Wednesday, July 29, 2015

Myanmar’s Economic Liberalisation

The Market Mogul - For 49 years, Myanmar suffered economic and political isolation from the international community. Its military regime coupled with sanctions from the US caused Myanmar to fall behind many of its ASEAN counterpart nations in terms of economic growth and living standards. In fact, in 2009, the Burmese economy was named the least free in Asia, together with North Korea.

Fortunately, Myanmar has seen some positive light since the quasi-civilian government of President Thein Sein came in power in 2011. Economic, social and political reforms were started then and are still in progress. Since the beginning of such reforms, foreign direct investment in Myanmar has gradually increased and totalled up to 4.4 billion USD between January and November last year.

However, Myanmar’s economic liberalisation process is not one without hurdles. Although its economy is set to grow at around 8.5 percent this financial year, Myanmar is exposed to numerous risks, domestically and internationally. Due to the rally of the US dollar, the kyat (Myanmar’s currency) has come under pressure, depreciating to K1230 per dollar towards the end of July 2015. Should the Federal Reserve decide to increase interest rates, the kyat is expected to depreciate further – IMF has warned that:

“Myanmar simply does not have enough foreign reserves to resist kyat depreciation.”

Myanmar is full of untapped natural resources, increasing its potential as an investor-friendly economy that neighbouring countries would love to collaborate with. But, its widening current account deficit is hampering such potential by reflecting fundamental weakness in the economy. To tackle its current account deficit, experts believe that Myanmar should have a flexible exchange rate that mirrors market conditions. A floating kyat will close the gap between official and parallel market rates, supressing the demand for US dollars and thus, saving the kyat from depreciating further. A stronger kyat will not only reduce imported inflation but also narrow Myanmar’s stubborn current account deficit.

The fiscal accounts of Myanmar are not looking up either – Myanmar’s tax revenue in 2014 was reportedly only 7 percent of its Gross Domestic Product (the lowest percentage in ASEAN). In order to improve fiscal conditions, Myanmar has to align its expenditure priorities and increase tax revenue. Instead of focusing on military expenditure, the government should channel money towards healthcare, education and social equality, especially of the Rohingyas.

It is without doubt that Myanmar has taken commendable steps towards integrating its economy in the global arena. Nevertheless, risks remain and for a developing country facing domestic conflict and financial weakness simultaneously, it will not take long for these risks to form the perfect storm. To ensure the economic prosperity of Myanmar, the above issues need to be addressed immediately and reforms to liberalise the economy need to continue. Only time will tell if President Thein Sein’s government will succeed in truly globalising Myanmar and maximising its potential.