IMF: Burma Could Become Asia’s Next Economic Frontier

An International Monetary Fund (IMF) report published on Wednesday highlighted both Burma’s potential for high economic growth and the enormous amount of work that will be required to realize that potential.

“The new government is facing a historic opportunity to jump-start the development process and lift living standards. Myanmar [Burma] has a high growth potential and could become the next economic frontier in Asia,” said an IMF statement issued by Meral Karasulu, who led an IMF Article IV mission to Burma from Jan. 9-25.

In order to accomplish this, the IMF statement said, Burma must turn its rich natural resources, young labor force and strategic economic location to its advantage, and the first step in this process is an economic reform program aimed at establishing macroeconomic stability.

If successful, such macroeconomic reform would lay an economic foundation that would allow rapid investment and development to take place in Burma that is both sustainable and does not produce dangerous destabilizing effects. But the IMF outlined major steps that will be required to institute such a reform package.

The IMF indicated that the top priority should be reforming Burma’s parallel exchange rate system—under which the official government exchange rate and the actual “black market” exchange rate are widely disparate—to eliminate constraints on economic growth.

According to the IMF, the Central Bank of Myanmar is already in the process of laying the technical groundwork and establishing the necessary market structure for implementing a unified exchange rate.

That process, however, will “require improvements in all areas of macroeconomic management,“ beginning with the establishment of a monetary policy framework that works to control inflation.

This in turn would mean that the Burmese government would have to halt its past policy of printing money as a means to reducing its budget deficit, which the IMF projected would be 4.6 percent of GDP for FY2012/2013, down about 1 percent from the previous year.

The IMF noted that revenues generated by investment and development spurred by a unification of the exchange rate, as well as revenues from the sale of natural gas, would improve Burma’s budget in the future.

However, exchange rate unification would also force the budget to reflect the losses incurred by state-owned businesses, which are now hidden by the parallel exchange system. The IMF said that further privatization of state-owned enterprises is also needed to spur private-sector growth.

According to the IMF, further sources of fiscal revenues, beyond those now contemplated, will need to be found to fund Burma’s projected development needs and provide a safety net for times of economic downturn, particularly price-declines for commodities such as natural gas.

Burma’s Parliament, which opened its current session on Thursday, will be discussing the FY2012/2013 budget in the coming weeks, and the IMF called it “a historic opportunity to redefine national spending priorities and bring fiscal transparency. “

In addition to exchange rate unification and the establishment of a sound fiscal policy, the IMF statement said that “Modernization of the financial system should be expedited to facilitate broad-based growth.”

This would include increasing the access to capital by private enterprises through such measures as a liberalization of loan requirements, expansion of bank networks into rural areas, nurturing competition among commercial banks and establishing a level playing field between state and private banks.

In addition, the IMF said that “allowing joint ventures with foreign banks would expedite the transfer of technology and prepare the sector for ASEAN financial integration in 2015.”

Increased credit is particularly important to Burma’s agricultural sector, and the IMF said that land reform should ensure that farmers can use land titles as collateral and private banks should be encouraged to lend in this sector as well.

But the IMF cautioned that “credit alone will not suffice to increase rural growth, which is essential to alleviate poverty,” and said that investment in rural infrastructure and spending on health and education are also essential.

In that respect, in its discussion of Burma’s 2012/2013 budget, the IMF welcomed the Burmese government’s reported “plans to reorient spending to health and education.” It also said that additional revenues generated by financial reforms should be used to build human capital and infrastructure.