Myanmar should watch out for the unintended consequences of economic reform.
Myanmar, also known as Burma, has taken several steps over the past year to open its economy, most recently uniting its unwieldy exchange rates. It has floated laws making it easier for foreign investors to pump money into the resource-rich country and for local farmers to claim title to their land. And administrative rules are encouraging local businesses to import more goods.
All that new openness could come with short-term pitfalls, including a large current-account deficit, an unstable currency and disruptions for big state-owned companies.
“A key challenge is to maintain macroeconomic stability as the country opens to increased flows of trade and investment,” the report says.
The ADB expects the relaxing of foreign-exchange controls to “propel imports upward and contribute to a widening of the current-account deficit,” which represents the shortfall in capital the country needs to operate. It forecasts this deficit at 5% in 2013, up from 0.9% in 2010.
The good news is Myanmar might be able to handle such a deficit through inflows of foreign investor capital. As sanctions ease, there will also be money flowing in from the likes of the ADB, the International Monetary Fund and the World Bank.
If it can’t attract the capital, however, the local currency, the kyat, could depreciate. The ADB report doesn’t discuss prospects for the kyat. But the ADB estimates Myanmar’s foreign-currency reserves, which the central bank can use to protect the value of the local currency, at nearly $8 billion–equal to nine months of exports, by economists’ reckoning enough to withstand a financial shock. It’s not much compared with the reserves of neighboring Thailand, which has $175 billion.
If Myanmar attracts too much capital, it could face the opposite problem, a rising kyat, which would hurt local businesses. The central bank could intervene in currency markets to try to hold it down, but that would fuel inflation, long a scourge in Myanmar as the government financed lavish spending projects by printing money. The new government has pledged to stop that practice.
The ADB figures growth will hit 6% this year and 6.3% in 2013, a solid rate given Myanmar’s bottlenecks and lack of infrastructure. (The ADB uses its own growth forecasts, calling official government figures “inconsistent with variables that are closely correlated with economic growth.”) Myanmar is starting from an extremely low position, its economy long having festered under a military junta that directed most of the country’s mineral, timber and energy wealth into the pockets of family and friends. At $715 a year, per capita income is the lowest in Southeast Asia and less than that of neighboring Bangladesh. Three-quarters of the population lacks electricity.
Big state-owned companies that were able to siphon profits onto their balance sheets thanks to the dual-exchange rate system, abolished on April 1, could face a reckoning that will require some to shut down, privatize or restructure.
“Unifying the exchange rate will expose the inefficiencies and losses of state enterprises, which dominate parts of the economy,” the report says.
What does Myanmar need to do? The ADB says the reform agenda is “extensive.” It recommends opening up more areas to private businesses, improving tax collection, extending transportation networks and expanding credit to businesses and farmers.
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