## cr1890 - 3.9 percent of GDP in 2016/17 from 5.1 percent 2015/16. The current account deficit continues ## Source details **Canonical URL:** [cr1890 - 3.9 percent of GDP in 2016/17 from 5.1 percent 2015/16. The current account deficit continues](https://www.imf.org/-/media/files/publications/cr/2018/cr1890.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1890.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1890.pdf.json) --- ### Recent developments - Growth slowed to 5.9 percent in 2016/17, down from 7.0 percent in 2015/16. - The fiscal deficit was around 2.5 percent of GDP in 2016/17, down from 4.4 percent of GDP in 2015/16. - The current account deficit fell to about 3.9 percent of GDP in 2016/17, from 5.1 percent in 2015/16. - The current account deficit continues to be mainly financed by FDI. - Real exchange rate and international reserves were broadly stable over 2017. - CBM reserves (gross) were US$5.2 billion as of November 2017, around 3 months of prospective imports (staff assessment of adequate reserves: 5-6 months). - Credit growth moderated but remained strong at 27 percent (y/y) in September 2017. - Tourism arrivals (April–December 2017) were 17 percent higher than in the same period in the previous year. - Rice and garment exports are growing at above 40 percent y/y in 2017/18. ### Medium-term outlook and projections - Growth is expected to rebound to 6.7 percent in 2017/18, mainly supported by a recovering agriculture sector, exports, and higher public spending. - Headline inflation is projected to decline to 5.5 percent in 2017/18 and to return to around 5 percent in the medium term. - Over the medium term, growth is expected to gradually pick up toward the estimated potential rate of about 7.0 percent to 7.5 percent, reflecting continued large FDI inflows and an improvement in public investment spending and efficiency. - The current account balance is expected to remain in deficit, with improvements in commodity prices and exports more than offset by growth in FDI and infrastructure-related imports. ### Key statistics (selected, as reported) - Real GDP: 5.9 percent (2016/17); projected 6.7 percent (2017/18); medium-term potential about 7.0 percent to 7.5 percent. - CPI (period average): 6.8 percent (2016/17); projected 5.1 percent (2017/18). - Total revenue (consolidated public sector): 18.8 percent of GDP (2016/17); projected 18.2 percent (2017/18). - Total expenditure (consolidated public sector): 21.3 percent of GDP (2016/17); projected 21.7 percent (2017/18). - Net lending (+)/borrowing (-): -2.5 percent of GDP (2016/17); projected -3.5 percent of GDP (2017/18). - Domestic public debt: 20.1 percent of GDP (2016/17); projected 20.3 percent of GDP (2017/18). - Reserve money growth: 8.8 percent (2016/17); projected 11.9 percent (2017/18). - Broad money growth: 19.4 percent (2016/17); projected 16.5 percent (2017/18). - Domestic credit growth: 25.5 percent (2016/17); projected 21.2 percent (2017/18). - Private sector credit growth: 33.8 percent (2016/17); projected 26.2 percent (2017/18). - Current account balance: -3.9 percent of GDP (2016/17); projected -5.3 percent of GDP (2017/18). - Financial account: 6.9 percent of GDP (2016/17); projected 5.7 percent of GDP (2017/18). - Foreign direct investment, net: 5.3 percent of GDP (2016/17); projected 6.3 percent of GDP (2017/18). - Overall balance: 0.6 percent of GDP (2016/17); projected 0.4 percent of GDP (2017/18). - CBM reserves (gross): US$5,134 million (2016/17); projected US$5,370 million (2017/18). - CBM reserves in months of prospective GNFS imports: 3.2 months (2016/17); projected 3.0 months (2017/18). ### Risks to the outlook - Risks are tilted to the downside. - Banking sector risks: need to adjust to important new prudential regulations after a period of rapid credit growth; latent banking sector risks are surfacing. - Humanitarian crisis in Rakhine State: could affect development finance and investor sentiment; direct economic impacts have been largely localized but social costs and full impacts are yet unfolding. - Additional risks: commodity prices, potentially volatile global financial markets, exposure to spillovers from China, and the risk of natural disasters. - Upside scenario: implementation of a more detailed strategic reform plan and higher infrastructure investment would raise potential growth. ### External financing scenarios and illustrative impacts - A temporary pause in anticipated DP budgetary financing (0.8 percent of GDP lower compared to the 2017/18 baseline) would result in a cut in spending, lower growth and higher central bank financing. - An equal cut in spending and higher fiscal deficit would result in a moderate exchange rate depreciation and higher inflation, assuming no indirect negative confidence effects. - Under the assumption that the financing shortfall is limited to budgetary financing and does not trigger stability risks, the impacts would be manageable, but economic activity and the poor would be negatively affected. - Conversely, a second wave of reforms and higher public investment using greater concessional finance would raise potential growth and foster inclusion. ### Executive Board / Directors' assessment (summarized) - Welcomed the rebound in Myanmar’s economy and favorable long-term growth prospects. - Expressed strong concern over increased downside risks, including the humanitarian crisis in Rakhine State, and highlighted the need for early and tangible progress toward peace and regional inclusion. - Recommended expanding Myanmar’s Sustainable Development Plan (MSDP) to address reform sequencing and regional disparities, including the humanitarian crisis in Rakhine State. - Urged sufficient resources to achieve the SDGs while anchoring fiscal policy on debt sustainability and lowering central bank financing of the deficit. - Welcomed progress on domestic revenue mobilization and urged further expenditure rebalancing and improvement in public financial management; cautioned against excessive use of tax amnesties and incentives. - Recommended close and transparent monitoring of State Economic Enterprises and large infrastructure projects, including PPPs, to minimize fiscal risks and debt distress. - Supported steps to improve financial sector regulation, implementation of the Banking Sector Action Plan, and strengthening the resolution framework; advised that financial sector and interest rate liberalization proceed at a pace commensurate with CBM capacity. - Encouraged the Central Bank of Myanmar to formally adopt the new transactions-based mechanism for setting the reference exchange rate, to develop the interbank foreign exchange market, and to allow greater exchange rate flexibility. - Considered the current stance of monetary policy appropriate and urged continued phasing out of CBM financing of the fiscal deficit. - Underscored the central role of capacity development and commended progress toward improving statistics and participation in the Enhanced General Data Dissemination System. - Noted that Myanmar will soon be in a position to fully meet its obligations under Article VIII and encouraged continued progress to remove remaining exchange restrictions and multiple currency practice. ### Key policy recommendations - Adopt an overarching medium-term growth strategy and pursue a second wave of reforms to set economic direction and support investment and job creation; focus structural reforms on priority areas with strong payoffs and further opening up to foreign trade and investment. - Fiscal policy should target achieving the Sustainable Development Goals (SDGs) by raising social and infrastructure spending while remaining anchored on debt sustainability and lowering central bank financing of the deficit. - Increase fiscal resources for the SDGs and infrastructure through continued domestic revenue mobilization, expenditure rebalancing, and improvements in Public Financial Management (PFM). - Use concessionary external financing to expand fiscal resources, reduce reliance on monetary financing, and bolster FX reserves. - Implement new prudential regulations to ensure financial stability and deepening, form contingency plans to address systemic banking risks, and strengthen the resolution framework. - Formally adopt a market-determined transactions-based mechanism for setting the exchange rate and continue to allow exchange rate flexibility to help cushion against exogenous shocks. *Source: Myanmar — Staff Report for the 2017 Article IV Consultation (February 9, 2018), International Monetary Fund.* ### 3.9 percent of GDP in 2016/17 from 5.1 percent 2015/16. The current account deficit continues ### cr1890 - 3.9 percent of GDP in 2016/17 from 5.1 percent 2015/16. The current account deficit continues ### Recent developments - Growth slowed to 5.9 percent in 2016/17, down from 7.0 percent in 2015/16. - The fiscal deficit was around 2.5 percent of GDP in 2016/17, down from 4.4 percent of GDP in 2015/16. - The current account deficit fell to about 3.9 percent of GDP in 2016/17, from 5.1 percent in 2015/16. - The current account deficit continues to be mainly financed by FDI. - Real exchange rate and international reserves were broadly stable over 2017. - CBM reserves (gross) were US$5.2 billion as of November 2017, around 3 months of prospective imports (staff assessment of adequate reserves: 5-6 months). - Credit growth moderated but remained strong at 27 percent (y/y) in September 2017. - Tourism arrivals (April–December 2017) were 17 percent higher than in the same period in the previous year. - Rice and garment exports are growing at above 40 percent y/y in 2017/18. ### Medium-term outlook and projections - Growth is expected to rebound to 6.7 percent in 2017/18, mainly supported by a recovering agriculture sector, exports, and higher public spending. - Headline inflation is projected to decline to 5.5 percent in 2017/18 and to return to around 5 percent in the medium term. - Over the medium term, growth is expected to gradually pick up toward the estimated potential rate of about 7.0 percent to 7.5 percent, reflecting continued large FDI inflows and an improvement in public investment spending and efficiency. - The current account balance is expected to remain in deficit, with improvements in commodity prices and exports more than offset by growth in FDI and infrastructure-related imports. ### Risks - Risks are tilted to the downside. - Banking sector risks: need to adjust to important new prudential regulations after a period of rapid credit growth; latent banking sector risks are surfacing. - Humanitarian crisis in Rakhine State: could affect development finance and investor sentiment; direct economic impacts have been largely localized but social costs and full impacts are yet unfolding. - Additional risks: commodity prices, potentially volatile global financial markets, exposure to spillovers from China, and the risk of natural disasters. - Upside scenario: implementation of a more detailed strategic reform plan and higher infrastructure investment would raise potential growth. ### Executive Board / Directors' assessment (summarized) - Welcomed the rebound in Myanmar’s economy and favorable long-term growth prospects. - Expressed strong concern over increased downside risks, including the humanitarian crisis in Rakhine State, and highlighted the need for early and tangible progress toward peace and regional inclusion. - Recommended expanding Myanmar’s Sustainable Development Plan (MSDP) to address reform sequencing and regional disparities, including the humanitarian crisis in Rakhine State. - Urged sufficient resources to achieve the SDGs while anchoring fiscal policy on debt sustainability and lowering central bank financing of the deficit. - Welcomed progress on domestic revenue mobilization and urged further expenditure rebalancing and improvement in public financial management; cautioned against excessive use of tax amnesties and incentives. - Recommended close and transparent monitoring of State Economic Enterprises and large infrastructure projects, including PPPs, to minimize fiscal risks and debt distress. - Supported steps to improve financial sector regulation, implementation of the Banking Sector Action Plan, and strengthening the resolution framework; advised that financial sector and interest rate liberalization proceed at a pace commensurate with CBM capacity. - Encouraged the Central Bank of Myanmar to formally adopt the new transactions-based mechanism for setting the reference exchange rate, to develop the interbank foreign exchange market, and to allow greater exchange rate flexibility. - Considered the current stance of monetary policy appropriate and urged continued phasing out of CBM financing of the fiscal deficit. - Underscored the central role of capacity development and commended progress toward improving statistics and participation in the Enhanced General Data Dissemination System. - Noted that Myanmar will soon be in a position to fully meet its obligations under Article VIII and encouraged continued progress to remove remaining exchange restrictions and multiple currency practice. ### Key policy recommendations - Adopt an overarching medium-term growth strategy and pursue a second wave of reforms to set economic direction and support investment and job creation; focus structural reforms on priority areas with strong payoffs and further opening up to foreign trade and investment. - Fiscal policy should target achieving the Sustainable Development Goals (SDGs) by raising social and infrastructure spending while remaining anchored on debt sustainability and lowering central bank financing of the deficit. - Increase fiscal resources for the SDGs and infrastructure through continued domestic revenue mobilization, expenditure rebalancing, and improvements in Public Financial Management (PFM). - Use concessionary external financing to expand fiscal resources, reduce reliance on monetary financing, and bolster FX reserves. - Implement new prudential regulations to ensure financial stability and deepening, form contingency plans to address systemic banking risks, and strengthen the resolution framework. - Formally adopt a market-determined transactions-based mechanism for setting the exchange rate and continue to allow exchange rate flexibility to help cushion against exogenous shocks. ### Selected key statistics (as reported) - Real GDP: 5.9 percent (2016/17); projected 6.7 percent (2017/18); medium-term potential about 7.0 percent to 7.5 percent. - CPI (period average): 6.8 percent (2016/17); projected 5.1 percent (2017/18). - Total revenue (consolidated public sector): 18.8 percent of GDP (2016/17); projected 18.2 percent (2017/18). - Total expenditure (consolidated public sector): 21.3 percent of GDP (2016/17); projected 21.7 percent (2017/18). - Net lending (+)/borrowing (-): -2.5 percent of GDP (2016/17); projected -3.5 percent of GDP (2017/18). - Domestic public debt: 20.1 percent of GDP (2016/17); projected 20.3 percent of GDP (2017/18). - Reserve money growth: 8.8 percent (2016/17); projected 11.9 percent (2017/18). - Broad money growth: 19.4 percent (2016/17); projected 16.5 percent (2017/18). - Domestic credit growth: 25.5 percent (2016/17); projected 21.2 percent (2017/18). - Private sector credit growth: 33.8 percent (2016/17); projected 26.2 percent (2017/18). - Current account balance: -3.9 percent of GDP (2016/17); projected -5.3 percent of GDP (2017/18). - Financial account: 6.9 percent of GDP (2016/17); projected 5.7 percent of GDP (2017/18). - Foreign direct investment, net: 5.3 percent of GDP (2016/17); projected 6.3 percent of GDP (2017/18). - Overall balance: 0.6 percent of GDP (2016/17); projected 0.4 percent of GDP (2017/18). - CBM reserves (gross): US$5,134 million (2016/17); projected US$5,370 million (2017/18). - CBM reserves in months of prospective GNFS imports: 3.2 months (2016/17); projected 3.0 months (2017/18). *Source: Myanmar — Staff Report for the 2017 Article IV Consultation (February 9, 2018), International Monetary Fund.* ### 7. Risks to growth are tilted to the downside. Long-standing weaknesses in the banking ### 7. Risks to growth are tilted to the downside. Long-standing weaknesses in the banking sector have surfaced as banks adjust to new regulations ### Downside risks to growth - Long-standing weaknesses in the banking sector have surfaced as banks adjust to new regulations, raising the risk of a sharp reversal of previously-strong credit growth. - The humanitarian crisis in Northern Rakhine state has created uncertainties regarding DP finance and investor sentiment. - The highly targeted U.S. sanctions are not expected to affect the broader economy, but any broadening of sanctions would add to downside risks. - The upcoming change in the fiscal year, from October 1, 2018, will challenge limited public sector capacity and may introduce greater risks on revenue and budget under execution. - Other external risks include commodity prices, potentially volatile global financial markets, and exposure to spillovers from China. - Natural disasters remain an ever-present risk; flood effects were relatively moderate in 2016/17 (Annex 1). ### External financing scenarios and illustrative impacts - A reduction in external financing would raise risks to growth and stability; reinvigorated reforms and greater use of concessional finance could boost the economy. - The Rakhine state crisis has created uncertainty over DP budgetary financing, with potential macroeconomic consequences depending on the authorities’ response. - Illustration: a temporary pause in anticipated DP budgetary financing (0.8 percent of GDP lower compared to the 2017/18 baseline) would result in a cut in spending, lower growth and higher central bank financing.3 - An equal cut in spending and higher fiscal deficit would result in a moderate exchange rate depreciation and higher inflation, assuming no indirect negative confidence effects. - Under the assumption that the financing shortfall is limited to budgetary financing and does not trigger stability risks, the impacts would be manageable, but economic activity and the poor would be negatively affected. - Conversely, a second wave of reforms and higher public investment using greater concessional finance would raise potential growth and foster inclusion.4 ### Authorities’ views (on risks and outlook) - Authorities broadly agreed with staff’s view of recent developments and outlook. - They noted the lower deficit was driven by greater fiscal prudence, which had helped to reduce central bank deficit financing and inflation. - Limited capacity had hindered budget execution; implementation should improve with the change in the fiscal year. - Lower inflation also reflected negative food price shocks and reduced farm incomes. - Regarding Rakhine state, public spending would be redirected to aid reconstruction and address regional disparities. ### Need for a second wave of reforms - Myanmar’s initial economic liberalization produced an impressive growth take-off and poverty reduction, underpinned by FDI. - A second wave of reforms is needed to sustain momentum; articulation of an overarching economic roadmap will help set economic direction and support investor confidence. - Recent reform progress includes updated prudential regulations and directives for the banking sector, progress on revenue mobilization and statistics, development of a benchmark government bond yield curve, liberalization of trade finance activities of foreign bank branches, a civil service reform action plan, and a rise in the minimum wage. - The new Companies Act (effective in FY2018/19) replaces the 1914 Act and will allow foreigners to take up to a 35 percent stake in Myanmar companies. - Structural reform priorities: agriculture, the banking system and interest rate liberalization, infrastructure, trade and the legal framework; further opening to foreign participation (e.g., allowing majority foreign ownership and reducing sectoral restrictions) to support skills and technology transfer. - Authorities agreed on the importance of a medium-term growth strategy and noted implementation of the Twelve Economic Policies focused on inclusive sustainable development. ### Fiscal outlook, transitions, and fiscal risks - Fiscal year change: Myanmar’s fiscal year will change from April–March to October–September; following a six-month transition period from April 1, 2018 to September 30, 2018, the new fiscal year will commence from October 1, 2018. - The transition should be carefully planned; the six-month transition period is best handled by linking budget ceilings to the previous year to minimize fiscal risks.9 - Early and clear communication on tax filing and processes is needed to minimize risks to revenues. - The fiscal deficit fell to 2.5 percent of GDP in 2016/17, due to higher revenues and lower spending relative to budget. - Increased tax collection led to a 9 percent overperformance relative to the revised budget in 2016/17. - Spending was under-executed relative to budget for recurrent (by 6 percent) and capital spending (by 21 percent). - CBM financing was 57 percent of domestic financing, exceeding the authorities’ target ceiling of 40 percent. - Authorities retained a target to limit CBM financing at 30 percent of domestic financing for 2017/18. - Deficit projections: - The fiscal deficit is projected to increase to 3.5 percent of GDP in 2017/18, and to 4 percent in 2018/19 following the six-month transition budget. - A greater share of fiscal expansion is expected to be allocated to recovery and reconstruction efforts in Rakhine state, including facilitating planned return of refugees from Bangladesh. - Revenue is projected to gradually rise due to continued tax buoyancy and further tax policy and administration reforms; recent increases in commodity prices are expected to mitigate the projected decline in natural gas related revenues. - The proposed minimum wage hike (a proposed 33 percent increase to 4,800 kyats, around US$3.60) would have a fiscal impact by increasing entry level civil service wages and should be integrated into civil service reform to minimize the rise in the wage bill.10 - Medium-term fiscal stance: - The deficit is expected to remain at around 4-4.5 percent of GDP in the medium term, a level consistent with low debt distress and the phasing out of CBM financing. - Phasing out CBM financing will require supportive domestic financial reforms and development of the government securities market (government should attempt to accept all bids at auctions and avoid cut-off rates except for outliers). ### Fiscal policy, SDGs, and external concessional finance - Fiscal policy should be geared towards achieving the Sustainable Development Goals (SDGs) while being anchored on debt sustainability and lowering central bank financing of the deficit. - Achieving the SDGs will require increasing fiscal resources through continued domestic revenue mobilization, expenditure rebalancing, and improving Public Financial Management (PFM). - Concessionary external financing can supplement domestic revenues, reduce monetary financing and bolster reserves. - Spending on education and health has remained low relative to peers though it has increased; additional public spending needs to reach the education and health SDGs are estimated at 2.5 percent of GDP in each sector.12 - Fiscal space can be created via expenditure rebalancing toward social sectors and priority infrastructure, improved PFM, and further revenue mobilization. - Greater access to external concessionary finance and structural reforms could allow higher sustained spending to achieve SDGs faster, consistent with alternative scenarios and the DSA. ### PFM reforms and managing fiscal risks - Progress since 2012 in core PFM capabilities: - Reinforced Treasury functions: Treasury department established in the Ministry of Finance, treasury bill auctions introduced, and modernization of cash and debt management. - Enhanced budget formulation: top-down approach and preparation of a medium-term fiscal framework. - Strengthened PFM legal and regulatory framework. - Improved financial reporting. - Authorities are preparing a new PFM strategy for the next five years with Bank and Fund TA. - Recommended further reform measures: - Fiscal transparency and reporting: include authorities’ accounting and GFS presentations in the October 2018/19 budget and in the medium term fiscal framework. - Develop a Financial Information Reporting System for the Treasury (FIRST) to consolidate and validate financial information; Myanmar currently manages PFM on a fully manual basis. - Strengthen budget credibility through better planning–budget interrelationship and stronger revenue forecasting capacity. - Better manage fiscal risks from SEEs and large public investment projects: limit and manage fiscal risks from SEEs (including restructuring and privatization); a quarter of the 32 on-budget SEEs incurred losses in their most recent reporting year, with most loss from the Electric Power Generation Enterprise (EPGE). - Gradual increase in electricity tariffs to help reduce EPGE losses while mitigating negative effects on the poor through adequate design. - Transforming some SEEs to joint ventures with the private sector is welcome and should avoid any government guarantee. - Large infrastructure projects, including PPPs, may generate significant fiscal risks and call for improved public investment management (PIM). ### Revenue mobilization next steps - Continue revenue modernization and administrative reforms that have delivered revenue buoyancy. - Next phase priorities (as approved by the Cabinet Economic Committee): - Complete modernization of tax laws: start with the Tax Administration and Procedures Law, the Income Tax Law (including rationalizing incentives and a tax expenditure statement), then amend the Commercial Tax Law (broadening the base and codifying tax rates). - Review natural resource revenues and the petroleum production sharing agreements and mining tax regime. - Develop staff capacity and operations; extend administrative reforms to the medium taxpayer segment and link regional offices through IT systems. - Improve customs administration to increase tax revenue and facilitate trade and investment, with support of Fund TA. *MYANMAR INTERNATIONAL MONETARY FUND* ### 21. The authorities emphasized that their medium-term fiscal framework was anchored on ### 21. The authorities emphasized that their medium-term fiscal framework was anchored on ### Medium-term fiscal framework and fiscal policy - Anchored on maintaining debt sustainability and phasing out CBM financing. - Continuing strong efforts to improve tax administration and conducting public education on taxation. - The Tax Administration and Procedures Law, and the Income Tax Law would be submitted to Parliament to be effective for the new fiscal year beginning October 2018. - Authorities reiterated commitment to reducing CBM financing of the deficit; missed target attributed in part to insufficient government securities issuance in under-subscribed auctions. - State-owned enterprise (SEE) restructuring commenced: 12 SEEs brought back under line ministries as administrative units, and six SEEs corporatized. - Change in fiscal year intended to improve implementation of capital and infrastructure expenditure given the timing of the monsoon season. - Authorities intend to release fiscal data in line with GFS in 2018. - Fiscal policy guidance: - Gear fiscal policy towards achieving the SDGs while remaining anchored on debt sustainability and lowering CBM financing of the deficit. - Create fiscal space for increased social and infrastructure spending through expenditure rebalancing, improved PFM, and further revenue mobilization. - Greater use of concessional financing from development partners to expand fiscal resources for SDGs and inclusion. - Better manage fiscal risks from SEEs and large public investment projects; restructuring and privatization of SEEs important to reduce budgetary burden and rationalize electricity tariffs. ### Exchange rate regime and monetary policy - Recent practice: - Kyat exchange rate remained stable through 2017; official reference exchange rate in line with market conditions. - FX auctions continue with very limited participation and no longer used as price discovery mechanism; CBM sets reference rate taking account of FX transaction data reported by banks. - A prohibition on trading outside of the FX trading band (+/- 0.8 percent around the official reference rate) has been lifted and communicated to the market, although a formal regulation is yet to be issued. - Policy recommendations and assessment: - Opportune time to formally adopt new exchange rate mechanism and remove the trading band. - Rationale: external position broadly in line with medium term fundamentals per the IMF’s EBA-light approach; current CBM reference rate consistent with a transaction-based mechanism (MCM TA report of 2017); informal/hundi rate aligned with current reference rate. - Formalizing the mechanism and clear communication will provide credibility to the de jure managed floating exchange rate regime and help anchor market expectations. - To avoid a multiple currency practice (MCP), government and SEEs must use the prevailing market rate for FX transactions. - Continued exchange rate flexibility needed to manage shocks while building reserves. - Market rate should be set as a weighted average of interbank and bank customer transactions until the interbank market develops further. - Recommended asymmetric FX intervention strategy: build reserves during capital inflow episodes and let the exchange rate act as a shock absorber during outflows; limit FX sales to avoiding disorderly market conditions and use the FX auction mechanism until intervention strategy is further developed. - Monetary policy stance: - Monetary tightening can be put on hold given improved inflation outlook and other factors. - Progress made toward withdrawing excess liquidity and developing a market-determined government bond yield curve. - Reserve requirements now apply to all banks and have been enforced. - Appropriate to maintain deposit auction volumes pending further developments in inflation and liquidity; increase deposit auction volumes if liquidity expands rapidly or inflation pressures rise. - CBM needs to further strengthen monetary policy framework: formally constitute monetary policy committee (MPC) and adopt a medium-term inflation objective. - Gradual liberalization of interest rates and interbank market development needed to improve monetary policy transmission. - Interbank cash market development hindered by excessive concentration of liquidity at some banks (including Myanmar Economic Bank) and fees for return of banknotes by CBM contributing to high currency in circulation. - Authorities’ views on exchange rate and monetary policy: - Intend to formally introduce the new exchange rate mechanism in the near future, while retaining the FX auction for future intervention purposes. - Strongly agree with need to improve interbank markets, including developing the repo market. - Concur that deposit auction volumes should not be raised further given liquidity and inflation outlook. - Intend to formally remove the exchange rate trading band. ### Financial stability and banking sector reform - Banking sector vulnerabilities: - Rapid credit growth concentrated in one-year overdrafts secured on real estate that have been continually rolled over (evergreened), increasing exposure to property values and obscuring risks. - Domestic private commercial banks are now the largest players and are systemically important, with large corporate exposures and significant lending to related parties. - Controls (notably on interest rates and product options) have negatively affected banks’ profitability and ability to price risks. - Banking system is undercapitalized, including shortfalls in some SOBs and systemic domestic private banks even under current NPL recognition levels. - Supervisory resources are stretched and will be challenged by approval of five new domestic banks. - Regulatory progress: - CBM released four key regulations in July 2017 to implement the FIL and strengthen regulation and supervision. - Under new regulations: - Minimum capital adequacy ratio requirements are 4 percent for tier 1 capital, and 8 percent for regulatory capital. - Large exposures limited to no more than 20 percent of core bank capital. - All overdraft loans must be cleared each year for a period of two consecutive weeks. - A directive issued in November 2017 allows restructuring of viable overdrafts to term loans of up to three years and addresses asset classification and provisioning. - Key challenges and policy priorities: - Restructure viable overdrafts and wind down large exposures while avoiding a credit crunch and excessive property price correction. - Assess recapitalization needs as banks submit overdraft and large exposure conversion plans and recognize losses as loans become overdue; avoid generalized forbearance. - Banking system action plan drawn up with the Fund to enhance resilience and strengthen resolution framework; feeds into broader financial system development strategy adopted in 2013. - Priorities: - Move ahead with restructuring of state-owned banks (SOBs); require SOBs to submit remedial action plans with timeframes and follow-up. - Continue financial sector and interest rate liberalization at a pace commensurate with CBM’s capacity to regulate and supervise; allow banks to lend unsecured where adequate risk management in place; lift tiered interest rate caps gradually; liberalize foreign banks’ domestic lending activities once domestic banks are stronger. - Increase bank capital; bring banks with capital shortfalls into compliance or face penalties; gradual interest rate liberalization to help banks better price credit risks and raise capital through improved profitability; allow foreign minority equity investments following Companies Act amendments. - Form contingency plans for systemic banking risks and strengthen resolution capacity; resource CBM for bank recovery and resolution to enable lender of last resort operations to solvent banks while avoiding public sector bailouts. - Financial inclusion and AML/CFT: - Work underway to improve financial inclusion and address outstanding AML/CFT concerns. - Initiatives: basic regulatory framework for mobile financial services; regulations supporting the 2011 Microfinance Business Law (2016 and 2017); credit reporting system regulation issued in March 2017 paving way for a credit bureau. - Myanmar removed from FATF’s monitoring process in June 2016; needs to make progress on outstanding AML/CFT issues. - Myanmar underwent an APG Mutual Evaluation in late 2017; report to be discussed and adopted by APG Plenary in July 2018; national risk assessment to be released in 2018. - Authorities’ views on financial stability: - Committed to improving financial regulation and supervision; appreciate banking sector action plan and TA from Fund and World Bank. - Actively consulting with banks in transition to new regulatory requirements and working to increase supervisory resources and training, though capacity is highly constrained. - Agree that interest rate caps should be removed gradually and intend to allow uncollateralized loans to SMEs at higher rates once risk management improves. - Intend to use ME results to assist finalization of draft AML/CFT bill and address weaknesses; improving customer due diligence and risk-based AML/CFT supervision are key challenges. ### Capacity development, data, and Article VIII - Capacity development (CD) is strategically important to economic reform; significant progress since 2011 due to active engagement from Myanmar counterparts. - Myanmar is one of the IMF’s largest recipients of CD resources; strong link needed between surveillance and CD. - Data improvements: - CBM published inaugural Quarterly Bulletin, monetary and financial statistics, and FSIs. - MOPF expects to release GFS fiscal data in 2018. - Central Statistical Organization (CSO) engaged in improving price and external sector statistics. - Data dissemination should benefit from participation in the Enhanced General Data Dissemination System (EGDDS). - Article VIII: - Work in progress to remove last remaining exchange restriction relating to a tax certification requirement. - Adoption of a new mechanism to set the official exchange rate, replacing the current multi-price auction, would remove the MCP that arose from the FX auction. - Myanmar will soon be in position to fully meet its obligations under Article VIII. ### Staff appraisal and macroeconomic outlook - Myanmar’s economy is rebounding and long-term prospects remain strong, but downside risks have increased. - Humanitarian crisis in Rakhine State has created uncertainty regarding development finance and investor sentiment; direct economic impacts largely localized but social costs and full impacts are yet unfolding. - Medium-term prospects: - Over the medium term, growth is expected gradually to pick up towards the estimated potential rate of about 7-7.5 percent, underpinned by higher investment. - Policy recommendations: - A medium-term economic roadmap is needed to provide strategic direction and support continued strong investment and job growth; second wave of reforms should sustain growth and poverty reduction. - Reform sequencing and implementation would benefit from increased private sector consultation and an overarching development plan anchored by a medium term fiscal framework. *cr1890 - 21. The authorities emphasized that their medium-term fiscal framework was anchored on* ### 39. It is an opportune time to formally adopt the new transactions-based exchange rate ### 39. It is an opportune time to formally adopt the new transactions-based exchange rate mechanism. ### Exchange rate mechanism and market certainty - With the auction no longer used as a price discovery mechanism, the CBM has informally set the official exchange rate near the informal market rate. - Recommendation: To enhance market certainty regarding exchange rate determination, the CBM should now formally adopt the new transactions-based mechanism for setting the reference exchange rate. ### Monetary policy stance - Finding: Monetary policy tightening can be put on hold, given the more moderate inflation outlook. - Progress noted: - Good progress has been made towards withdrawing excess liquidity from the banking system. - Good progress has been made towards developing a market-determined government bond yield curve. - Recommendation: Given recent inflation developments, slower growth, and potential risks in the banking sector, it would not be appropriate to raise deposit auction volumes further in the near term. - Policy enablers: Further development of debt and interbank markets will help enhance monetary policy effectiveness. ### Financial sector regulation and stability - Recommendation: New prudential regulations should be implemented with a view to ensuring financial stability and growth, while forming contingency plans to address systemic banking risks. - Implementation approach: - The CBM should continue to work with the banks as they transition to the updated regulatory environment, with appropriate consultation and communication. - Encouraging an orderly restructuring of the banking system and recapitalization will be a key challenge, including for the SOBs. - Financial sector and interest rate liberalization should proceed at a pace commensurate with the CBM’s capacity to regulate and supervise. ### Capacity development and statistics - Observation: Capacity development merits strong strategic focus; good efforts on improving statistics should be continued. - Recommendation: Greater recognition and focus on capacity development is needed, given the importance of CD to Myanmar’s economic transition and reform implementation. - Status: While much remains to be done to improve statistics, steady progress should be continued. ### External sector obligations and surveillance - Finding: Myanmar should soon be in position to fully meet its obligations under Article VIII. - Status: Work is in progress to remove the last remaining exchange restriction as well as the MCP. - Assessment: The authorities did not request and staff does not recommend approval of the exchange restriction and MCP maintained inconsistently with Myanmar’s Article VIII obligations. - Proposal: It is proposed that the next Article IV consultation be held on the standard 12-month cycle. *Source: cr1890 - 39. It is an opportune time to formally adopt the new transactions-based exchange rate mechanism* ### Box 1 . External Sector Assessment ### Box 1 . External Sector Assessment ### Exchange rate developments and REER - The kyat real effective exchange rate (REER) depreciated by about 6 percent in the year to August 2017, and more than 13 percent since mid-2016, primarily driven by the depreciation of the nominal exchange rate against the U.S. dollar. - This has reversed the trend of REER appreciation during 2015–16. - The nominal effective exchange rate depreciated by about 3.6 percent since the beginning of 2017. ### External position assessment - The external position is broadly consistent with medium-term fundamentals and desirable policy settings. - Current Account (CA) approach of EBA: - Reflecting stronger exports and a lower account current deficit, the CA approach suggests a real exchange rate gap of -2.6 percent and a modest undervaluation. - This is substantially lower than the near 6 percent gap and overvaluation in last years’ assessment. - Other approaches: - The REER and external sustainability (ES) approaches suggest an overvaluation. - A lower weight is attached to these approaches for EMDEs and the degree of overvaluation suggested by these two models has substantially fallen and is within the uncertainty bands. - Reported CA and REER summary metrics (from IMF staff estimates): - CA Actual -5.3% - Cyclically adjusted CA Norm -5.5% - CA Gap 0.5% - Of which: Policy Gap 2.1%-4.7% - Real Exchange Rate Gap -2.6% (CA approach); 8.1% (REER approach); 4.0% (ES approach) ### Competitiveness and structural constraints - Competitiveness needs to be strengthened to ensure external balance and adequate reserves in the medium term. - World Bank Doing Business Indicators (2018) findings: - Myanmar ranks behind regional peers in the ease of enforcing contracts, getting credit, and trading across borders. - The country performs poorly in most areas in the life cycle of a business. - Other business surveys indicate major impediments to investment: - Despite low wages, weak domestic supply chains and poor access to electricity, transport services and affordable financing, and corruption are the major impediments to investment. - Wage and competitiveness notes: - Following the experience of 2015, the proposed minimum wage increase is likely to leave aggregate private sector wages broadly unchanged. - Myanmar’s wage costs remain competitive. ### Reserves, external financing, and implications - Reserves (end-December 2017): - CBM’s gross foreign reserves stood at US$5.2 billion. - Reserves covered about 2.9 months of prospective imports (well below the estimated adequate level of 5- 6 months of imports). - Reserves were equivalent to 10.5 percent of broad money. - Policy implications: - Inadequate reserves highlight the importance of maintaining a flexible exchange rate to absorb external shocks. - Take opportunities to build a reserve buffer, including through concessional external financing, while working to improve competitiveness. *Source: IMF staff estimates and Myanmar country report materials.* ### 1. Regulatory Capital to Risk-Weighted Assets10.8 ### 1. Regulatory Capital to Risk-Weighted Assets10.8 ### Financial Soundness Indicators (selected) - 1. Regulatory Capital to Risk-Weighted Assets10.8 - 2. Regulatory Tier 1 Capital to Risk-Weighted Assets 9.2 - 3. Nonperforming Loans Net of Provisions to Capital... - 4. Nonperforming Loans to Total Gross Loans... - 5. Sectoral Distribution of Loans (Resident)100.0 - 6. Return on Assets0.4 - 7. Return on Equity6.0 - 8. Interest Margin on Gross Income53.5 - 9. Noninterest Expenses to Gross Income71.7 - 10. Liquid Assets to Total Assets (Liquid Asset Ratio)42.6 - 11. Liquid Assets to Short-Term Liabilities60.6 - 12. Net Open Position in Foreign Exchange to Capital... - Note: Aggregate FSIs may not reflect risks that exist in sections of the banking system. Some accounting practices may be non-standard. ### Appendix I. Key Policy Recommendations from the 2016 Article IV Consultation - Monetary and exchange rate policies - Objective: Keep inflation in check and maintain exchange rate flexibility. - Mop up excess liquidity by scaling up deposit auctions. - Implementation status: Good progress, deposit auctions were increased and liquidity has been reduced. The next step will be to address uneven distribution of liquidity. - Enforce the recalibrated reserve requirements. - Implementation status: Banks are in compliance. - Phase out CBM financing of the deficit. - Implementation status: Although the authorities exceeded their target ceiling in 2016/17, the proportion of domestic financing provided by the CBM has declined. - Allow the interest rate at T-bill auctions to rise. - Implementation status: Progress made, with more flexible rates and extended T-bill maturity. Foreign banks are allowed to participate in treasury auctions. However, interest rate flexibility remains insufficient and auctions have been under-subscribed. - Ensure exchange rate flexibility to mitigate impacts of external shocks. If the FX auction can no longer be used for price discovery, explore an alternative mechanism for setting the official exchange rate based on market transactions. - Implementation status: The official exchange rate has been in line with market conditions over 2017. The FX auction is no longer being used to set the official reference rate. A new transaction-based mechanism for setting the official exchange rate is expected to be adopted soon. - Fiscal policy - Keep the fiscal deficit below 4½ percent of GDP over the medium term. - Implementation status: Achieved for 2016/17. - Rationalize tax exemptions and investment incentives. - Implementation status: Not met. - Introduce anti-corruption measures to protect the integrity and reputation of the tax system. - Implementation status: In progress. - Recruit more professional staff to strengthen IRD's capacity. - Implementation status: In progress. - Pass the draft Tax Administration and Procedures Law. - Implementation status: Staff expects the bill to be passed in second half of 2018. - Scale up public education on taxation. - Implementation status: In progress. - Financial sector - Objective: Maintain financial stability, and improve financial sector regulation and supervision. - Issue and enforce bank regulations. - Implementation status: In progress. Issuance of key regulations in July 2017 was an important achievement. - Adopt the proposed three-year plan for bank supervision, and increase supervisory resources and training. - Implementation status: The CBM did not formally adopt the proposed plan, but has made progress on some significant elements. Some progress is being made on recruiting new supervisory staff, but further increases and training remains needed. - Resource the function at the CBM to develop plans for bank recovery and resolution. - Implementation status: In progress. - Accelerate reform of state-owned banks. - Implementation status: In progress. - Allow a carefully sequenced increase in lending interest rates, supported by appropriate complementary policies. - Implementation status: Good progress. The CBM intends to allow uncollateralized loans to SMEs at higher rates, once risk management practices are strengthened. ### Appendix II. Risk Assessment Matrix - Note on RAM: "The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly." - (A) Domestic Risks - Weak bank sector - Relative Likelihood: High - Transmission Channels: Possible credit crunch, if weak banks cut back on lending while adjusting to new regulations; Fears of bank fragility could lead to bank runs/collateral fire sales/contagion; Contingent fiscal liabilities related to recapitalization of state-owned banks or possible liquidity support; Pressure for further exchange rate depreciation. - Expected Impact of Risk: High - Recommended Policy Response: Enforce prudential regulations in a way that supports financial stability and growth; Strengthen supervisory capacity, including bank resolution and contingency planning; Form a broader strategy designed to enhance the banking system's long-term role in supporting the economy and improving credit risk management. - Internal Conflict and Rakhine State crisis - Relative Likelihood: High - Transmission Channels: Weaken investor confidence; Disrupt flow of development partner assistance; Risk of broader economic sanctions; Interrupt productive activities and slow economic growth; Ethnic and religious tensions as well as social unrests delay economic reforms. - Expected Impact of Risk: High/ Medium - Recommended Policy Response: If development partner financial assistance is disrupted, rationalize public expenditures while preserving humanitarian spending and reducing regional disparities; Resist monetization of fiscal deficit; Allow the exchange rate to adjust to any external financing shortfalls. - Limited institutional capacity - Relative Likelihood: High - Transmission Channels: The public sector is unable to cope with speed of reform, leading to slippages and slower-than-expected growth; Growth effects compounded by weaker business confidence; CBM financing of the fiscal deficit rises rapidly. - Expected Impact of Risk: Medium / High - Recommended Policy Response: Well-tailored TA programs that focus on staff training to raise institutional capacity; Coordinate TA programs with international donors and streamline and adjust the scope of the programs, if necessary; Further promote operational autonomy of the CBM. - Large natural disasters - Relative Likelihood: Medium/ High - Transmission Channels: Human cost; damage to infrastructure and capital; macroeconomic volatility; Negative impact on both short-term and potential growth. - Expected Impact of Risk: High - Recommended Policy Response: Identify and explicitly integrate risks into fiscal frameworks and budget planning; Build policy and financial buffers to enhance resilience to shocks; Enhance preparedness and invest in infrastructure that can better cope with natural hazards. - (B) External Risks - Tighter global financial conditions - Relative Likelihood: Medium - Transmission Channels: Depreciation pressures lead the CBM to hold the official exchange rate more appreciated than the market, widening the gap between the official and wider market rates; Large sales of FX by CBM reduce the reserve buffer. - Expected Impact of Risk: High - Recommended Policy Response: Allow the CBM reference rate to flexibly adjust to the parallel market rates and preserve CBM reserves; Tighten monetary and fiscal policies to support the kyat; and Enforce NOP limits and repatriation rules in Foreign Exchange Management Law to increase FX inflows to the official FX market. - Significant China slowdown and its spillovers - Relative Likelihood: Low/ Medium - Transmission Channels: Reduced export growth and FDI inflow, since China is an important trading partner and source of FDI; Significantly reduce growth and contribute to kyat depreciation. - Expected Impact of Risk: Medium - Recommended Policy Response: Allow greater exchange rate flexibility to absorb external shocks; Continue with structural reforms to diversify exports and trading partners; Improve business environment to attract more FDI from other sources. - Lower energy prices - Relative Likelihood: Low - Transmission Channels: A further decline in pipeline gas prices, triggered by declines in global demand; Reduce government revenues; Reduce gas export earnings and FDI, weakening the balance of payments position. - Expected Impact of Risk: Medium - Recommended Policy Response: Allow greater exchange rate flexibility to absorb external shocks; Promote diversification of export growth; Improve the business climate to attract FDI and develop SMEs. ### Appendix III. Surveillance Priorities and Integrated Capacity Development - Surveillance priority: Fiscal financing for SDGs and stability - CD Focus, Past Results, Current and Future CD Outcomes - Internal revenue - Phase 1: Set reform direction; Developed a project management and governance framework; Formed the Large Taxpayer Office - Phase 2: Modernize tax laws (Tax Administration and Procedures Law; Income Tax Law; Commercial Tax Law); Extend administrative reform to the medium tax payer segment (add new centralized services); Build staff capacity; Mobilize domestic and customs revenue to provide fiscal space for growth and achievement SDGs, and to phase out CBM financing of the deficit - Customs modernization - Past Results: Strategic reform plan; Improvements to risk and HR management - Current and Future CD Outcomes: Improve trader compliance and build staff capacity - Public financial management (PFM) - Past Results: Established the Treasury Department in MOPF; Cash management CD; Updated the Financial Rules and Regulations; Preparation of draft PFM Law - Current and Future CD Outcomes: Advise on the new PFM Law; Advise on gradual introduction of information technology in PFM; CD on cash management, treasury function, and internal audit; Improving budgeting processes and spending effectiveness - Surveillance priority: Financial Stability - Monetary policy framework and operations - Past Results: Central Bank Act; Adoption of reserve money targeting; Reserve requirement penalty regime - Current and Future CD Outcomes: Strengthen capacity to implement reserve money targeting framework; Money market development; Liquidity management and forecasting; Improve capacity to implement monetary policy - Foreign exchange markets - Past Results: 2012 adoption of the de jure managed float exchange rate regime; Aligned the official and parallel market exchange rates - Current and Future CD Outcomes: Advise on the official reference rate setting mechanism; FX inter-bank market development; Maintain exchange rate flexibility - CBM Financial Management - Past Results: Increased staff capacity; Regulation issued to establish Audit Committee; Modernization of internal audit and accounting, including adoption of IFRS - Current and Future CD Outcomes: Improve financial reporting to support effective central bank operations - AML/CFT - Past Results: AML/CFT law; Supporting directives and guidance notes - Current and Future CD Outcomes: Assist with completion of the National Risk Assessment; Reduce money laundering and financing of terrorism - Financial sector regulation and supervision - Past Results: 2016 Financial Institutions Law and key prudential regulations issued July 2017; Prepared 3-year plan to enhance bank supervision; Implementation of prudential regulations - Current and Future CD Outcomes: Strengthen supervisory capacity; Assist with development of CBM bank recovery and resolution functions; Maintain financial system stability - Surveillance priority: Build analytical capacity and improve data for surveillance - Macroeconomic data and analysis - Past Results: Established an inter-agency core macro group; Published the new Consumer Price Index, Financial Soundness Indicators, and Monetary and Financial Statistics; EGDDS participation. - Current and Future CD Outcomes: CD and training in statistical methodology and compilation; Data-sharing arrangements between institutions; Data dissemination including through EGDDS; Government Financial Statistics; Develop PPI and trade price indices; Improve the quality and timeliness of information used in the policy making process; Increased transparency and availability of macroeconomic data and information. *Sources: Myanmar authorities' data; and IMF staff calculations. 1/ Banking system FSIs available at http://data.imf.org. Aggregate FSIs may not reflect risks that exist in sections of the banking system. Some accounting practices may be non-standard. Source: IMF Country Report No. 17/30.* ### Appendix IV. Takeaways from Fund-Wide Pilot Work ### Appendix IV. Takeaways from Fund-Wide Pilot Work ### Domestic Revenue Mobilization - Myanmar has one of the lowest tax revenue collections in the world with high potential to collect more. - The revenue reform momentum achieved by the Internal Revenue Department (IRD) is encouraging. - Strategic revenue reforms need continuous political commitment and support from key stakeholders. - Good progress has been made in formulating an updated IRD reform plan incorporating some of the suggestions of the enhanced revenue mobilization analytical work in the pilot (including tax policy issues). - The updated IRD reform plan formed the basis of communications and priorities for Phase II (2017-2022) of the reform program. - Reforms in the Myanmar Customs Department are in early stages and will need ongoing external assistance and support. ### Climate Change - Myanmar is prone to large scale climate-related natural disasters and is one of the most vulnerable countries among developing Asian countries. - The SIP for the 2016 AIV showed that the policy response of the authorities to past natural disasters was more limited compared with other Developing Asia countries. - Staff’s analytical work highlighted the need for addressing weaknesses in ex-ante resilience and ex-post adaptive capacity. - The authorities concurred with staff on the need to continue with structural reforms to improve: - growth potential and resilience; - preparedness and response ability to more effectively mitigate the impact of climate-related disasters. ### Inequality - Myanmar is one of the fastest growing countries in Asia; however, growth alone is not sufficient to achieve poverty reduction. - Achieving inclusive growth requires: - strengthening macroeconomic and financial stability; - deepening structural reforms. - The analytical work in the SIP for the 2016 AIV (also featured in the 2017 Asia and Pacific Regional Economic Outlook) showed that: - higher infrastructure investments and financial sector reforms in Myanmar could significantly boost economic growth; - these reforms could reduce poverty and improve nationwide income distribution. - The authorities were acceptive to staff’s advice and has continued reform process to sustain growth and achieve the Sustainable Development Goals. *Source: Appendix IV. Takeaways from Fund-Wide Pilot Work (Staff Report for the 2017 Article IV Consultation — Informational Annex).* ### 1. External public and publicly guaranteed debt decreased to 15.0 percent of GDP as of ### cr1890 - 1. External public and publicly guaranteed debt decreased to 15.0 percent of GDP as of ### Overview - External public and publicly guaranteed (PPG) debt decreased to 15.0 percent of GDP as of June-2017 from 16.0 percent a year earlier. - Composition shifts as of mid-2017: share of multilateral creditors increased to 16.3 percent from 14.4 percent in 2015/16; share of official bilateral creditors increased to nearly 43 percent from 42 percent; share of commercial creditors declined from 42.6 percent to 40.7 percent in 2016. ### External debt composition and key statistics - Total external debt: 9,487.9 million US$ (15.0 percent of GDP). - Multilateral creditors total: 1,544.3 million US$; multilateral share rose to 16.3 percent from 14.4 percent. - Asian Development Bank: 516.9 million US$ (0.8 percent of GDP; multilateral composition 5.4 percent in table). - World Bank/IDA: 1,012.9 million US$ (1.6 percent of GDP; multilateral composition 10.7 percent in table). - Official bilateral creditors total: 4,067.9 million US$ (6.4 percent of GDP; share nearly 43 percent). - Paris Club: 2,308.4 million US$ (3.6 percent of GDP). - Japan: 2,171.3 million US$ (3.4 percent of GDP; Paris Club composition 22.9 percent in table). - Non-Paris Club: 1,759.5 million US$ (2.8 percent of GDP). - China: 1,405.3 million US$ (2.2 percent of GDP). - Financial institutions (commercial creditors) total: 3,859.3 million US$ (6.1 percent of GDP); their share fell to 40.7 percent from 42.6 percent. - Paris Club financial institutions: 1,267.9 million US$ (2.0 percent of GDP). - Non-Paris Club financial institutions: 2,591.4 million US$ (4.1 percent of GDP). - China (as financial institution creditor): 2,591.4 million US$ (4.1 percent of GDP). - Other: 16.4 million US$ (0.0 percent of GDP in table). ### External concessional financing outlook - World Bank expected commitments: about US$1.2 billion over three fiscal years. - Asian Development Bank expected concessional lending: about US$350 million per year in the near and medium term. - JICA expected concessional lending package: US$1.0 billion to 1.2 billion per year during the next three years. - External concessional financing is expected to rise over the medium term as multilateral lenders gradually step up financing. ### Domestic public debt and government financing - Domestic public debt increased to 22.6 percent of GDP in 2016/17 from 21.6 percent in the previous year. - T-bills accounted for 81 percent of domestic debt (76 percent were 3-month T-bills sold to the central bank, and 5 percent were sold in auction). - T-Bonds accounted for the remaining 19 percent (around 6.5 percent were sold in auction). - T-Bills sold to the CBM were settled at the interest rate 4 percent per annum for borrowings through FY 2015/16 and at average market auction rate for borrowings starting from FY 2016/17. - T-bonds (2-year and 3-year) were started to sell in the auction since September 2016, at coupon interest rate ranging from 9-9.5 percent. - Foreign bank branches, securities companies and insurance companies were permitted to participate in the auction starting from late 2016. - In 2016/17 lower fiscal deficit reduced financing need, causing central bank financing of the deficit to fall in nominal kyat terms, although the target ceiling of 40 percent of domestic financing for 2016/17 was not met. ### Policy and public debt management - Public Debt Management Law (PDML) enacted in 2016 requires the Ministry of Finance to prepare annually the Medium-term Debt Management Strategy for the next three years. - Government commitment: reduce Central Bank of Myanmar (CBM) financing and retain target to limit CBM financing at 30 percent of domestic financing for 2017/18. - Continued shift from short-term towards medium-term financing through issuance of Treasury Bonds. ### Macroeconomic assumptions underlying the DSA - Growth: weakened in 2016/17 to 5.9 percent; expected to recover to 6.7 percent in 2017/18. Medium term growth expected to pick up towards estimated potential of 7 percent to 7.5 percent. - Inflation: projected to fall slowly to an average of around 6 percent over the medium term; long-term inflation expected to settle at around 5 percent. - Fiscal deficit: narrowed from 4.4 percent to 2.5 percent of GDP in 2016/2017. Expected to widen to 3.5 percent in 2017/2018 reflecting the supplementary budget and to remain between 4 percent to 4.5 percent of GDP in the medium term. Staff advises authorities not to exceed this fiscal deficit in the medium term and to gradually reduce the deficit over the longer term. - Current account deficit: expected to remain relatively high over the medium term at around 5.5 percent to 6 percent. - Exports: projected robust medium- and longer-term growth supported by pickup in manufacturing and services, recovery of global oil prices, and further opening up of the economy; risks tilted to the downside. ### Alternative scenarios (from the DSA) - Low external financing scenario: - Assumes external financing of 0.5 percent of GDP per year during the medium term (compared with 1.3 percent of GDP in the baseline). - In the longer term assumes a lower fiscal deficit of 3.3 percent of GDP (compared with baseline 3.8 percent of GDP) financed by lower external borrowing. - High external financing scenario: - Assumes external financing of 1.5 percent of GDP during the medium term. - In the longer term assumes a higher fiscal deficit of 4.1 percent of GDP with higher external borrowing. - Tabulated baseline macro assumptions (selected): - Baseline 2017/18-2022/23 vs 2023/24-2037/38: - Real GDP growth (in percent): 7.2 / 6.4 / 7.3 / 6.6 (table format in source). - Inflation (percent change, y/y): 5.8 / 4.8 / 6.9 / 5.2 (table format in source). - Overall fiscal balance (in percent of GDP): -4.0 / -3.8 / -4.5 / -4.1 (table format in source). - Current account (in percent of GDP): -5.7 / -4.8 / -6.6 / -5.7 (table format in source). - Net external financing (in percent of GDP): 1.3 / 1.4 / 1.3 / 1.7 (table format in source). - Low and high external financing scenario selected entries (table format in source): - Low External Financing net external financing (in percent of GDP): 0.6 / 0.8 / 1.5 / 1.6. - High External Financing baseline fiscal balances and other entries shown in table. ### Debt sustainability analysis and risks - External DSA: Under baseline and stress tests, all external PPG debt indicators remain below policy relevant thresholds. Some indicators, such as PV of debt-to-GDP and PV of debt-to-exports ratios, are relatively sensitive to stress tests. - A combination stress test (perturbations to GDP growth, inflation, exports and non-debt creating flows) leads to a significant increase in PV of PPG external debt to exports and debt-to-revenue ratios. - Total public debt (external plus domestic): remains below benchmark under baseline and expected to remain stable throughout the forecast period. - Sensitivity analyses show vulnerability to shocks, particularly GDP growth and fixed primary deficit scenarios; in both, PV of debt to GDP ratio breaches the 38 percent of GDP benchmark by 2029. - In the extreme shock scenario, PV of debt to revenue ratio rises above 200 percent of GDP in the medium term. - Vulnerabilities and external risks: - Myanmar vulnerable to external shocks such as commodity price volatility and large scale climate-related natural disasters. - Risks from banking sector stress on the public-sector balance sheet; contingent liabilities related to recapitalization of state-owned banks are difficult to quantify owing to data limitations. ### Staff assessment and policy implications - IMF staff assessment: Myanmar is assessed to remain at low risk of external debt distress. PPG external debt is generally resilient to shocks under standard and alternative stress tests. - However, total public debt is vulnerable to extreme shocks and fiscal slippage. - Policy recommendations and implications: - Pursue prudent macroeconomic policies and build policy buffers, particularly foreign reserves. - Continue structural reforms to improve growth potential, resilience, and promote economic diversification. - Government should remain cautious about borrowing that leads to a buildup in debt. - Target public borrowing to projects that broaden the export base, have significant impact on potential growth (e.g., infrastructure investment), and increase resilience of debt sustainability. *Source: IMF staff report (Myanmar)—Data and analysis as presented in the provided text.* ### 10. The authorities broadly agreed with these conclusions and the analysis. They agreed ### 10. The authorities broadly agreed with these conclusions and the analysis. They agreed ### Authorities' agreement and policy stance - Fiscal policy should be anchored in debt sustainability and lowering central bank financing of the deficit. - The authorities were committed to improving the medium-term fiscal framework, including by updating their medium-term debt management strategy. - The authorities concurred with staff on the need to be cautious on nonconcessional borrowing and reconfirmed their intention to use nonconcessional external borrowing only to finance economically viable and growth-enhancing projects in priority sectors, at levels consistent with low risk of debt distress. ### Debt sustainability analysis and projections (high-level) - Figure note: The combination shock assumes real GDP, exports, US dollar deflator of GDP, and non-debt creating flows all at their historical averages over 2006-2016 minus one standard deviation in 2018-19. - Figure note: In Panel bcd, the most extreme shock is the combination shock; in panel e, the most extreme shock is the export shock; and, in panel f, the most extreme shock is one-time depreciation shock. - Table 4a highlights baseline and projection series across 2014–2037 for external debt, identified net debt-creating flows, non-interest current account deficit, exports, imports, net FDI, endogenous debt dynamics, PV of external debt, PV of PPG external debt, debt service ratios, and grant-equivalent financing. - Table 4c provides public sector debt projections and sustainability indicators, including: - Public sector debt series: 29.934.535.735.435.936.436.937.137.339.137.9 - Foreign-currency denominated share series: 13.915.915.614.414.814.414.113.412.711.59.6 - Gross financing need series: 1.65.63.45.35.86.26.46.26.26.15.6 - PV of public sector debt series: ......34.033.533.233.333.333.433.634.934.3 - Debt service-to-revenue and grants ratio series: 4.77.27.7 13.915.617.920.319.920.821.320.8 - Key macro assumptions in tables: - Real GDP growth series: 8.07.05.96.82.36.77.07.27.37.47.57.26.95.36.4 - GDP deflator in US dollar terms (change) series: 1.0-15.20.48.218.0-1.45.33.33.23.02.52.62.51.72.3 - Effective interest rate (percent) series: 5/-3.8-4.1-3.5-2.61.22.42.82.62.42.22.02.41.40.91.3 ### Stress tests and sensitivity analysis (selected indicators) - Table 4b sensitivity layout shows baseline and alternative/bound scenarios for PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-exports, and debt service-to-revenue with series presented for 2017–2037. - Example series from Table 4b: - PV of debt-to-GDP ratio baseline series: 1212111110977776666666 - PV of debt-to-exports ratio baseline series: 5252494541383029282727262625252524 - PV of debt-to-revenue ratio baseline series: 7573676459544139373634333232313130 - Debt service-to-exports ratio baseline series: 44444322222211111 - Debt service-to-revenue ratio baseline series: 66666532232222222 - Table 4b scenario notes: - A2 (less favorable financing) assumes the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline. - B3 assumes exports values remain permanently at the lower level, but the current account as a share of GDP returns to baseline after the shock (implicitly assuming an offsetting adjustment in import levels). - B5 combines B1–B4 using one-half standard deviation shocks. - B6 is a one-time 30 percent nominal depreciation relative to the baseline in 2018. ### Key recommendations and operational implications - Anchor fiscal policy in debt sustainability metrics and actively reduce central bank financing of the deficit. - Update and strengthen the medium-term fiscal framework and the medium-term debt management strategy. - Use nonconcessional external borrowing only for economically viable and growth-enhancing projects in priority sectors, and limit such borrowing to levels consistent with low risk of debt distress. - Maintain caution regarding new public sector loans on less favorable terms and monitor stress-test scenarios (real GDP growth shocks, export shocks, US dollar GDP deflator shocks, non-debt creating flow shocks, and depreciation) that materially raise public external debt ratios and debt service burdens. *Statement by the Staff Representative on Myanmar, March 12, 2018* ### 1. There are signs of a continuing economic recovery. The Purchasing Managers’ Index ### 1. There are signs of a continuing economic recovery. The Purchasing Managers’ Index ### Introduction - Authorities value the Fund’s advice and technical assistance and are in broad agreement with staff’s assessment. - Reform priorities: reduce poverty, foster job creation and rural development, promote better health and education services. - Authorities state a second wave of reforms is needed to sustain growth momentum. ### Recent Economic Development and Outlook - FY2016/2017 real GDP growth: 5.9 percent. - Real GDP estimated growth in FY2017/2018: about 7.0 percent, driven by recovery in agriculture and exports, higher public spending, and growth in construction and tourism. - Medium-term growth projection: around 6.8 percent, supported by higher public investment spending and FDI inflows. - Fiscal deficit narrowed to about 3 percent of GDP (compared to 4.4 percent of GDP in FY2015/2016). - Inflation declined to about 5.2 percent. - Current account deficit in FY2016/2017: about 3.9 percent of GDP (5.1 percent in FY2015/2016). - CBM foreign reserves: USD5.1 billion as at September 2017, sufficient to finance 3.4 months of imports. - Reserve coverage expected to remain above the minimum conventional threshold of 3 months’ import coverage throughout 2017/2018 fiscal year. - Kyat remained broadly stable over 2017. - Private sector credit expected to expand by 33 percent (authorities’ expectation) attributed to increased business opportunity, better access to credit, and development of credit facilities to Small and Medium Enterprises. - Risks: overall skewed to downside, but policies to promote private investment and improved macroeconomic management represent upside risks; stronger growth in ASEAN trading partners could have positive spillovers. - Latest indicators cited at the start of the unit: - Purchasing Managers’ Index in January indicated an economic expansion for a fourth straight month. - Gross foreign reserves at US$5.3 billion in January 2018, equivalent to about 3 months of prospective imports. - Private sector credit growth: 26 percent (y/y) in November 2017, down from 27 percent (y/y) in September 2017. - FDI project amounts approved by the Directorate of Investment and Company Administration for the first 10 months of 2017/18 show a marked deceleration since September 2017. - Authorities launched the Myanmar Sustainable Development Plan (MSDP) on February 26; MSDP identifies development priorities but needs further work on reform sequencing and integration with the medium term fiscal framework. ### Fiscal Policy - Authorities emphasize the role of fiscal policy in promoting growth and ensuring reform success; need to balance fiscal prudence with inclusive growth and poverty reduction. - Recent gradual, growth-friendly fiscal consolidation has kept current spending in check. - Positive fiscal performance in FY2016/2017 driven by higher tax revenue, improved tax-administration, introduction of self-assessments for large taxpayers, and capacity development within the tax authority. - Fiscal year change: Myanmar’s fiscal year will change from April-March to October-September commencing 1 October 2018 to improve implementation of capital and infrastructure given monsoon timing. - Latest budget focuses on priority socio-economic spending with increased budgets for education and health and higher allocation for growth-enhancing infrastructure to regions with urgent development needs. - Budget anchored on conservative revenue projections and targets a fiscal deficit of 3.5 percent of GDP in the medium term. - Revenue-side reforms and measures: - Consideration of changing the tax year to be consistent with the fiscal year. - Continued enhancements to tax and customs administration and tax policy reforms to strengthen domestic revenue mobilization. - Establishment of Large Taxpayer office in 2014 improved tax compliance and administration. - IRD reform program improved efficiency and effectiveness of tax collection. - Planned passage of the Tax Administration and Procedures Law and the Income Tax Law expected to be effective beginning the new fiscal year in October 2018. - Authorities working with Fund TA and other partners to improve customs administration and budgetary operations. - Public financial management: - New public financial management strategy being prepared for the next 5 years with the World Bank and Fund TA. - Authorities intend to release fiscal data in line with the Government Finance Statistics (GFS) framework in 2018. ### Monetary and Exchange Rate Policy - CBM made progress after central bank autonomy in July 2013: realignment of reference rate with parallel market rates, deposit auctions to mop up liquidity, Treasury bill auctions (January 2015) and bond auctions (September 2016). - Decision to allow purchase of government securities by foreign banks to promote Treasury bond market development. - Development of interbank market: since April 2016 banks allowed to engage in bilateral interbank lending and interbank market deposits. - CBM working to develop the repo market and gradually liberalize the interest rate to strengthen monetary policy transmission. - Authorities concur with staff recommendations: greater exchange rate flexibility and phasing out CBM fiscal deficit financing will strengthen monetary policy independence. - CBM introduced a limit on central bank deficit financing to 40 percent of domestic financing in FY2016/17; the proportion of domestic financing has declined significantly. - Planned further reduction: limit reduced to 30 percent of domestic financing for FY2017/2018 and fully eliminated in 2020; gradual approach to manage potential budget cost and private sector credit crowding out. - Since April 2012 Myanmar shifted from a fixed exchange rate (pegged to the SDR) to a managed floating exchange rate; initial USD reference rate determined through foreign currency auctions. - Current foreign currency pricing mechanism has brought the reference rate closer to the informal market; prohibition on trading outside the FX trading band has been lifted. - Authorities intend to formally introduce a new exchange rate mechanism but remain cautious about potential rate manipulation. ### Financial Stability - Significant regulatory progress: enactment of the Foreign Exchange Management Law (August 2012), Central Bank of Myanmar Law (July 2013), Securities Exchange Law (July 2013), Anti-Money Laundering Law (April 2014), and the Financial Institutions Law (2016). - CBM enhanced regulation and supervision to address asset quality and profitability concerns. - In July 2017 CBM issued four prudential regulations: Asset Classification and Provisioning Regulations, Large Exposure Regulations, Liquidity Ratio Requirement Regulations, and Capital Adequacy Regulations. - CBM is reviewing banks’ compliance measures and conducting industry consultations; issued a directive in November 2017 allowing restructuring of viable overdrafts to term loans of up to three years. - CBM working with banks to shore up capital levels to meet prudential requirements. - Authorities recognize the need for appropriate sequencing of reforms consistent with economic development and CBM capacity. - Financial inclusion and payments: - Mobile Banking Regulation and Mobile Financial Services Regulation (issued in 2013 and 2016) helped expand mobile payment participation. - Credit Information Reporting System regulation issued in March 2017 provides basis for establishment of a Credit Bureau. - CBM Net system established; RTGS and Mechanized Clearing House implemented in January 2016. - AML/CFT progress: - Anti-Money Laundering Law enacted in 2014 and accompanying regulations issued in 2015. - CBM issued a Risk Management Guidance Note and updated risk based Customer Due Diligence Directive in 2015. - FATF removed Myanmar from the list of countries under ICRG process in June 2016. ### Conclusion and Authorities’ Commitments - Authorities committed to preserving macroeconomic and financial stability, promoting sustainable and inclusive growth, and implementing reform measures. - Acknowledge capacity constraints and need to enhance institutional capacity building to sustain reform momentum. - Express gratitude to the Fund, World Bank, Asian Development Bank, and regional countries for support and policy advice and look forward to continued support. *Statement by Mr. Juda Agung, Executive Director for Myanmar, and Mr. Harizal Bin Alias, Advisor to the Executive Director — March 12, 2018* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1890.pdf_