Thursday 3 April 2014

Inflation Expected to Rise as Burma’s Economy Grows

RANGOON — While observers are positive about the economic outlook as Burma enters a new fiscal year, the Asian Development Bank (ADB) and the International Monetary Fund (IMF) both predict rising inflation, pushing the cost of living up for the country’s mostly poor population.

The ADB on Tuesday released its annual Asian Development Outlook report, estimating that Burma’s gross domestic product grew by 7.5 percent in 2013-14 and predicting higher growth of 7.8 percent both this year and next.

“Growth [in 2013] was supported by rising investment propelled by improved business confidence, commodity exports, buoyant tourism, and credit growth, complemented by the government’s ambitious, structural reform program,” the Bank said. It noted that, with new offshore natural gas fields now online, gas now makes up 40 percent of the value of Burma’s exports, or US$3.6 billion a year.

President Thein Sein—who has overseen political and economic reforms since coming to power three years ago—said in January that the government was aiming for 9.1 percent economic growth in the current fiscal year, which began Tuesday.

But with rapid growth and investment from overseas predicted to continue, the ADB also said that prices are rising in Burma. The Central Bank, which has only recently begun moving away from direct government control, still has limited levers with which to prevent a return to the uncontrolled inflation that was common in Burma before the country began its transition from military rule.

Inflation was 5.8 percent in 2013-14, and would accelerate to 6.6 percent and 6.9 percent in 2014-15 and 2015-16, respectively, the ADB said. “Factors contributing to inflation include a boost to public sector wages, higher electricity tariffs, and rising property prices in cities,” it said.

The Burmese currency, the kyat, has depreciated by 11 percent since it was floated April 2013, the ADB said. Other pressures on consumers have been higher food prices and soaring rents, especially in the commercial capital of Rangoon. The price of electricity, which is heavily subsidized, has alsojust been raised to anger of some groups of citizens.

The IMF on March 28 also published a report on Burma’s economy by members of the fund’s staff who are working closely with the Central Bank of Myanmar (CBM). The report reiterated the IMF’s prediction of 7.75 percent growth this year “as construction accelerates and services growth remains strong.”

“However,” said the IMF report, “inflation is forecast to reach 7 percent [this fiscal year], fueled by electricity prices and demand pressures.”

The IMF said inflation and the exchange rate of the kyat were a risk to the economy in the short term. “Should anticipated foreign exchange inflows not materialize soon, or be kept outside the CBM, its thin reserve cushion would be insufficient to resist short-term exchange rate pressures.”

A new law enacted in July 2013 separates the Central Bank from the Ministry of Finance, a move intended to avoid political meddling with the monetary system. But the IMF said autonomy would not become a reality until 2015-16, and said the Central Bank did not yet have the ability to regulate the monetary system.

“Monetary policy tools need to be developed urgently to counter inflationary pressures,” it said, advising that the Central Bank needed more money to do its job.

A Central Bank official, who spoke to The Irrawaddy on condition of anonymity, said that in a fast-growing economy like Burma, the current level of inflation is not especially high—and is far lower than “double-digit” levels seen under the country’s previous military regimes. However, the official admitted that the rate does need to be controlled in order to protect the poor from higher prices that would impact their cost of living.

“It is not really abnormal, but we have to come up with some measures,” the official said. “We’re going to take all possible measures to control this increasing inflation, although we don’t have that many instruments.”

The official explained that the current levers at the bank’s disposal were deposit auctions—the central bank can offer banks higher interest rates on deposits in order to take money out of the economy—and bank reserve requirements. He said the central bank was currently “revising” its method of enforcing reserve requirements in the financial sector—the proportion of money that private banks must keep in reserve and not lend out—in an effort to tighten up lending.

According to the IMF, lending in the private banking sector has been growing “apace”—in October 2013 it was 56 percent higher than a year earlier. The IMF said lending is expected to “moderate to around 30 percent by 2014/15.”

“We’re trying to take money out of the system,” the official said, adding that the Central Bank was also working with the Ministry of Finance to address the growing cost of living.

“It’s a trade-off between controlling inflation and facilitating growth in the market.”

source: The Irrawaddy

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