Photo by Eddy Milfort on flickr

Photo by Eddy Milfort on flickr.

Challenges remain, but the signs are looking good for the country’s ongoing economic development.

Myanmar is going through an epochal phase in its development, as shown by the country’s great transformations, and political and economic reforms following the formation of a semi-civilian government in 2011.

After 50 years of political and economic isolation, the country is in transition from a closed command economy to an open one based on free market principles. This process of liberalisation and opening to the global economy is the result of ambitious reforms in the fiscal, monetary, banking and currency areas, as well as in the fields of international trade and foreign investment.

Such reforms, along with improved macroeconomic management, have laid the foundations for an accelerated expansion of Myanmar’s economy, which grew at an average rate of 5.1 per cent each fiscal year[1] from 2005/06 to 2009/10. Over the past three years economic growth has picked up pace, reaching 8.5 per cent — higher than the average growth rate for ASEAN countries.

The country’s per capita income reached approximately US$1,300 in 2014, resulting in Myanmar’s “graduation” in the World Bank classifications from a low income to lower middle income nation. Nevertheless, Myanmar will keep receiving soft loans and grants from multilateral and bilateral donors. The good news is that International Monetary Fund projections confirm the current rate of economic expansion in 2015/16 and 2016/17 — assuming that the political transition following the November 2015 elections takes place smoothly, and that economic reforms are vigorously pursued.

Among the main drivers of Myanmar’s recent economic boom are the rapid growth of foreign trade and the significant increase in foreign exchange earnings from tourism, foreign direct investment and official development assistance. All these growth factors are closely linked to policies that have liberalised trade and financial transactions, together with the almost full lifting of sanctions imposed by Western countries.

An interesting indicator of Myanmar’s increasingly close ties to the global economy is the degree of its openness to international trade, measured by the ratio of total trade, or the sum of exports and imports of goods, to GDP. This grew from 37 per cent in 2011/12 to 47 per cent in 2014/15, an increase of 10 percentage points of GDP in just three years.

Over this period, imports of consumer and investment goods have responded to the opening of the economy much more rapidly than exports, causing a significant increase in the trade deficit, which reached 8.5 per cent of GDP in 2014/15. The recent sharp depreciation of the local currency, the kyat, against the US dollar has partially corrected this imbalance.

Exports of goods increased at a steady pace with an average annual growth rate of 11 per cent between 2011 and 2014, slightly higher than that registered over the previous three years. Myanmar’ exports continue to be concentrated in primary products, among which natural gas is predominant (40 per cent of total exports), followed by jade and agricultural products. Meanwhile, there has been a fall in exports of lumber due to very restrictive new legislation regarding environmental protection.

The country has only recently begun to expand into exports of manufactured goods (mostly clothing), a sign of its slow and belated integration into global value chains – which locate different stages of the production process across different countries. In addition, trading partners are still concentrated in the neighbouring countries, especially China and Thailand which have an aggregate share of 70 per cent of exports, as a consequence of the sanctions imposed by the West until recently.

Another factor contributing to the dynamism in Myanmar’s economy is tourism. Tourist arrivals have more than tripled since 2011 reaching 3 million visitors in 2014. Concurrently, international tourism receipts rose to approximately US$1.6 billion in 2014, six times higher than those in 2011, and equivalent to about 14 per cent of goods exported.

Another key indicator of Myanmar’s recent opening to global financial markets is represented by the inflows of foreign direct investment (FDI), showing a strong expansionary trend, with short-term fluctuations attributable to large infrastructure projects causing investment peaks in specific years.

As indicated by UNCTAD data, in 2014 the volume of FDI more than tripled from the 2005-2007 annual average. By that year, however, FDI flows were still equivalent to only 6 per cent of Myanmar’s gross domestic investment, compared to an average of 20 per cent for Southeast Asia countries.

Furthermore, in 2014/15, FDI authorisations, a leading indicator of inflows in coming years, reached the record figure of US$8.2 billion dollars, two-and-a-half times higher than the previous year. The sectors that have most attracted foreign investors are hydrocarbons, telecommunications, tourism, and manufacturing (mainly clothing).

In the medium term, FDI inflows are expected to continue growing rapidly, provided that regulatory and legal reforms are completed. In the short term, after the new government is formed and the political risks related to the transition phase recede, FDI should further expand. Despite the very positive signals on the FDI front, according to a World Bank report, in 2015 Myanmar ranked 167 out of 187 countries with regard to the “ease of doing business”, occupying the last position among ASEAN nations and the penultimate in East Asia and the Pacific.

There has also been a dramatic surge in Official Development Assistance (ODA) over recent years, following Myanmar’s rapprochement with the international community, which rewarded the country for its political and economic reforms. ODA per capita jumped to US$74 in 2013, against a mere US$7 dollars three years earlier. The overall volume of ODA was as high as US$3.9 billion dollars in 2013, corresponding to approximately 30 per cent of imports of goods and services.

Myanmar has therefore become the largest ODA recipient among ASEAN countries, both in absolute and per capita terms. In 2013, a significant share of ODA was granted by the cancellation of bilateral and multilateral debt, which, while not directly increasing the country’s foreign exchange earnings, enabled the full resumption of the activities of multilateral financial institutions and bilateral donors.

Despite these significant economic advances, Myanmar remains, with the exception of Cambodia, the poorest ASEAN nation in terms of GDP per capita. In addition, 37 per cent of the population lives below the poverty line and three-quarters of the poor are concentrated in rural areas.

Myanmar ranks 150th in the Human Development Index (HDI) drawn up by the United Nations Development Programme (UNDP), thus belonging to the category of countries with “low human development”. Other less advanced ASEAN nations, such as Cambodia, Laos and Vietnam, are in the “medium human development”. However, income inequality (measured by a Gini coefficient equal to 0.29, where 0 equals perfect equality and 1 perfect inequality, is relatively low compared to that of neighbouring countries.

A detailed analysis of the data provided by the UNDP yields some interesting conclusions. While the HDI component relating to per capita income has continued to rise rapidly since the 1990s, HDI as a whole did not improve at the same rate. This is because other HDI components, the level of education (measured by years of schooling) and health conditions (measured by life expectancy at birth), lagged. This situation reflects the low weight of social sectors in government expenditure.

In conclusion, Myanmar’s medium-term economic outlook appears very promising due to its great growth potential across a number of factors. These factors include abundant natural resources and tourist attractions, a very young population, growing economic integration with ASEAN countries, normalisation of trade relations with the West that will permit full use of its export capacity, and its strategic geopolitical position between two economic giants, India and China.

Key challenges, however, remain, particularly obsolete and deficient infrastructure which may be a serious obstacle to development, the poor level of education among the population, low labour productivity, an unfavourable business environment, the control and strong influence of the military on key sectors of the economy and, in the short term, the growing budget deficit and the fast increase in the inflation rate due to the rapid expansion of domestic demand.

In addition, the new government, after an impressive landslide victory in the national elections, will have to face incredibly high expectations from voters on what it can accomplish in the economic sphere. The new government’s actions could be further hampered by low-skilled civil servants and the long bureaucratic procedures that could adversely affect the implementation of reforms.

Mr Francesco Abbate is Adjunct Professor of International Economics at the Law Department of the University of Turin, Italy. Mr Marco Musso is an undergraduate student at the Department of Cultures, Politics and Society of the University of Turin.

[1] Myanmar’s fiscal year runs from 1 April to 31 March