IMF Executive Board Concludes 2013 Article IV Consultation with MyanmarPress Release No. 13/287
August 2, 2013
Recent economic developments have been positive. Growth is estimated to have risen to 6½ percent in fiscal year 2012/13 (April-May), driven by gas production, construction and services while inflation climbed to 4.7 percent in March 2013. The external current account deficit is estimated to have widened to around 4½ percent of GDP in 2012/13, but to have been largely financed by foreign direct investment. The recent depreciation of the kyat is contributing to aligning the exchange rate with longer-term fundamentals, after some apparent overvaluation during 2012. The auction-determined reference exchange rate, which is the rate used by the central bank, and the informal rate have converged. International reserves, some of which are still held by state banks, have increased to US$4.6 billion at end-March, covering 3¾ months of prospective imports. Broad money and private sector credit are growing rapidly. The fiscal deficit in 2012/13 is estimated to have declined to 3¾ percent of GDP, on account of higher tax revenues.
Over the past year, the government has successfully pursued wide-ranging economic reforms, including under their Staff-Monitored Program with the IMF, which is on track. It focuses on maintaining macroeconomic stability throughout the reform process and building the institutions and tools needed for the medium-term. Central elements of the government’s policy program have been the adoption of a managed floating exchange regime, and the establishment of a functioning formal foreign exchange market. The government has also liberalized imports and removed exchange restrictions, and steps to liberalize bank lending have been taken. In 2012/13, budget allocations for health and educations have been increased substantially, and efforts to reform tax policy and strengthen tax administration are underway. Legislation to improve the business climate and boost investment has also been passed.
The economic outlook remains favorable. Growth is expected to accelerate slightly in 2013/14, led by rising gas production and investment, including in the transport and telecommunications sectors, and a recovery in agriculture. Pressures from wage increases and asset prices are building, but inflation is expected to remain contained at around 6½ percent (year-on-year) assisted by global commodity prices which are forecast to decline. International reserves are projected to continue to rise. Financial intermediation is forecast to increase further, with broad money and credit to the economy continuing to expand at double-digit rates. Following a mid-year supplementary allocation, the budget deficit is projected at around 5 percent of GDP. In the medium-term, sustained and inclusive growth of around 7 percent is achievable, provided institutions and policies to manage the economy and supervise the financial system continue to be built. In addition, policies supportive of private sector investment, as well as public spending on infrastructure, health, and education are required. Risks to this outlook stem from limited macroeconomic management capacity, which is being strained by the rapid, broad-based economic transition and emerging domestic price pressures.
Executive Board Assessment
Executive Directors commended the authorities for the impressive progress in liberalizing the economy, which had facilitated development and poverty reduction. They welcomed in particular the advancement toward medium-term macroeconomic stability and institutional development objectives outlined in the government’s economic program. Directors noted, however, that the challenges ahead are daunting, requiring stronger institutions and prudent policies to preserve macroeconomic and financial stability during the economic transformation. Accordingly, they stressed the importance of proceeding with needed reforms in a carefully sequenced manner and at a pace consistent with administrative capabilities.
Directors considered that fiscal policy appropriately balances macroeconomic stability with development objectives. They supported plans to reorient expenditures toward health, education, and infrastructure, taking due regard to implementation and absorptive capacity, as well as the need to maintain debt sustainability following the recent rescheduling of external arrears. Directors encouraged the authorities to reduce the monetization of the fiscal deficit further, and to develop a medium-term fiscal framework aimed at smoothing expenditure and building fiscal buffers. This would require improved public financial management and a well-administered broad-based tax system to mobilize non-resource revenues.
Directors welcomed the far-reaching liberalization of the foreign exchange system. They observed that the adoption of a managed float regime has facilitated the convergence of the formal and informal exchange rates, and the recent depreciation of the kyat has helped align the exchange rate with longer-term fundamentals. Directors encouraged a further build-up of the central bank’s international reserves to more comfortable levels in support of the reform process. They looked forward to the full liberalization of current account transactions envisaged for this year.
Directors highlighted the urgency of improving monetary policy tools. Key priorities in this area are the enactment of a new central bank law to establish an autonomous and credible monetary authority and the development of instruments for effective monetary operations. Directors welcomed the resumption of regular deposit auctions and looked forward to the removal of financing constraints on open market operations.
Directors encouraged sustained efforts to develop a modern financial sector to support growth and the transmission of monetary policy. In this context, they emphasized the need to strengthen supervision, including of foreign exchange operations and state banks, enhance prudential regulations and regulatory capacity, and improve licensing procedures for banks. Directors also urged the authorities to address remaining deficiencies in their regime against money laundering and the financing of terrorism.
Directors recognized the importance of intensive technical assistance to support Myanmar’s reform process, and noted that technical assistance should be demand-led and tailored to Myanmar’s specific needs. The breadth of the reform agenda and the limited implementation capacity call for prioritization and close coordination with development partners. Directors stressed that particular priority should be given to improving economic statistics.