Information about Asia and the Pacific Asia y el Pacífico
Journal Issue

Myanmar: Staff Report for the 2015 Article IV Consultation

International Monetary Fund. Asia and Pacific Dept
Published Date:
September 2015
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1. Myanmar is undergoing a historical political transition. On November 8, the country is scheduled to hold its first general elections since the start of reforms in 2011. Also of historical significance is the ongoing peace process. The Myanmar government has recently signed a draft ceasefire agreement with 16 armed ethnic groups, and negotiations to reach a final agreement before the elections are continuing. Favorable outcomes on these two fronts would pave the way for greater political and social stability and underpin continued economic transition.

2. Myanmar has made impressive strides in economic reform but the country continues to face daunting development challenges. Trade and financial liberalization has moved forward rapidly with the dismantling of trade barriers and the opening of the banking sector. This year marks the entry of nine foreign banks and the operation of the Thilawa Special Economic Zone (SEZ), which will provide an initial platform for Myanmar’s export-oriented growth. Despite these advances, Myanmar remains the poorest country in Southeast Asia and its development indicators are well below its peers in the region (Table 6). Moreover, Myanmar’s capacity for economic management is low. The authorities have received considerable technical assistance from the Fund and have made good progress in implementing Fund policy recommendations, although much remains on the reform agenda (see the Appendix I).

Table 1.Myanmar: Selected Economic Indicators, 2011/12–2017/18 1/
Output and prices(Percent change)
Real GDP (authorities) 2/
Real GDP (staff working estimates)
CPI (end-period)−
CPI (period average)
Consolidated Public Sector 3/(Percent of GDP)
Total revenue12.123.423.326.420.820.620.8
Union government6.69.610.812.611.111.010.9
Of which: Tax revenue3.
SEE receipts7.815.413.713.810.110.010.3
Total expenditure16.725.125.129.325.625.225.3
Net acquisition of nonfinancial assets6.
Gross operating balance2.
Net lending (+)/borrowing (-)−4.6−1.7−1.8−2.9−4.8−4.7−4.6
Underlying net lending (+)/borrowing (-) 4/−4.6−1.7−2.2−5.5−5.9−5.2−4.6
Domestic public debt22.617.816.817.217.617.117.0
Money and Credit(Percent change)
Reserve money7.934.217.011.417.916.915.7
Broad money26.346.632.721.731.728.424.4
Domestic credit25.15.124.628.834.730.327.9
Private sector60.150.552.535.545.236.730.2
Balance of Payments(Percent of GDP, unless otherwise indicated)
Current account balance−1.9−4.2−5.2−6.1−8.9−8.3−7.7
Trade balance−0.3−3.8−4.6−8.2−11.6−11.1−10.0
Gas Exports6.
Financial account3.
Foreign direct investment, net3.
Overall balance−
CBM reserves
In millions of U.S. dollars9223,0624,5465,0705,0755,3746,539
In months of total imports0.
External debt
Total external debt (billions of U.S. dollars)15.313.710.28.89.711.212.8
(In percent of GDP)27.424.718.014.014.715.716.2
Of which: External debt arrears (billions of U.S. dollars) 5/
Terms of trade (in percent change)−2.80.0−−1.0−0.4
Exchange rates (kyat/$, end of period)
Official exchange rate5.68809651,027
Parallel rate8228789651,070
Memorandum items
GDP (billions of kyats)43,23847,72254,69962,83476,47192,641109,600
GDP (billions of US$)56.055.656.763.165.871.379.0
GDP per capita (US$)1,1181,1001,1121,2281,2691,3641,502
Sources: Data provided by the Myanmar authorities; and IMF staff estimates and projections.

Fiscal year from April 1 to March 31.

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

Union and state/region governments and state economic enterprises.

Excludes one-off receipts from telecoms licenses and signature bonus from gas contracts.

In 2012/13 and 2013/14, the figures incorporate arrears clearance agreements with Paris Club creditors, the World Bank and the Asian Development Bank.

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

Fiscal year from April 1 to March 31.

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

Union and state/region governments and state economic enterprises.

Excludes one-off receipts from telecoms licenses and signature bonus from gas contracts.

In 2012/13 and 2013/14, the figures incorporate arrears clearance agreements with Paris Club creditors, the World Bank and the Asian Development Bank.

Table 2.Myanmar: Summary Operations of the Nonfinancial Public Sector, 2011/12–2017/18(Consolidated Accounts)
(In billions of kyat)
Revenue and grants5,22211,15612,77216,56314,68515,91919,05222,742
Tax revenue1,6783,3754,2625,1605,1136,3097,8749,590
Transfers from SEEs to Union Government9887747463226986988371,020
SEE receipts net of transfers to Union Government2,3766,5606,7388,3727,0277,0278,42710,269
Other nontax revenue 1/1804228812,4041,5031,5031,4501,315
Union government1,9453,5214,4936,7298,1108,1759,93111,597
SEEs net of transfers to Union Government2,3144,5414,8046,6576,0546,0547,1798,748
Net acquisition of nonfinancial assets2,9493,8934,4355,0184,8545,3546,2697,417
Union government2,5722,9403,2883,7113,5664,0664,7255,535
Net lending (+)/borrowing (-)−1,986−799−960−1,841−4,333−3,664−4,328−5,020
Union government−1,671−1,865−1,747−2,248−4,018−3,348−4,031−4,658
SEEs net of transfers to Union Government−3151,066787407−315−315−297−362
External (net)65835362331,0041,9262,265
Domestic (net)1,9802197011,6082,6592,4022,755
Of which: CBM7906454081,4007894800
Deposit money banks 2/588−4121442081,7111,9212,755
(In percent of GDP)
Revenue and grants12.123.423.326.419.220.820.620.8
Tax revenue3.
Transfers from SEEs to Union Government2.
SEE receipts net of transfers to Union Government5.513.712.313.
Other nontax revenue0.
Union Government4.
SEEs net of transfers to Union Government5.49.58.810.
Net acquisition of nonfinancial assets6.
Union Government5.
Net lending (+)/borrowing (-)−4.6−1.7−1.8−2.9−5.7−4.8−4.7−4.6
Union Government−3.9−3.9−3.2−3.6−5.3−4.4−4.4−4.3
SEEs net of transfers to Union Government−−0.4−0.4−0.3−0.3
External (net)
Domestic (net)
Of which: CBM1.
Deposit money banks 2/1.4−
Memorandum items:(In percent of GDP, unless otherwise indicated)
Underlying net lending (+)/borrowing (-) 3/−4.6−1.7−2.2−5.5−6.8−5.9−5.2−4.6
Wages and salaries1.
Education expenditure0.
Health expenditure0.
Defense expenditure2.
Public debt49433532333334
GDP (in billions of kyat)43,23847,72254,69962,83476,47176,47192,641109,600
Sources: Myanmar authorities, and IMF staff estimates and projections.

Includes proceeds from sales of telecom licenses; and signature bonuses from gas production sharing contracts for on- and off-shore blocks.

In FY2012/13 includes valuation adjustment for the replacement of the official exchange rate with a market-determined exchange rate.

Excludes one-off receipts from telecom licenses and gas contracts signature bonuses.

Sources: Myanmar authorities, and IMF staff estimates and projections.

Includes proceeds from sales of telecom licenses; and signature bonuses from gas production sharing contracts for on- and off-shore blocks.

In FY2012/13 includes valuation adjustment for the replacement of the official exchange rate with a market-determined exchange rate.

Excludes one-off receipts from telecom licenses and gas contracts signature bonuses.

Table 3.Myanmar: Balance of Payments, 2011/12–2017/18(In millions of US$, unless otherwise indicated)
Current account−1,063−2,322−2,960−3,851−5,867−5,895−6,072
Trade balance−175−2,095−2,596−5,174−7,652−7,917−7,902
Exports, fob10,23310,34111,26412,38312,43514,53717,267
Of which: Gas3,5033,6663,2994,3103,5443,7033,829
Imports, mostly cif−10,408−12,436−13,860−17,557−20,087−22,454−25,169
Nonfactor services, net−496−75−1179741,0071,020973
Income, net−882−685−1,155−1,286−1,064−1,096−1,452
Of which: Interest due−560−94−220−225−233−244−258
Transfers, net4905339081,6341,8432,0972,310
Capital and financial account2,0615,1324,7964,8275,8726,1957,236
Direct investment, net2,0572,8002,6213,2933,6004,6005,490
Other investment49265562348641,4821,633
MLT debt disbursements6051,0857614541,2001,8952,014
Repayments due−600−159−206−220−336−413−380
Other flows−11,4061,6201,2991,408113113
Errors and omissions−1,924−670−352−452000
Overall balance−9252,1401,48452452991,165
Gross official reserves (increase: -)−72−2,140−1,484−524−5−299−1,165
Change in arrears (increase: +)997−6,056−4,7920000
Exceptional financing (positive: +)06,0564,7920000
Memorandum items
CBM reserves (in million US$)9223,0624,5465,0705,0755,3746,539
In months of prospective GNFS imports0.
Current account (in percent of GDP)−1.9−4.2−5.2−6.1−8.9−8.3−7.7
Trade balance (in percent of GDP)−0.3−3.8−4.6−8.2−11.6−11.1−10.0
Gas export volume (percent change)8.2−2.2−6.742.
Other exports volume (percent change)0.0−1.521.
Import volume (percent change)21.519.412.928.517.111.111.3
Foreign direct investment (in percent of GDP)
Public external debt (in percent of GDP)27251813.9914.7415.6816.20
Of which: Arrears19900000
Market exchange rate (kyat/US$, eop)7548809651,027
Sources: Authorities and Fund staff estimates and projections.
Sources: Authorities and Fund staff estimates and projections.
Table 4.Myanmar: Monetary Survey, 2011/12–2017/18 1/2/(In billions of kyat at end-period, unless otherwise indicated)
Net foreign assets−1.42,0533,4914,5525,5476,3908,401
Foreign assets3.02,5154,2885,4006,5807,5059,577
Foreign liabilities4.44627978481,0331,1151,176
Net domestic assets7,5528,0818,3648,6539,89211,65612,475
Domestic credit7,8519,0179,63511,02612,41513,19613,496
Claims on central government (net)7,6738,3188,72610,12610,91511,39611,396
Claims on deposit money banks (net)1786999099001,5001,8002,100
Other items net−299−936−1,271−2,373−2,523−1,540−1,021
Reserve money7,55110,13411,85513,20515,43918,04620,876
Currency in circulation6,0707,4268,96510,43212,19714,25616,492
Net foreign assets256,0069,0179,70211,32212,39014,701
Foreign assets497,21810,82012,05014,15515,50517,877
Foreign liabilities241,2121,8032,3482,8333,1153,176
Net domestic assets12,54812,42215,44420,07827,89437,95847,927
Domestic credit12,94813,61016,95821,83729,42438,32949,023
Net claims on government9,6888,4278,97910,58713,08815,48918,245
Deposit money banks2,0151092534612,1724,0946,849
Credit to the economy3,2605,1837,97911,25016,33622,83930,779
Private sector3,2554,8997,47110,12514,70220,09826,162
Other items net−400−1,188−1,514−1,759−1,529−371−1,096
Broad money12,57318,42824,46129,77939,21650,34862,629
Currency outside banks5,5636,6957,9679,38012,35315,60819,102
Money multiplier1.
Reserve money (y/y percent change)7.934.217.011.417.916.915.7
Broad money (y/y percent change)26.346.632.721.731.728.424.4
Broad money (in percent of GDP)29.138.644.747.451.354.357.1
Credit to private sector (in percent of GDP)7.510.313.716.119.221.723.9
Credit to private sector (y/y percent change)60.150.552.535.545.236.730.2
Deposits (in percent of GDP)16.224.630.232.535.137.539.7
Credit to economy/deposits (in percent)46.544.248.455.160.865.770.7
Exchange rate (kyat/$, end of period)5.568809651,027
Nominal GDP (in billions of kyat)43,23847,72254,69962,83476,47192,641109,600
Sources: Central Bank of Myanmar, and IMF staff estimates and projections.

The fiscal year ends on March 31.

From 2012/13, foreign assets and liabilites are valued at the reference rate (before: at official exchange rate).

Sources: Central Bank of Myanmar, and IMF staff estimates and projections.

The fiscal year ends on March 31.

From 2012/13, foreign assets and liabilites are valued at the reference rate (before: at official exchange rate).

Table 5.Myanmar: Medium-Term Projections, 2011/12–2020/21 1/
Output and prices(Percent change)
Real GDP (authorities) 2/
Real GDP (staff working estimates)
CPI (end-period)−
CPI (period average)
Consolidated Public Sector 3/(Percent of GDP)
Total revenue12.123.423.326.420.820.620.821.522.022.3
Union government6.69.610.812.611.111.010.910.911.211.3
Of which: Tax revenue3.
SEE receipts7.815.413.713.810.110.010.311.011.211.4
Total expenditure16.725.125.129.325.625.225.325.926.426.6
Net acquisition of nonfinancial assets6.
Gross operating balance2.
Net lending (+)/borrowing (-)−4.6−1.7−1.8−2.9−4.8−4.7−4.6−4.4−4.4−4.3
Underlying net lending (+)/borrowing (-) 4/−4.6−1.7−2.2−5.5−5.9−5.2−4.6−4.4−4.4−4.3
Domestic public debt22.617.816.817.217.617.
Money and Credit(Percent change)
Reserve Money7.934.217.011.417.916.915.714.313.412.7
Broad money26.346.632.721.731.728.424.421.119.418.5
Domestic credit25.15.124.628.834.730.327.923.020.418.6
Private sector60.150.552.535.545.236.730.226.622.220.2
Balance of Payments(Percent of GDP, unless otherwise indicated)
Current account balance−1.9−4.2−5.2−6.1−8.9−8.3−7.7−7.5−7.0−6.7
Trade balance−0.3−3.8−4.6−8.2−11.6−11.1−10.0−9.7−9.2−8.8
Gas Exports6.
Financial account3.
Foreign direct investment, net3.
Overall balance−
CBM reserves
In millions of U.S. dollars9223,0624,5465,0705,0755,3746,5397,9039,66611,882
In months of total imports0.
External debt
Total external debt (billions of U.S. dollars)15.313.710.28.89.711.212.814.616.418.5
(In percent of GDP)27.424.718.014.014.715.716.216.717.117.4
Of which: External debt arrears (billions of U.S. dollars) 5/
Terms of trade (in percent change)−2.80.0−−1.0−0.4−0.4−0.10.0
Exchange rates (kyat/$, end of period)
Official exchange rate5.68809651,027
Parallel rate8228789651070
Memorandum items
GDP (billions of kyats)43,23847,72254,69962,83476,47192,641109,600127,426146,739168,469
GDP (billions of US$)56.055.656.763.165.871.379.087.596.4106.2
GDP per capita (US$)1,1181,1001,1121,2281,2691,3641,5021,6501,8061,977
Sources: Data provided by the Myanmar authorities; and IMF staff estimates and projections.

Fiscal year from April 1 to March 31.

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

Union and state/region governments and state economic enterprises.

Excludes one-off receipts from telecoms licenses and signature bonus from gas contracts.

In 2012/13 and 2013/14, the figures incorporate arrears clearance agreements with Paris Club creditors, the World Bank and the Asian Development Bank.

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

Fiscal year from April 1 to March 31.

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

Union and state/region governments and state economic enterprises.

Excludes one-off receipts from telecoms licenses and signature bonus from gas contracts.

In 2012/13 and 2013/14, the figures incorporate arrears clearance agreements with Paris Club creditors, the World Bank and the Asian Development Bank.

Table 6.Myanmar: Millennium Development Goals (MDG) Indicators
Goal 1: Eradicate extreme poverty and hunger
Employment to population ratio, 15+, total (%)737475757676
Employment to population ratio, ages 15–24, total (%)525353535252
GDP per person employed (constant 1990 PPP $)1,9592,3283,0034,5996,7657,670
Income share held by lowest 20%
Malnutrition prevalence, weight for age (% of children under 5)2939303023
Goal 2: Achieve universal primary education
Literacy rate, youth female (% of females ages 15–24)9396
Literacy rate, youth male (% of males ages 15–24)9696
Persistence to last grade of primary, total (% of cohort)557275
Primary completion rate, total (% of relevant age group)768895
Goal 3: Promote gender equality and empower women
Proportion of seats held by women in national parliaments (%)........46
Ratio of female to male primary enrollment (%)93949810099
Ratio of female to male secondary enrollment (%)929910597105
Ratio of female to male tertiary enrollment (%)122157156136134123
Share of women employed in the nonagricultural sector (% of total nonagricultural employment)30.733.635.7
Goal 4: Reduce child mortality
Immunization, measles (% of children ages 12–23 months)688284848886
Mortality rate, infant (per 1,000 live births)766759514440
Mortality rate, under-5 (per 1,000 live births)1069279675651
Goal 5: Improve maternal health
Adolescent fertility rate (births per 1,000 women ages 15–19)362621171411
Births attended by skilled health staff (% of total)4656576471
Contraceptive prevalence (% of women ages 15—49)1733374146
Maternal mortality ratio (modeled estimate, per 100,000 live births)580470360260220200
Pregnant women receiving prenatal care (%)76768083
Unmet need for contraception (% of married women ages 15–49)
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Incidence of tuberculosis (per 100,000 people)393404412403384373
Prevalence of HIV, female (% ages 15–24)
Prevalence of HIV, male (% ages 15–24)
Prevalence of HIV, total (% of population ages 15—19)
Tuberculosis case detection rate (%, all forms)81015536668
Goal 7: Ensure environmental sustainability
Forest area (% of land area)60.056.753.451.04948
Improved sanitation facilities (% of population with access)5361687577
Improved water source (% of population with access)565967758386
Marine protected areas (% of territorial waters)001000
Goal 8: Develop a global partnership for development
Net ODA received per capita (current US$)4323774
Debt service (PPG and IMF only, % of exports of goods, services and primary income)18191108
Internet users (per 100 people)
Mobile cellular subscriptions (per 100 people)0000113
Telephone lines (per 100 people)
Fertility rate, total (births per woman)
GNI per capita, Atlas method (current US$)
GNI, Atlas method (current US$) (billions)
Gross capital formation (% of GDP)13.414.212.412.0
Life expectancy at birth, total (years)596062636565
Literacy rate, adult total (% of people ages 15 and above)9093
Population, total (millions)424548505253
Trade (% of GDP)
Source: The World Bank, World Development Indicators (April 2015).
Source: The World Bank, World Development Indicators (April 2015).

3. The key challenge in this election year is to maintain macroeconomic stability. Following three years of strong growth supported by loosening financial conditions, the economy is running into supply constraints, including shortages of infrastructure services (e.g., electricity) and skilled and semi-skilled labor. While productive capacity will increase over time with continued structural reforms and investment, policy adjustments are necessary to slow the growth of aggregate demand in the short run. This is all the more important in the face of lower commodity prices which make it difficult to sustain current policy settings without jeopardizing macroeconomic stability.

Recent Developments, Outlook, and Risks

4. Growth remains strong, but macroeconomic imbalances have increased significantly over the past year. Real GDP growth for 2014/15 (April/March) is estimated to have reached 8½ percent (Table 1). Growth picked up pace in manufacturing, construction, tourism, and natural gas production, which more than offset a slowdown in agriculture. Inflation reached 8 percent (y/y) in May, up from 4 percent in October (non-food inflation rose from 3¾ percent to 6 percent), reflecting mainly strong domestic demand, with import volumes growing by 28½ percent in 2014/15. The 2014/15 fiscal deficit is estimated at 3 percent of GDP, but the underlying deficit is estimated at 5½ percent once one-off receipts from telecom and gas companies are excluded (Table 2). The current account deficit widened to over 6 percent of GDP, largely reflecting a rapidly rising trade deficit, which increased from 4½ percent of GDP to 8¼ percent (Table 3). Since late 2014, the kyat has come under pressure to depreciate, and its value against the U.S. dollar has declined by about 20 percent. At end-March 2015, the Central Bank of Myanmar’s (CBM) foreign reserves covered around 3 months of imports, well below the estimated adequate level of 5-6 months of imports.1 Credit to the private sector continued to grow strongly at 35 percent (y/y) in March, albeit lower than the 53½ percent in 2013/14 (Table 4).

Real GDP Growth, Fiscal and Current Account Deficits

Sources: Authorities’ data; and IMF staff estimates and projections.

Staffs Views

5. The Myanmar economy is set for strong growth this year amid signs of overheating. The economy is expected to grow by 8½ percent this year, reflecting strong growth momentum but also expansionary macroeconomic policies. The projected increase in the fiscal deficit in the 2015/16 budget—amounting to almost 2 percent of GDP—will provide an expansionary stimulus and contribute to strong credit growth and a rising current account deficit. With increased financing need, CBM financing of the deficit is likely to remain significant at 1 percent of GDP while credit to private sector is expected to expand by about 45 percent. As a result, inflation is expected to rise to around 13 percent (end-year) in 2015/16 and the current account deficit to widen to about 9 percent of GDP, with the CBM’s foreign reserves falling to about 2½ months of imports.

Credit to Private Sector and Loan to Deposit Ratio

Sources: Authorities’ data; and IMF staff estimates and projections.

6. Downside risks to growth and stability in the near term have increased (Table 7). The formula-based price smoothing mechanism under the contract has mitigated the impact of the fall in international commodity prices on Myanmar’s gas export earnings, and the overall terms of trade remains favorable given that Myanmar is a net importer of fuel. However, lower natural gas prices would further reduce export earnings and government revenue, and could also lead to lower-than-expected FDI inflows in the medium-long run. A sharper-than-expected slowdown in China’s growth would also have a negative impact on Myanmar. Moreover, a tightening of US monetary policy and uncertainty over Greece’s economic situation could strengthen the US dollar and put further downward pressure on the kyat. Increasing vulnerabilities resulting from rapid credit growth, a widening current account deficit, and an expansionary budget pose increasing risks to price and external stability. The ongoing liberalization of the financial sector—despite its overall benefits—also comes with risks as the CBM’s regulatory and supervisory capacity is still relatively weak. A combination of these potential shocks—if materialized amid political uncertainty related to the general elections—could severely strain the economy (see scenario analysis in the following section). On the other hand, a well-received election outcome and peace process may provide an upside surprise, resulting in higher-than-expected FDI inflows.

Table 7.Myanmar: Risk Assessment Matrix 1/
Source of RisksRelative LikelihoodTransmission ChannelsExpected Impact of RiskRecommended Policy Response
(A) Domestic Risks
Expansionary fiscal policy due to electionsHigh
  • The large increase in public sector wages triggers larger than expected wage increases in the private sector, which add to aggregate demand;

  • Due to a shallow treasuries market with interest rate controls, CBM finances a large fraction of fiscal deficit, raising inflation pressure.

  • Raise inflation more than anticipated, which erodes public confidence in macroeconomic stability;

  • Increase external imbalances through a widening current account deficit and declining CBM reserves;

  • Introduce distortions in credit market as mobilizing resources and promoting better access to finance become more challenging.

  • Introduce measures to raise tax revenues and reduce expenditure through prioritization in the supplementary budget;

  • Tighten monetary policy stance through scaled-up deposit auctions and implementation of recalibrated reserve requirements; and

  • Ensure that interest rates is market determined in Treasury bills auctions.

Prolonged high credit growthHigh
  • Rapid expansion of credit (including hire purchase loans) by banks and nonbank financial institutions lead to faster import growth and reduce asset quality; and

  • Operations by foreign bank branches, which commence by October, fuel foreign borrowing by domestic financial institutions to on-lend in local currency.

  • Fuel pent-up demand for imports, which leads to higher inflation and larger current account deficit than anticipated with declines in CBM reserves.

  • Raise pressures for further depreciation, creating risks of financial market instability due to currency mismatch; and

  • Raise government contingent liabilities.

  • Scale up deposit auctions to mop up excess liquidity to control credit growth;

  • Tighten reserve requirements;

  • Strengthen supervisory capacity and implement a revamped regulatory framework, including through enforcement of key micro prudential measures; and

  • Enforce NOP limits and repatriation requirements.

Political instabilityMedium
  • Undermine confidence in macroeconomic instability;

  • Cast doubt on the administration’s ability to implement economic reforms; and

  • Ethnic and religious tensions as well as social unrests delay economic reforms.

Medium / High
  • Weaken investor confidence, delay actual FDI flows, and reduce foreign investors commitments to future FDI;

  • Interrupt productive activities and slow economic growth; and

  • Create further challenges to raise tax revenues to contain fiscal deficit.

  • Stress the importance of macroeconomic stability for poverty reduction and growth;

  • Resist monetization of government spending;

  • Safeguard central bank autonomy.

  • Enforces NOP limits and repatriation requirements.

Limited institutional capacityMedium
  • The public sector is unable to cope with speed of reform, leading to slippages and undermining confidence;

  • CBM does not have budgetary autonomy to effectively mop up liquidity to implement the reserve money targeting framework; and

  • Delays in strengthening supervisory capacity of the CBM contributes to building up of vulnerabilities in the financial sector.

Medium / High
  • Overall macroeconomic stability could be compromised, including through:

    • -failure to contain credit growth and inflation that leads to a higher current account deficit and kyat depreciation;

    • -debt sustainability becomes severely hampered;

    • -CBM financing of the fiscal deficit rises rapidly; and

    • -exposures by financial institutions rise rapidly without proper measures

  • Continue to provide well-tailored TA programs that focus on staff training to raise institutional capacity;

  • Coordinate TA programs with international donors and streamline and adjust the scope of the programs, if necessary; and

  • Further promote operational autonomy of the CBM and increase its operational budget to improve monetary policy operations.

(B) Global External Risks
Persistent dollar strengthHigh
  • Depreciation pressures lead the CBM to intervene in the FX auctions, widening the gap between the official and wider market rates.

  • Large sales of FX by CBM reduce the reserve buffer.

  • Erode public confidence in onshore FX market;

  • Hamper development of the formal FX market; and

  • Lower CBM reserves increase vulnerabilities.

  • Allow the CBM reference rate to flexibly adjust to the parallel market rates by following auction rules and preserve the CBM reserves;

  • Tighten monetary and fiscal policies to support the kyat; and

  • Enforce NOP limits and repatriation rules in Foreign Exchange Management Law to increase FX inflows to the official FX market.

Risks to energy prices

(persistently low prices)
  • A further decline in pipeline gas prices, triggered by declines in global demand.

  • Despite a formula-based smoothing mechanism, lower gas price would:

    • -reduce government revenues; and

    • -reduce gas export earnings and FDI, weakening the balance of payments position.

  • Allow greater exchange rate flexibility to absorb external shocks;

  • Promotes diversification of export growth through investment in agriculture and infrastructure; improve the business climate to attract FDI and develop SMEs.

Sharp growth slowdown (2015–16) in ChinaLow
  • Reduce export growth and FDI inflow since China is an important trading partner and source of FDI.

  • Reduced exports lead to a greater current account deficit;

  • Significantly reduce growth and contribute to kyat depreciation.

  • Allow greater exchange rate flexibility to absorb external shocks;

  • Promote export diversification through investment in infrastructure to address supply-side bottlenecks;

  • Improve business environment to attract more FDI from other sources.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Natural Gas Prices

(Percent, y/y)

1/ Myanma Oil and Gas Enterprise.

Sources: Authorities’ data; IMF’s World Economic Outlook (April 2015); and IMF staff projections.

7. Myanmar’s medium-long term growth prospects remain favorable on account of continued reform and FDI inflows (Table 5). Staff currently projects a long-term growth rate of around 7 percent. Given its low income level, Myanmar can sustain such rapid growth for a long time to come through catch up. With its strategic location and proximity to a dynamic East and Southeast Asia, Myanmar stands to benefit from an expected relocation of FDIs in manufacturing around the region in search of lower labor cost. To take advantage of this opportunity, Myanmar will need to continue to pursue market-oriented reform and improve its business environment.

Authorities’ Views

8. The authorities are in broad agreement with staff’s assessment of the current economic situation and outlook. However, they project growth at 9⅓ percent in 2015/16 on account of strong FDI inflows to support rapid growth in energy and manufacturing industries. A booming tourism sector will also help boost transportation and construction industries. Infrastructure development under the next Five-Year National Development Plan will help sustain economic growth in the long run.

Maintaining Near-Term Macroeconomic Stability

9. The authorities’ 2015/16 budget projects an overall fiscal deficit of just under 5 percent of GDP. Staff’s projections show a deficit of 4¾ percent of GDP after incorporating more plausible revenue and expenditure outcomes in contrast to the authorities’ very conservative revenue projection and an ambitious and perhaps unsustainable reduction in capital expenditure. Nevertheless, the budget represents a fiscal expansion of nearly 2 percent of GDP from last year, largely reflecting a substantial wage increase for public sector employees, albeit from a very low base (a little over 2 percent of GDP).

10. Credit to the private sector has been growing by 50 percent annually on average during 2011/12–2014/15 and is expected to increase by about 45 percent this year. Much of the credit has been provided to trade, manufacturing, construction (including real estate) and agriculture, which collectively account for more than two-thirds of total credit. Over 90 percent of the credit is extended through loans for 12 months or less, which are routinely rolled over with capitalization of interest. Loans through hire-purchase are also rising, although they still account for less than 10 percent of total loans outstanding. Meanwhile, most banks are undercapitalized and data on loan quality and provisioning continue to pose difficulties for proper analysis.

Private Banks: Credit by Sector and Growth 1/

(left: percent of GDP; right: percent, y/y)

1/ It does not include credit to private sector by state-owned banks.

2/ Other includes credits to local stores and specialized shops.

Sources: Authorities’ data; and IMF staff calculations.

11. Myanmar is facing challenges in implementing anti-money laundering/combating financing of terrorism (AML/CFT) measures. It remains listed by the Financial Action Task Force (FATF) as a country that has not made sufficient progress in implementing its action plan to address its significant AML/CFT shortcomings. Without progress, Myanmar banks’ correspondent banking relationships in major financial markets could be adversely affected if the FATF calls for countermeasures against Myanmar. It is thus urgent that the authorities promulgate FATF–compliant AML/CFT laws and regulations and implement them effectively.

Staff’s Views

12. Myanmar’s top policy priority in the near term is to address increasing macroeconomic imbalances and the resulting vulnerabilities. This calls for a tightening of monetary and fiscal policies along with exchange rate flexibility. Given the ongoing pressure on the kyat, early action to tighten policies and enforce prudential measures is needed to address the underlying causes of the growing macroeconomic imbalances.

Reducing the fiscal deficit and terminating CBM financing

Fiscal Deficit: Baseline vs. Adjustment Scenarios

(Percent of GDP)

Sources: Authorities’ data; and IMF staff estimates and projections.

13. Reducing the fiscal deficit is urgently needed to contain immediate inflationary pressure and anchor exchange rate expectations. Staff recommends that the fiscal deficit be reduced to about 4 percent of GDP in 2015/16, which would constitute a countercyclical measure to address the growing macroeconomic imbalances. This target can be achieved through a combination of measures in revenue mobilization and expenditure reprioritization in the upcoming 2015/16 supplementary budget expected in coming months. The budget should implement the collection of the commercial tax on telecom services which was postponed earlier this year and reduce low-priority current spending, including on goods and services, and travel expenses. While expenditures on health, education and infrastructure should be protected, transfers to Regions and States should be contained in line with their implementation capacity and spending responsibilities. Over the medium term, a new fiscal rule aimed at addressing volatile gas revenues can be considered (see paragraph 24).

Fiscal Adjustment(Percent of GDP)
Baseline NFCPS budget deficit−4.8−4.7
Adjustment NCPS budget deficit−4.1−4.2
Recommended adjustments:0.70.5
Tax revenue measures0.050.5
Expenditure measures0.68
Transfers to States and Regions0.34
Other non-wage non-interest spending0.34
Source: IMF staff calculations.
Source: IMF staff calculations.

14. Automatic CBM financing of the residual gap in the fiscal deficit should be terminated and replaced by issuance of government securities. Staff welcomes the establishment of the Treasury Department in September 2014 and the launch of T-bill auctions in January 2015. To attract substantially larger volumes of bids that are needed to meet the CBM’s reserve money target, it is urgent that the Ministry of Finance allows the interest rate at T-bill auctions to rise. Continued efforts will also be needed to integrate the auction with budget execution and cash management. In particular, the volume of fortnightly T-bill sales needs to be spread out to reduce pressures to issue large volumes of T-bills to the CBM at the end of the fiscal year. In addition, like domestic banks, foreign bank branches operating in Myanmar should be allowed to purchase government securities to broaden the government’s funding base. This will also provide better options for bank liquidity management and aid the development of the money markets.

Tightening monetary policy and ensuring exchange rate flexibility

Reserve Money: Baseline vs. Adjustment Scenarios

(Percent, y/y)

Sources: Authorities’ data; and IMF staff estimates and projections.

15. The CBM should tighten monetary condition to contain inflationary pressures and support the Kyat. The CBM should mop up liquidity by scaling up deposit auctions and transition to the recalibrated reserve requirement (which, in contrast to the current requirement, excludes government bonds from liquid assets) by the set target date of early October. The CBM’s reserve money target should be tightened while being flexible enough to accommodate the seasonality of structural liquidity. Access to the CBM discount window should be revamped by shortening the maturity to overnight to prevent the facility from being used as a de facto revolving credit facility. Staff continues to encourage the authorities to convert the CBM’s legacy debt portfolio to marketable government securities that can be used for open market operations. As inflation is expected to rise over the course of 2015/16, the CBM and government should consider increasing the current regulated minimum deposit and maximum lending rates, the CBM discount rate, and the fixed rates offered on Treasury bonds to improve the attractiveness of the instruments.

16. Staff welcomes the CBM’s recent bold move to close the exchange rate gap by aligning its reference rate with parallel market rates. Exchange rate flexibility is critical to maintaining external stability. The current downward pressure on the kyat is largely a result of macroeconomic policy inconsistency—monetary and fiscal policies are too loose to anchor the exchange rate expectations, although external shocks have also played a role (Box 1). Under the current macroeconomic policy settings, resisting depreciation pressure could lead to a quick rundown of reserves. A priority import window for supply of FX to importers of fuel and cooking oil was introduced in late-June, prior to the recent realignment of the reference rate and parallel market rates (Box 2). Staff is examining any jurisdictional implications arising from the operation of the window. The authorities noted their intention to phase out the window.

Strengthening prudential measures

17. Prudential measures, as well as liquidity tightening, are needed to arrest credit expansion and minimize financial sector risks. Because of the uncertainty over the sustainable pace of financial deepening, prudential measures will need to be introduced quickly and measures already in place should be enforced and tightened where needed to ensure credit to the private sector grow at a safe pace. In this regard, a top priority is to finalize and issue the remaining six out of the eight instructions on prudential regulations. This would help empower the supervisors to ensure that all banks meet capital and liquidity requirements in a reasonably short timeframe, that prudent loan classification and loss provisioning are followed and that loans are sound before they are rolled over. The authorities should also strengthen monitoring of hire purchase and credit funded by foreign loans, and start to prepare a bank resolution framework.

Reducing risks and improving growth sustainability

18. Two alternative scenarios prepared by staff illustrate the importance of taking concerted actions to tighten macro policies and strengthen prudential measures outlined above (Box 3). The (policy) adjustment scenario highlights the potential benefits of taking early action to address the imbalances identified in the baseline. The result of tightening policies and strengthening prudential measures would be reduced vulnerabilities and improved policy buffers. Real GDP growth would be somewhat lower than in the baseline because of less expansionary macroeconomic policies, but this growth path would be more sustainable. In contrast, the adverse scenario provides a stress test of a situation where fiscal policy slippages and deteriorating prudential standards further increase credit expansion (as reflected in the rising money multiplier), to around 60 percent compared with 45 percent in the baseline. If Myanmar were also hit by further declines in the price and production of natural gas and lower FDI inflows arising from elections-related uncertainty, growth would be slower and economic vulnerabilities would rise further. In particular, the fiscal deficit in 2015/16 could rise to over 6 percent, the current account deficit widen to 10 percent, and CBM reserves fall to V-h months of imports, with a further decline to less than 1 month in 2016/17.

Authorities’ Views

19. The authorities were in broad agreement with staff’s policy recommendations. They pointed out that they have been able to keep fiscal deficits lower than budgeted in recent years. While acknowledging the need to raise interest rates at T-bill auctions, they were concerned about increases in interest costs to the budget. They indicated that cutting maintenance cost and capital spending in the 2015/16 budget is necessary to meet the deficit target. The authorities indicated that increased transfers to sub-national governments are part of a political process for federalism.

20. The authorities recognized the need to tighten monetary condition and intended to scale up deposit auctions to reduce liquidity and anchor exchange rate expectations. The CBM has operational autonomy to mop up sufficient amount of liquidity. The authorities’ initial reluctance to allow the CBM reference rate to align with the market rates was out of concerns over a potential downward depreciation-inflation spiral once the CBM reference rate is allowed to reflect market conditions. The authorities also recognized the need to implement prudential measures and strengthen monitoring of banks’ balance sheets. In areas where prudential instructions are yet to be issued, the CBM has been using moral suasion to influence banks’ behavior.

Laying Foundations for Sustainable, Inclusive Growth

21. Myanmar lacks a well-developed private sector and is currently short of public goods and social services to support inclusive growth. The authorities’ Framework for Economic and Social Reforms (FESR) appropriately targets infrastructure development as a priority, as lack of infrastructure services, particularly electricity supply, is a major constraint on business activities. Expenditure on health and education, another well-identified priority, has increased in recent years, but public resources devoted to this area are well below in those found in peer countries. At the same time, access to finance is limited, particularly for the vast rural population and small and medium-sized enterprises, and Myanmar’s regulatory regime imposes heavy burdens on businesses.

Staff’s Views

22. Myanmar needs to implement well-focused reforms to foster inclusive growth. Given the current circumstances, policies should aim to mobilize and make the best use of public resources available, strengthen regulatory and supervisory framework for the financial sector, and continue to improve the business environment to create the enabling condition for private enterprise to flourish. Building institutional capacity is critical to moving forward in these areas.

Building fiscal space and improving spending efficiency

23. Revenue mobilization remains a top priority to increase public resources available for promoting inclusive growth. Tax revenue has increased significantly over the last three years, but it is still well below levels in most peer countries because of a narrow tax base, exacerbated by extensive tax incentives and weak administration. Staff recommends that as an initial step to reduce tax incentives, tax expenditure be estimated and presented as part of annual budgets. Preparatory work on the introduction of a value added tax (VAT) by 2020/21 should begin in earnest, including by passing the special commercial tax bill. The extractive industry fiscal regime should be reformed with a view to centralizing collection of gas-related revenue and increasing transparency, along with continued progress toward the membership of the Extractive Industries Transparency Initiative (EITI) (see Selected Issues Paper 1). On tax administration, staff welcomes the operation of the Large Taxpayers Office (LTO) with the introduction of self-assessment on income taxes. However, more budgetary resources need to be allocated to the field offices and Internal Revenue Department (IRD) headquarters to boost their capacity, including through staffing and ICT improvement. The extension of self-assessment to medium taxpayers should be delayed until new procedures and systems, especially for effective audit, are put in place in the LTO.

Tax Revenue

(Percent of GDP)

Sources: Authorities’ data; the World Bank; and IMF staff estimates.

24. Myanmar should continue to prioritize expenditure on infrastructure and social programs and improve public financial management. In this respect, the cut in capital spending budgeted for 2015/16 is neither desirable nor consistent with the authorities’ stated expenditure priorities. While it is important to raise public sector wages to retain and attract talents, the pace and structure of wage increases should be implemented in conjunction with a public service reform. Staff also encourages the authorities to assess the impact of expected increases in inflation on the poor and consider introducing well-targeted social programs as needed, such as free school meals to pupils attending compulsory education in public schools and free hospital treatments to pregnant and nursing women and elderly individuals. In the area of public financial management, the government should adopt a medium-term fiscal framework and consider introducing, over time, a fiscal rule to smooth spending against volatile gas revenues. The reform of state economic enterprises (SEEs) should be accelerated with a view to improving their efficiency and profitability in order to minimize contingent liabilities. This includes revising MOGE’s financial requirements to reflect its role in collecting natural gas rents on behalf of the government.

25. Given the limited fiscal resources and huge spending needs, it is all the more important that Myanmar maintain fiscal discipline to ensure debt sustainability. Myanmar’s risk of debt distress remains low (see the DSA), but overall public debt is projected to rise over time given the large financing needs for development. This highlights the importance of keeping deficits low and pursuing prudent external borrowing with an emphasis on concessional loans. Based on debt sustainability simulations, staff advised the government to lower its fiscal deficit target from 5 percent of GDP to 4½ percent of GDP over the medium to long term in order to safeguard fiscal sustainability.

Government Spending

(Percent of GDP)

Sources: Authorities Data; the World Bank; and IMF staff calculations.

Improving financial inclusion and promoting private enterprise

26. Improving financial inclusion will require safeguarding financial stability as well as broadening funding sources and reducing costs. Staff welcomes recent progress in preparing the Banks and Financial Institutions Law, the Investment Law and Company Law, and looks forward to their early approval by parliament. The enactment of these laws will help clarify the regulatory environment and make it more attractive to FDIs. The CBM should speed up approval of investment and other capital inflows consistent with these laws while maintaining appropriate capital management measures (such as setting annual ceilings of new borrowings) to safeguard financial stability. In addition, the CBM should consider allowing foreign exchange swaps and forwards to enable financial institutions and companies to hedge exchange rate risks and promote money market development. Foreign micro-finance institutions (MFIs) should be allowed to raise domestic kyat funding to facilitate more stable access to credit in the sector. Myanmar should take full advantage of the presence of nine foreign banks by end-September to modernize its banking sector while minimizing associated risks, such as volatility in capital flows (Selected Issues Paper 2).

27. Reforms of state banks should be accelerated, and policy banks, cooperatives, and MFIs need to be properly regulated and supervised (Box 4). Staff welcomes progress being made in the diagnostics of state banks with assistance of the World Bank and encourages the authorities to move expeditiously in formulating a reform plan to redefine the role of state banks and reduce financial and fiscal risks. One option would be to consolidate these banks and the many policy banks into one or two development banks with clear development mandates and a modern governance structure. Proper prudential regulations need to be applied to policy banks, cooperatives and MFIs, and their risks exposure, including foreign currency risks, should be monitored closely. Over time, the authorities should consider reducing fragmentation of financial supervision, with supervision power being consolidated in the CBM as its capacity develops.

28. Continued efforts will be needed to improve the business environment and external competitiveness. It is important to continue with regulatory reforms to reduce the cost of doing business, particularly in the areas of contract enforcement and business start-up, where Myanmar lags behind most of its peers. Myanmar has a great opportunity to leverage its participation in the ASEAN Economic Community to improve the business environment, as well as to take advantage of the dynamic regional market and value chains to implement its export-oriented development strategy, which entails export diversification to promote manufacturing activities (Selected Issues Paper 3). Raising labor productivity through education and training will be important to improve competitiveness, including in agriculture.

Ease of Doing Business: Overall Ranking and Its Components

1/ Economies are ranked on their ease of doing business, from 1–189. A high ease of doing business ranking means the regulatory environment is more conducive to the starting and operation of a local firm. The rankings are determined by sorting the aggregate distance to frontier scores on 10 topics. These indicators should be interpreted with caution due to a limited number of respondents, a limited geographical coverage, and standardized assumptions on business constraints and information availability.

2/ The number in () indicates Myanmar’s raking for each topic. Source: World Bank Doing Business (2015 Doing Business Report).

Authorities’ Views

29. The authorities attach great importance to promoting inclusive growth. They are fully aware of the need to raise revenue but have noted that their efforts are often hampered by capacity constraints. To build up human capital and reduce poverty, the 2015/16 budget provided an extension of the free basic education program and more resources for medical education to train more healthcare professionals. The authorities are also planning to increase hospital coverage in rural areas and provide free books in primary and secondary public schools. The authorities recognize the need to improve the regulatory and supervisory framework to safeguard financial stability when promoting financial inclusion. Their approach to improve the business climate includes setting up special economic zones to make localized improvement in infrastructure and the regulatory regime.

Developing Capacity for Macroeconomic Management

30. Myanmar has an ambitious technical assistance (TA) program and is one of the largest recipients of Fund assistance. To meet the authorities’ priorities, Fund TA has focused on central bank operations; financial sector supervision; revenue administration and tax reform; public financial management; macroeconomic analysis; AML/CFT; and statistics. Delivery is through a mix of resident advisors, experts in the Bangkok-based Technical Assistance Office for Lao P.D.R. and Myanmar (TAOLAM), and short-term HQ and expert missions. Considerable efforts have been made in collaboration and coordination with the World Bank and Asian Development Bank as well as bilateral development partners. Given the weak capacity in Myanmar, Fund assistance is likely to play a critical role for some time to come.

Staff’s Views

31. Strong leadership is critical to continued improvement in the effectiveness of technical assistance and capacity building. Staff welcomes the establishment of a steering committee and working groups with officials from various departments of the CBM to develop and refine monetary policy tools and to improve financial market and legal infrastructure. In the area of accounting and the payment system, a strong push from the top management is needed to increase the momentum.

32. Continued improvements in macroeconomic statistics are important for timely and informed policy-making. Significant progress has been made in reducing the time lags of releasing data, particularly on monetary statistics, but serious data shortcomings, as discussed in the Statistical Issues Appendix, still pose significant challenges to macroeconomic surveillance. Data shortcomings include, among others, those in the areas of national accounts and external sector statistics. Staff encourages the authorities to prioritize the compilation of consistent financial soundness indicators (FSIs) and expedite the release of the rebased CPI.

Authorities’ Views

33. The authorities recognize the importance of capacity building. They intend to strengthen leadership in this area and enhance absorptive capacity by facilitating suitably qualified officials to work closely with external experts. The rebased CPI is scheduled for release in the second half of 2015 and Fund technical assistance will be sought to improve FSIs.

Staff Appraisal

34. The year 2015 marks a major milestone in Myanmar’s political transition. A successful conduct of the November general elections and a timely conclusion of the peace negotiations will provide a firm basis for greater political and social stability and underpin continued economic transition.

35. The growth momentum remains strong, but signs of economic overheating have emerged in the face of supply bottlenecks and loose financial conditions. Downside risks to growth and stability have thus increased amid rising macroeconomic imbalances and a volatile external environment. This calls for urgent actions to reduce vulnerabilities.

36. An immediate policy priority is to tighten monetary condition. This action is essential to curb the rapid credit growth, a key factor behind the rising inflation and widening current account deficit, which in turn drive kyat depreciation. The CBM should scale up deposit auctions and promptly implement the recalibrated reserve requirement to mop up liquidity. Staff welcomes the CBM’s willingness to allow interest rates at deposit and securities auctions to rise, which will help attract more deposits and Treasury bill purchases by banks.

37. Prudential measures need to be enforced to help curb credit expansion and minimize financial risks. The CBM should ensure that banks meet capital and liquidity requirements, and that their loan portfolios are properly classified and provisioning is adequate. Where needed, prudential standards should be tightened. Building on recent progress, the CBM should promptly finalize and issue remaining instructions on prudential regulations. More broadly, increased efforts will be needed to modernize the regulatory framework and strengthen the supervisory capacity.

38. Staff welcomes the recent bold move by the CBM to realign its reference rate with the wider market exchange rates. This policy change has helped balance the FX market by bringing FX supply back to the formal market and reducing excess FX demand. It is critical that the CBM support the exchange rate by tightening monetary condition to forestall any potential depreciation-inflation spiral. The kyat is broadly in line with its medium-term fundamentals, and staff encourages the authorities to advance structural reforms to improve external competitiveness.

39. Addressing economic overheating will also require reducing the fiscal deficit in the near term and terminating automatic CBM financing of the fiscal deficit. Raising tax revenue by commencing the collection of the commercial tax on telecommunication service and reducing tax incentives should be among the immediate priorities. On the expenditure side, the authorities should consider curbing transfers to States and Regions and cutting low-priority recurrent expenditure. Staff welcomes the launch of T-bill auctions and advises that interest rates be raised to attract substantially higher bid volumes to mop up liquidity.

40. Sustained efforts will be needed for revenue mobilization to meet Myanmar’s huge development needs. Staff welcomes the operation of the Large Taxpayers Office and suggests that more resources be provided to the IRD to boost capacity. Legislation on the special commercial tax should be passed expeditiously and preparations for the introduction of a VAT should begin in earnest, as should work on estimating tax expenditure as part of annual budgets. Self-assessment of income taxes should not be extended to medium taxpayers until it works well in the LTO.

41. A large reform agenda remains on improving financial inclusion and the business environment to foster inclusive growth. Staff welcomes progress made in preparing relevant legislation and encourages its early approval in parliament. Much remains to be done in reforming state banks, strengthening supervision of policy banks and non-bank financial institutions, and facilitating market development to provide more reliable and affordable funding to these institutions. Early action is also needed to implement AML/CFT measures. Reducing the cost of doing business is important for fostering private enterprise, as is investing in human capital for raising labor productivity.

42. Continued technical assistance and capacity building are imperative to strengthen institutions for macroeconomic management. Staff encourages the authorities to provide strong leadership in implementing capacity building programs and make continued efforts to improve macroeconomic statistics, including early release of the rebased CPI and FSIs.

43. Staff supports the authorities’ request for approval of a multiple currency practice subject to Fund jurisdiction under Article VIII, Section 3. The current multi-price FX auction is a necessary but temporary mechanism for price discovery and liquidity management given Myanmar’s current underdeveloped FX market. The MCP arises from the mechanism of the foreign exchange auction and is maintained principally for non-balance of payments reasons. However, since the MCP does not materially impede the member’s balance of payments adjustments, does not harm the interests of other members, and does not discriminate among members and is temporary, and the authorities are unable to replace it at present, staff recommends Executive Board approval for its retention until August 27, 2016 or the conclusion of the next Article IV consultation, whichever is earlier.

44. It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

Box 1.External Sector Assessment

Myanmar’s inflation-based real effective exchange rate (REER) appreciated by 3¾ percent between mid-2014 and March 2015. This has reversed the trend depreciation since 2012 when exchange rates were unified. However, the nominal exchange rate has depreciated significantly since March 2015, by as much as 16 percent against the U.S. dollar. Given that anticipated inflation differentials is expected to be much less than the nominal depreciation, it is likely that the REER has also adjusted downwards since March 2015. Since 2010, trade restrictions and controls on FX transactions have been gradually lifted. Pent-up import demand has widened the current account deficit, and external shocks such as lower gas prices have exerted downward pressure on the kyat. This trend is likely to continue until financial policies are tightened to rein in aggregate demand.

Market and Effective Exchange Rates (EER) 1/

(Index, 2005=100)

Sources: Authorities; and IMF staff calculations.

1/ Auction rates (kyat/USD) are applied starting April 2012.

Given this background, the kyat appears to be broadly in line with Myanmar’s medium-term fundamentals. Data limitations and structural changes make it difficult to apply conventional econometrics-based evaluation methods. However, the Central Bank of Myanmar’s recent decision to move its reference exchange rate in line with the broad market rates has brought the exchange rate closer in line with the fundamentals. From September 2014 until mid-July 2015, the CBM was allowing the reference exchange rate to depreciate more slowly than the parallel market rate. However, in mid-July, the CBM brought its reference rate in line with market rates (a 6.7 percent depreciation). Staff projections, however, show that the current account deficit will likely remain elevated over the medium term as Myanmar continues to meet pent-up import demand. A moderate depreciation of the REER will help ensure that the deficit will narrow over the medium term.

Exchange Rates: CBM Reference and Hundi Rates

Sources: CBM and IMF staff calculations.

Pre and Post Reform Comparison (2000-10 v.s. 2011-14)

(In percent)

Source: IMF’s World Economic Outlook.

Myanmar will also need to strengthen macroeconomic stability and undertake structural reforms to improve its external position. Pent-up import demand unleashed by trade liberalization must be contained by tighter financial conditions. Over time, however, structural reforms to improve productivity are essential to raise Myanmar’s external competitiveness. Labor costs in Myanmar remain among the lowest in Asia, but productivity is also low due to skill shortages and supply bottlenecks. Market liberalization and regulatory reforms, as recently seen in telecommunications, can bring down the cost of doing business and attract FDI.

Box 2.Recent Foreign Exchange Market Developments

The CBM has experienced considerable challenges in managing depreciation pressures on the kyat. Beginning in October 2014, the CBM attempted to slow kyat depreciation by setting its reference rate (the cut-off rate at the auction) at a more appreciated rate than the parallel market rate, causing the gap between the two rates to diverge significantly. Although the CBM allowed the reference rate to depreciate, it was always lagging behind the parallel market rate and it was not until July 13, 2015 that the CBM took a bold move to realign the reference rate with the parallel market rate. This has largely restored the price discovery mechanism embedded in the auction rules and led to a sharp depreciation of the CBM reference rate. A gap between the two continues to exist but it is now less than 2 percent. Balance has been restored in the FX market and the kyat appears to have stabilized for now.

The kyat has depreciated significantly since September 2014 reflecting both external and internal factors. It has depreciated by about 20 percent against the US dollar and about 6¾ percent on a nominal effective basis. This has largely resulted from strong import demand and rising inflation pressures, reflecting ongoing fiscal stimulus and easy monetary and credit conditions. However, other factors have also played a role, including a strengthening US dollar, declines in natural gas prices, and political uncertainty ahead of the elections in November.

Currencies in Asia, 2014–2015 1/

(Index, 9/1/2014 = 100)

1/ Based on the bilateral exchange rate (US$/NCU).

Sources: DataStream; IMF staff calculations.

Alarmed by the strong depreciation pressure, the authorities tried to use administrative measures to curb speculation against the kyat but this only increased the imbalance in the FX market and undermined confidence in the currency. In December 2014 the CBM began to alter the allocation rules used in its daily FX auction such that FX was allocated on the basis of amount bid as opposed to price. With limited FX sales, this resulted in a divergence of the auction rate from the market rates. USD cash withdrawal limits were tightened in April 2015 in an attempt to reduce USD demand and the CBM took active steps to sanction both authorized dealers and informal market traders who were trading FX at significantly depreciated rates relative to the CBM reference rate. These measures only increased FX scarcity and hoarding exacerbating the imbalance in the FX market and putting further pressure on the kyat.

FX Turnover at Money Changers

(Thousands of U.S. dollars, 10 day moving average)

Source: Authorities’ data.

Prior to the recent exchange rate realignment, foreign exchange became scarce in the formal authorized dealer market forcing importers into the informal markets. As authorized dealers are required to trade FX within 0.8 percent of the CBM reference rate they quickly became uncompetitive purchasers of FX relative to informal market dealers who were trading FX at rates up to 10 percent more depreciated relative to the CBM reference rate. Turnover with authorized dealers and legal money changers thus declined as banks turned away all but their best customers looking to purchase FX. In late June, a priority import window was introduced whereby unrestricted FX would be supplied to importers of cooking oil and fuel at the reference rate, although some transactions may have taken place initially at a different rate. With the July 13 exchange rate realignment, importers are now able to obtain FX from the formal market and all transactions under the window are now taking place at the reference rate, which has been within 2 percent of parallel market rates since July 13.

Box 3.A Scenario Analysis of the Myanmar Economy

This box provides comparisons between the baseline, an adjustment scenario, and an adverse scenario. The comparisons illustrate possible macroeconomic outcomes through macro-financial linkages. The baseline assumes a rising fiscal deficit that is in large part financed through issuance of government securities, and a slight tightening of monetary conditions, which lead to continued rapid credit growth and rising inflation. Import demand remains strong and the current account deficit widens further, with reserve coverage falling from the previous year, albeit moderately (Table below). While the economic situation is likely to improve gradually over the medium term, it is vulnerable to internal and external shocks.

  • The adjustment scenario assumes that policy action is taken to mitigate the risks outlined above. Monetary policy is tightened by outright elimination of CBM’s deficit financing in 2015/16, which implies that the government will substantially scale up T-bill auctions to meet its full financing needs. At the same time, prudential standards are more vigorously enforced. As a result, reserve money and credit growth is slower, and inflation pressure is eased. Fiscal policy is also tightened through containing transfers to sub-national governments, reducing low-priority spending, broadening the tax base on the commercial tax, and cutting tax incentives. Collectively, these measures help boost investor confidence, increase FDI inflows (which helps offset some of the contractionary effect of policy tightening), reduce the current account deficit, and boost foreign reserves.

  • The adverse scenario provides a stress test of how certain shocks could affect the economy. It is assumed that the gas price and production decline by 15 percent and 5 percent, respectively, relative to the baseline, and political uncertainty related to the elections and easy monetary condition dents business confidence, resulting in lower FDI and other investment. On the fiscal front, revenue is lower than expected due to glitches in the newly introduced self-assessment of income taxes, and spending is higher due to political pressure. The resulting increase in the fiscal deficit is financed by the CBM, leading to more rapid growth in reserve money and private sector credit, and ultimately higher inflation, a further widening of the current account deficit, and lower foreign reserves. As banks are awash with liquidity, lending standards deteriorate, feeding back to credit growth (as reflected in the rising money multiplier). Ultimately, these lead to slower economic growth and greater vulnerabilities.

Baseline, Adjustment, and Adverse Scenarios
BaselineAdjustmentDiff. 1/AdverseDiff. 1/BaselineAdjustmentDiff. 1/AdverseDiff. 1/
Real GDP growth(Percent)8.58.2−0.37.8−−0.18.1−0.3
Reserve money growth(Percent)17.97.3−10.726.88 816.910.4−6.515.2−1.7
Broad money growth(Percent)31.716.4−15.243.812.128.419.8−8.629.00.6
Private sector credit(Percent, y/y)45.230.1−15.158.613.336.724.4−12.337.40.7
(Percent of GDP)19.217.6−1.721.01.721.718.5−
Current account balance(Percent of GDP)−8.9−7.91 0−9.9−1.0−8.3−6.31.9−10.1−1.8
Trade account balance(Percent of GDP)−11.6−10.61.0−12.7−1.1−11.1−9.21.9−13.2−2.1
Foreign Direct Investment(Percent of GDP)−−0.9
CBM reserves(Months of imports)−−1.5
Fiscal deficit(Percent of GDP)−4.8−4.10 7−6.3−1 5−4.7−4.20.5−5.8−1.1
Miscellaneous item:
CBM financing(Percent of GDP)1.00.0−−
Money multiplier(Level)2.542.47−0.072.580.042.792.68−0.112.890.10

The difference is based on the respective alternative scenario against the baseline scenario.

Sources: Authorities’ data; and staff calculations.

The difference is based on the respective alternative scenario against the baseline scenario.

Sources: Authorities’ data; and staff calculations.

Box 4.State-Owned and Policy Banks in Myanmar

Ongoing economic transformation is reducing the dominance once enjoyed by state-owned banks (SOBs). Total banking sector assets have increased by 10 percent of GDP over the past two years, reaching 58½ percent of GDP at end February 2015. Assets owned by private banks now account for half of the total, up by 12½ percentage points, whereas SOB assets amount to 29½ percent of GDP, a decline of 2½ percentage points.

State-owned Banks vs. Private Banks

(Percent of GDP)

Sources: Authorities’ data and IMF staff calculations.

In contrast to private banks SOBs have failed to capitalize on a booming private sector. Loans and advances to the private sector by private banks increased by more than twofold over the past two years, now accounting for 14 percent of GDP. At the same time, SOB lending to the private sector has increased much less rapidly and now accounts for a disproportionately small share in lending to the private sector (2½ percent of GDP). Myanmar Economic Bank, for example, has a large deposit base (5¼ percent of GDP), but its loans to the private sector account for only about 15 percent of its deposits. SOBs have also shifted their asset holdings to government securities.

A number of policy banks have been established in recent years, raising concerns over contingent liabilities for the government. These banks tend to be sponsored by a line ministry with private sector contributions and have a narrow sectoral focus for lending (e.g., tourism or construction). Like commercial banks, the policy banks take deposits and extend loans at the administratively controlled interest rates, except when they receive donor funding at lower costs. These banks also take foreign loans and on-lend in kyat, exposing themselves to exchange rate risks.

The government is in the process of formulating a reform strategy for SOBs and this will affect policy banks as well. This work is supported by the World Bank through comprehensive diagnostic studies of SOBs, with two finished already. The enactment of the Banks and Financial Institutions Act will provide a new regulatory framework for SOBs and policy banks, which will be required to reapply for licenses, providing an opportunity to eliminate regulatory arbitrage by policy banks. Staff has in the past recommended to consolidate SOBs and policy banks into a couple of policy banks.

Financial Sector Landscape


1/ Other includes cooperatives and financial company.

Source: Authorities data.

Figure 1.Myanmar: Macroeconomic Developments: Overview

Sources: Authorities’ data; CEIC Data; and IMF staff calculations.

Figure 2.Myanmar: Inflation and Real Sector Developments

Sources: Authorities’ data; CEIC Data; and IMF staff calculations.

Figure 3.Myanmar: Fiscal Sector Developments

Sources: Authorities’ data; CEIC Data; and IMF staff calculations.

Figure 4.Myanmar: External Sector Developments

Sources: Authorities’ data; CEIC Data; and IMF staff calculations

Figure 5.Myanmar: Monetary Sector Developments

Sources: Authorities; The World Bank; and IMF staff calculations.

Figure 6.Selected Indicators: Myanmar and Its Peers

Sources: Authorities; The World Bank; and IMF staff calculations.

Figure 7.Financial Sector Developments: Myanmar and Its Peers

Sources: Authorities; and IMF staff calculations.

Appendix I. Key Policy Recommendations from the 2014 Article IV Consultation
CategoryPolicy adviceImplementation status
Monetary policy
Objective: Use reserve money targeting more effectively to keep inflation in check.
Reform of reserve requirementsIn progress (regulations issued)
Establish budgetary autonomy to increase scale of monetary operationsCBM has sufficient funds for monetary operations.
Implement regular deposit auctions for liquidity sterilizationOngoing
Introduction of treasury securities auctionsAchieved
Committed but
Limit CBM financing of the deficitimplementation challenges remain
The excess liquidity at the Myanma Economic Bank will need to be absorbed to make deposit auctions effectiveIn progress
Discontinue financing of the Myanma Agricultural Development Bank (MADB)MADB Financing remains
Fiscal policy
Objective: Create fiscal space to finance large development needs while maintaining macroeconomic stability and debt sustainability.
Keeping deficits below 5 percent of GDPConsistently achieved
Good progress with rising
Strengthen revenue collectionrevenue collection, but tax incentives persist
Assign taxpayers to the Large Taxpayers OfficeAccomplished
Introduce taxpayer self-assessmentIntroduced for large taxpayers
Prioritize expendituresSpending on health and education is rising, but remains low
Improve public financial managementGood progress
Establishment of a new treasury department in the MoFAccomplished
Increase capacity for cash flow forecasting and cash balance management.In progress
Financial sector and exchange rate policies
Objective: Maintain flexibility of the exchange rate and financial market stability.
Draft new Banks and Financial Institutions Law and implement it.In progress (in parliament for approval)
Establish a strengthened, rules-based and transparent regulatory environment before foreign banks commence operations.In progress
The number of new policy banks should be minimized and their external borrowing tightly circumscribedProblem recognized, but challenges remain
Strengthening supervisory capacityIn progress
Reform of state-owned banksIn progress
Maintain exchange rate flexibility to mitigate impacts of external shocksBold steps have been taken
Source: IMF Country Report No. 14/307.
Source: IMF Country Report No. 14/307.

The IMF’s new metric for low-income countries suggests an adequate level of reserves of about 4½-7 months of imports for Myanmar. Given Myanmar’s huge development needs, it would be appropriate for Myanmar to target around 5–6 months of prospective import cover.

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