1. On behalf of the Myanmar authorities, we thank staff and management for the Fund’s active engagement with Myanmar, including the constructive policy discussions that took place in Yangon and Nay Pyi Taw from October 14 to 28, 2016.
The staff report reflects a good account of these discussions. The authorities appreciate staffs policy advice to address macroeconomic imbalances, including keeping the fiscal deficit in check, tightening monetary policy in light of growing inflationary pressures, allowing greater exchange rate flexibility, strengthening financial sector stability, and accelerating structural reforms to lay the foundation for more resilient and inclusive growth. The authorities broadly concur with the assessment and would take the recommendations into consideration in formulating future policies.
Recent Economic Developments and Outlook
2. After experiencing a rapid expansion of 7.3 percent in FY12015/16, economic activity softened in the first half of FY2016/17 due to weak external demand, low commodity prices and sluggish growth in the construction and investment sectors. Nevertheless, economic activity is expected to pick-up over the remainder of FY2016/17 and into FY2017/18 against the backdrop of the new government’s policies that are expected to boost investor confidence. Under the National Development Strategy, medium-term growth is projected to average 8.2 percent annually in the next 5 years, underpinned by improved macroeconomic management, increased natural gas production and exports, and stronger performance in the non-gas sectors as the economy opens up to foreign investment.
3. Inflation declined to 6.3 percent in August and is projected to average at 7 percent in FY2016/17 primarily on account of money supply growth. The current account deficit widened to 5.2 percent of GDP in FY2015/16 as a result of lower natural gas exports and continued strong import growth. The Central Bank of Myanmar’s (CBM) foreign reserves was lower by about US$290 million due mainly to a decline in FDI inflows amidst uncertainty during the political transition. The Kyat depreciated by about 17 percent against the U.S. dollar in nominal terms over the course of the fiscal year, but appreciated in real effective terms on account of high inflation.
4. The authorities consider the risks to growth to be more balanced. In particular, as uncertainties associated with the political transition subside and the new government’s policies to promote private investment start to bear fruit, upside risks to growth could materialize. On the external front, uncertainty over commodity prices and the rebalancing of the Chinese economy continue to pose downside risks to growth. Weak natural gas prices are weighing on export and government revenues while natural disasters remain a significant risk to the economy, as demonstrated by the massive floods in 2015 and the earthquake earlier in 2016. The authorities remain vigilant of the downside risks and will continue to undertake measures and reforms to enhance macro-financial stability and ensure economic resilience.
5. After a sharp increase in the fiscal deficit to 4.1 percent of GDP in FY2015/16, the authorities plan to maintain the deficit at around 4.5 percent of GDP over the medium term, which in staff view would be consistent with keeping Myanmar at low risk of debt distress while providing fiscal space to respond to shocks (including from frequent natural disasters) and meeting the large development needs.
6. Keeping the deficit in check is essential to maintain long-term debt sustainability and anchor inflation and exchange rate expectations. Therefore, Myanmar remains committed to the implementation of fiscal reforms, particularly tax and custom administration and tax policy reforms aimed at strengthening domestic revenue mobilization. Notable progress has been made on improving revenue administration, including the establishment of the large taxpayer office. The authorities are working closely with the Fund and other development partners to continue deepening the fiscal reforms, including by moving to Phase II of the revenue reform agenda. They also recognize the need to ensure consistency and clarity of tax legislation and to pass the Tax Administration Procedure Law, which is currently in drafting stage, in order to provide a stable and transparent legal basis for tax collection.
7. On expenditure management, the authorities will continue to prioritize expenditure on critical infrastructure and social services while improving efficiency, and containing fiscal risks -especially those emerging from State Economic Enterprises (SEEs), State-owned Banks (SOBs) and public-private partnerships (PPPs). Thus, they are developing the groundwork for the Public Financial Management Law while updating the Financial Rules and Regulations in the near term. The authorities, with the assistance of development partners, are also in the process of formulating reform strategies to improve SEE performance.
8. The authorities have agreed to switch to the GFS2 definition of fiscal deficit as soon as practicable, which would increase transparency and boost confidence of the business community and development partners in the government’s public financial management.
9. While public debt remains sustainable with the debt sustainability analysis showing a low risk of debt distress, the authorities are determined to continue improving the medium-term fiscal framework, particularly by developing a medium-term debt management strategy.
Monetary and Exchange Rate Policy
10. Myanmar has made important improvements to the monetary policy framework and managed float exchange rate system in the last several years. These reforms include the realignment of the reference rate with parallel market exchange rates in 2015, the conduct of deposit auctions to mop up liquidity and the introduction of treasury bill (T-Bill) auctions. The deposit auction, which was introduced in September 2012, facilitated market-driven interest rate determination and more terms of deposits with greater participation by commercial banks and greater flexibility for the CBM to target specific types of banks in the deposit auctions. In addition, the reserve requirements for banks, introduced in April 2015, have been fully complied with since October 2016.
11. The CBM continues to tighten monetary conditions to prevent further increases in macroeconomic imbalances and welcome staff’s recommendation to consider adopting a medium-term inflation objective of around 5 percent to anchor inflation expectations and guide its reserve money targeting.
12. A key measure to control inflation is the phasing out of central bank financing of the fiscal deficit. For the first time, the authorities will limit the central bank deficit financing to 40 percent of domestic financing in FY2016/17. This limit will be reduced gradually over the medium term to ensure the potential increase in cost to the budget and any unintended crowding out effects on private sector credit flows are manageable.
13. To facilitate the phasing out of central bank deficit financing, T-bill and Treasury Bond (T-bond) auctions were introduced in January 2015 and September 2016 respectively. Progress has been made with the T-bill auctions with market-determined interest rates and extended T-bill maturities. Foreign banks have been allowed to purchase government securities, which will also help to promote the development of the market.
14. Myanmar maintains and remains committed to a managed float exchange rate regime. Kyat depreciated by 17% against the USD between mid-2015 to end-Nov 2016, which is substantial and underscores that the exchange rate is flexible. In managing the exchange rate, the authorities need to strike a careful balance - excessive depreciation will further exacerbate inflation and could also affect confidence. Rather, the appreciation of real exchange rate is due to high inflation and thus, the measures by the CBM to tighten monetary conditions and reduce CBM financing of fiscal deficit. At the same time, the authorities agree that a more flexible reference rate setting mechanism is needed. In this context, the authorities agree on the options presented by staff in setting the reference rate, and requested Fund TA to study possible realignment between the auction rate and parallel market rate based on market transactions as advised by staff.
15. Notable progress has been achieved in strengthening financial stability. The Financial Institutions Law (FIL) has been enacted and bank regulation and supervision has been strengthened, including major advances made in full scope bank examinations, issuance of Mobile Financial Services Regulation and publication of IMF financial soundness indicators.
16. However, in view of the rapid credit growth due mainly to the large demand for credit by productive sectors and still-weak capital levels in some banks, the authorities are committed to further strengthening the financial supervision and regulatory framework. The CBM targets to issue and enforce prudential regulations by end-March 2017, as well as enforcing the FIL, completing full-scope examinations of all banks, and requiring banks to have capital and liquidity recovery plans to meet the new regulatory requirements. In this connection, the authorities agree with staff on the need to strengthen the capacity, including by having more human resource at the CBM, to develop plans for bank recovery and resolution to enable the CBM to deal with weak banks using its new FIL powers and to develop lender-of-last-resort capabilities. The authorities’ welcome staff advice to carefully sequence higher lending rates under the FIL, accelerate reforms of SOBs and deepen the money and foreign exchange markets. Myanmar looks forward to further Fund support in the development of the interbank money market and contingency planning for bank recovery and resolution.
17. Achieving resilient and inclusive growth requires continued reforms to the financial sector to improve financial intermediation and inclusion. In this regard, the authorities are implementing measures to expand the branch network of the banking system, encourage microfinance, and roll-out innovations in ATMs, point-of-sale systems and mobile banking. The CBM issued the Mobile Financial Services Regulation in March 2016 which now allows the participation of mobile network operators in mobile money market and mobile payments. In addition, the payment and settlement systems will be further enhanced with the establishment of the CBM Net system.
18. Important steps have been taken to further strengthen the AML/CFT framework with the passage of the Anti-Money Laundering Law and the Counter Terrorism Law, including its accompanying regulations since 2015 as well as a Risk Management Guidance Note and the updated risk based customer due diligence Directive for the compliance of financial institutions. As a result, the FATF removed Myanmar from the list of countries under the ICRG process in June 2016. A National Risk Assessment (NRA) on ML/TF is being conducted with the assistance of the IMF, and the NRA Report is expected to be issued in mid-2017.
Structural Reforms to Achieve Resilient and Inclusive Growth
19. After a smooth political transition in April 2016, the new government’s economic priorities are focused on implementing sound macroeconomic policies, enhancing human capital, developing the essential economic infrastructure as well as the agriculture and industry sectors, and promoting balanced economic development across the states and regions in the country. A significant milestone is the passage of the Investment Law in October 2016 which is a key policy instrument to improve the business environment and promote private sector participation.
20. The authorities’ welcome staff’s recognition of the improvements made to statistics and efforts towards developing capacity. Nevertheless, further attention to the Fund’s recommendations to capacity constraints to improve short-term absorption and long-term sustainability is still required and the authorities are committed to taking appropriate steps to address them.
21. The Myanmar authorities are committed to preserving macroeconomic and financial stability, promoting sustainable and inclusive growth, and stand ready to implement any measures deemed appropriate. The authorities are grateful to the Mission for the productive discussion and valuable assessment and recommendations. The authorities value the Fund continuous support to Myanmar and look forward to strengthening the level of communication and relationship with the Fund in the future.