Since Burma Kyat will depreciation in one year, Burma doesn’t need to care the Natural Resource Curse?


By Hirokazu Yamasaki

Under an exciting transition, the Burmese government is now trying to open its economy and international firms are increasing their foreign direct investment. On the other hand, though Burma is a natural resource-rich country and depends on natural resource exports (See the export commodities graph.), it suffered from low growth late for a long time. This is th

e Natural Resource Curse, which is the theory explaining the negative relationship between the annual growth rate and natural resource export rate. According to CNBC, in 2012, the former World Bank chief economist, Joseph Stiglitz, insisted that Burma should avoid the Natural Resource Curse. Thus, the Natural Resource Curse has become an important topic for Burma.

One of reasons of the Natural Resource Curse is exchange fluctuation because the currency appreciation contributes to reduce natural resource revenues. In April, 2012, the government adopted the managed float exchange rate system and the government began to care currency fluctuation. In this section, I try to forecast Burmese Kyat (MMK) against US dollar (USD), China Yuan (CNY) and Japanese Yen (JPY) and determine whether currency fluctuation will contribute to the Natural Resource Curse in Burma in one year.

 

  1. Forecasting MMK

To forecast Burmese Kyat, I employ the following basic methods: the Uncovered Interest Rate Parity (UIRP) and the Relative Purchasing Power Parity (RPPP.) UIRP explains the currency fluctuation with the interest rate and RPPP shows the currency fluctuation with the inflation rate.

First of all, to use UIRP, we discuss each country’s interest rate. I employ 1-year interest rate of the Treasury Yield Curve using the FactSet data. According to the Central Bank of Myanmar, the Central Bank Rate is 10%.  Since there are few information about Burmese interest rate, I employ 10% interest rate for Burma. The interest rates are following:

Second, to forecast Kyat using the RPPP, we discuss forecasting the Burmese inflation rate. According to IMF, the expected Burmese inflation rate exceeds 6% by the end of 2013-2014 fiscal year and remain elevated in 2014-2015 FY. In order to simplify the calculation, I assume that in the next three years the Burmese government achieve the 6% inflation rate. In terms of U.S. inflation expectations, I employ the 3% inflation rate based on the University of Michigan Inflation Expectation. Regarding both Chinese and Japanese inflation rates, I assume that both governments achieves the inflation target, 3.5% and 2% respectively.

Based on my scenarios, I show my forecast for USDMMK, CNYMMK and JPYMMK as follows:

In general, I forecast that MMK will depreciate against USD, CNY and JPY in the next 1 year.[1]

 

  1. Won’t Burma suffer from the Natural Resource Curse?

If my analysis is correct, Burma will gain more natural resource revenues. This revenue helps stimulate its economy. However, the answer is no because other factors possibly cause Burma fall into the Natural Resource Curse. Long-term downward trend of natural resource prices is one example. Furthermore, according to the Arakin Oil Watch, transparency of natural resource revenue, promotion of equity, securement of land rights and poverty reduction are needed to avoid the Natural Resource Curse. Joseph Stiglitz also insists that inclusive growth prevent the Natural Resource Curse. In terms of Burmese Natural Resource Curse, social policies plays an important role.

Fortunately, we have opportunities to examine these social policies through IEDP classes. I believe that community-based approaches helps examine how Burma avoids the Natural Resource Curse and achieve sustainable development. I would like to seek measures to prevent the Natural Resource Curse, based on the points of local’s view.

 


[1] To forecast more accurately, we also have to consider the macroeconomic fundamentals. Furthermore, we need more data. There are only one-year Kyat data because the Burmese government has just changed its currency regime.