Friday, September 22, 2017

Growth to rebound after flooding, says World Bank

After two years of macroeconomic stability and strong economic growth Myanmar faced a more challenging environment last year, with heavy flooding, a slowdown in investment during the election and a more challenging external environment, the World Bank said yesterday.

Growth slowed to 7 percent – less than the average rate of 8.5pc in 2013 and 2014 but higher than expected. Last October as the floods receded, the World Bank cut its 2015-16 forecast from 8.2pc to 6.5pc, a figure it said was subject to revision as more details emerged.

Agriculture output growth slowed by around 2pc due to flooding, the World Bank said, compared to 5.6pc growth in 2014-15. Earlier this year the Asian Development Bank estimated the economic cost of last year’s floods at US$1.5 billion, equal to 3pc of gross domestic product.

The agriculture sector has not recovered well, due to low productivity and inflation. The poor and vulnerable have been hurt the most, intensifying push factors in rural-urban migration, which is increasing rapidly, the World Bank said. Meanwhile, the light manufacturing sector is facing more competition from cheap imports, affecting its ability to create new employment.

The value of exports fell by 12pc in nominal terms in the first three quarters compared with the same period last year, due to flooding and falling commodity prices, which contributed to the country’s growing trade deficit and to exchange rate pressures.

Tighter external financing conditions and falling global demand, combined with lower international commodity prices, have not helped the economic environment for Myanmar, resulting in short-term vulnerabilities, the World Bank said.

While the elections created a feeling of economic optimism, structural constraints such as exchange rate instability, rising inflation – which peaked at 16pc year-on-year last October – and the political transition have held back investment flows.

“The institutional capacity and policy responses to deal with these macroeconomic shocks and imbalances have faced some challenges,” the World Bank said.

Monetary financing of the deficit rose sharply, adding to inflationary pressures, while Treasury bill auctions are still undersubscribed. Concerns over the growing trade deficit prompted measures to contain demand for foreign currency and imports.

Yet despite these headwinds, Myanmar remains one of the world’s fastest-growing economies. The World Bank believes growth will recover to 7.8pc this year, while an optimistic projection by the ADB suggests it could reach 8.4pc in 2016-17, the highest rate in Asia and the Pacific.

Economic prospects are still strong, the World Bank said, so long as the government can reduce the budget deficit and increase spending on public services and growth to offset the impact of lower commodity prices.

Speaking at the launch of the Myanmar Economic Report in Nay Pyi Taw yesterday, U Maung Maung Win, deputy minister for planning and finance, said the new government will be accountable and responsible, and will continue to seek economic development. “The Ministry of Planning and Finance will try to improve its tax intake from all sectors,” he said.

Continuing to establish a well-functioning exchange rate system will also be critical to allow Myanmar to benefit from growing trade and investment opportunities, the World Bank said. The kyat has been volatile over the past year, strengthening by 25pc to the US dollar in 2015 before weakening by 10pc this year to date. Without hedging facilities, foreign investors must take on the exchange rate risk.

Improving access to electricity is another priority. “One of the main challenges in attracting investments is the financial viability of the power sector, which critically depends on tariff policies both for gas supply to the power sector and for electricity distribution,” the World Bank said.

Reforming state-owned banks to promote transparency, stability and competitiveness in the financial sector is also crucial, it said, as they still account for more than half of total banking sector assets. Over the past few months, the Central Bank has been taking steps to free up some of these assets and to increase transparency in the sector.

In the short term the agriculture sector is expected to recover, though downside risks stem from the effects of El Niño, which created severe drought earlier this year. Over the medium term, economic growth is expected to bounce back to average 8.2pc.

Investor demand for services, such as transportation, communications and logistics, are likely to be the main drivers of growth, followed by infrastructure construction in the power and transport sectors.

Inflation should ease to an average of 8.5pc over the course of the year, the Bank said, while the budget deficit is likely to average 3.5pc of GDP over the medium term as government revenues increase.

“Over the medium to longer term, the manufacturing and processing sectors continue to hold strong promise as potentially important drivers of inclusive growth,” it said.

 Translation by Zar Zar Soe