Myanmar has made impressive strides in opening and liberalizing the economy, boosting growth and the economic outlook, but the formerly isolated country faces considerable challenges, particularly because of its limited macroeconomic management capacity.
In their regular report on the health of the Myanmar’s economy, IMF economists estimate that the country’s economy grew around 6½ percent in 2012/13, driven by gas production, construction, and services.
These drivers, along with further investment in telecommunication and transport, will continue to support economic activity, raising growth to 6¾ percent next year, says the report, which estimates that macroeconomic stability will be maintained with inflation contained at 6½ percent, and international reserves accumulating to 4 months of prospective imports.
But the IMF economists warn that the authorities’ limited macroeconomic management capacity is being stretched by the broad-based economic transition.
Inflationary pressures are also growing caused by wage increases, asset prices, and recent developments in the foreign exchange markets. On the upside, the economists note that growth could rise beyond their projection, if the pace of reforms were to exceed expectations.
In late 2012, the IMF helped the authorities develop a macroeconomic reform program for 2013 that identified priority actions consistent with capacity constraints. The Staff-Monitored Program, which is being jointly monitored by the government of Myanmar and IMF staff, is designed to maintain low inflation and increase international reserves to provide a buffer against shocks during the reform process. It also aims to build the institutional capacity and tools necessary for lasting macroeconomic stability.
The IMF economists praised the progress made by the authorities against their macroeconomic policy priorities, reflected in good progress against program benchmarks. All end-March quantitative targets were met by a comfortable margin, and the authorities also fulfilled their structural benchmarks, which were focused on exchange rate unification and the lifting of external payment restrictions.
Reforms to cut poverty, boost growth
While progress made so far is impressive, the report cautions that a long road lies ahead to enable the authorities to achieve their overriding aim of reducing poverty and promoting broad-based growth. The IMF economists note that the comprehensive and wide-ranging reforms in the authorities’ Framework for Economic and Social Reforms will require a careful and well sequenced approach.
In the macroeconomic area, the liberalization of the exchange rate and the wider economy make the deployment of monetary policy tools an urgent task. However, the progress of a law to provide operational autonomy to the central bank, was slower than expected. This delay impeded progress on strengthening the monetary policy framework, but the authorities have been working with the IMF to establish instruments. Just recently the government enacted a new Central Bank of Myanmar law to provide autonomy to the central bank.
Modern financial sector
Developing a modern financial sector and building a structure for monetary policy transmission are also important priorities and will take time. To begin the process, the authorities should strengthen supervision, including of foreign exchange operations, and develop a clear licensing regime for foreign banks, suggests the report.
Strengthening public financial management is of paramount importance. The report also stresses the importance of establishing a well-administered and broad-based tax system. The reforms will create space for much-needed increases in spending on infrastructure, health and education. These will also require the development of a medium-term fiscal framework that promotes the buildup of fiscal buffers and prevents expenditure volatility. Besides these challenges, the authorities must improve statistics and data quality, which are crucial for effective policymaking.
Support from international community
While the challenges posed by the reform agenda are daunting, they are surmountable with support from international community, say the IMF economists. Technical assistance, which is demand led and tailored to Myanmar’s specific needs, will continue to play an important role. Coordination and prioritization are essential given scarce administrative capacity and the breadth of the agenda.
The IMF’s newly established Resident Representative office and technical assistance office in Bangkok will be focal points for the IMF’s continued intensive support to the Myanmar authorities as they strive to maintain rapid progress against their ambitious economic reform objectives.