IMF Concludes 2015 Article IV Consultation Mission to MyanmarPress Release No. 15/308
July 1, 2015
An International Monetary Fund (IMF) team led by Mr. Yongzheng Yang visited Myanmar during June 17 to July 1 to hold the 2015 Article IV consultation discussions. The team met with Vice President U Nyan Tun, Deputy Governors of the Central Bank of Myanmar (CBM) U Set Aung, Daw Khin Saw Oo, and U Soe Min, Deputy Minister of Finance Dr. Maung Maung Thein, and other senior officials. The team also held discussions with parliamentarians and private sector representatives.
At the conclusion of the mission, Mr. Yang made the following statement:
“Real GDP growth in fiscal year (FY, ending March) 2014/15 is estimated at 8.5 percent and inflation has picked up to 8 percent in May 2015, with credit to the private sector growing rapidly, at 36 percent (year on year) in FY 2014/15. The 2014/15 fiscal deficit stood at 3 percent of GDP, but the underlying deficit is estimated at 5.5 percent of GDP once one-off telecom and natural gas revenues are excluded. The current account deficit widened further to about 6 percent of GDP in FY 2014/15, largely driven by strong import growth. With lower-than-expected FDI inflows, the foreign reserves held by CBM remain below 3 months of imports. The kyat has depreciated notably although in real effective terms it has remained largely unchanged.
“Economic growth is expected to remain strong in FY 2015/16, at 8.5 percent, led by strong domestic demand. The increased fiscal deficit in the FY 2015/16 budget and continued monetization of the deficit will contribute to strong demand and credit growth. Together with continuous release of pent-up demand, inflation may rise further in FY 2015/16 and the external current account deficit is expected to widen further.
“The economy is facing some downside risks. Persistent dollar strength and low natural gas prices could further weaken Myanmar’s fiscal and external positions. Vulnerabilities from rapid credit growth, an expansionary budget, and a widening trade deficit may pose risks to price and external stability. Moreover, the rapid liberalization of the financial sector should be carefully managed despite its overall benefits. These potential risks could affect the economy given weak capacity and thin policy buffers.
“A tightening of monetary and fiscal policies will be required to contain inflationary pressure and anchor exchange rate expectations. This policy move should be supported by prompt introduction and vigorous enforcement of prudential standards in the banking sector to slow credit expansion and reduce financial sector risks. In particular:
• To tighten monetary policy to curb credit growth, the CBM will need to scale up deposit auctions to mop up excess liquidity and implement a prompt transition to the newly calibrated reserve requirement for banks.
• The fiscal deficit for 2015/16 should be reduced through greater efforts on revenue mobilization and expenditure re-prioritization. Myanmar can substantially increase its tax revenue by minimizing tax incentives, strengthening tax compliance, and promptly implementing the commercial tax on telecommunication services. On the expenditure side, transfers to Regions and States should be conditioned on their implementation capacity and spending responsibilities. Phasing out CBM financing of the fiscal deficit as soon as possible would be a major step forward in reducing inflationary pressure.
• Tighter monetary and fiscal policies are essential to stabilize exchange rate expectations. At the same time, a more flexible CBM reference rate that reflects market conditions and closes the gap between the CBM reference rate and parallel market rates would help contain demand and bring back the supply of foreign exchange to the market. CBM FX sales to importers should occur at competitively determined market rates to reduce risks of excessive drains on international reserves.
“Maintaining macroeconomic stability is critical in managing the ongoing economic and social transition. Meanwhile, sustained reforms will be needed to create fiscal space to boost public investment, strengthen banking regulation and supervision to maintain financial stability, and improve the business environment to support inclusive growth. Building the institutional capacity for macroeconomic management is key to addressing Myanmar’s huge development challenges.
“The team thanks the authorities and other counterparts for their warm hospitality and candid exchange of views.”