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Myanmar: Staff Report for the 2015 Article IV Consultation—Supplementary Information

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
September 2015
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1. This supplement provides preliminary information on the impact of the recent floods in Myanmar since the staff report was finalized in early August. Staff’s assessment is that in the short term the fiscal and current account deficits are likely to be higher, and overall growth this year weaker than previously projected, which may warrant a modest adjustment to the timing and pace at which some of the staff’s policy recommendations should be implemented. Paragraph 4 of this supplement forms part of the staff’s assessment of the recent developments, and paragraphs 5 and 6 outline the possible recalibration of some of the policy recommendations in the staff appraisal.

2. Floods triggered by monsoon rains together with Cyclone Komen have caused major casualties and damages since July. As of mid-August, the floods and associated landslides killed 117 people and affected more than 1 million people (Myanmar’s population is estimated to be around 51 million). About 1.4 million acres of farmland are reportedly affected by flooding with about half of the affected totally damaged (around 3 percent of the estimated total sown area), and over 16,000 homes and 3,000 school buildings have been damaged by floods. The authorities are working on preliminary estimates of damages and losses, but it will take some time before an official comprehensive assessment of damages and losses can be completed. Nevertheless, the total damages and losses are expected to be significant. The authorities have requested World Bank assistance to carry out a Post-Disaster Needs Assessment (PDNA).

3. A state of emergency has been declared in the four worst-hit states and regions in the west of the country and the government has appealed for international assistance. Food, shelter, clean water and sanitation are in immediate need. The authorities have set up a National Natural Disaster Management Committee headed by a Vice President. Apart from immediate disaster relief, the government is organizing the distribution of seeds and providing support to the use of farm equipment for replanting. Repair of infrastructure, such as bridges and railroads, is already under way. A number of development partners have provided immediate disaster relief and humanitarian assistance. The World Bank and the Asian Development Bank plan to tap into their emergency assistance facilities, as well as to bring forward disbursement of some of the existing resources allocated for Myanmar, to assist the country’s recovery and reconstruction efforts. The authorities intend to request Fund assistance under the Rapid Credit Facility.

4. While an accurate assessment will require a PDNA, staff expects the floods to add significant short-term pressure on inflation, government spending, and the external position. Some food prices have already experienced a spike, and it is expected that inflation will rise further from already elevated levels. Apart from an increase in spending in the immediate aftermath of the disaster, additional public resources will be needed for recovery and reconstruction through the next fiscal year. The increased spending will contribute to the already rapid growth of imports, and together with the reduced exports of crops, the balance of payments situation is likely to worsen compared with staff’s baseline projections. On the other hand, the impact on the private banking sector is expected to be limited, as commercial banks in Myanmar have limited exposure to the agricultural sector, which appears to have borne the brunt of the disaster impact, although some businesses in urban areas may also have been affected by the floods. State-owned banks will likely be more affected as they are more involved in lending to the agricultural sector –losses here will impact on the fiscal position via a deterioration of the state economic enterprise sector balance.

5. The expected impact of the floods may affect the timing of fiscal consolidation. The authorities should continue to aim for an early phase-out of CBM financing of the fiscal deficit and scale up Treasury bill auctions, but a temporarily larger fiscal deficit in this and next fiscal year, commensurate with the additional resources needed for recovery and reconstruction, should be accommodated. To the extent that at least part of the additional spending needs will be covered by external assistance, the inflationary impact of moderately higher fiscal deficits will be limited, but a more decisive fiscal consolidation may be necessary in the outer years to preserve the fiscal target and debt sustainability. To this end, the authorities should also aim for grants and concessional loans in seeking external assistance. If external assistance falls short of the need, the authorities should consider further reprioritizing expenditure to protect spending targeted at the vulnerable and poor.

6. On the monetary front, some short-term adjustment to the monetary policy stance may be required. The early October target for the full implementation of the recalibrated reserve requirement should be maintained, but the CBM may need to adjust the timing of sterilization operations if pressures on liquidity begin to appear. The CBM’s discount window could also be used to meet temporary increases in liquidity demand. However, the CBM should be prepared to resume tightening the monetary stance through increasing the reserve requirement and scaling up deposit auctions if there are signs of a long-lasting effect of higher food prices on aggregate inflation. Staff continues to advise the authorities to maintain exchange rate flexibility, which would help mitigate the impact of the floods on the external position and facilitate economic recovery.

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