Fixing the Myanmar economy

Major structural overhauls have to be carried out so the country can maximise its potential for growth.

Myanmar’s economy is projected by the World Bank to grow by an average of 7 percent between 2017 and 2019. Last year, GDP rose by 6.5pc. That’s among the fastest growing economies in Asia, alongside the likes of India, China and Vietnam.

On the ground in Myanmar though, things appear to be slowing down. Government spending on infrastructure and development has fallen over the past three years, while the fiscal deficit has ballooned to 4.5pc of GDP in fiscal year 2016-17 from 3.2pc in 2015-16, and 1.2pc in 2014-15.

Meanwhile, foreign direct investments (FDI) have thinned, toUS$7 billion in 2016-17 from more than US$9 billion in the previous year, while the trade deficit has widened on the back of fluctuations in commodity prices, illegal trade and a weaker currency.

In 2016-17, the trade deficit amounted to over US$5.5 billion, up from US$5.4 billion in 2015-16 and US$4.9 billion in 2014-15, according to the statistics released by the Central Statistical Organisation.

But there are also a slew of roadblocks that stand in the way of economic development and growth, such as a shortage of tax revenues, burdensome regulations on the financial sector and lack of capital for businesses to expand.

Here are some major economic overhauls to carry out so that Myanmar can leverage on its economic potential and live up to expectations of growth:

Lowering the fiscal deficit

First, the government must raise tax revenues and reduce recurrent expenditure so that it has more headroom to spend on new infrastructure such as power grids, roads, hospitals and schools.

In February, it proposed spending of K20.89 trillion and revenues of K16.78 trillion for 2017-18, leaving the fiscal deficit at K4.12 trillion.

On the revenue front, efforts to systematically collect more commercial taxes are being taken. In 2016-17, commercial tax revenues amounted to K1.87 trillion, higher than the K1.75 trillion initially expected.

Others have suggested raising property taxes at the municipal level to raise the efficiency with which funds are disseminated to the various townships. “At the moment, the municipalities are locked in a cycle of low-tax collections and low-services provision,” said Lachlan McDonald, economist at the Renaissance Institute, a Yangon-based think tank.

In Yangon, taxes paid by individual properties amount to just US$1.86 on average, worth no more than “two cups of tea,” according to the Renaissance Institute. But even on a national scale, Myanmar collects the least amount of taxes in ASEAN, just under 8pc of GDP compared to 16pc in neighbouring Thailand, according to the World Bank.

Meanwhile, the government must restructure its spending, particularly on electricity tariffs. Losses from tariff subsidies rise every year, hitting US$300 million in 2016-17.

For years, industry insiders have lobbied for the State to fund a lower portion of the subsidies, to no avail. More recently, some have proposed that the government pay less electricity subsidies for Yangon only, but without any success so far.

Deepening capital markets

The other way for the government to raise money without putting pressure on the fiscal deficit is by issuing sovereign debt.

Government debt financing was first introduced in Myanmar just over two years ago, in January 2015, with the issue of a K3.67 trillion Government Treasury Note at a coupon rate of between 7pc- 9pc. That was followed by a K1.2 trillion bond issue in September 2016, with a coupon rate of 8.6 pc to 9.6 pc.

This year, on July 25, the first interbank repurchase agreement (repo) transaction in the country took place between Kanbawza Bank and Yoma Bank.Under an interbank repo transaction, one bank lends government securities to another and agrees to buy them back a day or week later at a set rate.

But bond trading in the country has so far taken place between financial institutions only. Now, discussions are also underway to make Government Treasuries available for public trade on the Yangon Stock Exchange (YSX), The Myanmar Times understands.

Earlier this month, U Thet Tun Oo, senior executive manager at the YSX, said negotiations are in place between the YSX, Central Bank of Myanmar (CBM) and Budget Department to allow government bond trading on the exchange. “However, it is quite difficult to guess when this can start,” he said.

Enacting new and better laws

Meanwhile, a slew of other laws and regulations are due for an overhaul. One of the most anticipated is the Myanmar Companies Act, which was submitted to the Amyotha Hluttaw for approval on July 20. This will replace the existing 1914 legislation under which companies must seek presidential approval to change their names and court approval to change business objectives.

Under the new Myanmar Companies Act, foreigners will also be able to take direct stakes in local companies and trade shares on the YSX. This will help to increase liquidity and provide businesses with much needed access to equity capital for operations and expansion.

Intellectual property laws to protect businesses and encourage innovation have also been drafted in the lower parliament, while legislation around the setting up of an official credit bureau to facilitate bond trading and enable a larger number of businesses to qualify for loans is in the pipeline.

The first-ever credit bureau is expected to launch in Myanmar after receiving the relevant licenses from the CBM within the next 12 months, the International Finance Corporation was reported as saying this month.

While those are all steps towards the right direction, for many businesses and potential investors in Myanmar, the more pressing question is when the new laws will take effect. Cheah Swee Gim, director at law firm Kelvin Chia Partnership, said the New Companies Act could be approved during the next Parliament sitting, possibly as soon as September or October.

If all goes well, the new law will be the second major legislation to be approved this year. In March, the Ministry of Planning and Finance approved the final version of the Myanmar Investment Rules issued under the Myanmar Investment Law 2016.

Under the new law, investments with official permits from the Myanmar Investment Commissiondo not require additional permits, while tax exemptions will be granted for investments in promoted sectors such as infrastructure, healthcare and educational developments.

Reducing inflation

At a maximum of 13pc, interest rates in Myanmar are among the steepest in the region. While high interest rates deter companies from taking loans, the CBM also prohibits banks from lowering their rates below inflation.

Between 2000 and 2015, average inflation in the country was recorded at 16pc, the highest in the region, according to the ASEAN+3 Macroeconomic Research Office (AMRO).

One reason for high inflation in the country is the large amount of money printed by the CBM to fund the fiscal deficit. Moving forward, the government is aiming to gradually reduce its reliance on the CBM to fund the fiscal deficit. From 2019-20, the target is no recurrent government spending will be funded by the central bank, said Sean Turnell, Economic Adviser to the government.

This fiscal year, the government missed its target of reducing central bank deficit financing to 40pc of the total fiscal deficit. “The reason was that the amount of financing raised from private banks was still below targets in this early stage of Treasury bill and bond market development,” said economists from AMRO.

However, they also said better financial planning and integration of foreign financing into the financial system should set the government on the right path in the years ahead.

Meanwhile, inflation has come down and is expected to come in at 6.8pc in 2016-17, according to AMRO. This, combined with the setting up of a functional credit bureau and a restructuring of the state’s largest banks, will give the banking sector more freedom and flexibility to offer competitively-priced loans that are tailored to the needs of local businesses.

Source : Myanmar Times