Growth in Myanmar undermined by rising inflation

Growth in Myanmar undermined by rising inflation

McKinsey estimates that Myanmar’s GDP could quadruple in size to over $200 billion in the next 20 years. But inflation may derail the prospect of growth and progress.

Myanmar’s political and economic liberalization has normalized diplomatic relations for the previously isolated country and significantly improved its economic outlook. Real GDP growth reached 7.3% in the 2012-2013 fiscal year and is expected to increase further over the next year. The improvement of a previously abysmal economic situation is largely due to macroeconomic policy reforms and a large increase in FDI.

The consulting company McKinsey has estimated that Myanmar’s GDP could quadruple in size to over $200 billion in the next 20 years, a monumental transformation for a country that for decades has ranked among the world’s poorest. As a result, there has been a massive influx of Western companies that are eager to capitalize on this new, resource-rich frontier market, which was previously dominated by Asian investors.

The rush to Myanmar has, however, strained the supply of services in the under-developed economy, which is suffering from decades of rigid government regulations as well as general economic malaise. Office rental prices in Yangon have recently surpassed those in Singapore, and the price of sending expats to the country is rapidly becoming prohibitively expensive for many Western companies.

Perhaps a more troubling consequence of the economic expansion is a substantial surge in inflation levels, with working-class salaries being eclipsed by the price of consumer goods. Inflation is expected to reach 6% by the end of FY2013-2014 and remain high for years to come. Signs of inflation have long been noticeable: the Central Bank put a 5,000 kyat note into circulation in 2009 and, just three years later, was forced to issue a 10,000 kyat banknote to keep up with the rapid price hikes.

The price of basic commodities is a main discussion topic, alongside general political developments, in the ubiquitous tea shops found throughout the country. Myanmar has the lowest wages in the region, with the salary for a factory worker in Yangon around $30-35 (roughly 30,000-35,000 kyat) a month.

In early 2014, an IMF delegation nevertheless praised Myanmar for the extensive fiscal reforms already implemented and for the country’s “favorable” economic outlook. The country has arguably improved in a range of areas since the military junta, to the surprise of most, decided to follow through on its promise to hand over power to a civilian, quasi-elected government.

Yet, the IMF also warned that high inflation and a substantial budget deficit contribute to an insufficient accumulation of international currency reserves. Given that economic management capacities are under-developed and the current economic growth model remains heavily dependent on foreign investments, the country is left highly susceptible to external economic shocks. Aware of these issues, the government has set its fiscal priorities with the goal of achieving broad-based economic growth and reducing the national poverty-levels.

Modernizing the financial sector will take several years and requires determined political effort. Perhaps most importantly, it requires a stable political environment. Yet, Myanmar has been anything but stable since the military rule ended in early 2011. Large-scale communal violence erupted in 2012, and again last year, between Buddhists and Muslims mainly in Rakhine State, leaving several hundred dead and displacing tens of thousands of refugees.

Despite the government’s efforts to achieve a national peace treaty with the dozens of active armed groups, there is still continued, and in some places escalating, fighting between government and rebel forces. As inflation levels rise, so does the risk of civil unrest, which could undermine the new regime and threaten the reform process altogether. Keep in mind that despite all its progress, the situation in Myanmar changes quickly and is difficult to predict.

Categories: Asia Pacific, Economics

About Author

Havard Bergo

Håvard is a foreign policy analyst who works in Kampala for LPC Consult International, a consulting company that specializes on developing projects in East Africa and Mozambique. He has previously worked with the United Nations in Bangkok and as a project manager for a research project in Montreal. Håvard graduated with an MSc in International Relations from the London School of Economics (LSE).