Recent Economic Developments and Outlook

Myanmar is expected to record GDP growth of 6.8 percent in FY2018/19. This is mainly driven by a rebound in the agricultural sector from the floods in 2018 which would partly offset the slowdown in domestic demand. Headline inflation spiked in the second half of 2019 largely due to supply-side factors namely the one-off hike in electricity tariffs that took effect on July 1, 2019 and increase in food prices from poor harvest. For FY2019/2020, the authorities project a GDP growth of 7.0 percent supported by higher government spending and private investment, as well as continued strength in the manufacturing including MSMEs (Micro, small, and medium-sized enterprises) and garments, and the tourism sectors. The current account (CA) deficit is expected to widen to 2.0 percent of GDP arising from the pickup in investments following the resumption of FDI inflows and increased government spending ahead of the elections. Meanwhile, headline inflation is expected to average 8.8 percent.

The authorities agree with staff’s assessment of the key challenges facing the Myanmar economy and the need to step up structural reform implementation. While external headwinds remain at large, domestic risks warrant close attention. Authorities are vigilant of the risks in the banking sector and are committed to follow through with the ongoing financial sector reforms and strengthen the supervisory framework to avoid negative spillovers to the broader economy. Steadfast implementation of reforms to strengthen domestic institutions and lay down necessary infrastructure are critical to underpin macroeconomic stability, foster sound business climate, and capitalize on the country’s endowment to improve longer-term prospects.

Fiscal policy

Fiscal policy is expected to remain expansionary to support growth amidst waning domestic demand. Fiscal deficit was 3.5 percent of GDP in FY2018/19. This provided a modest stimulus as intended but were slightly smaller than the budget estimate of 4.5 percent and revised estimate of 5 percent in FY2018/19 with lower-than-expected capital expenditure due to constraints in spending execution. The FY2019/20 budget envisions a higher fiscal deficit of 5.6 percent of GDP, where higher revenues from the recent electricity tariff hike and new tax amnesty measures would accommodate increased spending on infrastructure investment and social spending.

The authorities remain committed to phase out CBM financing. CBM financing was largely non-existent during the six months transition period (April-September 2018)¹ as borrowing through government bonds and bills were sufficient to finance the interim budget. In FY2018/19, CBM financing accounts for approximately 21 percent of domestic financing, and is below the statutory limit of MMK 1 trillion. The authorities see merit in staff’s recommendation to target CBM financing as a share of reserve money so as to have a more direct handle on inflation but noted that the proposed target of 1 percent of reserve money may restrain needed spending. Nevertheless, they concur that CBM financing should be reduced further and agreed on the need to strengthen liquidity forecasting capabilities and cash management for more effective and better-planned treasury issuance to lessen reliance on CBM financing going forward.

The authorities will continue to work with the Fund and other development partners to advance ongoing fiscal reforms to build up fiscal buffer and ensure longer-term fiscal sustainability. The new Income Tax Law (ITL) will introduce a new rate structure and rationalize tax incentives for corporates, under the goal of strengthening the tax base with minimal impact on the broader population. The draft new ITL has completed the public consultation stage and is being submitted to the Union Attorney General’s Office for their legal opinions. The authorities plan to table the draft new ITL to the Cabinet in June-July 2020 before it is proposed to the Parliament for approval. The ITL will complement progress made so far to improve tax administration by the Internal Revenue Department (IRD)’s tax administration capacity, including the new Tax Administration Law and upgraded computer systems.

On the expenditure side, the second phase of PFM reforms is underway and focuses on enhancing governance of State Economic Enterprises (SEE). The “Project Bank” has recently been operationalized. The Project Bank is a database of projects created to strengthen implementation of infrastructure investments by providing government agencies with better visibility and facilitating selection of projects and financing options. The PPP center has also been setup as a centralized body that would provide technical support for the PPP units of line ministries, conduct value-for-money assessments, and proposing PPP projects to the PPP Committee. Nevertheless, it is still early days for both the Project Bank and the PPP center. To effectively perform their intended functions, the former will require greater awareness and training for the users, while the latter needs to address its lack of personnel and continue working with the World Bank to build capacity.

Monetary and exchange rate policies

CBM will maintain a tight monetary policy stance with a focus on managing excess liquidity and ensuring external stability in order to anchor inflation expectations. CBM’s current priority is improving its monetary policy operations by introducing an interest rate corridor to better guide short-term interest rates and improve monetary policy effectiveness. They are contemplating the introduction of interest on excess reserves (IOER), noting the importance of having a safeguard in place given significantly large excess reserves of some state-owned banks. CBM recognize the drawbacks of existing limits on deposit and lending rates and agree with the need to work on the appropriate policy to gradually liberalize interest rates. That said, an adjustment to the minimum deposit rates and maximum lending rates must consider the potential impact on well-being of depositors and be communicated with care.

On exchange rates, the asymmetric intervention strategy and rule-based one-way FX auction implemented since November 2019 has been an effective tool in smoothing exchange rate movements and accumulating reserves. This helped curb exchange rate volatility amidst recent appreciation pressure and build up international reserves which now covers 3.5 months of imports. The spread between the reference and informal market rates narrowed, and interbank FX transactions have increased markedly, paving way towards a deeper and more liquid FX market. The CBM is committed to the established FX auction rules and plans to increase transparency of the rules as the FX market becomes more developed.

Financial sector

The CBM is working closely with the banking sector to ensure that they are on track to meeting CBM prudential regulations (2017) by the August 2020 deadline. To date, most of the domestic banks have met the CAR requirements. The CBM will continue to oversee the recapitalization process closely. Actions taken by banks include cash contributions, fixed asset revaluation, reduction on related party loans, subordinated debt issuance, and temporary suspension of dividend payments. Efforts to convert overdraft loans to term loans is also progressing as planned. The share of overdraft loans has been declining and was within the 30 percent target for 2019. Most banks are on-track towards meeting the 20 percent target for 2020. The authorities currently do not plan to reduce the target further at least in the near term, viewing that the 20 percent cap would provide the needed flexibility given that overdrafts are used for working capital purposes. NPLs started to come down from recent efforts to step up debt collection through a debt-property swap arrangement. As most collateral from such arrangement are land and building, the authorities are cognizant of the risks associated with banks’ increased exposure to the property market and will consider staff’s recommendation on how to address such exposures.

Despite recent progress in the banking sector reforms, risks to Myanmar’s financial stability remains. The authorities will continue to be vigilant and monitor risk developments closely and concur that further efforts are needed to effectively address the growing vulnerabilities. They broadly agree with the key priorities outlined in paragraph 17 of the Staff Report and will continue to work closely with the team in developing the necessary safeguards and contingency plans.

Structural reforms

The various policy and reforms underway across the different sectors will contribute to an improved investment climate, which is critical to realizing the MSDP’s goal of more inclusive and private sector led growth.

The authorities are making headway in their efforts to fight corruption. The fourth amendment to the Anti-Corruption Law (2018) tightened anti-corruption rules and created greater public trust. As a result, the number of complaints filed, investigations and prosecutions, and disciplinary actions (e.g. suspension of pay increase, demotions, etc.) have also increased significantly in the past 3 years. The progress made on this front will be supplemented by the new anti-corruption rules. In 2019, Corruption Prevention Units have been established in the different ministries to detect and resolve corruption issues.

The authorities agree with staff on the need to address deficiencies in the AML/CFT framework highlighted in the peer-review by the Asia Pacific Group (APG). The authorities have made a number of progress in addressing recommendations from the Mutual Evaluation Report in October 2018. These include (1) the completion and publication of the first National Risk Assessment Report as well as AML/CFT National Strategy;(2) the President Office order requiring all reporting organizations to comply with provisions related to CDD, EDD, BO, PEP related matters; (3) CBM’s revised Customer Due Diligence Directive for banks and non-banks financial institutions to conduct customer due diligences measures and ML/TF risk management; (4) the new remittance business regulation to formalize informal money/value-transfer services such as “hundi”; and (5) conducting on-site and off-site AML/CFT supervision on large- and medium-sized banks. As a result, the APG’s First Follow-up Report (2019) upgraded two recommendations from partially compliant and compliance to largely compliant, and one recommendation from non-compliant to largely compliant. To date, 6 and 12 recommendations are rated compliant and largely compliant, respectively.

The new AML/CFT law is in the works and will the strengthen role of the Myanmar Financial Intelligence Unit (FIU) in investigating and prosecuting money laundering cases. The draft bill is being prepared for submission to the Parliament soon.

Conclusion

The Myanmar authorities remain fully committed to preserving macroeconomic and financial stability and promoting sustainable and inclusive growth. Given the nascent stage of improving the policy framework and institutions and limited capacity, assistance from development partners are essential to realize the reform objectives while also sustaining the growth momentum in a more challenging global economic environment. The authorities would like to reiterate their sincere gratitude to the Fund, the World Bank, the Asian Development Bank, and bilateral partners for their continuing support as the country moves forward with the reform agenda.