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### INTRODUCTION — strategic priorities
- Myanmar faces a "historic opportunity" to jump-start development by leveraging natural resources, a young labor force, and proximity to dynamic economies.
- Macro stability prerequisites:
  - Unify the exchange rate.
  - Lift exchange restrictions.
  - Establish a consistent monetary policy framework.
  - Improve public financial management.
- Medium-term modernization priorities:
  - Enhance the business and investment climate.
  - Encourage financial sector development.
  - Further liberalize trade and foreign direct investment (FDI).

### RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK
- FY2010/11 performance and stocks:
  - Real GDP growth estimated at 5.3 percent in FY2010/11.
  - Inflation declined to 6.4 percent (y-o-y) in October 2011, from 8 percent a year earlier.
  - Gross international reserves rose to an estimated US$6.1 billion in FY2010/11 (about nine months of imports).
- Staff projections:
  - Real GDP growth projected at 5½ percent in FY2011/12 and at 6 percent in FY2012/13.
  - Inflation projected at 4.2 percent for FY2011/12 and 5.8 percent in FY2012/13.
- Risks:
  - Downside: drop in regional demand; sustained appreciation in parallel markets eroding external competitiveness.
  - Upside: easing of FDI restrictions, further credit increases, and progress toward exchange rate unification.

### EXCHANGE RATE UNIFICATION — key findings and recommendations
- Current regime and problems:
  - Official peg since 1977 to the SDR at 8.50 kyats per SDR (5.35 kyats per U.S. dollar); official rate not part of a monetary policy framework.
  - "Export-first" policy and complex exchange restrictions create parallel markets and multiple exchange rates.
  - Central Bank of Myanmar (CBM) issued U.S. dollar-equivalent Foreign Exchange Certificates (FECs) to limit U.S. dollar banknote circulation; FECs trade informally and acquired domestic functions.
- Measured misalignment and movements:
  - Parallel market kyat appreciated by 23 percent in nominal effective terms and about 29 percent in real effective terms since end-FY2009/10.
  - IMF assessment: informal market exchange rate on average 19 percent overvalued in FY2010/11 and 40 percent so far in FY2011/12.
- Authorities’ reform plans:
  - Replace official peg with a managed float and announce a redemption plan for FECs.
  - New fiscal budget assumes an exchange rate aligned with the prevailing parallel market rate.
  - Steps to create a formal foreign exchange market: licensing 17 private banks in October 2011 for money changing counters at Thein Phyu (TP) center; licensing 11 banks in November 2011 as authorized foreign currency dealers (AD) (licenses not yet activated); presently only three state banks conduct foreign exchange business with the rest of the world.
  - Timetable to gradually lift all remaining restrictions on current international payments and transfers by mid-2012 and complete by end-2013.
- Staff recommendations:
  - Adopt a managed float anchored by market infrastructure; establish an interbank market as prerequisite.
  - CBM to establish foreign currency auctions and a kyat deposit facility to conduct sterilized foreign currency operations.
  - Activate AD licenses coincident with easing restrictions on usability of foreign currency for private imports (including relaxing TP counter restrictions and making foreign currency accounts at private banks usable for imports).
  - Grant CBM standing authorization to use and manage international reserves; transfer most foreign assets of state banks to the CBM before auctions start and adopt international best practices for reserve management.
  - Prepare a plan to end the "export-first" policy and accept Article VIII obligations; lift exchange restrictions gradually and across the board.
- Authorities’ emphasis:
  - Strong commitment to unification with priority for stability; planned activation of AD licenses and launch of foreign currency auctions and interbank trading at the time of announcing the managed float.
  - Drafting a new foreign exchange law and welcomed planned IMF technical assistance.

### MONETARY POLICY FRAMEWORK — findings and recommendations
- Institutional and market conditions:
  - CBM lacks a monetary policy framework; interest rates set administratively.
  - CBM functions as a department within the Ministry of Finance and Revenue (MoFR) and historically monetized fiscal deficits.
  - Nascent over-the-counter treasury market at administratively-set rates; no formal interbank market; CBM does not conduct monetary operations.
- Recent interest rate moves:
  - Since September 2011, deposit and lending rates were cut by a cumulative 4 percentage points to 8 and 13 percent, respectively.
  - September adjustment placed treasury bond rates above the minimum deposit rate, incentivizing banks to hold treasury bonds and helping reduce deficit monetization.
- Staff recommendations:
  - Grant CBM full operational autonomy and accountability with a primary objective of domestic price stability.
  - Consolidate central banking functions and move treasury agency and reserve management from state banks to the CBM.
  - CBM should monitor reserve money to guide interest rate decisions.
  - Use planned deposit auctions as interim liquidity tools while developing the treasury securities market to enable market-based monetary operations.
- Views on interest rates:
  - Staff and authorities view current interest rate levels as appropriate given structural constraints; further cuts risk channeling savings into speculative assets.

### FISCAL MANAGEMENT — supporting development and ensuring sustainability
- Recent fiscal trajectory:
  - Fiscal deficit in FY2011/12 narrowed to an expected 5½ percent due to lower capital spending after the elections, completion of new capital construction, moderation in defense spending, recent increase in pensions, and a temporary tax exemption on key agricultural exports.
- Impact of exchange rate reform on the budget:
  - Adoption of a market-based exchange rate expected to reduce the consolidated public sector budget deficit by 1.2 percent of GDP in FY2012/13, lowering projected deficit to 4.6 percent of GDP (net transfers from SEEs account for this benefit).
- Financing composition and risks:
  - Bond financing estimated to reach 46 percent of the deficit in FY2011/12.
  - Residual financing largely monetized by the CBM due to weak public financial management.
  - Planned fiscal decentralization could increase deficit monetization because of weak budgeting capacity and separation of sub-national budgets from the State Fund Account.
- Staff recommendations:
  - Stop deficit monetization to contain inflation pressures.
  - Lift restrictions on state banks' and Myanmar Insurance’s holdings of government securities and encourage retail sales of treasury bonds.
  - Move to treasury bond auctions to phase out deficit monetization and establish market-determined interest rates.
  - Establish a treasury function within the MoFR and obtain technical assistance to strengthen public financial management.
  - With decentralization, delineate fiscal responsibilities and improve regional fiscal capacity.
  - Use the first budget discussion in the new parliament to redefine fiscal priorities: poverty reduction, human capital, infrastructure; shift spending toward health and education; orient capital spending to rural development and power generation with result-based planning and evaluation.

### FISCAL POLICY AND REVENUE MOBILISATION
- Tax and revenue reforms:
  - Replace the commercial tax with a general sales tax with a single tax rate and at most one reduced (or zero) rate for basic food items.
  - Raise the exemption threshold for income tax to simplify administration.
- Revenue and deficit outlook:
  - Under current policies, the deficit expected to decline to around 1¼ percent in the medium term, primarily due to a substantial increase in gas revenues in mid-2013.
  - Authorities target a deficit in the range of 4½ percent of GDP in FY2012/13 with more emphasis on social spending.
- Planned reallocations:
  - Reduce military spending to 14½ percent of total expenditures from 23½ percent.
  - Increase social spending to about 7½ percent of expenditures, from 5.4 percent.
- Staff recommendations:
  - Use resource-based revenues to increase growth potential by building infrastructure and human capital.
  - Expand tax bases and improve tax administration to lift nonresource revenues.

### SEEs, EXCHANGE REFORM, AND PRIVATIZATION
- Managed float implications:
  - Adoption of a managed float will increase transparency of SEEs’ performance and reveal implicit losses previously hidden by the official rate.
  - Initially replace implicit subsidies with explicit budget subsidies to prevent domestic arrears and sharp price adjustments.
  - Gradual reduction in regressive subsidies recommended to protect the poor.
- Exchange restrictions:
  - Prepare a plan to gradually remove all restrictions on current international payments and transfers; eliminate multiple currency practices (MPCs) by a target date.
  - Pending such a plan, staff does not recommend approval of existing exchange restrictions and MPCs.
- SEE privatization:
  - More than 700 SEEs privatized since the late 1990s; plan to move to open tenders in FY2012/13.
  - Expect slower privatization as most profitable SEEs already privatized.
  - Plan to liberalize SEE operations by allowing them to manage costs of raw materials from operating revenues, while continuing to cover losses, including those from adoption of a managed float.

### FINANCIAL SECTOR POLICIES AND MODERNIZATION
- Sector characteristics and constraints:
  - Financial sector small and repressed with administrative controls on intermediation.
  - Key obstacles: deposit-to-capital ratio, onerous collateral requirements, administratively set interest rates, and segmented banking activities.
  - Regulatory treatment of state and private banks uneven; supervision not aligned with the Basel Core Principles.
  - No unified national electronic payments and settlement system, though plans exist.
- Recent easing since March 2011:
  - More than 40 new bank branches allowed.
  - List of acceptable collateral further expanded.
  - These steps improved access to credit and led to acceleration in private sector credit growth from a low base.
- Staff recommendations:
  - Expedite financial sector modernization to prepare for the ASEAN Economic Community.
  - Gradual liberalization of loan interest rates to begin alongside monetary policy reforms.
  - Phase out the deposit-to-capital ratio while strengthening capital requirements.
  - Expand acceptable collateral and ease administrative requirements on branch expansion.
  - Encourage joint ventures with foreign financial institutions to expedite technology transfer ahead of ASEAN integration in 2015.
  - Strengthen regulatory and supervisory framework: move to internationally accepted loan classification and provisioning, strengthen conflict-of-interest rules, introduce net open foreign currency position limits, and strengthen AML/CFT regime guided by the FATF action plan.
- Authorities’ constraints:
  - Authorities concur broadly but cite capacity constraints at private banks for branch expansion and prefer gradual liberalization; plan to revise the financial institutions’ law.

- Technical details:
  - There are 23 banks, of which 19 are private.
  - The deposit-to-capital ratio limits deposit-taking by private banks up to 25 times of paid-up capital.

### STRUCTURAL POLICIES — agriculture, private sector, industrialization
- Growth drivers and impediments:
  - Growth narrow-based and dependent on energy and agriculture.
  - Agricultural development constrained by poor access to credit, lack of private land ownership, and inadequate infrastructure and inputs.
  - Energy sector surpassed agriculture as main source of export revenues but is state-controlled and isolated from the domestic economy.
  - Manufacturing stifled by poor infrastructure, inadequate know-how, and administrative constraints; Myanmar among highest costs to start a business.
- Authorities’ recent measures:
  - Doubled harvest loans to farmers in 2011.
  - Specialized rice companies provided additional credit in certain areas.
  - In January 2012, agricultural land allowed to be leased for up to 60 years to facilitate FDI.
  - Liberalization of private imports of gasoline and palm oil reduced rationing and improved price competition.
  - Considering land reform to grant private land ownership beginning in 2012.
- Staff recommendations:
  - Lift agricultural productivity via long-term credit and land titles usable as collateral.
  - Complement higher rural growth with public investment in roads, education, and health.
  - Remove nontransparent licensing practices; replicate gasoline and palm oil liberalization success.
  - Eliminate exchange restrictions and move toward a negative list for restricted FDI.
  - Promote private sector development by reducing administrative controls and the cost of doing business.
  - Prioritize eliminating infrastructure bottlenecks, beginning with energy and specialized economic zones to attract labor-intensive FDI.

### DATA, ARREARS, AND CAPACITY BUILDING
- Data shortcomings:
  - Data grossly inadequate for surveillance due to capacity constraints and inadequate resources.
  - Substantial technical assistance needed to upgrade statistical practices.
- External arrears:
  - Resolving external arrears would bolster engagement with the international community.
  - Recent reconciliation of outstanding obligations to Japan noted; should be extended to all creditors.
  - Myanmar remains in debt distress primarily due to arrears despite improved debt indicators.
- Authorities’ plans:
  - Improve data quality in the new national economic plan and overhaul statistical practices.
  - Extend reconciliation exercise to all creditors, noting development needs constrain payment capacity.
- Staff appraisal:
  - Substantial capacity building required to improve coverage and quality of data.
  - Resolving external arrears is essential to re-engage the international community.

### MACROECONOMIC OUTLOOK AND POLICY PRIORITIES
- Growth and inflation projections reiterated:
  - Real GDP growth expected at 5½ percent in FY2011/12 and 6 percent in FY2012/13.
  - Inflation projected at 4.2 percent for FY2011/12 and 5.8 percent in FY2012/13.
- Policy recommendations:
  - Complement exchange rate unification with strengthened monetary and fiscal management.
  - Grant CBM operational autonomy and transfer central banking functions from state banks to the CBM; start reserve money targeting.
  - No room for further interest rate cuts beyond recent reductions.
  - Reduce deficit monetization to contain inflation: expand retail sales of treasury bonds and lift restrictions on state banks’ and insurance company’s holdings until treasury auctions established.
  - Establish a treasury function to improve public financial management and delineate fiscal responsibilities under decentralization.

### DEBT SUSTAINABILITY ANALYSIS — classification, assumptions, and key indicators
- Classification:
  - Myanmar remains classified as in debt distress.
- Baseline macro assumptions (2011–31):
  - Real GDP growth assumed at 6 percent.
  - Inflation projected on average at 5.5 percent y/y in the medium term; stabilize around 3.5 percent in the long term.
  - Overall fiscal deficit expected to narrow from about 5½ percent in 2011 to 1¼ percent in 2017 and reach a broadly balanced budget by 2031.
  - Revenue expected to rise to over 20 percent of GDP in the medium term and stay over 19½ percent over the long term.
  - Export growth averages around 9 percent in the medium term and about 11 percent over the longer term.
  - New external debt assumptions: 20 year loans with five-year grace period and 4 percent interest rate.
  - Treasury bond nominal rates: two-year 8.75 percent, three-year 9 percent, five-year 9.5 percent.
- Current debt levels (end-2010 / 2010–11):
  - Total public sector debt stock: estimated at 47½ percent of GDP in 2010.
  - External PPG debt stock at end-2010: nominal 24½ percent of GDP; NPV 17¾ percent of GDP.
  - External arrears at end-2010: US$5.4 billion, accounting for 48 percent of total PPG external debt.
  - Net nonconcessional new borrowings reached 5.0 percent of total external debt in FY2010/11; China accounts for about 30 percent of the 2010 net increase.
- External debt projections:
  - PV of debt-to-GDP: about 16 percent in 2011 → about 6 percent in 2031 (threshold 30 percent).
  - PV of debt-to-exports: about 78 percent in 2011 → about 24 percent in 2031 (threshold 100 percent).
  - PV of debt-to-revenue: about 139 percent in 2011 → about 32 percent in 2031 (threshold 200 percent).
  - Stress test: a one-standard-deviation shortfall in export growth in 2012–13 would push NPV debt-to-exports ratio to 109 percent.
- Public debt projections and stress tests:
  - Nominal public debt stock projected to increase modestly to 47.9 percent of GDP by end-2012 before declining.
  - PV of public debt-to-GDP projected to decline to 12½ percent by the long term.
  - Stress scenarios: permanent growth shock or unchanged primary balance at 2011 levels would substantially worsen public debt ratios (e.g., PV public debt-to-GDP could reach 71 percent under unchanged primary balance).
- Staff assessment:
  - Improving debt indicators depend on increasing revenues from nonrenewable natural resources.
  - Reliance on nonrenewable revenues makes sustainability fragile; reducing reliance via improved tax policy and public financial management is essential.
  - Resolve external arrears and strengthen public fiscal management; improve growth potential and export diversification.

### KEY TABLED STATISTICS (selected headline figures preserved exactly as presented)
- GDP (2010/11): US$45.4 billion 2/
- Population (2007/08): 57.5 million
- Quota: SDR 258.4 million
- Staff working estimates of real GDP (series): 5.5, 3.6, 5.1, 5.3, 5.5, 6.0
- Consumer prices (period average series): 32.9, 22.5, 8.2, 8.2, 4.2, 5.8
- Consolidated revenue (percent of GDP series): 14.1; 13.1; 12.1; 11.9; 11.4; 21.6
- Consolidated expenditure (percent of GDP series): 17.9; 15.5; 16.9; 17.9; 16.9; 26.1
- Overall balance (percent of GDP series): -3.8; -2.4; -4.8; -6.0; -5.5; -4.6
- Gross reserves, end-period (millions of U.S. dollars series): 3,054; 3,629; 4,638; 6,070; 7,903; 9,889
- Gross reserves (in months of imports series): 6.6; 6.3; 7.9; 8.9; 9.4; 9.7
- Total external debt (including arrears, millions): 8,082; 9,101; 9,970; 11,240; 11,841; 12,419
- External debt arrears (millions): 3,858; 4,359; 4,781; 5,405; 5,510; 5,654

### STATISTICAL ISSUES — data adequacy and recommended actions
- Data provision has serious shortcomings: untimely, inconsistent, and with wide differences between official and independent estimates.
- National accounts:
  - Annual statistics only, considerable delays, incomplete private sector coverage, informal sector not fully accounted.
  - Base year updated to FY 2005/06; surveys on agricultural costs, manufacturing, informal sector underway; plan to include Chamber of Commerce survey in GDP estimation from April 2012.
- Price statistics:
  - CPI weights updated from the 2006 Household Income and Expenditure Survey but weights represent urban households only; rentals of owner-occupied housing excluded; missing prices not imputed.
- Government finance statistics:
  - No comprehensive monthly/quarterly fiscal compilation; annual data delayed up to 12 months.
  - Fiscal and monetary data inconsistent; debt statistics recording not comprehensive.
- Monetary and financial statistics:
  - Monetary survey covers CBM and commercial banks; reporting in Standardized Report Forms established January 2012.
  - Recommended: use market exchange rate for valuation, monitor interbank accounts, adopt electronic data capture, post revaluation amounts to valuation adjustment account on exchange rate unification day, and adopt market/fair value valuation in due course.
- External sector statistics:
  - Merchandise imports underestimated (military imports, certain official imports, and transactions outside official banking system excluded).
  - Services and financial flow data generally unavailable; balance of payments coverage and reliability need improvement.
- Data standards:
  - Myanmar does not participate in the IMF’s General Data Dissemination System; no data ROSC available.
  - Reporting to STA lags two to six months; BOP statistics not reported to STA for publication since 2007.

*Source: Myanmar 2011 Article IV Report and Staff Report for the 2011 Article IV Consultation—Debt Sustainability Analysis (IMF), prepared March 2, 2012.*

### 2012. The mission comprised Mses. Karasulu (Head), Dao, and Geng,

### _cr12104 - 2012. The mission comprised Mses. Karasulu (Head), Dao, and Geng,

### INTRODUCTION
- Myanmar faces a "historic opportunity" to jump-start development and lift living standards by leveraging rich natural resources, young labor force, and proximity to dynamic economies.
- Ensuring macroeconomic stability is the starting point, including plans to unify the exchange rate, lift exchange restrictions, establish a consistent monetary policy framework, and improve public financial management.
- Medium-term modernization requires removing impediments to growth: enhancing the business and investment climate, encouraging financial sector development, and further liberalizing trade and foreign direct investment (FDI).

### RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK
- FY2010/11 performance and stocks:
  - Real GDP growth estimated at 5.3 percent in FY2010/11.
  - Inflation declined to 6.4 percent (y-o-y) in October 2011, from 8 percent a year earlier.
  - Gross international reserves rose to an estimated US$6.1 billion in FY2010/11 (about nine months of imports).
- Staff projections and outlook:
  - Real GDP growth projected at 5½ percent in FY2011/12 and at 6 percent in FY2012/13.
  - Inflation projected at 4.2 percent for FY2011/12 and 5.8 percent in FY2012/13.
- Risks to outlook:
  - Downside: drop in regional demand; sustained appreciation in parallel markets eroding external competitiveness.
  - Upside: easing of FDI restrictions, further credit increases, and progress toward exchange rate unification.

### A. Exchange Rate Unification — Key Findings and Staff Recommendations
- Current regime and problems:
  - Since 1977, an official peg to the SDR at 8.50 kyats per SDR (5.35 kyats per U.S. dollar) has been in place; the official rate is not part of a monetary policy framework.
  - "Export-first" policy and complex exchange restrictions direct private transactions to parallel markets with multiple exchange rates and segmented markets.
  - Central Bank of Myanmar (CBM) has issued U.S. dollar-equivalent Foreign Exchange Certificates (FECs) to limit U.S. dollar banknote circulation; FECs have acquired additional domestic functions and trade informally.
- Measured misalignment and movements:
  - Parallel market kyat appreciated by 23 percent in nominal effective terms and about 29 percent in real effective terms since end-FY2009/10.
  - IMF framework assessment suggests informal market exchange rate is on average 19 percent overvalued in FY2010/11 and 40 percent so far in FY2011/12.
- Authorities’ reform plans:
  - Replace official peg with a managed float and announce a redemption plan for FECs.
  - New fiscal budget incorporates an exchange rate assumption aligned with prevailing parallel market rate.
  - Steps to create a formal foreign exchange market: licensing 17 private banks in October 2011 to operate money changing counters at Thein Phyu (TP) center; licensing 11 banks in November 2011 as authorized foreign currency dealers (AD) (licenses not yet activated); presently only three state banks conduct foreign exchange business with the rest of the world.
  - Plan to have a timetable to gradually lift all remaining restrictions on current international payments and transfers by mid-2012 and complete by end-2013.
- Staff recommendations:
  - Adopt a managed float anchored by necessary market infrastructure; establish an interbank market as a prerequisite.
  - CBM should establish foreign currency auctions and a kyat deposit facility to conduct sterilized foreign currency operations.
  - Activate AD licenses coincident with easing restrictions on usability of foreign currency for private imports (including relaxing TP counter restrictions and making foreign currency accounts at private banks usable for imports).
  - CBM should be granted standing authorization to use and manage international reserves; transfer most foreign assets of state banks to the CBM before auctions start and adopt international best practices for reserve management.
  - Prepare a plan to end the "export-first" policy and accept Article VIII obligations; lift exchange restrictions gradually and across the board to reduce market segmentation and mitigate appreciation pressures.
- Authorities’ emphasis:
  - Strong commitment to unification with priority for stability during the process; plan to activate AD licenses and launch foreign currency auctions and interbank trading at the time of announcing the managed float.
  - Drafting a new foreign exchange law and welcomed planned IMF technical assistance.

### B. Establishing a Monetary Policy Framework — Key Findings and Recommendations
- Current institutional and market conditions:
  - CBM lacks a monetary policy framework; interest rates are set administratively.
  - CBM functions as a department within the Ministry of Finance and Revenue (MoFR) with the primary historical role of monetizing fiscal deficits.
  - Nascent over-the-counter treasury market exists at administratively-set rates; no formal interbank market; CBM does not conduct monetary operations.
- Recent interest rate moves:
  - Since September 2011, deposit and lending rates were cut by a cumulative 4 percentage points to 8 and 13 percent, respectively.
  - September adjustment placed treasury bond rates above the minimum deposit rate, incentivizing banks to hold treasury bonds and helping reduce deficit monetization.
- Staff recommendations:
  - Grant CBM full operational autonomy and proper accountability with a clearly defined primary objective of domestic price stability.
  - Consolidate central banking functions and move treasury agency and reserve management functions currently held by state banks to the CBM.
  - CBM should start monitoring reserve money to guide future interest rate decisions, given the heavily cash-based economy.
  - Use planned deposit auctions as interim liquidity tools while developing the treasury securities market to enable market-based monetary operations.
- Views on interest rates:
  - Staff and authorities view current level of interest rates as appropriate given structural constraints; further cuts risk channeling savings into speculative assets.

### C. Fiscal Management: Supporting Development and Ensuring Sustainability
- Recent fiscal trajectory and composition:
  - Fiscal deficit in FY2011/12 narrowed to an expected 5½ percent due to lower capital spending after the elections, completion of new capital construction, moderation in defense spending, recent increase in pensions, and a temporary tax exemption on key agricultural exports.
- Impact of exchange rate reform on the budget:
  - Adoption of a market-based exchange rate expected to reduce the consolidated public sector budget deficit by 1.2 percent of GDP in FY2012/13, lowering projected deficit to 4.6 percent of GDP (net transfers from SEEs account for this benefit).
- Financing composition and risks:
  - Bond financing estimated to reach 46 percent of the deficit in FY2011/12, helped by recent interest rate adjustment.
  - Residual financing largely monetized by the CBM due to weak public financial management.
  - Planned fiscal decentralization could increase deficit monetization due to weak budgeting capacity, separation of sub-national budgets from the State Fund Account (treasury account), and interim financing by Myanma Economic Bank (which handles treasury functions).
- Staff recommendations:
  - Stop deficit monetization to contain inflation pressures.
  - Lift restrictions on state banks' and Myanmar Insurance’s holdings of government securities and encourage retail sales of treasury bonds to increase bond financing.
  - Move to treasury bond auctions to phase out deficit monetization and establish market-determined interest rates.
  - Establish a treasury function within the MoFR and obtain technical assistance to strengthen public financial management.
  - With planned decentralization, delineate fiscal responsibilities and improve regional capacity for fiscal management.
  - Use the first budget discussion in the new parliament to redefine fiscal priorities: focus on poverty reduction, building human capital and infrastructure, shift spending further to health and education to narrow regional differences, and orient capital spending to rural development and power generation with result-based planning and evaluation.

*Source: MYANMAR 2011 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND*

### 26.      Expanding tax bases would generate

### 26.      Expanding tax bases would generate

### Fiscal policy and revenue mobilisation
- Replacing the commercial tax with a general sales tax with a single tax rate, and at most one reduced (or zero) tax rate for basic food items, would simplify tax structures.
- Raising the exemption threshold for income tax would make administration easier.
- Under current policies, the deficit is expected to decline to around 1¼ percent in the medium term, primarily due to a substantial increase in gas revenues in mid-2013.
- Resource-based revenues should be used to increase Myanmar’s growth potential by building infrastructure and human capital.
- The authorities’ target a deficit in the range of 4½ percent of GDP in FY2012/13 with more emphasis on social spending.
- Planned reallocations of expenditure:
  - Reduce military spending to 14½ percent of total expenditures from 23½ percent.
  - Increase social spending to about 7½ percent of expenditures, from 5.4 percent.
  - Allocate more spending to transportation infrastructure.
- The authorities await a new national economic plan expected to allocate future gas revenues to poverty reduction, rural development, and industrialization.
- The new government’s first budget aims at redefining national spending priorities; plans to increase social spending while targeting a moderate fiscal deficit of 4½ percent of GDP in FY2012/13 are welcome, but there is further room to prioritize spending for poverty reduction and education.
- In the medium term, a broadly balanced budget is appropriate; increasing gas revenues should be used to expand growth potential by building human capital and infrastructure.
- More development spending would require lifting nonresource revenues by expanding tax bases through simplifying taxes and improving tax administration.

### Exchange rate reform, SEEs, and managed float
- Adoption of a managed float would increase transparency of SEEs’ performance and should guide their reform.
  - It would reveal implicit losses of importing SEEs previously hidden by the use of the official exchange rate.
  - Initially, implicit subsidies should be replaced with explicit subsidies to all loss-making SEEs in the budget to prevent accumulation of domestic arrears and avoid sharp price adjustments, especially for public utilities.
  - Going forward, any price adjustments should begin with gradual reduction in regressive subsidies to protect the poor.
- The unification of informal market exchange rates requires moving away from the ‘export-first’ policy.
  - Authorities should prepare a plan to gradually remove all exchange restrictions on current international payments and transfers, and eliminate multiple currency practices (MPCs) by a target date.
  - Pending such a plan, staff does not recommend approval of the existing exchange restrictions and MPCs.
- The planned adoption of a managed float is a welcome first step toward exchange rate unification; steps to establish necessary market infrastructure in line with IMF TA recommendations should continue, including expeditious removal of some exchange restrictions to make a larger pool of foreign currency available for private imports and other transfers abroad.
- The SEE losses revealed by a market-determined exchange rate should guide future SEE reforms; while explicit subsidies would avoid fast price hikes of utilities and essential inputs, a gradual reduction in regressive subsidies, which tend to benefit higher income groups, would contain their losses.
- Authorities plan further privatization of SEEs:
  - Progress noted in privatizing more than 700 SEEs since the late 1990s.
  - Plan to move to open tenders in FY2012/13.
  - Expect slower privatization as most profitable SEEs have already been privatized.
  - Plan to liberalize SEE operations by allowing them to manage costs of raw materials from operating revenues, but will continue to cover their losses, including those emanating from the adoption of a managed float.

### Financial sector policies and modernization
- The financial sector is small and repressed with administrative controls on financial intermediation.
  - Key obstacles: the deposit-to-capital ratio, onerous collateral requirements, administratively set interest rates, and segmented banking activities.
  - These controls and exchange restrictions led to a reportedly large unregulated shadow financial system.
  - Regulatory treatment of state banks and private banks is uneven; bank governance is poor; banking supervision does not follow the Basel Core Principles.
  - There is no unified national electronic payments and settlement system, although plans are under way to develop financial infrastructure.
- Recent easing since March 2011:
  - More than 40 new bank branches were allowed.
  - The list of acceptable collateral was further expanded.
  - These steps improved access to credit and led to acceleration in private sector credit growth, albeit from a very low base.
- Staff recommendations:
  - Expedite financial sector modernization to facilitate development and prepare for the ASEAN Economic Community.
  - Gradual liberalization of loan interest rates, as with deposit rates, should begin in tandem with reforms to the monetary policy framework.
  - Phase out the deposit-to-capital ratio while strengthening capital requirements.
  - Further expand the list of acceptable collateral and ease administrative requirements on expanding branch networks.
  - Joint ventures with foreign financial institutions would expedite technology transfer before ASEAN financial integration in 2015.
  - Complement liberalization with stronger regulatory and supervisory framework:
    - Move to internationally accepted definitions for loan classification and provisioning.
    - Strengthen conflict-of-interest requirements.
    - Introduce a net open foreign currency position limit.
    - Strengthen AML/CFT regime guided by the action plan agreed with the Financial Action Task Force.
  - Gradual liberalization of interest rates that began with deposit rates should be extended to loans, commissions, and fees.
  - Recent efforts should continue by lifting pervasive administrative controls on network expansions, phasing out the deposit-to-capital ratio, and expanding the list of allowable collateral; liberalization should be complemented by strengthened supervision and regulation.
  - Joint ventures with foreign banks would help prepare the sector for ASEAN financial integration in 2015.
- Authorities’ views and constraints:
  - Authorities broadly concur with staff positions but note capacity constraints, including limited human capacity at private banks as a constraint on branch expansions.
  - They prefer gradual liberalization, arguing many domestic banks are not ready for price competition; plan to revise the financial institutions’ law to modernize the sector.
- Technical details preserved:
  - There are 23 banks, of which 19 are private.
  - The deposit-to-capital ratio limits deposit-taking by private banks up to 25 times of paid-up capital.

### Structural policies: agriculture, private sector, and industrialization
- Growth is narrow-based, largely dependent on energy and agriculture.
  - Agricultural development is suppressed by poor access to credit, lack of private land ownership, and inadequate infrastructure and inputs.
  - Energy sector surpassed agriculture as the main source of export revenues, but growth dividend is limited as it is exclusively under state control and largely isolated from the domestic economy.
  - Manufacturing is stifled by poor infrastructure, inadequate know-how, and extensive administrative constraints; Myanmar has one of the highest costs in the world for starting a business.
- Authorities’ recent measures:
  - Doubled the size of harvest loans to farmers in 2011.
  - Specialized rice companies have provided additional credit in certain areas.
  - In January 2012, agricultural land was allowed to be leased for up to 60 years to facilitate FDI.
  - Liberalization of private imports of gasoline and palm oil helped reduce rationing and improved price competition.
  - Considering a new land reform to grant private land ownership, expected to begin in 2012.
- Staff views and recommendations:
  - Lifting agricultural productivity is essential for rural development; investment in productivity improvements requires long-term credit.
  - Planned land reform provides opportunity to grant land titles usable as collateral for borrowing, addressing a key impediment for private bank lending to agriculture.
  - Higher rates of broad-based rural growth are essential to reduce poverty and require complementary public investment in roads, education, and health.
  - Move away from nontransparent licensing practices that limit competition; replicate the success of gasoline and palm oil import liberalization.
  - Elimination of exchange restrictions is essential; gradually move to a negative list for restricted FDI.
  - Promote private sector development by reducing administrative controls and the cost of doing business; eliminate nontransparent licensing practices and administrative controls to provide a level playing field and reduce investor uncertainty.
  - Industrialization plans include eliminating infrastructure bottlenecks, beginning with energy; opened up onshore exploration to international companies; view specialized economic zones as focal points to attract FDI to labor-intensive industries; view reforms of the exchange regime as essential.

### Data, arrears, and capacity building
- Data remain grossly inadequate for surveillance due to capacity constraints and inadequate resources; substantial TA is necessary to support plans to upgrade statistical practices.
- Resolving external arrears would bolster government engagement with the international community.
  - Recent reconciliation of Myanmar’s outstanding obligations to Japan is a welcome first step and should be extended to all creditors.
  - Myanmar remains in debt distress, primarily due to arrears, notwithstanding improvement in debt indicators.
- Authorities plan to:
  - Include improving data quality as a priority in their new national economic plan and overhaul statistical practices.
  - Extend the reconciliation exercise to all creditors but noted vast development needs as a constraint on payment capacity.
- Staff appraisal highlights:
  - Substantial capacity building efforts are needed to improve coverage and quality of data.
  - Resolving external arrears is essential to re-engage the international community; recent efforts to reconcile arrears with Japan should be extended to all creditors.

### Macroeconomic outlook and monetary policy
- Growth and inflation projections:
  - Real GDP growth is expected to increase to 5½ percent in FY2011/12 and to 6 percent in FY2012/13, driven by commodity exports and higher investment.
  - Inflation projected at 4.2 percent for FY2011/12 and expected to rise to 5.8 percent in FY2012/13 as the recent decline in food prices phases out.
- Monetary and fiscal management recommendations:
  - Exchange rate unification reform should be complemented by strengthening monetary and fiscal management.
  - Plans to grant the CBM operational autonomy are positive and should include transferring all central banking functions from state banks to the CBM, and starting reserve money targeting.
  - While recent reduction in interest rates is welcome, there is no room for further interest rate cuts in light of the economic outlook.
  - Further progress in reducing deficit monetization is needed to contain inflation pressures.
    - Until treasury bond auctions can be established, expanding retail sales of treasury bonds and lifting restrictions on state banks’ and insurance company’s holdings of treasury securities would further reduce deficit monetization.
  - A treasury function is essential to improve public financial management and to delineate fiscal responsibilities under fiscal decentralization.

*Source: IMF staff report excerpt (Myanmar 2011 Article IV Report).*

### 60.      It is recommended that the next Article

### _cr12104 - 60.      It is recommended that the next Article

### Recommendation on Article IV schedule
- It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

### Living standards and regional comparisons (Figure 1)
- Per Capita GDP (PPP) (In U.S. dollars): Myanmar compared with peers (2000–2010) shows the lowest living standards in the region in the figure.
- General Government Balance (In percent of GDP): series shown for 2009–2011 with Myanmar among comparators.
- Public Domestic Spending, CBM's net credit to government, and Inflation (Year-on-year percent change): charts indicate routine deficit monetization led to episodes of high inflation.
- Inflation (Year-on-year percent change): Myanmar compared to peers (Average 2000–2009 and 2010).
- Government Revenue Excluding Grants, 2010 (In percent of GDP): Myanmar is shown with low government revenues among peers.
- Credit to the Economy (In percent of GDP), 2001–2010: Myanmar exhibits depressed financial intermediation.

Sources supporting these charts: Authorities; Direction of Trade; IMF’s World Economic Outlook; and IMF staff calculations.

### Macroeconomic developments and outlook (Figure 2 and Table excerpts)
- Real GDP Growth (In percent): historical series and IMF staff estimates/projections shown; authorities’ and IMF staff series plotted (01/02–11/12).
- Monetary Aggregates and Inflation (Year-on-year percent change): CBM's net credit to government, Broad money, Inflation, Food inflation series (2008M1–2011M7).
- Fiscal Overall Balance and Financing (In percent of GDP): revenues, expenditures, other bank financing (right axis, reverse), central bank credit (right axis, reverse) with projections.
- Interest Rate and Inflation, 2005–11 (Percent): Treasury bill rate, Bank lending rate, Bank deposit rate, 5-year treasury bond rate, Inflation series listed.
- Balance of Payments (In billions of U.S. dollars): FDI, Current account excluding grants, Overall balance, Natural gas exports, Gross reserves (in months of imports, RHS).
- Real Effective Exchange Rate, 2008–11 (Index, Jan 2008=100): Nominal and Real series showing strong appreciation of the kyat.

Key headline country statistics (as presented)
- GDP (2010/11): US$45.4 billion 2/
- Population (2007/08): 57.5 million
- Quota: SDR 258.4 million

### Staff working estimates and projections (Table 1 excerpts)
- Staff working estimates of real GDP: 5.5, 3.6, 5.1, 5.3, 5.5, 6.0 (series across years).
- Consumer prices (period average): 32.9, 22.5, 8.2, 8.2, 4.2, 5.8 (series).
- Consumer prices (end of period): 28.8, 9.2, 7.1, 8.9, 5.0, 5.4 (series).
- Public sector operations (In percent of GDP): Total revenue (including grants): 14.1, 13.1, 12.1, 11.9, 11.4, 21.6 (series); Total expenditure: 17.9, 15.5, 16.9, 17.9, 16.9, 26.1; Overall balance: -3.8, -2.4, -4.8, -6.0, -5.5, -4.6.
- Central bank financing (In percent of GDP): 2.7, 2.2, 3.7, 4.0, 2.5, 1.1.
- Domestic public debt (In percent of GDP): 16.5, 16.8, 20.0, 22.8, 25.9, 26.7.
- Broad money (In percent of GDP): 21.0, 23.4, 34.8, 36.3, 33.3, 24.6.
- Domestic credit (In percent of GDP): 22.1, 24.0, 34.8, 34.4, 32.5, 26.8.
- Public sector (net) credit (In percent of GDP): 23.3, 25.6, 34.4, 28.5, 23.8, 15.7.
- Private sector credit (In percent of GDP): 16.7, 16.2, 36.9, 55.4, 68.0, 60.0.

### Consolidated nonfinancial public sector (Table 2 highlights)
- Consolidated revenue (In billons of kyats): 3,283; 3,772; 3,909; 4,337; 4,551; 9,622; ... (series through 2017/18).
- Of which: Revenue from gas exports (billions): 7; 9; 8; 10; 10; 1,646; 2,110; 2,467; 2,440; 2,425; 2,425.
- Consolidated expenditure (In billons of kyats): 4,177; 4,450; 5,463; 6,513; 6,747; 11,662; ...
- Gross operating balance (current balance, billons): 726; 1,005; 874; 815; 162; 2,942; ...
- Net lending/borrowing (overall balance, billons): -894; -678; -1,554; -2,176; -2,195; -2,040; -1,446; ...
- Net incurrence of liabilities (billions): 892; 628; 1,477; 2,056; 1,978; 1,863; ...
- Domestic securities issuance: Treasury bonds series and treasury bills indicated in detailed rows.
- Bank financing (billions): 724; 980; 1,656; 1,844; 1,977; 1,621; 1,056; ...

Consolidated accounts (In percent of GDP)
- Consolidated revenue: 14.1; 13.1; 12.1; 11.9; 11.4; 21.6; 22.0; 21.9; 20.7; 19.8; 19.0.
- Consolidated expenditure: 17.9; 15.5; 16.9; 17.9; 16.9; 26.1; 24.9; 23.6; 22.3; 21.2; 20.3.
- Gross operating balance (current balance): 3.1; 3.5; 2.7; 2.2; 0.4; 6.6; 7.9; 8.8; 8.3; 8.1; 7.9.
- Net lending/borrowing (overall balance): -3.8; -2.4; -4.8; -6.0; -5.5; -4.6; -2.9; -1.7; -1.6; -1.4; -1.3.
- Bank financing (percent of GDP): 3.1; 3.4; 5.1; 5.1; 5.0; 3.6; 2.1; 1.0; 1.0; 0.9; 0.8.

### General government and State Economic Enterprises (Table 2 detailed)
General government (In billons of kyats)
- Revenue: 1,701; 2,097; 2,160; 2,430; 2,452; 4,304; 5,507; 6,699; 7,196; 7,748; 8,425.
- Taxes: 875; 1,045; 1,077; 1,083; 1,064; 1,459; 1,638; 1,831; 1,990; 2,187; 2,416.
- Grants: 0.2; 0.3; 0.5; 0.4; 0.4; 55.4; 55.6; 55.7; 55.8; 55.9; 55.9.
- Expenditure: 2,161; 2,269; 3,175; 4,078; 4,123; 5,800; 6,373; 6,905; 7,387; 7,852; 8,506.
- Expense: 812; 937; 1,159; 1,445; 2,178; 2,515; 2,756; 2,955; 3,143; 3,360; 3,609.
- Interest (domestic and external): 147; 181; 263; 415; 513; 644; 675; 676; 651; 632; 628.
- Net acquisition of nonfinancial assets: 1,349; 1,332; 2,016; 2,633; 1,945; 3,285; 3,617; 3,950; 4,244; 4,492; 4,896.
- Gross operating balance (current balance): 889; 1,160; 1,001; 985; 274; 1,789; 2,751; 3,744; 4,053; 4,387; 4,816.
- Net lending/borrowing (overall balance): -460; -1; 72; -1,015; -1,648; -1,671; -1,496; -866; -206; -1; 90; -104; -80 (note table formatting includes additional entries).

State economic enterprises (In billons of kyats)
- Revenue: 2,268; 2,482; 2,542; 2,806; 3,089; 7,706; 8,863; 9,749; 10,147; 10,718; 11,382.
- Expenditure: 2,702; 2,988; 3,081; 3,334; 3,613; 8,250; 9,443; 10,464; 10,940; 11,553; 12,260.
- Gross operating balance (current balance): -163; -155; -127; -170; -112; 1,153; 1,192; 1,081; 1,046; 1,115; 1,187.
- Net lending/borrowing (overall balance): -434; -506; -539; -528; -524; -544; -580; -715; -793; -835; -878.

Notes included in table:
- The SPDC (the political organization of the military) budget has been reduced by about 75 percent in FY2011/12 (about 2.6 percent of GDP).
- From FY2011/12, other nontax revenue include certain local development councils.
- From FY2012/13, official exchange rate is assumed to be abolished with adoption of a market-based exchange rate.

### Monetary survey and reserves (Table 3 highlights)
Monetary authorities' accounts (In billions of kyats, end of period samples)
- Net foreign assets: 2/ 12.9; 17.9; 21.4; 26.0; 29.6; 33.7; 6,677.7 (table includes later large valuation-adjusted line items).
- Reserve money: 3,561.9; 4,187.1; 5,363.0; 7,001.2; 6,535.3; 8,488.4; 9,596.7.
Monetary survey (In billions of kyats and percent changes)
- Broad money: 4,392.5; 5,420.7; 7,304.9; 9,957.4; 10,474.4; 13,268.5; 16,526.3.
- Narrow money: 3,081.6; 3,589.7; 4,660.4; 5,901.6; 5,859.6; 7,484.0; 8,604.6.
- Quasi-money: 1,310.8; 1,831.0; 2,644.5; 4,055.8; 4,614.9; 6,264.7; 7,303.5.
- Domestic credit (annual percent): 22.1; 24.0; 34.8; 34.4; 31.8; 32.5; 26.8 (series).
- Reserve money (percent of GDP): 20.8; 17.6; 28.1; 30.5; 16.8; 21.2; 13.1.
- Gross official reserves (in billions of U.S. dollars) 5/: 3.1; 3.6; 4.6; 6.1; 6.1; 7.9; 9.9.
- Private sector credit (in percent of GDP): 3.3; 3.1; 3.8; 5.6; 6.3; 8.6; 12.2.

Notes:
- Figures represent end of fiscal year in March.
- Converted at the official exchange rate before FY2012/13; after that a market-determined exchange rate is assumed.
- Valuation gains/losses lines reflect adoption of a market-determined exchange rate.

### Balance of payments and medium-term external projections (Table 4 and Table 5 highlights)
Trade and current account (In millions of U.S. dollars)
- Trade balance: 924; 302; 72; 799; -238; -1,779; -833; 824; -366; -1,194; -1,984 (2007/08–2017/18 series).
- Exports, mainly f.o.b.: 6,446; 7,241; 7,139; 8,980; 9,889; 10,491; 11,996; 13,827; 14,151; 15,047; 16,252.
- Public exports and gas contributions (In millions): public exports 4,061; 4,562; 4,105; 5,388; 5,439; 5,660; 6,892; ...; of which gas: 2,282; 2,849; 2,480; 2,657; 3,047; 3,022; 4,039; ...
- Imports, mainly c.i.f.: -5,522; -6,938; -7,067; -8,181; -10,127; -12,270; -12,829; -13,003; -14,517; -16,241; -18,236.
- Services, net: -1,062; -1,556; -1,289; -1,413; -1,413; -892; -1,589; -2,297; -2,420; -2,536; -2,383.
- Private transfers, net: 227; 334; 270; 250; 265; 292; 335; 362; 391; 422; 456.
- Current account, excluding grants (In millions): 89; -920; -947; -365; -1,385; -2,379; -2,086; -1,111; -2,396; -3,308; -3,911.
- Nonmonetary capital movements and FDI: Nonmonetary capital movements: 676; 816; 993; 576; 3,044; 4,151; 2,531; 1,725; 1,765; 1,664; 1,745. Foreign direct investment: 715; 976; 963; 969; 2,863; 3,995; 2,317; 1,475; 1,620; 1,786; 1,975.
- Overall balance (In millions): 799; 112; 619; 808; 1,729; 1,842; 516; 685; -560; -1,574; -2,096.

Reserves and external debt
- Gross reserves, end-period (In millions of U.S. dollars): 3,054; 3,629; 4,638; 6,070; 7,903; 9,889; 10,565; 11,426; 11,071; 9,775; 7,984.
- Gross reserves (in months of imports): 6.6; 6.3; 7.9; 8.9; 9.4; 9.7; 9.9; 10.5; 9.2; 7.2; 5.3.
- Total external debt (including arrears): 8,082; 9,101; 9,970; 11,240; 11,841; 12,419; 12,921; 13,409; 13,859; 14,159; 14,426.
- External debt arrears: 3,858; 4,359; 4,781; 5,405; 5,510; 5,654; 5,815; 5,991; 6,196; 6,474; 6,779.
- Net reserves, end-period: 3,357; 3,800; 5,023; 5,860; 7,693; 9,679; 10,355; 11,216; 10,861; 9,565; 7,774.

Medium-term projections (Table 5 summary)
- Real GDP (constant prices) headline growth series: 12.0; 10.3; 10.6; 10.4 (historical), with staff working estimates: 5.5; 3.6; 5.1; 5.3; 5.5; 6.0; continuing projection values shown across 2012/13–2017/18.
- Inflation (CPI, end of period): 28.8; 9.2; 7.1; 8.9; 5.0; 5.4; 5.3; 5.3; 5.3; 5.3; 5.3 (series).
- Public finances (percent of GDP): Total revenue (including grants): 14.1; 13.1; 12.1; 11.9; 11.4; 21.6; 22.0; 21.9; 20.7; 19.8; 19.0. Total expenditure: 17.9; 15.5; 16.9; 17.9; 16.9; 26.1; 24.9; 23.6; 22.3; 21.2; 20.3. Overall balance: -3.8; -2.4; -4.8; -6.0; -5.5; -4.6; -2.9; -1.7; -1.6; -1.4; -1.3.
- Estimated domestic public debt (percent of GDP): 16.5; 16.8; 20.0; 22.8; 25.9; 26.7; 26.1; 24.5; 23.1; 21.7; 20.3.
- Estimated total public debt (percent of GDP): 56.5; 45.8; 48.3; 47.6; 48.7; 49.5; 48.0; 45.7; 43.5; 41.3; 39.2.

### Debt Sustainability Analysis (DSA) findings and risks
- Classification: Myanmar remains classified as in debt distress.
- Rationale: Although debt indicators show a moderate risk of debt distress based on a forward-looking analysis, the presence of substantial arrears and uncertainty about timing and modality of their resolution pose substantial risks to the debt outlook.
- Medium-term outlook: The projected path of Myanmar’s external and public debt burden indicators improves significantly in the medium and long term compared to last year’s DSA, primarily due to increasing fiscal revenues with the planned adoption of a market-determined exchange rate and a better outlook for the economy.
- Thresholds applied: For external PPG debt the DSA uses conservative LIC-DSA thresholds in absence of a CPIA rating: NPV of debt-to-GDP ratio threshold 30 percent; NPV of debt-to-exports ratio threshold 100 percent; NPV of debt-to-revenue ratio threshold 200 percent; debt service-to-exports ratio threshold 15 percent; debt service-to-revenue ratio threshold 25 percent.
- Scenario sensitivity: External debt burden indicators do not breach indicative thresholds under the baseline, but the debt level is sensitive to shocks such as shortfalls in exports as indicated by standard bound tests.
- Public debt dynamics: Overall public sector debt indicators are high in the short term but expected to decrease over the longer term.
- Alternative scenarios: Under an alternative scenario with a fixed higher primary deficit or permanently lower growth over the medium and long term, Myanmar’s public debt sustainability would deteriorate.

### Policy implications and priorities (as stated)
- Emphasis on sound macroeconomic policies to improve growth potential on a sustained basis.
- Strengthen public financial management.
- Pursue export diversification.

Approved by:
- Masato Miyazaki and Dhaneshwar Ghura (IMF)

Prepared by:
- International Monetary Fund
- March 2, 2012

*Source: Myanmar 2011 Article IV Report and Staff Report for the 2011 Article IV Consultation—Debt Sustainability Analysis (IMF).*

### 1.      The external and public debt

### _cr12104 - 1.      The external and public debt

### Baseline and key macroeconomic assumptions (2011–31)
- DSA framework: standard LIC DSA; projections based on baseline scenario assumptions presented in Box 1.
- Real GDP growth: assumed at 6 percent.
- Inflation: projected on average at 5.5 percent y/y in the medium term; expected to stabilize around 3.5 percent in the long term.
- Overall fiscal deficit (in percent of GDP): expected to narrow from about 5½ percent in 2011 to 1¼ percent in 2017, then gradually reach a broadly balanced budget by 2031.
- Revenue (consolidated nonfinancial public sector; in percent of GDP): expected to rise to over 20 percent of GDP in the medium term; expected to stay over 19½ percent of GDP over the long term.
- Public expenditure: mostly at around 20 percent through the medium term; kept below 19½ percent up to 2031.
- Export growth: averages around 9 percent in the medium term; around 11 percent over the longer term.
- Import growth: averages around 10¼ percent in the medium term; around 10 percent over the longer term.
- Current account (including official transfers): in deficit in 2011 and expected to remain in deficit over the medium and longer term.
- Domestic public debt composition (as of end-FY2010/11): around 20 percent in the form of treasury bonds; the rest in treasury bills bearing a nominal interest rate of 4 percent.
- Treasury bond maturities and nominal interest rates: two-year 8.75 percent, three-year 9 percent, five-year 9.5 percent.
- New financing composition: half foreign exchange debt; remainder domestic medium and long-term debt.
- New external debt assumptions: 20 year loans with five-year grace period and 4 percent interest rate.
- New domestic borrowings average maturity: three years.
- Arrears and aid: arrears constitute a significant part of foreign debt; DSA assumes no rescheduling of arrears or resumption of repayments; aid flows assumed to remain at current levels.

### Current debt levels and composition (end-2010 / 2010–11)
- Total public sector debt stock: estimated at 47½ percent of GDP in 2010 (slightly lower from 48½ percent of GDP in 2009).
- Share foreign currency denominated: more than half of total public debt (Table 1a).
- External PPG debt stock at end-2010:
  - Nominal terms: 24½ percent of GDP.
  - Net present value (NPV) terms: 17¾ percent of GDP.
- External arrears at end-2010: US$5.4 billion, accounting for 48 percent of total PPG external debt.
- Composition of arrears: about 80 percent owed to bilateral creditors; remainder split between multilateral and private creditors.
- Net nonconcessional new borrowings: started increasing from FY2008/09, reaching 5 percent of total external debt in FY2010/11.
- Creditor composition of net increase in nonconcessional loans in 2010: China accounts for about 30 percent.
- Myanmar: Net Nonconcessional New External Borrowings 2007/08–2010/11 (in percent of total external debt):
  - 2007/08: -0.3
  - 2008/09: 2.8
  - 2009/10: 2.4
  - 2010/11: 5.0

### External debt sustainability projections and indicators
- Under baseline, all external debt indicators remain below indicative debt burden thresholds and decline over projection period.
- PV of debt-to-GDP ratio: about 16 percent in 2011 → about 6 percent in 2031 (indicative threshold: 30 percent).
- PV of debt-to-exports ratio: about 78 percent in 2011 → about 24 percent in 2031 (indicative threshold: 100 percent).
- PV of debt-to-revenue ratio: about 139 percent in 2011 → about 32 percent in 2031 (indicative threshold: 200 percent).
- Debt service-to-exports and debt service-to-revenue ratios: stay below indicative thresholds throughout projection period despite projected high debt service during 2011–21.
- Stress test finding: a one-standard-deviation shortfall in export growth in 2012–13 compared with historical average would push the NPV of debt-to-exports ratio to 109 percent.

### Public debt sustainability projections and stress tests
- Nominal public debt stock: projected to increase modestly to 47.9 percent of GDP by end-2012 (42½ percent of GDP in NPV terms) before declining steadily thereafter.
- PV of public debt-to-GDP ratio: projected to decline to 12½ percent by long term.
- PV of public debt-to-revenue ratio: projected to decline to 64¼ percent by long term.
- Debt service-to-revenue ratio: projected to reach 3¼ percent by 2031 under baseline.
- Stress test outcomes and vulnerabilities:
  - Under a permanent growth shock: public debt (PV terms) would remain high at 43 percent of GDP in 2031.
  - If the primary balance remains unchanged at its 2011 level: PV of public debt-to-GDP would rise to 71 percent by 2031.
  - Overall stress tests indicate vulnerabilities remain throughout projection period.

### Staff assessment and policy implications
- Risk classification: Debt indicators show a moderate risk of debt distress based on forward-looking analysis, but presence of substantial arrears and uncertainty about their resolution pose substantial risks; Myanmar remains classified as in debt distress.
- Comparison to prior DSA: Projected paths of external and public debt indicators improve significantly compared to last year’s DSA (2010) owing to projected smaller fiscal deficits from increasing gas revenues and use of a market-determined exchange rate in budgetary operations.
- Key vulnerabilities and recommended policy priorities:
  - Resolve external arrears: external arrears constitute a large portion of external PPG debt; resolving them is important to improve overall debt profile.
  - Sound macroeconomic policies: strengthen public fiscal management to safeguard fiscal sustainability.
  - Improve growth potential and export diversification: address structural impediments to external competitiveness to manage export-related vulnerabilities.
  - Monitor and reconcile debt records: differences may exist between authorities’ debt numbers and creditors’ books, posing upside risk to debt burden indicators.

*Source: IMF staff estimates and Myanmar authorities, "The external and public debt" (DSA), Myanmar 2011 Article IV Report — Debt Sustainability Analysis.*

### 12.      The improving debt indicators depend

### 12.      The improving debt indicators depend

### Main finding
- The improving debt indicators depend on increasing revenues from nonrenewable natural resources.
- Maintaining the primary balance at its 2011 level would put public debt sustainability under significant risk.
- This underscores the importance of reducing reliance on nonrenewable revenue sources by improved tax policies and public financial management.

### Debt sustainability projections (selected outcomes, 2011–2031)
- PV of external debt (selected years): 17.8; 15.6; 15.4; 14.3; 13.4; 12.7; 12.2; 10.1; 6.2 (presented in series across projection horizon).
- PV of PPG external debt (in percent of exports, selected years): 84.8; 77.6; 77.7; 70.6; 63.7; 64.6; 64.0; 48.3; 24.2.
- PV of PPG external debt (in percent of government revenues, selected years): 151.5; 138.5; 71.6; 65.2; 61.5; 61.3; 61.8; 51.0; 31.8.
- Debt service-to-exports ratio (in percent, selected series): 5.9; 4.4; 3.1; 3.9; 5.2; 5.1; 4.9; 5.6; 7.1; 2.7; 0.8.
- PPG debt service-to-revenue ratio (in percent, selected series): 11.2; 8.4; 5.6; 7.0; 4.8; 4.7; 4.7; 5.3; 6.8; 2.9; 1.0.
- Total gross financing need (Billions of U.S. dollars, series): 0.3; 0.3; -0.4; -1.2; -1.3; 0.0; -0.1; 1.1; 2.2; 3.9; 0.1.
- Non-interest current account deficit that stabilizes debt ratio (series): 9.0; 2.9; 4.7; 5.3; 4.4; 4.4; 2.3; 3.9; 4.7; 4.6; 0.8.

### Key macroeconomic assumptions used in projections
- Real GDP growth (in percent) (series across periods): 3.6; 5.1; 5.3; 10.4; 4.0; 5.5; 6.0; 5.9; 6.0; 6.0; 6.0; 5.9; 6.0; 6.0; 6.0.
- GDP deflator in US dollar terms (change in percent) (series): 50.0; 6.8; 22.3; 9.4; 24.6; 8.5; 2.4; 5.1; 4.3; 4.3; 3.2; 4.6; 3.0; 4.1; 3.2.
- Effective interest rate (percent) (series): 1.8; 0.5; 0.5; 1.1; 0.4; 1.4; 2.6; 3.4; 4.0; 3.8; 3.8; 3.2; 3.2; 1.5; 2.6.
- Growth of exports of G&S (US dollar terms, in percent) (series): 11.6; -1.3; 24.9; 15.9; 15.1; 10.0; 6.2; 14.1; 15.0; 2.8; 6.7; 9.1; 11.9; 12.0; 11.5.
- Growth of imports of G&S (US dollar terms, in percent) (series): 27.2; -1.5; 14.6; 15.7; 18.1; 19.6; 13.8; 9.5; 6.3; 10.7; 10.9; 11.8; 10.5; 10.0; 10.1.
- Grant element of new public sector borrowing (in percent): 1.3 (repeated across projection years where reported).
- Government revenues (excluding grants, in percent of GDP) (series): 12.9; 11.4; 11.7; 11.3; 21.4; 21.9; 21.8; 20.6; 19.8; 19.7; 19.5; 19.5.

### Sensitivity analysis and stress tests
- The most extreme stress test is defined as the test that yields the highest ratio in 2021; in figure captions this corresponds variably to a GDP deflator shock, an Exports shock, or a Combination shock for different indicators.
- Table 1b sensitivity outcomes (selected):
  - PV of debt-to-GDP ratio, baseline and scenarios (selected values): Baseline 16 (2011), 15 (2012), 14 (2013), 13 (2014), 13 (2015), 12 (2016), 10 (2021), 6 (2031).
  - PV of debt-to-exports ratio, baseline and scenarios (selected values): Baseline 78 (2011), 78 (2012), 71 (2013), 64 (2014), 65 (2015), 64 (2016), 48 (2021), 24 (2031).
  - PV of debt-to-revenue ratio, baseline and scenarios (selected values): Baseline 139; scenario A2 (Primary balance unchanged from 2011) reaches 63; scenario B2 (Export value growth shock) reaches 76–98 in some years as shown in the sensitivity tables.
- Public sector debt sensitivity (Table 2b, selected scenarios):
  - Baseline public sector debt (percent of GDP): 42 (2011), 43 (2012), 41 (2013), 39 (2014), 37 (2015), 36 (2016), 27 (2021), 12 (2031).
  - Scenario A2 (Primary balance unchanged from 2011) produces debt ratios reaching 63 and 71 in mid-projection years and 71 and 63 in alternative tables, indicating significant deterioration when the 2011 primary balance is held constant.
  - Scenario A3 (Permanently lower GDP growth) and bound tests (B1–B5) show elevated PV and debt service ratios under adverse growth, export, deflator, and non-debt-creating flow shocks.

### Public sector debt dynamics and drivers (selected quantitative components)
- Public sector debt (percent of GDP, historical and projection series): 45.5; 48.4; 47.2; 47.3; 47.9; 45.9; 43.3; 41.1; 38.8; 27.1; 12.4.
- Change in public sector debt (series): -6.2; 2.9; -1.2; 0.1; 0.6; -2.0; -2.6; -2.3; -2.3; -2.0; -1.0.
- Identified debt-creating flows (series): -10.6; -0.1; -3.4; -0.4; 0.2; -2.5; -3.2; -3.0; -2.6; -2.4; -1.3.
- Primary deficit (percent of GDP, selected): 1.3; 3.9; 4.7; 3.0; 1.1; 3.8; 2.4; 0.6; -0.6; -0.5.
- Revenue and grants (percent of GDP, series): 13.1; 12.1; 11.9; 11.4; 21.6; 22.0; 21.9; 20.7; 19.9; 19.8; 19.5.
- Primary (noninterest) expenditure (percent of GDP, series): 14.4; 15.9; 16.6; 15.2; 24.0; 22.7; 21.3; 20.2; 19.2; 18.6; 18.9.
- Automatic debt dynamics contribution (series): -11.7; -3.8; -7.8; -3.6; -1.7; -2.7; -2.1; -2.0; -1.5; -1.2; -0.8.
- Contribution from interest rate/growth differential (series): -4.2; -3.1; -3.0; -1.7; -2.1; -2.0; -1.7; -1.6; -1.5; -1.1; -0.6.
- Contribution from real GDP growth (series): -1.8; -2.2; -2.5; -2.4; -2.7; -2.7; -2.6; -2.4; -2.3; -1.6; -0.8.
- Contribution from real exchange rate depreciation (series): -7.5; -0.7; -4.8; -1.9; 0.4; -0.7; -0.4; -0.4; 0.0.

### Policy implications and recommendations (as stated or implied)
- Reduce reliance on nonrenewable revenue sources by:
  - Improving tax policies.
  - Strengthening public financial management.
- Avoid maintaining the primary balance at the 2011 level, as doing so would put public debt sustainability under significant risk.
- Monitor and prepare for stress scenarios identified in sensitivity analyses, including shocks to GDP deflator, export values, and combinations of macro shocks.

### Memorandum and additional indicators (selected)
- Nominal GDP (Billions of US dollars, selected): 31.4; 35.2; 45.4; 51.9; 56.3; 62.7; 69.3; 76.6; 83.8; 126.9; 320.4.
- Nominal dollar GDP growth (series): 55.4; 12.3; 28.8; 14.4; 8.5; 11.3; 10.5; 10.5; 9.3; 10.8; 9.1; 10.3; 9.4.
- Gross financing need (percent of GDP, selected): 3.3; 5.6; 6.5; 6.0; 5.1; 3.3; 2.0; 2.1; 2.2; 0.7; 0.1.
- PV of public sector debt (selected percent of GDP series): 40.6; 41.5; 42.5; 41.2; 39.1; 37.4; 36.0; 27.5; 12.5.
- PV of contingent liabilities: not reported (ellipsis in source tables).

*Source: 2011 ARTICLE IV REPORT—DEBT SUSTAINABILITY ANALYSIS MYANMAR (staff estimates and projections, tables and figures quoted).*

### ANNEX I. MYANMAR: SOCIAL INDICATORS

### ANNEX I. MYANMAR: SOCIAL INDICATORS

### Population
- Total population, midyear (millions): 33.6 (1975–80); 40.8 (1985–90); 57.5 (1997–2009); Same Region/Income Group: 194; 48; 46
- Growth rate (percent annual average): 2.3 (1975–80); 1.59 (1985–90); 2.2 (1997–2009); Same Region/Income Group: 0.7; 2.2
- Urban population (percent of population): 24.0 (1975–80); 24.9 (1985–90); 33.2 (1997–2009); Same Region/Income Group: 44.1; 28.3
- Total fertility rate (births per woman): 5.4 (1975–80); 4.2 (1985–90); 2.3 (1997–2009); Same Region/Income Group: 1.9; 4.2

### Income
- Consumer price index (2005=100): 114 (1975–80); 208 (1985–90); 126 (1997–2009); Same Region/Income Group: 141
- Food price index (2005=100): 191 (1985–90)

### Social indicators — Public expenditure
- Health (percent of GDP): 0.24 (1985–90); 4.2 (1997–2009); Same Region/Income Group: 5.3
- Education (percent of GDP): 1.5 (1975–80); 1.8 (1985–90); 1.3 (1997–2009); Same Region/Income Group: 3.3; 3.5
- Social security and welfare (percent of GDP): 0.1 (1985–90)

### Access to safe water (Percent of population)
- Total: 57 (1975–80); 71 (1985–90); 88 (1997–2009); Same Region/Income Group: 64
- Urban: 87 (1975–80); 79 (1985–90); 96 (1997–2009); Same Region/Income Group: 85
- Rural: 47 (1975–80); 81 (1997–2009); Same Region/Income Group: 56

### Access to health care
- Population per physician (persons): 12,755 (1985–90); 2,778 (1997–2009); Same Region/Income Group: 855; 5,464

### Immunization (percent under 12 months)
- Measles: 87 (1997–2009); Same Region/Income Group: 91; 78
- DPT: 88 (1975–80); 90 (1985–90); 93 (1997–2009); Same Region/Income Group: 80

### Child malnutrition (percent under 5 years)
- 30 (1985–90); 9 (1997–2009); Same Region/Income Group: 28

### Life expectancy at birth (years)
- Total: 57 (1975–80); 59 (1985–90); 62 (1997–2009); Same Region/Income Group: 72; 57
- Male: 55 (1975–80); 57 (1985–90); 60 (1997–2009); Same Region/Income Group: 74; 56
- Female: 60 (1975–80); 61 (1985–90); 64 (1997–2009); Same Region/Income Group: 71; 59

### Mortality
- Infant (per thousand live births): 94 (1975–80); 84 (1985–90); 54 (1997–2009); Same Region/Income Group: 217; 76
- Under 5 (per thousand live births): 135 (1975–80); 118 (1985–90); 71 (1997–2009); Same Region/Income Group: 261; 118
- Adult (15–59) male (per 1,000 population): 38 (1985–90); 42 (1997–2009); Same Region/Income Group: 50; 158; 312
- Adult (15–59) female (per 1,000 population): 31 (1985–90); 31 (1997–2009); Same Region/Income Group: 88; 99; 275

*Sources: World Development Indicators, World Bank; and Myanmar authorities.*

### ANNEX VI. MYANMAR: STATISTICAL ISSUES

### ANNEX VI. MYANMAR: STATISTICAL ISSUES

### Assessment of Data Adequacy for Surveillance
- Data provision continues to have serious shortcomings that hamper effective surveillance even though a number of indicators are now disseminated on the internet.
- Data are not provided in a timely manner, while official and independent estimates of key macroeconomic variables differ widely.

### National accounts
- National accounts statistics are available only on an annual basis with considerable delay.
- Coverage of the private sector is incomplete as a proper business directory for sampling is not available yet.
- Resource constraints, primarily at the Planning Department and the Central Statistical Organization, limit the conduct of surveys.
- GDP estimates do not completely account for informal sector activity.
- Specific omissions and measurement issues:
  - Agricultural work-in-progress is not included.
  - Construction is recorded on the basis of construction permits.
  - Taxes and subsidies on products are excluded.
  - Estimates of goods for processing and deflators of financial and insurance services need improvement.
- Recent progress and plans:
  - Base year updated to FY 2005/06.
  - Surveys being conducted on agricultural costs, manufacturing, and the informal sector.
  - Plan to include data from the Chamber of Commerce’s survey on private sector in GDP estimation starting April 2012.

### Price statistics
- CPI base, basket, and weights updated following previous STA TA and derived from the Household Income and Expenditure Survey of 2006.
- Remaining weaknesses:
  - Weights only represent urban households even though rural areas were also surveyed.
  - Some construction inputs are included.
  - Rentals of owner-occupied housing are excluded.
  - Missing prices are not imputed.
  - Classification of items is outdated.

### Government finance statistics
- No comprehensive monthly or quarterly compilation of fiscal data.
- Annual comprehensive data are compiled with delays of up to 12 months after the end of the reference year.
- Only consolidated data for state economic enterprises are available.
- Some transactions recorded partly on an accrual basis and partly on a cash basis.
- Fiscal and monetary data are not consistent.
- Budget estimates and actual expenditures tend to differ by wide margins.
- Annual data on operations of the consolidated central government were last reported for 2005 to STA for publication in the Government Finance Statistics Yearbook, but do not include an economic classification of expenditure.
- Recording of debt statistics is not comprehensive.

### Monetary and financial statistics
- Monetary survey compiled by the CBM covers the central bank and all commercial banks (public and private).
- Reporting of monetary data in the Standardized Report Forms, which accord with the MFSM classification principles, was established in January 2012.
- Recommended improvements to quality of monetary statistics:
  - Use the market exchange rate, rather than the overvalued official exchange rate, for valuing foreign currency-denominated balance sheet accounts.
  - Monitor the consistency of interbank accounts that show positions between the CBM and the commercial banks.
  - Use electronic means to capture and share data to minimize mistakes.
- In January 2012, CBM authorities were recommended that:
  - On the date of adopting a managed float (and also for that end-month), the CBM and all commercial banks should prepare their balance sheets using the previously in effect exchange rate and the new exchange rate prevailing on the date of unification (and at that end-month).
  - Amounts contra to the revaluation of foreign currency denominated positions (at the CBM and all commercial banks) should be posted to the valuation adjustment account rather than to the profit and loss account.
  - In due course, adopt market or fair value-based valuation of financial instruments.
  - Review the accuracy of recording the IMF Accounts in the CBM’s balance sheet for consistency with FIN recommendations and make revisions as called for.

### External sector statistics
- Coverage and reliability of the balance of payments could be improved.
- Merchandise imports are underestimated because:
  - Military imports and other official imports, including imports linked to FDI under joint venture agreements with exemptions from custom duties, are generally excluded.
  - An overvalued official exchange rate is still used to convert some private sector transactions.
- Detailed data on services transactions and financial flows are generally not available.
- Transactions not undertaken through the official banking system are usually not estimated.
- Evaluation of external debts not nominated in U.S. dollars is conducted irregularly; historical data are distorted by applying the exchange rate at the evaluation point.
- Trade data are recorded at the time of entries by customs, causing serious volatility in values and incorrect time records.
- Many recommendations of the STA TA missions conducted in 1999 and 2000 have not been implemented.

### Data Standards and Quality
- Myanmar does not participate in the IMF’s General Data Dissemination System.
- No data ROSC available.

### Reporting to STA
- Myanmar submits data reports to STA with a lag of two to six months.
- Balance of payments statistics have not been reported to STA for publication since 2007.

### Key statistics and indicators (as presented)
- Real GDP (staff working estimates of real GDP): 5.5, 3.6, 5.1, 5.3, 5.5, 6.0 (annual percent change for series 2007/08–2012/13 rows correspond to columns in table).
- Agriculture growth: 4.4, 4.4, 4.5 (listed for relevant years).
- Inflation (period average): 32.9, 22.5, 8.2, 8.2, 4.2, 5.8.
- Inflation (End of period): 28.8, 9.2, 7.1, 8.9, 5.0, 5.4.
- Public finance (in percent of GDP) — consolidated public sector:
  - Total revenue (including grants): 14.1, 13.1, 12.1, 11.9, 11.4, 21.6.
  - Total expenditure: 17.9, 15.5, 16.9, 17.9, 16.9, 26.1.
  - Overall balance: -3.8, -2.4, -4.8, -6.0, -5.5, -4.6.
- Money and credit (annual percent change):
  - Broad money: 21.0, 23.4, 34.8, 36.3, 33.3, 24.6.
  - Domestic credit: 22.1, 24.0, 34.8, 34.4, 32.5, 26.8.
- Balance of payments (in million of dollars):
  - Trade balance: 924, 302, 72, 799, -238, -1,779.
  - Exports: 6,446, 7,241, 7,139, 8,980, 9,889, 10,491.
  - Imports: -5,522, -6,938, -7,067, -8,181, -10,127, -12,270.
  - Current account balance (excluding grants): 89, -920, -947, -365, -1,385, -2,379.
  - Gross official reserves: 3,054, 3,629, 4,638, 6,070, 7,903, 9,889.
  - Gross official reserves (In months of total imports): 6.6, 6.3, 7.9, 8.9, 9.4, 9.7.
- External debt (in million of dollars):
  - Total external debt (including arrears): 8,082, 9,101, 9,970, 11,240, 11,841, 12,419.
  - (In percent of GDP): 40.0, 29.0, 28.3, 24.8, 22.8, 22.8.
  - External debt arrears: 3,858, 4,359, 4,781, 5,405, 5,510, 5,654.
- Memorandum items:
  - Official exchange rate (kyat per U.S. dollar): 5.2, 5.8, 5.7, 5.4, 5.2, ...
  - FEC (parallel) rate (kyat per U.S. dollar): 1,110, 992, 1,004, 861, 810, ...
  - GDP in billions of kyats: 23,336, 28,778, 32,351, 36,436, 39,805, 44,621.
  - GDP in millions of U.S. dollars: 20,182, 31,367, 35,225, 45,380, 51,925, 54,416.
- Notes from table:
  - Fiscal year (April–March).
  - Before FY2012/13, GDP converted at a weighted exchange rate, where the official and FEC market rates are weighted with about 8 and 92 percent, based on the respective shares of public and private sectors in GDP.
  - The authorities plan to adopt a managed float in FY2012/13.
  - Exchange rate for FY2011/12 is as of January 2012.

*Source: _cr12104 - ANNEX VI. MYANMAR: STATISTICAL ISSUES (IMF staff report content provided).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12104.pdf_