Myanmar: Safeguarding Macroeconomic Stability and Deepening Reforms are Warranted to Secure Sustainable Growth
June 28, 2017 | Press Release
SINGAPORE, June 28, 2017 – Myanmar’s economic growth is expected to be strong in FY2017/18. Nonetheless, macroeconomic stability risks remain elevated and need to be addressed by tight monetary and fiscal policies, strengthened financial sector policy and deeper reforms, according to the 2017 Annual Consultation Report on Myanmar published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared on the basis of AMRO’s Annual Consultation Visit to the country in January 2017 and data availability as of 31 March 2017.
Growth is expected to recover in FY2017/18 (ending 31 March) to 7.0 percent per annum, after the economy slowed down to an estimated 6.0 percent in FY2016/17. Increased investments with the implementation of the new Investment Law and stronger export performance with the development of Special Economic Zones are behind the improved prospects for growth.
Notwithstanding the improvement in growth outlook, macroeconomic risks are still significant and could derail the favorable outlook. Managing the fiscal position remains challenging as falling revenues require tighter expenditure management. After rising sharply to 4.5 percent of GDP in FY2015/16 due to falling revenues and rising expenditure, the fiscal deficit for FY2016/17 is expected to increase further to 4.8 percent of GDP. External stability risks remain significant as the current account deficit continues to widen. Inflation is expected to stabilize at around 6.2 percent in FY 2017/18 from 6.8 percent in FY2016/17, but risks to inflation remain significant, with inflation pressures in the economy remaining high on the back of strong credit growth and some pick-up in oil prices.
Although credit expansion plays an important role in enlarging financial access for firms and households, rapid credit growth also pose significant risks to the financial sector, especially if the loans turn into NPLs and weaken the bank balance sheets. Loan portfolios of state-owned banks may also have weakened, owing to their low capacity for risk assessment and continued dependence on government funding to fulfill their development mandates.
Given the challenging environment, safeguarding macroeconomic stability and undertaking deeper reforms need to go hand in hand to secure sustainable growth in the medium-term. Maintaining tight monetary policy together with focused efforts to phase out direct financing of the deficit by the central bank are essential to contain inflationary pressures. Enhancing tax revenue and improving public expenditure efficiency is required amid a tight fiscal environment. Maintaining exchange rate flexibility and building up of international reserves as a buffer against external shocks, are recommended in the face of elevated external uncertainty.
Closely monitoring the financial sector is also needed to quickly identify and address emerging risks. Regular onsite and offsite supervision of commercial banks and publication of financial soundness indicators are positive initiatives that support financial stability. The issuance of new regulations under the Financial Institutions Law is important in the rapidly changing financial landscape.