As its economic liberalisation agenda progresses, the government has increasingly turned its attention towards addressing the country’s widening trade deficit. Although Myanmar exports have risen sharply over the previous decade, they have not kept pace with import growth. An overdependence on raw resource exports and the lack of a diversified, value-added export base have been identified as primary challenges. The National Export Strategy (NES) 2015-19 highlights priority sectors for investment, emphasising agri-processing and value-added manufacturing as holding the highest potential. Targeted import and export regulatory reforms should also support increased inflows into new projects serving the domestic market, as has been the case in the automotive industry.
Size estimates of the trade deficit vary. The Observatory of Economic Complexity (OEC) at the Massachusetts Institute of Technology, for example, reports that total imports rose from $6.1bn in 2009 to $9.02bn in 2010, $12.1bn in 2011, and highs of $21bn and $21.4bn in 2014 and 2015, respectively. Although exports receipts have also recorded strong growth, they failed to keep pace with imports, which rose from $5.34bn in 2009 to $6.57bn in 2010, $6.91bn in 2011, $11.9bn in 2014 and $12.4bn in 2015. The trade deficit peaked $9bn in 2015, before easing in 2016 when import receipts fell to $15.7bn against $11.7bn of exports, resulting in a three-year low of $4bn.
According to the World Bank, Myanmar’s trade deficit rose from 5.1% of GDP in FY 2013/14 to hit 6.3% in FY 2014/15, 8.6% in FY 2015/16 and 10.2% in FY 2016/17. In its “East Asia and Pacific Economic Update”, the bank reported that the trade deficit stood at 8.5% of GDP, or $5.73bn as of October 2017.
According to the Ministry of Commerce (MoC), the country slipped from a $100m trade surplus in FY 2011/12, with a recorded $9.14bn of exports and $9.04bn of imports, to a $91.9m deficit in FY 2012/13. The deficit increased significantly in the following years, rising to hit $2.56bn in FY 2013/14, $4.1bn in FY 2014/15 and a high of $5.44bn in FY 2015/16, before easing to $5.29bn in FY 2016/17. In the first half of FY 2017/18 the trade deficit reached $1.87, compared with $1.74 in the same period of FY 2016/17.
Although the country’s trade deficit has shrunk since 2015, Myanmar’s export base remains dominated by raw resources, leaving it vulnerable to external shocks. Refined petroleum and vehicles comprise nearly one-quarter of total import receipts, pushing the government to direct recent trade policy objectives towards bolstering value-added, capital-intensive manufacturing and processing to stimulate local industry. The OEC reports that unprocessed petroleum gas was Myanmar’s largest export in 2016, at $3.17bn, or 27% of the total, followed by dried legumes ($1.39bn, 12%), raw sugar ($1.07bn, 9.1%), non-knit men’s suits ($577m, 4.9%) and rice ($439m, 3.8%).
Raw resource dependency has weighed heavily on the balance of trade in recent years. The Directorate of Investment and Company Administration (DICA) reports that approved foreign investment in the oil and gas sector dropped to zero in FY 2016/17 and the first half of FY 2017/18, although it had been the largest approved investment source in FY 2015/16 at $4.82bn. Total approved foreign investment eased from $9.48bn in FY 2015/16 to $6.65bn in FY 2016/17 as a result.
Gas export receipts have also fallen sharply since the dip in global oil prices in mid-2014, with the MoC reporting in December 2016 that natural gas export earnings had dropped by 40% year-on-year (y-o-y) in the April-December period of FY 2016/17, from $3bn to $1.82bn. This also impacted the import bill, with the World Bank reporting that petroleum product import receipts fell by 11% y-o-y in the first half of FY 2016/17.
On The Pulse
Adding to Myanmar’s trade imbalance, India announced in August 2017 that it had imposed a quota on some agricultural imports from Myanmar. Applied to beans and pulses, India’s import quotas were set at 200,000 tonnes of pigeon peas annually, and 300,000 tonnes each for mung beans and green grams. Myanmar had previously exported 1.5m tonnes of pulses annually, according to media reports, and India is the country’s largest agricultural export market. Because dried legumes are Myanmar’s second-largest export, the country stands to lose a significant portion of export revenues in FY 2017/18, exacerbating challenges brought on by depressed global oil markets. “The problem is that Myanmar reached its quota at the end of April, and now has no one to sell to,” Alexander Jaggard, country representative at Mekong Economics, told OBG. “This challenge is compounded by the fact that many agricultural products from Myanmar are seen in an unfavourable light, including rice and palm oil. The need for reform is pressing when you consider that 70% of the workforce is employed in agriculture.”
Another major challenge in addressing the trade deficit is the lack of domestic manufacturing and refining capacity. The OEC reports that refined petroleum was the largest import category in 2016, amounting to $1.64bn, or 10.45% of the total. Although the country is home to three refineries, they are in need of upgrades and are unable to meet local demand. A recent cancellation of the major planned refinery in the southern city of Dawei will likely see the problem persist over the medium term (see Energy chapter).
Vehicles make up another key import category, with the OEC reporting that delivery truck, motorcycle, bus, car and tractor imports comprised a combined 14.3% of the total bill. An estimated 90% of the 540,000 passenger vehicles registered at the end of 2015 were second-hand imports from Japan. In 2016 Myanmar imported a further 120,000 used vehicles from Japan, which contributed to the total $1.25bn of Japanese imports in FY 2016/17, compared with exports, which stood at $784.26m, according to MoC data. Japanese imports have risen steadily, increasing from $1.09bn in FY 2012/13 to $1.3bn in FY 2013/14 and $1.75bn in FY 2014/15, before easing to $1.45bn in FY 2015/16.
National Export Strategy
Recent policymaking reflects the government’s recognition of overdependence on raw resource exports and the need to develop a strong local production base. In March 2015 the MoC published the NES, which focuses on four key issues: the supply side, the business environment, market entry and development aspects. Under development since 2013, the strategy highlights agriculture as a critical area for development, identifying several priority sectors that hold high potential for future expansion, as well as four cross-cutting service sectors. Priority sectors are dominated by agriculture and include rice, fish and crustaceans, wood-based products, rubber, and pulses, beans and oilseed crops. Priority service sectors include trade finance, trade information and promotion, quality management, and trade facilitation and logistics.
The government is already making steady progress on implementing the NES, with the MoC reporting that there are two projects currently under way to support its objectives: an inclusive tourism project slated for construction in Kayah State, and a project to boost agricultural export revenues by improving food safety and compliance. The latter, for example, will see the production of oilseeds benefit from technical assistance from the International Trade Centre and financial support from the World Trade Organisation’s standards and trade development facility, with the three-year programme running until end-2018, and focusing on the Sagaing, Mandalay and Magwey regions. It aims to benefit farmers, processors and exporters along the entirety of the oilseed value chain.
Import regulations have also been relaxed to encourage investment in agriculture, with the overall goal of increasing productivity, production and agri-processing. In June 2017, for example, the MoC started permitting foreign-owned companies to import fertilisers, seeds, pesticides, hospital equipment and construction materials. Prior to this decision, only Myanmar companies and foreign-local joint ventures had been allowed to operate in these sectors.
The government has similarly adjusted import regulations in a bid to stimulate investment in automobile manufacturing. In January 2017 the government implemented vehicle import restrictions, aimed at improving road safety, and supporting domestic vehicle manufacturing. The regulations will ban the import of right-hand-drive vehicles, with exceptions granted for vehicles built between 2011 and 2014.
Companies including Nissan, Kia, Zhejiang Lifeng and Tiger have already established operations in Myanmar, and in May 2017 Ford launched a $10m, 4000-sq-metre assembly plant in Yangon, with an annual capacity of 1500 units. Suzuki, meanwhile, began construction of a plant in January 2017, with plans to boost annual production to 10,000 units in 2018.
Challenges & Opportunities
Recent moves have not been without their challenges. Suzuki has the annual capacity to build 2700 units – including the Ertiga minivan and Carry small truck – although it sells just 1000 of these each year within the country, according to industry media reports. Because new vehicles can be between 50% and 200% more expensive than pre-owned, just 6000-7000 new vehicles were being sold annually in Myanmar as of January 2017.
However, local manufacturers benefit from registration fee exemptions, which can comprise upward of 30% of the cost of a second-hand import. The low concentration of parts suppliers makes production less cost-efficient and materials import requirements remain high, presenting additional opportunities for investment in the manufacturing value chain.
Indeed, the attractiveness of auto manufacturing to international investors is evident in recent investment statistics. In October 2017 DICA reported that manufacturing has become the most popular sector for new foreign investment flows, with approved investment rising from $1.06bn in FY 2015/16 to $1.18bn in FY 2016/17. The first six months of FY 2017/18 has already seen investment of $1.45bn, leaving Myanmar well positioned to diversify its export base, expand domestic production, and reduce or eliminate its trade deficit.