After a shaky 2016 Myanmar is hoping for stronger economic growth in the year ahead. The IMF publishes its first in-depth report on the economy in over a year this week, and The Myanmar Times spoke to IMF resident representative Yasuhisa Ojima about the outlook for growth and what the government can do address the many threats to stability.
How has Myanmar done in terms of GDP growth this fiscal year?
We have revised downward the projection of this fiscal year’s [2016-17] growth rate to 6.3 percent, a respectable rate, mainly due to softer-than-expected economic activity during the first half of the year. This slowdown mainly resulted from the sluggish construction activities and a slow agricultural recovery from the floods in 2015-16, as well as slowing demand from major trading partners and significant declines in commodity prices.
Should people be worried about the lower GDP growth estimate and does the IMF expect growth to recover next fiscal year?
We expect a higher growth rate of around 7.5pc for 2017-18 due to an anticipated rebounding construction activity in Yangon and FDI inflows. Continued efforts by the authorities to boost business confidence through regulatory reforms and greater policy clarity will also help recovery.
What evidence is there that FDI flows, rather than approved investment, are increasing?
The FDI inflows have been weaker than anticipated after a sharp increase in 2014-15, but we expect them to recover from next fiscal year onward given Myanmar’s favorable medium-term growth prospects and the authorities’ continued efforts to create a more conducive business environment. The passage of the Investment Law and the expected passage of the Company Law bode well for future investment.
What are the risk factors going forward for Myanmar?
Key risks to growth and stability include: concerns over policy clarity going forward; weak commodity prices and slow export demand; global financial market volatility; natural disasters; and the possibility that rapid credit growth over the recent past may have weakened opaque bank balance sheets.
These risks highlight the need for acceleration of domestic reforms to reduce vulnerabilities and build up policy buffers, such as increasing foreign reserves. We are pleased that the authorities are aware of these risks and are making efforts to address them, such as strengthening bank supervision and increasing communications with the business community.
Aside from the macroeconomic imbalances that the fund has long warned of, what kind of risks does the banking system present?
International experience suggests that rapid credit growth for a sustained period of time as witnessed in Myanmar can lead to deterioration of loan quality. To address this risk, we encourage the Central Bank to issue key regulations soon to implement the Financial Institutions Law and to continue to strengthen supervisory capacity. We welcome progress that has been made by the Central Bank, including on full-scope examinations of banks and on compliance with reserve requirements and net open position on foreign exchange.
It should also be noted that banking sector risks and those arising from macroeconomic imbalances—current account and fiscal deficits—are often linked and can interact with each other. For example, a major correction to macro imbalances can lead to a slowdown in economic growth and affect the financial health of banks. Similarly, poor performance of banks, especially state-owned banks, may result in increased liabilities for the government and exacerbate macro imbalances. Thus the authorities need to take a comprehensive approach to strengthening macro and financial stability.
What should the Central Bank be doing to tighten monetary conditions?
First and foremost, phasing out central bank financing of the fiscal deficit would be critical to contain inflationary pressures. As we all know, Central Bank financing of fiscal deficits is equivalent to printing money, and hence pushing up prices. Second, more proactive liquidity management is needed, for instance, through more active Central Bank deposit auctions with fully market-determined interest rates. Meanwhile, the Central Bank should continue to ensure that banks comply with reserve requirements. We welcome the government’s plans to phase out central bank financing and encourage the Ministry of Planning and Finance to scale up auctions of T-bills and T-bonds so that fiscal deficits can be financed by issuance of these government securities.
The kyat has neared record lows against the US dollar, what are the economic implications?
Recent kyat depreciation reflects Myanmar’s economic conditions and is appropriate. Greater exchange rate flexibility is needed to strengthen Myanmar’s external position, namely to build up foreign reserves. This means that the value of the kyat needs to reflect market demand and supply on a daily basis. The Central Bank should intervene only when rapid and large exchange rate movements threaten to cause a disorderly market and financial instability. There are concerns that a weaker kyat would lead to higher inflation, but inflation needs to be contained by a tighter monetary policy, which in turn would help reduce downward pressures on the exchange rate.
Is the Central Bank’s proposal to allow the interbank market to determine the reference rate and free banks from the exchange rate trading band positive?
The objective of Myanmar’s exchange rate policy is to ensure that the value of the kyat reflect market demand and supply. The current daily auction was designed for this purpose, namely to discover the prices of the US dollar against the kyat. Any alternative to the auction should aim to achieve the same objective, and a reference rate determined by observable transactions entered into at arm’s length in the interbank bank market could do so if such a mechanism is set up with sound governance and transparency and supported by a reasonably deep interbank market. We noticed a proposal for such a mechanism outlined publicly by a Central Bank official in December. We could provide the authorities with technical assistance to explore such a system in supporting the authorities’ commitment to a flexible exchange rate.
What policies would improve lending to agriculture and SMEs?
Despite the rapid credit growth over the past few years, agriculture and SMEs have had limited access to finance. Extensive controls including on interest rates have made it difficult for farm households and SMEs to access credit. Against this background, we would recommend a carefully sequenced increase in lending interest rates, supported by appropriate supervision. Specifically, the authorities should allow higher, tier lending rates for new loan products permitted under the new Financial Institutions Law (including unsecured and secured on moveable collateral), to help develop an interest rate structure for loans of longer than one year.
The authorities could also raise the interest rate caps on microfinance loans, along with other measures, including to ensure their sound regulation and supervision. We also encourage the authorities to consider complementary policy measures, for instance, improving rural infrastructure (particularly electricity and transport to increase access to mobile banking and bank branches), financial literacy, and business bookkeeping, as well as establishing a credit bureau.
Source: Myanmar Times
