Adverse Effects of COVID-19 and disruptions to the economy

Following the moderation of the infection rate under the initial outbreak of COVID-19 in early March, Myanmar has been hit by a more severe second wave which has led to a resurgence in the number of infected patients since end-August. Since the outset of the pandemic, the authorities established a National-Level Central Committee to facilitate swift treatments of the infected people and imposed necessary measures to stem the spread of the virus. However, the second wave of the pandemic has caused the caseload to accumulate over tenfold since end-August, with 126,345 reported positive cases and 2,728 fatalities as of early January 2021.

The authorities have given priority to containing the pandemic and protecting lives and livelihoods through several measures. The government has expanded the measures to tackle second wave transmission by issuing stay-at-home orders, closing of schools, transport and hospitality services, and firms as well as imposing restrictions on international travel and factories. As a result, business closures and unemployment have significantly risen, and the poverty gap has widened sharply. To support the affected sectors and vulnerable groups, the authorities have launched relief measures comprising of cash and in-kind transfers, pandemic prevention, control and treatment activities all together amounting to 1.9 percent of GDP in FY 2019/20. Given the weak economic environment and pandemic-related disruptions in the economy, Myanmar’s fiscal deficit is expected to widen significantly.

Fund’s assistance and the authorities’ measures to tackle the pandemic

The first RCF/RFI disbursement facilitated financial support to vulnerable households to a large extent, while the authorities were focusing on cash and in-kind transfers. The first disbursement under the RCF/RFI arrangement helped finance COVID-19 related expenditures and thereby avoided a larger fiscal gap and resorting to non-concessional financing while limiting financing from the CBM. In addition, the authorities launched the COVID-19 Economic Relief Plan (CERP) in April 2020 to provide cash and in-kind transfers to the most vulnerable and affected households, including internally displaced persons. As of November 2020, total cash and in-kind transfers of about 500 billion kyat (around US$375 million) have been provided to affected households. Going forward, the authorities envisage to continue larger scale transfers to deal with rising poverty posed by the COVID-19 crisis.

The authorities expressed their strong commitments to implement economic relief measures in line with the Fund’s suggestions while putting large emphasis on vulnerable groups. They have been drafting the Myanmar Economic Resilience and Reform Plan (MERRP) since the early FY 2020/21 to enhance the implementation of the CERP. Under the MERRP, relief measures such as additional tax and utility deferrals, soft loans and cash transfers to affected sectors and households, and macroeconomic and financial stability measures will be introduced.

Economic Performance and Outlook

Myanmar’s economy was affected largely by the pandemic in FY 2019/20, and the second wave of the outbreak is impeding the economic recovery in FY 2020/21. Myanmar’s economic growth for FY 2019/20 is estimated at 3.2 percent, a significant decline from 6.8 percent in FY 2018/19. In FY 2020/21, the adverse impacts of the second wave during the first quarter is expected to contribute to the decline in the annual GDP growth to 0.5 percent, despite the gradual lifting of restrictions in the end of 2020 and commencing the vaccination program in early February 2021 to support economic recovery.

While near term economic stability has improved, the outlook on external stability poses increasing risk. Inflation fell to 2 percent year-on-year in September from 9.1 percent in March owing to lower food and fuel prices. Nevertheless, inflation is projected to rise gradually to 5.4 percent by the end of FY 2020/21 due to the rebound in economic activities as the economy reopens and increasing food and fuel prices. The current account deficit declined to 3.5 percent of GDP in FY 2019/20 from a previous estimate of 4.0 percent, reflecting lower than expected imports and higher personal remittances. International reserves, although still below the desired level, improved to 4.7 months of imports in FY 2019/20 from 4 months of imports in the previous year, and is expected remain at this level in the near term unless additional financing is secured. Accordingly, the prospect of external stability is projected to weaken going forward, reflected in the expected widening of the current account deficit to 4.4 percent of GDP in FY 2020/21. The weak external demand and disruption in production of export manufacturing companies are expected to weigh on exports while imports are projected to rise on the back of higher COVID-19 related imports.

The fiscal position for FY 2019/20 has been favorable but it is expected to deteriorate in FY 2020/21 due to higher pandemic-related spending and lower revenue. In FY 2019/20, higher than anticipated tax collections and stronger gas revenues helped to maintain the fiscal deficit at 4.7 percent of GDP. However, the containment measures and the economic support package as well as a weaker economic outturn are expected to result in the widening of the fiscal deficit to 6 percent of GDP, creating a fiscal financing gap amounting to 1.1 percent of GDP (US$1 billion) in FY 2020/21.

Risks are tilted to the downside. The authorities realize the staff’s assessment of the risk to the economy. The prolonged pandemic together with the global economic downturn and lower foreign exchange inflows can further constrain economic growth. In addition to domestic economic disruptions, the external sector is expected to worsen owing to subdued external demand and global supply chain disruptions, and lower remittance and FDI inflows into the economy. Moreover, the protracted and severe second wave of the COVID-19 crisis may generate scarring affects that would adversely affect livelihoods and hamper potential growth in the longer term. As these drawbacks exacerbate the existing inefficiencies of a low-income developing economy, Myanmar’s economic growth could decline by an additional 3.5 percentage points in FY 2020/21 according to the downside scenario.

The Myanmar Government has requested additional Fund assistance under the RCF and RFI amounting to SDR 258.4 million (50 percent of quota) to partially close the current account and fiscal financing gaps. The authorities are committed to using these funds to partly support the temporary increase in the government spending and current account deficits in FY 2020/21. They also commit to implement a comprehensive set of measures to strengthen healthcare, protect the socio-economic well-being of those affected by the pandemic, reduce scarring affects and support a steady recovery once the pandemic subsides. The additional Fund support will also help limit monetization, hence mitigate rising inflationary and external pressures. Moreover, the Fund financing will help catalyze further concessional financing from other multilateral and bilateral development partners, including the World Bank, Asian Development Bank and Japan International Cooperation Agency.

The authorities continue to request the extended debt service suspension from 14 creditors, including members of the G20 and the Paris Club under the Debt Service Suspension Initiative (DSSI). As the estimated savings under the DSSI in FY 2019/20 amounted to US$114 million, the authorities have extended requests to sign debt suspension agreements with Paris Club creditors as well as individual creditors. As of December 2020, the bilateral agreement with four Paris Club creditors have been signed and negotiations with four other creditors are underway.

Policy implementations of the authorities

The Myanmar authorities have been focusing their near-term fiscal spending on the pandemic relief and will shift to gradual fiscal consolidation when the crisis abates. Given the severe economic impact of the second wave of the pandemic, the authorities implemented crisis mitigating measures such as tax exemptions, expansion of social and health care services and direct support to households and businesses. Furthermore, the existing Maternity and Child Cash Transfer (MCCT) program has been expanded since June to cover most vulnerable groups and concentrate on people from disadvantaged and conflict regions. The additional public spending on the pandemic relief measures is estimated to rise to 2.3 percent of GDP in FY 2020/21. The authorities also applied to access COVID-19 vaccines through the COVAX Advance Market Commitment and are in discussion with development partners to seek support for the purchase of the vaccine for the Myanmar population. The purchase contract for the first batch of the vaccines from India has already been signed.

The authorities commit to promote efficient allocation of scare resources and good governance on the use of public funds. To ensure the efficacy of fiscal expenditures and limit CBM financing to around 5 percent of the previous year’s reserve money and 20 percent of total financing in FY 2020/21, the authorities have introduced various safeguard measures to preserve efficient resource allocation and strengthen the governance framework. This includes improving business protocol such as accounting, monitoring and reporting of the pandemic related expenditures, and enhancing disclosure and audit procedure for COVID-19 related spending. They also plan to establish a Steering Committee with the development partners to closely monitor and effectively manage the recovery financing.

Various measures to strengthen public finance will be introduced to improve fiscal prudence going forward. The authorities plan to develop a cash planning model and Treasury Single Account-lite, framework for analyzing, monitoring and reporting of fiscal risks as well as enhance the well-sequenced tax and Public Finance Management (PFM) reforms.

The authorities commit to maintain public debt sustainability. Notwithstanding the total public debt accumulating due to the pandemic-related spending, Myanmar maintains public debt sustainability with a low overall risk of debt distress. The December 2020 DSA showed that Myanmar has adequate capacity to repay the Fund as peak liabilities to the Fund will account for 0.9 percent of GDP or 8.7 percent of gross international reserves. The authorities commit to pursue prudent fiscal policy and steadfast fiscal reforms to gradually bring down the fiscal deficit, preserve public debt sustainability and ensure that the CBM financing will be limited to below 5 percent of the previous year’s reserve money and to be gradually phased out when the situation permits.

On the monetary front, CBM will maintain an accommodative monetary policy stance to support economic performance while strengthening its monetary operations. In pursuing the monetary easing stance, the CBM agrees on the need to closely monitor inflationary pressures as the inflation outlook is subject to large uncertainties, especially those related to the pandemic and its implications on economic activities. They also agree to allow exchange rate flexibility to continue its role as a shock absorber and commit to rules- based FX intervention introduced in early FY 2019/20 to facilitate building adequate international reserves. The authorities will continue to enhance monetary operations, including the use of credit auctions and repos and the introduction of interest on excess reserves, with technical assistance from the IMF. The authorities also commit to improve public cash management and reduce reliance on monetary financing through enhancing the coordination between MOPFI and CBM.

Financial sector stability is regarded as a top priority. The authorities commit to strengthen financial sector stability and accelerate preparation of contingency plans for managing banking sector stress. The prolonged COVID-19 crisis could raise credit risks in the banking sector, hence the CBM has strengthened the commercial banks’ recapitalization measures by closely monitoring the progress of the commercial banks’ recapitalization plan. They have been assessing banks’ compliance with prudential benchmarks on a quarterly basis and have identified legacy NPLs with technical assistance from the Fund. In 2020, some of these commercial banks managed to recapitalize and thereby fulfilled CBM’s capital requirements. The authorities also commit to continue the ongoing process of restructuring state banks under the World Bank’s assistance. Moreover, with the Fund technical assistance, the CBM has agreed to conduct asset quality and solvency assessment on the commercial banks with high NPLs and plans to introduce enhanced measures to safeguard financial stability.

The authorities continue the ongoing structural reform agenda under the Myanmar Sustainable Development Plan (MSDP). As this long-term development plan aims at improving the business climate, the steadfast implementation of structural policy reforms is critical to advance progress towards inclusive and private sector led growth. The authorities have also introduced various measures to facilitate trade and investment, including the reduction of customs duties, streamlining bureaucratic procedures, and launching online platform and virtual marketplace for domestic and international trade. Moreover, the authorities have scaled up current structural reforms in governance, anti-corruption, and the AML/CFT framework. They also introduced a time bound remedial Action Plan, in response to Myanmar being included on the FATF Grey list. This entails the development of risk assessment tools for banks, new regulations for banks and non-bank financial institutions, and AML/CFT trainings. In addition, remittance business licenses are granted to non-bank companies to monitor and conduct personal and family remittance transactions in accordance with the AML/CFT legal framework and requirements.

Conclusion

The Myanmar authorities have reaffirmed commitment to preserving macroeconomic and financial stability and endorsed advancing reforms towards sustainable and inclusive growth. Given that the prolonged COVID-19 pandemic results in additional challenges to the reform progress, the second disbursement through the RCF and RFI arrangement will support the economy in its development path. Moreover, the Fund arrangements will catalyze further financing support from donors and creditors and are instrumental to the authorities’ effort to mitigate the impact of COVID-19 and sustain the growth momentum, while preserving policy buffers. The authorities are deeply grateful for the Fund’s continued support in these difficult times.