The economy is expected to grow by 8.5 percent this year and at a similar pace in 2016, fueled by the strong growth momentum and expansionary macroeconomic policies. The projected increase in the fiscal deficit—amounting to almost 2 percent of GDP—is expected to provide an expansionary stimulus and contribute to strong GDP growth.
The report identifies the country’s huge development potential. “Myanmar has made impressive strides in economic reform, including in the dismantling of trade barriers and the opening of the banking sector,” said the IMF’s mission chief for Myanmar, Yongzheng Yang.
“With continued economic reforms and foreign direct investment, the country’s economic prospects look favorable,” he added.
Increasing vulnerabilities under loose monetary, fiscal conditions
However, the report says loose financial conditions are heightening macroeconomic imbalances, with rising inflation, persistent depreciation pressure of the kyat, the domestic currency, and a widening current account deficit.
The fiscal deficit is projected to rise to 4.8 percent of GDP in 2015/16 from about 3 percent in 2014/15 while credit to the private sector is expected to increase by 45 percent this year.
The fast credit growth coupled with strong domestic demand pushed inflation to 8 percent last May and prices are expected to rise further, especially given the impact of the recent floods on agricultural production.
The increase in the current account deficit, which stood at over 6 percent of GDP last year, largely reflects a rapidly rising trade deficit driven by strong import demand. Since late 2014, the kyat has come under significant depreciation pressure with its value against the U.S. dollar declining by around 20 percent. As a result, foreign reserves remain low, covering less than three months of imports, well below the estimated adequate level of five to six months of imports for Myanmar.
Externally, risks to growth and stability have grown recently. Declining natural gas prices and slowing growth in China could impact Myanmar’s economy given the importance of this commodity and the role of the world’s second largest economy to Myanmar’s external trade.
Maintaining macroeconomic stability
“The authorities need to tighten monetary and fiscal...