Yangon University of Economics

Executive Master of Development Studies Programme (EMDevS)

16th Batch (2018-2019)
Macroeconomics
Assignment - III

Name : Hnin Yee Hpwe

Roll No: EMDevS - 14
Date : 18th Jan 2019

Suppose a country’s output is below / above the policy-maker’s desired level of output and is
experiencing a trade deficit / surplus. Assume the policy-maker’s goals are to achieve the
desired level of output (i.e., full employment output) and balanced trade. Given this
information, what type of exchange rate and / or fiscal policy can be used to achieve
simultaneously these two goals? Explain taking a country’s data into consideration.
The following should be included in your discussion.
1. Identifying economic performance using GDP growth and trade balance.
2. Relevant policy advocates-discussion of fiscal and exchange rate policies.
3. A table with at least GDP, trade balance, budget deficit and nominal or real change rate. Your
data cover period 1990 to 2018. Your discussion can be centered on recent years.

1. Economic performance of Myanmar

Gross domestic product (GDP) denotes the aggregate value of all services and goods produced
within a country in any given year. GDP is an important indicator of a country's economic
power. In 2017, Myanmar's gross domestic product amounted to around 67.28 billion U.S.
dollars.

Trade balance = the value of exported goods - the value of imported goods
A positive trade balance signifies a trade surplus, while a negative value signifies a trade deficit.
In 2017, Myanmar's trade deficit amounted to around 5.37 billion U.S. dollars.

Till 2012, output and trade is above the policy maker’s desire level, the policy makers' goals
were to achieve full employment output and balanced trade.
Fiscal policy-wise: gov. spending should decrease. Doing this lowers output (which is too high)
and creases output demand for domestic goods.

After 2012, output and trade is below the policy maker’s desire level, the policy makers' goals
were to achieve desire level of output.
Fiscal policy-wise: gov. spending should increase. This will increase output as well as reduce
some of the trade surplus.

2. Government’s Trader policy

As its economic liberalization 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, emphasizing 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.

Developing Deficit
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.

Export Base
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%).

Exchange rate policy

Due to pervasive controls on foreign exchange and trade, the foreign exchange market has
been segmented between the public and private sectors. The allocation of foreign exchange in
the public sector has been centrally controlled by the government. On the other hand, the
private sector has not been required to surrender export earnings, nor has it been granted
foreign exchange allocation for imports at the official rate. The government has tolerated the
private sector trading foreign exchange in negotiated transactions. As a result, the parallel
market exchange rate has been determined mostly in accordance with the supply and demand
of foreign exchange in the private sector.

Despite the reform by the new government inaugurated in March 2011, the structure of the
foreign exchange market is mostly intact. Since October 2011, the Central Bank has permitted
private banks to run foreign exchange counters where the private sector can legitimately buy
and sell foreign exchange, though within limits. In April 2012, the Central Bank began to
announce a reference rate that explicitly guides the prices of foreign exchange at the exchange
counters. In addition, the Central Bank initiated auctions of foreign exchange with private
commercial banks. Although this series of reforms offers an additional channel for foreign
exchange transactions, convertibility of kyat for current account transactions is still limited, and
negotiated transactions of foreign exchange outside the banking sector persist. Moreover, state
economic enterprises are still separated from the private sector foreign exchange market.

Given the segmentation of the foreign exchange market, the impact of the large inflows of
foreign exchange from natural gas exports and FDI on the parallel market exchange rate is not
straightforward. Such foreign exchange inflows concentrated in the public sector, and remained
in the public sector, so that they could not be the cause of the appreciation in the parallel
market. On the contrary, there should be other sources that sharply increased the supply of
foreign exchange to the parallel market; sales at gem emporiums, which seem to be
unrecorded in the balance of payments statistics, are a suspected source.
3. Table
Trade
Year Export Import Balance GDP
1990 0.32491 0.27 0.05491 0.5
1991 0.41925 0.64595 -0.2267 5.3
1992 0.53142 0.65116 -0.11974 6
1993 0.58603 0.81396 -0.22793 6.5
1994 0.79845 0.88577 -0.08732 7.1
1995 0.85121 1.33459 -0.48338 7.8
1996 0.74634 1.35809 -0.61175 8.4
1997 0.86627 2.03729 -1.17102 9
1998 1.06522 2.6658 -1.60058 7.5
1999 1.12459 2.30012 -1.17553 9.8
2000 1.62017 2.37089 -0.75072 10.3
2001 2.35802 2.84927 -0.49125 7.5
2002 3.01472 2.32384 0.69088 7.8
2003 2.45839 2.06972 0.38867 12.1
2004 2.35548 2.17393 0.18155 12.2
2005 3.77645 1.90813 1.86832 13.8
2006 4.53912 2.53821 2.00091 16.7
2007 6.25269 3.24661 3.00608 23.3
2008 6.88219 4.25661 2.62558 34.6
2009 6.66154 4.34762 2.31392 38.1
2010 8.66108 4.75966 3.90142 49.6
2011 9.23804 9.01897 0.21907 56.2
2012 8.87691 9.1814 -0.30449 55.8
2013 9.4 12.0425 -2.6425 56.8
2014 10 9.5 0.5 65.44
2015 10 11.9 -1.9 59.68
2016 9.1 13.7 -4.6 63.22
2017 10.2 12.8 -2.6 66.5