The Sule Pagoda is a stupa in the heart of downtown Yangon. It is in the center of the city and an important space in contemporary Myanmar politics, ideology and geography. Photo: iStock
The Sule Pagoda is a stupa in the heart of downtown Yangon. It is in the center of the city and an important space in contemporary Myanmar politics, ideology and geography. Photo: iStock

As the United States and the European Union debate tougher trade and diplomatic sanctions against Myanmar for expulsion and killing of Muslim Rohingya refugees, who after crossing the border by the hundreds of thousands into Bangladesh are now fleeing further south by boat ahead of the rainy season, the two-year-old government of Aung San Suu Kyi has also come under harsh international criticism for economic-policy lethargy.

The International Monetary Fund (IMF), in its March Article IV report, joined alienated investors in urging a “second reform wave,” after a number of fiscal, monetary, business and banking steps were completed during the initial transition from military rule as outlined under a dozen-point plan by the now-ruling National League for Democracy.

These themes were elaborated under a 250-provision blueprint in February spanning objectives from state-enterprise overhaul to judicial modernization, but without designating priorities or assigning responsible ministries.

This muddled vision has kept the country at the bottom of the World Bank’s “Doing Business” rankings, especially in minority-shareholder protection, handling of bankruptcies and contract enforcement. It leaves in place excess bureaucracy and infrastructure defects that hamper normal commercial and credit transactions, despite headline growth and inflation progress.

Tax revenue is just over 5% of gross domestic product, embedding budget deficits, and implementation of rules is still lacking for the new investment code permitting 35% international ownership in local companies.

The central bank inaugurated a bad-loan resolution push, but it has stalled without broader direction, as State Counselor Suu Kyi and her team continue to shun technocrats and political outsiders who could contribute sharper business-friendly thinking, including around the moribund Yangon Stock Exchange with a handful of illiquid listings.

The IMF report refers to the “downside risk” of the Rakhine state humanitarian crisis, despite limited immediate economic effects. Total reconstruction and social costs have yet to be tallied even as few refugees are likely to repatriate voluntarily, and aid partners may withdraw as investor sentiment sours in protest of documented abuses.

Focus on that issue may detract from creation of an “overarching private-sector roadmap” for near-term structural changes and productivity gains that could also set a path toward achievement of Sustainable Development Goals.

Medium-term GDP growth will be 7-7.5% with continued foreign direct investment and commodity-price improvement, despite a chronic current-account gap, but reduced donor budget support would force repeated reliance on central-bank funding at the same time as it is trying to curb banks’ runaway 25% credit expansion to the construction and real-estate sectors. Financial stability would then be undercut on both fronts, the IMF suggests.

Growth in fiscal year 2017-18 is estimated at 6.7%, on agricultural recovery and a 40% rise in rice and textile exports, notwithstanding mixed tourism. Inflation should be in the 5% range, and the fiscal deficit will rise to 3.5% of GDP as the authorities target a central-bank ceiling on buying of domestic debt at 30% of the total.

A main thrust is to cut losses by state companies, which have affected one-quarter of them, led by the electric-power operator.

Tax-law regimes await thorough updates for personal and corporate income, and in the mining and natural-resources industries.

The currency was firmer in 2017 compared with the previous year’s depreciation, but dual official and informal rates persist despite calls for greater flexibility. Foreign-exchange auctions get minimal bank and non-bank participation and do not aid price discovery, and the 0.8% daily trading bond could be formally removed. The system can still be managed but should aim to avoid intervention outside of “disorderly conditions” to enable reserve buildup beyond the current US$5 billion or three months’ imports, the IMF recommends.

Monetary policy in turn should move to interest-rate liberalization and inflation targeting, as the interbank and government bond markets develop with introduction of a yield curve. The central bank is not independent but has imposed reserve requirements and bolstered supervisory capacity with expert technical assistance.

New capital, liquidity, loan classification and large borrower exposure rules were introduced nine months ago. Private and state-run units, with respective two-thirds and one-third asset shares, are undercapitalized and unprofitable. The former must whittle down real-estate-related overdrafts, and the latter should “move ahead” with restructuring, both the IMF and international banking analysts argue. However, this cleanup has languished along with the broader sweep, as frontier-market portfolio investors indefinitely relegate allocation to the dustbin.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.

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