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3/9)WORLD_BANK:POLICIES FOR SUSTAIN



/* Posted 14 Apr 11:00am 1998 by drunoo@xxxxxxxxxxxx(Dr U Ne Oo) in
maykha-l */
/* -------------" Policies for Economic Reform 3/9 "------------ */

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MYANMAR: POLICIES FOR SUSTAINING ECONOMIC REFORM (3/9)

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

C. EVALUATION OF REFORMS

15. The GOM's economic reform program is distinguished from the
development strategy followed for the quarter century since 1962 by
three clear features. The scheme to compensate for the overvaluation
of the Kyat, such as foreign exchange retention, and the incentives
provided to foreign investment aim at encouraging exports and
integrating the Myanmar economy with the rest of the world. The
liberalization of agricultural pricing and marketing is intended to
reduce the bias against agricultural production and allow farmers
greater freedom of choice. And, removing restrictions on
private-sector involvement in economic activity and encouraging the
growth of private businesses are directed at facilitating the
transition to a market-oriented economy. Along with these structural
reforms, there have also been attempts at addressing the internal
and external imbalances that afflicted the economy in the
late-1980s.

MACROECONOMIC STABILIZATION

16. STABILIZATION HAS NOT BEEN ACHIEVED. When economic reforms were
initiated in the late-1980s, severe macroeconomic problems
characterized the Myanma economy, largely due to unsustainably large
fiscal deficits. The situation has undoubtedly eased in some
respects. The current account deficit has been reduced (as a share
of exports), and consumer price inflation (year-on-year) has fallen.
These improvements reflect the fall in the fiscal deficit from 13.7%
of GDP in FY89 to 6.5% in FY95.

17. But despite this improvement, macroeconomic stability remains
elusive,  as indicated by continued internal and external
imbalances. Inflation remains high and variable. The reduction in
the fiscal deficit has been achieved entirely by cutting
expenditures (current and capital) rather than by broadening the
revenue base or improving the performance of SEs. In particular, the
continued erosion of the revenue base can be seen by noting that the
average ratio of government revenues in FY91-95 was half that in the
early-1980s, with the contraction covering all components of
revenue. And, the slowing of monetary growth until FY94 was
accomplished mainly by limiting growth of credit to the private and
cooperative sectors rather than by reducing the expansion of
public-sector credit.

18. The current account gap also remains unsustainably large, as is
evident from the continued build-up of external arrears. The main
policy response to this external imbalance has been to allow the
private sector's external transactions to be conducted at an
exchange rate lower than the highly-overvalued official rate. By
allowing the full retention of foreign exchange earnings by private
exporters, and the trading of foreign exchange by domestic residents
through foreign exchange accounts and FECs, there has been a de
facto legalization of the parallel foreign exchange market with the
goal of engineering a de facto devaluation. These measures have not
restored external balance mainly because the official nominal
exchange rate remains highly overvalued. And since the official rate
still applies to all public-sector imports, a complex exchange rate
system now exists, which segments the market for foreign exchange
between the private and public sectors. The continued discrimination
against the tradeables sectors (exports and import-substitutes) can
be noted from the trends in the real exchange rate (RER) even after
taking account of the parallel-market rate. A weighted-average RER
(that uses the relative trade shares of the private and public
sector) has appreciated by more than tow-thirds even since 1989,
implying that the bias against tradeables has worsened to this
extent.

19. WHY MACROECONOMIC STABILITY IS ESSENTIAL. Hence, macroeconomic
stabilization measures are still needed urgently. Without them, the
reforms in sectoral policies that have been implemented, important
as they are, will not be enough to bring forth a sustained growth
response. The recent experience of the successful economies of East
Asia illustrates clearly the importance of restoring and maintaining
macroeconomic stability for sustained export-led growth. The key to
doing this in most of these economies was the control of fiscal
deficits to levels that could be financed without need for excessive
monetary expansion. The need to establish a stable macroeconomic
framework along with the implementation of sectoral policy reforms
is born out also in the economies that are currently making the
transition from central planning. The dividens from pursuing
aggressive macroeconomic stabilization early in the reform process
are evident, for instance, from the recent experience of Viet Nam
and Laos. Viet Nam's ambitious economic reform program, for
instance, was initiated in 1989. It included stabilization measures
such as unification and devaluation of the exchange rate (by over 70
percent in 1989), increases in deposit and lending interest rates to
positive real levels, and reductions in fiscal expenditures through
the streamlining of the military and the public sector. The
resulting macroeconomic stability has contributed to higher
investment and growth.

(4/9) THE INCENTIVE STRUCTURE

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