## MYANMAR

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---

### INTRODUCTION
- Myanmar is undergoing a rapid economic transition with reforms focusing on liberalization of the foreign exchange, trade and foreign investment regimes, and establishment of special economic zones (SEZs).
- Initial reforms are attracting foreign investment in telecommunications, infrastructure, financial, and manufacturing sectors.
- Authorities’ capacity is strained by simultaneous implementation of numerous reforms.
- Provisional 2014 Census indicates a population of 51.4 million.

### RECENT DEVELOPMENTS, OUTLOOK, AND RISKS
- Growth and external balance
  - Output growth estimated at 8¼ percent in 2013/14, driven by construction, manufacturing and services, and supported by agriculture.
  - Current account deficit estimated at 5½ percent of GDP in 2013/14.
  - External financing: FDI, new loans, and inflows related to telecommunications licenses more than financed the current account deficit.
- Prices, reserves, and monetary aggregates
  - Inflation broadly stabilized, at 6 percent (y/y) in May 2014.
  - Exchange rate: depreciated in 2013 then stabilized.
  - International reserves held by the CBM increased to US$4.5 billion by end-March, covering nearly 3 months of prospective imports.
  - Broad money and private sector credit growth: 32 and 58 percent (y/y) respectively in February.
  - Reserve money growth decelerated to 14 percent (y/y).
- Fiscal balances
  - Underlying fiscal deficit (excludes one-off telecommunications license revenues) estimated to have declined to 3 percent of GDP in 2013/14.
  - Headline deficit estimated at 1½ percent of GDP in 2013/14.
- Staff outlook and projections
  - Growth expected to average 8¼ percent in the next few years, led by rising gas production and investment.
  - Inflation expected to remain under control at around 6 percent over the medium term.
  - Current account deficit projected to remain elevated as FDI-related imports are balanced by rising exports and transfers.
  - CBM international reserves forecast to continue to increase rapidly as foreign inflows intensify.
  - Reserve money growth projected to remain contained provided CBM undertakes significant sterilization; broad money and credit to continue expanding at double-digit rates.
  - Underlying fiscal deficit set to widen to around 5½ percent of GDP in 2014/15, with headline deficit around 4½ percent of GDP due to further one-off revenues.
  - Medium-term underlying fiscal deficit projected to decline below 5 percent of GDP as tax revenues increase gradually with administration reforms.
- Risks
  - Main risks are domestic: thin external and fiscal buffers, stretched administrative capacity to develop/implement policies and absorb TA.
  - Fiscal strains from increasing tax exemptions, higher expenditure pressures, and external borrowing for off-budget operations raising contingent liabilities.
  - Financial sector risks: entry of foreign banks will burden supervisory capacity and challenge monetary/exchange rate management.
  - Upside risk: possible large one-off inflows from concession fees for oil and gas exploration.
  - DSA indicates Myanmar, following completion of arrears clearance with Paris Club creditors, is at low risk of external debt distress; public debt expected to remain close to, albeit below, the indicative benchmark.
- Institutional support
  - IMF TA will be scaled up in central banking and statistics; priorities include building CBM systems and policies, enhancing tax policies and systems, strengthening public financial management (PFM), and improving statistics and macroeconomic analysis.

### MAINTAINING MACROECONOMIC STABILITY
- Exchange rate and reserves
  - Exchange rate appears broadly in line with fundamentals but reserves remain low relative to adequacy metrics (5–6 months of imports).
  - Exchange rate depreciated by 15 percent between April 2012 and June 2014; export performance improved markedly; labor costs remain lowest in the region but other costs (particularly real estate) rising; external current account can be sustainably financed by FDI and aid.
- Inflation and credit
  - Inflation rose to 7.3 percent (y/y) in August 2013, declined to 6 percent in May 2014; likely to remain at this level due to administered electricity price increases and demand pressures.
  - Real estate prices in urban areas rising; financial depth low with credit to the private sector at only 15 percent of GDP.
- Monetary and fiscal interactions
  - CBM’s monetization of fiscal deficit declined further in 2013/14, but pressures on reserve money expected with widening fiscal deficit in 2014/15 and rising international reserves.
  - One-year transition period for new CBM law ended in July 2014, giving CBM budgetary autonomy.
- Short-term fiscal outlook (select figures and points)
  - Authorities’ 2014/15 budget envisages overall deficit of 6 percent of GDP; staff projects headline deficit below 5 percent of GDP and underlying deficit about 5½ percent of GDP.
  - Budget includes about US$1.2 billion (2 percent of GDP) in nontax revenues from telecommunications licenses; US$750 million of these were received in 2013/14 after the budget was passed, and about US$375 million are expected to materialize in 2014/15.
  - Authorities project lower nominal Union Government tax revenues and SEE receipts budgeted to shrink by 1 percent of GDP.
  - Budget envisages increased transfers from Union to sub-national governments and a civil servants’ salary increase of kyat 20,000 (US$20) per month, leading to a rise in spending by around 0.4 percent of GDP.
- Staff monetary recommendations
  - Monetary policy must be more active in 2014/15: substantial sterilization required to keep reserve money and inflation under control; credit growth needs containment.
  - Reform reserve requirements per IMF advice; utilize CBM budgetary autonomy to scale up monetary operations for sterilization; absorb excess liquidity at Myanma Economic Bank (MEB) to make deposit auctions effective; retain direct control of interest rates until markets deepen.
  - Scale back deficit monetization rapidly; introduce treasury securities auctions; discontinue other CBM financing of fiscal operations (e.g., financing of MADB).
  - Strengthen CBM balance sheet by converting old government debt to the CBM into marketable treasury bonds at market interest rates and a range of maturities.
  - Establish automatic mechanism for transferring public sector foreign exchange earnings to CBM to replace ministerial approvals for ad-hoc sales.
  - Develop a strategy to manage international reserves to maximize returns and safeguard the thin reserves buffer.
- Fiscal strategy
  - Keep deficits below 5 percent of GDP to balance development needs and macro stability; broaden tax base, re-unify commercial tax rates, carefully prioritize expenditures, strictly limit and report loan-financed off-budget operations.

### SUSTAINING RAPID AND INCLUSIVE GROWTH
- Long-run potential and structural transformation
  - With appropriate policies and successful implementation of the Framework for Economic and Social Reforms (FESR), achieving average growth of around 7 percent over the next 20 years is within reach.
  - Industrialization and services expansion (telecommunications, transportation, banking, retail and wholesale trade) are key growth drivers.
  - Agriculture expected to grow more slowly but remain an important source of employment.
  - Further discoveries of natural resource deposits could add to growth prospects.
- Employment, urbanization, and demographics
  - United Nations project a decline in population growth from 1 percent in 2014 to ¼ percent by 2033, requiring faster employment shifts to higher-productivity sectors and rapid urbanization.
  - A hypothetical economy of 50 million inhabitants and a GDP of about US$65 billion could intensify competitive pressures in regional markets and FDI.
- Poverty and inclusion
  - Poverty around 26 percent; recent World Bank research suggests the rate may be even higher.
  - Poverty concentrated in coastal and hilly regions; around a half of the poor rely on agriculture.
- Natural gas revenues and fiscal management
  - Natural gas revenues can boost public investment but borrowing against future revenues risks absorption constraints and debt sustainability issues.
  - DIGNAR model simulations indicate gas revenue streams should finance a gradual scaling up in public investment while building fiscal space.
  - A sound and transparent fiscal regime for extractive industries, as envisaged by the Extractive Industries Transparency Initiative, would help realize revenue potential.
- Data and statistics
  - Statistics need urgent improvement; weak capacity and data shortcomings hinder economic policymaking and IMF surveillance.
  - Authorities recognize this and are seeking technical support from partners, including the IMF.
- Staff policy priorities for inclusive growth
  - Continued structural reforms and reallocation of public expenditure: invest in infrastructure, boost access to finance, reform agriculture, expand education and health services.
  - Transparent legal and regulatory frameworks to foster competition and attract investment.
  - Sound macroeconomic management to contain vulnerabilities accompanying long growth spells.

### FISCAL SPACE, TAXATION, AND PUBLIC INVESTMENT (STAFF RECOMMENDATIONS)
- Key recommendations and timing
  - Introduce a VAT as planned in 2018/19; groundwork should be laid soon.
  - Critical steps in the 2015 taxation bill:
    - (i) reduce exemptions from the commercial tax to a narrow range of well-defined consumption goods;
    - (ii) unify the commercial tax rate to facilitate enforcement and compliance;
    - (iii) reform the taxation of special consumption goods into a separate excise tax (requiring agreement on apportioning revenues to states and regions).
  - Strictly control ad-hoc tax exemptions.
  - Large Taxpayers Office (LTO) urgently needs taxpayers assigned; introduce unique taxpayer identification numbers and taxpayer self-assessment.
  - Fiscal decentralization and SEE finance reform must be carefully planned given capacity constraints and short-term impacts on Union finances.
  - Protect and expand public investment while resuming increases in social spending; prioritize expenditures and implement PFM strategy including at sub-national levels.
  - Establish treasury department in the MoF and develop capacity for cash flow forecasting, cash balance management, and treasury security issuance.
  - Introduce treasury securities auctions in time for the 2015/16 budget to reduce CBM financing and strengthen fiscal accounting and reporting.

### FINANCIAL SECTOR MODERNIZATION
- Background and developments
  - Authorities plan to grant licenses to 5–10 foreign bank branches during 2014.
  - Modernized Banking and Financial Institutions Law in final stages; modernized prudential regulations drafted.
  - CBM supervisory capacity is being upgraded with IMF TA support.
  - Parliament passed Anti Money Laundering and Counterterrorism Laws in 2014, but substantial deficiencies remain in the AML/CFT regime.
  - Foreign exchange auctions settled in overseas accounts; use of interbank market increasing but remains low.
  - Remaining key step toward Article VIII acceptance: issuance of a comprehensive set of regulations for the Foreign Exchange Management Law.
- Staff priorities and risks
  - Urgent need for CBM to define a unified playing field for foreign and domestic banks covering lending and deposits in foreign exchange, capital account flows, reserve and liquidity requirements.
  - Policies should limit dollarization and preserve CBM discretionary approval of capital flows.
  - Minimize number of new policy banks; tightly circumscribe their external borrowing; protect loan portfolio quality and supervise closely.
  - Strengthen supervision: expand and train CBM staff, including AML/CFT expertise; develop staff retention policies as foreign banks enter the labor market.
  - Reform state-owned banks, notably MFTB: options include transforming MFTB private-customer operations into a commercial bank, selling, closing, or absorbing policy functions into government; consider absorbing some staff into the CBM for reserve management.

### AUTHORITIES’ VIEWS AND ACTIONS
- Authorities’ priorities and commitments
  - Priority: set framework for CBM operations after transition period, restructure legacy treasury debt to CBM, formulate CBM budget, implement reserve requirement reforms.
  - Considering use of MEB’s excess liquidity to accelerate reduction of fiscal deficit monetization.
  - Committed to maintaining fiscal discipline, strengthening debt management, building a medium-term fiscal framework, and exploring mechanisms for saving windfall revenues.
  - Agreed on importance of broadening tax base and limiting exemptions.
  - LTO established in April 2014; Treasury Department in the Ministry of Finance established in September 2014.
  - Intend to move forward with treasury securities auctions by early 2015 and requested continued TA support.
  - Working with World Bank on fiscal decentralization and SEE reform.
  - Confident of accepting Article VIII obligations soon; foreign exchange regulations issuance in final stage and remaining restrictions in the Foreign Investment Law to be removed in redrafting.
  - Requested extension of Executive Board approval for the Multiple Currency Practice (MCP) until September 23, 2015 or the next Article IV consultation.

### POLICY ENDORSEMENTS AND STAFF APPRAISAL
- Staff appraisal highlights
  - Economic reform program is bearing fruit; growth expected to continue rising and inflation to remain broadly contained.
  - External position improving; risk of debt distress is low after arrears clearance.
  - Principal vulnerabilities: thin external and fiscal buffers, rising fiscal pressures, and constrained institutional capacity amid rising foreign inflows.
- CBM recommendations
  - Aggressively deploy monetary policy tools to manage foreign inflows; reduce fiscal deficit monetization; use inflows to build CBM international reserves.
  - Establish automatic mechanism firmly assigning CBM guardianship of state foreign exchange reserves.
  - Upgrade CBM internal systems urgently, particularly in accounting and reserves management.
- Fiscal recommendations
  - Keep deficits below 5 percent of GDP; strictly control off-budget borrowing and guarantees; strengthen cash and debt management capacity.
  - Reduce exemptions, unify commercial tax rate, introduce excise tax to lay foundation for VAT.
  - Strengthen tax administration, establish treasury department, improve budget transparency and reporting.

### KEY STATISTICS AND SELECT PROJECTIONS (select figures preserved exactly as in source)
- Growth and inflation
  - Real GDP growth (staff working estimates): 5.3, 5.9, 7.3, 8.3, 8.5, 8.5
  - CPI (period average): 8.2, 2.8, 2.8, 5.7, 6.6, 6.3
- Fiscal and public sector (percent of GDP)
  - Total revenue: 11.4; 12.0; 23.3; 24.8; 24.2; 24.0
  - Union government revenue: 6.3; 6.5; 9.5; 11.4; 10.4; 10.4
  - Of which: Tax revenue: 3.3; 3.9; 7.1; 7.2; 7.3; 7.4
  - SEE receipts: 7.0; 7.8; 15.3; 14.7; 14.3; 14.6
  - Total expenditure: 16.9; 16.6; 25.0; 26.5; 28.7; 28.6
  - Net lending (+)/borrowing (-): -5.4; -4.6; -3.4; -1.6; -4.5; -4.6
  - Domestic public debt: 21.1; 22.7; 22.8; 20.6; 21.1; 21.3
- Money and credit (percent change)
  - Reserve money: 30.5; 7.9; 34.2; 14.3; 28.0; 19.4
  - Broad money: 36.3; 26.3; 46.6; 33.8; 32.3; 26.4
  - Private sector credit: 65.4; 60.1; 50.5; 66.5; 44.7; 31.8
- External sector and reserves
  - Current account balance (percent of GDP): -1.2; -1.9; -4.3; -5.4; -5.3; -5.1
  - CBM reserves (in millions of U.S. dollars): 850; 922; 3,062; 4,546; 6,439; 8,783
  - CBM reserves (in months of total imports): 0.9; 0.8; 2.2; 2.9; 3.5; 4.3
  - Total external debt (billions of U.S. dollars): 14.4; 15.3; 13.7; 10.9; 11.9; 13.4
  - GDP (billions of US$): 49.6; 56.2; 55.8; 56.8; 65.3; 73.6
  - GDP per capita (US$): 998; 1,121; 1,103; 1,113; 1,270; 1,420

_International Monetary Fund — source: _cr14307_._

### 2014. The staff team comprised Mr. Davies (head), Messrs Kashiwase

### MYANMAR

### INTRODUCTION
- Myanmar is undergoing a rapid economic transition with reforms focusing on liberalization of the foreign exchange, trade and foreign investment regimes, and establishment of special economic zones (SEZs).
- Initial reforms are attracting foreign investment in telecommunications, infrastructure, financial, and manufacturing sectors.
- Authorities’ capacity is strained by simultaneous implementation of numerous reforms.
- Provisional 2014 Census indicates a population of 51.4 million.

### RECENT DEVELOPMENTS, OUTLOOK, AND RISKS
- Growth and external balance
  - Output growth estimated at 8¼ percent in 2013/14, driven by construction, manufacturing and services, and supported by agriculture.
  - Current account deficit estimated at 5½ percent of GDP in 2013/14.
  - External financing: FDI, new loans, and inflows related to telecommunications licenses more than financed the current account deficit.
- Prices, reserves, and monetary aggregates
  - Inflation broadly stabilized, at 6 percent (y/y) in May 2014.
  - Exchange rate: depreciated in 2013 then stabilized.
  - International reserves held by the CBM increased to US$4.5 billion by end-March, covering nearly 3 months of prospective imports.
  - Broad money and private sector credit growth: 32 and 58 percent (y/y) respectively in February.
  - Reserve money growth decelerated to 14 percent (y/y).
- Fiscal balances
  - Underlying fiscal deficit (excludes one-off telecommunications license revenues) estimated to have declined to 3 percent of GDP in 2013/14.
  - Headline deficit estimated at 1½ percent of GDP in 2013/14.
- Staff outlook and projections
  - Growth expected to average 8¼ percent in the next few years, led by rising gas production and investment.
  - Inflation expected to remain under control at around 6 percent over the medium term.
  - Current account deficit projected to remain elevated as FDI-related imports are balanced by rising exports and transfers.
  - CBM international reserves forecast to continue to increase rapidly as foreign inflows intensify.
  - Reserve money growth projected to remain contained provided CBM undertakes significant sterilization; broad money and credit to continue expanding at double-digit rates.
  - Underlying fiscal deficit set to widen to around 5½ percent of GDP in 2014/15, with headline deficit around 4½ percent of GDP due to further one-off revenues.
  - Medium-term underlying fiscal deficit projected to decline below 5 percent of GDP as tax revenues increase gradually with administration reforms.
- Risks
  - Risks mainly domestic: thin external and fiscal buffers, stretched administrative capacity to develop/implement policies and absorb TA.
  - Fiscal strains: increasing tax exemptions, higher expenditure pressures, external borrowing for off-budget operations increasing contingent liabilities.
  - Financial sector risks: entry of foreign banks will burden supervisory capacity and challenge monetary/exchange rate management.
  - Upside risk: possible large one-off inflows from concession fees for oil and gas exploration.
  - DSA indicates Myanmar, following completion of arrears clearance with Paris Club creditors, is at low risk of external debt distress; public debt expected to remain close to, albeit below, the indicative benchmark.
- Institutional support
  - IMF TA will be scaled up in central banking and statistics; priorities include building CBM systems and policies, enhancing tax policies and systems, strengthening public financial management (PFM), and improving statistics and macroeconomic analysis.

### MAINTAINING MACROECONOMIC STABILITY
- Exchange rate and reserves
  - Exchange rate appears broadly in line with fundamentals but reserves remain low relative to adequacy metrics (5–6 months of imports).
  - Box 1 highlights: the exchange rate depreciated by 15 percent between April 2012 and June 2014; export performance improved markedly; labor costs remain lowest in the region but other costs (particularly real estate) rising; external current account can be sustainably financed by FDI and aid.
- Inflation and credit
  - Inflation rose to 7.3 percent (y/y) in August 2013, declined to 6 percent in May 2014; likely to remain at this level due to administered electricity price increases and demand pressures.
  - Real estate prices in urban areas rising; financial depth low with credit to the private sector at only 15 percent of GDP.
- Monetary and fiscal interactions
  - CBM’s monetization of fiscal deficit declined further in 2013/14, but pressures on reserve money expected with widening fiscal deficit in 2014/15 and rising international reserves.
  - One-year transition period for new CBM law ended in July 2014, giving CBM budgetary autonomy.
- Short-term fiscal outlook (Box 2 highlights)
  - Authorities’ 2014/15 budget envisages overall deficit of 6 percent of GDP; staff projects headline deficit below 5 percent of GDP and underlying deficit about 5½ percent of GDP.
  - Key fiscal points:
    - Budget includes about US$1.2 billion (2 percent of GDP) in nontax revenues from telecommunications licenses; US$750 million of these were received in 2013/14 after the budget was passed, and about US$375 million are expected to materialize in 2014/15.
    - Authorities project lower nominal Union Government tax revenues and SEE receipts budgeted to shrink by 1 percent of GDP.
    - Budget envisages increased transfers from Union to sub-national governments and a civil servants’ salary increase of kyat 20,000 (US$20) per month, leading to a rise in spending by around 0.4 percent of GDP.
  - Table excerpt (percent of GDP):
    - 2015/16   BudgetProj.            Proj.
    - Revenue and grants22.524.224.0
    - T ax revenue5.87.37.4
    - SEE rec eipts net of transfers to UG12.913.413.3
    - Other nontax revenue3.63.13.0
    - Grants0.30.40.4
    - Expenditure28.728.728.6
    - Expense19.920.019.6
    - Net ac quisition of nonfinancial assets8.88.89.0
    - Net lending (+)/borrowing (-)-6.1-4.5-4.6
    - Union Government-6.6-5.5-5.7
    - SEEs net of transfers to UG0.51.01.0
    - Underlying balance 1/-8.1-5.4-5.3
- Policy recommendations (Staff views)
  - Monetary policy must be more active in 2014/15: substantial sterilization required to keep reserve money and inflation under control; credit growth needs containment.
  - Steps needed: reform reserve requirements per IMF advice; utilize CBM budgetary autonomy to scale up monetary operations for sterilization; absorb excess liquidity at Myanma Economic Bank (MEB) to make deposit auctions effective; retain direct control of interest rates until markets deepen.
  - Scale back deficit monetization rapidly; introduce treasury securities auctions; discontinue other CBM financing of fiscal operations (e.g., financing of MADB).
  - Strengthen CBM balance sheet by converting old government debt to the CBM into marketable treasury bonds at market interest rates and a range of maturities to provide CBM income for operations and sterilization.
  - Establish automatic mechanism for transferring public sector foreign exchange earnings to CBM to replace ministerial approvals for ad-hoc sales.
  - Develop a strategy to manage international reserves to maximize returns and safeguard the thin reserves buffer.
  - Fiscal strategy: keep deficits below 5 percent of GDP to balance development needs and macro stability; broaden tax base, re-unify commercial tax rates, carefully prioritize expenditures, strictly limit and report loan-financed off-budget operations.
- Authorities’ views
  - Authorities prioritize setting framework for CBM operations after transition period, restructuring legacy treasury debt to CBM, formulating CBM budget, and implementing reserve requirement reforms.
  - Considering using MEB’s excess liquidity to accelerate reduction of fiscal deficit monetization.
  - Committed to maintaining fiscal discipline, strengthening debt management, building a medium-term fiscal framework, and exploring mechanisms for saving windfall revenues; agreed on importance of broadening tax base and limiting exemptions.

### SUSTAINING RAPID AND INCLUSIVE GROWTH
- Long-run potential
  - Myanmar’s long-run growth potential is substantial; with appropriate policies and successful implementation of the Framework for Economic and Social Reforms (FESR), achieving average growth of around 7 percent over the next 20 years is within reach.
  - Regional integration, including ASEAN Economic Community, could help integration into regional supply chains and promote inward investment.
- Constraints and priorities
  - Sustaining rapid and inclusive growth requires maintaining near-term macro stability while building institutional and policy frameworks for budget and financial sector management.
  - Capacity constraints have influenced the pace of structural reform; intensive, well-tailored capacity building and IMF TA in central banking and statistics are required.
  - Key short-term priorities: building CBM systems and policies, enhance tax policies and systems, strengthen PFM, improve statistics and macroeconomic analysis.

_International Monetary Fund_

### Box 3. Long-Run Growth

### Box 3. Long-Run Growth

### Growth drivers and structural transformation
- Successful episodes in the region were driven by sustained growth in industry and services supported by high public and private investment.
- Industrialization generally starts at the lower end of the value chain using cheap labor to produce for export markets, supporting gradual employment shifts from agriculture to industry.
- Utility and construction sectors, underpinned by high investment, contribute to growth across the economy.
- Services cited: telecommunications, transportation, banking, and retail and wholesale trade—these facilitate business activities and yield synergies for robust economic growth.
- Agriculture expected to grow at a slower pace but will continue to provide an important source of employment in rural areas.
- In Myanmar, further discoveries of natural resource deposits could add to growth prospects.

### Employment, urbanization, and demographic trends
- While the agricultural labor force is expected to gradually decline, employment in industry and services is likely to rise.
- China example: urbanization and internal migration raised the growth rate of the urban population to 4.4 percent a year on average during 1982–2002, compared to 1.2 percent growth in the total population during the same period.
- Myanmar population projection: United Nations project a decline in population growth from 1 percent in 2014 to ¼ percent by 2033—this will require more rapid shifts in employment to higher-productivity sectors and result in rapid urbanization.
- A hypothetical economy of 50 million inhabitants, and a GDP of about US$65 billion—could raise competitive pressures for some other Asian low-income countries (LICs) for markets and FDI, especially in the garment sector and in tourism.

### Poverty and inclusion
- The FESR focus: poverty reduction.
- Poverty has been declining in recent years but is still high, at around 26 percent. Recent World Bank research suggests the rate may be even higher.
- Poverty is particularly intense in coastal and hilly regions, where conflict is also most prevalent.
- Around a half of the poor rely on agriculture for their livelihood.

### Natural gas revenues and fiscal management
- If properly leveraged, Myanmar’s natural gas wealth has the potential to boost growth and development.
- Natural gas revenues represent an opportunity to expand public investment to help close infrastructure gaps and increase productivity and growth.
- Caution: international experience points to dangers of borrowing against future revenues to accelerate investment, which can lead to absorption capacity constraints and threaten debt sustainability.
- The IMF Research Department’s DIGNAR model was applied to analyze issues: simulations indicate future gas revenue streams should finance a gradual scaling up in public investment while building fiscal space to help maintain a stable macroeconomic environment.
- A sound and transparent fiscal regime for extractive industries, as envisaged by the Extractive Industries Transparency Initiative (which Myanmar has joined), would help realize revenue potential.

### Data and statistics
- Statistics need urgent improvement to enable effective economic planning and management.
- Weak capacity and data shortcomings are a significant obstacle to economic and social policymaking and hamper effective IMF surveillance.
- Authorities recognize improving economic statistics in their economic reform strategy and are seeking technical support from partners, including the IMF.

### Staff views on sustaining broad-based growth
- Continued structural reforms and reallocation of public expenditure are required.
- Critical areas: investments in infrastructure, boosting access to finance, and agricultural reform to spread economic opportunities and reduce rural poverty.
- A transparent legal and regulatory framework that fosters competition is indispensable to encourage domestic and international investment.
- Expansion of education and health services is needed to accelerate poverty reduction and improve productivity.
- Sound macroeconomic management is vital because long growth spells are often accompanied by a buildup in vulnerabilities that need careful management.

### Fiscal space, taxation, and public investment
- Fiscal space is limited: public finances are dependent on SEEs and natural resource revenues; tax revenues are very low and the tax base narrow due in part to widespread exemptions; social spending needs to rise.
- Public debt projected to remain close to the benchmark over the long term and breaches it in some scenarios.
- Off-budget external nonconcessional borrowing and guarantees for policy banks and microfinance pose risks to debt control and complicate fiscal management.
- Budget constraints could be eased short-term if fees for oil and gas exploration materialize.

Key staff recommendations and findings:
- Introduce a VAT as planned in 2018/19; groundwork should be laid soon.
- Critical steps to be taken in the 2015 taxation bill:
  - (i) reduce exemptions from the commercial tax to a narrow range of well-defined consumption goods;
  - (ii) unify the commercial tax rate to facilitate enforcement and compliance;
  - (iii) reform the taxation of special consumption goods into a separate excise tax (requiring agreement on apportioning revenues to states and regions).
- Strictly control ad-hoc tax exemptions.
- Large Taxpayers Office (LTO) urgently needs taxpayers assigned; introduce unique taxpayer identification numbers and taxpayer self-assessment.
- Fiscal decentralization and SEE finance reform must be carefully planned, taking capacity constraints and short-term impacts on Union government finances into account.
- Protect and expand public investment while resuming increases in social spending; prioritize other government spending and implement PFM strategy, including at sub-national levels.
- Establish treasury department in the MoF and develop technical capacity for cash flow forecasting, cash balance management, and treasury security issuance.
- Treasury securities auctions need to be introduced in time for the 2015/16 budget to reduce CBM financing and strengthen fiscal accounting and reporting; auctions will assist financial sector development by reducing excess liquidity and establishing market-determined interest rates.

### Fiscal decentralization: international lessons (Box 4 summary)
- Sequencing matters: resources should accompany assignment of spending responsibilities.
- Pace of decentralization should link to subnational capacity; asymmetric arrangements may be appropriate.
- Subnational governments should face effective budget constraints and be provided overall resource envelopes sufficient for assigned responsibilities.
- Control over a portion of own resources promotes accountability; assignment of own revenue should consider tax base mobility and administrative capacity (property and land taxes typically assigned to subnational governments).
- Intergovernmental transfers are needed and should be designed to minimize fiscal vulnerability to cyclical fluctuations and address regional inequalities.
- Subnational borrowing needs careful control to ensure fiscal discipline; market discipline is rarely effective in low-income countries.

### Financial sector modernization
Background and developments:
- Expansion and modernization accelerating: authorities plan to grant licenses to 5–10 foreign bank branches during 2014.
- Proposals for further policy banks following the two licensed in 2013.
- A modernized Banking and Financial Institutions Law is in the final stages of drafting; modernized prudential regulations have been drafted.
- CBM’s supervisory capacity is being upgraded with IMF TA support.
- Parliament passed Anti Money Laundering and Counterterrorism Laws in 2014, but substantial deficiencies remain in the AML/CFT regime.
- Foreign exchange auctions are now settled in overseas accounts, improving foreign exchange market efficiency.
- Use of the interbank market is increasing but remains low.
- Remaining key step toward Article VIII acceptance: issuance of a comprehensive set of regulations for the Foreign Exchange Management Law.

Staff views and priorities:
- Entry of foreign banks will likely trigger a sea-change in capital, banking and financial markets; urgent need for CBM to define a unified playing field for foreign and domestic banks.
- Policies needed urgently on: lending and deposits in foreign exchange; capital account flows; foreign exchange reserve and liquidity requirements.
- Policies should contain macroeconomic risks (including by preserving CBM’s discretionary approval of capital flows) while limiting dollarization.
- Principle: establish a strengthened, rules-based, transparent regulatory environment before foreign banks commence operations.
- Use foreign bank entry to modernize domestic financial sector through cooperation and learning.

Risks and reforms:
- Expansion of policy banks is concerning: they generate fiscal risks and further segment the financial sector; international experience shows policy banks often make poor lending decisions and incur large losses that the government covers.
- Minimize the number of new policy banks and tightly circumscribe their external borrowing; protect loan portfolio quality, supervise closely, and ensure level playing field with commercial banks.
- Strengthen supervision: enforce macro- and microprudential regulations amid rapid credit growth; expand and train CBM supervisory staff, including AML/CFT; develop policies to attract and retain qualified staff as foreign banks enter the labor market.
- Reform state-owned banks, particularly the MFTB: anticipate reduced role when foreign exchange reserves are channeled to the CBM; explore options to transform MFTB private-customer operations into a commercial bank, sell, or close; absorb remaining policy functions into the government; consider absorbing some staff into the CBM for expanded reserve management.

### Authorities’ views (summarized)
- Authorities agreed reforms are needed on many fronts; cited rising public investment, increased electricity generation, and progress in developing SEZs as achievements.
- They reiterated commitment to preserving macroeconomic stability with emphasis on containing inflation.
- Stressed importance of financial sector development including through mobile telephony.
- Explained many exemptions and special regimes in the 2014 taxation bill were inserted by the legislature; intend to reform taxation of special consumption goods in next year’s taxation bill.
- Expect LTO to manage taxpayers as per original implementation plan and are taking measures to reduce tax evasion.
- Determined to move forward with treasury securities auctions by early 2015 and establish the treasury department in the MoF; requested continued TA support.
- Working closely with the World Bank on fiscal decentralization and SEE reform.
- Confident they would be able to accept Article VIII obligations soon; indicated foreign exchange regulations issuance was in its last stage and remaining restrictions in the Foreign Investment Law would be removed in redrafting.
- Requested extension of Executive Board approval for the Multiple Currency Practice (MCP) arising from the foreign exchange auction.
- Acknowledged challenges from foreign bank entry on a tight timeline; requested additional TA to establish policy and regulatory frameworks and capacity building for supervision.

*Source: _cr14307 - Box 3. Long-Run Growth*

### 39.      The authorities also acknowledged the risks associated with the creation of policy

### _cr14307 - 39.      The authorities also acknowledged the risks associated with the creation of policy

### Authorities' rationale and risk-mitigation options for policy banks
- Authorities acknowledged risks associated with the creation of policy banks.
- Political imperatives lead authorities to consider policy banks as a means to develop the economy where market-based incentives would under-serve segments of the population or specific sectors such as agriculture.
- Options being explored to mitigate risks:
  - Consolidation of policy banks into one national development bank.
  - Regionalization.
  - State bank reform measures, including:
    - Transforming MFTB into an export-import bank.
    - Eventually transforming MEB into a development bank.

### Staff appraisal — macroeconomic outlook and challenges
- The authorities’ economic reform program is bearing fruit, but challenges remain daunting.
- Key assessments:
  - Economic growth is expected to continue rising.
  - Inflation should remain broadly contained, though risks remain.
  - The external position is improving.
  - The risk of debt distress is low.
  - Sectoral reforms are advancing and are expected to trigger large investments, most notably in telecommunications and banking.
- Principal vulnerabilities:
  - External and fiscal buffers remain thin.
  - Fiscal pressures are rising.
  - Macroeconomic management challenges will increase with rising foreign inflows, placing further strain on already stretched institutional capacity.

### Recommendations for the Central Bank of Myanmar (CBM)
- The CBM needs to take action on multiple fronts.
- Monetary policy and reserves management:
  - Monetary policy tools need to be more aggressively deployed to manage the impact of foreign inflows.
  - A continued reduction in deficit monetization is needed to ease the burden on these new tools.
  - Foreign inflows should enable a much-needed boost to the CBM’s international reserves.
  - An automatic mechanism is required that firmly establishes the CBM as the guardian of the state’s foreign exchange reserves.
  - The CBM’s policy of smoothing exchange rate fluctuations while not targeting a specific rate remains appropriate.
- Institutional upgrades:
  - The CBM’s internal systems urgently need to be upgraded, particularly in accounting and reserves management.

*Source: IMF staff appraisal text from the provided content unit.*

### 42.      The current strategy of keeping deficits below 5 percent of GDP remains appropriate

### _cr14307 - 42.      The current strategy of keeping deficits below 5 percent of GDP remains appropriate

### Fiscal strategy and public financing
- Staff view: The current strategy of keeping deficits below 5 percent of GDP remains appropriate, but off-budget borrowing needs to be carefully controlled.
- Budget policy guidance:
  - Provide for a steady stream of spending even if revenues are volatile due to one-off receipts.
  - Treasury securities auctions need to be introduced to finance spending consistent with macroeconomic stability; this will require strengthening cash and debt management capacity.
- Risks noted:
  - Recent off-budget external non-concessional borrowing and guarantees for policy banks and microfinance pose risks to debt control and complicate fiscal management.
  - Increases in transfers to subnational governments without effective budget constraints could be a drain on government resources.
  - Reforming SEEs and separating them from the budget could trigger contingent liabilities and reduce a source of budget funding.

### Revenue mobilization and tax policy
- Increased tax revenue is crucial to allow increases in social spending and public investment.
- Recommended tax-policy measures:
  - Cut back exemptions.
  - Unify the commercial tax rate.
  - Introduce an excise tax which would lay the foundation for a VAT in the medium term.
- Public financial management:
  - Strengthen tax administration.
  - Establish a government treasury and improve budget preparation, execution, and transparency.
  - Off-budget borrowing should be strictly limited and reported to the legislature alongside the budget.

### Banking sector regulation and financial stability
- Urgent need to upgrade regulation and supervision of the banking sector ahead of the impending entry of foreign banks.
- Key supervisory priorities:
  - Strengthen supervision with adequate staff and financial resources.
  - Extend the supervisory perimeter to state banks.
  - Minimize the number of new policy banks, protect the quality of their loan portfolios, and tightly circumscribe their external borrowing, particularly if state-guaranteed.
  - Tightly circumscribe domestic activities in foreign currency, retain discretionary CBM approval for capital account flows, and strengthen supervisory capacity to limit dollarization and financial stability risks.
- Monetary and market reforms:
  - Continue development of monetary policy tools: basic open market operations, reform reserve requirements, refine reserve money forecasting/targeting, improve liquidity forecasting.
  - Establish a market for treasury bonds and develop cash and debt management capacity.
  - Reduce monetization of the fiscal deficit and use CBM deposit auctions more aggressively where appropriate.

### Technical assistance, statistics, and institutional capacity
- Continued intensive IMF TA is critical; coordination, prioritization and adaptation to Myanmar’s circumstances are essential given scarce administrative capacity and a broad agenda.
- TA focuses: central banking, financial sector supervision, revenue reform, public financial management (treasury), statistics, and macroeconomic analysis.
- Improving statistics to underpin economic management and IMF surveillance is crucial:
  - National accounts need major improvement; CPI methodology weaknesses; fiscal data are delayed and inconsistent; balance of payments coverage gaps.
  - STA three-year project and long-term GFS advisor planned; participation in GDDS began November 2013.
- Capacity constraints imply reforms must be prioritized and sequenced, with donor coordination.

### Policy endorsement and institutional calendar
- Staff support the authorities’ request for approval of a MCP subject to Fund jurisdiction under Article VIII, Section 3.
  - Rationale: MCP is maintained principally for non-balance of payments reasons; it does not materially impede balance of payments adjustments, does not harm other members, and does not discriminate among members.
  - Staff recommend Executive Board approval for its retention until September 23, 2015 or the conclusion of the next Article IV consultation, whichever is earlier.
- It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### Key statistics and projections (select figures from source)
- Fiscal stance and public sector:
  - Authorities aim to keep the fiscal deficit below 5 percent of GDP over the medium term.
  - Net lending (+)/borrowing (-): -5.4, -4.6, -3.4, -1.6, -4.5, -4.6 (for FYs shown in Table 1).
  - Tax revenue (Union government share examples): 3.3, 3.9, 7.1, 7.2, 7.3, 7.4 (percent of GDP over listed years).
- Monetary and financial:
  - Reserve money (y/y percent change examples): 30.5, 7.9, 34.2, 14.3, 28.0, 19.4.
  - Broad money (y/y percent change examples): 36.3, 26.3, 46.6, 33.8, 32.3, 26.4.
  - Credit to private sector (y/y percent change examples): 65.4, 60.1, 50.5, 66.5, 44.7, 31.8.
- External sector and debt:
  - Current account balance (percent of GDP examples): -1.2, -1.9, -4.3, -5.4, -5.3, -5.1.
  - CBM reserves (in millions of U.S. dollars): 850, 922, 3,062, 4,546, 6,439, 8,783 (for listed years).
  - Total external debt (billions of U.S. dollars): 14.4, 15.3, 13.7, 10.9, 11.9, 13.4.
- Growth and inflation:
  - Real GDP growth (staff working estimates): 5.3, 5.9, 7.3, 8.3, 8.5, 8.5 (for listed years).
  - CPI (period average examples): 8.2, 2.8, 2.8, 5.7, 6.6, 6.3.
- Debt sustainability:
  - IMF/World Bank assessment: Myanmar is assessed to be at low risk of debt distress following the clearance of external arrears in 2013/14.
  - Under the baseline, public and publicly guaranteed external debt burden indicators remain well below indicative thresholds; total public debt remains below the benchmark but vulnerable to shocks.

*Source: IMF staff report for Myanmar (2014 Article IV consultation), selections from the provided chapter/section.*

### introduction of a VAT. Directors stressed the need to strengthen public financial management.

### _cr14307 - introduction of a VAT. Directors stressed the need to strengthen public financial management.

### Key policy messages from Directors and Authorities
- Directors stressed the need to strengthen public financial management.
- Directors underscored the importance of upgrading regulation and supervision of the banking sector in anticipation of entry by foreign banks.
- Directors cautioned against the establishment of additional policy banks and encouraged the authorities to ensure that their operations do not pose financial and fiscal risks.
- Directors recommended addressing the remaining deficiencies in the anti-money laundering framework.
- Directors stressed that continued progress with structural reforms is necessary to ensure macroeconomic stability and spur inclusive growth, prioritizing:
  - investments in infrastructure,
  - expanding education and health services,
  - boosting access to finance,
  - improving the business climate,
  - diversifying exports,
  - improving economic statistics.

### Fiscal policy and public financial management (Authorities' statements and actions)
- 2014/15 Budget enacted in March 2014 with greater focus on priority socio-economic spending (education and health) and increased allocations to local governments for rural development and poverty alleviation.
- Authorities aim to keep the fiscal deficit below 5 percent of GDP.
- Commitments to increase tax revenue by:
  - strengthening tax administration,
  - broadening tax base,
  - simplifying the tax rate structure,
  - strengthening public debt management.
- Large tax-payers office (LTO) established in April 2014.
- Public finance management reforms under way to improve fiscal transparency, including:
  - reporting revenues from natural resources,
  - preparing the budget with ceilings and a medium-term fiscal framework,
  - improving public procurement outcome information,
  - issuing budget execution reports,
  - submitting audit reports to the parliament.
- New Treasury Department in the Ministry of Finance established in September 2014 to focus on cash management, debt management, and accounting and reporting.
- Introduction of treasury securities auctions is being considered; authorities intend to reform taxation of special consumption goods.
- Fiscal decentralization and SEE reform are being implemented in initial stages.
- Authorities emphasize transparency, accountability, and adherence to financial rules and audit codes.

### Monetary and exchange rate policy
- Progress reported in liquidity forecasting, deposit auction, reserve money targeting, and implementing a managed float exchange rate system.
- Authorities have reduced deficit monetization.
- Staff recommended introducing treasury securities auctions and converting old government debt to the CBM into marketable treasury bonds at market interest rate with a range of maturities.
- Authorities note potential inflationary pressures from capital inflows, rising credit growth, and expansionary government expenditure.
- Main instruments used to control inflation currently: liquidity forecasting and deposit auction; these have reduced CBM’s net foreign assets.
- Authorities agree with staff that substantial sterilization is required to keep reserve money and inflation under control.
- Authorities are considering using excess liquidity of Myanmar Economic Bank (MEB) to accelerate reduction of fiscal deficit monetization.
- Request to the Fund to retain a multiple currency practice subject to Fund approval under Article VIII, Section 3 until September 23, 2015 or the conclusion of the next Article IV consultation, whichever is earlier.
- Remaining step for Article VIII membership: issue regulations for the Foreign Exchange Management law; bill submitted to the parliament and expected to be enacted soon.

### Financial sector policy and reform
- Financial sector expanding and undergoing rapid modernization; regulation and supervision need continuous strengthening.
- Modernized Banking and Financial Institutions Law is in final stages of drafting; modernized prudential regulations drafted; CBM supervisory capacity being upgraded.
- Myanmar’s 20 year Financial Sector Development Plan (FSDP) runs from 2011/12 to 2030/31 with goals including:
  - implement net open position of foreign exchange for authorized dealer licensed private banks;
  - establish Yangon foreign exchange market;
  - modernize payment and settlement system;
  - improve investment opportunities and increase paid-up capital for SME development;
  - initiate and develop private insurance enterprises;
  - increase job opportunities through microfinance development.
- Implementation aided by technical assistance from IMF, WB, ADB and others; progress encouraging but human capacity constraints and weak institutional infrastructure remain.
- Current financial system structure (by most international standards, still small):
  - four state owned banks,
  - 23 private banks,
  - 42 foreign bank representative offices,
  - about 800 branches of banks,
  - one state-owned insurance company,
  - 12 private insurance companies,
  - 189 microfinance institutions licensed,
  - 3 upcoming policy-based banks,
  - impending entry of foreign banks,
  - nascent capital market.
- Regulatory reforms since 2011 include microfinance law (2011), foreign exchange management law (2012), new central bank law and securities exchange law (2013); drafting of new financial institutional law and issuance of regulations for central bank law and foreign exchange management law are in last stage.
- Authorities agree with staff that strengthening supervision and establishing a strengthened, rule-based and transparent regulatory environment should be completed before foreign banks commence operations.
- Anti Money Laundering and Counterterrorism law enacted in 2014; bylaws in their second draft. Authorities committed to address remaining deficiencies in AML/CFT regime.

### Structural reforms and capacity building
- Authorities acknowledge capacity constraints in implementing reforms and emphasize need for accelerated institutional capacity building.
- Authorities value technical assistance and support from the Fund, the World Bank, the ADB and regional countries and look forward to continued support.

### Selected economic indicators (2010/11–2015/16)
- Real GDP (authorities): 10.4; 5.9; 7.3; 8.7; 9.1; ...
- Real GDP (staff working estimates): 5.3; 5.9; 7.3; 8.3; 8.5; 8.5
- CPI (end-period): 8.9; -1.1; 4.7; 6.3; 5.9; 6.7
- CPI (period average): 8.2; 2.8; 2.8; 5.7; 6.6; 6.3
- Consolidated Public Sector (Percent of GDP) — Total revenue: 11.4; 12.0; 23.3; 24.8; 24.2; 24.0
- Union government revenue: 6.3; 6.5; 9.5; 11.4; 10.4; 10.4
- Of which: Tax revenue: 3.3; 3.9; 7.1; 7.2; 7.3; 7.4
- SEE receipts: 7.0; 7.8; 15.3; 14.7; 14.3; 14.6
- Grants: 0.0; 0.0; 0.1; 0.2; 0.4; 0.4
- Total expenditure: 16.9; 16.6; 25.0; 26.5; 28.7; 28.6
- Expense: 8.8; 9.8; 16.8; 18.2; 20.0; 19.6
- Net acquisition of nonfinancial assets: 8.0; 6.8; 8.1; 8.3; 8.8; 9.0
- Gross operating balance: 2.6; 2.2; 6.5; 6.6; 4.3; 4.4
- Net lending (+)/borrowing (-): -5.4; -4.6; -3.4; -1.6; -4.5; -4.6
- Domestic public debt: 21.1; 22.7; 22.8; 20.6; 21.1; 21.3
- Money and Credit (Percent change) — Reserve money: 30.5; 7.9; 34.2; 14.3; 28.0; 19.4
- Broad money: 36.3; 26.3; 46.6; 33.8; 32.3; 26.4
- Domestic credit: 34.4; 25.1; 5.1; 30.4; 32.5; 25.3
- Private sector credit: 65.4; 60.1; 50.5; 66.5; 44.7; 31.8
- Balance of Payments (Percent of GDP) — Current account balance: -1.2; -1.9; -4.3; -5.4; -5.3; -5.1
- Trade balance: 1.3; -0.3; -3.8; -4.7; -3.8; -4.3
- Exports: 17.8; 18.2; 18.6; 21.5; 22.9; 22.6
- Imports: -16.5; -18.6; -22.4; -26.2; -26.7; -27.0
- Financial account: 2.9; 3.7; 9.2; 9.0; 8.2; 8.3
- Foreign direct investment, net: 4.5; 3.7; 5.0; 4.6; 5.1; 5.2
- Overall balance: -0.9; -1.6; 3.8; 2.6; 2.9; 3.2
- CBM reserves (In millions of U.S. dollars): 850; 922; 3,062; 4,546; 6,439; 8,783
- CBM reserves (In months of total imports): 0.9; 0.8; 2.2; 2.9; 3.5; 4.3
- Total external debt (billions of U.S. dollars): 14.4; 15.3; 13.7; 10.9; 11.9; 13.4
- External debt (In percent of GDP): 29.0; 27.3; 24.6; 19.2; 18.2; 18.2
- Of which: External debt arrears (billions of U.S. dollars) 3/: 9.9; 10.8; 4.8; 0.0; 0.0; 0.0
- Terms of trade (in percent change): 0.0; 2.0; -2.2; -0.4; -0.5; -0.4
- Exchange rates (kyat/$, end of period) — Official exchange rate: 5.4; 5.6; 880; 964; ...; ...
- Parallel rate: 861; 822; 878; 965; ...; ...
- Memorandum items — GDP (billions of kyats) 4/: 39,847; 43,368; 47,851; 54,756; 63,323; 73,042
- GDP (billions of US$): 49.6; 56.2; 55.8; 56.8; 65.3; 73.6
- GDP per capita (US$): 998; 1,121; 1,103; 1,113; 1,270; 1,420

### Recent economic developments (authorities' summary)
- Real GDP growth estimated to rise from 7.3 percent in 2012/13 to 8.7 percent in 2013/14, driven by gas production, construction, manufacturing, services, trade, and supported by agriculture; projected to reach 9.1 percent in 2014/15.
- Consumer price inflation cited as 5.71 percent in 2013/14 due to increases in fuel, rent and food prices.
- Current account deficit expected to widen to 5.5 percent of GDP in 2013/14, mainly because of an increase in imports of capital goods.
- Exports increased by 24.8 percent and imports rose by 51.7 percent in 2013/14 compared to the previous year.
- Current account deficit largely financed by capital inflows, mainly FDI which stood at 4.6 percent of GDP in 2013/14.
- Gross international reserves increased from USD 3.1 billion in 2012/13 to USD 4.5 billion at end-March 2014, adequate to finance 3 months of imports.
- Credit to the private sector increased year on year by 50 percent in 2012/13 and 52 percent in 2013/14.
- Money growth recorded as 32.73 percent year on year in 2013/14 compared to the previous year.

*Source: _cr14307 - introduction of a VAT. Directors stressed the need to strengthen public financial management.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14307.pdf_