Thursday, 26 January 2012 16:25 Mizzima News
Meral Karasulu, the deputy division chief of the Asia and Pacific Department at the International Monetary Fund, who led the IMF assessment team, said in a statement released on Wednesday: “Burma has a high growth potential and could become the next economic frontier in Asia, if it can turn its rich natural resources, young labor force, and proximity to some of the most dynamic economies in the world, into its advantage.”
She said the process of upgrading Burma's antiquated financial system has already begun with recent changes in the exchange rate and restrictions on current international payments and transfers. The IMF team studied current processes and analyzed factors that could streamline and enhance Burma’s financial system, including aspects of its budget expenditures.
“As this essential process continues, channeling the reform momentum to improving monetary and fiscal management and to structural reforms would allow taking full advantage of the positive effects of exchange rate unification,” she said.
Karasulu said modernizing Burma’s economy would require changes to enhance the business and investment climate, modernizing the financial sector, and further liberalizing trade and foreign direct investment.
She said Burma’s real GDP growth is expected to increase to 5½ per cent in FY2011/12 and 6 percent in FY2012/13, driven by commodity exports and higher investment supported by robust credit growth and improved business confidence.
“Inflation, projected at 4.2 percent for FY2011/12, is expected to pick up to 5.8 per cent in FY2012/13 as the recent decline in food prices phases out,” she said.
She noted that the parallel market exchange rate of the kyat has appreciated by about 32 per cent in nominal effective terms since end-FY2009/10. The appreciation pressures are primarily due to large foreign inflows into the economy, which cannot find an outlet due to exchange restrictions on current international payments and transfers, she said.
The technical work by the Central Bank of Myanmar (CBM) is already under way to establish the necessary market structure. Ultimately, the unification of the exchange rate would require moving away from the “export first” policy. In light of the appreciation pressures, she said certain exchange restrictions can be removed immediately, for example, by allowing the use of all foreign currency bank account balances for imports, easing import licensing requirements and access to the newly established foreign exchange retail counters.
“A successful exchange rate unification would require improvements in all areas of macroeconomic management,” she noted. “This will have to start with establishing a monetary policy framework to focus on price stability. The authorities’ plan to grant operational autonomy and accountability to CBM is a welcome first institutional step towards this goal.”
Noting Burma’s recent reduction in interest rates, she said, “We do not see room for further interest rate cuts in the near term in light of the buoyant growth expectations and the inflation outlook. Within the current regulatory constraints on financial intermediation and impediments to productive investment, lower real interest rates would risk channeling savings to potentially speculative outlets, such as real estate.”
Stimulating productive investment is now resting on structural policies to reduce barriers to private sector development and improve financial intermediation, she said.
“The discussion of the 2012/13 budget in the new Parliament provides a historic opportunity to redefine national spending priorities and bring fiscal transparency,” she said. “We welcome the authorities’ plans to reorient spending to health and education, while targeting a moderate fiscal deficit, which we project to be about 4.6 percent of GDP, about 1 percent lower than the last year’s deficit. A prudent fiscal policy is essential to maintain macroeconomic stability, especially during the exchange rate unification process.
She sad overall, Burma’s fiscal balance is expected to improve in the medium term, but mainly due to new gas exports from the Shwe and Zawtika projects once they come on line.
“These additional revenues should be used to build human capital and infrastructure,” she said. “These are key priorities to alleviate poverty and reduce bottlenecks to industrialization,” she said. “The sizable development needs of Myanmar would require additional fiscal revenues, primarily from non-resource based sources, to safeguard fiscal sustainability and prevent boom-and-bust cycles associated with fluctuations in commodity prices. There is room to increase revenues by improved tax policies that should emphasize direct taxation over indirect taxes to protect the poor.”
“The adoption of a market-determined exchange rate in SEEs’ operations would allow better assessment of their performance, and provide an opportunity to accelerate SEE reforms. These efforts should focus on containing their losses by gradually reducing regressive subsidies, which benefit higher income groups, to protect the most vulnerable poor.
A key to Burma’s growth potential lies in more banks, she said. “Modernization of the financial system should be expedited to facilitate broad-based growth. Improvements to financial intermediation should begin by phasing out the deposit-to-capital ratio and expanding the list of collateral, including to all crops. Expansion of bank networks, especially in rural areas, is essential to increase access to finance. Nurturing a stronger commercial banking culture requires price competition. Interest rate liberalization started with some freedom in setting deposit rates, and should be extended to loan products. A level playing field between state and private banks, including in the areas of regulation and supervision, is critical to promote competition.”
Allowing joint ventures with foreign banks would expedite the transfer technology and prepare the sector for Asean financial integration in 2015, she said.
Another key reform area lies in he agriculture sector, which needs more credit to increase productivity and improve rural livelihoods.
“The planned land reform provides a unique opportunity, and should ensure that land titles of farmers can be used as collateral. However, credit alone will not suffice to increase rural growth, which is essential to alleviate poverty,” she said. Investment in rural infrastructure, including through community-driven development initiatives, and spending on health and education, are also essential.
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