On the fiscal and current account deficits and tax initiatives
How do you evaluate the economic policies of the National League for Democracy (NLD)?
TURNELL: The NLD’s first year in power addressed Myanmar’s macroeconomic imbalances, particularly the country’s fiscal deficit, which is expected to hit 4.8% of GDP by the end of 2017. The objective is to ensure the deficit does not exceed the 5% threshold set by the IMF, under which governments are better positioned to guarantee the fiscal sustainability of their national budgets.
The need to control these macroeconomic imbalances naturally slowed down the government’s ambitious reform strategy, delaying to some extent spending increases on health, education, infrastructure and electricity. As a result, the NLD decided to focus on rebalancing the economy and trying to deliver growth. This will benefit Myanmar in the long run, since maintaining large fiscal deficits can bring high inflation or excessive borrowing from the central bank. Despite the merits of this route, the government should have better communicated its intentions, particularly to the business community. The latter saw the modesty of the government’s macroeconomic measures and absence of rapid economic growth as an inability to run the economy.
In 2018 we can expect to see some changes in government strategy, as the Cabinet recognises the importance of shifting the current policy towards growth. With more solid macroeconomic foundations and the support of international stakeholders, I believe Myanmar will be able to take this important step.
What are the underlying reasons for the slow execution of concessional funds and soft loans from international stakeholders?
TURNELL: First, it is an effect of the overheated economy left behind by the previous government; Myanmar’s rising inflation and growing fiscal deficit had to be tackled. Second, one needs to look at the stage the national bureaucracy is at currently. Local authorities lack the capacity to efficiently handle the influx of concessional loans and funds coming from some institutional stakeholders. It will take time for ministries to fully learn how to allocate those funds.
Furthermore, the government and its ministries are still undergoing significant changes. After decades of military rule, the public administration and national bureaucracy need to be reformed. Inflexible procedures and bureaucratic inertia are two of the major challenges that need to be addressed in a system that is still too attached to its hierarchical past. This may help explain why some of the funds allocated to Myanmar’s National Electricity Plan have yet to be utilised. The government has focused on reshaping and redefining the role of some public administration departments, as well as changing the mindset of the national bureaucracy by stressing the importance of critical thinking and introducing more transparent procedures.
How can Myanmar address its current account deficit without creating trade restrictions on imports?
TURNELL: While the budget is under the direct control of the government, the problem with the current account deficit is that it is only tangentially influenced by government policy. Looking at the way the economy has been developing, we can expect imports to increase as the country becomes wealthier. In this sense, part of the current account deficit tells a positive story, because if you break down its imports, Myanmar is bringing in a great number of capital goods that will boost growth in the near future as the country starts expanding its manufacturing base. As the Myanmar people become wealthier, demand for consumer goods is expected to grow.
One of the most important measures to address these imbalances is to make sure that the administration continues with its managed float of the kyat – unlike in the past when the national currency was dramatically overpriced under a fixed exchange rate policy. This will help the government tame inflationary and other pressures. At the beginning of 2016, inflation reached 16%, and we expect to bring it down to around 7.8% by the end of 2017. Having a competitive currency is critical for countries that are vulnerable to variations in global commodity prices. A floating exchange works as a shock absorber by helping the economy remain stable. Building a competitive and productive economy will come from channelling investment into the right areas, namely infrastructure, and from improving the regulatory environment so that private sector players feel confident enough to invest.
Given Myanmar’s low tax revenue, what can be done to expand the national tax base?
TURNELL: Taxation and democracy are intimately linked. In Myanmar, there is already “representation”, and there now needs to be reasonable levels of “taxation”. On this front, officials are looking to work on some of the policies undertaken by the previous government. One of these is to make the taxation of large companies a more efficient process.
Second, the government is crafting strategies to expand its taxation base. Officials are conscious of the fact that the country is not ready for every citizen to pay income tax. While universal income tax is a long-term objective, the government is focusing on improving commercial taxation by introducing a very simple and universal turnover tax. This would help prepare the ground for the launch of a value-added tax or goods and services tax in the future, as those two levies are more sophisticated.
Besides commercial tax, the government is studying the possibility of establishing a property tax, as well as rationalising the multiple tax or tariff rates applied to imports. The idea would be to adopt a single, uniform and relatively low tariff, because the golden rule in this field is to keep taxes as low and easy to implement as possible.