1. On behalf of the Myanmar authorities, we thank staff and management for the Fund’s active engagement with Myanmar, including the constructive and candid policy discussions during the Article IV Consultation that took place from November 6 to 17, 2017.
2. In the past 5 years, the authorities have been intensifying reform efforts to further improve the living standards of the Myanmar people. Among the priorities are to reduce poverty, foster job creation and rural development as well as to promote better health and education services. The authorities agree that while Myanmar has made important progress in key areas of the economic reform program, a second wave of reforms is now needed to sustain the growth momentum. To this end, the authorities highly value the Fund’s advice and technical assistance, and will continue to consider the Fund’s advice in moving forward with the reform strategy. The authorities are in broad agreement with staff’s assessment and will take the recommendations into consideration in formulating future policies.
Recent Economic Development and Outlook
3. The Myanmar economy registered growth of 5.9 percent in FY1 2016/2017. The lower-than-expected growth performance during this period was mainly due to the temporary suspension of construction permits in Yangon and weak agricultural production following severe weather conditions. Weak export performance also contributed to the moderation in growth. However, economic activity has since rebounded strongly. Real GDP is estimated to grow by about 7.0 percent in FY2017/2018 driven by a recovery in agriculture and exports and higher public spending, aided by growth in the construction and tourism sectors. As the authorities continue to strengthen macro-economic management, medium-term growth is projected to gradually pick-up to around 6.8 percent, supported by higher public investment spending and FDI inflows.
4. Developments since the 2016 Article IV point to more favorable macroeconomic conditions and reduced imbalances. Fiscal adjustments carried out during the year have narrowed the fiscal deficit to about 3 percent of GDP (compared to 4.4 percent of GDP in FY2015/2016), in turn further reducing the fiscal deficit financing by the Central Bank of Myanmar (CBM). Inflation declined to about 5.2 percent on the back of reduced monetary financing and lower food prices. Fiscal adjustment also contributed to a stronger external position, with the current account deficit falling to about 3.9 percent of GDP in FY2016/2017 (5.1 percent in FY2015/2016). The current account deficit continues to be financed by FDI.
5. The CBM’s foreign reserves increased to USD5.1 billion as at September 2017, sufficient to finance 3.4 months of imports. The authorities expected the accumulation of international reserves to continue given the increase in capital inflows. Foreign reserves are expected to remain above the minimum conventional threshold of 3 months’ import coverage throughout 2017/2018 fiscal year. The Kyat remained broadly stable over the course of 2017.
6. Credit to the private sector remained healthy to support the growing economy, and is expected to expand by 33 percent attributed largely to increased business opportunity, better access to credit to business entities and further development of credit facilities to Small and Medium Enterprises.
7. Going forward, the growth momentum is expected to be sustained. While overall risks are currently skewed to downside, government’s policies to promote private investment and improvement in macroeconomic management continues represent upside risks. Stronger growth in Myanmar’s trading partners, particularly the ASEAN economies, could also have positive spillovers to Myanmar’s economy. The latest economic data indicated steady flows of FDI and tourist arrivals into Myanmar. Financial stability risk is expected to be contained with the implementation of the new prudential regulations that will help improve banks’ asset quality and capital positions.
8. The authorities acknowledge the important role of fiscal policy in promoting economic growth and development as well as in ensuring the success of their reform agenda. Balancing fiscal prudence with the broader goals of inclusive growth and poverty reduction will require that the authorities strike the right balance in prioritizing critical socio-economic expenditure.
9. The implementation of a gradual and growth-friendly fiscal consolidation strategy in recent years has kept current spending in check. The positive fiscal performance continues in FY2016/2017 on the back of higher tax revenue, reflecting improved tax-administration including the introduction of self-assessments for large tax-payers and capacity development within the tax authority.
10. Myanmar’s fiscal year will change from April-March, to October-September commencing 1 October 2018. The change in fiscal year is intended to improve implementation of capital and infrastructure, given the timing of the monsoon season. The latest budget will continue to focus on priority socio-economic spending with an increase in the budget for education and health, along with higher allocation for growth-enhancing infrastructure to the regions that face urgent development needs. The budget is anchored on conservative revenue projections and targets a fiscal deficit of 3.5 percent of GDP in the medium term. As acknowledged in the staff report, this deficit level is consistent with the assessment to build fiscal space to respond to shocks (including from natural disasters) and meeting the substantial development needs. Most importantly, it will also put Myanmar at minimal risk of debt distress.
11. On the revenue side, tax revenue improvements will support increased spending in infrastructure and social expenditure. The proposal to change the tax year to be consistent with the fiscal year is currently under consideration, with the authorities weighing the pros and cons, mindful of domestic implementation capacity.
12. Myanmar remains committed to implementing fiscal reform measures. These include enhancing tax and customs administration, and measures to reform tax policy aimed at strengthening domestic revenue mobilization. Progress has been made on improving revenue administration, notably the establishment of Large Taxpayer office in 2014 which has helped improve tax compliance and tax administration. The Internal Revenue Department (IRD) reform program has helped improve efficiency and effectiveness of the tax collection agency. This first phase of reforms has yielded dividends in terms of improving revenue buoyancy and tax payer services. Efforts are on-going to bring IRD practices closer to the international tax administration standards.
13. Going forward, the authorities are committed to further deepen the implementation of fiscal reforms. Modernization of tax laws to provide a transparent and legal basis for tax collection as well as rationalization of tax incentives are key reform priorities for 2018. These includes passage of the Tax Administration and Procedures Law and the Income Tax Law which are expected to be effective beginning the new fiscal year in October 2018. The authorities are working closely with the Fund TA team and other development partners to further develop revenue management capabilities including, improving customs administration and budgetary operations.
14. A new public financial management strategy is being prepared for the next 5 years with the World Bank and Fund TA focusing on strengthening institutional capacity to support efficient, accountable, and transparent delivery of public services.
15. The authorities intend to release fiscal data in line with the Government Finance Statistics (GFS) framework in 2018 to increase transparency and boost confidence of the private sector and development partners in the government’s public financial management.
Monetary and Exchange Rate Policy
16. Within a relatively short period after the central bank was granted autonomy in July 2013, the CBM has made important progress to enhance its monetary policy framework and the managed float exchange rate system. This includes realignment of the reference rate with parallel market exchange rates and the conduct of deposit auctions to mop up liquidity. Treasury bill and bond auctions were introduced in January 2015 and September 2016 respectively. This has facilitated market-driven interest-rate determination and greater participation by commercial banks. The recent decision to allow purchase of government securities by foreign banks will further promote the development of the Treasury bond market. Myanmar is also in the process of developing its interbank market. Since April 2016, the authorities have allowed banks to engage in bilateral interbank lending and interbank market deposit to support the development of the banking sector and liquidity management. To improve the monetary policy framework, the CBM is trying to develop the repo market to improve the functioning of money markets and distribution of liquidity among banks. Plans are underway to gradually liberalize the interest rate, which would help strengthen monetary policy transmission.
17. The authorities concur with staff’s recommendations in various areas regarding the monetary sector. The authorities recognize that greater exchange rate flexibility and phasing out of CBM fiscal deficit financing will strengthen monetary policy independence and effectiveness. The authorities remain committed to reducing CBM deficit financing in a gradual manner. In line with staff’s recommendation, the authorities for the first time introduced a limit on the central bank deficit financing to 40 percent of domestic financing in FY2016/17. Although the limit was not met, the proportion of domestic financing has declined significantly. The limit will be further reduced to 30 percent of domestic financing for FY2017/2018 and fully eliminated in 2020. The gradual approach is to ensure the potential increase in cost to the budget and any unintended crowding out effects on private sector credit flows are manageable.
18. Since April 2012, Myanmar has abandoned the fixed exchange rate regime (pegged to the SDR) in favor of a managed floating exchange rate regime. In the initial stage of transition, the daily reference rate for the US Dollar was determined through foreign currency auctions. However, there was limited market participation in foreign currency auctions, due to the under-developed market. The government has taken various steps to reduce the divergence between the official reference rate and market rate. The current foreign currency pricing mechanism has brought the reference rate closer to the informal market. At the same time, a prohibition on trading outside the FX trading band has been lifted. Moving forward, the authorities intend to formally introduce the new exchange rate mechanism but remain cautious regarding the potential rate manipulation.
19. The authorities have made considerable progress in improving the regulatory environment to strengthen financial stability. This includes enacting new laws and regulations, upgrading prudential regulations, revising the supervisory framework, and developing supervisory techniques in line with international standards. Several laws have been enacted, namely, the new Foreign Exchange Management Law (August 2012), the new Central Bank of Myanmar Law (July 2013), the Securities Exchange Law (July 2013), Anti-Money Laundering Law (April 2014) and the Financial Institutions Law (2016).
20. In the past year, the CBM has stepped-up efforts to strengthen regulation and supervision of financial institutions including to address the authorities’ concerns regarding the true picture of bank’s asset quality and profitability. In July 2017, to implement the Financial Institutions Law, the CBM issued four important prudential regulations, namely, Asset Classification and Provisioning Regulations, Large Exposure Regulations, Liquidity Ratio Requirement Regulations and Capital Adequacy Regulations. The CBM is currently reviewing individual banks’ measures to comply with regulations and active industry consultations are on-going to obtain feedback and address implementation issues. Based on industry feedback, a further directive that allows for the restructuring of viable overdrafts to term loans of up to three years was issued in November 2017. The CBM is working closely with the banks to shore up capital levels to meet the prudential requirement.
21. The authorities remain committed to improving financial regulation and supervision and are grateful for the technical assistance provided by the Fund and World Bank on the banking sector plan and look forward to its implementation. The authorities fully recognize that more needs to be done to further strengthen financial stability; however, they underscore the need for appropriate sequencing of reforms commensurate with economic development and the CBM’s capacity to regulate and supervise the financial sector.
22. Efforts are on-going to promote a more inclusive financial system, including enhancing access to banking services and microfinance. The Mobile Banking Regulation and Mobile Financial Services Regulation issued in 2013 and 2016 have helped expand participation of financial service providers in the mobile payment network. The regulation on the Credit Information Reporting System issued in March 2017 provides a basis for the establishment of a Credit Bureau in Myanmar. The payment and settlement system has been further enhanced with the establishment of the CBM Net system. In addition, to improve the payment and settlement mechanism, the Real Time Gross Settlement System (RTGS) and Mechanized Clearing House (MCH) were implemented in January 2016.
23. Important milestones have also been made in the AML/CFT area. The Anti-Money Laundering Law were enacted in 2014 and its accompanying regulations were issued in 2015. To help enhance compliance by banks and financial institutions, CBM has issued a Risk Management Guidance Note and an updated risk based Customer Due Diligence Directive in 2015. FATF removed Myanmar from the list of countries under ICRG process in June 2016.
24. The authorities remain committed to preserving macroeconomic and financial stability, promoting sustainable and inclusive growth and implementing appropriate reform measures. At the same time, given capacity constraints, the authorities are mindful of challenges in implementing reform measures on many fronts. Our authorities acknowledge that the pace of institutional capacity building needs to be enhanced to help smooth the reform process and ensure that the current growth momentum is sustainable. In this regard, the authorities recognize the instrumental role international financial institutions and countries in the region have played in helping to strengthen Myanmar’s capacity building. Therefore, our authorities would like to express their sincere gratitude to the Fund, the World Bank, the Asian Development Bank and countries in the region for their support and policy advice over the years and look forward for their continuous support as the country moves forward with its economic reform program.
The fiscal year (FY) starts on April 1 and ends on March 31