## 1. Macroeconomic Developments ## Source details **Canonical URL:** [1. Macroeconomic Developments](https://www.imf.org/-/media/files/publications/cr/2020/english/1mmrea2020003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1mmrea2020003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1mmrea2020003.pdf.json) --- ### Context and recent drivers - Economy remains below potential; downside risks have intensified. - Key drivers and constraints: - Real estate market correction and uncertainties ahead of the November 2020 elections weakening investor sentiment. - Systemic risks in the banking system remain elevated, increasing urgency for comprehensive financial sector reform and contingency planning. - Myanmar Sustainable Development Plan (MSDP) forms the authorities’ economic roadmap; a second wave of reforms is underway. - Recent reforms: adopting a market-based reference exchange rate, electricity tariff reform, and enactment of the Tax Administration Law. - Capacity development (CD) is crucial to implement MSDP reforms and transition to a market-based open economy. - Political/security context: - Prospects for progress on the refugee crisis in Rakhine State ahead of the 2020 elections are limited; 2018 MoU with the UN has faced difficulties and progress has stalled. - Security situation deteriorated in border areas; ethnic-regional tensions remain elevated. - Data/process notes: - Staff do not have updated estimates of potential growth due to ongoing revisions to national accounts; growth is clearly less than the 7-8 percent estimated in 2016 Staff Report. - Myanmar’s fiscal year changed from April–March to October–September; report uses new fiscal year definition for historical data and projections. ### Recent developments (FY2018/19 and to September 2019) - Growth and demand: - Growth in FY2018/19 is expected to be 6.5 percent, up slightly from 6.4 percent in FY2017/18, driven by a modest fiscal stimulus and a one-off increase in gas exports. - Domestic demand weak: slowing credit growth, real estate price correction, and declining investments. - External sector and reserves: - Trade deficit shrank from 5 to 3 percent of GDP; current account deficit shrank from 4 to 2 percent of GDP in FY2018/19. - Exports held up, led by garment manufacturing and natural gas. - FX reserves via auctions built modestly to about US$5.7 billion (3.5 months of imports) at end-September 2019. - Overall external position in FY2018/19 broadly in line with fundamentals; reserve coverage remains inadequate. - Inflation and monetary aggregates: - Headline inflation: 8.6 percent at end-September 2019; higher electricity tariffs contributed over 2 percentage points. - Broad money growth moderated from 19 percent in 2017/18 to 15½ percent in September 2019. - Reserve money growth picked up at fiscal year end due to increased monetary financing but remained within target as NFA remained broadly stable. - Kyat and REER broadly stable since February 2019 after CBM adopted a market-determined reference exchange rate; informal market spread reduced. - Banking sector and real estate: - Private sector credit growth slowed to 16 percent year to end-September 2019, down from 21 percent a year earlier. - CBM gave banks more time to meet large exposure limits and minimum capital adequacy levels; overdrafts declined. - Banks face difficulties recovering real estate collateral from NPLs; anecdotal corrections: rental rates may have declined by 50 percent and condo prices by 30 percent. ### Key statistics (as reported) - GDP growth: 6.5 percent in FY2018/19; 6.4 percent expected in FY2019/20. - Headline inflation: 8.6 percent at end-September 2019. - FX reserves: about US$5.7 billion (3.5 months of imports) at end-September 2019. - Fiscal deficit: 3.5 percent of GDP in FY2018/19 (3 percent in FY2017/18). - Net CBM financing: 8.4 percent of previous year’s reserve money in September 2019 (staff recommended 1 percent). - Broad money growth: 15½ percent in September 2019 (19 percent in 2017/18). - Private sector credit growth: 16 percent year to end-September 2019 (21 percent a year earlier). - Tourism revenue (FY2017/18): 2.6 percent of GDP; Chinese tourists 17 percent of total foreign visitors in FY2018/19. ### Outlook and risks - Near-to-medium-term outlook: - Growth in FY2019/20 expected to moderate slightly to 6.4 percent as uncertainty weighs on investor sentiment ahead of 2020 elections. - Domestic demand supported by fiscal stimulus in FY2019/20 budget. - Current account projected to widen starting FY2020/21 as one-off factors abate. - From FY2020/21 bank deleveraging likely to slow credit and GDP growth as legacy problems are addressed; term loans come due and banks restructure to meet capital and exposure limits by August 2020. - Medium-term growth now projected to be lower than previously envisaged given delayed restructuring and weaker property market. - Inflation expected to fall to 6-7 percent range in the medium term as electricity-tariff and food-price pressures abate. - Downside risks: - Domestic: higher-than-expected inflation if fiscal financing increases CBM financing; rising NPLs and undercapitalization in some private banks could precipitate system-wide distress; renewed conflict and limited progress on refugee crisis could limit donor financing and dampen investor sentiment. - External: global trade tensions, higher crude oil prices, slowdown in China, climate change and disasters, and novel coronavirus impact mainly through tourism. - Upside potential: - Planned scaling up of infrastructure and human capital spending could amount to as much as 3 percent of GDP per year over five years, funded predominantly from ODA and PPPs, and could raise growth by 1.5-2.0 percent over medium-to-long term. ### Scenarios and stress tests (summary) - Scaling Up Scenario: - Planned investment scaling up: up to 3 percent of GDP per year over five years (predominantly ODA and PPPs). - Potential growth impact: +1.5-2.0 percent over medium-to-long term. - Constraints: absorptive capacity, weaknesses in public investment management, limited PPP experience; fiscal structural reforms required. - Banking System Stress Scenario (illustrative): - Deposit withdrawals could leak to large informal FX market. - Output and credit growth could decline significantly relative to orderly deleveraging baseline: by as much as 4½ percentage points (output) and 10 percentage points (credit). - Higher inflation, more depreciated exchange rate, and large FX reserves losses. - Public and external debt would remain below DSA risk thresholds despite stress. ### Monetary policy: stance and recommended upgrades - Current stance: - Staff advice: maintain current monetary stance of market rates at slightly positive real terms despite a negative output gap to anchor external stability and inflation expectations. - Inflation projected to fall to mid-single digits as broad monetary aggregates moderate, supported by the phasing-out of CBM financing and positive real interest rates. - Priority recommendations: - Firm commitment to phase-out monetary financing of the deficit: - keep monetary financing under 1 percent of last year’s reserve money in the interim. - staff recommended adhering to eliminating CBM financing in FY 2020/21 as originally communicated to parliament. - Establish an interest rate corridor: - lower band via interest on excess reserves (IOER) at the CBM. - upper band via discount window facility; CBM should clarify discount window purpose and eligibility. - within corridor, use deposit auctions and expand repos to develop a reliable yield curve. - Enhance monetary policy formulation and communication: - establish a broad inflation objective; clarify decision-making through a monetary policy committee. - Gradually liberalize commercial banks’ deposit and lending rates, commensurate with supervisory capacity. - Adhere to new FX intervention rule and support FX market development; asymmetric FX intervention strategy (buying FX during inflows and selling only to avoid disorderly market conditions) and one-way FX auction rule adopted. ### Fiscal policy: stance, medium-term targets, and reforms - Recent stance and recommendations: - FY2018/19 fiscal deficit estimated at 3.5 percent of GDP. - Recommendation: fiscal deficit for FY2019/20 should increase to about 4 percent of GDP to respond to weak cyclical conditions and address rapidly increasing demand for electricity. - Medium-term fiscal deficit should remain around 4-4½ percent of GDP to support growth while preserving debt sustainability. - CBM financing should be phased out in FY 2020/21 or FY 2021/22 at the latest. - Fiscal structural reforms recommended: - Adopt a medium-term revenue strategy with specific targets; modernize the tax system; improve PFM and treasury management; develop the bond market. - Fiscal space measures (selected): - Modernize the tax system: submit new Income Tax Law (ITL); procure ITAS and implement Tax Administration Law (TAL). - Improve budget execution and efficiency: anchor budget on realistic revenue forecasts; continue PFM reforms including FIRST 2.0 and GFS reporting. - Implement pension reforms: plan move to defined contribution pension system via Central Provident Fund (CPF) with further actuarial study. ### Financial sector: vulnerabilities and reform priorities - Current vulnerabilities: - Legacy asset quality problems; re-underwriting into 3-year loans has increased NPLs; some loans include large bullet payments. - Specific provisioning and general provisions unevenly enforced; loan-loss provisions could be substantially higher than reported going forward. - Financial reporting by banks does not yet adhere to international standards; local version of IFRS due by 2022. - Rapid accumulation of real estate assets on banks’ books could raise systemic risk if realizable values decline. - Immediate priorities for reform (preserved from source): - Phase out remaining forbearance and prepare for restructuring: review large exposures and capital improvement plans. - Asset quality reviews (AQRs): prioritize independent AQR of top private banks by international specialists. - Strengthen supervisory oversight: establish high-frequency monitoring of credit and liquidity risks. - Limits on banks’ exposures to real estate and large corporates: take gradual steps to limit excessive real estate holdings and facilitate speedy disposal at market prices; consider centralized corporate restructuring if systemic. - Establish operational framework for emergency liquidity assistance (ELA) and resolution: strengthen ELA capacity and establish a dedicated restructuring group within CBM. - Contingency planning and macroeconomic policies: set up coordination mechanisms between CBM and MOPFI; public support and credible policy package may be required if risks materialize. - Address health of non-systemic private banks and state-owned banks: promptly resolve insolvent non-systemic banks; restructure undercapitalized state-owned banks guided by World Bank strategy. ### Debt sustainability, contingent liabilities, and public debt profile - Coverage and methodology: - DSA uses consolidated public sector debt, government-guaranteed debt and social security funds; SOE debt on-lent and included in public external debt coverage. - LIC DSF composite indicator for Myanmar final classification: medium. - Total public debt and composition (FY2018/19 estimated): - Total public debt: 38.1 percent of GDP. - Public domestic debt: 61.8 percent of total public debt. - PPG external debt: 38.2 percent of total public debt. - Off-balance sheet liabilities: - PPAs and PPPs estimated at 3.2 percent of GDP (off-balance-sheet). - Standard shock for potential bank recapitalization needs added to analysis: 5 percent of GDP. - Total contingent liabilities considered in scenario: 6.1 percent of GDP (sum of various components). - DSA conclusions: - External PPG debt indicators remain below policy relevant thresholds in baseline. - PV of total public debt remains under indicative thresholds in baseline but could breach under extreme shocks. - Natural disaster shock specified: one-off shock of 10 percentage points of GDP to debt-GDP ratio in second year of projection; largest standardized shock that pushes PV of public debt-to-GDP to 55.0 percent in FY2027/28. - Policy implications: - Build policy buffers: strengthen domestic revenues and build foreign reserves. - Monitor contingent liabilities from PPPs and banking system fragilities; strengthen debt management capacity. ### Scaling up scenario — assumptions and implications - Sectoral assumptions: - Electricity: additional annual PPA payments increase by US$800 million for additional 1000 MW; public sector capital spending increase US$500 million; private investment in generation doubles. - Transportation: additional spending of 2 percent of GDP each year, equally shared between direct budget spending and private sector (through PPPs). - Growth effects: - WEO calibration: 1 percentage point of GDP increase in public investment → 0.25 percent increase in output contemporaneously, rising to 0.5 percent after four years. - Under assumed scaling up, GDP growth could be raised by 1.5–2.0 percent in the medium to long term; scenario assumes growth could reach about 8 percent in medium/long term. - Fiscal and debt implications: - PV-of-public-debt to GDP ratio rises but remains under thresholds in baseline; could breach under extreme shock. - Additional PPPs and PPA payments create long-term fiscal commitments and contingent liabilities, with exposure to foreign currency risk. - Policy recommendations: - Strengthen public investment selection and management, implement value-for-money analysis, operationalize Project Bank to consolidate project info and monitor fiscal liabilities, build capacity in MOPFI. ### Tax system reform (Annex V and tax reform journey) - PIT and CIT findings: - Current PIT practice excludes 98 percent of taxpayers; PIT potential revenue estimated at only 0.3 percent of GDP absent avoidance/evasion. - Corporate tax incentives estimated to entail direct cost exceeding 25 percent of total CIT revenue. - IMF TA (September 2019) recommended reform options expected to raise revenues by 2-4 percent of GDP and improve distribution. - Baseline PIT reform package (recommended): - Lower exemptions/deductions in PIT from 6.8 million kyat to 1.75 million kyat (or at least to 3 million kyat) and revise rate structure. - Proposed PIT scale (as presented): - Bracket 1: start 1.7 mln (P67th percentile); end 2.3 mln; Marginal tax rate 10% - Bracket 2: start 2.3 mln (P80th percentile); end 4.3 mln; Marginal tax rate 20% - Bracket 3: start >4.3 mln (P95th percentile); Marginal tax rate 25% - Estimated impact of proposed PIT: - Revenue (% GDP): 3.8% - Revenue (MMK, billion): 3440 - Fraction population paying PIT (full enforcement): 32% - Fraction population losing less than 5% of gross income: 93% - Other tax measures: - Tax capital gains at statutory CIT rate of 25% (with exceptions), tax rental income at CIT rate; impose domestic WHT on interest of 10%; introduce cross-border WHTs; rationalize incentives and govern tax expenditures under MoPFI. - Introduce a simplified presumptive tax regime: uniform turnover tax at 3 percent for businesses below MMK 150,000 million turnover. - Administration and IT: - Procurement of ITAS and enactment of TAL; ITAS and TAL implementation highest priorities for 2019−20; centralize processing and expand SAS. ### Governance, SEEs, PPPs, and AML/CFT - SEEs and governance: - Electricity tariff cost-recovery adjustment will reduce Electric Power Generation Enterprise losses (about 1 percent of GDP in FY2018/19). - Decision to bring SEE oversight under MOPFI recommended; privatization/restructuring strategy suggested. - Off-balance-sheet liabilities related to PPAs and PPPs estimated at 3 percent of GDP; highlight need to identify and report contingent liabilities in fiscal risk reports to parliament. - PPP and public investment management: - Project Bank launched to consolidate project information and facilitate appraisal and prioritization; value-for-money analysis recommended to decide on financing modalities. - AML/CFT and anti-corruption: - National Risk Assessment (2017) informed National Strategy (2019); APG Mutual Evaluation (2018) deficiencies remain; risk of being greylisted during FATF plenary in February 2020. - High-level coordination initiated; further amendments to AML law and capacity building needed. - Recent achievements: medium taxpayer’s office, TAL passage, increased complaints to ACC. - Governance conclusion: - Governance and corruption vulnerabilities are severe and systemic; capacity and resource constraints critical to address AML/CFT deficiencies and improve fiscal transparency. ### Data, capacity development, and IMF support - IMF and development partners provide CD on fiscal and monetary institutions, financial sector, legal framework, and statistics. - Progress and needs: - Substantial progress in CPI, ESS, and GFS data quality; NSDP launched in April 2019 implementing e-GDDS. - National accounts being revised and rebased on 2015 supply and use tables with ADB and Fund assistance; not fully reflected yet. - FIRST became operational at the Treasury level in July 2019; FIRST 2.0 planned to integrate treasury and budget reporting. - Ongoing need for CD in national accounts, treasury operations, AML/CFT, bank supervision, recovery and resolution, and debt and fiscal risk management. - CD rationalization: - Majority of IMF CD funded externally; reprioritization and streamlining undertaken to reduce resource allocation in FY2020 given absorptive constraints. ### Selected table highlights and projections (selected datapoints) - Real GDP (percent change): 2018/19: 6.5; 2019/20: 6.4; 2020/21 (Proj.): 6.0; 2021/22 (Proj.): 6.2. - CPI (end-period): 2018/19: 9.5; 2019/20: 7.7; 2020/21 (Proj.): 6.6. - Consolidated public sector: Total revenue (percent of GDP) 2018/19: 18.0; 2019/20: 18.1; 2020/21 (Proj.): 18.1. - Net lending (+)/borrowing (-) (percent of GDP): 2018/19: -3.5; 2019/20: -4.1; 2020/21 (Proj.): -4.4. - Private sector credit (percent of GDP): 2018/19: 16.4; 2019/20: 12.7; 2020/21 (Proj.): 6.3. - Current account balance (percent of GDP): 2018/19: -2.0; 2019/20: -3.2; 2020/21 (Proj.): -3.5. - CBM reserves (gross, millions US$): 2018/19: 5,667; 2019/20: 5,936; 2020/21 (Proj.): 6,376. - Total public debt (percent of GDP): 2018/19: 38.1; 2019/20 (Proj.): 37.9; 2020/21 (Proj.): 38.5. *Source: IMF staff report excerpt (1mmrea2020003).* ### 1. Macroeconomic Developments ______________________________________________________________ 23 ### 1. Macroeconomic Developments ### Context - Despite favorable long-term prospects, the economy remains below potential and downside risks have intensified. - Drivers and constraints: - Real estate market correction and uncertainties ahead of the November 2020 elections weakening investor sentiment. - Systemic risks in the banking system remain elevated, increasing urgency for comprehensive financial sector reform and contingency planning. - Myanmar Sustainable Development Plan (MSDP) forms the basis of the authorities’ economic roadmap; a second wave of reforms is underway. - Recent reforms: adopting a market-based reference exchange rate, electricity tariff reform, and enactment of the Tax Administration Law. - Capacity development (CD) is crucial to implement MSDP reforms and transition to a market-based open economy. - Political and security context: - Prospects for progress on the refugee crisis in Rakhine State ahead of the 2020 elections are limited; the 2018 MoU with the UN has faced difficulties and progress has stalled. - Security situation has deteriorated in border areas; ethnic-regional tensions remain elevated. *Recent quoted notes from staff:* - Staff do not have updated estimates of potential growth due to ongoing revisions to national accounts; growth is clearly less than the 7-8 percent estimated in 2016 Staff Report. - Myanmar’s fiscal year has changed from April–March, to October–September; report uses new fiscal year definition for historical data and projections. ### Recent Developments (FY2018/19 and to September 2019) - Growth and demand: - Growth in FY2018/19 is expected to be 6.5 percent, up slightly from 6.4 percent in FY2017/18, driven by a modest fiscal stimulus and a one-off increase in gas exports. - Domestic demand remains weak reflecting slowing credit growth, a correction in real estate prices and declining investments. - FDI and investment: - FDI inflows continue to decline as large projects have been completed; FDI project approvals witnessed a slight uptick since a sharp decline in FY2017/18. - Inflation: - Headline inflation stood at 8.6 percent at end-September, with higher electricity tariffs contributing over 2 percentage points; inflation is expected to moderate. - External sector and reserves: - Trade deficit shrank from 5 to 3 percent of GDP; current account deficit shrank from 4 to 2 percent of GDP in FY2018/19. - Exports held up, led by garment manufacturing and natural gas. - FX reserves via auctions built modestly to about US$5.7 billion (3.5 months of imports) at end-September 2019. - Overall external position in FY2018/19 was broadly in line with fundamentals and desirable policies; risks of external debt and overall debt distress are low, but reserve coverage remains inadequate. - Fiscal developments: - FY2018/19 fiscal deficit estimated at 3.5 percent of GDP versus 3 percent in FY2017/18. - Rapid pickup in the deficit toward year-end raised net CBM financing in September 2019 to 8.4 percent of last year’s reserve money, above staff’s recommended 1 percent. - Gross and net CBM financing deviation partly reflects accumulated government deposits at the CBM from the 6-month transition budget year (April to September 2018). - Monetary and exchange rate: - Reserve money growth picked up at fiscal year end due to increased monetary financing but remained within target as NFA remained broadly stable. - Broad money growth moderated from 19 percent in 2017/18 to 15½ percent in September 2019. - Kyat and REER broadly stable since February 2019 after CBM adopted a market-determined reference exchange rate; informal market spread reduced. - Banking sector and real estate: - Private sector credit growth slowed to 16 percent year to end-September 2019, down from 21 percent a year earlier. - CBM gave banks more time to meet large exposure limits and minimum capital adequacy levels. - Overdrafts declined; banks face difficulties recovering real estate collateral from NPLs. - Anecdotal corrections: rental rates may have declined by 50 percent and condo prices by 30 percent; land prices adjusted less. ### Key statistics (as reported) - GDP growth: 6.5 percent in FY2018/19; 6.4 percent expected in FY2019/20. - Headline inflation: 8.6 percent at end-September 2019. - FX reserves: about US$5.7 billion (3.5 months of imports) at end-September 2019. - Fiscal deficit: 3.5 percent of GDP in FY2018/19 (3 percent in FY2017/18). - Net CBM financing: 8.4 percent of previous year’s reserve money in September 2019 (staff recommended 1 percent). - Broad money growth: 15½ percent in September 2019 (19 percent in 2017/18). - Private sector credit growth: 16 percent year to end-September 2019 (21 percent a year earlier). - Tourism revenue (FY2017/18): 2.6 percent of GDP; Chinese tourists 17 percent of total foreign visitors in FY2018/19. ### Monetary and Fiscal Management Observations - The year-end rise in net CBM financing partly due to change of fiscal year and gaps in cash management; could have been avoided by greater domestic debt issuance through the year. - Treasury and deposit auction rates remained relatively stable despite seasonally low excess reserves. - Excess reserves of banking system seasonally low; reserve money growth moderated to about 6 percent y/y since September. - FY2018/19 was likely the first year that gross and net CBM financing deviated because of accumulated government deposits at the CBM from the transition year. ### Structural and institutional issues - Legacy issues in the banking system and decades of under-investment in human capital constrain capacity. - Continued reforms and capacity development needed to implement MSDP and transition to market-based open economy. ### Recent sectoral notes - Natural gas: revenues from natural gas extraction declining; A6 block of Shwe Yee Htun-2 moved to development phase and could come on stream by FY2022/23. - Infrastructure: scaling up (China-Myanmar Economic Corridor and East-West corridor) seen as potential to realize growth potential by integrating into regional supply chains. ### Staff footnotes and data process - National accounts are being revised and rebased on new 2015 supply and use tables with ADB and Fund assistance; currently not fully reflecting updates. ### Outlook and Risks - Near-to-medium-term outlook: - Growth in FY2019/20 expected to moderate slightly to 6.4 percent as uncertainty weighs on investor sentiment ahead of 2020 elections. - Domestic demand supported by fiscal stimulus in FY2019/20 budget. - Current account projected to widen starting FY2020/21 as one-off factors abate. - From FY2020/21 bank deleveraging likely to slow credit and GDP growth as legacy problems are addressed; term loans come due and banks restructure to meet capital and exposure limits by August 2020. - Medium-term growth now projected to be lower than previously envisaged given delayed restructuring and weaker property market. - Inflation expected to fall to 6-7 percent range in the medium term as electricity-tariff and food-price pressures abate. - Downside risks have increased: - Domestic risks: higher-than-expected inflation if fiscal financing increases CBM financing; rising NPLs and undercapitalization in some private banks could precipitate system-wide distress with macrofinancial spillovers; renewed conflict and limited progress on refugee crisis could limit donor financing and dampen investor sentiment. - External risks: global trade tensions, higher crude oil prices, slowdown in China, climate change and disasters, and novel coronavirus impact mainly through tourism. ### Upside potential - Planned scaling up of infrastructure and human capital spending and full implementation of MSDP could be an upside: - Scaling up could amount to as much as 3 percent of GDP per year over five years, funded predominantly from ODA and PPPs. - Could raise growth by 1.5-2.0 percent over medium-to-long term. - SDG-related spending gaps are large; expenditures are gradually scaled-up in upside scenario reflecting absorptive capacity constraints. - Significant fiscal structural reforms needed to realize this scenario and manage fiscal risks. ### Scenarios and Stress Tests - Scaling Up Scenario: - Planned investment scaling up: up to 3 percent of GDP per year over five years (predominantly ODA and PPPs). - Potential growth impact: +1.5-2.0 percent over medium-to-long term. - Constraints: absorptive capacity, weaknesses in public investment management, limited PPP experience; fiscal structural reforms required. - Banking System Stress Scenario (illustrative, calibrated to cross-country experience and Myanmar’s 2003 episode): - Possible outcomes in a bank distress event: - Deposit withdrawals could leak to large informal FX market, given lack of alternative assets and weak enforcement of capital controls. - Output and credit growth could decline significantly relative to orderly deleveraging baseline: by as much as 4½ percentage points (output) and 10 percentage points (credit). - Higher inflation, more depreciated exchange rate, and large FX reserves losses. - Public and external debt would remain below DSA risk thresholds despite stress. *Authorities’ views and additional analysis appear in subsequent sections of the source.* *Source: IMF staff report excerpt (1. Macroeconomic Developments).* ### 14. The authorities broadly agreed with staff’s view of the recent developments and ### 14. The authorities broadly agreed with staff’s view of the recent developments and ### Recent developments and outlook - Subdued growth attributed to: delays in project implementation, tepid investment, and continued correction in the real estate market. - Authorities suggested FY2018/19 GDP could surprise on the upside owing to a pickup in government spending at the end of the fiscal year and increase in tourist arrivals. - Authorities are carefully considering large infrastructure projects, including the China-Myanmar economic corridor, to benefit from Myanmar’s strategic location while ensuring debt sustainability. - Authorities hopeful of a pickup in FDI and investment over the next few years. - Authorities appreciated the quantitative risk scenarios and policy trade-offs outlined by staff; recognized the severity of the downside scenario and sought to realize upside gains through full implementation of the MSDP. ### Financial sector: current position and vulnerabilities - Legacy asset quality problems are being addressed slowly; vulnerabilities remain. - Adoption of new prudential regulations in 2017 was a critical first step. - Banks reportedly met the July 2019 target of 30 percent of total lending switched from overdraft into term loans. - Re-underwriting into 3-year loans has increased NPLs; some re-underwritten loans include large bullet payments likely to pose repayment challenges. - Specific provisioning for NPLs and required general provisions have been unevenly enforced; loan-loss provisions could be substantially higher than reported going forward. - Some banks (including a few systemic private banks) have raised capital through subordinated debt and minority stakes by foreign banks as allowed by prudential regulations. - Recapitalization needs could be large and unevenly distributed, making a purely private sector solution unviable and necessitating public support. - Financial reporting by banks does not yet adhere to international standards; banks finalizing end-September 2019 financial statements as required under the Financial Institutions Act of 2016 and the 2017 prudential guidelines. - Domestic banks currently use a cash-based accounting approach; a local version of IFRS is due to be in place by all banks in 2022. Two smaller banks are starting to implement IFRS on a pilot basis. - Rapid accumulation of real estate assets on banks’ books could raise systemic risk if realizable real estate values decline. - Progress made on on- and offsite bank examinations and introducing risk-based supervision with Fund TA; compliance and enforcement remain at early stages. ### Financial sector reform strategy — findings and immediate priorities - Urgent need for a comprehensive financial sector reform strategy to safeguard financial stability; failure to tackle asset quality head-on would raise clean-up costs and economic toll. - CBM extended period for banks’ compliance with capital adequacy and large exposure limit requirements to August 2020; during extension CBM should ensure banks maximize recoveries, book loan losses, adequately provision and rebuild capital, and encourage restructuring of viable loans. - Critical legal and institutional priorities to enable: - ascertainment of banks’ true health; - loss recognition and provisioning (including supportive tax provisions); - orderly deleveraging and recapitalization; and - effective resolution mechanisms that limit spillovers while protecting small depositors. Immediate priorities (bullet list preserved from source): - Phase out remaining forbearance and prepare for restructuring: - review banks' submissions of large exposures and capital improvement plans to ensure ambition and realism; monitor implementation closely. - Asset quality reviews (AQRs) and risk monitoring: - prioritize an independent AQR of the top private banks by international specialists to determine asset quality and capital needs and inform resolution decisions. - Strengthen supervisory oversight: - establish processes for high-frequency monitoring of credit and liquidity risks, building on progress toward risk-based supervision. - Limits on banks’ exposures to real estate and large corporate borrowers: - take gradual steps to limit excessive real estate holdings and facilitate speedy disposal at market prices. - if AQR identifies systemic viability problems in large corporates, consider a centralized corporate restructuring solution within a proper governance framework. - Establish operational framework for emergency liquidity assistance (ELA) and resolution: - strengthen capacity, policies and procedures for emergency liquidity support for solvent banks (distinct from day-to-day liquidity management). - establish a dedicated restructuring group within the CBM for resolution operations. - Contingency planning and macroeconomic policies should risks materialize: - public support and a credible policy package may be required to instill confidence in the banking system and exchange rate, protecting external and fiscal positions. - set up coordination mechanisms between the CBM and the Ministry of Planning, Finance and Industry (MOPFI). - supportive fiscal and monetary policy and an external financing backstop would be important to anchor expectations and respond to disorderly market conditions. - Address health of non-systemic private banks and state-owned banks: - promptly resolve insolvent non-systemic banks. - restructure undercapitalized state-owned banks guided by the World Bank’s restructuring strategy. ### Authorities’ views on financial sector reform - Authorities (CBM) committed to improving financial supervision and addressing systemic risks. - CBM noted progress in converting overdrafts to term loans and confident most banks would meet capital adequacy and large exposure limits by August 2020. - CBM recognized importance of implementing prudential regulations and monitoring/enforcement. - Timely recapitalization seen as key to maintaining confidence; some capital injections have taken place through CBM-allowed avenues. - AQRs viewed as useful for identifying banks’ “true” financial position and restructuring options. - CBM noted use of “step-in contracts” by some banks but stated CBM has not approved their use. - Uncertainties over adherence to international accounting standards and borrowers’ capacity/willingness to pay pose challenges to enforcing credible capital improvement plans. - Agreement that a well-formulated financial safety net and contingency plans are needed. ### Monetary policy: current stance and objectives - Inflation recently spiked mainly due to supply-side factors, notably the doubling of the electricity tariff. - Broad money growth remains below target despite a September spike in monetary financing. - Staff advice: maintain current monetary stance of market rates at slightly positive real terms despite a negative output gap to anchor external stability and inflation expectations. - Inflation projected to fall to mid-single digits as broad monetary aggregates moderate, supported by the phasing-out of CBM financing and positive real interest rates. - Recommend greater coordination between line ministries, MOPFI and CBM to lower risk of budget underfunding and excessive interest rate volatility. - Improve liquidity forecasting and actively undertake open market operations to contain money growth and anchor interest rates. ### Upgrading the monetary policy framework — recommendations - Move to a more active and credible monetary policy framework following transition to market-determined reference exchange rate mechanism (Appendix III referenced in source). - Firm commitment to phase-out monetary financing of the deficit: - keep monetary financing under 1 percent of last year’s reserve money in the interim. - staff recommended adhering to eliminating CBM financing in FY 2020/21 as originally communicated to parliament. - Support development of deep and liquid money and FX markets. Priority measures (bullet list preserved from source): - Establish an interest rate corridor to guide short-term interest rates: - lower band established by introduction of interest on excess reserves (IOER) at the CBM. - upper band to be the rate on the existing discount window facility. - CBM should clarify discount window purpose and eligibility (monetary policy tool, overnight duration, permissible collateral). - distinguish discount window from lender of last resort facility with separate eligibility and terms. - within corridor, use deposit auctions and expand repos to develop a reliable yield curve. - Enhance monetary policy formulation and communication: - establish a broad inflation objective; - clarify decision-making through a monetary policy committee; - conduct regular reviews and communicate monetary policy stance. - Gradually liberalize commercial banks’ deposit and lending rates, commensurate with supervisory capacity and stability: - greater flexibility would strengthen monetary transmission and help banks price credit risks and raise capital via improved profitability. - current 8 percent deposit floor for savings/term deposits described as high by regional standards. - Adhere to the new FX intervention rule and support FX market development: - asymmetric FX intervention strategy—buying FX during inflows and selling only to avoid disorderly market conditions—appears to be working. - one-way FX auction with clear internal guidelines eliminates the multiple currency practice (MCP). - shift focus to supporting formal FX market development by amending regulatory gaps (Foreign Exchange Management Law), encouraging hedging instruments, and improving timely market information availability. ### Authorities’ views on monetary framework - CBM plans to further upgrade the monetary framework and reiterated commitment to steadily phase out monetary financing. - CBM will continue market-determined reference exchange rate and will consider introducing an interest rate corridor including an IOER. - While worried about rising inflation, authorities were open to gradual interest and deposit rate flexibility at the appropriate time. - Authorities noted deposit and treasury auctions were working well and keeping market rates above expected inflation. - Acknowledged the spike in monetary financing in September but stated that after adjustments it did not breach their gross nominal target of 20 percent of planned domestic financing. - Agreed that given planned spending pickup in FY2019/20 it is important to closely monitor and forecast financing needs. - Reiterated commitment to steadily phase out monetary financing but were unsure of timing given the political cycle when the next 2020–21 budget would be submitted prior to the elections under uncertain external financing conditions. ### Fiscal policy: creating fiscal space and strengthening the fiscal framework - Improved budget execution supported growth in FY2018/19; FY2018/19 fiscal deficit was in line with staff estimates and provided modest stimulus, albeit with greater net CBM financing than envisaged due to lower domestic debt issuances. - Tax revenues stagnant; non-tax revenue from State Economic Enterprises (SEE) declined. - Capital expenditure was subdued reflecting capacity constraints in spending execution. - Recommendation: fiscal deficit for FY2019/20 should increase to about 4 percent of GDP to respond to weak cyclical conditions and address rapidly increasing demand for electricity, with increased revenue driven by higher electricity tariffs offset by higher infrastructure spending. - Medium-term fiscal deficit should remain around 4-4½ percent of GDP to support growth while preserving debt sustainability. - CBM financing should be phased out in FY 2020/21 or FY 2021/22 at the latest. - Fiscal structural reforms needed to create fiscal space for SDG-related spending and possible bank-related costs. - Revenue-to-GDP ratio on a declining trend, partly due to declining natural resource revenue and stagnant tax revenues. - Authorities should adopt a medium-term revenue strategy with specific targets; enhance treasury management to ensure sufficient financing of the fiscal deficit and develop the bond market. Fiscal space measures (bullet list preserved from source): - Modernize the tax system to raise revenues: - submit a new Income Tax Law (ITL) to parliament, incorporating a new rate structure for personal income tax to protect the tax base, raise revenues and rationalize incentives by removing scope for discretion. - reduced rates for undisclosed income proposed in the FY2019/20 budget should be one-off and phased-out by the new ITL. - procure the Integrated Tax Administration System (ITAS) and enact the Tax Administration Law (TAL); devote resources to implement TAL and ITAS to improve governance and fight corruption. - modernize fiscal regimes for the petroleum and mining sectors, incorporating Fund recommendations in the ITL. - develop a comprehensive tax reform encompassing commercial and the special goods tax in the medium term, paying due regard to capacity. - Improve budget execution and efficiency: - anchor budget on realistic revenue forecasts and targets linked to tax reforms and macro developments. - continue PFM reforms including new chartered accounts and financial information reporting system (FIRST 2.0) and GFS reporting in future budget documents to strengthen spending monitoring. - address gaps in cash management that led to sharp rise of CBM financing toward end of FY2018/19 through better coordination between Treasury and CBM and proactive treasury securities issuance. - Implement pension reforms: - plan to move to a defined contribution pension system through a Central Provident Fund (CPF), supported by the World Bank, to provide financial security for public sector retirees while ensuring long-term fiscal sustainability and developing domestic capital market. - main parameters (contribution rate, benefits, replacement rates) need careful calibration based on further actuarial study and may entail significant transition costs. *Source: 1mmrea2020003 - 14. The authorities broadly agreed with staff’s view of the recent developments and* ### 24. The government has made progress in enhancing governance in SEEs. The recent cost- ### 24. The government has made progress in enhancing governance in SEEs. The recent cost- ### Governance and State-Owned Economic Enterprises (SEEs) - Recent cost-recovery adjustment to electricity tariffs is commendable and will reduce Electric Power Generation Enterprise losses (about 1 percent of GDP in FY 2018/19). - Decision to bring SEE oversight under the MOPFI is timely and should be followed up by a privatization/restructuring strategy. - Careful assessment of PPAs currently under negotiation based on cost competitiveness including contingent liabilities and guarantees should be centralized. - Ongoing Fund TA will provide concrete recommendations on fiscal relations between SEEs and the center. - On petroleum production sharing contracts, the new bidding round should adopt a competitive bidding process and a "model contract" based on Fund TA on fiscal aspects and linked to the new Petroleum law. ### Public investment, PPPs, and fiscal risks - A framework for managing public investment including public-private partnerships (PPPs) should be established to monitor and control the associated fiscal risks. - The “Project Bank” could be developed into a tool that can consolidate the key information of investment projects and facilitate appraisal and prioritization including in the power sector. - Value for money analysis can help decide which projects should be on-budget, ODA financed or set up as PPPs. - Current off-balance sheet liabilities related to existing power purchase agreements (PPAs) and PPPs (estimated at 3 percent of GDP) and the planned scaling up of infrastructure project could entail significant fiscal risks. - A large share of the envisaged projects in the “project bank” are being proposed as PPPs, which may bring efficiency gains but can also entail contingent liabilities including from sovereign guarantees. - It becomes crucial to identify and report contingent liabilities in a fiscal risk report which should be presented to the parliament on a regular basis. - Further Fund TA can support the estimation and reporting of contingent liabilities in collaboration with the World Bank. ### Authorities’ views and intentions - The authorities agreed on the fiscal stance and are committed to fiscal reforms. - The government’s FY2019/20 budget contains a positive fiscal stimulus with strengthened capital spending particularly in the energy sector. - They reiterated the commitment to phasing out CBM financing of the budget, and explained the overshooting of the target in end FY2018/19 as temporary. - The authorities are discussing recommendations from the recent Fund mission on income tax policy, including scenarios on the personal income tax structure. - The IRD is expanding the coverage of the self-assessment system (SAS) and centralizing tax return and payment processing for the large and medium taxpayer offices. - Although the “Project Bank” has just been launched, they intended to make it instrumental in managing public investment including PPPs. - Investments under the CMEC would be assessed according to international standards. - Authorities noted benefits from ongoing reforms to the state owned banks and welcomed forthcoming Fund TA to support strengthening SEE governance and the management of fiscal risks. ### Structural reforms and business environment - Sustaining reform momentum is important to achieve higher and more inclusive growth. - Build on recent progress to open foreign investment to new sectors such as insurance. - Further efforts required to enhance the business environment: more reliable power supply, contract enforcement, improved access to finance and logistics. - A new energy masterplan with a clear project pipeline included in the “Project Bank” would help secure energy security at least cost. - Measures to improve corporate governance, including via the new insolvency law, would ensure healthy investment. - Adopt important financial infrastructure briskly: credit bureau, secured transactions framework, regulatory oversight of payments to enable broader access to finance and support digital payment solutions. - East-West corridor and CMEC should be developed through competitive bidding processes and transparent reporting of fiscal risks. ### Governance, anti-corruption, and AML/CFT - Recent achievements: establishing the medium taxpayer’s office, passage of the TAL, and increased complaints to the anti-corruption commission (ACC). - Second cycle of review of UNCAC implementation is complete, with findings expected shortly. - On IMF advice, the new bidding round for exploration has been delayed to ensure it is consistent with the draft ITL. - The National Risk Assessment (2017) shaped the National Strategy formally adopted in 2019. - Progress on deficiencies highlighted by the 2018 Mutual Evaluation Report by the Asia Pacific Group (APG) has been held back by weak capacity and limited reforms, raising the risks that Myanmar will be placed on the “greylist” during the Financial Action Task Force (FATF) plenary in February 2020. - Addressing gaps in the AML/CFT framework recommended by the APG is critical; high-level coordination has been initiated and should be followed up by further efforts to amend the AML law in line with Fund TA. - Fiscal transparency, including EITI reporting, and strengthening anti-corruption efforts should help mobilize tax and natural resource revenues while reducing the costs of doing business. ### Fund capacity development (CD) - IMF and other development partners provide CD focused on: building fiscal and monetary institutions, strengthening the financial sector and legal framework, and improving macroeconomic statistics. - More needs to be done in national accounts and treasury operations. - Some reprioritization, given absorptive constraints and rapidly evolving needs, may be required. ### Staff appraisal — Growth and macro outlook - Economic activity in FY2018/19: growth is estimated at 6.5 percent in FY2018/19, up slightly from 6.4 percent in 2017/18 on account of modest fiscal stimulus and one-off increase in gas exports. - For FY2019/20 growth is expected to moderate slightly to 6.4 percent as the real estate price correction and uncertainty weighs on investor sentiment in the runup to elections. - Starting FY 2020/21, bank deleveraging is expected to slow credit and GDP growth, as banks start writing off irrecoverable NPLs fully and recapitalize after the expiry of the forbearance that the authorities extended to August 2020. - Medium-term growth is now projected to be lower than previously envisaged. - FDI inflows are subdued amid tepid foreign investor sentiment. ### Financial sector risks and monetary policy - Systemic risks stemming from fragilities in the banking system remain elevated. - Re-underwriting has led to a rise in NPLs; weaker real estate valuations have stressed bank capital. - Some banks have raised capital including through foreign equity injections, but this remains insufficient. - The CBM extended the period for banks’ compliance with capital adequacy and large exposure limit requirements to August 2020. - During this extension, the CBM should encourage banks to restructure viable loans, recapitalize and prepare a comprehensive financial sector restructuring strategy including contingency planning. - Recent spike in inflation is mainly due to supply side factors, notably the doubling of electricity tariffs. - Monetary stance should remain broadly unchanged by keeping market rates at positive real levels and broad money growth on its declining trend. - Reserve coverage at around 3½ months of imports remains inadequate. - Transition to a one-way FX auction and implementation of clear internal guidelines which eliminate the MCP is to be commended and should help accumulate reserves. - With the successful transition to the market-determined reference exchange rate mechanism and a FX intervention rule, the time is right to upgrade the monetary policy framework and gradually liberalize retail bank interest rates. ### Fiscal policy and medium-term priorities - The mildly expansionary fiscal stance: fiscal deficit estimated at about 4 percent of GDP in FY 2019/20, compared to 3½ percent in FY2018/1 9. - Rapid pickup in the deficit toward the end of FY2018/19 sharply raised central bank financing; CBM financing should be phased out in FY2020/21 as originally envisaged. - Declining trend in revenue-to-GDP ratio needs to be reversed; a medium-term revenue strategy with specific targets is needed to meet SDG related spending needs in a sustainable way. - This involves modernizing the tax system and improving PFM systems for more efficient and responsive fiscal spending. - Implementation of the medium-term economic roadmap, the MSDP, will play a critical role to help achieve the SDGs and will require heavy investment in physical and human capital while managing fiscal risks. - Focus on PPPs and selected bilateral projects, including under the East-West and the China-Myanmar economic corridor, but the fiscal risks need to be assessed and properly managed. ### Governance conclusion and capacity development needs - Despite some progress, governance and corruption vulnerabilities are severe and systemic in Myanmar. - Measures to address capacity and resource constraints are critical to address the AML/CFT deficiencies identified by the APG. - The new bidding round for petroleum exploration should be competitive and consistent with the ITL to improve fiscal governance and natural resource management. - Financial sector regulatory and corporate insolvency framework are paramount to address elevated banking sector risks. - More resources should be dedicated to strengthening the anti-corruption framework including further integration to the MSDP. - CD remains crucial to support the ambitious structural and policy reforms; further work is needed in national accounts statistics, treasury operations and the AML/CFT framework. *International Monetary Fund — Chapter content from 1mmrea2020003* ### 38. It is proposed that the next Article IV consultation be held on the standard 12-month ### 1mmrea2020003 - 38. It is proposed that the next Article IV consultation be held on the standard 12-month cycle. ### Macroeconomic developments - Growth remains subdued amid weak domestic demand. - Exports of manufactured goods "is holding up in the face of regional headwinds and border trade disruptions" and "more recently, tourism has picked up." - Manufacturing production has begun to weaken while imports slow due to subdued domestic and foreign investment. - GDP growth (year-on-year change) series shown for fiscal years 14/15–19/20; staff projection label "Proj." - Goods exports (year-on-year percent change) and components presented for 2015/16–2019/20. - Tourist arrivals (cumulative, in thousands) series shown for 2014–2019 (Oct). - Myanmar: PMI (Seasonally adjusted, 50+=Expansion) series shown Jan-17 to Nov-19 with indicators: Output, Employment, Input prices, Output prices. - Goods imports (y/y percent change) series by category: Capital goods, Intermediate goods, Consumer goods for 2015/16–2019/20. - Contribution to Real GDP (year-on-year growth) decomposed into Domestic demand, External demand, Statistical discrepancy, Overall growth (series through 2018/19* and note on fiscal year change). ### Macro-Fiscal and external developments - The level of CBM financing spiked temporarily due to gaps in cash management; reserve money growth remains moderate. - Inflation has picked up driven by the near doubling of electricity tariffs and higher food prices; exchange rate has stabilized. - Import demand contracted sharply decreasing the current account deficit, which remains financed by FDI, but this is insufficient to allow CBM to accumulate international reserves in the short run. - Fiscal financing (in percent of GDP) series for External, Banks, Central bank, Others for 14/15–19/20 with "Proj." - Reserve money growth (percent, year-on-year) and decomposition of net foreign assets, net credit to government, net credit to banks, other items net, reserve money for 13/14–18/19. - Inflation (headline, food, non-food) (percent change y/y) series May-14 to Aug-19. - Nominal and Effective Exchange Rates: REER/NEER based on official rate, Official exchange rate, Relative price (2010=100, increase=appreciation) Jul-15 to Oct-19. - Balance of Payments (in billions of U.S. dollars) showing Trade balance, FDI, Current account excluding grants, Financial account balance, Overall balance for 14/15–19/20 with "Proj." - Total and Net CBM Reserves (in billions of U.S. dollars and months of imports, right scale) with projections. ### Macro-structural developments - "Tax mobilization needs to raise more revenue" as social spending still lags behind peers in the region. - Infrastructure quality remains a deterrent to attracting FDI; "FDI restrictions have been eased." - Wages in the aggregate private sector remain broadly unchanged and wage costs remain competitive. - ASEAN Economies: Infrastructure Quality Index (2016–17) ranking: Singapore highest (index scale Highest = 7 and Lowest = 1) and Myanmar positioned toward lower end among listed peers. - Tax Revenue, 2017 (In percent of GDP) comparisons across countries with Myanmar included. - Union Government Spending on Education and Health (In percent of GDP) series 2014/15–2018/19; education and health shown relative to "average Asia." ### Macrofinancial developments - Money and credit growth have slowed, but financial deepening is progressing. - Private credit is concentrated in construction, trade and services sectors. - Securities auctions on competitive terms picked up through the year. - Retail bank rates remain at fixed levels while Treasury rates have risen in line with inflation. - Private sector credit (In percent of GDP) compared across Myanmar, Lao PDR, Cambodia, Vietnam (years from beginning of reforms). - Reserve and Broad Money, and Private Sector Credit (in percent change year-on-year; inflation-adjusted) series 2008–2019. - Myanmar T-bill Auctions (Issued vs. Offer) (In millions of kyats) Aug-15 to Dec-19 with Competitive and Non-competitive categories. - Retail Saving and Lending Interest Rates (In percent) series 2008/09–2018/19 showing multiple rate types including small personal loans (micro-finance), savings rate basic floor/ceiling, working capital loans, agriculture loans (MADB), unsecured loan. - Auction Rates (In percent per annum) 14-day deposit, 3-month T-bill, 1-year T-bill Sep-16 to Nov-19. - Private Banks: Credit by Sector and Growth (left: percent of GDP; right: percent change, year-on-year) for 2014/15–2018/19 H1; sectors: Agriculture, Manufacturing, Trade, Transport, Construction, Services, Other, Total (growth, right scale). ### Progress towards Sustainable Development Goals (SDGs) - Strong growth has helped to increase per capita GDP; income inequality is comparable to peer countries. - Healthcare is still lagging; additional investments in education and infrastructure are needed. - Access to the formal financial system remains low. ### Selected Economic Indicators (Table 1: 2016/17–2021/22) - Real GDP (percent change): 2016/17: 5.8; 2017/18: 6.4; 2018/19: 6.5; 2019/20: 6.4; 2020/21 (Proj.): 6.0; 2021/22 (Proj.): 6.2. - CPI (end-period; base year from 2014/15=2012): 2016/17: 3.4; 2017/18: 8.6; 2018/19: 9.5; 2019/20: 7.7; 2020/21 (Proj.): 6.6; 2021/22 (Proj.): 6.2. - CPI (period average; base year from 2014/15=2012): 2016/17: 4.6; 2017/18: 5.9; 2018/19: 8.6; 2019/20: 7.9; 2020/21 (Proj.): 6.9; 2021/22 (Proj.): 6.4. - Consolidated public sector (percent of GDP): Total revenue 2016/17: 18.3; 2017/18: 18.8; 2018/19: 18.0; 2019/20: 18.1; 2020/21 (Proj.): 18.1; 2021/22 (Proj.): 18.4. - Tax revenue (percent of GDP): 2016/17: 7.1; 2017/18: 7.1; 2018/19: 6.8; 2019/20: 6.9; 2020/21 (Proj.): 7.2; 2021/22 (Proj.): 7.5. - Total expenditure (percent of GDP): 2016/17: 21.0; 2017/18: 21.8; 2018/19: 21.5; 2019/20: 22.1; 2020/21 (Proj.): 22.5; 2021/22 (Proj.): 22.9. - Net lending (+)/borrowing (-) (percent of GDP): 2016/17: -2.7; 2017/18: -3.0; 2018/19: -3.5; 2019/20: -4.1; 2020/21 (Proj.): -4.4; 2021/22 (Proj.): -4.4. - Domestic public debt (percent of GDP): 2016/17: 23.3; 2017/18: 26.3; 2018/19: 23.4; 2019/20: 23.5; 2020/21 (Proj.): 23.9; 2021/22 (Proj.): 24.4. - Reserve money (y/y percent change): 2016/17: 8.0; 2017/18: 4.6; 2018/19: 11.3; 2019/20: 8.4; 2020/21 (Proj.): 9.0; 2021/22 (Proj.): 8.9. - Broad money (y/y percent change): 2016/17: 21.4; 2017/18: 18.6; 2018/19: 15.4; 2019/20: 11.8; 2020/21 (Proj.): 10.9; 2021/22 (Proj.): 11.0. - Private sector credit (percent of GDP): 2016/17: 27.4; 2017/18: 21.2; 2018/19: 16.4; 2019/20: 12.7; 2020/21 (Proj.): 6.3; 2021/22 (Proj.): 6.7. - Current account balance (percent of GDP): 2016/17: -6.5; 2017/18: -4.2; 2018/19: -2.0; 2019/20: -3.2; 2020/21 (Proj.): -3.5; 2021/22 (Proj.): -4.0. - CBM reserves (gross) in millions of U.S. dollars: 2016/17: 5,141; 2017/18: 5,462; 2018/19: 5,667; 2019/20: 5,936; 2020/21 (Proj.): 6,376; 2021/22 (Proj.): 7,040. - Total external debt (billions of U.S. dollars): 2016/17: 17.7; 2017/18: 19.6; 2018/19: 19.1; 2019/20: 19.1; 2020/21 (Proj.): 19.3; 2021/22 (Proj.): 19.6. - GDP (billions of kyats): 2016/17: 82,700; 2017/18: 92,789; 2018/19: 105,012; 2019/20: 120,872; 2020/21 (Proj.): 138,076; 2021/22 (Proj.): 157,026. - GDP (billions of US$): 2016/17: 61.5; 2017/18: 67.1; 2018/19: 68.5; 2019/20: 74.8; 2020/21 (Proj.): 81.9; 2021/22 (Proj.): 89.6. - GDP per capita (US$): 2016/17: 1,267; 2017/18: 1,279; 2018/19: 1,242; 2019/20: 1,321; 2020/21 (Proj.): 1,440; 2021/22 (Proj.): 1,593. - Exchange rates (kyat/$, end of period): Official exchange rate 2016/17: 1,357.7; 2017/18: 1,551.5; 2018/19: 1,533.0. Parallel rate 2016/17: 1,350.9; 2017/18: 1,563.6; 2018/19: 1,533.1. ### Summary operations of the nonfinancial public sector (Table 2: 2015/16–2020/21) - Revenue (in billions of kyats): 2015/16 Act.: 14,520; 2016/17 Est.: 15,100; 2017/18: 17,471; 2018/19: 18,866; 2019/20 (Proj.): 21,831; 2020/21 (Proj.): 25,007. - Taxes (in billions of kyats): 2015/16: 5,294; 2016/17: 5,897; 2017/18: 6,561; 2018/19: 7,168; 2019/20 (Proj.): 8,372; 2020/21 (Proj.): 9,909. - Expenditure (in billions of kyats): 2015/16 Act.: 17,391; 2016/17 Est.: 17,365; 2017/18: 20,266; 2018/19: 22,541; 2019/20 (Proj.): 26,763; 2020/21 (Proj.): 31,057. - Gross operating balance (in billions of kyats): 2015/16: 2,630; 2016/17: 3,065; 2017/18: 3,811; 2018/19: 3,444; 2019/20 (Proj.): 3,746; 2020/21 (Proj.): 4,139. - Net lending/borrowing (in billions of kyats): 2015/16: -2,871; 2016/17: -2,265; 2017/18: -2,795; 2018/19: -3,675; 2019/20 (Proj.): -4,932; 2020/21 (Proj.): -6,050. - Net incurrence of liabilities (in billions of kyats): 2015/16: 3,534; 2016/17: 2,072; 2017/18: -10,643; 2018/19: 3,283; 2019/20 (Proj.): 5,133; 2020/21 (Proj.): 6,204. - Domestic securities issuance and components provided across years (including central bank and commercial bank contributions). ### Public sector operations (percent of GDP; Table 2 concluded) - Revenue (percent of GDP): 2015/16: 19.6; 2016/17: 18.3; 2017/18: 18.8; 2018/19: 18.0; 2019/20 (Proj.): 18.1; 2020/21 (Proj.): 18.1. - Expenditure (percent of GDP): 2015/16: 23.4; 2016/17: 21.0; 2017/18: 21.8; 2018/19: 21.5; 2019/20 (Proj.): 22.1; 2020/21 (Proj.): 22.5. - Net lending/borrowing (percent of GDP): 2015/16: -3.9; 2016/17: -2.7; 2017/18: -3.0; 2018/19: -3.5; 2019/20 (Proj.): -4.1; 2020/21 (Proj.): -4.4. - Primary balance (percent of GDP): 2015/16: -2.6; 2016/17: -1.4; 2017/18: -1.1; 2018/19: -1.8; 2019/20 (Proj.): -2.4; 2020/21 (Proj.): -2.6. - Public debt (percent of GDP): 2015/16: 37.8; 2016/17: 38.3; 2017/18: 40.8; 2018/19: 38.2; 2019/20 (Proj.): 36.9; 2020/21 (Proj.): 37.2. - Domestic public debt (percent of GDP): 2015/16: 22.0; 2016/17: 23.3; 2017/18: 26.3; 2018/19: 23.4; 2019/20 (Proj.): 23.5; 2020/21 (Proj.): 23.9. - CBM financing (share of reserve money): 2015/16: 17.5; 2016/17: 11.6; 2017/18: 1.4; 2018/19: 4.1; 2019/20 (Proj.): 1.0; 2020/21 (Proj.): 1.0. ### Balance of Payments (Table 3: 2016/17–2023/24) - Current account (millions of U.S. dollars): 2016/17: -4,002; 2017/18: -2,811; 2018/19: -1,372; 2019/20: -2,402; 2020/21 (Proj.): -2,853; 2021/22 (Proj.): -3,558; 2022/23 (Proj.): -4,268; 2023/24 (Proj.): -5,024. - Current account (percent of GDP): 2016/17: -6.5; 2017/18: -4.2; 2018/19: -2.0; 2019/20: -3.2; 2020/21 (Proj.): -3.5; 2021/22 (Proj.): -4.0; 2022/23 (Proj.): -4.4; 2023/24 (Proj.): -4.7. - Trade balance (millions of U.S. dollars): 2016/17: -4,636; 2017/18: -3,429; 2018/19: -2,056; 2019/20: -2,762; 2020/21 (Proj.): -3,335; 2021/22 (Proj.): -4,006; 2022/23 (Proj.): -4,850; 2023/24 (Proj.): -5,604. - Merchandise exports f.o.b. (millions of U.S. dollars): 2016/17: 9,475; 2017/18: 11,226; 2018/19: 11,472; 2019/20: 11,615; 2020/21 (Proj.): 12,242; 2021/22 (Proj.): 13,478; 2022/23 (Proj.): 15,002; 2023/24 (Proj.): 16,538. - Merchandise imports f.o.b. (millions of U.S. dollars): 2016/17: 15,291; 2017/18: 15,587; 2018/19: 14,263; 2019/20: 15,142; 2020/21 (Proj.): 16,373; 2021/22 (Proj.): 18,308; 2022/23 (Proj.): 20,702; 2023/24 (Proj.): 23,009. - Balance on services (millions of U.S. dollars): 2016/17: 1,181; 2017/18: 933; 2018/19: 734; 2019/20: 765; 2020/21 (Proj.): 797; 2021/22 (Proj.): 824; 2022/23 (Proj.): 850; 2023/24 (Proj.): 867. - Primary income balance (millions of U.S. dollars): 2016/17: -1,649; 2017/18: -1,960; 2018/19: -1,924; 2019/20: -2,058; 2020/21 (Proj.): -2,058; 2021/22 (Proj.): -2,218; 2022/23 (Proj.): -2,218; 2023/24 (Proj.): -2,389. - Secondary income balance (millions of U.S. dollars): 2016/17: 2,283; 2017/18: 2,578; 2018/19: 2,608; 2019/20: 2,419; 2020/21 (Proj.): 2,539; 2021/22 (Proj.): 2,666; 2022/23 (Proj.): 2,800; 2023/24 (Proj.): 2,968. - Capital and Financial Account (millions of U.S. dollars): 2016/17: -5,189; 2017/18: -3,952; 2018/19: -2,326; 2019/20: -2,671; 2020/21 (Proj.): -3,293; 2021/22 (Proj.): -4,222; 2022/23 (Proj.): -4,817; 2023/24 (Proj.): -5,518. - Direct investment liabilities (millions of U.S. dollars): 2016/17: 3,563; 2017/18: 3,229; 2018/19: 1,968; 2019/20: 2,286; 2020/21 (Proj.): 2,615; 2021/22 (Proj.): 3,090; 2022/23 (Proj.): 3,548; 2023/24 (Proj.): 4,235. - Overall balance (millions of U.S. dollars): 2016/17: 306; 2017/18: 321; 2018/19: 205; 2019/20: 269; 2020/21 (Proj.): 440; 2021/22 (Proj.): 664; 2022/23 (Proj.): 548; 2023/24 (Proj.): 494. - GDP (in millions of U.S. dollars) and level of gross reserves (end of period) series provided through 2023/24 (e.g., reserves 2016/17: 5,141; 2017/18: 5,462; 2018/19: 5,667; 2019/20: 5,936; 2020/21 (Proj.): 6,376; 2021/22 (Proj.): 7,040; 2022/23 (Proj.): 7,588; 2023/24 (Proj.): 8,082). ### Monetary survey (Table 4: 2016/17–2023/24) - Central Bank of Myanmar net foreign assets (end-period, in billions of kyats): 2016/17: 6,519; 2017/18: 8,010; 2018/19: 8,116; 2019/20 (Proj.): 8,357; 2020/21 (Proj.): 8,775; 2021/22 (Proj.): 9,418; 2022/23 (Proj.): 9,944; 2023/24 (Proj.): 10,416. - Reserve Money (end-period, in billions of kyats): 2016/17: 16,562; 2017/18: 17,327; 2018/19: 19,291; 2019/20 (Proj.): 20,911; 2020/21 (Proj.): 22,794; 2021/22 (Proj.): 24,815; 2022/23 (Proj.): 27,217; 2023/24 (Proj.): 29,804. - Broad money (end-period, in billions of kyats): 2016/17: 45,938; 2017/18: 54,480; 2018/19: 62,884; 2019/20 (Proj.): 70,274; 2020/21 (Proj.): 77,916; 2021/22 (Proj.): 86,506; 2022/23 (Proj.): 96,449; 2023/24 (Proj.): 107,335. - Narrow money and components, other deposits, and memorandum items provided (money multiplier, velocity, reserve money y/y percent change, broad money y/y percent change, credit to private sector y/y percent change, nominal GDP). ### Medium-term projections (Table 5: 2016/17–2024/25) - Real GDP (staff working estimates, percent change): 2016/17: 5.8; 2017/18: 6.4; 2018/19: 6.5; 2019/20: 6.4; 2020/21 (Proj.): 6.0; 2021/22 (Proj.): 6.2; 2022/23 (Proj.): 6.3; 2023/24 (Proj.): 6.5; 2024/25 (Proj.): 6.5. - CPI (end-period; base year=2012): 2016/17: 3.4; 2017/18: 8.6; 2018/19: 9.5; 2019/20: 7.7; 2020/21 (Proj.): 6.6; 2021/22 (Proj.): 6.2; 2022/23 (Proj.): 6.1; 2023/24 (Proj.): 6.1; 2024/25 (Proj.): 6.1. - Consolidated public sector (percent of GDP): Total revenue 2016/17: 18.3; 2017/18: 18.8; 2018/19: 18.0; 2019/20: 18.1; 2020/21 (Proj.): 18.1; 2021/22 (Proj.): 18.4; 2022/23 (Proj.): 18.8; 2023/24 (Proj.): 19.1; 2024/25 (Proj.): 19.4. - Tax revenue (percent of GDP): 2016/17: 7.1; 2017/18: 7.1; 2018/19: 6.8; 2019/20: 6.9; 2020/21 (Proj.): 7.2; 2021/22 (Proj.): 7.5; 2022/23 (Proj.): 7.5; 2023/24 (Proj.): 7.8; 2024/25 (Proj.): 8.1. - Total expenditure (percent of GDP): 2016/17: 21.0; 2017/18: 21.8; 2018/19: 21.5; 2019/20: 22.1; 2020/21 (Proj.): 22.5; 2021/22 (Proj.): 22.9; 2022/23 (Proj.): 23.3; 2023/24 (Proj.): 23.7; 2024/25 (Proj.): 23.9. - Net lending (+)/borrowing (-) (percent of GDP): 2016/17: -2.7; 2017/18: -3.0; 2018/19: -3.5; 2019/20: -4.1; 2020/21 (Proj.): -4.4; 2021/22 (Proj.): -4.4; 2022/23 (Proj.): -4.5; 2023/24 (Proj.): -4.6; 2024/25 (Proj.): -4.5. - Reserve money (y/y percent change) projections: 2019/20: 8.4; 2020/21 (Proj.): 9.0; 2021/22 (Proj.): 8.9; 2022/23 (Proj.): 9.7; 2023/24 (Proj.): 9.5; 2024/25 (Proj.): 9.5. - Broad money (y/y percent change) projections: 2019/20: 11.8; 2020/21 (Proj.): 10.9; 2021/22 (Proj.): 11.0; 2022/23 (Proj.): 11.5; 2023/24 (Proj.): 11.3; 2024/25 (Proj.): 11.2. - Current account balance (percent of GDP) projections: 2019/20: -3.2; 2020/21 (Proj.): -3.5; 2021/22 (Proj.): -4.0; 2022/23 (Proj.): -4.4; 2023/24 (Proj.): -4.7; 2024/25 (Proj.): -5.0. - Exports (percent of GDP) projections: 2019/20: 15.5; 2020/21 (Proj.): 15.0; 2021/22 (Proj.): 15.1; 2022/23 (Proj.): 15.3; 2023/24 (Proj.): 15.5; 2024/25 (Proj.): 15.8. - Imports (percent of GDP) projections: 2019/20: 24.9; 2020/21 (Proj.): 23.2; 2021/22 (Proj.): 20.8; 2022/23 (Proj.): 20.2; 2023/24 (Proj.): 20.4; 2024/25 (Proj.): 21.2. - CBM reserves (gross) projection (millions of U.S. dollars): 2019/20: 5,936; 2020/21 (Proj.): 6,376; 2021/22 (Proj.): 7,040; 2022/23 (Proj.): 7,588; 2023/24 (Proj.): 8,082; 2024/25 (Proj.): 8,509. - Total external debt (billions of U.S. dollars) projection: 2019/20: 19.1; 2020/21 (Proj.): 19.3; 2021/22 (Proj.): 19.6; 2022/23 (Proj.): 20.0; 2023/24 (Proj.): 20.7; 2024/25 (Proj.): 21.8. - GDP (billions of kyats) projection path through 2024/25: 2019/20: 120,872; 2020/21 (Proj.): 138,076; 2021/22 (Proj.): 157,026; 2022/23 (Proj.): 177,879; 2023/24 (Proj.): 201,830; 2024/25 (Proj.): 229,106. - GDP (billions of US$) projection path through 2024/25: 2019/20: 74.8; 2020/21 (Proj.): 81.9; 2021/22 (Proj.): 89.6; 2022/23 (Proj.): 97.8; 2023/24 (Proj.): 106.9; 2024/25 (Proj.): 117.0. - GDP per capita (US$) projection path through 2024/25: 2019/20: 1,321; 2020/21 (Proj.): 1,440; 2021/22 (Proj.): 1,593; 2022/23 (Proj.): 1,718; 2023/24 (Proj.): 1,807; 2024/25 (Proj.): 1,901. *Data sources cited in the content: Myanmar authorities; IMF staff estimates and projections; CEIC Data Co.; Ministry of Hotels and Tourism; IHS Markit; Haver Analytics; World Economic Forum; World Bank; Central Bank of Myanmar; CBM/MOPF. *Content derived from: 1mmrea2020003 - 38. It is proposed that the next Article IV consultation be held on the standard 12-month cycle.* ### Annex I. Key Policy Recommendations from the 2018 Article IV ### Annex I. Key Policy Recommendations from the 2018 Article IV ### Monetary and exchange rate policies - Objective: Contain inflation and maintain exchange rate flexibility and set groundwork for upgrading the monetary framework. - Increase in government securities issuance and deposit auction volumes, pending further developments in inflation and liquidity; improve liquidity forecasting and further development of debt and interbank markets - Implementation status: In progress. - Strengthen monetary policy formulation by articulating a medium-term inflation objective and introducing an interest rate on excess reserve (IOER) to provide a floor for an interest rate corridor. - Implementation status: Under consideration - Steadily phase out CBM financing of the deficit and recalibrating the target as a share of previous year’s reserve money rather than of domestic financing. - Note: CBM financing of the deficit spiked at the end of FY 2018/19, to levels higher than in previous years, and was close to official target ceiling of 20 percent of domestic financing. - Develop a one-way FX intervention strategy and further develop FX market. - Implementation status: In progress. A one-way FX auction rule was adopted in November 2019, which in addition to the clear guidelines eliminates the MCP. ### Fiscal policy - Objective: Create fiscal space to help achieve Sustainable Development Goals (SDGs) while maintaining macroeconomic stability and debt sustainability. - Provide a moderate fiscal stimulus to the economy, keeping the fiscal deficit around 4 percent of GDP over the medium term to maintain a low risk of debt distress. - Implementation status: Achieved for FY2018/19. - Continued domestic revenue mobilization, including through a comprehensive MTRS, modernizing and enacting tax laws (including a chapter on extractives), customs reforms, and strengthening administrative capacity. - Implementation status: The Tax Administration Law went into effect in September 2019. The income tax law is being revised and modernized. Other elements of IRD’s second phase of the reform journey are in progress. - Expenditure rebalancing towards social sectors and priority infrastructure spending while enhancing spending efficiency to help achieve (SDGs). - Implementation status: In progress. - Improvements in Public Financial Management (PFM), prioritizing fiscal transparency and reporting, incorporating an IT system for the Treasury, a stronger relationship between planning and budget, and better managing, controlling and reporting fiscal risks. - Implementation status: In progress. - Restructuring and improving governance of SEEs; push ahead with electricity tariff reform. - Implementation status: SEE reform is advancing; the State Asset Management Corporation (a holding company for the best performing SEEs) is being established. A comprehensive electricity tariff reform enacted in July 2019. - Tap concessional external borrowing and increase market based domestic financing of the fiscal deficit. - Implementation status: In progress. ### Financial sector - Objective: Ensuring financial stability and deepening and strengthening financial sector regulation and supervision. - Implement 2017 prudential regulations. - Implementation status: In progress. Banks appear to have met the July 2019 target of overdrafts comprising 30 percent of total lending. The CBM has extended the period for capital adequacy and large exposure limit compliance to August 2020. - Strengthen bank capitalization. - Implementation status: In progress. - Form contingency plans to address systemic banking risks and strengthen resolution framework. - Implementation status: In progress. - Accelerate reform of state-owned banks. - Implementation status: In progress. - Continue financial sector and interest rate liberalization at a pace commensurate with CBM's capacity. - Implementation status: In progress. *Source: IMF Country Report No. 19/100.* ### Annex V. Reforming the Income Tax System ### Annex V. Reforming the Income Tax System ### Overview and headline findings - Modernizing the tax system in Myanmar is critical for securing revenues for development and improving efficiency and equity. - Current personal income tax (PIT) practice excludes 98 percent of taxpayers, resulting in a very narrow base and a very low PIT potential. - The PIT potential revenue is estimated to be only 0.3 percent of GDP even in the absence of any tax avoidance or evasion. - On the corporate income tax (CIT) front, the overly generous and distortionary tax incentives are estimated to entail a direct cost exceeding 25 percent of total CIT revenue. - IMF tax policy TA mission (September 2019) recommended reform options expected to raise revenues by 2-4 percent of GDP and improve distribution over the medium term. ### Baseline PIT reform package (recommended) - Lower exemptions/deductions in the PIT from 6.8 million kyat to 1.75 million kyat (or at least to 3 million kyat) and revise the rate structure. - Proposed PIT scale (as presented): - Bracket 1: start 1.7 mln (P67th percentile); end 2.3 mln; Marginal tax rate 10% - Bracket 2: start 2.3 mln (P80th percentile); end 4.3 mln; Marginal tax rate 20% - Bracket 3: start >4.3 mln (P95th percentile); Marginal tax rate 25% - Estimated impact of the proposed PIT structure: - Revenue (% GDP): 3.8% - Revenue (MMK, billion): 3440 - Fraction population paying PIT (full enforcement): 32% - Fraction population losing less than 5% of gross income: 93% - Distributional note: the proposed tax structure would raise revenue primarily from the 1/3 richest taxpayers and implies a small change for the majority of population. ### Corporate tax and other base-broadening measures - Tax all capital gains at the corporate level at the statutory CIT rate of 25 percent, except for gains from selling majority-owned companies; include taxing capital gains in the petroleum sector using the statutory CIT rate. - Tax rental income at the corporate level at the statutory CIT rate. - Impose a domestic withholding tax (WHT) on interest of 10%. - Introduce a cross-border WHT on dividends and management and technical fees. ### Tax incentives: rationalization and governance - The draft Income Tax Law (ITL) supersedes other legislation providing income tax incentives and allows for accelerated depreciation or investment allowances. - Recommendation: ideally repeal the tax holidays and reinvestment tax credit in Myanmar Investment Law and replace with cost-based incentives in the ITL such as tax investment credits; at minimum, rationalize incentives and make them rule-based with clear eligibility criteria in the ITL. - Rationalization should narrow scope (sectors, regions) and generosity (e.g., time-bound with no renewals) through rules-based strict criteria and be agreed by Cabinet before ITL submission to Parliament. - Income tax incentives should be fully governed by the MoPFI, which should be provided information on tax expenditures as a requirement. ### Other recommended income tax system changes - Introduce a simplified presumptive tax regime with a uniform turnover tax at a rate of 3 percent for businesses with a turnover below MMK 150,000 million. - Adopt transfer pricing legislation based on OECD guidelines and introduce additional rules regarding international taxation. - Address distortions in the CIT by applying the standard CIT rate on listed firms and transparently defining allowable business expenditures, including amortization allowances of intangible assets. - Given asset quality problems and very low provisioning levels in the banking sector, permit mandatory bank provisions (as defined by the supervisory authority) to be tax deductible, introduced in line with prudent fiscal considerations. *Source: Annex V. Reforming the Income Tax System, Myanmar: Reforming the Income Tax System, IMF Technical Report, November 2019.* ### 5. Myanmar’s transformational tax system reform journey is now in its second phase. ### 1mmrea2020003 - 5. Myanmar’s transformational tax system reform journey is now in its second phase. ### Tax system reform — achievements and ongoing reform actions - Intensive TA from the IMF focuses on consolidating first-phase reforms and introducing features of a modern tax system. - IMF CD continues in tax administration, tax policy development, and legislation drafting. - Key achievements in 2018−19: - Procurement of a new integrated tax administration system (ITAS) to be deployed over the next three years. - Enactment of the Tax Administration Law (TAL). - Revenue mobilization and administration initiatives supported by IMF TA: - Expanding the taxpayer population covered by the self-assessment system. - Centralizing tax return and payment processing for the large and medium taxpayer offices. - Enhanced taxpayer services via a Technical Review Committee to provide greater clarity to interpretation and administration of the tax laws. - Establishing a Public Education and Communications Unit to act as a gatekeeper for the IRD website and public statements. - Establishing a Risk and Intelligence Unit to strengthen risk management capability. - Increased staffing and competencies in the Information Technology Directorate to reflect ITAS project workloads and broader e-services. ### ITAS and TAL implementation — priorities and operational considerations - ITAS and TAL implementation are the highest reform priorities scheduled for 2019−20. - Recommended next steps following TAL adoption in July 2019: - Reform the income tax and adopt a new income tax law (ITL) as the sole legal instrument governing the income tax. - Operational imperatives during 2019–20: - Continue centralizing processing and taxpayer services and continue the SAS expansion with trained dedicated staff to support ITAS and TAL. - Manage competing demands on time, focus, and resources while ensuring operations continue, taxpayer services do not decline, and revenues are protected through enforcement and compliance improvement responses. - Strengthen governance processes to manage changes and competing priorities. ### Public Financial Management (PFM) and fiscal risk management - CD has progressed on improving budget planning, managing fiscal risks, and strengthening budget execution. - TA provided to strengthen institutional, legal, budgetary, and reporting frameworks to manage fiscal costs and risks from PPPs. - Actions and developments: - Update of standardized PPP contracts in line with FAD recommendations. - Launch of the first prioritized public investment program, Project Bank, with World Bank support to identify and screen infrastructure projects and account for fiscal liabilities from PPPs. - Priorities going forward: further enhance fiscal risk management, including those from SEEs. - Treasury and reporting progress: - Establishment of the workplan for the newly created Treasury Policy and Quality Promotion Division. - Drafting of instructions and new templates for SEEs reporting to Treasury. - Considerable progress on automating financial reporting. - Development partners expected to take a more prominent role on some PFM projects (such as FMIS) going forward. ### FIRST (automated financial reporting) and chart of accounts (COA) - FIRST first phase developed as an initial step towards eventual FMIS. - Provides flexible, automated data entry and automated consolidation of Union level financial reporting. - Includes cash forecasting reporting and reconciliation functionality (with government bank account information). - FIRST became operational at the Treasury level in July 2019. - Plans for FIRST 2.0 under discussion: - FIRST 2.0 will integrate treasury and budget reporting and possibly extend financial reporting and accounting functionality to the spending unit level. - Key priority for success: develop a unified chart of accounts (COA). - Regional PFM and Treasury Advisors have established a COA working group and agreed a COA review with relevant stakeholders to enhance administrative and economic classification and support automation. ### Myanmar Customs Department (MCD) — progress and remaining agenda - Notable progress in computerization and, with IMF support, development of the Export/Import Manual and new training and human resource policies. - Overall progress remains slow and TA needs remain significant. - Medium-term reform priorities for MCD: - Enhance strategic management of reform initiatives. - Strengthen operational risk management. - Build intelligence, post clearance audit, and investigation functions. - Strengthen enforcement and increase cooperation with IRD. - Review and update law enforcement methodology. - Role for development partners and donors in leading CD delivery in some areas. ### Extractive industries (EI) — legal and fiscal framework issues - Important legal and policy issues in EI remain to be addressed. - Developments: - A new draft Petroleum Law is being debated in parliament. - Drafting of a dedicated EI chapter of the new Income Tax Law (ITL) is underway to address gaps and ambiguities in application of income tax to the petroleum and mining sectors. - Ongoing TA on the EI fiscal regime, including reform of the model production sharing contract (PSC) ahead of the planned licensing round. - Policy considerations: - With authorities seeking to attract new investment, the government needs to ensure the fiscal regime is sufficiently attractive and legislative uncertainty is addressed. ### Monetary policy framework and central bank priorities - Central Bank of Myanmar (CBM) is upgrading the monetary policy framework to better support price and external stability. - Priority actions for CBM: - Firmly and credibly establish its monetary targeting framework. - Strengthen reserve money targeting regime by upgrading: - (i) monetary policy toolkits by implementing IMF recommendations. - (ii) liquidity monitoring. - Improve operational procedures of monetary policy toolkits, publish interbank market reference rates, and upgrade market intelligence capacity. - Consider assistance to set up a monetary policy committee and a technical working group over time. - Medium-term priorities: further deepen the interbank market and develop a FX intervention strategy. - CD to design amendments to the FX management law to address regulatory gaps and facilitate development of interbank FX markets and hedging instruments through gradual recalibration of net FX open positions. ### Banking supervision, regulatory framework, and financial sector reform - Ongoing CD from the IMF and the World Bank to strengthen bank supervision and regulation. - Progress achieved: - Strengthening on-and-offsite bank examinations. - Introducing risk-based supervision with Fund TA. - Remaining needs: - Compliance and enforcement, including judicious use of penalties, remain at early stages. - A comprehensive financial sector reform strategy is urgently required to safeguard financial stability. - Key elements for reform strategy: - Mechanisms to ascertain banks’ true health; enable loss recognition and provisioning, orderly deleveraging, and recapitalization; effective resolution mechanisms that limit spillovers while protecting small depositors. - Roles: - World Bank leading on regulatory and resolution framework. - IMF continuing to strengthen bank supervision and financial stability analysis. - Traction on bank resolution has been limited due to evolving sector circumstances and capacity constraints. ### Accounting, governance, and regulatory developments at CBM - CBM committed to complying with IFRS for its 2021 yearend. - Steps taken: - Adopted the Institute of Internal Auditors’ International Professional Practices Framework for its Internal Audit function. - TA to fully transition to IFRS by this deadline and to adopt risk-based audit procedures continues. - Strengthening risk-based supervision with IMF TA continues; commitment to convert to risk-based auditing needs reinforcement and incorporation into CBM’s workplans. - Regulatory milestones: - 2017 regulation on large exposure limits provides safeguards against excess financial exposures. - In March 2019, CBM issued pending regulations covering contentious corporate governance aspects (Directives on “Fit & Proper,” “Directors,” “External Auditors,” “Related Parties,” and “Substantial Interest”). - Issuance of these regulations is expected to help strengthen credit risk management, but supervisory authorities require further capacity building to operationalize them. ### AML/CFT — national strategy and effectiveness challenges - Legal framework developments: - 2014: Myanmar enacted a new AML Law and a Counter Terrorism Law that contains CFT provisions. - 2015: AML/CFT Rules were issued. - National Risk Assessment and Strategy: - NRA completed in 2017; findings disseminated via executive summary and seminars. - NRA findings fed into the 2017/18 mutual evaluation (ME) and informed the National Strategy. - National Strategy completed in May 2019 and formally adopted by Cabinet in May 2019. - Effectiveness concerns: - Most recent APG evaluation identified weak levels of effectiveness across Myanmar’s entire AML/CFT regime. - It is unlikely the authorities will be able to demonstrate that deficiencies identified in the mutual evaluation report have been corrected by the end of the observation period (October 2019). - High risk that Myanmar will be grey-listed under the FATF’s International Cooperation Review Group (ICRG) process in February 2020. - Shortcomings focus on effectiveness and require high levels of political commitment. - Major concerns include failure to update and use most supervisory tools developed with IMF help and sub-optimal cooperation between Banking Regulation and Financial Supervision departments in the CBM. - Ongoing assistance: - LEG has provided extensive legislative drafting recommendations to assist authorities. - Fund will continue to assist the CBM to improve the effectiveness of its AML/CFT supervision. ### Data, statistics, and training - Improvements and remaining gaps: - Substantial progress in CPI, ESS, and GFS data quality. - Revamped National Summary Data Page (NSDP) launched in April 2019 implementing the e-GDDS. - Establishment of banking system data collection for the balance of payments and administrative data collection for direct investments. - Weak inter-agency cooperation remains a major impediment. - Recent TA focused on national accounts to develop/update quarterly GDP measures (in line with rebased estimates of annual GDP by production and expenditure in FY 2015/16 prices) and on price statistics to enhance quality and develop sound GDP deflators. - Coverage of FSIs and lack of consistency with MFS data remain to be resolved. - Improving monetary statistics (e.g., data on government financing and financial data of nonbank financial institutions) expected to continue. - As CBM’s supervisory capacity improves, more attention needed to balance sheet data to aid macro-financial analysis and consolidated supervision. - Training and capacity building: - Ongoing customized courses, specialized workshops, and training in surveillance methodologies. - Recent in-country IMF training topics: fiscal costs and risks from PPPs (Fiscal Risk Assessment Model), treasury management, budget analysis, government accounting and reporting, monetary and exchange rate operations, statistical methodologies (ESS and GFS), financial programming and debt sustainability analysis. - Opportunities for officials to join regional training events led by STI, CDOT, and OAP. - Recent offerings focused on macro-forecasting, macroeconomic diagnostics, and macro-financial analysis. - MPFI established the PFM Academy with training courses expected to start in FY2019/20 with support from development partners, including the IMF. - An inter-agency core macroeconomic group (led by CDOT) continues to meet regularly to develop, update, and operationalize a macroeconomic framework. ### Rebalancing and rationalizing capacity development (CD) - Majority of IMF CD in Myanmar is funded from external sources; most missions are peripatetic. - A reprioritization and streamlining of CD was undertaken to reduce resource allocation in FY2020. - Rationalization of CD undertaken in the FY2018/19 RAP and to continue over the medium term. - Strategic shifts and considerations: - CD in several fiscal areas (such as customs reforms) may be reallocated given absorptive capacity and changes in Civil Service regulations. - Tax administration project in IRD is maturing and will be less resource intensive going forward. - Need for CD in prudential regulations, supervisory capacity, training staff to follow up full-scope bank examination findings, recovery and resolution, and related areas. - Progress depends on ownership of reforms and establishment of dedicated teams to work on bank restructuring issues. - Reprioritization and streamlining are contingent on traction with the authorities and capacity constraints of limited CD resources. *Source: International Monetary Fund, Myanmar country report excerpt.* ### 1. Peace & Stability2 Economic Stability & ### 1. Peace & Stability2 Economic Stability & Strengthened Macroeconomic Management ### 2.1 Effectively manage the exchange rate and balance of payments - 2.1.5 Stabilize inflation both from a monetary and fiscal policy perspective - Reduce CBM financing of the budget deficit and develop domestic debt market - Strengthen monetary policy tool kit, improvie liquidty mangement, reduce CBM financing of the budget deficit, and develop domestic debt market. CBM can better control inflation by utilizing the function of financial markets. - 2.1.8 Develop the currency swap auction market through which foreign and domestic banks are more comfortable in conducting foreign currency interbank transactions, minimizing foreign exchange risk and uncertainty - To develop the capacity of the authorities to implement FX operations efficiently and in a manner consistent with their chosen monetary policy FX regime - TA to implement the policy regarding the provision of FX liquidity outside of the spot FX market intervention while adequately managing the associated risks. ### 2.2 Reduce inflation and maintain monetary stability - 2.2.1 Continue monetary policy prudence with a view to stabilizing inflation and ensuring balance between economic growth and stability - Gradually move to a reserve money targeting framework with a flexible exchange rate regime - 2.2.2 Continue conducting deposit auctions - Enforce and maintain reserve requirement and liquidity monitoring/forecasting. - 2.2.3 Continue enforcing reserve requirement instructions on banks with flexibility to account for seasonality - Upgrade monetary operations - 2.2.4 Strengthen treasury securities auctions and expand public understanding of bonds, bills and similar instruments - Further strengthening the primary government securities market and develop secondary market. Development of yield curve. - 2.2.6 Develop the interbank money market, and ultimately liberalize bank interest rates based on borrower risk profiles - Improve monetary operations and market development. Utilize the interbank transaction data collected by the CBM so that it is useful for market participants, with the aim of publishing key interest rates. - Interbank money market becomes more transparent and easier to use for market participants, including the CBM, improving banks' capacity to manage their liquidity. - To develop the capacity of the authorities to implement FX operations efficiently and in a manner consistent with their chosen monetary policy FX regime - The CBM can better control inflation and financial conditions. - 2.2.7 Develop the REPO market through which the CBM can absorb excess liquidity from the market through open market operations, including possibly REPO auctions - Develop and implement roadmap to liberalize interest rates commensurate with the CBM’s capacity to supervise financial system as well as calibrate macro-financial developments and implement market-based operations - Interest rates become more market-determined, improving the scope and effectiveness of monetary operations. Possible introduction of repos. - 2.2.9 Strengthen BOP shock absorptive capacity and build up foreign exchange reserves to support a more favourable BOP position - Strengthen external sector statistics. TA and training to improve data timeliness, quality, and coverage and macroeconomic analysis through TA aimed at building a comprehensive macroeconomic framework - Improved quality of BOP and IIP data, in terms of : (1) improved coverage, particularly for direct investment, remittances, and external debt; (2) consistency with MFS ### 2.3 Increase domestic revenue mobilisation through a fair, efficient and transparent taxation system - 2.3.1 Reform the structure and governance mechanisms of IRD and other relevant entities, and establish functionally based departments organized to best administer the tax system for different groups of taxpayers - Support activities in the Operations Management, Design and Monitoring, and Tax Reform directorates. - 2.3.3 Implement new information technology systems for registration, processing, accounting, and case work - ICT implementation - 2.3.4 Develop modern tax laws, including a new Tax Administration Law, a new Income Tax Law and a new VAT Law - Development of new model production sharing contract (PSC) for petroleum. Income Tax Law including a specialized chapter on extractive industries. - 2.3.5 Introduce anti-corruption and tax evasion counter-measures to protect the integrity and reputation of the tax system, including expanding the focus of internal audit and establishing an Internal Affairs Unit - 2.3.6 Expand the implementation of a Self-Assessment System to Medium Taxpayer Offices. - 2.3.7 Implement a risk-based approach to tax administration using a Compliance Improvement Strategy to guide the administration of taxpayer services and enforcement strategies. - 2.3.8 Streamline tax processes and procedures to reflect good international practice and maximise opportunities provided by modern technology - 2.3.9 Develop IRD staff capabilities by providing clear expectations of staff roles and responsibilities, relevant training, modern work practices including effective performance management - Covered in IRD Reform Journey - Support activities in the Operations Management, Design and Monitoring, and Tax Reform directorates. ### 2.4 Strengthen public financial management to support stability and the efficient allocation of public resources - 2.4.1 Significantly increase overall budget transparency, including the continued publication of Citizen Budgets, presentation of tax expenditures in annual budgets and other measures - Support through TA and training on strengthening public finanicial management (PFM), supporting improved treasury management and modernization of financial management systems, and improving government finance statistics (GFS) and public sector debt statistics (PSDS) - A treasury reform roadmap 2018-2022 has been developed. - Phase I of Financial Information Reporting System for the Treasury (FIRST) has gone live. Time lag of budget execution reports and financial reports shortened. Format of fiscal reports more aligned with international standards. Developing capacity for medium-term FMIS development. Budget execution and controls are strengthened and have largely achieved. Comprehensiveness, frequency, and quality of fiscal reports has been enhanced. - 2.4.4 Strengthen scrutiny and oversight of budget proposals and cut unnecessary expenditures - Integrate recurrent and capital budgets, implement medium-term capital program (MTCP) and the mechanism for central review of project proposals and appraisals, develop baseline expenditure estimates and focus budget scrutiny on new initiativesve and solicit explanatory information in the budget to facilitate budget scrutiny and analysis. - Capital projects are better programmed with medium-term fiscal constrains and policy guidance. ### 2.5 Enhancing the efficiency and competitiveness of State Economic Enterprises - 2.5.4 Standardize financial reporting structures across SEEs and release financial data on SEEs to the public - Supporting Improved Treasury Management and Modernization of Financial Management Systems - New templates of SEEs' financial reports would support the consolidation of public accounts. Comprehensiveness, frequency, and quality of fiscal reports is enhanced. ### 3.5 Increase broad-based access to financial services and strengthen the financial system overall - 3.5.1 Strengthen the capacity of domestic financial institutions - Develop/Strengthen banking regulations and prudential norms and more efficient use of supervisory resources to better oversee key risks in their banking systems - 3.5.4 Continue liberalisation of the banking sector including through plans and regulations for the Financial Institutions Law (FIL) and Foreign Exchange Management Law (FEML) - Modernize FEML. - 3.5.8 Introduce measures that enable Myanmar banks to ensure full compliance with applicable prudential standards - 3.5.12 Strengthen the CBM's supervisory and regulatory capacity, including through the development of a comprehensive banking sector strategy with clear responsibilities for the CBM *Source: 1mmrea2020003 - 1. Peace & Stability2 Economic Stability & (PDF).* ### 3.5 Increase broad-based ### 3.5 Increase broad-based access to financial services and strengthen the financial system overall ### Increase financial transparency and enforcement - Increase financial transparency, including by enforcing existing regulations on financial reporting and the introduction of additional transparency-related regulations for financial institutions. - Strengthen the CBM's institutional capacity to conduct financial management operations and ensure the integrity of its financial reporting. - The CBM has established the basis of a modern accounting framework. - Strengthen implementation and monitoring to ensure compliance with financial reporting requirements. ### Strengthen banking regulation, prudential norms, and supervision - Develop and strengthen banking regulations and prudential norms and more efficent use of supervisory resources to better oversee key risks in their banking systems. - Recommendations to improve monetary and financial statistics and supervisory information: - Expand the coverage of institutions included in the monetary survey. - Monitor the consistency of reciprocal/interbank accounts that show positions between the CBM and the commercial banks and initiate data review and resolution of large inconsistencies. - Use electronic means to capture and share data to minimize mistakes. - In due course, adopt market or fair value-based valuation of financial instruments. ### Financial sector surveillance and data quality improvements - The authorities submitted quarterly financial soundness indicators (FSI) to STA for dissemination in March 2017, with data back to beginning of 2016. - The CBM reports nine core and four encouraged FSIs for deposit takers for posting on the IMF’s FSI website with a lag of more than one quarter. - Reporting of one core and three encouraged FSIs was discontinued since the third quarter of 2016. - CBM reports data on several series and indicators to the Financial Access Survey (FAS), including the two indicators (commercial bank branches per 100,000 adults and ATMs per 100,000 adults) adopted by the UN to monitor Target 8.10 of the Sustainable Development Goals (SDGs). ### IMF technical assistance and capacity building (financial sector focus) - Myanmar is one of the largest recipients of IMF technical assistance (TA). - Central Banking TA: a resident foreign exchange advisor, a resident advisor on accounting and internal audit and a monetary operations advisor based in CDOT provided hands-on training and frequent responsive advice, supported by HQ missions. - The CBM is being assisted by a resident financial management advisor to strengthen the CBM’s accounting framework and systems. - Financial Sector Supervision TA: work led by a resident advisor in Yangon supported by HQ and expert missions. AML/CFT TA delivered by HQ staff and short-term expert missions. - The IMF has assisted the Central Bank of Myanmar in developing a framework for coordination of international technical assistance. ### Key statistical and data issues relevant to financial governance - Data provision has serious shortcomings that significantly hamper surveillance: data are not provided in a timely manner, and official and independent estimates of key macroeconomic variables differ widely. - National accounts: follow the 1968 System of National Accounts; quarterly compilation commenced in FY 2018/19 at new base-year, 2015/2016, price; significant discrepancies exist between production and expenditure approaches; GDP is estimated at producer prices instead of recommended market prices; informal sector activity not completely accounted for. - Price statistics: IMF STA provided TA to develop a new Producer Price Index (PPI) in 2018, but these data are not yet released; a new Household Income and Expenditure Survey was conducted in 2017 and results will be used to update the CPI basket and weights in 2020. - Government finance statistics: no comprehensive monthly or quarterly compilation of fiscal data; monthly cash-based budget execution data are available in local language but are not published; annual comprehensive data compiled in GFSM format but financing data are incomplete; recording of debt statistics is not comprehensive. - External sector statistics: balance of payments and IIP compiled on BPM6 since 2016 and quarterly figures are reported to STA; coverage of some components (trade in goods, remittances, private non-bank financial transactions and positions) should be further reviewed and enhanced. *Source: Myanmar: Staff Report for the 2019 Article IV Consultation—Informational Annex, February 11, 2020.* ### 1. The coverage of public sector debt used in the DSA is consolidated public sector debt, ### 1mmrea2020003 - 1. The coverage of public sector debt used in the DSA is consolidated public sector debt, ### Coverage and methodology - Coverage of public sector debt used in the DSA: - Consolidated public sector debt, government-guaranteed debt and social security funds. - SOE debt is on-lent and is therefore included in the coverage of public external debt. - There is no outstanding debt to the IMF. - LIC DSF composite indicator (CI) methodology: - CI is based on a weighted average of factors: real GDP growth, remittances, international reserves, world growth and the CPIA score. - CI calculation is based on 10-year averages of the variables, across 5 years of historical data and 5 years of projection, and the corresponding CPIA. - For Myanmar, the final debt carrying capacity classification for this DSA is medium. - Applicable debt burden thresholds (as used in the exercise): - EXTERNAL debt burden thresholds: PV of debt, in percent of Exports 180; Debt service, in percent of Exports 15. - TOTAL public debt benchmark: PV of debt, in percent of GDP 40; Debt service, in percent of Revenue 18. - PV of total public debt, in percent of GDP applicable threshold: 55. ### Total public debt levels and composition (FY2018/19, estimated) - Total public debt: 38.1 percent of GDP as of FY2018/19. - Public debt coverage components: - Public domestic debt: 61.8 percent of total public debt in FY2018/19. - Public and publicly guaranteed (PPG) external debt: 38.2 percent of total public debt in FY2018/19. - Domestic debt composition: - T-Bills: 44.2 percent of total public debt. - T-Bonds: 17.6 percent of total public debt. - Domestic debt total: 16.3 (USD millions) representing 61.8 percent of total (table format in source). - PPG external debt composition (Estimated End-August 2019, USD millions and percent of total): - Bilateral Creditors: 8.1 — 30.6 percent of total. - Paris Club: 4.2 — 16.0 percent of total. - Of which: Japan: 2.9 — 10.9 percent. - Non-Paris Club: 3.9 — 14.6 percent. - Of which: China: 3.4 — 13.0 percent. - Multilateral Creditors: 2.0 — 7.5 percent of total. - Of which: ADB: 0.6 — 2.2 percent. - Of which: IDA: 1.4 — 5.2 percent. - Commercial Creditors: 0.0 — 0.1 percent of total. - Total (Domestic + PPG external): 26.4 — 100.0 percent of total public and publicly guaranteed debt. - Total private external debt: 13.1 percent of GDP as of FY2018/19. - Total external debt (PPG external + private external): 27.9 percent of GDP as of FY2018/19. ### Financing, fiscal balance, and central bank financing - New loans signed during transition period (April 2018 – September 2018) and FY2018/19 (October 2018 – September 2019): approximately US$ 843.0 million. - Fiscal deficit estimates: - FY2018/19 fiscal deficit: about 3.5 percent of GDP (compared to 3 percent in FY2017/18). - CBM financing: - CBM financing rose to 8.4 percent of last year’s reserve money in FY2018/19. - Authorities’ policy stance: - Authorities committed to phasing out CBM financing through greater treasury securities issuances. ### Contingent liabilities and banking sector risks - Off-balance sheet liabilities related to PPPs and PPAs: approximately 3.2 percent of GDP. - Under LIC DSA standard methodology this translates to a shock of 1.09 percent of GDP as part of contingent liabilities. - Standard shock for potential bank recapitalization needs added to analysis: 5 percent of GDP. - Coverage of contingent liabilities (default and deviations table in source): - Other elements of the general government not captured in 1.0 percent of GDP: 0 - SoE's debt (guaranteed and not guaranteed by the government) 1/2 percent of GDP: 0 - PPP: 35 percent of PPP stock => 1.09 (percent of GDP) - Financial market (default value): 5 percent of GDP => 5 - Total (2+3+4+5) in percent of GDP: 6.1 - Myanmar off-balance-sheet debt related to PPPs and PPAs (Million of USD / Percent of 2018 GDP): - Electricity: 1,874.7 — 2.8 percent - of which electricity BOT: 1,399.6 — 2.1 percent - of which electricity JV/BOT: 475.1 — 0.7 percent - Gas: 131.8 — 0.2 percent - Ports: 110.0 — 0.2 percent - Total: 2,116.4 — 3.2 percent - Banking sector notes: - Banks have converted overdrafts into term loans and appear to have met the July 2019 target of 30 percent of total lending set by the CBM. - Capital positions and profitability are low in most private banks; recapitalization will be needed over time. - Data limitations hinder full assessment of NPLs and recapitalization needs; uneven loan loss recognition, inadequate provisions, large exposures, and low capital positions indicate potential systemic concerns. ### Baseline macroeconomic assumptions and projections (FY2019-FY2024 average) - Key macro assumptions (Baseline / Previous DSA): - Real GDP growth (in percent): 6.2 / 6.7 - Inflation (percent change, y/y): 7.0 / 6.5 - Primary fiscal balance (in percent of GDP): -2.1 / -1.9 - Overall fiscal balance (in percent of GDP): -3.9 / -3.6 - Current account (in percent of GDP): -4.7 / -4.8 - FDI (in percent of GDP): 2.9 / 4.1 - Short-term developments and assumptions: - Growth slowed to 6.4 percent in FY2018/19 from 6.5 percent in the six-month transition budget. - Inflation stood at 8.6 percent at end-September 2019; expected to moderate to the 6-7 percent range in the medium term. - Current account deficit projected to increase to 5 percent of GDP over the short to medium term. - External financing: project financing from large creditors in place; budget financing from creditors remains uncertain. Multilateral financing expected stable; bilateral financing projected to pick up in near term. - Fiscal outlook: fiscal deficit projected to remain around 4½ of GDP in the medium term, with primary deficit around 2½ percent of GDP. - Realism of baseline: - PPG external debt-to-GDP ratio follows similar path to previous DSA (2019) but shifted downwards compared to DSA (2014) due to large debt relief. - Projected growth path is in line with a fiscal multiplier of 0.2. ### Debt sustainability, stress tests, and scenario analysis - External PPG debt indicators: - All external PPG debt indicators remain below policy relevant thresholds in the baseline. - PV of external debt-to-GDP ratio declines from 12.0 percent of GDP in FY2018/19 to around 10.0 percent of GDP over the projection period. - Sensitivity and standardized stress tests: - Slowdown in exports and FDI negatively impact PV of debt-to-GDP, PV of debt-to-exports, and debt service-to-exports ratios. - Debt service-to-revenue ratio is affected by depreciation. - Largest standardized shock that pushes PV of public debt-to-GDP in FY2027/28 to reach 55.0 percent of GDP is the natural disaster shock. - Natural disaster shock specification (note in source): One-off shock of 10 percentage points of GDP to debt-GDP ratio in the second year of the projection period (2019 for this case). Real GDP growth and exports are lowered by 1.5 and 3.5 percentage points, respectively, in the year of the shock. - Historical context: Annual expected losses from natural hazards estimated around 2 percent of GDP annually (between 2006–15). - Staff scenario analysis: - Planned scaling up of infrastructure projects is key to accelerating growth but entails significant fiscal costs and risks. - Scaling up public investment requires additional financing and would have important implications for public debt dynamics. - Some projects proposed as PPPs can bring efficiency gains but entail substantial fiscal risks where they involve contingent liabilities, including sovereign guarantees. - Staff assess macro-fiscal impact through scenario analysis considering growth benefits of ramped up investment and resulting increased public debt and fiscal risks. ### Policy implications and recommendations (as indicated by staff analysis) - Build policy buffers, particularly: - Strengthen domestic revenues. - Build foreign reserves. - Continue structural reforms to: - Improve growth potential and resilience. - Promote economic diversification and expand the export base. - Improve the business environment to support exports and FDI (including importance of new bidding round). - Closely monitor contingent liabilities and PPP-related commitments. - Enhance preparedness and response to natural disasters: - Address weaknesses in ex-ante resilience and ex-post adaptive capacity. - Build stronger fiscal and external buffers to mitigate disaster vulnerability. - Banking sector measures: - Continue bank restructuring, recapitalization over time, and strengthen loan loss recognition and provisioning. *Source: IMF staff estimates and Myanmar authorities as presented in the provided DSA content.* ### 11. The scaling up scenario is drawn from development partner studies on electricity and ### 1mmrea2020003 - 11. The scaling up scenario is drawn from development partner studies on electricity and ### Scaling up scenario — sectoral investment assumptions - Electricity sector assumptions: - Annual power purchasing agreement (PPA) payments to independent power producers (IPPs) will increase by US$800 million for an additional capacity of 1000 MW, enough to satisfy the nation’s demand for electricity in the next 5 years. - Public sector capital spending will increase by US$500 million (doubling the historical level) for scaling up infrastructure in generation, transmission and distribution. - Private sector investments in generation by IPPs is expected to also double from historical levels. - Transportation sector assumptions: - Asian Development Bank (2016) estimates Myanmar needs to increase investments in the sector to 3-4 percent of GDP (up from 1-1.5 percent). - In this scenario, an additional spending of 2 percent of GDP each year is assumed. - The additional spending is assumed to be equally shared between direct budget spending and private sector (through PPPs). ### Macroeconomic linkage and growth effects - WEO (2014) calibration: a contemporaneous effect of a 1 percentage point of GDP increase in public investment is a 0.25 percent increase in output, which gradually increases to about 0.5 percent four years after the shock. - Under the assumed investment scaling up, GDP growth could be raised by 1.5–2.0 percent in the medium to long term. - The scenario assumes planned scaled up investments could raise growth to about 8 percent in the medium to long term. ### Fiscal and public-debt implications - Under the scaling up scenario, the PV-of-public-debt to GDP ratio rises but remains under its indicative thresholds overall; however, under the most extreme shock the PV-of-public-debt to GDP ratio could breach its indicative threshold in the medium term. - The assumed additional PPP projects and PPA payments could result in long term fiscal commitments and explicit and implicit contingent liabilities. - PPA payment commitments: - Have direct budget costs. - Create additional fiscal risks because payments for electricity purchased are measured in foreign currency and the government will assume the risk of exchange rate fluctuations. - The government has limited ability to track these contingent liabilities, which is important given foreign currency requirements and the level of reserves. ### Policy recommendations and public investment management - Strengthen public investment selection and management framework to ensure that projects with the highest economic returns are selected and implemented. - Implement a public investment management framework that ensures value for money assessments and sound fiscal risk management. - Build capacity of the Ministry of Planning and Finance to analyze and select infrastructure projects. - The Project Bank (launched in December 2019) aims to become the hub to identify and screen infrastructure projects and account for fiscal liabilities from PPPs; authorities should operationalize and strengthen it. ### Box 2 — Energy Infrastructure Sector Investment (key facts) - Myanmar has an access (electrification) rate of 50 percent nationwide. - Electricity consumption in Myanmar is only about one-tenth of the world’s average. - Current generation level: 3.6 GW. - World Bank estimate: consumption will grow at an average annual rate of 11.1 percent until 2030 reaching 12.6 GW by 2030. - Outlook for domestic gas production is on the decline starting 2020/21, although gas production from the A6 block could help reduce the decline in the medium term. - Investment needs: - Electricity: around US$2 billion per year over the medium term. - Gas: about US$10 billion over the medium term. ### Assessment of risk rating and other macro-fiscal vulnerabilities - Myanmar’s risk of external debt distress is low as is the overall risk of debt distress. - The overall debt outlook remains positive but is vulnerable to slowdown in FDI, exports, and natural disasters. - Immediate concerns include larger than expected contingent liabilities arising from the banking system or from a rapid ramp up in PPPs. - Recommendations to mitigate risks: - Remain vigilant of banking system fragilities and monitor fiscal risks from PPPs. - Establish a monitoring framework for contingent liabilities concentrated in a few sectors. - Strengthen debt management capacity. - Embark on a medium-term revenue strategy underpinned by a revenue target and comprehensive tax policy reforms building on administrative reforms. - Support development of formal FX markets by addressing regulatory gaps, encouraging the availability of hedging instruments, and improving the availability of timely market information. - Over the medium term, strengthen the business environment and governance to raise investment outlook and potential growth. - Over the longer term, increase fiscal and external buffers to strengthen resilience against natural disasters and support debt sustainability. *Sources: Myanmar authorities; and IMF staff estimates.* ### 16. The authorities broadly agreed with staff's assessment of the debt sustainability analysis. In ### 1mmrea2020003 - 16. The authorities broadly agreed with staff's assessment of the debt sustainability analysis. In ### Authorities' response and commitments - The authorities broadly agreed with staff's assessment of the debt sustainability analysis. - In the context of the proposed infrastructure scaling up, the authorities appreciated the staff analysis and presentation on risks from scaling up. - They reiterated the commitment to phasing out CBM financing of the budget and explained the overshooting of the target at end FY 2018/19 as temporary. - The “Project Bank” has just been launched and the authorities intend to make it instrumental in managing public investment including PPPs. - The authorities welcome oncoming Bank and Fund TA to support them in strengthening SEE governance and the management of fiscal risks. ### Key debt-sustainability indicators and stress-test framework (high-level) - Stress-test customization and assumptions: - Default terms of marginal debt are based on baseline 10-year projections. - All additional financing needs generated by shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA. - Tailored stress test shares/terms example: Avg. nominal interest rate on new borrowing in USD = 5.0%; Avg. maturity (incl. grace period) = 20; Avg. grace period = 5; USD Discount rate = 5.0%; Shares of marginal debt examples: 23, 6. - Thresholds and diagnostics used in figures and tables: - PV of PPG external debt-to-GDP threshold example: 100% (threshold shown in figures). - Debt service-to-revenue ratio threshold example: 5.0% (noted in figure annotations). ### Selected historical and projection figures (external DSA table highlights) - External debt (nominal) 2016–2039 (selected datapoints, in percent of GDP unless otherwise indicated): - 2016: 20.9 - 2017: 28.9 - 2018: 30.9 - 2019: 27.9 - 2020: 25.7 - 2021: 23.8 - 2022: 22.3 - 2023: 21.1 - 2024: 20.3 - 2029: 16.1 - 2039: 15.7 - Of which: public and publicly guaranteed (PPG) external: - 2016: 15.7 - 2017: 15.0 - 2018: 16.3 - 2019: 14.7 - 2020: 14.6 - 2021: 14.5 - 2022: 14.3 - 2023: 14.2 - 2024: 14.1 - 2029: 14.5 - 2039: 13.9 - Identified net debt-creating flows (selected years, percent of GDP): - 2019: -3.1 - 2020: -2.8 - 2021: -1.5 - 2022: -1.1 - 2023: -0.8 - 2024: -0.6 - 2029: 0.6 - Non-interest current account deficit (percent of GDP, selected): - 2016: 3.8 - 2017: 6.0 - 2018: 3.6 - 2019: 1.2 - 2020: 2.5 - 2021: 2.8 - 2022: 3.4 - 2023: 3.8 - 2024: 4.2 - 2029: 2.0 - Net FDI (negative = inflow, percent of GDP): - 2016: -5.1 - 2017: -5.8 - 2018: -4.8 - 2019: -2.9 - 2020: -3.1 - 2021: -3.2 - 2022: -3.5 - 2023: -3.6 - 2024: -4.0 - 2029: -3.7 - Endogenous debt dynamics (contribution, percent of GDP, selected): - 2019: -1.8 - 2020: -1.1 - 2021: -0.9 - 2022: -0.8 - 2023: -0.8 - 2024: -0.8 - 2025: -0.7 - Sustainability indicators (selected): - PV of PPG external debt-to-GDP ratio (selected projections): 11.9, 12.0, 11.8, 11.6, 11.4, 11.3, 11.2, 10.2, 11.7 (table shows these across projection years). - PV of PPG external debt-to-exports ratio (selected): 51.0, 51.2, 53.6, 54.7, 54.0, 53.4, 53.3, 57.7, 52.5. - PPG debt service-to-exports ratio (selected): 4.4, 4.7, 5.1, 5.1, 5.2, 5.2, 5.2, 4.9, 4.9. - PPG debt service-to-revenue ratio (selected): 4.9, 5.6, 6.4, 6.9, 6.5, 6.2, 6.0, 5.6, 5.5, 4.4, 4.1. - Gross external financing need (Million of U.S. dollars, selected): - 2016: 2812.7 - 2017: 4428.2 - 2018: 3403.4 - 2019: 3429.2 - 2020: 4271.7 - 2021: 4534.1 - 2022: 4536.6 - 2023: 4649.0 - 2024: 4637.5 - 2029: 10523.3 ### Public sector debt (baseline highlights from public DSA) - Public sector debt (percent of GDP, selected): - 2016: 37.8 - 2017: 38.3 - 2018: 39.8 - 2019: 38.1 - 2020: 37.9 - 2021: 38.5 - 2022: 39.5 - 2023: 40.8 - 2024: 42.2 - 2029: 30.8 - 2039: 41.4 - Of which: external debt (percent of GDP) matches external DSA PPG external series (see external table). - Change in public sector debt (percent of GDP, selected): - 2019: -1.7 - 2020: -0.1 - 2021: 0.6 - 2022: 1.0 - 2023: 1.3 - 2024: 1.4 - 2029: -1.0 - Identified debt-creating flows (percent of GDP, selected): - 2019: -0.9 - 2020: 0.0 - 2021: 0.8 - 2022: 1.1 - 2023: 1.4 - 2024: 1.5 - 2029: -0.7 - Primary deficit (percent of GDP, selected): - 2016: 2.6 - 2017: 1.4 - 2018: 1.1 - 2019: 1.8 - 2020: 2.4 - 2021: 2.6 - 2022: 2.5 - 2023: 2.5 - 2024: 1.3 - 2029: 1.9 - Revenue and grants (percent of GDP, selected): - 2016: 19.6 - 2017: 18.3 - 2018: 18.8 - 2019: 18.0 - 2020: 18.1 - 2021: 18.1 - 2022: 18.4 - 2023: 18.8 - 2024: 19.1 - 2029: 22.6 - Sustainability indicators (selected): - PV of public debt-to-GDP ratio (selected projections): 36.8, 35.4, 35.1, 35.6, 36.5, 37.8, 39.2, 39.9, 27.9 (table lists values across years). - PV of public debt-to-revenue and grants ratio (selected): 195.6, 196.8, 194.5, 196.7, 198.4, 200.9, 205.2, 196.1, 123.3. - Debt service-to-revenue and grants ratio (selected): 28.2, 29.4, 28.8, 30.0, 47.4, 59.5, 70.3, 80.7, 88.2, 61.3, 29.5. - Gross financing need (selected): 8.0, 6.5, 6.4, 7.2, 10.9, 13.3, 15.4, 17.6, 19.3, 13.7, 7.1. ### Sensitivity and scenario testing (selected notes) - Table 3 (external PPG sensitivity) and Table 4 (public debt sensitivity) report multiple alternative scenarios, bound tests, and tailored tests including: - A1. Key variables at their historical averages in 2019-2029. - B1–B6. Bound tests for Real GDP growth, Primary balance, Exports, Other flows, Depreciation, Combination B1–B5. - C1–C4. Tailored tests for Combined contingent liabilities, Natural disaster, Commodity price (n.a. in places), Market financing (n.a. in places). - The memorandum item notes: Grant element assumed on residual financing (i.e., financing required above baseline) = 0.0 (and zeros across projection years where shown). ### Statement by Ms. Alisara Mahasandana and Mr. Acharawat Srisongkram (February 28, 2020) — Authorities' appraisal and outlook - Authorities thanked the IMF Article IV mission team for constructive and candid discussions on priority actions to tackle imminent risks in the financial sector and to strengthen policy frameworks towards more sustainable growth. - The authorities are fully committed to advance the comprehensive reform agenda under the Myanmar Sustainable Development Plan (MSDP). - They concur with staff’s appraisal and policy recommendations and will take them into consideration as they continue to advance the reform agenda. - Recent economic developments and outlook (authorities' numbers and projections): - FY2018/19 GDP growth: 6.8 percent. - For FY2019/2020, authorities project GDP growth of 7.0 percent. - Current account (CA) deficit expected to widen to 2.0 percent of GDP. - Headline inflation spiked in the second half of 2019 largely due to a one-off hike in electricity tariffs effective July 1, 2019 and increase in food prices from poor harvest. - Growth drivers cited for FY2019/2020: higher government spending and private investment, continued strength in manufacturing including MSMEs and garments, and the tourism sectors. *Sources: Country authorities; and IMF staff estimates and projections as presented in the specified content unit.* ### 8.8 percent. ### 8.8 percent. ### Macroeconomic overview and authorities' stance - Authorities agree with staff’s assessment of key challenges and the need to step up structural reform implementation. - External headwinds remain large; domestic risks warrant close attention. - Authorities are vigilant of risks in the banking sector and committed to follow through with ongoing financial sector reforms and strengthen the supervisory framework to avoid negative spillovers. - Steadfast implementation of reforms to strengthen domestic institutions and lay down necessary infrastructure is critical to underpin macroeconomic stability, foster a sound business climate, and improve longer-term prospects. ### Fiscal policy - Fiscal policy is expected to remain expansionary to support growth amidst waning domestic demand. - Fiscal deficit was 3.5 percent of GDP in FY2018/19. - Budget estimates and revisions for FY2018/19: - Budget estimate: 4.5 percent - Revised estimate: 5 percent - Actual: 3.5 percent of GDP (lower-than-expected capital expenditure due to constraints in spending execution). - FY2019/20 budget envisages a fiscal deficit of 5.6 percent of GDP, with higher revenues from: - recent electricity tariff hike - new tax amnesty measures - Authorities remain committed to phase out CBM financing. - CBM financing was largely non-existent during the six months transition period (April-September 2018) as borrowing through government bonds and bills were sufficient to finance the interim budget. - In FY2018/19, CBM financing accounts for approximately 21 percent of domestic financing, and is below the statutory limit of MMK 1 trillion. - Authorities note staff’s recommendation to target CBM financing as a share of reserve money (staff proposed target of 1 percent of reserve money) but consider that the proposed target may restrain needed spending. - Authorities concur that CBM financing should be reduced further and agree on the need to strengthen liquidity forecasting capabilities and cash management for more effective and better-planned treasury issuance. - Tax policy and administration reforms: - New Income Tax Law (ITL) will introduce a new rate structure and rationalize tax incentives for corporates to strengthen the tax base with minimal impact on the broader population. - Draft new ITL has completed public consultation and is being submitted to the Union Attorney General’s Office for legal opinions. - Authorities plan to table the draft new ITL to the Cabinet in June-July 2020 before proposing it to Parliament for approval. - ITL will complement progress in tax administration by the Internal Revenue Department (IRD), including the new Tax Administration Law and upgraded computer systems. - Public financial management and investment project support: - Second phase of PFM reforms focuses on enhancing governance of State Economic Enterprises (SEE). - “Project Bank” has been operationalized: a database of projects to strengthen implementation of infrastructure investments by providing visibility and facilitating selection of projects and financing options. - PPP center has been set up as a centralized body to provide technical support for PPP units, conduct value-for-money assessments, and propose PPP projects to the PPP Committee. - Both the Project Bank and the PPP center are at an early stage: - Project Bank needs greater awareness and training for users. - PPP center needs to address lack of personnel and continue working with the World Bank to build capacity. ### Monetary and exchange rate policies - CBM will maintain a tight monetary policy stance with focus on managing excess liquidity and ensuring external stability to anchor inflation expectations. - CBM priorities and instruments: - Introduce an interest rate corridor to better guide short-term interest rates and improve monetary policy effectiveness. - Contemplating introduction of interest on excess reserves (IOER), noting the importance of a safeguard given significantly large excess reserves of some state-owned banks. - Recognize drawbacks of existing limits on deposit and lending rates; agree on need to work on appropriate policy to gradually liberalize interest rates. - Any adjustment to minimum deposit rates and maximum lending rates must consider potential impact on well-being of depositors and be communicated with care. - Exchange rate regime and outcomes: - Asymmetric intervention strategy and rule-based one-way FX auction implemented since November 2019 has been effective in smoothing exchange rate movements and accumulating reserves. - International reserves now cover 3.5 months of imports. - Spread between the reference and informal market rates narrowed. - Interbank FX transactions have increased markedly, paving way towards a deeper and more liquid FX market. - CBM committed to established FX auction rules and plans to increase transparency of the rules as the FX market develops. ### Financial sector - CBM is working closely with the banking sector to meet CBM prudential regulations (2017) by the August 2020 deadline. - To date, most domestic banks have met the CAR requirements. - CBM will continue to oversee the recapitalization process closely. - Actions taken by banks include: - cash contributions - fixed asset revaluation - reduction on related party loans - subordinated debt issuance - temporary suspension of dividend payments - conversion of overdraft loans to term loans (efforts progressing as planned). - Overdrafts and targets: - Share of overdraft loans has been declining and was within the 30 percent target for 2019. - Most banks are on-track towards meeting the 20 percent target for 2020. - Authorities do not plan to reduce the target further in the near term, viewing the 20 percent cap as providing needed flexibility given overdrafts’ use for working capital. - Non-performing loans and collateral exposures: - NPLs started to come down from stepped-up debt collection through a debt-property swap arrangement. - Most collateral from such arrangements are land and building; authorities are cognizant of risks associated with banks’ increased exposure to the property market and will consider staff’s recommendations on addressing such exposures. - Ongoing vigilance: - Despite progress, risks to financial stability remain. - Authorities will continue to monitor risks closely and concur that further efforts are needed to address growing vulnerabilities. - Authorities broadly agree with key priorities outlined in paragraph 17 of the Staff Report and will work with the Fund team to develop safeguards and contingency plans. ### Structural reforms - Policy and reforms underway across sectors aim to improve the investment climate to realize the MSDP’s goal of more inclusive and private sector-led growth. - Anti-corruption progress: - Fourth amendment to the Anti-Corruption Law (2018) tightened rules and created greater public trust. - Number of complaints filed, investigations and prosecutions, and disciplinary actions have increased significantly in the past 3 years. - New anti-corruption rules will supplement progress; Corruption Prevention Units were established in different ministries in 2019. - AML/CFT framework improvements in response to APG peer-review: - Progress addressing recommendations from the Mutual Evaluation Report (October 2018) includes: 1. Completion and publication of the first National Risk Assessment Report and AML/CFT National Strategy. 2. President Office order requiring all reporting organizations to comply with provisions related to CDD, EDD, BO, PEP related matters. 3. CBM’s revised Customer Due Diligence Directive for banks and non-banks financial institutions to conduct customer due diligence measures and ML/TF risk management. 4. New remittance business regulation to formalize informal money/value-transfer services such as “hundi”. 5. Conducting on-site and off-site AML/CFT supervision on large- and medium-sized banks. - APG’s First Follow-up Report (2019) outcomes: - Upgraded two recommendations from partially compliant and compliance to largely compliant. - Upgraded one recommendation from non-compliant to largely compliant. - To date, 6 recommendations are rated compliant and 12 are rated largely compliant. - New AML/CFT law is being prepared to strengthen the Myanmar Financial Intelligence Unit (FIU) in investigating and prosecuting money laundering cases; draft bill is being prepared for submission to Parliament soon. ### Conclusion and external assistance - Authorities remain fully committed to preserving macroeconomic and financial stability and promoting sustainable and inclusive growth. - Given nascent policy framework improvements and limited capacity, assistance from development partners is essential to realize reform objectives and sustain growth momentum in a more challenging global economic environment. - Authorities reiterate sincere gratitude to the Fund, the World Bank, the Asian Development Bank, and bilateral partners for continuing support. *Source: 1mmrea2020003 - 8.8 percent.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mmrea2020003.pdf_