## _cr13250 ## Source details **Canonical URL:** [_cr13250](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13250.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13250.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13250.pdf.json) --- ### Introduction - Myanmar is rapidly emerging from isolation; the government is pursuing comprehensive economic reforms to open Myanmar to the global economy, boost growth, and reduce poverty. - The Staff‑Monitored Program (SMP) runs through end‑2013, is on track, and focuses on maintaining macroeconomic stability and building institutions/tools for the medium term, with a key focus on achieving Article VIII status in 2013. - Quantitative targets and structural benchmarks for March 2013 were met; progress on monetary control hampered by delay in passing the Central Bank of Myanmar (CBM) law. - Challenges: limited capacity for managing rapid change and absorbing international assistance; addressing widespread poverty and promoting broad‑based growth requires comprehensive reforms. ### Recent developments and key indicators - Political and external normalization: - Arrears to the World Bank and the AsDB resolved in January 2013. - Paris Club agreement in late‑January 2013: write off 50 percent of all arrears and reschedule the remainder over 15 years with a 7‑year grace period; phased treatment to be completed in early 2014. - April 2012 agreement with Japan on debt restructuring. - Macroeconomic performance (select figures preserved verbatim): - Growth: 6½ percent (2012/13 estimate). - Inflation: 4.7 percent (y/y) in March 2013; 6 percent (y/y) in December 2012. - Current account deficit: around 4½ percent of GDP (2012/13 estimate). - International reserves: US$4.6 billion at end‑March; covering 3¾ months of prospective imports. - Broad money growth: 58 percent (y/y) in February. - Private sector credit growth: 48 percent (y/y) in February. - Fiscal deficit: 3¾ percent of GDP (2012/13 estimate). - Exchange rate: kyat depreciated by 6 percent in May 2013 alone; around 945 kyat to the dollar in late‑May 2013; kyat 13½ percent lower than at April 2012 managed float introduction. - Financial sector depth: broad money 42 percent of GDP; credit to private sector 10 percent of GDP. ### Outlook and risks - Short‑term staff outlook: - Growth expected to accelerate slightly in 2013/14, led by rising gas production and investment and a recovery in agriculture. - Inflation projected around 6½ percent (y/y) in 2013/14. - International reserves projected to continue to rise. - Broad money and credit expected to expand at double‑digit rates. - Budget deficit projected at 5 percent of GDP after a mid‑year supplementary allocation. - Medium term: - Potential for growth of around 7 percent with a stable external balance if key institutional constraints addressed. - Preconditions: rapid institution‑building for economic management and financial supervision; policies supportive of private‑sector investment; public spending on infrastructure, health, and education. - Risk Assessment Matrix (Source | Likelihood | Impact — items preserved verbatim): - Higher inflation than expected | Medium | High. - Political instability | Low | Medium. - Limited administrative capacity | Medium | Medium. - Natural disaster stalls growth and increases fiscal pressures | Low | Medium. - Faster than anticipated investor response to reforms (upside) | Medium | High. - Global oil shock triggered by geopolitical events | Low | Low — Oil prices rise to $140/barrel. - Appreciation of the kyat in real effective terms | Low | Medium. - Deeper than expected slowdown in emerging markets | Medium | Low. - Decline in natural gas prices | Low | High. ### Maintaining stability: exchange rate, reserves, and monetary operations - CBM policy: - The CBM’s policy of smoothing exchange rate fluctuations while not targeting a specific rate is appropriate. - Targeting a specific exchange rate level could be costly and risky given analytical uncertainty. - Reserve adequacy and accumulation: - Model‑based optimal level between about 5 and 8½ months of imports (baseline). - Given Myanmar circumstances, coverage of about 5–6 months of imports would be appropriate. - All reserves held by state banks projected to be transferred to the CBM by 2014/15. - Reserve accumulation should occur through further transfers from state banks and net purchases at auctions, but not at the expense of market stability. - Exchange market developments: - Auction‑determined reference rate and informal rate have converged. - Kyat real effective depreciation around 9 percent by May 2013 since April 2012 managed float. - CBM has sold reserves at auctions to smooth fluctuations; tools to sterilize FX inflows remain underdeveloped. ### Monetary and fiscal policy balance - Fiscal policy is the main instrument while monetary tools are developed. - Medium‑term fiscal strategy and targets: - Authorities’ strategy: keep deficits of around 5 percent of GDP; increase nonresource revenue; boost allocations to priority sectors; increase access to concessional finance. - Monetization of the fiscal deficit should be reduced and eliminated over the next few years. - The 5 percent of GDP deficit target may need adjustment according to the macroeconomic environment and until effective monetary policy tools are developed. - Short‑term: fiscal policy must also address large development needs; 2013/14 budget and projected additional spending strike a balance and are consistent with maintaining a low risk of debt distress. ### Rapid credit growth and financial stability - Rapid credit growth is a welcome sign of financial deepening but requires monitoring. - Staff recommendations: - Further relaxation of lending constraints should not be considered. - Factor risks from high credit growth and rising real estate prices into future monetary policy settings once effective tools are established. ### The 2013/14 budget — key numbers and measures (table figures reproduced exactly as in source) - Revenue and grants: 23.0, 18.9, 23.4 (2012/13 Estimate; 2013/14 Budget; 2013/14 Projection). - Tax revenue: 6.4, 4.4, 6.6. - SEE receipts net of transfers to UG: 13.8, 12.1, 14.2. - Expenditure: 26.6, 24.5, 28.4. - Expense: 16.7, 16.9, 19.6. - Of which: Education: 1.2, 1.2, 1.4. - Health: 0.4, 0.6, 0.6. - Defense: 2.0, 2.0, 2.7. - Investment: 10.0, 7.6, 8.8. - Net lending (+)/borrowing (‑): -3.7, -5.6, -5.0. - Nominal GDP: 47,433; 059,249; 53,501. - Key expenditure measures: - A 23 percent salary increase to public sector workers and pensioners; wage bill expected to increase by 50 percent with additional hiring; wage bill remains 11 percent of current expenditure. - Higher current spending in education and health increased by 30 and 78 percent, respectively, compared to 2012/13. - Exceptional overheads for nationwide census; reduced capital allocations as preparations for South East Asian Games are completed. - Profitable SEEs expected to self‑finance 100 percent of working capital in 2013/14; government will cover 20 percent of working capital expenses of loss‑making SEEs (in 2012/13, all SEEs were expected to self‑finance 78 percent of working capital). - Revenue surge in 2012/13 not fully reflected in the budget; mid‑year supplementary budget expected to raise fiscal deficit to around 5 percent of GDP. ### Forging tools for monetary control — recommendations and sequencing - Liberalization progress: - Unified exchange rate and open current account progressing; flows through formal exchange auction increased markedly since April 2012. - Foreign Exchange Management Law enacted August 2012; implementing instructions issued. - Plan to phase out Foreign Exchange Certificates; more than half of FECs outstanding already exchanged. - CBM autonomy and constraints: - CBM law approved by legislature in March 2013 but revisions needed; delay impeded development of monetary tools, notably deposit auctions. - Regulations for effective reserve requirements not issued. - Staff recommendations (select items preserved verbatim): - Remove remaining minor restrictions from the foreign investment law to achieve full compliance with Article VIII and ASEAN Economic Community obligations. - Continue policy allowing profit transfers abroad after payment of profit taxes without further restriction; issue instructions to formalize the practice. - Abolish deduction of living expenses from permissible transfers of salaries. - Replace and amend implementing instructions to the foreign exchange management law with comprehensive regulations. - To support formal FX market development, CBM should: place private banks’ purchases of foreign exchange from formal auction, upon request, directly into their overseas accounts; MoFR and CBM should instruct state banks to make FX payments on behalf of private banks in a timely manner; reactivate the CBM’s U.S. dollar account at the U.S. Federal Reserve. - Enact CBM law and issue implementing regulations as soon as possible with provisions for budgetary and operational autonomy, authority to conduct monetary policy and supervise the financial sector. - Specify concrete supervisory powers in a new financial institutions law. - Interim preparatory steps toward reserve money targeting: - Maintain regular deposit auctions; improve reserve money and liquidity projections; recalibrate reserve requirements; develop CBM organization and information dissemination. ### Moving toward reserve money targeting (sequencing) - CBM currently has no nominal policy anchor; a reserve money targeting framework is proposed as an intermediate target. - Sequencing highlights: - Regular deposit auctions (even at low volumes); step up volumes after budget constraints are eased and CBM law enters into force. - Refine reserve money projections with IMF TA. - Recalibrate reserve requirements urgently to create demand for CBM current account balances. - Support interbank market development and reform standing facilities. - Mop up MEB excess liquidity and apply reserve requirements to state banks when appropriate. - Retain direct controls on retail interest rates until CBM controls wholesale interest rates; phase out thereafter. - Target: enable CBM to introduce a reserve money target in 2014. ### Financial sector modernization: priorities and risks - Sector characteristics and recent steps: - Financial sector is small, segmented, partly dollarized, and repressed; state‑owned banks dominate; public confidence low. - Eligible collateral expanded to include key agricultural export goods; deposit rates liberalized within a fixed corridor. - Abolished capital‑to‑deposit requirement; eased capital requirements for new branches; introduction of credit cards and ATMs; payment union established. - Rapid increase in microfinance providers (effectively unsupervised); applications for bank branches have more than tripled relative to 2012/13. - Staff key priorities: - Licensing and foreign bank entry: ensure adequate licensing procedures; caution against a parallel JV banking system. - Regulating FX positions: strengthen supervision and issue instructions limiting banks’ net open FX positions with IMF TA support. - Establish market‑determined interest rates via deposit/credit and treasury auctions. - Modernize prudential regulations and supervisory capacity; bring definitions of bank capital and NPLs closer to international standards; strengthen enforcement of connected lending limits; improve risk management; bring state banks under CBM supervision; strengthen microfinance and insurance supervision. - Address AML/CFT deficiencies urgently to avoid countermeasures after October 2013. ### State‑owned banks and sector reform - State banks are effectively beyond CBM supervisory remit; subjecting them to CBM supervision requires CBM law and revision of financial institutions law. - MFTB options: - Until recently held most government foreign reserves and conducted FX transactions. - Options include absorbing MFTB (or staff) into CBM, merging it with another state‑owned bank, or unwinding it. - MEB options: - Acts as public sector treasury and commercial bank; holds large balances of structural excess liquidity. - Reducing excess liquidity (e.g., through swap against treasury bills held by CBM) would allow MEB to participate in treasury auctions and integrate with market‑based system. ### Fiscal context, tax reform, and PFM - Resource revenue dependence: - Peak gas revenue projection: 6.5 percent of GDP in 2014/15. - Under current projections (excluding potential new discoveries), all gas revenues are needed to finance public sector budget and fiscal deficits of around 5 percent of GDP. - Government fiscal reform strategy (select items): - Tax administration: Strategic reform plan adopted by IRD; establishment of a Large Taxpayer Office (LTO) in September 2013 (SMP structural benchmark); fully operational from April 1, 2014. - Tax policy: Long‑term objective to introduce a full VAT; interim priorities include reforming special consumption goods taxation, expanding taxation of services, clarifying and limiting tax incentives. - PFM: MoFR working group to develop PFM reform strategies; priorities include budget formulation, expenditure control, fiscal accounting/reporting; establishing a treasury department with cash and debt management functions is critical. - Staff fiscal recommendations: - Boost nonresource revenues; broaden tax base; simplify rate structure. - Ensure sufficient resources for LTO in supplementary budget. - Medium‑term fiscal framework principles: smooth expenditures in face of volatile resource revenues; prudent resource revenue projections; utilize nonrecurring revenues for investment once broad tax base developed. - Develop fiscal institutions for transparent management of resource wealth and a fiscal regime for extractive industries. ### Boosting broad‑based growth and human capital - Authorities’ strategy (FESR) focuses on reducing poverty and diversifying growth for employment, particularly in rural areas. - Recent reforms and actions: - Laws passed: foreign investment, access to land (including titling), microfinance. - Telecommunications licenses being awarded; new offshore oil and gas blocks tendered transparently. - Plan to double generating capacity within next three to four years (largely gas‑fired plants). - Staff recommendations: - Invest in infrastructure (power, transport), support private investment, manage SEZs to avoid isolation and tax‑base erosion. - Boost agricultural productivity and ensure higher final sale prices benefit farmers. - Increase expenditures on education and health further; reallocate health spending toward current spending and primary health care. - Socio‑economic figures preserved: - Poverty decreased from 32 percent in 2005 to around 25 percent in 2010. - LTO establishment: September 2013 (SMP structural benchmark); fully operational from April 1, 2014. - IRD compiled list of the 1,000 largest taxpayers by turnover. ### SMP implementation, monitoring, and monetary policy tools - SMP progress: - All quantitative and structural benchmarks for end‑March 2013 were met. - Reserve accumulation of the CBM significantly exceeded the target; fiscal targets met comfortably. - Payment restrictions on invisibles lifted; private banks enabled to offer FX operations at par with state banks; plan for withdrawing FECs announced and being implemented. - Benchmarks and monitoring: - Bi‑weekly deposit auctions resumed and included as a continuous structural benchmark from June 2013. - Target for net domestic financing of NFPS deficit adjusted downward by proceeds from telecommunications licenses; proceeds reported to IMF Asia and Pacific Department. - Monthly reporting commitments on State Fund Account and sub‑accounts to IMF. - SMP Monitoring Committee includes senior representatives from CBM, MoFR, and Ministry of National Planning and Economic Development. - Quantitative benchmark outcomes (selected exact figures): - Net international reserves of the CBM (floor) cumulative flows (US$ millions) — Target/Projection: 705, 1,300, 1,504, 1,916, 2,125 — Actual: 974, 948 — Target met: Yes. - Net domestic financing of the NFPS deficit (ceiling) cumulative flows (billions of kyat) — Target/Projection: 1,921, 343, 1,053, 1,523, 1,815 — Actual: -346, -390, 952 — Target met: Yes. - Contracting or guaranteeing of nonconcessional external debt (ceiling) cumulative flow (US$ millions) — Target/Projection: 2,000, 2,000, 2,000, 2,000, 2,000 — Actual: 0 — Target met: Yes. ### Debt sustainability assessment (DSA) and public debt outlook - DSA baseline: Myanmar assessed at low risk of debt distress following clearance of external arrears. - Key baseline assumptions and projections (selected): - Real GDP growth assumed to average about 7 percent in the medium term; expected to increase to 7.5 percent in 2033/34. - Inflation (GDP deflator) projected on average at 5.6 percent (y/y) in the medium term; around 4 percent in FY2033/34. - Primary fiscal deficit of NFPS expected to widen from 2.1 percent in FY2012/13 to 3.2 percent in the medium term. - Exports assumed to average 24.7 percent of GDP in the medium term. - Current account registered a deficit of about 4.4 percent in FY2012/13; expected to stabilize around 5 percent of GDP over the long term. - Public domestic debt composition end‑FY2012/13: around 35 percent treasury bonds; treasury bills bearer nominal interest rate of 4 percent; treasury bonds maturities two, three, and five years with fixed nominal interest rates of 8.75, 9, and 9.5 percent respectively. - DSA quantitative indicators (selected exact figures): - NPV of debt as a percent of GDP: Threshold 30; End 2012/13: 22.1; End 2013/14: 15.9. - NPV of debt as a percent of Exports: Threshold 100; End 2012/13: 106.8; End 2013/14: 72.7. - NPV of debt as a percent of Revenue: Threshold 200; End 2012/13: 96.5; End 2013/14: 68.6. - Debt Service as a percentage of Exports: Threshold 15; End 2012/13: 2.2; End 2013/14: 4.2. - Stress tests and vulnerabilities: - Export shock can temporarily breach PV of debt‑to‑exports threshold; mitigants include Myanmar’s track record on large gas projects and contractual purchase commitments. - Policy implications: continue prudent fiscal policy; improve tax policy and PFM; increase use of concessional financing while limiting nonconcessional borrowing to viable projects. ### Monetary policy legal/instrumental framework and sequencing - Urgent tasks: - Enact CBM law to establish legal foundation and autonomy. - Deploy monetary policy tools and establish monetary control as highest priority. - Interim operational steps prior to law enactment: - Continue regular deposit auctions; improve forecasting capability; recalibrate reserve requirements; remove financing constraints on open market operations. - Develop supervisory regime, licensing regime for foreign banks, and sequence reforms given administrative capacity limits. ### Technical assistance, capacity building, and statistics - IMF TA record and planned support (select items and dates preserved): - Jun. 2012: Assisted in developing monetary operations through deposits and credit auctions. - Oct. 2012: Broad TA needs assessment of CBM. - Jan. 2013: Assisted drafting implementing regulations for FX Management Law. - Mar. 2013: Advice on reserve requirements, interest rate liberalization, liquidity management through T‑bill auctions. - May 2013: Framework for assistance to CBM on monetary operations, banking supervision, HR and training; identification of TA priorities for banking supervision. - STA engagements: May 2012 fiscal data assessment; Mar. 2013 CPI assessment and Monetary and Financial Statistics review; Apr. 2013 BOP statistics assessment. - World Bank–IMF collaboration: - Joint Financial Sector TA Plan and joint missions in financial sector strategy, bank supervision, Central Bank Law, Financial Institutions Law, PFM. - Joint managerial action plan for June 2013–May 2014 with pipelines of WB projects and IMF planned work program (SMP review, Article IV, resident advisors, treasury securities auction, statistical missions). - Statistical system improvements and data adequacy issues (select points): - Re‑estimated GDP for 2010/11 and 2011/12; plans to develop updated national accounts series and produce updated CPI. - Major data shortcomings: delayed national accounts, incomplete private sector coverage, weaknesses in CPI weights, lack of timely fiscal compilation, inconsistencies in fiscal/monetary data, underestimation of merchandise imports. - Myanmar does not participate in IMF’s GDDS; BOP statistics not reported to STA for publication since 2007. ### Selected contextual indicators and staff appraisal (select exact figures) - Human development ranking: 149 out of 186 countries. - GDP (2012/13): US$55.3 billion. - Population (2010/11): 61.2 million. - Real GDP (staff estimates): 2009/10: 5.1; 2010/11: 5.3; 2011/12: 5.9; 2012/13: 6.4; 2013/14: 6.8 (percent change). - Gross official reserves (millions of US$): 2012/13: 4,599; 2013/14: 5,537. - Reserves in months of total imports: 2012/13: 3.7; 2013/14: 3.9. - Broad money (percent change): 2012/13: 69.9; 2013/14: 26.2. - Private sector credit (percent change): 2012/13: 49.9; 2013/14: 36.8. - Current account balance (percent of GDP): 2012/13: -4.4; 2013/14: -4.3. - External debt arrears (billions of US$): 2012/13: 4.8. - Exchange rates (kyat/$, end period): Official 2012/13: 880; Parallel 2012/13: 878. ### Authorities’ stance and Letter of Intent (June 12, 2013) — program priorities - Government reports implementation bearing fruit: macroeconomic stability, strong growth, high investor interest. - Commits to: - Enact CBM law and continue bi‑weekly deposit auctions as a continuous structural benchmark. - Gradually transfer international reserves from state banks to CBM. - Continue liberalizing current account transactions and accept Article VIII obligations. - Use nonconcessional borrowing only for economically viable projects in priority sectors. - Establish LTO and PFM reforms; finalize PFM strategy and establish treasury department with TA support. - Program objectives: - Maintain low and stable inflation; increase international reserves; ensure debt sustainability; build foundations for sustainable growth and institutions. - Requests continued IMF TA in monetary operations, fiscal reform, financial supervision, AML/CFT, statistics, and related areas. *International Monetary Fund — Myanmar staff report extract (2013).* ### 2013. The staff team comprised Mr. Davies (head), Messrs. Kashiwase ### MYANMAR — 2013 IMF Staff Report ### Introduction - Myanmar is rapidly emerging from a long period of isolation; the government is pursuing comprehensive economic reforms to open Myanmar to the global economy, boost growth, and reduce poverty. - The Staff‑Monitored Program (SMP), which runs through end-2013, is on track and focuses on maintaining macroeconomic stability and building institutions and tools for the medium term, with a key focus on achieving Article VIII status in 2013. - Quantitative targets and structural benchmarks for March 2013 were met; progress on monetary control has been hampered by the delay in passing the Central Bank of Myanmar (CBM) law. - Challenges: limited capacity for managing rapid change and absorbing international assistance; addressing widespread poverty and promoting broad-based growth will require comprehensive reforms. ### Recent Developments (A. Recent Developments) - Political and external normalization: - Political liberalization and reconciliation are progressing; parliament set to review the constitution ahead of the 2015 general election. - Relations with bilateral and multilateral creditors normalized: arrears to the World Bank and the AsDB resolved in January 2013; agreement with the Paris Club in late‑January 2013 to write off 50 percent of all arrears and reschedule the remainder over 15 years with a 7-year grace period, phased treatment to be completed in early 2014. - April 2012 agreement with Japan on debt restructuring. - Macroeconomic performance and key indicators: - Growth is estimated to have risen to 6½ percent in 2012/13, driven by gas production, construction and services. - Inflation climbed to 4.7 percent (y/y) in March 2013 (was 6 percent y/y in December 2012). - Current account deficit estimated around 4½ percent of GDP in 2012/13, financed by foreign direct investment. - Exchange rate: after appreciation, depreciation recently—kyat depreciated by 6 percent in May 2013 alone. - International reserves increased to US$4.6 billion at end-March, covering 3¾ months of prospective imports. - Broad money and private sector credit growth in February: 58 and 48 percent (y/y), respectively. - Fiscal deficit in 2012/13 estimated to have declined to 3¾ percent of GDP, due to higher tax revenues and lower-than-anticipated capital expenditure. - Policy reforms pursued in 2012/13: - Adoption of a managed floating exchange regime; establishment of a functioning formal foreign exchange market. - Liberalization of imports and removal of exchange restrictions; steps to liberalize bank lending. - Substantial increases in budget allocations for health and education. - Reforms to tax policy and tax administration underway; legislation to improve the business climate and boost investment passed. ### Outlook and Risks (B. Outlook and Risks) - Staff short-term outlook: - Growth expected to accelerate slightly in 2013/14, led by rising gas production and investment (transport and telecommunications) and a recovery in agriculture. - Inflation expected to remain contained at around 6½ percent (y/y), assisted by forecast declines in global commodity prices. - International reserves projected to continue to rise. - Financial intermediation forecast to increase further; broad money and credit to the economy to expand at double‑digit rates. - Following a mid-year supplementary allocation, the budget deficit is projected at 5 percent of GDP. - Medium-term prospects: - With key institutional constraints addressed, Myanmar has potential to achieve growth of around 7 percent in the medium term with a stable external balance. - Preconditions for translating endowments into sustained inclusive growth: rapid institution-building for economic management and financial supervision; policies supportive of private-sector investment; public spending on infrastructure, health, and education. - Risks (Box 1: Risk Assessment Matrix) — Source | Likelihood | Impact - Higher inflation than expected | Medium | High — Foreign inflows, wage increases and money growth trigger higher inflation which the CBM is unable to control due to lack of capacity. - Political instability | Low | Medium — Ethnic and religious tensions undermine confidence and delay economic reforms. - Limited administrative capacity | Medium | Medium — Public sector unable to cope with speed of reforms, leading to slippages. - Natural disaster stalls growth and increases fiscal pressures | Low | Medium — Vulnerability to cyclones. - Faster than anticipated investor response to reforms (upside) | Medium | High — Reforms accelerate FDI and growth. - Global oil shock triggered by geopolitical events | Low | Low — Oil prices rise to $140/barrel. - Appreciation of the kyat in real effective terms | Low | Medium — Could erode competitiveness. - Deeper than expected slowdown in emerging markets | Medium | Low — Affects Myanmar via lower potential growth. - Decline in natural gas prices | Low | High — High dependence on natural gas revenues increases budget deficit and/or triggers growth slowdown. ### Maintaining Stability (Policy Discussions — A. Maintaining Stability) - Main short-term policy challenge: maintain macroeconomic stability (including low inflation) amid rapid change and limited instruments. - External balances and reserves: - Total reserves are held both in state banks and in the CBM; total reserves appear sufficient by traditional metrics, but reserves under direct CBM control are only just sufficient to safeguard external stability. - All reserves held by state banks are projected to be transferred to the CBM by 2014/15. - Reserve adequacy: model-based optimal level between about 5 and 8½ months of imports (baseline); given Myanmar circumstances, coverage of about 5–6 months of imports would be appropriate (Box 2: Reserve Adequacy). - Exchange rate and market developments: - The kyat depreciated to around 945 kyat to the dollar in late‑May 2013, 13½ percent lower than at the introduction of the managed float in April 2012. - Auction-determined reference rate and informal rate have converged; CBM has sold significant amounts of reserves in auctions to smooth fluctuations and meet demand. - Real effective depreciation: the kyat has depreciated in real effective terms by around 9 percent by May 2013 since the April 2012 managed float (Box 3: Exchange Rate Assessment). - Inflation and monetary developments: - Inflation drivers: fuel, rent, and food; recent depreciation expected to partially feed through to domestic prices in 2013/14; asset price increases and public sector wage rises could add pressures. - Money and credit expand rapidly though from a low base; about one-fifth of broad money growth reflects revaluation of foreign-currency deposits after the float. - CBM deposit auctions intended to sterilize FX operations were held intermittently due to budgetary constraints. - Excess reserves, mainly at Myanma Economic Bank (MEB), remain large; ratio of private sector credit to deposits has declined and remained stable for private banks. - Financial sector size: broad money and credit to the private sector are 42 and 10 percent of GDP, respectively. ### Key Statistics and Projections (select figures repeated verbatim) - Growth: 6½ percent (2012/13 estimate). - Inflation: 4.7 percent (y/y) in March 2013; 6 percent (y/y) in December 2012; projected around 6½ percent (y/y) in 2013/14. - Current account deficit: around 4½ percent of GDP (2012/13 estimate). - International reserves: US$4.6 billion at end-March; covering 3¾ months of prospective imports. - Broad money growth: 58 percent (y/y) in February. - Private sector credit growth: 48 percent (y/y) in February. - Fiscal deficit: 3¾ percent of GDP (2012/13 estimate); projected 5 percent of GDP after mid-year supplementary allocation (2013/14). - Medium-term potential growth: around 7 percent. - Exchange rate: around 945 kyat to the dollar (late‑May 2013); kyat 13½ percent lower than at April 2012 managed float introduction. - Reserve adequacy model range: between about 5 and 8½ months of imports; suggested appropriate coverage about 5–6 months of imports. - Real effective depreciation since April 2012 managed float: around 9 percent by May 2013. - Financial sector depth: broad money 42 percent of GDP; credit to private sector 10 percent of GDP. _International Monetary Fund — Myanmar staff report extract (2013)._ ### 16. The CBM’s policy of smoothing exchange rate fluctuations while not targeting a ### 16. The CBM’s policy of smoothing exchange rate fluctuations while not targeting a specific rate is appropriate ### Exchange rate policy and reserves - The CBM’s policy of smoothing exchange rate fluctuations while not targeting a specific rate is appropriate. - Targeting a specific exchange rate level could be costly and is risky given significant analytical uncertainty due to a thin data base and structural transformation of the economy. - Given the scale of the economic transition, the CBM should strive to build further reserves to achieve at least 5 months of prospective import cover. - Reserve accumulation should occur through: - further transfers from state banks, and - net purchases at auctions, - but not at the expense of the stability and further development of the foreign exchange market. - Expected higher foreign exchange inflows over the next year provide an opportunity to build reserves. - Tools to sterilize foreign exchange inflows remain underdeveloped. - Building capacity to better understand seasonality could enable smoothing exchange rate fluctuations over months rather than days or weeks. ### Monetary and fiscal policy balance - With monetary policy tools still being developed, fiscal policy is the main instrument for macroeconomic management. - Fiscal policy must also address Myanmar’s large development needs. - The 2013/14 budget and projected additional spending in the mid-term supplementary budget: - strike an appropriate balance between macro-management and development needs, - are consistent with maintaining a low risk of debt distress (Box 4). - Monetization of the fiscal deficit should be reduced and eliminated over the next few years. - Over the medium term, the authorities’ strategy is to: - keep deficits of around 5 percent of GDP, - increase nonresource revenue, - boost allocations to priority sectors, - increase access to concessional finance. - The 5 percent of GDP deficit target may need adjustment according to the macroeconomic environment and until effective monetary policy tools are developed. ### Rapid credit growth and financial stability - Rapid credit growth is a welcome sign of financial deepening. - At present, it does not pose significant macroeconomic risks, but should be monitored carefully. - Further relaxation of lending constraints should not be considered. - Experience elsewhere shows sustained high levels of annual credit growth tend to lead to macroeconomic instability, particularly when accompanied by rapidly rising real estate prices. - These risks should be factored into monetary policy settings once effective tools are established. ### Authorities’ views (exchange rate, reserves, fiscal) - Authorities broadly concurred with staff’s views. - They stressed commitment to: - a flexible exchange rate policy that does not target a specific level, - smoothing fluctuations, - maintaining adequate international reserves. - They agreed further transfers of reserves to the CBM were needed but noted declining reserves at state banks limit scope for growth from that source. - They acknowledged limited ability to control monetary aggregates and credit developments. - On fiscal policy, they reaffirmed a medium-term deficit target of around 5 percent of GDP to maintain a low risk of debt distress and support macroeconomic stability. - They intend to use nonconcessional borrowing only for economically viable projects in priority sectors such as energy and infrastructure. - They aim to raise tax revenue performance and pointed to initiatives already taken. ### The 2013/14 Budget — key numbers and measures (Box 4) - Revenue and grants: 23.0, 18.9, 23.4 (2012/13 Estimate; 2013/14 Budget; 2013/14 Projection) [In percent of GDP table headings preserved as in source] - Tax revenue: 6.4, 4.4, 6.6 - SEE receipts net of transfers to UG: 13.8, 12.1, 14.2 - Expenditure: 26.6, 24.5, 28.4 - Expense: 16.7, 16.9, 19.6 - Of which: Education: 1.2, 1.2, 1.4 - Health: 0.4, 0.6, 0.6 - Defense: 2.0, 2.0, 2.7 - Investment: 10.0, 7.6, 8.8 - Net lending (+)/borrowing (-): -3.7, -5.6, -5.0 - Nominal GDP: 47,433; 059,249; 53,501 (table reproduced exactly as in source) - Key expenditure measures: - A 23 percent salary increase to public sector workers and pensioners; wage bill expected to increase by 50 percent with additional hiring; wage bill remains 11 percent of current expenditure. - Higher current spending in education and health increased by 30 and 78 percent, respectively, compared to 2012/13. - Exceptional overheads budgeted for the nationwide census. - Allocations for capital reduced as preparations for the South East Asian Games are completed; health sector focus shifting to primary health care and prevention. - Profitable SEEs expected to self-finance 100 percent of working capital in 2013/14; government will cover 20 percent of working capital expenses of loss-making SEEs (in 2012/13, all SEEs were expected to self-finance 78 percent of working capital). - Revenue surge in 2012/13 not fully reflected in the budget; budget deficit projected at about 3¾ percent of GDP, but mid-year supplementary budget expected to increase spending and result in a fiscal deficit of around 5 percent of GDP. ### Forging the tools for monetary control — background and staff recommendations - Liberalization progress: - Rapid progress toward a unified exchange rate and an open current account. - Flows through the formal exchange auction have increased markedly since April 2012; official rate closely aligned with informal market rates. - A foreign exchange management law freeing all current transactions enacted in August 2012 with implementing instructions issued. - Payment restrictions on invisibles mostly lifted; private banks enabled to offer foreign exchange operations at par with state banks. - Plan to phase out Foreign Exchange Certificates (FECs) is being implemented; more than half of FECs outstanding already exchanged. - Some restrictions from the foreign investment law remain; recent cessation by state banks of timely transfers of foreign exchange on behalf of private banks is limiting formal market development. - CBM autonomy and operational constraints: - Final enactment of the new law to give greater autonomy to the CBM has been delayed; CBM bill approved by legislature in March 2013 but revisions needed. - Uncertainty over provisions in key areas, notably budgetary and operational autonomy. - Delay has impeded development and use of monetary policy tools, in particular deposit auctions, because the CBM currently operates under a budget appropriated by parliament. - Regulations for effective reserve requirements have not been issued. - CBM has removed the ban on interbank trading and is considering steps to help market development. - Staff views and recommendations: - Remaining restrictions from the foreign investment law are minor but need removal to achieve full compliance with Article VIII and ASEAN Economic Community obligations. - Continue policy allowing profit transfers abroad after payment of profit taxes without further restriction; issue instructions to formalize the practice. - Abolish deduction of living expenses from permissible transfers of salaries. - Replace and, where necessary, amend instructions issued to implement the foreign exchange management law with a set of comprehensive regulations. - To support development of the wider foreign exchange market, the CBM should: - place private banks’ purchases of foreign exchange from the formal auction, upon request, directly into their overseas accounts; - the Ministry of Finance and Revenue (MoFR) and CBM should instruct state banks to make foreign exchange payments on behalf of private banks in a timely manner as long as private banks have sufficient funds; - reactivate the CBM’s U.S. dollar account at the U.S. Federal Reserve so it can make and receive foreign exchange payments on behalf of private banks purchasing foreign exchange in auctions without recourse to state banks. - Development of a sufficiently deep interbank market is important so price discovery can occur there, replacing the current multiple-price auction system. - Enactment of the CBM law and issuing implementing regulations are critical and need to be achieved as soon as possible; the law must contain provisions for budgetary and operational autonomy, authority to conduct monetary policy and supervise the financial sector, including state banks. - Concrete supervisory powers should be specified in a new financial institutions law. - Interim preparatory steps while waiting for CBM law (to move toward a reserve money targeting framework): - Maintain regular deposit auctions which have recently been resumed (new SMP benchmark). - Continuously improve the CBM’s reserve money and liquidity projections. - Recalibrate reserve requirements in line with previous IMF TA. - Further develop CBM internal organization, management and information dissemination. ### Moving toward reserve money targeting (Box 5) — sequencing and measures - Currently the CBM has no nominal policy anchor; ultimate goals will be established by the new CBM law. - To achieve goals, the CBM needs to develop a reserve money targeting framework as an intermediate policy target. - Sequencing of reforms: - Regular deposit auctions, even at low volumes, to develop market practice; volumes stepped up once budget constraints are relieved and ultimately removed when CBM law enters into force. - Continuous refinement of reserve money projections supported by IMF TA. - Recalibrating reserve requirements is critical and should be implemented as soon as possible to create demand for CBM current account balances. - Support development of an interbank market to improve monetary policy transmission and permit eventual liberalization of lending rates. - These elements will enable the CBM to introduce a reserve money target in 2014. - Reforms to standing facilities will help manage interest rate volatility. - Develop liquidity forecasting and integrate state banks into the monetary regime as medium-term issues. - Mop up MEB excess liquidity to prevent a liquidity overhang in the banking system. - Apply reserve requirements to state banks once state bank reforms lead to competition with commercial banks. - Retain direct controls on retail interest rates until the CBM has established a track record of maintaining the reserve money target; phase out direct controls once the CBM has control over wholesale interest rates. - Process of monetary reform timing (as presented): - Immediate to end-2013: Conduct open market operations; Recalibrate reserve requirements; Deregulate and develop interbank markets; Implement reserve money target; Reform standing facilities; Develop liquidity forecasting; Mop up MEB excess liquidity; Apply reserve requirements to state banks (timing table preserved as structure). ### Financial sector modernization — background, developments, and priorities - Background: - Financial sector is small, segmented, partly dollarized, and repressed due to administrative controls limiting intermediation. - State-owned banks dominate and public confidence is low. - No operational foreign bank presence; governance and supervision of local banks are far behind international standards, including on AML/CFT issues. - Recent modernization steps: - Eligible collateral expanded to include key agricultural export goods. - Deposit rates liberalized within a fixed corridor. - Myanma Agricultural Development Bank raised credit limits for farmers. - Abolished capital-to-deposit requirement; eased capital requirements for opening new branches. - Introduction of credit cards and automated teller machines; establishment of a payment union for interbank settlements. - Rapid increase in microfinance providers, which are effectively unsupervised. - Sector expansion prospects: - Applications for opening new bank branches have more than tripled relative to 2012/13. - Plans for establishing a stock exchange. - Several private insurance companies recently licensed. - Microfinance sector projected to grow further. - Authorities finalizing policy for admitting foreign banks, initially through joint ventures. - Staff views and key priorities: - Increasing access to financial services is important for broad-based growth; recent reforms are steps in the right direction though capital requirements for new branches should soon be removed completely. - Effective supervision of the increasing number of operators in microfinance and the previously state-monopolized insurance sector is essential. - Transition to a modern financial system is complex and requires extensive capacity building in the CBM and banks, particularly in regulation and supervision. - Key priorities include: - Licensing and foreign bank entry: ensure licensing policies and procedures are adequate; caution against a parallel banking system of joint-venture banks separated from wholly-owned domestic entities. - Regulating foreign exchange positions: strengthen supervision and issue instructions limiting banks’ net open foreign exchange positions and other necessary prudential regulations with IMF TA support. - Establishing market-determined interest rates: deposit/credit auctions and treasury securities auctions are first steps; regulations to govern such auctions are being prepared (SMP benchmark); IMF to provide TA. - Modernizing prudential regulations and supervisory capacity: bring definitions of bank capital and nonperforming loans closer to international standards; strengthen enforcement of connected lending limits; improve banks’ risk management; enhance supervisory capacity with a resident IMF advisor; improve banks’ reporting and establish a framework for consolidated supervision; bring state banks under CBM supervision; strengthen supervision of microfinance and insurance sectors. - Addressing AML/CFT deficiencies: Myanmar is classified by the Financial Action Task Force as having strategic AML/CFT deficiencies and not having made sufficient progress; could face countermeasures after October 2013 which could reverse recent progress in integrating with international financial markets. Authorities should act urgently to strengthen legal framework and supervisory arrangements for AML/CFT. *Source: IMF staff report excerpt (chapter/section as provided).* ### 33. As private banks play an increasing role in the financial system, the role of state- ### _cr13250 - 33. As private banks play an increasing role in the financial system, the role of state- ### State-owned banks and banking-sector reform - State banks are effectively beyond the CBM’s supervisory remit; subjecting them to CBM supervision requires passage of the CBM law and revision of the financial institutions law. - Reform options for Myanma Foreign Trade Bank (MFTB) and the MEB need to be developed; the process is complex and the transition must be carefully considered and managed. - MFTB roles and options: - Until recently held most of the government’s foreign reserves and carried out most foreign exchange transactions for state-owned companies and the private sector. - Increasing role of private banks in foreign exchange operations and transfer of reserves to the CBM necessitate reconsideration of MFTB’s role. - Current role as agent for foreign exchange operations is not a viable long-run business model, particularly after normalization of international financial relations. - Options to be explored include absorbing the MFTB (or parts of its staff) into the CBM, merging it with another state-owned bank, or unwinding it. - MEB roles and options: - Acts as the public sector’s treasury in addition to commercial relations with the private sector. - Despite some net purchases of treasury securities over the last year, it holds large balances of structural excess liquidity. - Reducing excess liquidity (e.g., through a swap against treasury bills held by the CBM) would allow MEB to participate freely in treasury securities auctions on a regular basis and integrate more fully with the nascent market-based financial system. ### Authorities’ views on banking, supervision, and AML/CFT - Authorities broadly agreed with staff assessment and recommendations but emphasized need for significant additional TA. - Joint ventures and foreign bank entry: - Need to provide sufficient room for domestic banks to develop capacity to compete with foreign entrants. - Strong interest of foreign banks in establishing a presence in Myanmar, including through joint ventures. - Strengthening supervision and regulating net open foreign exchange positions: - Authorities had no experience and requested forthcoming TA from the IMF, World Bank and other partners. - Requested comments on draft regulations on treasury securities auctions and TA for implementing them. - Microfinance expansion: - Acknowledged supervisory challenges but stressed need to rapidly boost credit availability in rural areas; counted on donor support, in particular from the World Bank and AsDB, to assist in building supervision of these institutions. - AML/CFT deficiencies: - With IMF TA, key bills—a countering of money laundering law, and a counter terrorism bill—were on their way to submission to parliament. - Agreed urgent action was needed but noted parliament’s crowded agenda. ### Fiscal context and reforms - Resource revenue dependence: - A large share of government revenue is directly or indirectly related to natural resources, in particular gas. - New fields coming on stream in 2013/14 will boost gas revenues in the next few years, with a peak of 6.5 percent of GDP projected in 2014/15. - In the medium term gas production is expected to level; under current projections (which exclude revenues from potential new discoveries), all gas revenues are needed to finance the public sector budget (which would still leave fiscal deficits of around 5 percent of GDP, in line with the government’s fiscal strategy). - Windfall receipts may occur from licensing state-owned assets or privatizations. Box — Government’s fiscal reform strategy (summary of official plan) - Tax administration: - Strategic reform plan adopted by the Internal Revenue Department (IRD). - Plan envisages establishment of a Large Taxpayer Office (LTO) in September 2013 (SMP structural benchmark) that will become fully operational from April 1, 2014. - LTO will introduce taxpayer self-assessment and issue unique taxpayer identification numbers. - IRD has initiated staffing of LTO, compiled a list of the 1,000 largest taxpayers by turnover, and is in the process of selecting an accommodation for the LTO in Yangon. - IMF TA will assist selection of large taxpayers for the LTO and design of staff training. - Tax policy: - Long-term objective to introduce a full value-added tax (VAT) as the main broad-based consumption tax. - Interim priorities: (i) reform taxation of special consumption goods into a separate tax as a precursor to VAT; (ii) expand taxation of services as administrative capacity allows; (iii) clarify policy on tax incentives and limit such incentives to the largest extent possible. - Exemptions should be streamlined and time-limited. - Public financial management (PFM): - MoFR established a working group to develop PFM reform strategies and coordinate donors; PFM strategy to be finalized in the next few months. - PFM priorities include: (i) budget formulation; (ii) strengthening fiscal discipline and expenditure control; and (iii) fiscal accounting and reporting. - Establishing a treasury department in the MoFR with cash and debt management functions is a critical initial step (will facilitate introduction of treasury securities auctions) and will be supported by TA from the IMF and other partners. - A public expenditure review (PER) coordinated by the World Bank has been launched. - Government committed to implementing the Extractive Industry Transparency Initiative. ### Staff views on fiscal policy and PFM - Need to boost nonresource revenues to finance development expenditure and reduce dependence on natural resources; reforming tax policy and strengthening tax administration are critical. - Tax policy recommendations: - Broaden the tax base and simplify existing rate structure. - Short-term priorities: (i) reform special consumption goods taxation as precursor to VAT; (ii) expand taxation of services; (iii) clarify and limit tax incentives, emphasizing other options to attract investment such as streamlining bureaucracy and providing infrastructure and social services. - Retain incentives only as a minor role; exemptions to be streamlined and time-limited. - Tax administration: - Establishment of the LTO should further increase revenues and pave way for subsequent reforms. - Important that sufficient resources be allocated in the forthcoming supplementary budget for the LTO. - PFM modernization: - Emerging priorities are appropriate; strategy should be finalized soon and disseminated to development partners. - Early PER results should inform preparation of the 2014/15 budget. - Establishment of a treasury function is a key first step. - Medium-term fiscal framework principles: - (i) Smoothing of expenditures in face of potentially volatile resource revenues. - (ii) Prudent projections of resource revenues to avoid an unsustainable build-up of debt. - (iii) Utilization of nonrecurring revenues for investment, at least once a broad tax base is developed. - Need for fiscal institutions for transparent and efficient management of resource wealth and a fiscal regime for extractive industries. - Framework must consider changing financial relations between the Union government, states and regions, and SEEs. ### Boosting broad-based growth and human capital - Authorities’ strategy (FESR): - Focused on reducing poverty and diversifying growth to provide income and employment, particularly in rural areas. - FESR endorsed by donors in the Nay Pyi Taw Accord in January 2013; comprehensive reforms envisaged in agriculture, health care, education, industrial development, and infrastructure. - Recent policy and reform actions: - Laws passed/promulgated: foreign investment, access to land (including through titling), microfinance; other laws under consideration for special economic zones and small enterprises. - Telecommunications licenses being awarded; new offshore blocks for oil and gas exploration tendered transparently. - Plan to double generating capacity within the next three to four years (largely gas-fired plants fueled by domestic share of new gas fields); earmarked future gas discoveries for domestic use. - Staff recommendations for sustainable and inclusive growth: - Investments in infrastructure (power generation and transportation) are key, public or private. - Supportive investment policies to promote industrial development and employment; well-managed SEZs can play a role but must avoid isolation and tax-base erosion. - Boost agricultural productivity and ensure gains and higher final sale prices benefit farmers—measures include seed development and increasing competition among rice traders. - Increase expenditures on education and health further to reduce poverty effects and improve workforce productivity; recent large increases are appropriate but outcomes remain far below Asian peers. - Reallocate health expenditures toward more current spending (noted as welcome in the 2013/14 budget). - Statistics: - Urgent improvement needed in coverage and timeliness of national accounts, prices, balance of payments, and fiscal and monetary statistics. - Authorities recognize importance and have requested technical support from many partners including the IMF. Key socio-economic figures preserved from the source - Poverty decreased from 32 percent in 2005 but remained high at around 25 percent in 2010. - Peak gas revenue projection: 6.5 percent of GDP in 2014/15. - Fiscal deficits projected around 5 percent of GDP under current projections. - LTO establishment: September 2013 (SMP structural benchmark); fully operational from April 1, 2014. - IRD compiled list of the 1,000 largest taxpayers by turnover. ### SMP implementation and monetary policy tools - Implementation progress: - All quantitative and structural benchmarks for end-March 2013 were met. - Reserve accumulation of the CBM significantly exceeded the target; fiscal targets met comfortably. - Payment restrictions on invisibles lifted; private banks enabled to offer foreign exchange operations at par with state banks; plan for withdrawing FECs announced and being implemented. - Benchmarks for September 2013: - Authorities on track to meet quantitative and structural benchmarks for September 2013. - Fiscal deficit financing targets remain appropriate for projected deficit outturn of 5 percent of GDP (does not take into account proceeds from sale of licenses for telecommunications and oil and gas blocks). - Proceeds from such sales should be used to build fiscal buffers and finance priority spending over the medium term consistent with maintaining macroeconomic stability. - Targets for reserve accumulation remain appropriate; progress made on structural benchmarks relating to establishment of the LTO and treasury securities auctions. - Next and final review expected to be completed in early 2014. - Monetary policy instruments: - Authorities resumed bi-weekly deposit auctions and included their continuation as a new structural benchmark in the revised Memorandum of Economic and Financial Policies. - Volumes currently small but expected to increase to sterilize impact of foreign exchange operations once budget constraints are eased. ### Staff appraisal and macroeconomic outlook - Progress and challenges: - Authorities have made impressive strides in opening and liberalizing the economy despite limited capacity: import restrictions removed, import monopolies abolished, administrative procedures eased, and exchange rate regime overhauled. - Financial sector has begun to modernize and integrate with the world economy; legislation passed to lay foundations for growth in key sectors. - Social spending increased and government moving to formulate new poverty-alleviation policies. - Administrative capacity is strained by rapid change and need to catch up to international practices and standards. - Exchange rate and reserves: - Myanmar has come a long way in liberalizing its foreign exchange regime; current account mostly open and formal and informal markets have converged. - Recent depreciation of the kyat is contributing to aligning the exchange rate with longer-term fundamentals after apparent overvaluation up to 2012. - CBM policy of smoothing exchange rate fluctuations while not targeting a specific rate remains appropriate. - Continuing to increase CBM international reserves is crucial to provide a more comfortable external buffer to the reform process. - Need for macroeconomic tools: - Macroeconomic stability preserved so far, but additional instruments are needed to manage mounting price pressures. - Critical that monetization of the fiscal deficit be reduced further. *International Monetary Fund — Extracts from the Myanmar staff report and associated boxes and assessments* ### 53. The liberalization of the exchange rate and of the wider economy makes the ### _cr13250 - 53. The liberalization of the exchange rate and of the wider economy makes the ### Monetary policy and central bank legal/instrumental framework - Urgent task: deploy monetary policy tools and establish monetary control; this should be given the highest priority. - Legal reform: enactment of the new CBM law will be a vital step in establishing an appropriate legal foundation. - Interim operational steps (before law’s enactment) recommended: - Continue putting in place instruments in advance of the law’s enactment. - Resumption of regular deposit auctions is welcome even if volumes are still constrained. - Continuously seek to improve forecasting capability. - Recalibrate reserve requirements soon to gain additional levers of monetary control. - Remove financing constraints on open market operations. ### Financial sector development and supervisory framework - Objective: develop a modern financial sector to support growth and transmit monetary policy. - Constraints: capacity constraints imply the process will take time but requires immediate action to accelerate reforms. - Recommended sequencing and priorities: - Establish an effective supervisory regime, including for foreign exchange operations. - Develop a clear licensing regime for foreign banks. - Adopt a careful and well-sequenced approach given existing administrative capacity limits. ### Fiscal policy and medium-term fiscal framework - Caution on deficit targets: fiscal deficit targets should be applied judiciously. - Volatility in natural resource revenues or lumpy inflows from asset and license sales should not drive unwarranted volatility in expenditure. - Recommendation: develop a medium-term fiscal framework that: - Promotes build-up of fiscal buffers through saving in good years. - Allows prudent spending of buffers over the medium term. - Requires development of a well-enforced broad-based tax system. - Requires strengthened public financial management. ### Technical assistance, capacity building, and statistics - Intensiveness required: intensive hands-on technical assistance and capacity building tailored to Myanmar’s specific needs will be critical for a successful reform process. - Coordination and prioritization: coordination, prioritization and adaptation to Myanmar’s circumstances are essential given scarce administrative capacity and the breadth of the agenda. - Role of IMF TA: IMF technical assistance is expected to continue to be intensive, led by government demand and delivered in close coordination with other development partners. - Statistics: improving statistics to underpin economic management and strengthen IMF surveillance is critical. ### Multiple Currency Practice (MCP) and IMF jurisdiction - Staff position: supports the authorities’ request for approval of a multiple currency practice (MCP) subject to Fund jurisdiction under Article VIII, Section 3. - Rationale: the MCP is maintained principally for nonbalance of payments reasons. - Staff assessment: - MCP does not materially impede the member’s balance of payments adjustments. - MCP does not harm the interests of other members and does not discriminate among members. - Authorities are unable at present to replace the MCP. - Recommendation: staff recommend Executive Board approval for retention of the MCP until June 28, 2014 or the next Article IV consultation, whichever is earlier. - Consultation timing: it is proposed that the next Article IV consultation be held on the standard 12-month cycle. ### Selected contextual indicators cited in the text - Human development ranking: Myanmar ranks 149 out of a total of 186 countries in human development. - (Figure and tables referenced in the source present detailed macroeconomic indicators, fiscal and monetary aggregates, balance of payments entries, and medium-term projections; substantive numeric values and series are contained in the source tables and figures.) *Source: IMF staff report excerpt as provided in the supplied content unit.* ### Appendix I. Myanmar—Letter of Intent ### Appendix I. Myanmar—Letter of Intent ### Overview and Program Status - Letter dated June 12, 2013 addressed to Ms. Christine Lagarde, Managing Director, International Monetary Fund. - Government reports that implementation of the reform program is bearing fruit with macroeconomic stability, strong growth, and high investor interest. - All SMP quantitative and structural benchmarks for end-March 2013 were met. - Reserve accumulation of the CBM "significantly exceeded the target" and fiscal targets were met comfortably. - Payment restrictions on invisibles lifted; private banks enabled to offer foreign exchange operations at par with state banks; plan for withdrawing Foreign Exchange Certificates announced and being implemented. - Government expects enactment soon of law to establish an autonomous Central Bank of Myanmar and proposes continuing bi-weekly deposit auctions as a new structural benchmark. - Government authorizes IMF to publish this Letter of Intent and the attached MEFP. ### Macroeconomic Outlook and Key Indicators - Growth in 2012/13 estimated at 6½ percent, driven by gas production, construction, and services. - Inflation: rose to 6 percent (y/y) in December 2012; declined to 4.7 percent in March 2013. - International reserves: $4.6 billion at end-March 2013, covering 3¾ months of prospective imports. - Fiscal deficit in 2012/13 estimated at 3¾ percent of GDP, slightly lower than envisaged earlier, largely due to large increases in tax collections. - Outlook 2013/14: - Growth expected to accelerate slightly, led by rising gas production and investment. - Inflation projected to remain contained at around 6½ percent (y/y). - International reserves forecast to continue to rise. - Broad money and credit to the economy expected to continue to expand at double-digit rates. - Medium term growth expectation: sustained growth of around 7 percent. - Fiscal deficit target: around 5 percent of GDP (IMF definition) for 2013/14 and aimed to be kept around this level over the medium term. ### Program Objectives and Priorities - Primary aims: - Maintain low and stable inflation. - Increase international reserves to provide a buffer against external shocks. - Ensure debt sustainability. - Lay foundations for sustainable growth by building a macroeconomic framework and developing institutions and instruments. - Key policy priority areas for IMF-supported monitoring through December 2013: - Eliminating remaining exchange restrictions and multiple currency practices (MCPs). - Developing monetary policy institutions and tools to support price stability. - Modernizing the financial sector to facilitate macroeconomic management and growth. - Laying foundations for improving fiscal revenues in the medium term for sustainable development spending. - Government requests continued IMF technical assistance (TA) in all above areas. ### Foreign Exchange Policies - Steps taken: - Interventions deepened and informal market rate and reference rate have converged further. - Licensed a number of non-bank money changers to complement authorized dealer banks. - Lifted payment restrictions on invisibles; private banks enabled to offer FX operations at par with state banks; plan to withdraw Foreign Exchange Certificates being implemented (structural benchmarks). - Commitments and measures: - Committed to accept obligations of Article VIII Section 2(a), 3 and 4 of the IMF’s Articles of Agreement and to level the playing field for private banks. - CBM preparing to place banks’ purchases of foreign exchange from formal auctions, upon request, directly into banks’ overseas accounts to facilitate replenishment. - Continue allowing profit transfers abroad after payment of profit taxes without further restriction. - Consolidate recently issued instructions into consolidated implementing regulations for the Foreign Exchange Management Law by end of 2013. - Continue supplying sufficient liquidity to foreign exchange auctions to avoid large deviations from the informal market, without targeting any specific exchange rate level. - Seek continued approval of the IMF’s Executive Board for the multiple currency practice arising from multi-priced FX auctions, to be maintained temporarily until market develops. ### Monetary Policy and Operations - Reforms under way: - Preparing revision of required reserves definition to include only current account balances with the CBM. - Plan to lengthen the reserve maintenance period to two weeks. - Adjusting required reserve and liquid asset ratios in line with previous IMF TA recommendations. - Begun forecasting liquidity and reserve money; conducted several deposit auctions. - Begun holding deposit and credit auctions regularly every two weeks with small volumes; plan to step up volumes to sterilize FX operations once budget constraints eased. - Removed ban on interbank trading to strengthen monetary policy transmission. - Institutional developments: - New CBM law approved in March 2013 but revisions needed before enactment; enactment delayed. - Government intends to reinforce efforts to control monetary conditions even ahead of CBM law implementation: - Gradually transfer international reserves from state banks to the CBM. - Continue bi-weekly deposit auctions (continuous structural benchmark). - Ease budget constraints in the supplementary budget until CBM law implementation. - Strengthen capacity to forecast key monetary aggregates with IMF TA. - Aim to move to a reserve money targeting framework during 2014 after establishing a track record of deposit auctions and revising reserve requirements for private banks. - Revised reserve requirements to be extended to state banks when sufficient capacity is developed. - Abolished mandatory surrender requirement for foreign exchange; with IMF TA will develop instructions on limiting banks’ net open foreign exchange position. ### Financial Sector Modernization - Measures taken: - Eased capital requirements for opening new bank branches; abolished capital-to-deposit ratio. - Permitted Myanmar Economic Bank (MEB) to purchase treasury bills to reduce excess liquidity (insufficient to eliminate it). - Begun developing draft regulation to establish treasury security auctions (structural benchmark) with IMF TA support. - Prudential and supervisory reforms: - Once IMF resident advisors on bank regulation and supervision are in place, government will: - Bring definitions of bank capital and nonperforming loans closer to international standards. - Strengthen enforcement of connected lending limits. - Improve banks’ risk management as precursor to liberalization of lending rates and maturities. - Changes to be implemented step by step in line with development of supervisory capacity. - MEB and MFTB reforms: - Prepare to integrate MEB more fully into market-based system once new CBM law is promulgated, reserve requirements applied to MEB, and treasury securities auctions started; consider options to absorb MEB’s remaining excess liquidity (e.g., swap against treasury bills held by CBM) and allow MEB to freely participate in treasury auctions. - Begin to consider options for reform of the Myanma Foreign Trade Bank (MFTB) and request IMF TA to develop and assess alternatives. ### Fiscal Policies and Public Financial Management - Fiscal stance and budgeting: - 2013/14 budget envisages further growth in education and health current expenditure; reduced capital allocations due to near-completion of several projects for the 2013 South East Asia Games. - Expect need to increase spending on security due to continued ethnic and religious unrest; intend to increase allocations for priority sectors in forthcoming supplementary budget. - Overall budget deficit (IMF definition) to remain around 5 percent of GDP. - Nonconcessional financing to be used only for economically viable projects in priority sectors such as energy and infrastructure, at levels consistent with maintaining debt sustainability and low risk of debt distress. - Tax administration and reforms: - Developed comprehensive strategic plan to modernize tax administration; centerpiece is establishment of the Large Taxpayer Office (LTO) (structural benchmark). - Formed working group to develop PFM reform strategies and serve as donor coordination tool after receiving TA from IMF and World Bank; launched public expenditure review (PER) with World Bank to improve efficiency of public spending. - Formed Scrutinizing and Monitoring Tax Collection Board (government and private sector participation) to advise on tax reform action plan. - Medium-term goal: introduce a value added tax; interim measures include reforming taxation of special consumption goods and expanding taxation of services. - Principle to streamline and limit tax exemptions to ensure broad revenue base; will inform implementation of small and medium enterprises law and revised special economic zones law. - Short-term priority: ensure successful establishment of LTO and allocate sufficient resources in forthcoming supplementary budget for LTO to prepare for taking over administration of large taxpayers at beginning of 2014/15. - Public financial management actions: - Finalize PFM strategy and disseminate to development partners in July 2013. - PFM strategy focus areas: (i) budget formulation; (ii) strengthening fiscal discipline and expenditure control; (iii) fiscal accounting and reporting. - Early action: establish treasury department with cash and debt management functions in the Ministry of Finance and Revenue during 2013 with TA from IMF and other partners. - Expect to finalize PER during 2014 and use early analysis to inform 2014/15 budget preparation. ### Policies for Growth and Structural Reforms - Emphasis on improving health and education, attracting domestic and foreign investment, and enhancing human capital. - Budget to increase allocations for health and education; working with development partners to maximize expenditure impact and obtain additional funding. - Investment promotion: - Implementing regulations for the foreign investment law issued. - Laws on special economic zones and small and medium enterprises expected to be passed by the Hluttaw in 2013. - Focusing on attracting international investment for critical infrastructure: energy, transport and telecommunication. - Adopted transparent tendering processes as demonstrated by recent auctions for telecoms licenses and oil and gas blocks. - Agricultural development prioritized through implementation of new land and microfinance laws recently passed by the Hluttaw. *Source: Appendix I. Myanmar—Letter of Intent and Attachment I. Myanmar—Memorandum of Economic and Financial Policies (June 12, 2013).* ### 20. We continue to place high priority on improving the accuracy and timeliness of our ### _cr13250 - 20. We continue to place high priority on improving the accuracy and timeliness of our ### Improvements to statistical systems - Accelerated provision of monetary data to the IMF. - Re‑estimated GDP for 2010/11 and 2011/12. - Plans, with partner assistance including the IMF, to: - develop an updated national accounts series with broader coverage, - produce an updated CPI, - enhance coverage of the balance of payments, - improve fiscal and monetary statistics, including through more timely provision. ### Program monitoring and reporting - Continued close monitoring of program implementation. - One new structural benchmark introduced in addition to end‑September benchmarks in MEFP of December 28, 2012. - Definitions of relevant variables follow the Technical Memorandum of Understanding attached to the MEFP of December 2, 2012. - Adjustment: the target for net domestic financing of the nonfinancial public sector deficit will be adjusted downward by the amount of proceeds from telecommunications licenses; these proceeds will be reported to the IMF’s Asia and Pacific Department. - Reporting commitment: monthly reporting of receipts, payments, and balances of the State Fund Account and all sub‑accounts to IMF’s Asia and Pacific Department no more than six weeks after the end of each month. - SMP Monitoring Committee composition and role: - Includes senior representatives from the CBM, Ministry of Finance and Revenue, and Ministry of National Planning and Economic Development. - Reports regularly to the Minister of Finance and Revenue on program progress. - Works with IMF staff on formal reviews; next review due in January 2014. ### Quantitative benchmark outcomes (selected) - Net international reserves of the CBM (floor) (cumulative flow from end‑September 2012; in millions of US$) - Target/Projection: 705, 1,300, 1,504, 1,916, 2,125 - Actual: 974, 948 - Target met: Yes - Net domestic financing of the NFPS deficit (ceiling) (cumulative flow from the beginning of the fiscal year to end‑period; in billions of kyat) - Target/Projection: 1,921, 343, 1,053, 1,523, 1,815 - Actual: -346, -390, 952 - Target met: Yes - Net CBM financing of the NFPS deficit (ceiling) (cumulative flow from the beginning of the fiscal year to end‑period; in billions of kyat) - Target/Projection: 960, 311, 913, 1,147, 94 - Actual: -453, -914, 645 - Target met: Yes - Accumulation of new external payment arrears by the non‑financial public sector (ceiling) (ceiling on stock at end‑period; in millions of US$) - Target/Projection: 0,0,0,0,0,0 - Actual: 0 - Target met: Yes - Contracting or guaranteeing of nonconcessional external debt (ceiling) (cumulative flow from the beginning of the fiscal year to end‑period; in millions of US$) - Target/Projection: 2,000, 2,000, 2,000, 2,000, 2,000 - Actual: 0 - Target met: Yes - Notes: - Fiscal year begins April 1. - Net international reserves include SDRs and gold. Valued at program exchange rate of US$/euro=1.27 and a gold price of US$1,750 per troy ounce. - Targets are set for September 2013. - Nonfinancial public sector (NFPS) comprises the Union government and state economic enterprises. A program exchange rate of 850 kyat/US$ applies. - The target will be adjusted downward by the amount of proceeds from the auctioning of telecommunications licenses. - Excludes accumulation of new arrears on debt already in arrears. ### Structural benchmarks and status (selected) - For first review (target date March 2013) — Status: Met - Eliminate exchange restrictions on payments and transfers for invisibles (¶6) — To eliminate Article VIII restrictions. - Announce plan for phasing out Foreign Exchange Certificates (¶6) — To eliminate a multiple currency practice. - Remove restrictions that prevent private banks from conducting foreign exchange operations at par with state banks (¶6) — To help unify informal exchange. - For second review - Conduct bi‑weekly deposit auctions (¶10) (new benchmark) — To help establish control over monetary aggregates. Timing: Continuous from June 2013 — Status: In progress. - Prepare regulations to introduce treasury securities auctions (¶11) — To facilitate market‑based deficit financing. Target: September 2013 — Status: In progress. - Establish an operational large taxpayer unit (¶17) — To improve tax administration and increase tax revenues. Target: September 2013 — Status: In progress. ### Debt sustainability assessment — overview - Assessment: Myanmar is assessed to be at low risk of debt distress following the clearance of its external arrears. - Baseline scenario assumptions: - Planned resolution of Myanmar’s external arrears to be completed in 2013/14 as agreed with the Paris Club creditors. - Gradual reduction in reliance on nonconcessional financing as concessional resources become available after resolution of arrears. - Under baseline, public and publicly guaranteed (PPG) external debt burden indicators remain well below indicative thresholds. - Stress test results: - One alternative stress test (export shock) leads to a temporary breach of the indicative threshold for the debt‑to‑exports ratio. - Mitigants include Myanmar’s track record implementing large natural gas projects and contractual purchasing commitments of project partners. - Policy implications to maintain low risk: - Continue current prudent fiscal policy, - Improve tax policy and public financial management, - Increase use of concessional financing while limiting nonconcessional borrowing to viable and growth‑enhancing projects. ### Background and recent developments relevant to the DSA - Medium‑term real GDP growth revised upward to 7 percent from about 6.6 percent in the previous DSA, reflecting robust FDI and related private investment and public investment. - Overall fiscal deficit remains the same as in previous DSA in the medium term; revenue collection expected to improve reflecting better‑than‑expected performance in 2012/13. - The DSA incorporates agreed resolution of arrears with multilateral and bilateral creditors: - April 2012: agreement with Japan on debt restructuring including bridge loan and cancellation/rescheduling of arrears. - January 2013: World Bank and Asian Development Bank arrears resolved with bridge financing from Japan. - Late‑January 2013: Paris Club agreed treatment to be completed in early 2014: write off 50 percent of all arrears and reschedule remaining over 15 years with a 7 year grace period; phased write‑off (25 percent immediately, 75 percent on successful completion of the SMP). Japan signed minutes but maintains more generous treatment previously announced. Norway wrote off 100 percent of its outstanding debt. - March 2013: Italy signed an agreement to cancel 50 percent of all arrears and conduct a debt‑for‑development swap on the remainder. - Authorities’ aims: - Gradually reduce reliance on external nonconcessional financing, - Use nonconcessional external borrowing only for economically viable projects in priority sectors (energy and infrastructure), - Keep fiscal deficit in FY2013/14 and over the medium term broadly unchanged at around 5 percent of GDP. ### Key macroeconomic assumptions underlying the baseline DSA (FY2013/14–33/34) - Real GDP growth: - Assumed to average about 7 percent over the medium term. - Expected to increase to 7.5 percent in 2033/34. - Inflation (GDP deflator): - Projected on average at 5.6 percent (y/y) in the medium term. - Expected to reach around 4 percent in FY2033/34. - Primary fiscal deficit of the nonfinancial public sector (in percent of GDP): - Expected to widen from 2.1 percent in FY2012/13 to 3.2 percent in the medium term. - Exports (percent of GDP): - Assumed to average 24.7 percent in the medium term. - Projected to average around 30.7 percent during FY2019/20–FY2033/34. - Imports (percent of GDP): - Assumed to average 27.8 percent in the medium term. - Projected to average 35.7 percent during FY2019/20–FY2033/34. - Current account (including official grants): - Registered a deficit of about 4.4 percent in FY2012/13; expected to remain in deficit in the medium term and stabilize around 5 percent of GDP over the long term. - Public domestic debt composition as of end‑FY2012/13: - Around 35 percent in the form of treasury bonds; the rest in treasury bills (bearing nominal interest rate of 4 percent). - Treasury bonds issued in maturities of two, three, and five years, with fixed nominal interest rates of 8.75, 9, and 9.5 percent, respectively. - Financing of the deficit: - Combination of domestic public borrowing and foreign loans, including bilateral and multilateral creditors. - Short term: reliance on nonconcessional external financing and increasingly on issuance of treasury bonds. - Medium term: share of external financing expected to increase, especially concessional sources; treasury bond issuance expected to continue to develop domestic treasury bond market and facilitate move to treasury security auctions. ### DSA quantitative indicators (selected) - Indicative thresholds and actuals (End 2012/13; End 2013/14): - NPV of debt as a percent of GDP: Threshold 30; End 2012/13: 22.1; End 2013/14: 15.9 - NPV of debt as a percent of Exports: Threshold 100; End 2012/13: 106.8; End 2013/14: 72.7 - NPV of debt as a percent of Revenue: Threshold 200; End 2012/13: 96.5; End 2013/14: 68.6 - Debt Service, as a percentage of Exports: Threshold 15; End 2012/13: 2.2; End 2013/14: 4.2 - Debt Service, as a percentage of Revenue: Threshold 18; End 2012/13: 2.0; End 2013/14: 3.9 ### External debt sustainability findings - Completing resolution of remaining arrears in 2013/14 is essential to bring all external debt indicators below indicative thresholds in 2013/14. - First phase of arrears resolution in 2012/13 improved debt burden indicators; NPV of debt as a percent of exports remained above threshold in 2012/13. - Under baseline with completion of second phase, all external indicators below thresholds at end‑FY2013/14; e.g., PV of debt‑to‑GDP decreases from about 22 percent in FY2012/13 to 16 percent in FY2013/14. - Vulnerabilities to export shocks and exchange rate depreciation; export shock leads to temporary breach of PV of debt‑to‑exports threshold, but timing and project contractual commitments mitigate risks. ### Public debt sustainability findings - Public debt burden indicators (including domestic public debt) improve initially due to planned arrears resolution: - Nominal debt stock projected to decrease from 48.0 percent in 2012/13 to 41.9 percent in 2013/14. - Thereafter, public debt burden indicators remain broadly unchanged despite robust growth, reflecting significant development needs and assumed overall fiscal deficits. - Public sector domestic debt noted as high; mitigation from expected decline in share of nonconcessional financing. - Stress tests show vulnerabilities to: - Lower real GDP growth, - Large and persistent primary fiscal deficits. - Policy recommendations to reduce vulnerabilities: - Prudent fiscal policy, - Improvements in tax policy and public financial management, - Strengthening of debt management functions, - Better project assessment capability to identify projects with good economic returns, - Capacity to obtain more concessional financing. *International Monetary Fund — Staff Report excerpts from the Myanmar 2013 DSA and program monitoring sections.* ### 9. Myanmar is assessed to be at low risk of debt distress given its planned resolution of arrears. ### 9. Myanmar is assessed to be at low risk of debt distress given its planned resolution of arrears. ### Assessment and rationale - Myanmar is assessed to be at low risk of debt distress under the baseline scenario. - This assessment is in line with the previous DSA undertaken in November 2012. - Developments since November 2012 that support the DSA analysis: - a successful arrears rescheduling process consistent with assumptions; and - continued strong economic performance with enhanced growth prospects. - The baseline scenario assumes a resolution of the remaining arrears in 2013/14 as agreed with the Paris Club. - The resolution of arrears with the Paris Club creditors will improve all debt burden indicators. ### Risks and stress scenarios - Under the baseline scenario, the indicative threshold for the PV of debt-to-export ratio is temporarily breached under the export shock. - Risk-mitigating factors for the export shock: - Myanmar’s good track record in implementing large natural gas projects; and - contractual purchase commitments of project partners. - Remaining vulnerabilities: - overall public debt sustainability is vulnerable to fiscal slippages and low real GDP growth; and - vulnerability is heightened by relatively high domestic debt levels. ### Policy implications and recommendations - The assessment underscores the importance of: - diversifying Myanmar’s export base; and - prudent fiscal policy to guard against fiscal slippages. - Additional policy priorities: - improvements in tax policy to reduce reliance on nontax revenues from nonrenewable sources; and - enhancements in public financial and debt management. *Source: IMF staff assessment as presented in the referenced DSA section.* ### 10. The authorities broadly agreed with these conclusions and with the thrust of the analysis. ### _cr13250 - 10. The authorities broadly agreed with these conclusions and with the thrust of the analysis. ### Summary of authorities' views and policy stance - The authorities broadly agreed with the staff conclusions and with the thrust of the analysis. - They concurred with staff on the need to be cautious on nonconcessional borrowing. - They acknowledged the importance of maintaining high exports in light of the temporary breach of the threshold. ### Debt sustainability and stress-test context - The most extreme stress test is defined as the test that yields the highest ratio in 2023. - In figure b. it corresponds to a One-time depreciation shock; in c. to an Exports shock; in d. to a One-time depreciation shock; in e. to an Exports shock; and in figure f. to a One-time depreciation shock. - Revenues are defined inclusive of grants. ### Key projections and indicators (selected) - Exports (in percent of GDP or as presented): 18.3, 19.3, 20.7, 21.9, 24.4, 24.9, 25.0, 25.8, 26.2, 29.0, 35.0 - Imports (in percent of GDP or as presented): 18.4, 20.7, 24.7, 25.0, 26.6, 27.4, 28.0, 29.2, 30.3, 33.9, 40.0 - Net FDI (negative = inflow): -4.5, -3.7, -5.2, -3.1, 1.1, -3.8, -3.9, -4.3, -4.6, -4.6, -4.7, -5.5, -5.0, -5.4 - Non-interest current account deficit (selected series): 1.3, 1.4, 4.3, -1.0, 4.2, 4.0, 4.2, 4.3, 4.3, 4.3, 4.2, 4.5, 4.7, 4.7 - PV of external debt (selected years): 22.1, 15.9, 16.2, 16.4, 16.3, 16.2, 16.1, 14.8, 14.9 - In percent of exports (selected years): 106.8, 72.7, 66.6, 65.9, 64.9, 62.7, 61.3, 51.1, 42.6 - PV of PPG external debt (selected years): 22.1, 15.9, 16.2, 16.4, 16.3, 16.2, 16.1, 14.8, 14.9 - In percent of government revenues (selected years): 96.5, 68.6, 68.7, 68.0, 66.2, 64.8, 63.1, 57.8, 54.9 - Debt service-to-exports ratio (in percent, selected): 7.6, 10.7, 2.2, 4.2, 3.9, 3.7, 4.2, 3.7, 3.4, 3.6, 2.3 - PPG debt service-to-revenue ratio (in percent, selected): 12.2, 17.2, 2.0, 3.9, 4.0, 3.8, 4.3, 3.8, 3.5, 4.0, 2.9 - Total gross financing need (Billions of U.S. dollars, selected): -0.7, 0.1, -0.1, 0.8, 1.0, 0.9, 0.8, 0.8, 0.6, 0.3, 2.9 - Non-interest current account deficit that stabilizes debt ratio (selected): 8.6, 3.0, 6.7, 9.8, 3.6, 4.0, 4.3, 4.3, 4.2, 4.6, 4.6 ### Key macroeconomic assumptions (selected) - Real GDP growth (in percent, selected series): 5.3, 5.9, 6.4, 9.2, 4.3, 6.8, 6.9, 6.9, 7.0, 7.1, 7.1, 7.0, 7.4, 7.5, 7.4 - GDP deflator in U.S. dollar terms (change in percent, selected): 23.8, 6.9, -7.5, 12.7, 18.2, 0.7, 2.3, 2.9, 3.1, 3.2, 3.2, 2.6, 3.2, 3.0, 3.2 - Effective interest rate (percent, selected): 2.2, 3.9, 0.6, 1.7, 1.0, 1.3, 1.8, 1.7, 1.7, 1.6, 1.6, 1.6, 1.4, 1.3, 1.4 - Growth of exports of G&S (U.S. dollar terms, in percent, selected): 13.6, 19.4, 5.6, 14.8, 13.2, 14.0, 21.7, 12.1, 11.2, 13.8, 12.3, 14.2, 13.4, 13.1, 13.0 - Growth of imports of G&S (U.S. dollar terms, in percent, selected): 18.6, 27.7, 17.3, 19.7, 23.9, 9.0, 16.0, 13.7, 12.9, 14.9, 14.8, 13.5, 13.0, 12.5, 12.9 - Grant element of new public sector borrowing (in percent, selected): 21.7, 24.4, 26.7, 26.9, 27.1, 28.2, 25.8, 29.4, 26.3 - Government revenues (excluding grants, in percent of GDP, selected): 11.4, 12.0, 22.9, 23.2, 23.6, 24.1, 24.6, 24.9, 25.4, 25.7, 27.2, 26.3 ### Memorandum and other items (selected) - Nominal GDP (Billions of U.S. dollars, selected): 49.6, 56.2, 55.3, 59.4, 65.0, 71.5, 78.9, 87.2, 96.4, 159.9, 450.8 - PV of PPG external debt (Billions of U.S. dollars, selected): 11.9, 9.3, 10.4, 11.6, 12.7, 14.0, 15.4, 23.6, 67.1 - Gross workers' remittances (Billions of U.S. dollars, selected): 0.2, 0.4, 0.5, 0.5, 0.6, 0.6, 0.7, 0.7, 0.8, 1.1, 2.4 ### Scenarios and sensitivity analysis (high-level) - Alternative scenarios and bound tests presented include: - A1. Key variables at their historical averages in 2013–2033. - A2. New public sector loans on less favorable terms in 2013–2033 (assumes interest rate on new borrowing is by 2 percentage points higher than in the baseline). - Bound tests such as B1 (Real GDP growth at historical average minus one standard deviation), B2 (Export value growth shock), B3 (U.S. dollar GDP deflator shock), B4 (Net non-debt creating flows shock), B5 (Combination of shocks), and B6 (One-time 30 percent nominal depreciation relative to the baseline in 2014). - Select sensitivity outcomes (PV and ratios shown in tables): - PV of debt-to-GDP ratio (baseline and scenarios reported in tables). - PV of debt-to-exports ratio and PV of debt-to-revenue ratio under baseline and stress scenarios (detailed values provided in the tables). ### Policy implications highlighted - Exercise caution on accumulating nonconcessional debt to preserve sustainability. - Maintain high export performance to address the temporary breach of thresholds and reduce vulnerability under stress scenarios. - Monitor debt-service ratios and financing needs given projected gross financing needs and external debt metrics. *Source: IMF staff report content provided in the document _cr13250.* ### Introduction of open ### Introduction of open market operations ### Technical assistance and capacity building (Jun. 2012–May 2013) - Jun. 2012: Assisted the authorities in developing monetary operations through deposits and credit auctions. - Oct. 2012: Made a broad TA needs assessment of the central bank and provided recommendations which will further develop the work plan for resident advisors and determine what additional experts may be needed to supplement the work of the General Advisor. - Jan. 2013: Assisted the authorities in drafting implementing regulations to give effect to FX Management Law. - Mar. 2013: Provided advice on the transition to a more effective set of reserve requirements, interest rates liberalization, and liquidity management through T-bill auctions. - May 2013 (multi-topic, with the World Bank): Set a framework for assistance to the CBM on monetary operations, banking supervision, human resources and training. - May 2013 (banking supervision): Identified TA priorities and developed jointly with the authorities a strategic plan to identify products, sequencing and timing of TA in banking supervision. - STA engagements: - May 2012: Assessment of fiscal data compilation and dissemination practice, and recommended improvements. - Mar. 2013: CPI assessment and recommendations for a new CPI series based on the 2011 Household Income and Expenditure Survey (HIES). - Mar. 2013: Monetary and Financial Statistics—identified contributing items to the deficit financing QPCs of the Staff‑Monitored Program, investigated source data for key items, and determined reporting timeframe. - Apr. 2013: BOP Statistics—assessed BOP and IIP statistics and recommended a thorough review of the coding system used by the exchange transaction registry of banks to conform to BOP needs. ### World Bank–IMF collaboration (May 2013) - Country teams led by Mr. Davies (IMF) and Ms. Dixon (World Bank) maintain excellent working relations and increasing regular coordination as both institutions scale up engagement in Myanmar. - Following clearance of arrears to IDA in January 2013, the Bank resumed normal lending relations; four IDA lending projects in the pipeline scheduled for delivery within the next 12 months. - Joint products and missions: - Joint IMF‑WB Financial Sector Technical Assistance Plan note specifying collaboration areas and lead institution roles. - Joint missions in financial sector strategy, bank supervision, Central Bank Law, Financial Institutions Law. - Joint missions in public financial management, including a PFM Foundational Course and a Debt Sustainability Analysis. - Agreement to collaborate on macro‑fiscal analysis chapter of the Public Expenditure Review (PER). - Recent key cooperation areas: - Macroeconomic policy advice: WB representatives participate in IMF Article IV and SMP missions; staffs discuss macroeconomic policies and messages to authorities. - Structural reforms: Joint work and shared views on structural reforms for investment climate, private sector development, and social development. - Shared reform priorities (as identified by Fund and WB): - Promoting long-term growth and diversification by enhancing business and investment climate, encouraging financial sector development, and further liberalizing trade and FDI. - Foreign exchange policy: finalize unification of the exchange rate, remove remaining current account restrictions, develop an interbank foreign exchange market, remove restrictions arising from foreign investment law, and issue comprehensive regulations for the foreign exchange management law. - Monetary policy: strengthen CBM capacity, enact CBM law to increase autonomy, conduct regular basic open market operations, reform reserve requirements, and develop reserve money forecasting and targeting framework. - Financial intermediation liberalization and supervisory strengthening: set bank capital and NPL definitions closer to international standards, strengthen enforcement of connected lending limits, improve banks’ risk management, and develop a plan to reform state‑owned banks. - Fiscal discipline and transparency: improve quality, timeliness, and transparency of government financial statistics (including SEEs), strengthen public financial management, establish a treasury function, and define fiscal responsibilities under planned decentralization; government committed to adopting EITI. - Prioritizing fiscal policies toward social and infrastructure spending: reallocate toward health, education, and infrastructure. - Avoiding a quasi‑fiscal deficit in the energy sector: recent electricity tariff adjustments welcomed to reduce QFD; elimination of QFD essential for financial viability and mobilizing investment. ### Joint Managerial Action Plan (June 2013–May 2014) — mutual work programs (summarized) - World Bank planned lending projects (pipeline) and analytical/advisory services include: - Myanmar Electric Power Project — Ongoing — Board date within next 12 months. - Telecommunications Sector Reform Project — Ongoing, Next mission in August 2013 — Board date within next 12 months. - Public Finance Management Modernization Project — To be determined — Board date within next 12 months. - Support to Education Project — To be determined — Board date within next 12 months. - Analytical/advisory: Public Expenditure Review (Ongoing — July 2014); PFM Reform strategy support (Ongoing — July 2013); Financial Management and Procurement Fiduciary Assessments (To be determined). - Myanmar Economic Brief, Myanmar Economic Monitor (biannual) — Ongoing — December, 2013. - Development Policy Note — Ongoing — September 30, 2013. - Support to Financial Sector Development — Ongoing — June 2014. - Myanmar EITI Preparation Support — To be determined — September 2014. - IMF planned work program next 12 months includes: SMP review (Late 2013); Article IV (Mid 2014); Conference on natural resource management (Late‑May 2013); follow‑up missions on LTO, AML/CFT, Article VIII; establishing treasury securities auction (August 2013); long‑term monetary operation advisor in TA office in Bangkok (September 2013); resident banking supervision advisor (September 2013); multi‑sector national accounts mission (Late‑June 2013); CPI follow‑up (July 2013); financial programming course and macroeconomic training (August 2013); development of Government Finance Statistics (Ongoing). ### Relations with the World Bank and the Asian Development Bank - World Bank: - Myanmar became World Bank member in 1952, IFC in 1956, and IDA in 1962. - Myanmar cleared full arrears to the Bank in January 2013, amounting to US$420 million through a bridge loan from the Japan Bank for International Cooperation; Bank resumed normal lending with an IDA credit to help repay the bridge loan. - Bank opened first country office in Myanmar on August 1, 2012; Interim Strategy Note (ISN) discussed on November 1, 2012; Board approved an US$80 million pre‑arrears clearance grant for a Community Driven Development Project. - Analytical/advisory services scaled up, including a Public Expenditure and Financial Accountability assessment funded by DFID; a PER underway. - Asian Development Bank (AsDB): - Myanmar joined AsDB in 1973; AsDB developed a road map toward resumption of normal operations in 2012. - AsDB interim country partnership strategy for 2012–2014 focuses on human resources and capacities, enabling economic environment, and access/connectivity (especially energy and transport). - Myanmar cleared arrears to AsDB in January 2013. - Historical AsDB assistance: 33 loans totaling US$1,107 million for 28 projects and one policy‑based operation; TA totaling US$21.8 million for 54 projects (16 approved since 2012 reengagement). - AsDB coordinates closely with IMF, World Bank, UNDP and other partners. - AsDB historical sector lending (as presented): - Agriculture and natural resources: 15 loans, 316.1 US$ million, 28.6 percent. - Energy: 4 loans, 26.8 US$ million, 2.4 percent. - Finance: 2 loans, 20.0 US$ million, 1.8 percent. - Health, nutrition, and social protection: 2 loans, 63.1 US$ million, 5.7 percent. - Industry and trade: 3 loans, 26.4 US$ million, 2.4 percent. - Public sector management: 1 loan, 575.7 US$ million, 52.0 percent. - Transport and communications: 2 loans, 42.5 US$ million, 3.8 percent. - Water supply, sanitation, and waste management: 4 loans, 36.0 US$ million, 3.3 percent. - Total: 33 loans, 1,106.6 US$ million, 100.0 percent. ### Statistical issues and data adequacy (Assessment of Data Adequacy for Surveillance) - General: Data provision has serious shortcomings—timeliness issues and wide divergences between official and independent estimates hamper effective surveillance. - National accounts: - Only annual national accounts with considerable delay. - Private sector coverage incomplete; lack of proper business directory for sampling. - GDP estimates do not fully account for informal sector activity. - Agricultural work‑in‑progress excluded; construction recorded based on permits; taxes and subsidies on products excluded. - Improvements needed for estimates of goods for processing, many services, and deflators for financial and insurance services. - Price statistics: - Current CPI weights based on 2006 HIES; weaknesses include urban‑only representation of weights, inclusion of some construction inputs, exclusion of rentals of owner‑occupied housing, no imputation for missing prices, and outdated classification. - CSO plans to introduce new CPI in early 2014 with weights based on HIES conducted in November 2012 and other methodological improvements. - Government finance statistics: - No comprehensive monthly or quarterly fiscal compilation; monthly cash‑based budget execution data available in local language but not published. - Annual comprehensive data compiled with delays up to 12 months after reference year. - Transactions of SEEs recorded partly on accrual and partly on cash basis; fiscal and monetary data inconsistent. - Budget estimates and actual expenditures differ widely; debt statistics recording not comprehensive. - Monetary and financial statistics: - Monetary survey covers central bank and all commercial banks; standardized report forms established in January 2012. - Quality improvements suggested: monitor consistency of reciprocal/interbank accounts, initiate data review and resolution of large inconsistencies, use electronic capture and sharing, consider market/fair value valuation in due course, and review IMF Accounts recording in CBM balance sheet. - External sector statistics: - Merchandise imports underestimated due to exclusion of military and other official imports and imports linked to FDI joint ventures with customs exemptions. - Trade data recorded at time of customs entries causing volatility and timing errors. - Many STA TA recommendations from 1999–2000 not implemented. - Goods, services, and income rely on mixed compilation methods with limited coverage; detailed services and financial flows data generally not available; transactions outside official banking system usually not estimated. - External debt not denominated in U.S. dollars evaluated irregularly; FDI flows not properly measured; IIP compilation relies on accumulation of BOP flows making positions unreliable. - Myanmar participating in a three‑year program to improve External Sector Statistics in Asia and the Pacific; first TA mission in May 2013 produced a work plan phased in two semesters. - First two objectives agreed with authorities by November 2013: (a) timely quarterly dissemination of BOP data; and (b) elaboration of external debt tables. - CBM viewed as able to improve data collection and dissemination on direct investment, other investment, and official reserves during 2013. - 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 with a lag of two to six months. BOP statistics have not been reported to STA for publication since 2007. No fiscal data reported to STA for publication in the IFS. Annual consolidated central government operations last reported for 2005 to STA for Government Finance Statistics Yearbook, lacking economic classification of expenditure. ### Table of Common Indicators Required for Surveillance (As of May 2013) — selected frequencies and dates - Exchange Rates: Date of latest observation 05/13; Date received 05/13; Frequency of data W; Frequency of reporting I; Frequency of publication M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 02/13; Date received 05/13; Frequency of data M; Frequency of reporting M; Frequency of publication I. - Reserve/Base Money: 02/13 (latest observation), 05/13 (received), M (data), M (reporting), M (publication). - Broad Money: 02/13 (latest observation), 05/13 (received), M (data), M (reporting), M (publication). - Central Bank Balance Sheet: 02/13 (latest observation), 05/13 (received), M (data), M (reporting), M (publication). - Consolidated Balance Sheet of the Banking System: 02/13 (latest observation), 05/13 (received), M (data), M (reporting), M (publication). - Interest Rates: 04/13 (latest observation), 05/13 (received), M (data), I (reporting), M (publication). - Consumer Price Index: 03/13 (latest observation), 05/13 (received), M (data), M (reporting), M (publication). - Revenue, Expenditure, Balance and Composition of Financing — General Government: FY 11/12 (Date of latest observation), 05/13 (Date received), A (data), I (reporting), NA (publication). - External Current Account Balance: FY 11/12 (latest observation), 05/13 (received), A (data), I (reporting), I (publication). - Exports and Imports of Goods: FY 12/13 (latest observation), 05/13 (received), M (data), M (reporting), M (publication). - GDP/GNP: FY 11/12 (latest observation), 05/13 (received), A (data), I (reporting), I (publication). - Gross External Debt: FY 12/13 (latest observation), 05/13 (received), A (data), I (reporting), I (publication). - International Investment Position: Q1 2012 (latest observation), 10/12 (received), Q (data), I (reporting), I (publication). ### IMF Press Release: IMF Executive Board Concludes 2013 Article IV Consultation with Myanmar (Press Release No. 13/287 — August 2, 2013) - Key recent developments and indicators: - Growth estimated at 6½ percent in fiscal year 2012/13 (April‑May), driven by gas production, construction and services. - Inflation climbed to 4.7 percent in March 2013. - External current account deficit estimated around 4½ percent of GDP in 2012/13; largely financed by foreign direct investment. - Auction‑determined reference exchange rate and informal rate have converged following kyat depreciation. - International reserves increased to US$4.6 billion at end‑March, covering 3¾ months of prospective imports; some reserves still held by state banks. - Broad money and private sector credit growing rapidly. - Fiscal deficit in 2012/13 estimated to have declined to 3¾ percent of GDP due to higher tax revenues. - Outlook and projections: - Growth expected to accelerate slightly in 2013/14, led by rising gas production and investment and a recovery in agriculture. - Inflation expected to remain contained at around 6½ percent (year‑on‑year). - International reserves projected to continue rising. - Broad money and credit expected to expand at double‑digit rates. - Budget deficit projected at around 5 percent of GDP after a mid‑year supplementary allocation. - Medium‑term: sustained and inclusive growth of around 7 percent is achievable with continued institutional and policy development, private investment support, and public spending on infrastructure, health, and education. - Risks stem from limited macroeconomic management capacity and emerging domestic price pressures. - Executive Board assessment highlights: - Commended authorities for progress in liberalizing the economy and advancing toward medium‑term macroeconomic stability and institutional development. - Emphasized need for careful sequencing and pace of reforms consistent with administrative capacity. - Fiscal policy: directors supported reorientation toward health, education, and infrastructure while maintaining debt sustainability; encouraged reduced monetization of fiscal deficit and development of a medium‑term fiscal framework. - Foreign exchange: welcomed managed float and convergence of formal and informal exchange rates; encouraged further reserve build‑up and full current account liberalization envisaged for the year. - Monetary policy: urged enactment of a new central bank law to establish autonomy and credibility; development of instruments for effective monetary operations; welcomed resumption of regular deposit auctions and removal of financing constraints on open market operations. - Financial sector: encouraged development of modern financial sector, strengthened supervision (including of foreign exchange operations and state banks), enhanced prudential regulations and capacity, improved licensing procedures, and addressing AML/CFT deficiencies. - Technical assistance: recognized importance of intensive, demand‑led, tailored TA; prioritized improvement of economic statistics. ### Selected economic indicators (2009/10–2013/14) — key figures - GDP (2012/13): US$55.3 billion. - Population (2010/11): 61.2 million. - Quota: SDR 258.4 million. - Real GDP (staff working estimates): 2009/10: 5.1; 2010/11: 5.3; 2011/12: 5.9; 2012/13: 6.4; 2013/14: 6.8 (percent change). - CPI (end‑period): 2009/10: 7.7; 2010/11: 8.9; 2011/12: -1.1; 2012/13: 4.7; 2013/14: 6.5. - Consolidated Public Sector (Percent of GDP): Total revenue: 2009/10: 10.7; 2010/11: 11.4; 2011/12: 12.0; 2012/13: 23.0; 2013/14: 23.4. Total expenditure: 2009/10: 15.6; 2010/11: 16.9; 2011/12: 16.6; 2012/13: 26.6; 2013/14: 28.4. - Net lending (+)/borrowing (‑): 2009/10: -4.9; 2010/11: -5.4; 2011/12: -4.6; 2012/13: -3.7; 2013/14: -5.0 (percent of GDP). - Domestic public debt (% of GDP): 2009/10: 18.7; 2010/11: 21.0; 2011/12: 22.5; 2012/13: 22.6; 2013/14: 22.4. - Broad money (percent change): 2009/10: 34.8; 2010/11: 36.3; 2011/12: 26.3; 2012/13: 69.9; 2013/14: 26.2. - Private sector credit (percent change): 2009/10: 36.9; 2010/11: 65.4; 2011/12: 60.1; 2012/13: 49.9; 2013/14: 36.8. - Current account balance (percent of GDP): 2009/10: -1.3; 2010/11: -1.9; 2011/12: -2.4; 2012/13: -4.4; 2013/14: -4.3. - Exports (percent of GDP): 2009/10: 19.9; 2010/11: 17.4; 2011/12: 17.9; 2012/13: 18.6; 2013/14: 19.9. - Imports (percent of GDP): 2009/10: -18.6; 2010/11: -16.5; 2011/12: -18.6; 2012/13: -22.5; 2013/14: -22.8. - Foreign direct investment, net (percent of GDP): 2009/10: 2.5; 2010/11: 4.5; 2011/12: 3.7; 2012/13: 5.2; 2013/14: 3.8. - Gross official reserves (millions of U.S. dollars): 2009/10: 2,809; 2010/11: 3,754; 2011/12: 4,026; 2012/13: 4,599; 2013/14: 5,537. - Reserves in months of total imports: 2009/10: 3.7; 2010/11: 3.9; 2011/12: 3.5; 2012/13: 3.7; 2013/14: 3.9. - Total external debt (billions of U.S. dollars): 2009/10: 13.8; 2010/11: 14.4; 2011/12: 15.3; 2012/13: 13.7; 2013/14: 11.7. - Total external debt (percent of GDP): 2009/10: 36.1; 2010/11: 29.0; 2011/12: 27.3; 2012/13: 24.8; 2013/14: 19.7. - External debt arrears (billions of U.S. dollars): 2009/10: 9.3; 2010/11: 9.9; 2011/12: 10.8; 2012/13: 4.8. - Exchange rates (kyat/$, end of period): Official exchange rate: 2009/10: 5.7; 2010/11: 5.4; 2011/12: 5.6; 2012/13: 880. Parallel rate: 2009/10: 1004; 2010/11: 861; 2011/12: 822; 2012/13: 878. - Memorandum items: - GDP (billions of kyats): 2009/10: 34,958; 2010/11: 39,847; 2011/12: 43,368; 2012/13: 47,433; 2013/14: 53,501. - GDP (billions of US$): 2009/10: 38.1; 2010/11: 49.6; 2011/12: 56.2; 2012/13: 55.3; 2013/14: 59.4. - GDP per capita (US$): 2009/10: 587; 2010/11: 742; 2011/12: 900; 2012/13: 868; 2013/14: 915. *Source: IMF staff report content as provided in the supplied document.* ### 1. On behalf of our Myanmar authorities, we would like to extend our sincere gratitude ### _cr13250 - 1. On behalf of our Myanmar authorities, we would like to extend our sincere gratitude ### Opening and reform stance - Authorities extend "sincere gratitude and appreciation to Mr. Matt Davies and his team" for discussions during the Article IV consultation and first review of the Staff Monitored Program (SMP). - Authorities acknowledge staff's positive assessment that "the authorities have achieved impressive progress in its reform agenda which has contributed to macroeconomic stability, strong growth and high investor interest." - Authorities note institutional and capacity constraints and emphasize careful deliberation to avoid unintended consequences. - Authorities "concurred with the broad appraisal in the staff report and would thoughtfully consider the recommendations therein." ### Recent economic development and outlook - Growth: - "Growth is estimated to rise to 6.7% in 2012/13, compared with the average growth rate of 5% in the previous five years." - "The authorities expect growth to accelerate more than 8% in 2013/14, mainly led by rising gas production and investment, services, construction and also recovery in agriculture sector..." - Staff's estimation of "potential higher growth prospects for 2013/2014" is noted as consistent. - Inflation: - "Inflation has increased to 4.7% in 2012/13, it remains moderate." - Authorities expect inflation "to remain contained at around 5.3% in 2013/14, with global commodity prices forecasted to decline." - External sector and reserves: - "The current account deficit is projected to widen to 4.4% in 2012/13 due to the increase in import of capital goods." - "International reserves have risen to US$ 4.6 billion at the end of March, 2013 which covers 3.75 months of imports." - Structural drivers: - Authorities highlight measures aimed at improving agricultural productivity, supporting industrialization and fostering SME growth as further strengthening growth outlook. ### Sectoral developments - Agriculture: - Agriculture "remains a major contributor to the GDP." - Reforms include "land reform, exemption of taxes on some export items and intensifying trade promotion especially with neighboring countries." - Agriculture, "including livestock and fishery is expected to contribute towards a higher growth rate." - Industry and services: - Industrial sector (manufacturing, power, energy, construction and mining) and services expected to contribute to higher growth. - Reforms cited: "diversification of economic structure, simplifying business registration, measures to facilitate corporatization and privatization, as well as opening up the private sector investment opportunities." - Services and trade growth supported by "rising exports with greater access to international markets, liberalization on export and foreign investment in the transportation and telecommunication sectors." - Infrastructure and energy: - Emphasis on "expansion of electric power generation," "discovering new oil and gas fields for domestic consumption," and investments in infrastructure. ### Fiscal policy and public financial management (PFM) - Fiscal reform strategy objectives: "inclusive, sustainable and equitable development and poverty reduction and upgrading standard of living." - Key reform measures: - "broadening the tax base, strengthening the tax administration, improving accountability and simplifying tax rate structure." - "Large Taxpayer Office is expected to be established in the very near future." - "Establishment of a working group and a treasury department in the Ministry of Finance and Revenue are also on track." - PFM reforms: - "comprehensive fiscal reform process including developing PFM strategy is also under process with the Fund’s technical assistance." ### Monetary and exchange rate policy - Exchange rate regime: - "pegged official exchange rate had been replaced by a managed float system since April 1, 2012 with technical support from the Fund." - "Foreign exchange auction is now being operated and Foreign Exchange Certificate is now being phased out gradually to maintain exchange rate stability and achieve the goal of exchange rate unification." - Authorities committed to "maintaining a flexible exchange rate policy that does not target a specific level, while smoothing fluctuations and maintain adequate international reserves." - Financial access and intermediation reforms: - Measures include "liberalizing the interest rate on deposits, easing restrictions on eligible collateral, lifting deposit-to-capital ratio and capital requirement for branch expansion, and granting foreign exchange operations to private banks." - Central Bank of Myanmar (CBM) autonomy and tools: - Expectation that "the new CBM Law, once enacted, will provide greater operational autonomy to the CBM." - Plan to "review the existing Financial Institutions of Myanmar Law, 1990 to establish a comprehensive legal framework." - Authorities "intend to accelerate progress" on developing monetary policy tools and "have begun holding bi-weekly deposit auctions and will include this as a new structural benchmark." - Current account liberalization and Article VIII obligations: - Authorities "reaffirmed their commitment to fully liberalize the current account transactions and fully accepting the obligations of Article VIII during the year." - "The Foreign Exchange Management Law, was enacted in August, 2012, with the aim of improving foreign exchange management and removing restrictions on current payments and transfers abroad." - "Rules relating to the said law are now in drafting stage." ### Financial sector modernization and stability - Reforms implemented: - "Eligible collateral has been expanded to include key agricultural export goods." - "Deposit rates have also been liberalized within a fixed corridor." - "The authorities have abolished the capital-to-deposit requirement, and eased capital requirements for the opening of new branches." - Introduction of "Credit cards and ATMs" and establishment of "a payment union for interbank settlements." - Foreign bank entry: - CBM will "allow foreign bank entry to participate in the banking sector in the form of Joint-Venture in the near future," consistent with "ASEAN Economic Community blueprint." - Authorities emphasize safeguarding financial stability and allowing domestic banks "sufficient room ... to develop capacity." - CBM "is currently in the process of finalizing the policy for admitting foreign banks." - Banking sector soundness and supervisory needs: - "Overall, the financial position of the banking sector remain sound with high level of capitalisation, adequate liquidity buffers, improved performance in profit earnings and manageable NPL level." - Authorities emphasize strengthening supervisory and regulatory framework and capacity building and seek continued Fund technical assistance. ### Anti-money laundering / counter-terrorist financing - Legal reforms: - "The draft Counter Terrorism Law has been finalized and is in the process of being submitted to the Parliament." - "The new Control of Money Laundering Law is being redrafted with the assistance of the Fund’s technical assistance..." - Myanmar "remained committed to implement a strong AML/CFT system and to address the remaining deficiencies in its AML/CFT regime." ### Statistics and technical assistance - Authorities agree on the importance of improved statistics for Fund surveillance and policy formulation. - Authorities appreciate Fund TA "on compilation of CPI and National Account in the first stage" and "look forward for further technical support in this area." ### SMP performance and outlook - SMP achievements: - "The authorities have made good progress in meeting all the benchmarks set for the program, including building the international reserves of CBM and improving the functioning of the foreign exchange market." - Expectations: - "Further progress can be expected during the year towards the program objectives and the authorities are on the right track to meet the quantitative and structural benchmarks for September 2013." ### Conclusion and sequencing - Authorities acknowledge "significant progress" and a "favourable" growth outlook but are "mindful of the challenges ahead especially in the area of institutional and capacity building." - Reform pace: - Authorities state "the pace of changes would have to be commensurate with the implementation capacity of the authorities and existence of appropriate preconditions and safeguards." - Emphasize "the need for appropriate sequencing of measures" to ensure smooth reform and maintain macroeconomic stability. - Appreciation and cooperation: - Authorities "would like to express their sincere gratitude to the Fund, the World Bank and the ADB for their continuous support and invaluable input" and "look forward to continued cooperation in the years to come." *Source: Statement on behalf of the Myanmar authorities (IMF content unit _cr13250).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13250.pdf_