IMF Executive Board Concludes 2011 Article IV Consultation with MyanmarPublic Information Notice (PIN) No. 12/44
May 7, 2012
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with Myanmar is also available.
On March 19, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Myanmar.1
Against the background of economic and political reform momentum, growth is picking up modestly. Real GDP growth is estimated to have increased to 5.3 percent in FY2010/11 (April-March) helped by fiscal spending in the election year and buoyant commodity exports. Growth is projected at 5½ percent in FY2011/12 and is expected to increase to 6 percent in FY2012/13, driven by commodity exports and higher investment, supported by improved business confidence. CPI inflation, at 6.4 percent (year-on-year) in October 2011, is projected to decline to 4.2 percent in FY2011/12 from 8.9 percent in FY2010/11, mainly due to lower food prices and less deficit monetization. Inflation is expected to pick up in FY2012/13 to 5.8 percent as the recent drop in food prices phases out.
The parallel market exchange rate of the kyat has appreciated by 29 percent in nominal effective terms since end-FY2009/10, primarily due to large inflows, which cannot find an outlet due to the ‘export-first’ policy that restricts private imports to the availability of private export earnings.
Risks to this outlook are balanced. On the downside, a drop in regional demand could negatively affect exports, although Myanmar remains largely insulated from the developments in advanced economies due to sanctions. However, a sustained appreciation of the currency could further erode external competitiveness and constrain household incomes. On the upside, the recent easing of foreign direct investment (FDI) restrictions on private land use and repatriation of profits, further increase in credit, and continued progress toward exchange rate unification could bolster growth.
The new government of Myanmar has embarked on a series of economic reforms beginning with the exchange rate regime. The economy has been burdened with complex exchange restrictions that give rise to multiple currency practices in informal but tolerated markets.
As a first step toward unification of multiple exchange rates, the authorities plan to adopt a managed float as their new exchange rate regime and end the official peg to the SDR that has been used primarily in public sector operations since 1977. They are taking steps to establish the necessary market infrastructure, including by establishing an interbank market and foreign currency operations at the Central Bank of Myanmar (CBM). To address immediate appreciation pressures, the authorities have recently eased some of the exchange restrictions by allowing foreign currency purchases for car imports under a special program, and health and travel expenses abroad. They have also temporarily reduced taxes on key agricultural exports to address declining external competitiveness.
The new government’s first budget targets a smaller deficit, notwithstanding a planned increase in much needed social spending. The consolidated nonfinancial public sector deficit is projected to decline from 5½ percent of GDP in FY2011/12 to 4.6 percent of GDP in FY2012/13. This is primarily due to higher net transfers from state economic enterprises (SEEs), primarily from gas exports, as the budget, for the first time, would apply market-based exchange rates for SEEs’ exports and imports. Spending on education and health is expected to increase to 7½ percent of total expenditures, up from 5.4 percent. The CBM cut the administratively-set interest rates by a cumulative four percentage points since September 2011, the first cuts since 2007. They have also revised the fixed interest rate structure to provide financial incentives for banks to hold treasury bonds, and as a consequence, deficit monetization is projected to decline to about half of the fiscal deficit in FY2011/12.
The external position remains comfortable even though the current account is projected to deteriorate. The current account deficit is projected to widen to 2.7 percent of GDP in FY2011/12, from 0.8 percent of GDP in FY2010/11, as export growth falls short of fast import growth linked to large FDI projects in the energy sector. Gross official reserves rose to US$7.1 billion in September 2011, and are expected to remain comfortable at about 9.4 months of imports in FY2011/12.
Formal financial intermediation remains repressed due to pervasive controls on banks. The authorities relaxed the requirements on deposit taking, expanded the administratively-set collateral list, eased controls on extending branch networks, and allowed some flexibility in setting the deposit rates as part of the recent interest rate cuts. As a result private sector credit growth has accelerated, albeit from a very low base.
The authorities have also taken some steps to promote rural growth and increase competition. Harvest loans to farmers have been doubled, FDI rules have been relaxed, and imports of gasoline and palm oil have been liberalized.
Executive Board Assessment
Executive Directors noted the considerable economic potential of Myanmar, and welcomed the authorities’ renewed commitment to address the country’s development challenges through far reaching reforms. Improved policy frameworks and a carefully sequenced implementation of reforms remain key to the success of the authorities’ strategy.
Directors concurred that reforming the exchange rate system is the top priority, and saw the planned adoption of a managed float as the first step toward exchange rate unification. They agreed that further steps are urgently needed to establish the necessary market infrastructure and move away from the present inefficient system for allocating foreign exchange. In this context, Directors encouraged the authorities to remove remaining exchange restrictions and eliminate multiple currency practices as soon as circumstances permit.
Directors viewed the current stance of monetary policy as broadly appropriate. They welcomed the authorities’ plans to grant the Central Bank of Myanmar operational autonomy to pursue domestic price stability, and recommended transferring to it all central banking functions. Directors welcomed progress in reducing deficit monetization, but considered that more needs to be done. They encouraged the authorities to expand retail sales of government securities and lift restrictions on their holdings by state-owned financial institutions, pending the establishment of treasury bond auctions.
Directors welcomed plans to reduce the fiscal deficit while increasing social spending. They agreed that a broadly balanced budget for the central government is an appropriate medium-term target. Over time, growing revenues from natural resources and improved tax structures will provide the resources to finance needed social spending and infrastructure. Directors also agreed that strengthening public financial management is necessary to support the reorientation of monetary policy and minimize fiscal risks, including those associated with fiscal decentralization and the adoption of the managed float. Directors welcomed the authorities’ efforts to reconcile some external arrears, and encouraged them to extend these efforts to all creditors with a view to eventually clear the arrears.
Directors stressed that modernizing the financial system is essential to promote growth. They welcomed the steps already taken to ease administrative controls on banks, and called for further liberalization of bank operations and interest rates. Directors underscored that financial reforms must be complemented by strengthened supervision and regulation.
Directors noted that broad-based sustainable growth and poverty reduction require structural reforms to remove barriers to trade and foreign investment, enhance the business climate, and improve agricultural productivity. Strengthening the statistical base is also crucial for policy evaluation and design and should remain an important objective for policymakers. Underscoring Myanmar’s significant needs for further capacity building, Directors welcomed the increased involvement of International Financial Institutions (IFIs) and other donors in providing technical assistance in a variety of areas, and stressed the importance of coordination among the providers to avoid duplication of efforts or inefficient delivery.