2/9)WORLD_BANK:POLICIES FOR SUSTAIN

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/* -------------" Policies for Economic Reform 2/9 "------------ */

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MYANMAR: POLICIES FOR SUSTAINING ECONOMIC REFORM (2/9)

WORLD BANK Report No. 14062-BA, October 16, 1995.

RECENT ECONOMIC PERFORMANCE [6]

10. GROWTH TRENDS. GDP Growth has rebounded since FY90, averaging
about 4.2 % in FY90-94 and rising to 6.8% in FY95, in contrast with
the average decline of over 5% during FY86-88. But growth has been
highly variable from year to year, and slower than in the
early-1980s. This recent growth has extended to all sectors of the
economy, although it has been most rapid in the primary sectors,
particularly agriculture and forestry. Within the industrial sector,
miniig and construction have grown fastest, reflecting in part their
response to the incentives now provided to foreign investment in
these activities. Manufacturing growth has resumed but has remained
variable due to its links to agricultural performance.
^M
11. INVESTMENT AND SAVING. Investment recovered during FY90-95,
reflecting the increase in private investment that followed the
implementation of tax incentives and liberalization measures, which
more than made up for the continued fall in public investment.
Savings have also recovered since FY90, reflecting the reduction in
the dissaving of the public sector. However, despite this recovery,
the consequent narrowing of the saving-investment gap relative to
the early-1980s has been achieved entirely due to the fall in
investment. The domestic saving rate now is actually lower than in
the early-1980s, while gross investment has fallen to about 12% of
GDP.
^M
12. FISCAL TRENDS. The composition of public sector revenues changed
little during FY91-95, but the share of revenues to GDP continues to
decline, and in FY95, was slightly over 7% compared to about 19%
during the early-1980s. Tax revenues, which account for almost 60%
of reveunes, showed the same declining trend. Efforts to control
expenditures in FY91-95 have been more successful, and the cuts have
been deepest in capital expenditures of SEs. The only expenditure
category that has been protected from cuts has been defence which
now accounts for over a third of total public expenditures.
Reflecting the efforts at expenditure control, the fiscal deficit
fell to 6% of GDP during FY90-94, from an average of over 10% in
FY87-89. However, this improvement was reversed in FY95 when the
deficit rose to 6.3% of GDP. The deficit has been financed by
borrowing from the domestic banking system, and increasingly, since
FY89, by the accrual of arresrs on external debt.
^M
13. MONETARY GROWTH AND INFLATION. As the fiscal deficit fell in
FY91-94, monetary growth slowed, particularly in FY94. However, with
the widening of the fiscal deficit in FY95, monetary expansion
accelerated once again. The private sector's share in domestic
credit has grown but remains small -- aobut 14% in FY95. All
interest rates -- deposit and lending -- are still controlled, and
despite a small increase in some rates in 1992 and again in
early-1995, these remain highly negative in real terms. Although
measures were implemented to promote financial savings, its share in
GDP has stagnated. At the consumer level (in Yangon), average anjual
inflation in FY95 fell to 22%. But. a clear downward trend is not
yet apparent, and the average annual inflation rate during FY91-95
was much higher than in the early 1980s.
^M
14. EXTERNAL TREND. During FY91-95, the deficit on the current
account improved, due mostly to higher remittances from Myanma
citizens abroad, and increase in receipts from travel, owing to the
removel of restrictions on tourism and the incentives provided to
foreign investment in tourism. However, despite more rapid growtn,
the trade balance has improved little. Moreover, the direction of
exports and their concentration among primary products have remained
almost unchanged. But the composition of imports shifted sharply
towards consumer goods ( mainly food and durables), which now
account for over 40% of all imports. The current account gap has
been financed increasingly by accumulating arrears, which have
doubled since FY91, to almost $1.5 billion. With the suspension of
foreign aid since FY90, there have been substantial outflows of
medium -- and long-term capital since FY91. However, attracted by
the cahnges in the foreign investment laws and tax incentives,
foreign direct investment has averaged about $190 million annually
in FY91-95. It has been concentrated in the oil and gas, mining, and
hotels and tourism sectors. Finally, although the official exchange
rate remains fixed at its 1977 level (vis-a-vis the SDR), a variety
of arrangements have been instituted since 1988 to allow private
sector transactions to occur at a far more depreciatee
parallel-market exchange rate.
^M
FOOTNOTES:^M

[6] The economic trends summarized here rely on official date from
GOM sources, and should be interpreted with caution because they are
based on the official exchange rate. Since the economic distortions
that arise from the overvalued exchange rate are pervasive, a
systematic attempt at adjusting the official data is beyond the
scope of this report. However, apart from this problem, the quality
and coverage of economic statistics appear no worse than in other
low-income countries in East Asia.
^M
(3/9) EVALUATION OF REFORMS^M

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