Structural constraints to investments will remain a major challenge to Myanmar’s medium-term growth, the World Bank has warned.

According to the bank’s “East Asia and Pacific Economic Update” report, despite progress over the last four years, expansion of private business activity is now running into bottlenecks because of the lack of electricity and impediments to finance, land and skilled labour.

Rural areas remain isolated by limited transport infrastructure, which restricts the ability of farmers and local non-farm businesses to access markets.

“These factors are affecting the productivity of the private sector, which is struggling to compete with imports, including in labour-intensive light manufacturing sectors. Therefore macroeconomic policies that are conducive to stability and low inflation are critical to not only off-set loss of competitiveness, but also encouraging investments in infrastructure and supporting services,” the bank said.

Promoting these investments will not only require fiscal flexibility, but also require the leveraging of resources from the private sector. Needed investment in the utilities sector alone is projected to be US$30 billion (Bt1.05 trillion) over the next 15 years. Although a gradual increase in public revenue, reprioritisation in the budget and concessional financing from external donors may contribute, such adjustments will not be sufficient to plug major infrastructure gaps.

Economic growth in Myanmar has eased to 7 per cent in 2015-16 due to floods, inflationary pressures and a slowdown in new investments.

Medium-term growth is projected to average 8.2 per cent per year in real terms. This reflects pent-up demand but also assumes continued progress on structural reforms, including measures to improve business regulations, continued expansion of access to financial services and major investments in the power sector.

Pressures on Myanmar’s current account are likely to remain strong due to the drop in international commodity prices and the slowdown in China. The fall in oil prices has already started to feed through to Myanmar’s gas export prices, and production is unlikely to grow significantly over the medium term. The demand for and prices of mineral exports are likely to remain down. These developments may also put pressure on government receipts, although that is expected to be offset to some extent by gains from tax administration reforms.

Import growth in the first three quarters of 2015-16 has decelerated to 2.5 per cent compared to 25 per cent in the same period last year due chiefly to the decreasing demand for imported industrial raw materials. The overall trade deficit, however, will remain large due to a drop in exports. This is due to a combination of falling commodity prices, which have translated to a slight drop in the value of gas exports, and falling mineral exports.

The bank said that the historic elections of November 2015 have created a general sense of economic optimism. However, the floods contributed to rising food prices and slower private consumption growth. Private investment growth in 2015-16 has also slowed due to a combination of structural constraints and a moderation in new investments.

Following the Central Bank of Myanmar’s downward adjustment to the reference exchange rate in August 2015, the kyat has moved broadly in line with market forces. The kyat appreciated slightly at the beginning of 2016, largely due to seasonal factors, but has remained supportive of external competitiveness.

Risks to Myanmar’s economic outlook include thin external and fiscal buffers, the capacity of the government to maintain reform momentum, ethnic and sectarian tensions, and vulnerability to bad weather.