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IMF Executive Board Concludes 2014 Article IV Consultation with Myanmar

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
October 2014
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On September 24, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Myanmar.

Growth is accelerating and the external balance remains stable. Output growth is estimated to have risen to 8¼ percent in fiscal year (FY) 2013/14 (April-March). Inflation has broadly stabilized, and stood at 6 percent (year-on-year, y/y) in April 2014. After depreciating in 2013, the exchange rate has stabilized. The current account deficit is estimated to have widened to 5½ percent of GDP in 2013/14, but to have been more than financed by foreign direct investment, new loans, and inflows related to telecommunications licenses. International reserves held by the Central Bank of Myanmar (CBM) increased to US$4.5 billion by end-March, covering 2¾ months of prospective imports. While the base remains low, broad money and private sector credit continue to grow rapidly, at 32¼ and 58½ percent (y/y), respectively in February. The headline fiscal deficit in 2013/14 is estimated at 1½ percent of GDP. A debt sustainability analysis indicates that Myanmar is now at a low risk of debt distress.

The economic outlook is favorable. Growth is expected to average 8¼ percent in the next few years, led by rising gas production and investment. Inflation is expected to remain under control at around 6 percent over the medium term. The current account deficit is projected to remain broadly stable, while the CBM’s international reserves are forecast to continue to increase rapidly as foreign inflows intensify. With transfers from the Union Government to states and regions increasing significantly, the underlying fiscal deficit is set to widen to around 5½ percent of GDP in 2014/15, but further one-off revenues should bring the headline deficit to around 4½ percent of GDP. In the medium term, the underlying fiscal deficit is projected to again decline to below 5 percent of GDP.

Medium and long-term prospects remain strong, but require sustained policy and institutional reforms even as the authorities’ capacity is being strained. In order to achieve rapid and inclusive growth, it is vital to maintain near-term macroeconomic stability while building modern institutions and sound policy frameworks to manage the budget and financial sector. Risks arise from thin external and fiscal buffers, particularly as the authorities’ capacity to develop and implement policies and absorb technical assistance is being stretched. The entry of foreign banks will burden nascent supervisory capacity and challenge monetary and exchange rate management, particularly in the face of continuing demand-side pressures on inflation. At the same time, structural fiscal risks are building as tax exemptions increase even as expenditure pressures rise. External borrowing for off-budget operations is also increasing. On the upside, large one-off inflows from concession fees for oil and gas exploration could materialize in the near term

Executive Board Assessment2

Executive Directors commended the authorities for the continued progress with their economic reform program, which has contributed to strong growth. Directors noted that while the medium and long-term economic prospects are favorable, Myanmar’s economy faces risks in the short run as fiscal buffers are thin and the capacity to develop and implement policy remains constrained. Accordingly, Directors recommended further efforts to reinforce policy and institutional frameworks and pursue structural reforms. Directors agreed that continued technical assistance from the Fund and other international institutions remains critical given Myanmar’s vast transformational needs and limited capacity.

Directors welcomed the advances made in developing monetary policy tools, but saw need for a more vigorous deployment of these tools to manage the impact of foreign inflows, and keep reserve money and inflation under control. Priority should be given to improving liquidity forecasting, and developing a market for treasury bonds. Deficit monetization also needs to continue to be scaled back. Directors supported the policy of smoothing exchange rate fluctuations while not targeting a specific rate. Noting that international reserves remain low, they urged the establishment of an automatic mechanism to transfer public sector foreign exchange earnings to the central bank. Furthermore, Directors encouraged the authorities to strengthen over time the central bank’s internal systems, particularly in accounting and reserves management.

Directors emphasized the importance of a prudent orientation of fiscal policy that addresses Myanmar’s development needs while safeguarding debt and macroeconomic sustainability. They supported the strategy to keep fiscal deficits below 5 percent of GDP and underscored that off-budget borrowing needs to be carefully controlled. Additional efforts to mobilize revenues are also necessary to allow increases in social spending and public investment. Priority should be given to cutting back exemptions, strengthening tax administration, and preparing for the introduction of a VAT. Directors stressed the need to strengthen public financial management.

Directors underscored the importance of upgrading regulation and supervision of the banking sector in anticipation of entry by foreign banks. They also cautioned against the establishment of additional policy banks and encouraged the authorities to ensure that their operations do not pose financial and fiscal risks. Directors recommended addressing the remaining deficiencies in the anti-money laundering framework.

Directors stressed that continued progress with structural reforms is necessary to ensure macroeconomic stability and spur inclusive growth. Reform efforts should focus on investments in infrastructure, expanding education and health services, boosting access to finance, improving the business climate, and diversifying exports. Improving economic statistics is also essential.

Myanmar: Selected Economic Indicators, 2010/11–2015/16 1/
2010/112011/122012/132013/142014/152015/16
Est.Proj.
Output and prices(Percent change)
Real GDP (authorities)10.45.97.38.79.1
Real GDP (staff working estimates)5.35.97.38.38.58.5
CPI (end-period)8.9-1.14.76.35.96.7
CPI (period average)8.22.82.85.76.66.3
Consolidated Public Sector 2/(Percent of GDP)
Total revenue11.412.023.324.824.224.0
Union government6.36.59.511.410.410.4
Of which: Tax revenue3.33.97.17.27.37.4
SEE receipts7.07.815.314.714.314.6
Grants0.00.00.10.20.40.4
Total expenditure16.916.625.026.528.728.6
Expense8.89.816.818.220.019.6
Net acquisition of nonfinancial assets8.06.88.18.38.89.0
Gross operating balance2.62.26.56.64.34.4
Net lending (+)/borrowing (-)-5.4-4.6-3.4-1.6-4.5-4.6
Domestic public debt21.122.722.820.621.121.3
Money and Credit(Percent change)
Reserve money30.57.934.214.328.019.4
Broad money36.326.346.633.832.326.4
Domestic credit34.425.15.130.432.525.3
Private sector65.460.150.566.544.731.8
Balance of Payments(Percent of GDP, unless otherwise indicated)
Current account balance-1.2-1.9-4.3-5.4-5.3-5.1
Trade balance1.3-0.3-3.8-4.7-3.8-4.3
Exports17.818.218.621.522.922.6
Imports-16.5-18.6-22.4-26.2-26.7-27.0
Financial account2.93.79.29.08.28.3
Foreign direct investment, net4.53.75.04.65.15.2
Overall balance-0.9-1.63.82.62.93.2
CBM reserves
In millions of U.S. dollars8509223,0624,5466,4398,783
In months of total imports0.90.82.22.93.54.3
External debt
Total external debt (billions of U.S. dollars)14.415.313.710.911.913.4
(In percent of GDP)29.027.324.619.218.218.2
Of which: External debt arrears (billions of U.S. dollars) 3/9.910.84.80.00.00.0
Terms of trade (in percent change)0.02.0-2.2-0.4-0.5-0.4
Exchange rates (kyat/$, end of period)
Official exchange rate5.45.6880964
Parallel rate861822878965
Memorandum items
GDP (billions of kyats) 4/39,84743,36847,85154,75663,32373,042
GDP (billions of US$)49.656.255.856.865.373.6
GDP per capita (US$)9981,1211,1031,1131,2701,420
Sources: Data provided by the Myanmar authorities; and IMF staff estimates and projections.

Fiscal year from April 1 to March 31.

Union and state/region governments and state economic enterprises.

In 2012/13 and 2013/14, the terms of bilateral arrears clearance agreements with Paris Club creditors, the World Bank and the AsDB are incorporated.

Real GDP series is rebased to 2010/11 prices by the authorities.

Sources: Data provided by the Myanmar authorities; and IMF staff estimates and projections.

Fiscal year from April 1 to March 31.

Union and state/region governments and state economic enterprises.

In 2012/13 and 2013/14, the terms of bilateral arrears clearance agreements with Paris Club creditors, the World Bank and the AsDB are incorporated.

Real GDP series is rebased to 2010/11 prices by the authorities.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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