recovery in growth 39 Prices projected to stabilize 40 Fiscal space for service delivery and growth 41 Ongoing current account deficit 41 Longer-term growth from manufacturing 43 Policy Watch 45 The crossroads of Myanmar’s energy sector policies 45 Reforming Myanmar’s State Owned Banks 47 MYANMAR ECONOMIC MONITOR MAY 2016 List of Figures Figure 1. Investment commitments Q1-Q3 (US$ m) 5 Figure 2 Sector contribution to growth (% change) 5 Figure 3 Share of agriculture losses and output (%) 6 Figure 4 Flood impacts in selected countries (% of GDP) 6 Figure 5 Paddy production, Myanmar (‘000 tons) 7 Figure 6 Indices of rice prices and exchange rate, Myanmar 7 Figure 7 SEE petroleum and petrochemical products 8 Figure 8 Industry output from selected SEEs 8 Figure 9 Gas sector output (cf m and % change yoy) 10 Figure 10 Gas wellhead production (MMSCF) 10 Figure 11 Sector composition of GDP (% share) 11 Figure 12 State/Region contribution to growth (% change) 11 Figure 13 Households with a current or returned migrant by year of departure (%) 12 Figure 14 Employment in destination sites by sector 12 Figure 15 Trade flows and balance (US$ bn, quarterly) 15 Figure 16 Trade growth (Q1-Q3. % change) 15 Figure 17 Myanmar non-gas and non-industry export volumes and values (6-m 16 moving average) Figure 18 Developing Asia export volumes and values (yoy change in 12-month 16 moving average) Figure 19 Contribution to export growth (% yoy) 17 Figure 20 Volume and value of gas exports 17 Figure 21 Volume and value of agriculture exports 17 Figure 22 Wholesale rice prices 17 Figure 23 Contribution to import growth (% yoy) 19 Figure 24 Private and Government imports (US$ m) 19 Figure 25 Border trade (January 2014 = 100) 21 Figure 26 Maritime trade (January 2014 = 100) 21 Figure 27 Consolidated public sector spending and revenue 23 Figure 28 Fiscal balances (% of GDP) 23 Figure 29 Net domestic financing (Kyat billion) 24 Figure 30 Net claims on government Q1-Q3 (Kyat billion) 25 Figure 31 Treasury Bonds outstanding (Kyat million) 25 Figure 32 Outstanding domestic debt (Kyat million) 25 Figure 33 Treasury Bill auction results (Kyat billion) 26 Figure 34 Share of net financing (%) 26 MYANMAR ECONOMIC MONITOR MAY 2016 Figure 35 Breakdown of tax receipts (% of GDP) 26 Figure 36 Tax and customs collections (% change yoy) 26 Figure 37 Contribution to expenditure growth (% change) 27 Figure 38 Military vs. health and education expenditure (% of general government 27 expenditure) Figure 39 Operational balance of selected SEEs (% of GDP) 28 Figure 40 Inflation contribution by component 32 Figure 41 Inflation dynamics 32 Figure 42 Evolution of the distribution of price component increases 33 Figure 43 Nominal Effective Exchange Rate 35 Figure 44 Real Effective Exchange Rate 35 Figure 45 Range of Kyat-USD Parallel Rate 36 Figure 46 Official and Parallel Exchange Rates 36 Figure 47 Bids and offers submitted daily at the foreign exchange auction 36 Figure 48 Total daily turnover in the interbank foreign exchange marke 36 Figure 49 Daily Auction Results 37 Figure 50 FDI commitments by sector 39 Figure 51 Agriculture productivity and structural transformation 39 Figure 52 Gas production by field 42 Figure 53 Commodity price indices (monthly) 42 Figure 54 General government balance, revenue and debt, 2014 (% of GDP) 42 Figure 55 Redemption of government bonds 42 Figure 56 Access to energy – Electric power consumption (kWh per capita) 45 Figure 57 Access to electricity (% of population)in selected countries 1990-2012 45 MYANMAR ECONOMIC MONITOR MAY 2016 List of tables Table 1 Beans and pulses production, Myanmar 7 Table 2 Industry State Economic Enterprises (Kyat million) 9 Table 3 Myanmar Gross Domestic Product (Kyat billion) 13 Table 4 East Asia and Pacific – GDP growth (2013-2015) 14 Table 5 Myanmar selected social indicators 14 Table 6 Beans and pulses exports (Tons) 17 Table 7 Merchandise trade (US$ m) 18 Table 8 Union Government Revenue (% of GDP) 27 Table 9 SEE payments to Union Budget (% of GDP) 30 Table 10 Fiscal operations (% of GDP) 31 Figure 11 Selected Economic Indicators, Projections 2015-20171 44 List of boxes Box 1 Garments as a source of export growth and diversification 20 Box 2 Exchange rate reforms 38 Box 3 SEZs and inclusive growth 44 Box 4 Myanmar’s State Owned Banks 50 MYANMAR ECONOMIC MONITOR MAY 2016 Executive summary Recent economic developments peaked at 16 percent (year-on-year) in October 2015. Low productivity in the sector also means After two years of strong economic growth and slower recovery, affecting the poor and vulnerable macroeconomic stability, Myanmar faced a more most negatively. Negative shocks to agriculture difficult economic environment in 2015-2016. can exacerbate push relative to pull factors in The economy in 2013 and 2014 grew at an average rural-urban migration, the overall rate of which is of 8.5 percent per year, as reforms opened up the increasing rapidly.1 At the same time, Myanmar’s space for private investment, which averaged over light manufacturing sector, dominated by food 20 percent of GDP per year over this period. Public processing, is facing more competition from consumption also accelerated to help fill large cheaper imports, which affects its ability to create gaps in service delivery, whilst increased domestic new employment. On the external accounts, the revenue and access to concessional finance value of exports declined by 12 percent in nominal helped to maintain fiscal discipline, with deficits terms in the first three quarters of 2015-2016 below 3 percent of GDP. Even with rapidly growing compared to the same period last year due to the demand, inflation in 2013 and 2014 averaged agriculture supply shock and declining commodity around 5.8 percent per year. prices. This has contributed to a growing trade deficit and pressures on the exchange rate. In 2015-2016, economic growth in Myanmar eased to 7 percent amid a supply shock from The institutional capacity and policy responses heavy flooding, a slowdown in new investment to deal with these macroeconomic shocks and flows during an election year, and a more imbalances have faced some challenges. On challenging external environment including lower fiscal policy, pressures from a weakening Kyat and commodity prices affecting Myanmar’s main falling commodity prices led to a sharp increase in exports. Agriculture output growth is estimated monetary financing of the deficit, which will have to have slowed to 2 percent due to the floods, compounded underlying inflationary pressure. compared to 5.6 percent growth in the previous Treasury Bill auctions, which can help to absorb year. The historic elections of November 2015 domestic liquidity, remain undersubscribed due to created a general sense of economic optimism lower than expected discount rates. Concerns over and private investors have remained upbeat. the growing trade deficit seem to have prompted However, ongoing structural constraints, short- measures to contain the demand for foreign term exchange rate instability, rising inflation, currency and imports. These include limits on the and the political transition have contributed to withdrawal of foreign currency, administrative a deceleration in new investment flows. These delays and red tape in foreign transfers, and limits were exacerbated by tightening external financing on importation of capital machinery. The volume conditions and declining global demand. Falling of currency traded in the official foreign exchange international commodity prices have also started auctions has gradually declined over the course of to feed through to declining net exports. the year, and not offset by any major increase in activity on the interbank foreign exchange market. These developments have brought to the fore a number of short-term economic vulnerabilities for Myanmar. The supply shock to agriculture 1 WBG and LIFT, “A Country on the Move: Domestic contributed to a sharp rise in inflation, which Migration in Two Regions of Myanmar – A Qualitative Social and Economic Monitoring (QSEM) Thematic Study,” (2016) EXECUTIVE SUMMARY | 1 MYANMAR ECONOMIC MONITOR MAY 2016 Economic outlook collections. Government revenue could average around 14 percent of GDP over the medium-term. As the economy recovers from its 2015-2016 Spending pressures are likely to remain high with supply shock and private investments begin Myanmar’s growing infrastructure bill, but also its to pick up again, real GDP growth in Myanmar rising recurrent needs to improve coverage and is projected to rise to 7.8 percent in 2016- quality of public services. 2017, and average 8.2 percent per year over the medium-term. The agriculture sector is Over the medium to longer-term, the projected to bounce back over the short-term, manufacturing and processing sectors though there are downside risks from the effects continue to hold strong promise as potentially of El Niño, which have created severe drought important drivers of inclusive growth. Structural in early 2016. Investors’ demand for services transformation towards higher value added (e.g. transportation, distribution, information manufacturing will depend in big part on the technology, communications and logistics) is growth of supporting infrastructure and services, expected to be the main driver of growth over the but also investment in skills. The garments sector short to medium-term. Beyond this, infrastructure could help address binding constraints in services construction activity, particularly in the power and and infrastructure that affect the manufacturing transport sectors, are expected to pick up pace sector as a whole. This could lay the foundations for and be major drivers of growth over the medium higher value addition, and avoid a low equilibrium to long-term. dominated by trading, low value services, and basic assembly. Inflationary pressures are expected to ease relative to 2015-2016, averaging 8.5 percent over the course of 2016-2017. This is linked to recovery Policy priorities from last year’s agriculture supply shock, combined Myanmar’s economic prospects remain strong, with projected low international commodity prices. with a premium on sound macroeconomic International agricultural prices are projected policies and institutions to help manage emerging to decline in 2016; the largest drop is for grains challenges. In the short-term, this includes (-3.4 percent), which have a relatively big bearing balancing fiscal adjustment for macroeconomic for Myanmar.2 Oil prices are projected to average stability and fiscal expansion for public services US$37 per barrel in 2016, which should benefit and growth to help navigate the impact of lower Myanmar as a net oil importer.3 Downside risks commodity prices. On fiscal adjustment, one to this projection include continued monetization option is to improve the efficiency of capital of the budget deficit and limited monetary policy spending. This might mean consolidating public capacity to mop up excess liquidity. investment projects and reallocating them to areas that help relieve constraints to growth (e.g. urban The Union Budget deficit is projected to average areas and emerging growth poles; transportation 3.5 percent of GDP over the medium-term. Oil links that help connect economic centers; and and gas receipts are expected to decline due to a social services in poorer, less densely populated combination of falling production from existing gas areas). On fiscal expansion, one option could be to fields and lower international commodity prices. prioritize a reduction in revenue leakage from tax At the same time, ongoing tax administration expenditures by adopting a clear and consistent reforms should yield positive results for income tax policy for the granting of tax incentives to the private sector. 2 WBG, “Commodity Markets Outlook: Weak Growth in Emerging Economies and Commodity Markets,” (Jan 2016) 3 Ibid. EXECUTIVE SUMMARY | 2 MYANMAR ECONOMIC MONITOR MAY 2016 Reducing the budget deficit and prudent public The Policy Watch section in this Myanmar debt management could help reduce inflationary Economic Monitor covers selected issues in pressures, in addition to maintaining fiscal access to electricity, and reform of State Owned sustainability. In this regard, reversing and Banks. Access to electricity remains a top priority ultimately eliminating monetary financing of for productivity and competitiveness in the the deficit could be one of the top priorities for economy. One of the main challenges in attracting fiscal management. This would require continued investments into the power sector will be its efforts to develop domestic debt markets through financial viability. This critically depends on tariff the Treasury Bill auctions, and upcoming Treasury policies both for gas supply to the power sector Bond auctions, including by allowing interest and for electricity distribution. The government rates to better reflect market conditions. The could in this regard look into three policy options. government could also benefit from rebalancing The first is to consider a gas pricing framework its public debt portfolio towards longer-term and that could better reflect the true economic cost more concessional external financing. Although of supply in Myanmar, which may imply lower Myanmar is still classified at low risk of debt domestic prices than export prices. The second is distress,4 external vulnerabilities as illustrated to study how electricity tariffs could better reflect by recent exchange rate and commodity price the cost of supply. For 2015-2016, the overall tariffs developments, may adversely affect public debt are estimated to be below the cost of supply by sustainability, particularly if it fuels more short- about Kyats 300 billion. The third option is to look term domestic borrowing. into targeted subsidies to address any household affordability concerns. A pro-poor targeted Staying the course on establishing a well- subsidies mechanism could usefully replace the functioning exchange rate system is likely to be prevailing non-targeted mechanism for electricity critical for Myanmar to keep benefiting from consumption. growing trade and investment opportunities. This means continued strengthening of official Another priority area is the reform of State Owned market mechanisms (i.e. foreign exchange Banks (SOBs) to promote transparency, stability auctions, interbank foreign exchange market) and and competitiveness of the financial sector. maintaining exchange rate flexibility, even if this Although recent liberalization of the financial could imply further devaluation. The latter can sector has helped to significantly expand the role be important for external competitiveness and of private banks, SOBs still account for slightly balance. Maintaining fiscal discipline, as noted more than half of total banking sector assets. above, and further development of monetary They share some common challenges including: policy tools to help mop up liquidity (e.g. low transparency; lack of modern technology and deposit auctions),5 could help offset potential IT systems; unclear policy mandates; and lack of inflationary effects of a weaker Kyat. The large modern corporate governance. Reform priorities current account deficit on the other hand, which could include: (i) developing an appropriate is estimated at 7 percent of GDP in 2015-2016, ownership framework for SOBs to clarify policy does not necessarily pose immediate concerns for mandates and ownership responsibilities; (ii) external sustainability. The deficit in 2015-2016 clarifying the legal framework for operations of was driven by cyclical factors, moreover foreign SOBs to promote effective corporate governance; direct investments, which depend on imports for (iii) establishing a high level coordination building up productive capacity in the economy, mechanism to manage the reform process; and are expected to pick up over the medium-term. (iv) improving disclosure and transparency of SOB financial and operational performance. 4 IMF, “Staff Report for the 2015 Article IV Consulta- tions – Debt Sustainability Analysis” (August, 2015) 5 IMF, “Staff Report for the 2015 Article IV Consulta- tions” (August, 2015) EXECUTIVE SUMMARY | 3 MYANMAR ECONOMIC MONITOR MAY 2016 Economic growth Following a strong take off soon after opening a major shift in the demand-side drivers of growth. up, the Myanmar economy weathered some The increasingly challenging external environment turbulence in 2015-2016 amid a more difficult has led to a substantial decline in the contribution economic environment. After growing at 8.5 of net exports to growth, and also some decline in percent per year in 2013 and 2014, growth in the contribution of private investment. Domestic 2015-2016 eased to 7 percent due to a supply consumption continues to underpin economic shock from flooding in July 2015, which led to expansion in these countries. inflationary pressures and deteriorating real household incomes. This was exacerbated by Demand easing over the short-term slowing investments due to ongoing structural constraints and the political transition; and a Within this context, private demand in Myanmar more challenging external environment, including has also eased, with the economy growing at declining international commodity prices, an estimated 7 percent in 2015-2016, compared which have affected Myanmar’s gas exports. A to 8.5 percent the previous year. Much of the combination of these have contributed to rising easing is attributed to a flood-induced supply inflation, exchange rate pressures, and widening shock to agriculture, which has led to a rapid macroeconomic imbalances. Expansion in services rise in inflation, resulting in declining household accounts for the resilience in growth, though these purchasing power and slower private consumption emerging challenges have brought to the fore growth relative to 2014-2015. Public consumption short-term economic vulnerabilities for Myanmar. on the other hand increased by around 14 percent in real terms in 2015-2016, partly in response to Challenging external environment6 spending pressures arising from external shocks. Public investments across economic services (e.g. Growth in the global economy along with that transportation, power, industry) increased by of the East Asia and the Pacific (EAP) region have around 10 percent in real terms. continued to slow down since October 2015. Economic activity eased in the Euro Area and the Private investors have remained upbeat, United States, whilst activity in Japan contracted especially after the historic elections of in the last quarter of 2015. Growth in developing November 2015, but new investment flows in EAP slowed to 6.5 percent, down from 6.8 percent 2015-2016 have decelerated. Both domestic and in 2014, mostly due to decelerations in China (6.9 foreign investment commitments remained strong percent growth in 2015 compared to 7.4 percent in the first three quarters of 2015-2016 (Figure 1). in 2014) and regional commodity exporters. But after two years of very rapid growth, actual investments have moderated. Part of this is linked Despite the slowdown, the EAP region still to some new investments being parked over the accounted for almost two-fifths of global growth political transition. In addition, tightening external in 2015. At the same time, the EAP region, financing conditions combined with declining particularly among its larger economies, has seen global demand have delayed some foreign investments, particularly in the tradable sectors. These issues were compounded by short-term 6 WB, “East Asia and Pacific Update,” April 2016 ECONOMIC GROWTH | 4 MYANMAR ECONOMIC MONITOR MAY 2016 Figure 1. Investment commitments Q1-Q3 (US$ m) Figure 2. Sector contribution to growth (% change) 8,000 9% 7,000 8% 6,000 Percentage change 7% US Dollar (million) 5,000 6% 4,000 5% 3,000 4% 2,000 3% 2% 1,000 1% 2013 Q1-Q3 2014 Q1-Q3 2015 Q1-Q3 0% Foreign investment commitments 2012/13 2013/14 2014/15 2015/16 Domestic investment commitments Agriculture Industry Services Sources: CSO, DICA Sources: MOPF, WB Staff estimates macroeconomic challenges including exchange transportation services. A combination of all this rate pressures and rising inflation, in addition to will have negatively affected household incomes. ongoing longer-term structural constraints (e.g. electricity, access to finance, land). The resulting economic impact of the floods, as measured by the damage to physical assets Agriculture affected by floods and loss in production flows, is estimated at around 3.1 percent of 2014/2015 GDP, which Agriculture growth decelerated to 2 percent in is not insignificant when compared to other 2015-2016 compared to 5.6 percent the previous recent cases (Figure 4).7 Over 80 percent of the year due to the impact of heavy rains between value-added losses, estimated at 0.8 percentage July and September 2015 causing widespread points of GDP, come from the agriculture sector. flooding and landslides.The sector contributed Within agriculture, the largest impact has been on less than 10 percent of overall growth (Figure paddy production. The floods have impacted the 2). Although the floods were geographically main monsoon harvest, whereas the dry season widespread, major agricultural producing areas production is estimated to drop due to water were particularly badly hit (Figure 3). Damages shortages caused by El Niño and substitution from the disaster affected storage facilities towards more profitable crops (e.g. beans and with stocks of seeds; animals and livestock; pulses). aquaculture facilities and fisheries’ ponds; and fishing equipment. Losses were generated from lower crop production, reduced output of meat and eggs, and contraction in fisheries’ production. 7 For a more detailed analysis on the impact of the These in turn had knock on effects beyond floods, please see Government of the Union of Myanmar, agriculture in food processing, trading, and “Myanmar – Post-Disaster Needs Assessment of Floods and Landslides,” July-September 2015 ECONOMIC GROWTH | 5 MYANMAR ECONOMIC MONITOR MAY 2016 Figure 3. Share of agriculture losses and output (%) Figure 4. Flood impacts in selected countries (% of GDP) 12 Share in national agriculture losses due to floods 30% Ayeyarwaddy 10 Bago 25% 0 Percentage 20% 0 Mandalauy 0 15% Yangon Sagaing 0 10% Rakhine 0 Yemen (2008) Guatemala (2010) Myanmar (2000) Namibia (2000) Burkina Faso (2000) Mozambique (2000) Argentina (2000) Senegal (2000) Moldova (2000) 5% Chin Magway Shan Kayah Kayin 0% 5% 10% 15% 20% NPT Kachin Mon Share in national agriculture output 2014/15 Damage Loss Sources: MOPF, WB Staff estimates Sources: WB Paddy production has contracted but it is Beans and pulses, which account for around 50 difficult to estimate the exact magnitude. The percent of value added in crops, were not as US Department of Agriculture estimates a 3.2 badly affected by the floods. Beans and pulses percent decline in 2015-2016 (Figure 5). Rice are mainly planted during the cool off season price developments suggest a bigger decline. and harvested between January and March. The wholesale price of Emata rice in Yangon in Only green gram is harvested throughout the September-October 2015 averaged Kyat 498,200 year. Higher prices for beans and pulses, lower per ton, which is 36 percent higher than the same production costs compared to paddy, and lower period last year. Yet in US dollar terms, rice prices water requirements have encouraged farmers to in Yangon have remained relatively stable, which shift production towards these crops. suggests that the production shock combined with the weaker Kyat contributed to the sharp increase At the same time, a lack of access to quality in prices. High prices in China attract more seeds combined with price volatility have and more of Myanmar exports. In November- affected production potential. While the main December, Myanmar prices converged with prices 2015-2016 harvest for black gram and pigeon of its main export competitors – Thailand and peas is yet unknown (February-March 2016), the Vietnam, so in theory they could compete on FOB decline in exports in 2015 points to production basis. Yet, the large wedge with China prices (~ constraints. Between April and August 2015, $250/ton) diverted exports from other locations Myanmar exported beans and pulses produced in to cross-border trade. 2014-2015. Starting from October 2015 it began to export green gram produced in 2015/16, though in lower volumes than during the same period of 2014. Production is estimated to have increased by 0.8 percent. ECONOMIC GROWTH | 6 MYANMAR ECONOMIC MONITOR MAY 2016 Figure 5. Paddy production, Myanmar (‘000 tons) Figure 6. Indices of rice prices and exchange rate, Myanmar 19,800 150 19,600 140 19,400 130 Index 2013=100 ‘000 tons 19,200 120 19,000 110 100 18,800 90 19,600 80 19,400 Jul-13 Jul-14 Jul-15 Apr-13 Apr-14 Oct-13 Oct-14 Apr-15 Oct-15 Jan-13 Jan-14 Jan-16 Jan-15 19,200 18,000 Kyat/ton USD/ton Kyats/USD 2013/14 2014/15 2015/16 Sources: USDA Source: FAOGIEWS Domestic manufacturing facing more due to limited processing and packaging. Output is vulnerable to supply and price developments competition in the agriculture sector, and also to the cost of Developments in the agriculture sector have had imported inputs. spillover effects on manufacturing and processing output. Around 60 percent of industrial output Domestic producers in the food processing comes from manufacturing and processing, industry are facing growing competition approximately 70 percent of which is from food from cheaper imports. Their productivity and processing. This in turn is dominated by rice competitiveness are hampered by weak domestic milling, edible oils and snack foods. The sector supply chains and a lack of access to affordable therefore has a fairly narrow base, relying on high finance. In addition, much of the inputs for volumes and suffering from low value addition domestically processed foods have to be imported Table 1. Beans and pulses production, Myanmar   2013/14 2014/15 2015/16 Production, ‘000 tons 2,674 2,705 2,763 Black gram (Matpe) 1,076 1,080 1,069 Green gram (Pedesein) 992 1,050 1,071 Pigeon peas (Pesingon) 579 575 587 Change from the last year, % 3.6 2.2 0.8 Exports, ‘000 tons (annual, FOB) 1,301 1,459 951 Source: WB Staff estimates based on data from MALI and MOC ECONOMIC GROWTH | 7 MYANMAR ECONOMIC MONITOR MAY 2016 Figure 7. SEE petroleum and petrochemical products Figure 8. Industry output from selected SEEs 2014-2015 – 2015-2016 Q1-Q3 (% change, gal th) 2014-2015 – 2015-2016 Q1-Q3 (% change) 20% 20% 10% 10% 0% 0% -10% -10% -20% -20% -30% -30% -40% -40% -50% -50% -60% Motor Diesel Furnace Aviation LPG Kerosene Pharma Cotton Fertlizer Beer (gal) Soft drink Cigarette spirit oil oil turbine solids (kg) fabric (yd urea (M (unit th) th) Ton) Source: CSO Source: CSO (e.g. flour, preservatives, packaging material), SEEs involved in commercial activities will find it which are now more costly due to a weaker Kyat. increasingly difficult to compete in Myanmar’s Although exchange rate developments will have growing marketplace. This is reflected in the offset some of the price differential, domestic expanding operational deficits of SEEs under the producers complain that unofficial, untaxed Ministry of Industry (Table 2). Consumers and imports of processed foods through Myanmar’s producers now have greater choice and access borders with neighboring countries are making it to better quality goods at a cheaper cost thanks difficult for them to compete. to the gradual opening up of the economy to the domestic private sector and international trade. Data from State Economic Enterprises in Restructuring, including privatization, of loss manufacturing and processing, albeit a small making SEEs involved in commercial activities, share of total output, also point to declining could potentially relieve fiscal burden and expand production. For example, the Myanmar access to critical factors of production for the Petrochemical Enterprise, which is involved in private sector, including prime industrial land. the downstream production of petroleum and petrochemical goods experienced a 14 percent Foreign investments in manufacturing and decline in output in the first three quarters of processing have begun to gradually take off in the 2015-2016 compared to the same period last Thilawa Special Economic Zone (SEZ). Investors are year (Figure 7). Similarly, output of selected producing both for export (e.g. garments, electrical manufacturing and processing products from SEEs assembly, medical equipment) and domestic (e.g. operating under the Ministry of Industry has also agriculture machinery, fertilizer, pharmaceuticals, fallen over the same period (Figure 8). construction material, processed foods) markets. Recent macroeconomic developments including slowing external demand created some concerns for export oriented firms due to growing ECONOMIC GROWTH | 8 MYANMAR ECONOMIC MONITOR MAY 2016 Table 2. Industry State Economic Enterprises (Kyat million)   2012-2013 PA 2013-2014 PA 2014-2015 PA 2015-2016 RE Revenue 183,194 143,760 92,896 193,863 Expenditure 734,598 678,016 501,908 544,406 Recurrent 121,641 167,210 170,776 231,835 Capital 612,957 510,806 331,132 312,571 Operating balance 61,553 (23,450) (77,880) (37,972) Source: MOPF, WB Staff estimates uncertainties in external markets. Similarly for More recently, there seems to be a gradual investors targeting the domestic market, exchange shift from residential towards infrastructure, rate and inflation pressures have increased risks commercial and industrial construction, though on returns to foreign investment. these are running into structural constraints. Access to long-term financing is a major issue, But SEZ investors take a longer-term perspective. with a mismatch between the gestation period for Despite growing competition and rising cost for projects and the terms and conditions offered by skilled labor, Myanmar continues to benefit from local banks. The latter lend mostly to short-term, a significant labor cost advantage relative to its lower risk, trading activities. Another constraint competitors. A total of 7 factories in Thilawa have is electricity; large commercial and industrial already started operations, another 16 are in the units that have recently been completed have process of setting up their operations, and a total inadequate access to power. These issues are of 60 have reserved space. This is equivalent to compounded by the sector’s large dependence on 80 percent occupancy. These investments could imports of building materials. Although the cost generate up to 40,000 jobs. of building materials has fallen internationally, the recent volatility in foreign exchange markets There has been a gradual easing in construction have made business planning more difficult and activity over the course of 2015-2016. The big affected the pace of expansion. construction boom of recent years was dominated by an expansion of the residential market, which Gas production edged up over the course of in 2013 was estimated to account for around 40 2015-2016, helping to buffer some of the shock percent of construction activity.8 A combination from falling gas prices. Gas production in the first of speculation and overheating in the residential three quarters of 2015-2016 was up 8 percent segment has led to falling demand as reflected relative to the same period the previous year, in declining sale and rental prices. The new when production shot up by 36 percent with the Condominium Law, passed in January 2016, now Shwe and Zawtika fields coming on stream (Figure allows foreign investors to invest in condominium 9). In 2015-2016, output from Shwe and Zawtika is projects, which could help bring in new capital. expected to be up by 30 percent relative to 2014- 2015, though output from the Yetagun and Yadana fields are expected to drop by 7 percent. 8 Oxford Business Group, “Improving regulations and standards for Myanmar’s construction sector.” ECONOMIC GROWTH | 9 MYANMAR ECONOMIC MONITOR MAY 2016 Figure 9. Gas sector output (cf m and % change yoy) Figure 10. Gas wellhead production (MMSCF) 200,000 60% 800000 180,000 700000 50% 160,000 40% 600000 140,000 Percentage change Cubic Feet (m) 120,000 500000 30% 100,000 400000 MMSCF 20% 80,000 60,000 300000 10% 440,000 300000 0% 100000 0 -10% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 0 2013 2015 2012-2013 2013-2014 2014-2015 2015-2016 Yetagun Yadana Shwe Zawtika Source: CSO Source: MOEE Expansion of essential services licenses continues to create bottlenecks given the number of government agencies involved Around 60 percent of growth in 2015-2016 and the lack of coordination. Another example came from expansion in the service sector, is the recent application of the outdated Stamp which helped maintain resilience amid external Duty Law that imposes a 1.5 percent tax on the shocks. Telecommunications services continued value of new loan contracts. This can amount to grow, though rollout has been slower than to a large, inefficient levy, which negatively planned. Telecom operators have faced challenges affects foreign investments. Another example in importing equipment due to difficulties in is last year’s decision to introduce a 5 percent accessing or remitting foreign exchange to external commercial tax on telecommunications and then vendors. This has been ascribed to both policies postpone implementation till 2016-2017. This had to restrict withdrawal of foreign exchange, but important implications for telecom operators that also inefficiencies in the Myanma Foreign Trade had invested in reconfiguring internal systems to Bank (MFTB) and the Myanma Investment and accommodate the new tax. Commercial Bank (MICB), which still play a large role in foreign exchange transactions. Telecom operators have also faced challenges receiving Structural change and labor migration clearances from multiple levels of government The pace and pattern of economic growth over agencies for construction and layout of fiber optic the past 5 years have contributed to major shifts infrastructure and towers. in the sector composition of GDP. Despite some increase in agriculture output in 2013 and 2014, The transparency, efficiency and stability of the share of the sector has dropped from around business regulations in particular areas may be 37 percent of GDP in 2010 to around 29 percent in affecting the pace of expansion in the service 2015 (Figure 11). This has been offset by big gains sector. For example, the process for issuing import in services (wholesale and retail trade, followed by ECONOMIC GROWTH | 10 MYANMAR ECONOMIC MONITOR MAY 2016 Figure 11. Sector composition of GDP (% share) Figure 12. State/Region contribution to growth (% change) 45% 9% 43% 8% 41% 7% 39% 37% 6% Percent share 35% 5% 33% 4% 31% 29% 3% 27% 2% 25% 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 1% 0% Industry Agriculture Services 2012/13 2013/14 2014/15 Yangon Sagaing Mandalay Ayeyarwady Others Sources: MOPF, WB Staff estimates Sources: MOPF, WB Staff estimates transportation, and communications), which have Together with these developments, Myanmar been the biggest drivers of growth; and industry is experiencing high levels of migration out of (manufacturing and processing, followed by rural areas, as illustrated by a recent World construction, and energy, including gas). Bank study.9 The study focuses on migration in Ayeyarwady and Magway, which are home to Out of 14 States and Regions across Myanmar, large numbers of Myanmar’s rural poor and are the Regions of Yangon, Sagaing, Mandalay, and also close to Yangon and Mandalay. One in five Ayeyarwady accounted for nearly two thirds of households in Ayeyarwady and one in four in real GDP growth in the past two years. Yangon Magway report having at least one household alone accounted for 25 percent of real GDP member currently migrating. Most of these are growth in 2014-2015 (with 14 percent of the total domestic migrants (91 percent in Ayeyarwady and population), and Mandalay another 15 percent 78 percent in Magway). Migration from villages in (with 12 percent of the population). Together, both Regions has increased rapidly in the past four these two Regions are important growth poles for years (Figure 13). Myanmar. Over 90 percent of Yangon’s economy and over 75 percent of Mandalay’s economy is The migration rate for men is higher than for made up of industry and services. Ayeyarwady and women, which nonetheless is also high. In Sagaing are major agriculture centers, though the Ayeyarwady, 60 percent of migrants were male, share of agriculture in regional GDP has declined compared to 66 percent in Magway. Around 80 between 2011 and 2014 in both cases. percent of migrants in each Region were between the ages of 11 and 30, with the vast majority in 9 WBG and LIFT, “A Country on the Move: Domestic Migra- tion in Two Regions of Myanmar – A Qualitative Social and Economic Monitoring (QSEM) Thematic Study,” (2016) ECONOMIC GROWTH | 11 MYANMAR ECONOMIC MONITOR MAY 2016 Figure 13. Households with a current or returned migrant by Figure 14. Employment in destination sites by sector year of departure (%) Before 60% 2010 2010 2011 2012 2013 2014 50% 60% 48% 40% 50% 37% 30% 40% 30% 20% 18% 20% 10% 11% 12% 10% 5% 5% 0% 12% g on re l ng rs ai rin he 8% tu et hi cti 7% tu ul /R Ot Fis tru 0% ac ric le 4% 3% ns uf sa Ag an Co le ho M W Magway Ayeyarwady Magway Ayerarwady Source: WBG “A Country on the Move” (2016) their late teens or early twenties. Migrants also Magway, small landholding households migrated tended to be better educated than non-migrants. less than the landless, because the former are able In both Regions, landless households were more to generate income from their own agriculture or likely to have family members migrating than business, and from casual labor. the rest of the population. Close to 60 percent of migrants from Ayeyarwady and around 24 percent Push factors (i.e. conditions that drive people of migrants from Magway moved to Yangon. out of rural areas) relative to pull factors (i.e. conditions that draw labor to urban areas) may Migrants mostly found work in the informal labor have been important drivers of rural-urban market. They tend to work as casual laborers in migration. This is reflected in migrants’ motivation restaurants, construction, and other low-skill to move out of rural areas and their occupations employment. A quarter of male migrants worked in urban areas. This also manifests itself from in construction. Around 55 percent of female qualitative research under the World Bank study, migrants in Yangon were employed in light which finds that earning differentials between manufacturing, particularly garments, which is sending and destination locations may not be sought after due to better pay, more regular, and substantial, particularly when factoring in higher longer-term work compared to alternatives. cost of living in urban areas. The real attractions are the certainty and regularity of urban jobs. The The majority of migrants moved out of rural areas importance of push relative to pull factors may in search for more stable earning opportunities. be driven by a combination of low agriculture In Ayeyarwady, households with more diverse productivity and rural economic opportunities income sources were less likely to migrate unlike on the one hand, and slow urban employment landless households engaged in seasonal work and expansion relative to the supply of low skill labor who were more vulnerable to income shocks. In on the other. This is not unusual for a country at Myanmar’s stage of development. ECONOMIC GROWTH | 12 MYANMAR ECONOMIC MONITOR MAY 2016 Urbanization could be a big driver of economic opportunities if supported by sound urban planning, a conducive business climate, and policies to maximize benefits of agglomeration. These could be important to avoid risks of push factors becoming a drag on economic growth as cities become overcrowded and poverty rises as employment opportunities and public services struggle to keep pace with the increased inflow of migrants. Transforming rural-urban migration as a source of growth is likely to require continued efforts at enhancing agriculture productivity, increasing access to rural services, removing bottlenecks to the expansion of labor intensive manufacturing industries, and increased focus on urban planning and services. Table 3. Myanmar Gross Domestic Product (Kyat billion)   2013-2014 2014-2015 2015-2016 GDP (constant at 2010 prices) 49,030 53,196 56,928 Agriculture 15,346 16,209 16,533 Industry 13,964 15,190 16,374 Services 19,720 21,797 24,020 GDP (Nominal) 54,756 63,323 75,431 Agriculture 17,138 19,295 21,907 Industry 15,595 18,081 21,697 Services 22,023 25,947 31,828 Sources: MOPF, WB Staff Estimates ECONOMIC GROWTH | 13 MYANMAR ECONOMIC MONITOR MAY 2016 Table 4. East Asia and Pacific – GDP growth (2013-2015) (% change)   2013 2014 2015 East Asia and Pacific1 6.3 6.1 5.7 Developing East Asia and Pacific 7.2 6.8 6.5 Papua New Guinea 5.5 8.5 8.5 Myanmar 8.5 8.5 7.0 Cambodia 7.4 7.1 7.0 Lao PDR 8.5 7.5 7.0 China 7.7 7.4 6.9 Vietnam 5.4 6.0 6.7 Philippines 7.1 6.1 5.8 Malaysia 4.7 6.0 5.0 Indonesia 5.6 5.0 4.8 Timor-Leste2 5.4 6.0 4.3 Fiji 3.5 5.3 4.0 Solomon Islands 3.0 1.5 3.3 Thailand 2.8 0.9 2.8 Mongolia 11.6 7.8 2.3 Memo: Developing East Asia exc. China 5.1 4.6 4.7 Source: WB East Asia and Pacific Update October 2015, April 2016 1/ Developing East Asia + NIEs + Korea 2/ Non-oil GDP Table 5. Myanmar selected social indicators   2013-2014 2014-2015 LMIC avg1 Population (million) 51.2 51.7 Population Growth (% change) 1.02 1.01 1.5 Population Density (per square km) 76 76 142 Labour Force Participation Rate (%) 66.9 67.0 59.2 Adult literacy rate 89 90 73 Sources: CSO, WDI 1/ 2014 except adult literacy 2010 ECONOMIC GROWTH | 14 MYANMAR ECONOMIC MONITOR MAY 2016 Foreign Trade and Investment External trade and investment flows are Growing trade deficit progressively contributing to Myanmar’s economic growth and its future growth potential. Myanmar experienced a growing trade deficit The contribution of net exports to GDP growth has over the first three quarters of 2015-2016 driven historically been very low. But the role of exports mainly by a contraction in exports rather than in growth is steadily increasing and the opening strong growth in imports as in 2014-2015. The up to imports has enabled access to much needed trade deficit in the first three quarters of 2015- inputs for enhancing domestic productive capacity. 2016 reached close to US$ 4.4 billion compared to Merchandise trade has increased from an average US$ 3 billion over the same period last year (Figure of 25 percent of GDP between 1986 and 2011 15). In the last three months of 2015, the trade to nearly 50 percent in 2014-2015, comparable deficit reached its highest level of any quarter in to other countries in the region soon after they recent years. Imports in the first three quarters liberalized. Increased openness has also led to of 2015-2016 grew by only 2 percent in nominal growing external imbalances, with the current terms relative to the same period last year. The account deficit estimated at 7 percent of GDP in value of exports in the first three quarters of 2015- 2015-2016. In particular, a slowdown in exports in 2016 was on the other hand down 12 percent 2015-2016, together with a deceleration in foreign in nominal terms relative to the same period in investment inflows, have created some concerns 2014-2015 (Figure 16). for policy makers, which are discussed further below. Figure 15. Trade flows and balance (US$ bn, quarterly) Figure 16. Trade growth (Q1-Q3. % change) 5,000 1,500 45% 4,000 1,000 Trade balance (US$ bn) 3,000 500 35% 2,000 Trade (US$bn) 1,000 - - (500) 25% (1,000) (1,000) Percent change (Q1-Q3) (2,000) (1,500) (3,000) 15% (4,000) (2,000) (5,000) (2,500) 5% Q2Q3Q4 Q2Q3Q4 Q1Q2Q3Q4 Q1Q2Q3Q4 Q1Q2Q3Q4 Q1Q2Q3 2010 2011 2012 2013 2014 2015 -5% Exports Imports Trade balance -15% Exports Imports 2012 2013 Source: MOC, Customs, CSO 2014 2015 FOREIGN TRADE AND INVESTMENT | 15 MYANMAR ECONOMIC MONITOR MAY 2016 Contraction in exports gas continued to account for around 40 percent of total merchandise exports. Myanmar’s gas export Both the volume and the value of exports have prices are revised every quarter by averaging contracted due to cyclical factors associated with selected heavy fuel prices and production cost the large share of commodities in Myanmar’s indices over the previous 12 months. The effect export basket. A combination of declining of the sharp drop in heavy fuel prices that started commodity prices and the devaluation of the in the summer of 2014 therefore began to feed Kyat against the US dollar, have led to a drop in through after 3 months, with full pass through the US dollar value of exports. The volume of non- after a 12-month lag. This is evident from the US gas and non-industry exports has also declined dollar value of gas exports dropping more sharply sharply, falling by around 23 percent in the first than the volume of gas exports starting in mid- three quarters of 2015-2016 compared to the 2015 (Figure 20). same period last year (Figure 17) due to the impact of floods on agriculture. In developing East Asia, The agriculture sector also suffered a marked export values have declined much more than decline in exports due to the flood-related supply volumes (Figure 18), which has been most marked shock of 2015-2016 (Figure 21). There was a small for commodity exporters such as Malaysia and recovery in the third quarter following the lifting Indonesia. of a rice export ban, including increased supply across the border to China. The volume of beans The drop in international oil prices have started and pulses exports, which account for over half to feed through to Myanmar’s gas exports, which of agriculture exports, has also declined sharply, contributed to roughly 25 percent of the drop in though offset to some extent by higher prices in total exports between August and December 2015 2015-2016. While the main 2015-2016 harvest (Figure 19). In the first three quarters of 2015-2016, Figure 17. Myanmar non-gas and non-industry export Figure 18. Developing Asia export volumes and values volumes and values (6-m moving average) (yoy change in 12-month moving average) 1,200,000 550 30 >?1752!87-,30!@;025D