## _cr15267

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### Key policy recommendations
- Introduce a value-added tax.
- Limit tax incentives.
- Condition transfers to states and regions on implementation capacity.
- Further reprioritize expenditures to reduce the fiscal deficit.
- Implement the Extractive Industries Transparency Initiative Standard.
- Replace direct Central Bank of Myanmar (CBM) financing of fiscal deficits with Treasury bill issuance through auctions; allow the interest rate at T-bill auctions to rise to attract higher bid volumes and terminate CBM financing of fiscal deficits.
- Tighten monetary policy to reduce macroeconomic vulnerabilities arising from signs of overheating; maintain the October target date for implementation of the recalibrated reserve requirement.
- CBM should be prepared to increase the reserve requirement and scale up deposit auctions should signs of second-round effects from food price increases on inflation emerge.
- Withdraw liquidity from the banking system by stepping up deposit auctions and implementing the recalibrated reserve requirement.
- Enforce and, where needed, tighten existing prudential measures to contain credit growth and reduce financial sector risks.
- Speed up issuance of remaining prudential instructions and strengthen CBM supervisory capacity, particularly given the entry of nine foreign banks.
- Reform state-owned banks and strengthen supervision of policy banks and non-bank financial institutions to safeguard financial stability.
- Compile and release consistent financial soundness indicators.
- Implement measures on anti-money laundering and combating the financing of terrorism to protect Myanmar’s correspondence bank relationships.
- Continue structural reforms focusing on improving the business environment, financial inclusion, health services, and education.
- Strengthen institutional capacity with continued technical assistance and improve economic statistics to enhance macroeconomic management.

### Macroeconomic situation and outlook
- Recent developments:
  - Real GDP growth for 2014/15 is estimated at "8½ percent".
  - Inflation reached "8 percent (y/y) in May", up from "4 percent in October"; non-food inflation rose from "3¾ percent to 6 percent".
  - Import volumes grew by "28½ percent in 2014/15".
  - Credit to the private sector grew "35 percent (y/y) in March", down from "53½ percent in 2013/14".
  - Since late 2014, the kyat has declined by "about 20 percent" against the U.S. dollar.
  - At end-March 2015, CBM foreign reserves covered "around 3 months of imports", below the estimated adequate level of "5−6 months of imports".
- Staff projections and risks:
  - Economy expected to grow by "8½ percent" in 2015/16.
  - Projected fiscal deficit increase in the 2015/16 budget is "almost 2 percent of GDP".
  - CBM financing of the deficit likely to remain significant at "1 percent of GDP".
  - Private sector credit expected to expand by "about 45 percent".
  - Inflation expected to rise to "around 13 percent (end-year) in 2015/16".
  - Current account deficit expected to widen to "about 9 percent of GDP".
  - CBM foreign reserves projected to fall to "about 2½ months of imports".
  - Downside risks: lower natural gas prices, a sharper-than-expected slowdown in China, tightening of US monetary policy, uncertainty over Greece, and weak CBM regulatory and supervisory capacity.
  - Upside risk: a well-received election outcome and peace process could raise FDI inflows.

### Fiscal outlook and 2015/16 budget
- Authorities’ 2015/16 budget projects an overall fiscal deficit of just under "5 percent of GDP".
- Staff projects a deficit of "4¾ percent of GDP" after incorporating more plausible revenue and expenditure outcomes.
- The budget represents a fiscal expansion of nearly "2 percent of GDP" from last year, largely reflecting a substantial wage increase for public sector employees ("a little over 2 percent of GDP").
- Staff recommends reducing the fiscal deficit to about "4 percent of GDP" in 2015/16 as a countercyclical measure.
- Recommended adjustment measures:
  - Implement collection of the commercial tax on telecom services (previously postponed).
  - Reduce low-priority current spending, including on goods and services, and travel expenses.
  - Protect expenditures on health, education and infrastructure.
  - Contain transfers to Regions and States in line with their implementation capacity and spending responsibilities.
- Over the medium term, consider a new fiscal rule aimed at addressing volatile gas revenues.

### Fiscal sustainability and public debt
- Staff advised lowering the fiscal deficit target from "5 percent of GDP" to "4½ percent of GDP" over the medium to long term to safeguard fiscal sustainability.
- Emphasize prudent external borrowing with an emphasis on concessional loans.
- DSA findings:
  - Myanmar assessed to remain at low risk of debt distress under the baseline.
  - Public and publicly guaranteed external debt indicators remain well below indicative thresholds under the baseline.
  - Total public debt projected to rise over the long term; present value of total public debt as a percentage of GDP remains below indicative benchmark but vulnerable to shocks.
  - Stress tests: growth shocks and fiscal slippages can cause breaches in later years (examples: breach in 2023/34 under extreme growth shock; breach in 2033/34 when fixing the primary balance).
- Key DSA numeric highlights (selected series and projections are as presented in the source):
  - Public sector debt (selected series): "43.1", "34.8", "31.6", "33.4", "33.4", "33.6", "34.1", "34.7", "35.1", "38.0", "43.7".
  - PV of public sector debt (selected projection entries): "28.2", "29.4", "28.9", "28.8", "28.9", "29.2", "29.3", "30.9", "35.1".
  - Gross financing need (selected entries): "3.1", "2.5", "3.5", "5.7", "5.8", "5.8", "5.9", "6.1", "6.0", "5.9", "6.1".
  - PV of PPG external debt in percent of exports (selected projection entries): "45.4", "50.5", "47.3", "44.8", "45.2", "44.1", "44.0", "39.9", "38.1".
  - PV of PPG external debt in percent of government revenues (selected projection entries): "42.5", "58.4", "59.0", "58.2", "56.7", "55.7", "55.1", "56.9", "68.4".

### Monetary policy, liquidity management, and exchange rate
- Immediate policy priority: tighten monetary conditions to curb rapid credit growth, rising inflation, and widening current account deficit.
- CBM operational recommendations:
  - Terminate CBM direct deficit financing; conduct Treasury bill auctions with market-determined interest rates.
  - Mop up liquidity by scaling up deposit auctions.
  - Transition to the recalibrated reserve requirement (which excludes government bonds from liquid assets) by the set target date of early October (maintain October target date).
  - Tighten the CBM’s reserve money target while accommodating seasonality of structural liquidity.
  - Revamp access to the CBM discount window by shortening maturity to overnight to prevent use as a de facto revolving credit facility.
  - Convert the CBM’s legacy debt portfolio to marketable government securities for open market operations.
  - Consider increasing regulated minimum deposit and maximum lending rates, the CBM discount rate, and fixed rates on Treasury bonds as inflation is expected to rise over the course of 2015/16.
  - Allow exchange rate flexibility and realign reference exchange rate with the wider market; maintain exchange rate flexibility.
- Recent FX and reserve indicators:
  - Kyat declined by "about 20 percent" against the U.S. dollar since late 2014.
  - CBM foreign reserves covered "around 3 months of imports" at end-March 2015; staff projects reserves to fall to "about 2½ months of imports".
  - Staff projects inflation to rise to "around 13 percent (end-year) in 2015/16" under baseline.

### Financial sector, supervision, and prudential measures
- Credit growth and composition:
  - Credit to the private sector averaged "50 percent" annually during 2011/12–2014/15 and expected to increase by about "45 percent" in 2015/16.
  - Sectors receiving most credit: trade, manufacturing, construction (including real estate) and agriculture (collectively > two-thirds of total credit).
  - Over "90 percent" of credit is extended through loans of 12 months or less, routinely rolled over with capitalization of interest.
  - Hire-purchase loans rising but account for less than "10 percent" of total loans.
  - Most banks are under-capitalized; loan quality and provisioning data are weak.
- Supervisory priorities:
  - Finalize and issue remaining six out of eight prudential instructions.
  - Ensure banks meet capital and liquidity requirements in a reasonably short timeframe.
  - Enforce prudent loan classification and loss provisioning; ensure loans are sound before rollovers.
  - Strengthen monitoring of hire purchase and credit funded by foreign loans.
  - Prepare a bank resolution framework.
  - Over time consider reducing fragmentation of financial supervision, consolidating supervision power in the CBM as capacity develops.
- State-owned and policy banks (Box 4 highlights):
  - Total banking sector assets reached "58½ percent of GDP" at end February 2015, an increase of "10 percent of GDP" over two years.
  - Private bank assets account for half of total, up by "12½ percentage points".
  - State-owned bank (SOB) assets amount to "29½ percent of GDP", a decline of "2½ percentage points".
  - Loans and advances to the private sector by private banks now "14 percent of GDP"; SOB lending to private sector "2½ percent of GDP".
  - Myanmar Economic Bank: deposit base equals "5¼ percent of GDP"; loans to private sector about "15 percent" of its deposits.
  - IMF staff recommends consolidating SOBs and policy banks into a couple of policy banks.

### Structural reforms, revenue mobilization, and public spending priorities
- Revenue mobilization measures:
  - Estimate and present tax expenditure as part of annual budgets to reduce tax incentives.
  - Begin preparatory work on introduction of a VAT by "2020/21", including passing the special commercial tax bill.
  - Implement collection of the commercial tax on telecommunication services.
  - Reform extractive industry fiscal regime to centralize collection of gas-related revenue and increase transparency; continue EITI progress.
  - Allocate more resources to IRD (field offices and headquarters) to boost capacity; delay extension of self-assessment to medium taxpayers until LTO procedures and audit systems in place.
- Public spending recommendations:
  - Prioritize infrastructure and social programs; avoid cuts to capital spending inconsistent with priorities.
  - Implement wage increases in conjunction with public service reform.
  - Assess inflation impacts on the poor and consider well-targeted social programs (examples: free school meals, free hospital treatments to pregnant and nursing women and elderly individuals).
  - Adopt a medium-term fiscal framework and consider introducing a fiscal rule to smooth spending against volatile gas revenues.
  - Accelerate reform of state economic enterprises (SEEs) to improve efficiency and minimize contingent liabilities; revise MOGE’s financial requirements to reflect role in collecting natural gas rents.

### Financial inclusion, private sector development, and state banks
- Policy and structural measures:
  - Mobilize public resources, strengthen regulatory and supervisory framework, and improve business environment to enable private enterprise.
  - Early parliamentary approval encouraged for Banks and Financial Institutions Law, Investment Law and Company Law.
  - CBM to speed up approval of investment and capital inflows consistent with laws while maintaining capital management measures (e.g., annual ceilings on new borrowings).
  - Consider allowing foreign exchange swaps and forwards to enable hedging and promote money market development.
  - Allow foreign micro-finance institutions (MFIs) to raise domestic kyat funding.
  - Leverage entry of nine foreign banks by end-September to modernize banking sector while managing capital flow volatility risks.
  - Reform state banks: define roles, consider consolidating into one or two development banks with clear mandates and modern governance; apply proper prudential regulations to policy banks, cooperatives and MFIs and monitor exposures including foreign currency risks.

### Floods impact (preliminary supplement)
- Immediate human and physical impact:
  - Floods and Cyclone Komen: killed "117 people" and affected more than "1 million people" (population ~ "51 million").
  - About "1.4 million acres" of farmland affected; about half totally damaged (around "3 percent" of estimated total sown area).
  - Over "16,000 homes" and "3,000 school buildings" damaged.
- Short-term macro effects and staff assessment:
  - Fiscal and current account deficits likely to be higher short term; overall growth weaker than previously projected.
  - Staff expects added pressure on inflation, government spending, and external position; food price spikes already observed.
  - Private commercial banks: limited expected impact; state-owned banks: likely more affected due to greater lending to agriculture.
- Policy response recommendations:
  - Continue aiming for early phase-out of CBM financing of the fiscal deficit and scale up Treasury bill auctions.
  - Accommodate a temporarily larger fiscal deficit this and next fiscal year for recovery and reconstruction; seek grants and concessional loans to limit inflationary impact.
  - Maintain the early October target for recalibrated reserve requirement but adjust sterilization timing if liquidity pressures appear.
  - CBM discount window could be used for temporary liquidity increases; be prepared to resume tightening if inflationary pressures persist.

### Scenarios, risks, and projected outcomes (selected indicators)
- Real GDP growth (Percent):
  - 2015/16: Baseline 8.5; Adjustment 8.2; Adverse 7.8.
  - 2016/17: Baseline 8.4; Adjustment 8.2; Adverse 8.1.
- Inflation (Percent):
  - 2015/16: Baseline 12.2; Adjustment 10.4; Adverse 16.5.
  - 2016/17: Baseline 11.8; Adjustment 8.8; Adverse 15.9.
- Private sector credit (Percent, y/y):
  - 2015/16: Baseline 45.2; Adjustment 30.1; Adverse 58.6.
  - 2016/17: Baseline 36.7; Adjustment 24.4; Adverse 37.4.
- Current account balance (Percent of GDP):
  - 2015/16: Baseline -8.9; Adjustment -7.9; Adverse -9.9.
  - 2016/17: Baseline -8.3; Adjustment -6.3; Adverse -10.1.
- CBM reserves (Months of imports):
  - 2015/16: Baseline 2.5; Adjustment 3.1; Adverse 1.6.
  - 2016/17: Baseline 2.3; Adjustment 3.3; Adverse 0.9.
- Fiscal deficit (Percent of GDP):
  - 2015/16: Baseline -4.8; Adjustment -4.1; Adverse -6.3.
  - 2016/17: Baseline -4.7; Adjustment -4.2; Adverse -5.8.
- CBM financing (Percent of GDP):
  - 2015/16: Baseline 1.0; Adjustment 0.0; Adverse 2.5.
  - 2016/17: Baseline 0.5; Adjustment 0.0; Adverse 1.7.
- Money multiplier (Level):
  - 2015/16: Baseline 2.54; Adjustment 2.47; Adverse 2.58.
  - 2016/17: Baseline 2.79; Adjustment 2.68; Adverse 2.89.

### Data, statistics, and technical assistance priorities
- Selected key statistics (Real GDP and other series, staff working estimates and projections 2011/12–2017/18):
  - Real GDP: "5.6", "7.3", "8.4", "8.5", "8.5", "8.4", "8.3".
  - CPI (end-period): "-1.1", "4.7", "6.3", "7.4", "13.3", "10.2", "8.2".
  - Total revenue (Consolidated Public Sector): "12.1", "23.4", "23.3", "26.4", "20.8", "20.6", "20.8".
  - Tax revenue (Union government, of which): "3.9", "7.1", "7.8", "8.2", "8.2", "8.5", "8.8".
  - Total expenditure (Consolidated Public Sector): "16.7", "25.1", "25.1", "29.3", "25.6", "25.2", "25.3".
  - Net lending (+)/borrowing (-): "-4.6", "-1.7", "-1.8", "-2.9", "-4.8", "-4.7", "-4.6".
  - Private sector credit (percent change): "60.1", "50.5", "52.5", "35.5", "45.2", "36.7", "30.2".
  - Current account balance (percent of GDP): "-1.9", "-4.2", "-5.2", "-6.1", "-8.9", "-8.3", "-7.7".
  - CBM reserves (in millions of U.S. dollars): "922", "3,062", "4,546", "5,070", "5,075", "5,374", "6,539".
  - CBM reserves (in months of total imports): "0.8", "2.4", "2.8", "2.8", "2.5", "2.3", "2.5".
  - GDP (billions of kyats): "43,238", "47,722", "54,699", "62,834", "76,471", "92,641", "109,600".
  - GDP (billions of US$): "56.0", "55.6", "56.7", "63.1", "65.8", "71.3", "79.0".
  - GDP per capita (US$): "1,118", "1,100", "1,112", "1,228", "1,269", "1,364", "1,502".
- Statistical gaps and plans:
  - Major shortcomings in national accounts, external sector statistics, and timeliness of data; rebased CPI scheduled for release in second half of 2015.
  - Priority to compile and publish consistent FSIs and expedite release of rebased CPI.
- Technical assistance delivery modes: resident advisors, TAOLAM, and short-term HQ missions; coordination with World Bank, ADB, and bilateral partners.

### Authorities' views and cooperation with partners
- Authorities broadly agreed with staff conclusions and the thrust of analysis; intend to use nonconcessional external borrowing only for economically viable priority projects consistent with low risk of debt distress.
- Authorities reiterated aim to keep fiscal deficit below "5 percent of GDP" over the medium term.
- Cooperation with World Bank and IMF on reform agenda, technical assistance, and DSA; joint management action plan and selected IMF TA activities outlined for June 2015–May 2016.

*Source: IMF staff report (Myanmar: Staff Report for the 2015 Article IV Consultation) and supplementary information (content unit: _cr15267).*

### introduction of a value-added tax, limit tax incentives, condition transfers to states and

### introduction of a value-added tax, limit tax incentives, condition transfers to states and regions on implementation capacity, and further reprioritize expenditures.

### Key policy recommendations
- Introduce a value-added tax.
- Limit tax incentives.
- Condition transfers to states and regions on implementation capacity.
- Further reprioritize expenditures to reduce the fiscal deficit.
- Implement the Extractive Industries Transparency Initiative Standard.
- Replace direct Central Bank of Myanmar (CBM) financing of fiscal deficits with Treasury bill issuance through auctions; allow the interest rate at T-bill auctions to rise to attract higher bid volumes and terminate CBM financing of fiscal deficits.
- Tighten monetary policy to reduce macroeconomic vulnerabilities arising from signs of overheating; maintain the October target date for implementation of the recalibrated reserve requirement.
- CBM should be prepared to increase the reserve requirement and scale up deposit auctions should signs of second-round effects from food price increases on inflation emerge.
- Withdraw liquidity from the banking system by stepping up deposit auctions and implementing the recalibrated reserve requirement.
- Enforce and, where needed, tighten existing prudential measures to contain credit growth and reduce financial sector risks.
- Speed up issuance of remaining prudential instructions and strengthen CBM supervisory capacity, particularly given the entry of nine foreign banks.
- Reform state-owned banks and strengthen supervision of policy banks and non-bank financial institutions to safeguard financial stability.
- Compile and release consistent financial soundness indicators.
- Implement measures on anti-money laundering and combating the financing of terrorism to protect Myanmar’s correspondence bank relationships.
- Continue structural reforms focusing on improving the business environment, financial inclusion, health services, and education.
- Strengthen institutional capacity with continued technical assistance and improve economic statistics to enhance macroeconomic management.

### Macroeconomic situation and outlook
- Recent developments:
  - Real GDP growth for 2014/15 is estimated at "8½ percent".
  - Inflation reached "8 percent (y/y) in May", up from "4 percent in October"; non-food inflation rose from "3¾ percent to 6 percent".
  - Import volumes grew by "28½ percent in 2014/15".
  - Credit to the private sector grew "35 percent (y/y) in March", down from "53½ percent in 2013/14".
  - Since late 2014, the kyat has declined by "about 20 percent" against the U.S. dollar.
  - At end-March 2015, CBM foreign reserves covered "around 3 months of imports", below the estimated adequate level of "5−6 months of imports".
- Staff projections and risks:
  - The economy is expected to grow by "8½ percent" in 2015/16.
  - The projected fiscal deficit increase in the 2015/16 budget is "almost 2 percent of GDP".
  - CBM financing of the deficit is likely to remain significant at "1 percent of GDP".
  - Private sector credit is expected to expand by "about 45 percent".
  - Inflation is expected to rise to "around 13 percent (end-year) in 2015/16".
  - The current account deficit is expected to widen to "about 9 percent of GDP".
  - CBM foreign reserves projected to fall to "about 2½ months of imports".
  - Downside risks: lower natural gas prices, a sharper-than-expected slowdown in China, tightening of US monetary policy, uncertainty over Greece, and weak CBM regulatory and supervisory capacity.
  - Upside risk: a well-received election outcome and peace process could raise FDI inflows.

### Fiscal and monetary measures emphasized
- Fiscal:
  - Reduce the fiscal deficit through revenue mobilization and expenditure reprioritization.
  - Mobilize revenues to support priority spending.
- Monetary and market operations:
  - Terminate CBM direct deficit financing; conduct Treasury bill auctions with market-determined interest rates.
  - CBM to withdraw liquidity via deposit auctions and recalibrated reserve requirement (maintain October target date).
  - Allow exchange rate flexibility to cushion Myanmar from exogenous shocks and maintain external competitiveness given relatively high inflation.
  - Realign reference exchange rate with the wider market; maintain exchange rate flexibility.

### Financial sector and supervision
- Enforce and tighten prudential measures to contain credit growth and reduce financial sector risks.
- Speed up issuance of remaining prudential instructions and strengthen CBM supervisory capacity in view of nine foreign banks entering this year.
- Reform state-owned banks; strengthen supervision of policy banks and non-bank financial institutions.
- Compile and publish consistent financial soundness indicators.
- Implement anti-money laundering and combating the financing of terrorism measures to preserve correspondence bank relationships.

### Structural reforms and capacity building
- Implement structural reform agenda to achieve inclusive and sustainable growth.
- Focus reforms on:
  - Improving the business environment.
  - Enhancing financial inclusion.
  - Strengthening health services and education.
- Continue technical assistance to build institutional capacity and improve economic statistics.

### Selected key statistics (from "Myanmar: Selected Economic Indicators, 2011/12–2017/18")
- Real GDP (staff working estimates): "5.6", "7.3", "8.4", "8.5", "8.5", "8.4", "8.3" (2011/12–2017/18).
- CPI (end-period): "-1.1", "4.7", "6.3", "7.4", "13.3", "10.2", "8.2" (2011/12–2017/18).
- Total revenue (Consolidated Public Sector): "12.1", "23.4", "23.3", "26.4", "20.8", "20.6", "20.8" (2011/12–2017/18).
- Tax revenue (Union government, of which): "3.9", "7.1", "7.8", "8.2", "8.2", "8.5", "8.8" (2011/12–2017/18).
- Total expenditure (Consolidated Public Sector): "16.7", "25.1", "25.1", "29.3", "25.6", "25.2", "25.3" (2011/12–2017/18).
- Net lending (+)/borrowing (-): "-4.6", "-1.7", "-1.8", "-2.9", "-4.8", "-4.7", "-4.6" (2011/12–2017/18).
- Underlying net lending (+)/borrowing (-) 4/: "-4.6", "-1.7", "-2.2", "-5.5", "-5.9", "-5.2", "-4.6" (2011/12–2017/18).
- Domestic public debt: "22.6", "17.8", "16.8", "17.2", "17.6", "17.1", "17.0" (2011/12–2017/18).
- Reserve money (percent change): "7.9", "34.2", "17.0", "11.4", "17.9", "16.9", "15.7" (2011/12–2017/18).
- Broad money (percent change): "26.3", "46.6", "32.7", "21.7", "31.7", "28.4", "24.4" (2011/12–2017/18).
- Domestic credit (percent change): "25.1", "5.1", "24.6", "28.8", "34.7", "30.3", "27.9" (2011/12–2017/18).
- Private sector credit (percent change): "60.1", "50.5", "52.5", "35.5", "45.2", "36.7", "30.2" (2011/12–2017/18).
- Current account balance (percent of GDP): "-1.9", "-4.2", "-5.2", "-6.1", "-8.9", "-8.3", "-7.7" (2011/12–2017/18).
- Exports (percent of GDP): "18.3", "18.6", "19.9", "19.6", "18.9", "20.4", "21.8" (2011/12–2017/18).
- Imports (percent of GDP): "-18.6", "-22.4", "-24.4", "-27.8", "-30.5", "-31.5", "-31.8" (2011/12–2017/18).
- CBM reserves (in millions of U.S. dollars): "922", "3,062", "4,546", "5,070", "5,075", "5,374", "6,539" (2011/12–2017/18).
- CBM reserves (in months of total imports): "0.8", "2.4", "2.8", "2.8", "2.5", "2.3", "2.5" (2011/12–2017/18).
- Total external debt (billions of U.S. dollars): "15.3", "13.7", "10.2", "8.8", "9.7", "11.2", "12.8" (2011/12–2017/18).
- Total external debt (In percent of GDP): "27.4", "24.7", "18.0", "14.0", "14.7", "15.7", "16.2" (2011/12–2017/18).
- GDP (billions of kyats): "43,238", "47,722", "54,699", "62,834", "76,471", "92,641", "109,600" (2011/12–2017/18).
- GDP (billions of US$): "56.0", "55.6", "56.7", "63.1", "65.8", "71.3", "79.0" (2011/12–2017/18).
- GDP per capita (US$): "1,118", "1,100", "1,112", "1,228", "1,269", "1,364", "1,502" (2011/12–2017/18).

*Source: IMF staff report (Myanmar: Staff Report for the 2015 Article IV Consultation).*

### 9.      The authorities’ 2015/16 budget projects an overall fiscal deficit of just

### _cr15267 - 9.      The authorities’ 2015/16 budget projects an overall fiscal deficit of just

### Fiscal outlook and 2015/16 budget
- Authorities’ 2015/16 budget projects an overall fiscal deficit of just under 5 percent of GDP.
- Staff projects a deficit of 4¾ percent of GDP after incorporating more plausible revenue and expenditure outcomes.
- The budget represents a fiscal expansion of nearly 2 percent of GDP from last year, largely reflecting a substantial wage increase for public sector employees (a little over 2 percent of GDP).
- Staff recommends reducing the fiscal deficit to about 4 percent of GDP in 2015/16 as a countercyclical measure.
- Recommended adjustment measures for fiscal consolidation include:
  - Implement collection of the commercial tax on telecom services (previously postponed).
  - Reduce low-priority current spending, including on goods and services, and travel expenses.
  - Protect expenditures on health, education and infrastructure.
  - Contain transfers to Regions and States in line with their implementation capacity and spending responsibilities.
- Over the medium term, consider a new fiscal rule aimed at addressing volatile gas revenues (see paragraph 24).

### Credit growth, composition, and banking sector vulnerabilities
- Credit to the private sector has been growing by 50 percent annually on average during 2011/12–2014/15 and is expected to increase by about 45 percent this year.
- Much of the credit has been provided to trade, manufacturing, construction (including real estate) and agriculture, which collectively account for more than two-thirds of total credit.
- Over 90 percent of the credit is extended through loans for 12 months or less, which are routinely rolled over with capitalization of interest.
- Loans through hire-purchase are rising but still account for less than 10 percent of total loans outstanding.
- Most banks are under-capitalized and data on loan quality and provisioning continue to pose difficulties for proper analysis.

### AML/CFT challenges
- Myanmar remains listed by the Financial Action Task Force (FATF) as a country that has not made sufficient progress in implementing its action plan to address its significant AML/CFT shortcomings.
- Without progress, Myanmar banks’ correspondent banking relationships in major financial markets could be adversely affected if the FATF calls for countermeasures.
- Urgent need for authorities to promulgate FATF–compliant AML/CFT laws and regulations and implement them effectively.

### Monetary policy, liquidity management, and exchange rate
- Staff calls for tightening of monetary and fiscal policies along with exchange rate flexibility to address macroeconomic imbalances.
- CBM measures recommended:
  - Mop up liquidity by scaling up deposit auctions.
  - Transition to the recalibrated reserve requirement (which excludes government bonds from liquid assets) by the set target date of early October.
  - Tighten the CBM’s reserve money target while accommodating seasonality of structural liquidity.
  - Revamp access to the CBM discount window by shortening maturity to overnight to prevent use as a de facto revolving credit facility.
  - Convert the CBM’s legacy debt portfolio to marketable government securities for open market operations.
  - Consider increasing regulated minimum deposit and maximum lending rates, the CBM discount rate, and fixed rates on Treasury bonds as inflation is expected to rise over the course of 2015/16.
- Staff welcomes CBM’s move to align its reference rate with parallel market rates; exchange rate flexibility is critical to external stability.
- A priority import window for FX to importers of fuel and cooking oil was introduced in late-June and will be phased out according to authorities.

### Public debt and fiscal sustainability
- Myanmar’s risk of debt distress remains low (see the DSA), but overall public debt is projected to rise over time given large financing needs.
- Staff advised lowering the fiscal deficit target from 5 percent of GDP to 4½ percent of GDP over the medium to long term to safeguard fiscal sustainability.
- Emphasize prudent external borrowing with an emphasis on concessional loans.

### Prudential measures and financial sector supervision
- Urgent need to arrest credit expansion and minimize financial sector risks through prudential measures and liquidity tightening.
- Priority actions:
  - Finalize and issue the remaining six out of eight instructions on prudential regulations.
  - Ensure banks meet capital and liquidity requirements in a reasonably short timeframe.
  - Enforce prudent loan classification and loss provisioning; ensure loans are sound before rollovers.
  - Strengthen monitoring of hire purchase and credit funded by foreign loans.
  - Prepare a bank resolution framework.
- Over time consider reducing fragmentation of financial supervision, consolidating supervision power in the CBM as its capacity develops.

### Scenarios, risks, and projected outcomes
- Two staff scenarios illustrate the benefits of early policy tightening versus adverse outcomes:
  - Adjustment (policy) scenario: tightening policies and strengthening prudential measures reduces vulnerabilities and improves policy buffers; real GDP growth would be somewhat lower than in the baseline but more sustainable.
  - Adverse scenario stress test assumptions:
    - Fiscal policy slippages and deteriorating prudential standards further increase credit expansion (money multiplier rises to around 60 percent compared with 45 percent in the baseline).
    - Further declines in price and production of natural gas and lower FDI inflows from elections-related uncertainty.
    - Potential outcomes in adverse scenario:
      - Fiscal deficit in 2015/16 could rise to over 6 percent.
      - Current account deficit could widen to 10 percent.
      - CBM reserves could fall to 1⅓ months of imports, with a further decline to less than 1 month in 2016/17.

### Structural reforms, revenue mobilization, and public spending priorities
- Revenue mobilization remains a top priority to increase public resources for inclusive growth.
- Staff recommendations:
  - Estimate and present tax expenditure as part of annual budgets to reduce tax incentives.
  - Begin preparatory work on introduction of a value added tax (VAT) by 2020/21, including passing the special commercial tax bill.
  - Reform the extractive industry fiscal regime to centralize collection of gas-related revenue and increase transparency; continue progress toward Extractive Industries Transparency Initiative (EITI) membership.
  - Allocate more budgetary resources to field offices and IRD headquarters to boost capacity (staffing and ICT improvements).
  - Delay extension of self-assessment to medium taxpayers until new procedures and audit systems are in place in the LTO.
- Public spending recommendations:
  - Continue to prioritize infrastructure and social programs; the cut in capital spending budgeted for 2015/16 is neither desirable nor consistent with stated priorities.
  - Implement wage increases in conjunction with a public service reform.
  - Assess inflation impacts on the poor and consider well-targeted social programs (examples cited: free school meals to pupils attending compulsory education in public schools; free hospital treatments to pregnant and nursing women and elderly individuals).
  - Adopt a medium-term fiscal framework and consider introducing a fiscal rule to smooth spending against volatile gas revenues.
  - Accelerate reform of state economic enterprises (SEEs) to improve efficiency and profitability and minimize contingent liabilities, including revising MOGE’s financial requirements to reflect its role in collecting natural gas rents on behalf of the government.

### Financial inclusion, private sector development, and state banks
- Policies should mobilize public resources, strengthen regulatory and supervisory framework for the financial sector, and improve the business environment to enable private enterprise.
- Staff welcomes progress on Banks and Financial Institutions Law, the Investment Law and Company Law and urges early parliamentary approval.
- CBM should speed up approval of investment and capital inflows consistent with these laws while maintaining capital management measures (such as setting annual ceilings of new borrowings).
- Consider allowing foreign exchange swaps and forwards to enable hedging and promote money market development.
- Foreign micro-finance institutions (MFIs) should be allowed to raise domestic kyat funding to facilitate more stable access to credit.
- Take full advantage of the presence of nine foreign banks by end-September to modernize the banking sector while managing risks such as volatility in capital flows.
- Reform state banks: move expeditiously to define roles, consider consolidating into one or two development banks with clear mandates and modern governance; apply proper prudential regulations to policy banks, cooperatives and MFIs and monitor exposures including foreign currency risks.

*MYANMAR INTERNATIONAL MONETARY FUND*

### 28.      Continued efforts will be needed to improve the business environment and external

### _cr15267 - 28.      Continued efforts will be needed to improve the business environment and external

### Business environment and external competitiveness
- Continue regulatory reforms to reduce the cost of doing business, particularly in contract enforcement and business start-up, where Myanmar lags most peers.
- Leverage participation in the ASEAN Economic Community to:
  - Improve the business environment.
  - Take advantage of the dynamic regional market and value chains to implement an export-oriented development strategy that entails export diversification to promote manufacturing activities (Selected Issues Paper 3).
- Raise labor productivity through education and training to improve competitiveness, including in agriculture.

### Authorities’ views on inclusive growth and public services
- Authorities attach great importance to promoting inclusive growth and recognize the need to raise revenue, noting capacity constraints hamper efforts.
- Fiscal measures in the 2015/16 budget:
  - Extension of the free basic education program.
  - More resources for medical education to train more healthcare professionals.
  - Plans to increase hospital coverage in rural areas and provide free books in primary and secondary public schools.
- Regulatory and supervisory framework improvements are recognized as necessary to safeguard financial stability while promoting financial inclusion.
- Approach to improving business climate includes setting up special economic zones for localized improvements in infrastructure and regulatory regime.

### Developing capacity for macroeconomic management (Technical Assistance)
- Myanmar is one of the largest recipients of Fund assistance with an ambitious TA program focusing on:
  - Central bank operations.
  - Financial sector supervision.
  - Revenue administration and tax reform.
  - Public financial management.
  - Macroeconomic analysis.
  - AML/CFT.
  - Statistics.
- Delivery modes: resident advisors, experts in the Bangkok-based Technical Assistance Office for Lao P.D.R. and Myanmar (TAOLAM), and short-term HQ and expert missions.
- Coordination with World Bank, Asian Development Bank, and bilateral partners emphasized.
- Given weak capacity, Fund assistance likely to remain critical for some time.

### Staff views on capacity building and statistics
- Strong leadership is critical to improve effectiveness of TA and capacity building; staff welcome establishment of steering committee and working groups at the CBM.
- Accounting and payment system reforms require a strong push from top management to increase momentum.
- Continued improvements in macroeconomic statistics are important; progress made in reducing data release time lags, particularly monetary statistics, but serious shortcomings remain (national accounts and external sector statistics).
- Staff encourages prioritizing:
  - Compilation of consistent financial soundness indicators (FSIs).
  - Expedited release of the rebased CPI.

### Authorities’ plans on capacity and statistics
- Authorities intend to strengthen leadership and enhance absorptive capacity by facilitating suitably qualified officials to work closely with external experts.
- The rebased CPI is scheduled for release in the second half of 2015 and Fund technical assistance will be sought to improve FSIs.

### Staff appraisal — macroeconomic stance and policy priorities
- 2015 marks a major milestone in Myanmar’s political transition; successful November general elections and timely peace negotiations would underpin stability and economic transition.
- Growth momentum remains strong, but signs of overheating have emerged due to supply bottlenecks and loose financial conditions; downside risks and rising imbalances call for urgent actions to reduce vulnerabilities.
- Immediate policy priority: tighten monetary conditions to curb rapid credit growth, rising inflation, and widening current account deficit that drive kyat depreciation. Recommended actions:
  - Scale up deposit auctions.
  - Promptly implement the recalibrated reserve requirement to mop up liquidity.
  - Allow interest rates at deposit and securities auctions to rise to attract more deposits and Treasury bill purchases by banks.
- Prudential measures: ensure banks meet capital and liquidity requirements; proper loan classification and adequate provisioning; tighten prudential standards where needed; finalize and issue remaining prudential instructions; modernize regulatory framework and strengthen supervisory capacity.
- Exchange rate policy: staff welcomes CBM realignment of its reference rate with market rates; critical for CBM to support exchange rate by tightening monetary conditions to avoid depreciation-inflation spiral. Staff finds the kyat broadly in line with medium-term fundamentals and encourages structural reforms to improve external competitiveness.
- Fiscal policy: reduce fiscal deficit in near term and terminate automatic CBM financing of the fiscal deficit. Immediate revenue priorities:
  - Commence collection of the commercial tax on telecommunication service.
  - Reduce tax incentives.
  - Consider curbing transfers to States and Regions and cutting low-priority recurrent expenditure.
  - Raise T-bill auction interest rates to attract higher bid volumes to mop up liquidity.
- Revenue mobilization: welcome Large Taxpayers Office operation; suggest more resources for the IRD; pass legislation on special commercial tax expeditiously; begin preparations for VAT introduction; estimate tax expenditure as part of annual budgets; do not extend self-assessment of income taxes to medium taxpayers until it works well in the LTO.
- Financial inclusion and business environment reforms: early approval of prepared legislation encouraged; further reforms needed for state banks, policy banks, and non-bank financial institutions; facilitate market development for reliable and affordable funding; implement AML/CFT measures; reduce cost of doing business and invest in human capital to raise labor productivity.
- Continued TA and capacity building imperative; authorities urged to provide strong leadership and improve macroeconomic statistics, including early release of the rebased CPI and FSIs.
- Staff supports authorities’ request for approval of a multiple currency practice (MCP) under Article VIII, Section 3 as a necessary but temporary mechanism; recommends Executive Board approval for retention until August 27, 2016 or the conclusion of the next Article IV consultation, whichever is earlier.
- Next Article IV consultation proposed on the standard 12-month cycle.

### External sector assessment and exchange rate developments
- REER movements:
  - Inflation-based REER appreciated by 3¾ percent between mid-2014 and March 2015; nominal exchange rate then depreciated by as much as 16 percent against the U.S. dollar since March 2015, implying REER likely adjusted downwards since March 2015.
- Since 2010 trade restrictions and controls on FX transactions have been gradually lifted; pent-up import demand widened the current account deficit; lower gas prices exerted downward pressure on the kyat.
- Kyat appears broadly in line with medium-term fundamentals; CBM’s decision to move its reference exchange rate closer to market rates brought exchange rate closer to fundamentals. From September 2014 until mid-July 2015 the CBM allowed the reference exchange rate to depreciate more slowly than the parallel market; in mid-July the CBM realigned its reference rate with market rates (a 6.7 percent depreciation).
- Staff projects current account deficit will likely remain elevated over the medium term as pent-up import demand continues; a moderate REER depreciation will help narrow the deficit.
- Structural reforms to improve productivity are essential to raise external competitiveness; labor costs are among the lowest in Asia but productivity is low due to skill shortages and supply bottlenecks; market liberalization and regulatory reforms (e.g., telecommunications) can lower business costs and attract FDI.

### Recent foreign exchange market developments
- CBM challenges in managing depreciation pressures:
  - From October 2014 CBM set its reference rate at a more appreciated rate than the parallel market, creating a large gap until July 13, 2015 when CBM realigned reference rate with parallel market.
  - Realignment restored price discovery in auctions and led to a sharp depreciation of the CBM reference rate; gap now less than 2 percent and kyat appears stabilized for now.
- Kyat depreciation since September 2014:
  - About 20 percent against the US dollar.
  - About 6¾ percent on a nominal effective basis.
  - Drivers: strong import demand, rising inflation pressures from fiscal stimulus and easy monetary/credit conditions, stronger US dollar, declines in natural gas prices, and political uncertainty ahead of elections.
- Administrative measures by authorities (e.g., altering FX auction allocation rules, USD cash withdrawal limits, sanctions) increased FX scarcity and hoarding, exacerbating market imbalance prior to realignment.
- Prior to realignment, formal market scarcity forced importers into informal markets; authorized dealers constrained by trading within 0.8 percent of CBM reference rate became uncompetitive vs informal dealers trading up to 10 percent more depreciated. Introduction of a priority import window for cooking oil and fuel at the reference rate helped; post July 13 realignment importers can obtain FX from formal market and transactions under the window take place at the reference rate (within 2 percent of parallel market rates since July 13).

### Scenario analysis (Baseline, Adjustment, Adverse) — selected indicators (2015/16 and 2016/17)
- Real GDP growth (Percent)
  - 2015/16: Baseline 8.5; Adjustment 8.2; Diff. 1/ -0.3; Adverse 7.8; Diff. 1/ -0.7
  - 2016/17: Baseline 8.4; Adjustment 8.2; Diff. 1/ -0.2; Adverse 8.1; Diff. 1/ -0.3
- Inflation (Percent)
  - 2015/16: Baseline 12.2; Adjustment 10.4; Diff. 1/ -1.8; Adverse 16.5; Diff. 1/ 4.3
  - 2016/17: Baseline 11.8; Adjustment 8.8; Diff. 1/ -3.0; Adverse 15.9; Diff. 1/ 4.1
- Reserve money growth (Percent)
  - 2015/16: Baseline 17.9; Adjustment 7.3; Diff. 1/ -10.7; Adverse 26.8; Diff. 1/ 8.8
  - 2016/17: Baseline 16.9; Adjustment 10.4; Diff. 1/ -6.5; Adverse 15.2; Diff. 1/ -1.7
- Broad money growth (Percent)
  - 2015/16: Baseline 31.7; Adjustment 16.4; Diff. 1/ -15.2; Adverse 43.8; Diff. 1/ 12.1
  - 2016/17: Baseline 28.4; Adjustment 19.8; Diff. 1/ -8.6; Adverse 29.0; Diff. 1/ 0.6
- Private sector credit (Percent, y/y)
  - 2015/16: Baseline 45.2; Adjustment 30.1; Diff. 1/ -15.1; Adverse 58.6; Diff. 1/ 13.3
  - 2016/17: Baseline 36.7; Adjustment 24.4; Diff. 1/ -12.3; Adverse 37.4; Diff. 1/ 0.7
- Current account balance (Percent of GDP)
  - 2015/16: Baseline -8.9; Adjustment -7.9; Diff. 1/ 1.0; Adverse -9.9; Diff. 1/ -1.0
  - 2016/17: Baseline -8.3; Adjustment -6.3; Diff. 1/ 1.9; Adverse -10.1; Diff. 1/ -1.8
- Trade account balance (Percent of GDP)
  - 2015/16: Baseline -11.6; Adjustment -10.6; Diff. 1/ 1.0; Adverse -12.7; Diff. 1/ -1.1
  - 2016/17: Baseline -11.1; Adjustment -9.2; Diff. 1/ 1.9; Adverse -13.2; Diff. 1/ -2.1
- Foreign Direct Investment (Percent of GDP)
  - 2015/16: Baseline 5.5; Adjustment 6.1; Diff. 1/ 0.6; Adverse 4.4; Diff. 1/ -1.1
  - 2016/17: Baseline 6.5; Adjustment 7.2; Diff. 1/ 0.7; Adverse 5.5; Diff. 1/ -0.9
- CBM reserves (Months of imports)
  - 2015/16: Baseline 2.5; Adjustment 3.1; Diff. 1/ 0.6; Adverse 1.6; Diff. 1/ -0.9
  - 2016/17: Baseline 2.3; Adjustment 3.3; Diff. 1/ 1.0; Adverse 0.9; Diff. 1/ -1.5
- Fiscal deficit (Percent of GDP)
  - 2015/16: Baseline -4.8; Adjustment -4.1; Diff. 1/ 0.7; Adverse -6.3; Diff. 1/ -1.5
  - 2016/17: Baseline -4.7; Adjustment -4.2; Diff. 1/ 0.5; Adverse -5.8; Diff. 1/ -1.1
- Miscellaneous: CBM financing (Percent of GDP)
  - 2015/16: Baseline 1.0; Adjustment 0.0; Diff. 1/ -1.0; Adverse 2.5; Diff. 1/ 1.5
  - 2016/17: Baseline 0.5; Adjustment 0.0; Diff. 1/ -0.5; Adverse 1.7; Diff. 1/ 1.1
- Money multiplier (Level)
  - 2015/16: Baseline 2.54; Adjustment 2.47; Diff. 1/ -0.07; Adverse 2.58; Diff. 1/ 0.04
  - 2016/17: Baseline 2.79; Adjustment 2.68; Diff. 1/ -0.11; Adverse 2.89; Diff. 1/ 0.10

*MYANMAR  INTERNATIONAL MONETARY FUND*

### Box 4. State-Owned and Policy Banks in Myanmar

### Box 4. State-Owned and Policy Banks in Myanmar

### Recent developments in the banking landscape
- Total banking sector assets have increased by 10 percent of GDP over the past two years, reaching 58½ percent of GDP at end February 2015.  
- Assets owned by private banks now account for half of the total, up by 12½ percentage points.  
- State-owned bank (SOB) assets amount to 29½ percent of GDP, a decline of 2½ percentage points.

### Lending patterns and key statistics
- Loans and advances to the private sector by private banks increased by more than twofold over the past two years, now accounting for 14 percent of GDP.  
- SOB lending to the private sector now accounts for 2½ percent of GDP.  
- Myanmar Economic Bank: deposit base equals 5¼ percent of GDP; loans to the private sector account for only about 15 percent of its deposits.  
- SOBs have shifted asset holdings toward government securities (no numeric breakdown provided in the source text).

### Policy banks: structure and risks
- Recent years have seen establishment of a number of policy banks; they are typically:  
  - sponsored by a line ministry with private sector contributions; and  
  - narrowly focused sectorally (examples: tourism or construction).  
- Operational features and risks:  
  - Policy banks take deposits and extend loans at administratively controlled interest rates, except when they receive donor funding at lower costs.  
  - They take foreign loans and on-lend in kyat, exposing themselves to exchange rate risks.  
- Concerns: potential contingent liabilities for the government stemming from policy banks.

### Reform agenda and staff recommendations
- Government actions under way:  
  - Formulating a reform strategy for SOBs that will also affect policy banks.  
  - World Bank support through comprehensive diagnostic studies of SOBs, with two studies finished already.  
  - Enactment of the Banks and Financial Institutions Act will provide a new regulatory framework; SOBs and policy banks will be required to reapply for licenses, creating an opportunity to eliminate regulatory arbitrage by policy banks.  
- IMF staff recommendations (as stated in the source):  
  - Consolidate SOBs and policy banks into a couple of policy banks.

*Source: Box 4. State-Owned and Policy Banks in Myanmar (excerpt).*

### Appendix I. Key Policy Recommendations from the 2014

### Appendix I. Key Policy Recommendations from the 2014 Article IV Consultation

### Monetary policy
- Objective: Use reserve money targeting more effectively to keep inflation in check.
- Reform of reserve requirements
  - Implementation status: In progress (regulations issued)
- Establish budgetary autonomy to increase scale of monetary operations
  - Implementation status: CBM has sufficient funds for monetar
y operations.
- Implement regular deposit auctions for liquidity sterilization
  - Implementation status: Ongoing

*Source: Appendix I. Key Policy Recommendations from the 2014 Article IV Consultation (_cr15267).*

### Introduction of treasury securities auctionsAchieved

### Introduction of treasury securities auctionsAchieved

### Fiscal policy: Objective and progress
- Objective: Create fiscal space to finance large development needs while maintaining macroeconomic stability and debt sustainability.
- Keep deficits below 5 percent of GDP: Consistently achieved
- Strengthen revenue collection:
  - Good progress with rising revenue collection, but tax incentives persist
  - Assign taxpayers to the Large Taxpayers Office: Accomplished
  - Introduce taxpayer self-assessment: Introduced for large taxpayers
- Prioritize expenditures:
  - Spending on health and education is rising, but remains low
- Improve public financial management: Good progress
  - Establishment of a new treasury department in the MoF: Accomplished
  - Increase capacity for cash flow forecasting and cash balance management: In progress
- Discontinue financing of the Myanma Agricultural Development Bank (MADB): MADB Financing remains
- Limit CBM financing of the deficit: Committed but implementation challenges remain
  - The excess liquidity at the Myanma Economic Bank will need to be absorbed to make deposit auctions effective: In progress

### Financial sector and exchange rate policies: Objective and status
- Objective: Maintain flexibility of the exchange rate and financial market stability.
- Exchange rate regime and operations:
  - On April 1, 2012, the authorities replaced the official peg to the SDR with a managed float.
  - The Central Bank of Myanmar (CBM) started daily two-way multiple-price foreign currency auctions with technical assistance provided by Monetary and Capital Markets Department (MCM).
  - The CBM reserves the right to intervene to moderate excessive exchange rate volatility.
  - The de jure exchange rate arrangement was reclassified as managed float; the de facto exchange rate regime is classified as other managed arrangement.
  - Myanmar continues to avail itself of transitional arrangements under Article XIV, although it has eliminated all Article XIV restrictions.
  - Myanmar has made significant progress toward satisfying Article VIII obligations but maintains exchange restrictions and a multiple currency practice (MCP) subject to Fund approval under Article VIII.
- Financial sector reform and supervision:
  - Draft new Banks and Financial Institutions Law and implement it: In progress (in parliament for approval)
  - Establish a strengthened, rules-based and transparent regulatory environment before foreign banks commence operations: In progress
  - Strengthening supervisory capacity: In progress
  - Reform of state-owned banks: In progress
  - The number of new policy banks should be minimized and their external borrowing tightly circumscribed: Problem recognized, but challenges remain
  - Maintain exchange rate flexibility to mitigate impacts of external shocks: Bold steps have been taken

### Fund relations, technical assistance, and institutional support
- Membership and quota:
  - Joined on January 3, 1952; Article XIV.
  - Quota: 258.4 SDR Million, Percent Quota: 100
  - Fund holdings of currency (Exchange Rate): 258.4 SDR Million, Percent: 100
  - Reserve Tranche Position: 0 SDR Million, Percent: 0
- SDR Department:
  - Net cumulative allocation: 245.76 SDR Million, Percent Allocation: 100
  - Holdings: 1.84 SDR Million, Percent: 0.75
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements: None
- Projected Payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 2015: 0.06; 2016: 0.13; 2017: 0.13; 2018: 0.13; 2019: 0.13
  - Total: 2015: 0.06; 2016: 0.13; 2017: 0.13; 2018: 0.13; 2019: 0.13
- Article IV and reporting:
  - Myanmar is on the standard 12-month Article IV consultation cycle.
  - Last Article IV consultation discussions were conducted on June 4–17, 2014; Executive Board concluded on September 24, 2014.
- Technical Assistance (TA) priorities and delivery:
  - Central Banking: resident foreign exchange advisor and monetary operations advisor based in TAOLAM; accounting framework and systems assistance.
  - Financial Sector Supervision: resident advisor in Yangon; AML/CFT assistance.
  - Revenue Reform: resident tax administration advisor; tax policy via HQ missions.
  - Public Financial Management: capacity development of the Treasury Department (established October 2014); advisor based in TAOLAM.
  - Statistics: external sector and government finance statistics advisors in TAOLAM; rebased CPI scheduled to be released in 2015/16.
  - Macroeconomic Analysis: advisor based in TAOLAM leads integrated training program.
- Resident Representative transitions:
  - Ms. Yu Ching Wong completed assignment on July 24, 2015; Mr. Yasuhisa Ojima to assume position beginning September 2015.
- Technical Assistance Office for Lao P.D.R. and Myanmar (TAOLAM):
  - Opened in October 2012 in Bangkok; five TA advisors covering PFM, monetary operations, macro training, government financial statistics, and external sector statistics.
  - Mr. David Cowen to head the office after Ms. Susan Creane’s completion in July 2015.
- Selected Myanmar: Technical Assistance by the Fund during 2014 (Department — Topic — Period):
  - MCM — Drafting regulations of the Foreign Exchange Management Law (FEML) — January, 2014
  - MCM — Building accounting framework of the CBM — February/July/August/September, 2014
  - MCM — Coordinating Technical Assistance by donors — April, 2014
  - MCM — Developing operating budget framework of the CBM — June, 2014
  - MCM — Building regulatory and supervisory framework for the entry of foreign banks — August, 2014
  - LEG — Drafting Tax Law for tax reform — February, 2014
  - LEG — Modernizing Tax Policy and Administration — July, 2014
  - STA — Improving External Sector Statistics including BOP and IIP — January/April/June/July/August/October, 2014
  - STA — GFS and Public Sector Debt Statistics Workshops — July, 2014
  - STA — ASEAN Community Statistical System — October, 2014

### World Bank–IMF collaboration and development partner activities
- Collaboration: Fund and Bank country teams maintain excellent working relations; high level of cooperation and coordination on macroeconomic and structural issues.
- World Bank engagement and programs:
  - Post-arrears: clearance of arrears to IDA in January 2013 facilitated resumption of lending and IFC investment/advisory activities.
  - Approved IDA projects in electricity, telecommunications, public financial management, and education; IFC investments in microfinance, hospitality, and banking.
  - Provisional IDA 17 allocation: US$1.6 billion.
  - IFC expects up to US$1 billion in investments over CPF period and US$20 million in technical assistance.
- Areas of joint work and priorities:
  - Macroeconomic policy advice and joint Debt Sustainability Analysis (DSA).
  - Financial sector: coordinated TA on Banks and Financial Institutions Law, state-owned bank diagnostics, microfinance and insurance regulation, regulatory framework for mobile financial services, Financial Sector Development Strategy.
  - Fiscal management: coordination on macro-fiscal analysis, Large Taxpayers’ Office, Treasury Department and payment systems, debt sustainability analysis, and PFM sector working group.
  - Structural reforms and Investment Law drafting: IMF provided written comments on 1st and 2nd drafts.
  - Statistics: joint missions and TA on national strategy for development of statistics; IMF TA in GFS, BOP, prices, and monetary statistics; ADB TA on SNA compilation framework; WB focus on statistical strategy, institutional reform, and poverty monitoring.
- Shared reform priorities highlighted:
  - Promoting long-term growth and diversification: enhance business and investment climate, financial sector development, further liberalize trade and FDI.
  - Macroeconomic stability: address rising inflation and higher current account and fiscal deficits via tighter monetary and fiscal policies and exchange rate flexibility.
  - Foreign exchange policy: deepen FX market, follow FX auction rules, develop interbank FX market, finalize Investment Law.
  - Monetary policy: grant CBM full budgetary autonomy; build tools and capacity for monetary policy (open market operations, reform reserve requirements, refine reserve money forecasting and targeting).
  - Financial sector liberalization: sequence reforms with strengthened regulatory/supervisory framework; develop money markets and banks' risk management; new Banks and Financial Institutions Law to modernize prudential regulations.
  - Fiscal discipline and sustainability: strengthen revenue collection (including commercial tax on telecom services), transparent management of natural resource rents, rationalize tax exemptions; strengthen debt management and debt strategy; control wage bill growth linked to fiscal sustainability; promote fiscal transparency.
  - Prioritizing social and infrastructure spending: increase allocation to health and education; improve efficiency in infrastructure spending.
  - Strengthening statistical capacity: implement SNA 2008, construct Supply-Use Table (SUT), new household survey under discussion with WB.

### Joint Management Action Plan (June 2015–May 2016): Selected IMF activities
- Surveillance missions (IMF):
  - Staff visit Dec. 2015
  - Staff visit Apr. 2016
  - Article IV Oct. 2016
- TA activities (IMF) — ongoing or next 12 months:
  - Customs, Customs Administration, LTO and donor coordination, Tax Administration, Indirect taxation (consumption tax)
  - Assistance for Revision of the Financial Regulations, Cash flow forecasting and management, Operations Management Unit Design
  - PFM, Performance Measurement, SOE Governance Framework/TA Review
  - Support Establishment and Modernization of Treasury Functions
  - Legal drafting and supervision, National Risk Assessment, Fiscal law for tax administration
  - Financial System Modernization, Banking Supervision, Central Bank Accounting, Monetary Operations, Central Bank Financial Management
  - CPI, Government Finance Statistics, External Sector Statistics, Monetary Data Reported in SRF
  - Reporting and Dissemination of FSIs: Next 12 Mo.
  - General Data Dissemination System (GDDS): Next 12 Mo.

### Statistical issues: data adequacy, gaps, and planned improvements
- General: Data provision has serious shortcomings that significantly hamper surveillance; data are not provided in a timely manner; official and independent estimates differ widely.
- National Accounts:
  - Current methodology: broadly follows SNA 1968; national accounts data available only annually; GDP compiled at current and constant prices by activity.
  - Major weaknesses: discrepancies between production and expenditure approaches; GDP estimated at producer prices instead of market prices; lack of relevant price indexes (e.g., producer price index); incomplete coverage of private and informal sectors; major improvements needed for agriculture, construction, and public administration estimates.
  - TA: AsDB and UNDP assisting to implement 2008 SNA.
- Price statistics:
  - CPI weights based on 2006 HIES; methodological weaknesses include urban-only weights, inclusion of some construction inputs, exclusion of rentals of owner-occupied housing, no imputation of missing prices, outdated classification.
  - CSO plans to introduce new CPI with weights based on 2012 HIES; IMF STA provided TA since March 2013; new index planned for release in September 2015.
- Government Finance Statistics (GFS):
  - 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.
  - Some State Economic Enterprise transactions recorded partly on accrual and partly on cash basis; fiscal and monetary data inconsistent; debt statistics recording incomplete.
  - Myanmar participating in a three-year program funded by the government of Japan to improve GFS in Asia and Pacific; long-term GFS advisor stationed at TAOLAM.
- Monetary and Financial Statistics:
  - Monetary survey covers central bank and all commercial banks (public and private); reporting in Standardized Report Forms established January 2012.
  - New institutions (nine finance companies, multiple deposit-taking MFIs in 2013–14) and nine foreign bank branches commencing 2015 are not yet part of the monetary survey.
  - Recommendations to improve quality: expand institutional coverage; monitor consistency of reciprocal/interbank accounts; use electronic means to capture and share data; adopt market/fair value-based valuation of financial instruments in due course; review IMF Accounts recording in CBM balance sheet.
- Financial soundness indicators (FSI): Authorities do not provide FSIs to STA for dissemination; compiling and disseminating FSIs is critical.
- External sector statistics:
  - BOP and IIP compiled on BPM5; Myanmar has not participated in CDIS or CPIS.
  - Coverage gaps: missing components (some services, direct investment assets, portfolio investment assets and liabilities, other investment assets); quality concerns.
  - Revaluation of the national currency in April 2012 caused a large break in BOP and IIP series.
  - STA three-year project on Improvement of External Sector Statistics started March 2014 with a resident advisor in TAOLAM.
- Data Standards and Quality:
  - Myanmar began participating in the IMF’s General Data Dissemination System in November 2013.
  - No data ROSC available.
  - Myanmar submits data to STA with a lag of two to six months.
  - Quarterly BOP and IIP data are reported on an annual basis for the IMF’s Balance of Payments Statistics Yearbook.
  - No fiscal data reported to STA for publication in the IFS.
  - Annual data on consolidated central government operations were last reported for 2005 to STA for publication in GFS Yearbook, without economic classification of expenditure.

### Debt Sustainability Assessment
- Risk rating and outlook:
  - Myanmar is assessed to remain at low risk of debt distress.
  - Under the baseline scenario, public and publicly guaranteed (PPG) external debt burden indicators remain well below their indicative thresholds.
  - Total public debt will also remain below the benchmark, even as it will rise over the long term.
  - Low risk rating unchanged from previous DSA which incorporated resolution of external arrears with the Paris Club, the World Bank and the Asian Development Bank.
- Risks and policy implications:
  - Domestic downside risks: fiscal slippages from the authorities’ current target of below 5 percent of GDP and lower growth.
  - External downside risks: further declines in gas prices and depreciation of the kyat.
  - While these shocks do not lead to breaches of indicative thresholds or benchmarks in the medium term, keeping a low risk of debt distress requires:
    - Prudent fiscal policy
    - Sound public financial management
    - Increasing use of concessional finance while limiting nonconcessional borrowing to viable and growth-enhancing projects
- Methodology:
  - DSA uses LIC DSA framework with conservative thresholds based on average CPIA index indicating a weak rating.
  - DSA was jointly prepared by the IMF and the World Bank.

*Source: IMF Country Report No. 14/307; Staff Report for the 2015 Article IV Consultation — Informational Annex (August 14, 2015).

### 1.      The external and public debt sustainability analyses are based on the standard LIC DSA

### _cr15267 - 1.      The external and public debt sustainability analyses are based on the standard LIC DSA

### Framework and scope
- The external and public debt sustainability analyses are based on the standard LIC DSA framework. The DSA framework presents the projected path of Myanmar’s external and public sector debt burden indicators, and draws conclusions on the sustainability of debt.
- The analysis incorporates the resolution of Myanmar’s arrears with its multilateral and bilateral creditors completed in 2013/14. Paris Club members agreed to write off 50 percent of all arrears and reschedule the remaining arrears over 15 years with a 7-year grace period; the treatment was phased, with 25 percent of the write-off occurring immediately and 75 percent on the successful completion of a staff-monitored program with the IMF. Myanmar also resolved arrears to the World Bank and the Asian Development Bank in January 2013, with the help of bridge financing from Japan.

### Key macroeconomic assumptions and projections
- Real GDP growth in 2014/15: 8.5 percent.
- Average medium-term GDP growth expectation: 8.1 percent.
- Inflation in 2014/15: increased to over 7.5 percent (end of period); projected to be higher in the medium term compared to the last DSA, but to converge back to almost the same long-term trend as in the previous DSA.
- Fiscal balance and revenue:
  - Fiscal deficit in 2014/15: 2.9 percent of GDP (benefiting from windfall gains from telecommunications and oil and gas licenses).
  - Fiscal deficit expected in the medium term: 4.5 percent of GDP due to structural expenditure increases.
  - Fiscal deficit projected in the long-term: 4.2 percent of GDP.
  - Revenues revised downward in the medium and long-term due to lower projected SEEs revenues.
- Current account:
  - The current account deficit widened in 2014/15, driven primarily by an increase in import demand.
  - Gas prices expected to be 20 percent lower in 2015/16 compared with 2014/15, contributing to a significantly wider medium-term current account deficit relative to the last DSA.
- Financing mix:
  - Myanmar is expected to gradually reduce reliance on external nonconcessional financing over the medium term as access to concessional resources increases following arrears resolution.
  - Average new disbursements from non-Paris Club members in the past few years were around 90 percent of total disbursements; assumption: this number will decrease by more than 50 percent in the medium-term, but will gradually increase over the long-term as Myanmar becomes more developed and able to access financial markets.

### Key macroeconomic assumption table (baseline scenario indicators as presented)
- Medium TermLong TermMedium TermLong Term
- 2015/16- 2020/212021/22-2035/362014/15-2019/202020/21-2034/35
- Re al  GDP Growth (i n percent)8.16.88.16.6
- Inflation (in percent)9.14.76.34.0
- Overall fiscal balance (in percent of GDP)-4.5-4.2-4.6-3.8
- Noninterest current account (in percent of GDP)-7.3-4.4-4.7-3.3
- Revenue (nonfinancial public sector; in percent of GDP)21.323.82425
- Source: IMF staff estimates
- Key Macroeconomic Assumptions Underlying the DSA for the Baseline Scenario (FY2015/16-35/36)
- Current DSAPrevious DSA

### Debt sustainability analysis findings
- Recent developments limiting external debt stock:
  - Resolution of arrears in 2013/14 reduced external debt stock.
  - Valuation effect of recent exchange rate changes resulted in a reduction of the stock of external debt at end 2014/15 (the kyat (reference rate) appreciated against a basket of currencies in which Myanmar’s external debt is denominated).
  - Only modest external borrowing in 2014/15.
- External debt outlook:
  - Public and publically guaranteed external debt will remain well below the indicative thresholds throughout the projection period under the baseline.
  - Standard stress tests reflect downside risks (e.g., reduction in export value from a further drop in gas price, and depreciation of the exchange rate). Standard stress tests indicate no thresholds will be breached, but shocks can increase debt service (for example, a one-time depreciation increases the debt service to revenue ratio).
  - Prudent external borrowing is important given exchange rate volatility and potential large impacts on the debt burden.
  - Continued strong external sector performance required: maintain high export growth in manufacturing and agriculture in addition to gas, attract FDI to fund investment projects, and obtain more concessional financing.
- Public debt outlook:
  - Total public sector debt will remain below the indicative benchmark under the baseline scenario but is vulnerable to shocks.
  - The present value of total public debt as a percentage of GDP remains below the indicative benchmark throughout the projection period but continues to rise over the long-term reflecting significant development needs and assumed overall fiscal deficits.
  - Standard stress tests show public debt sustainability is vulnerable to lower real GDP growth and fiscal slippages. In the present value of total public debt to GDP ratio, the most extreme shock is the growth shock which causes a breach in the indicative benchmark in 2023/34 while fixing the primary balance causes a breach in 2033/34.

### Fiscal risks and policy recommendations
- Fiscal vulnerabilities:
  - Public finances dependent on natural resource revenues.
  - Tax revenues are very low and the tax base remains narrow, in part due to widespread exemptions.
  - Transfers to sub-national governments without devolving spending responsibilities will increase the overall public sector deficit.
  - Aggregate SEEs expected balance to turn negative in 2015/16, underscoring the need for SEE reforms to increase efficiency.
  - Guarantees for policy banks could pose risks to debt control and complicate fiscal management; only prudent borrowing by policy banks should be allowed.
  - Need to improve collection of statistics on policy banks and SEEs.
- Policy recommendations to mitigate fiscal risks:
  - Raise revenue through policy measures, notably introducing a value added tax (VAT) and reducing tax incentives.
  - Carefully plan and implement fiscal decentralization and SEEs financial reforms to safeguard fiscal sustainability.
  - Proper use of windfall revenues—such as those from oil and gas exploration—within a medium-term fiscal framework.
  - Limit contingent liabilities by improving SEEs performance and allowing only prudent borrowing by policy banks.
  - Increase use of concessional finance.

### Staff assessment
- Myanmar is assessed to be at low risk of debt distress under the baseline scenario, but continued prudent macroeconomic policies and sound debt management are required to keep debt sustainable.
- Under the baseline scenario:
  - All external debt indicators are below their indicative thresholds; standard stress tests show shocks will not cause breaches although shocks such as a one-time depreciation can raise debt service (as a ratio of revenue).
  - Total public debt remains below the benchmark but rises throughout the projection period and is vulnerable to fiscal slippages and low real GDP growth.
- Policy implications for maintaining sustainability:
  - Prudent fiscal policy, improvements in revenue performance and public financial management.
  - Limit contingent liabilities by improving SEEs performance and ensuring prudent borrowing by policy banks.
  - Increase use of concessional financing.

*Source: IMF staff estimates, DSA (as presented in the content unit)._

### 11.      The authorities broadly agreed with these conclusions and with the thrust of the analysis.

### _cr15267 - 11.      The authorities broadly agreed with these conclusions and with the thrust of the analysis.

### Authorities' stance and fiscal policy intentions
- The authorities broadly agreed with the staff conclusions and the thrust of the analysis.
- They concurred with staff on the need to be cautious on nonconcessional borrowing.
- They reconfirmed their intention to use nonconcessional external borrowing only to finance economically viable projects in priority sectors, at levels consistent with low risk of debt distress.
- To limit the use of nonconcessional financing, the authorities reiterated their aim to keep the fiscal deficit below 5 percent of GDP over the medium term.

### Indicators of public and external debt (selected baseline figures and projections)
- External debt (nominal) series (selected entries): 25.3; 18.0; 14.4; 15.8; 16.3; 16.6; 17.0; 17.4; 17.8; 20.0; 25.5.
- PV of external debt (selected projection entries): 11.0; 11.9; 11.8; 11.8; 11.8; 11.9; 12.0; 12.9; 16.9.
- PV of PPG external debt (selected projection entries): 11.0; 11.9; 11.8; 11.8; 11.8; 11.9; 12.0; 12.9; 16.9.
- PV of PPG external debt in percent of exports (selected projection entries): 45.4; 50.5; 47.3; 44.8; 45.2; 44.1; 44.0; 39.9; 38.1.
- PV of PPG external debt in percent of government revenues (selected projection entries): 42.5; 58.4; 59.0; 58.2; 56.7; 55.7; 55.1; 56.9; 68.4.
- Debt service-to-exports ratio (in percent, selected entries): 2.2; 3.3; 2.9; 4.1; 4.0; 3.4; 3.2; 3.1; 3.1; 2.5; 2.4.
- PPG debt service-to-revenue ratio (in percent, selected entries): 2.0; 3.3; 2.7; 4.7; 5.0; 4.4; 4.0; 4.0; 3.9; 3.5; 4.2.
- Total gross financing need (Billions of U.S. dollars, selected entries): -0.2; 0.7; 0.8; 2.7; 1.8; 1.1; 0.9; 0.7; 0.5; -1.4; 0.7.

### External debt sustainability baseline drivers and key macro assumptions
- Identified net debt-creating flows (selected entries): -0.7; 0.1; -1.0; 2.3; 0.6; -0.5; -0.7; -1.1; -1.3; -2.7; -1.9.
- Non-interest current account deficit (selected entries): 4.0; 4.8; 5.7; 0.5; 4.7; 8.6; 7.9; 7.4; 7.2; 6.7; 6.4; 4.6; 4.1; 4.4.
- Net FDI (negative = inflow, selected entries): -5.0; -4.6; -5.2; -3.6; 1.2; -5.5; -6.5; -6.9; -7.0; -6.9; -6.8; -6.3; -5.0; -5.7.
- Endogenous debt dynamics contributions (selected): contribution from nominal interest rate 0.2; 0.4; 0.4; 0.4; 0.4; 0.3; 0.3; 0.3; 0.3; 0.3; 0.3; contribution from real GDP growth -2.0; -2.1; -1.4; -1.2; -1.2; -1.2; -1.2; -1.2; -1.2; -1.3; -1.3.
- Key macro assumptions (selected entries):
  - Real GDP growth (in percent, selected entries): 7.3; 8.4; 8.5; 8.3; 3.5; 8.5; 8.4; 8.3; 8.0; 7.7; 7.7; 8.1; 7.2; 5.7; 6.8.
  - GDP deflator in US dollar terms (change in percent, selected entries): -7.5; -6.0; 2.7; 9.9; 15.8; -4.0; 0.0; 2.4; 2.5; 2.4; 2.3; 0.9; 2.3; 2.3; 2.3.
  - Effective interest rate (percent, selected entries): 0.6; 1.6; 2.2; 1.9; 0.9; 2.6; 2.5; 2.3; 2.1; 2.0; 1.9; 2.2; 1.5; 1.4; 1.5.
  - Growth of exports of G&S (US dollar terms, in percent, selected entries): 4.9; 10.8; 19.4; 17.6; 11.5; 1.1; 15.2; 16.9; 10.1; 13.6; 10.8; 11.3; 12.6; 11.7; 12.9.
  - Growth of imports of G&S (US dollar terms, in percent, selected entries): 17.4; 13.0; 25.6; 24.5; 20.6; 13.4; 11.8; 12.3; 11.1; 11.5; 9.9; 11.7; 12.2; 11.4; 11.8.
- Grant element of new public sector borrowing (in percent, selected entries): 37.6; 39.1; 41.0; 41.7; 42.0; 43.0; 40.8; 41.0; 40.2; 40.9.

### Sensitivity analysis and stress tests (highlights)
- Figure/text note: "The most extreme stress test is the test that yields the highest ratio on or before 2025."
- In the scenario analyses (PV of debt-to-GDP; PV of debt-to-exports; PV of debt-to-revenue; debt service-to-revenue), the baseline and multiple alternative and bound-test scenarios are reported for 2015/16-2035/36.
- Table 1b (selected scenario outcomes, headline examples):
  - PV of debt-to-GDP ratio (baseline and stressed outcomes, selected years): baseline 12 (2015/16); 12 (2016/17); 12 (2017/18); 12 (2018/19); 12 (2019/20); 12 (2020/21); 13 (2025/26); 17 (2035/36).
  - PV of debt-to-exports ratio (baseline and stressed outcomes, selected years): baseline 50; 47; 45; 45; 44; 44; 40; 38.
  - PV of debt-to-revenue ratio (baseline and stressed outcomes, selected years): baseline 58; 59; 58; 57; 56; 55; 57; 68.
- Selected bound-test outcomes (examples):
  - B2 (Export value growth at historical average minus one standard deviation in 2016-2017) increases PV of debt-to-exports to 55; 69; 69 in mid-period entries and raises PV of debt-to-revenue and other ratios in corresponding years.
  - B4 (Net non-debt creating flows at historical average minus one standard deviation) produces elevated stress outcomes for PV and debt-service ratios (examples include 61; 73; 72; 69 in PV-to-exports entries).
  - B6 (One-time 30 percent nominal depreciation relative to the baseline in 2016) shows elevated ratios in several indicators (examples include PV-to-GDP outcomes 16 and 24 in later years in Table 1b).

### Public sector debt dynamics (baseline and projections)
- Public sector debt (selected series): 43.1; 34.8; 31.6; 33.4; 33.4; 33.6; 34.1; 34.7; 35.1; 38.0; 43.7.
- Of which foreign-currency denominated (selected series): 25.3; 18.0; 14.4; 15.8; 16.3; 16.6; 17.0; 17.4; 17.8; 20.0; 25.5.
- Change in public sector debt (selected entries): -6.2; -8.3; -3.2; 1.8; 0.0; 0.2; 0.4; 0.6; 0.5; 0.6; 0.4.
- Identified debt-creating flows (selected entries): 1.1; -1.6; -0.6; 1.8; -0.1; 0.2; 0.4; 0.6; 0.4; 0.5; 0.6.
- Primary deficit (selected entries and averages): 0.4; 0.2; 1.3; 1.8; 1.2; 3.3; 3.1; 3.1; 2.9; 2.9; 2.8; primary deficits that stabilize the debt-to-GDP ratio: 6.7; 8.5; 4.5; 1.5; 3.2; 2.8; 2.5; 2.3; 2.3; 2.2; 1.9.
- Revenue and grants (selected entries): 23.4; 23.3; 26.4; 20.8; 20.6; 20.8; 21.5; 22.0; 22.3; 23.2; 25.2.
- Automatic debt dynamics and contributions (selected): contribution from interest rate/growth differential -3.5; -3.4; -2.4; -2.9; -3.0; -2.7; -2.4; -2.2; -2.2; -2.1; -1.6.
- PV of public sector debt (selected projection entries): 28.2; 29.4; 28.9; 28.8; 28.9; 29.2; 29.3; 30.9; 35.1.
- Gross financing need (selected entries): 3.1; 2.5; 3.5; 5.7; 5.8; 5.8; 5.9; 6.1; 6.0; 5.9; 6.1.
- Debt service-to-revenue and grants ratio (in percent, selected entries): 10.3; 8.3; 8.1; 10.9; 12.6; 12.9; 13.4; 14.2; 14.1; 13.4; 14.6.

### Alternative scenarios and stress sensitivity (public debt)
- Table 1d summarizes alternative scenarios and bound tests for public debt indicators:
  - Baseline PV of Debt-to-GDP Ratio examples: 29 (2015/16); 29 (2016/17); 29 (2017/18); 29 (2018/19); 29 (2019/20); 29 (2020/21); 31 (2025/26); 35 (2035/36).
  - Alternative scenario A1 (Real GDP growth and primary balance at historical averages) PV-to-GDP: 29; 28; 27; 26; 26; 26; 25; 24.
  - Alternative scenario A2 (Primary balance unchanged from 2015) shows higher long-run PV-to-GDP outcomes: 29; 29; 29; 29; 30; 30; 33; 40.
  - Bound tests B1-B5 display a range of elevated outcomes under growth, primary balance, depreciation, or other shocks (examples: B1 leads to PV-to-GDP 30; 32; 33; 34; 35; 40; 50 in later years).
- Debt service and PV-to-revenue sensitivity: baseline PV of Debt-to-Revenue Ratio entries: 141; 141; 139; 134; 133; 131; 133; 139. Alternative and stress scenarios can raise these ratios substantially (examples include values above 160, 174, 200 in severe stress scenarios in Table 1d).

*Source: STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION—SUPPLEMENTARY INFORMATION (IMF).*

### 1.  This supplement provides preliminary information on the impact of the recent floods in

### _cr15267 - 1.  This supplement provides preliminary information on the impact of the recent floods in

### Immediate human and physical impact
- Floods triggered by monsoon rains together with Cyclone Komen have, as of mid-August, killed 117 people and affected more than 1 million people (Myanmar’s population is estimated to be around 51 million).
- About 1.4 million acres of farmland are reportedly affected by flooding with about half of the affected totally damaged (around 3 percent of the estimated total sown area).
- Over 16,000 homes and 3,000 school buildings have been damaged by floods.
- As of mid-August, authorities are preparing preliminary estimates; an official comprehensive assessment will take time. The authorities have requested World Bank assistance to carry out a Post-Disaster Needs Assessment (PDNA).

### Short-term macroeconomic effects (staff assessment)
- Fiscal and current account deficits are likely to be higher in the short term, and overall growth this year weaker than previously projected.
- Staff expects the floods to add significant short-term pressure on inflation, government spending, and the external position.
- Some food prices have already experienced a spike, and it is expected that inflation will rise further from already elevated levels.
- Increased public spending for relief, recovery, and reconstruction will contribute to the already rapid import growth and, together with reduced crop exports, is likely to worsen the balance of payments relative to the staff baseline.
- Impact on the banking sector:
  - Private commercial banks: limited expected impact because they have limited exposure to the agricultural sector.
  - State-owned banks: likely more affected due to greater lending to agriculture; losses could affect the fiscal position via deterioration of the state economic enterprise sector balance.

### Policy response and immediate needs
- A state of emergency declared in the four worst-hit states and regions in the west; government appealed for international assistance.
- Immediate needs: food, shelter, clean water and sanitation.
- Authorities have set up a National Natural Disaster Management Committee headed by a Vice President.
- Government actions: distribution of seeds, support for farm equipment for replanting, repair of infrastructure (bridges and railroads).
- Development partners: a number have provided immediate disaster relief and humanitarian assistance.
- Multilateral lenders: World Bank and Asian Development Bank plan to use emergency assistance facilities and to bring forward disbursements allocated for Myanmar.
- Authorities intend to request Fund assistance under the Rapid Credit Facility.

### Fiscal policy implications and recommendations
- Expected impact may affect timing of fiscal consolidation; authorities should:
  - Continue aiming for an early phase-out of CBM financing of the fiscal deficit and scale up Treasury bill auctions.
  - Accommodate a temporarily larger fiscal deficit in this and next fiscal year, commensurate with additional resources needed for recovery and reconstruction.
  - Seek grants and concessional loans in external assistance to limit inflationary impact of higher deficits.
  - If external assistance falls short, consider further reprioritizing expenditure to protect spending targeted at the vulnerable and poor.
- A more decisive fiscal consolidation may be necessary in outer years to preserve fiscal targets and debt sustainability.

### Monetary policy and exchange rate recommendations
- Some short-term adjustment to monetary policy may be required.
- Maintain the early October target for full implementation of the recalibrated reserve requirement, but the CBM may need to adjust timing of sterilization operations if liquidity pressures appear.
- The CBM’s discount window could be used to meet temporary liquidity increases.
- CBM should be prepared to resume tightening (increase reserve requirement and scale up deposit auctions) if higher food prices have a long-lasting effect on aggregate inflation.
- Staff advises maintaining exchange rate flexibility to help mitigate external pressures and facilitate recovery.

### Broader economic context and indicators (authorities’ reporting and staff figures)
- Real GDP growth:
  - Staff’s estimate for FY 2014/15: 8.5 percent (FY 2013/2014: 8.4 percent).
  - Authorities’ estimates/projections: FY 2014/15: 9.1 percent; FY 2015/16: 9.3 percent.
- Sector shares of GDP: services and other 37.7 percent; industry 34.4 percent; agricultural, livestock, fishery and forestry 27.9 percent.
- Inflation: average CPI increased to 5.9 percent in FY 2014/15 (FY 2013/14: 5.7 percent); flood impacts could pose an upside risk to inflation in FY 2015/16.
- Current account: estimated to widen to around 6 percent of GDP in FY 2014/15 (FY 2013/14: 5 percent of GDP).
- Gross international reserves held by the Central Bank of Myanmar (CBM): US$ 5.12 billion, sufficient to finance about three months of imports.
- Credit to the private sector: estimated to expand by 35.5 percent in FY 2014/15 (FY 2013/14: 52.5 percent).
- Fiscal year definition: FY starts April 1 and ends March 31.

### Ongoing reforms and financial sector measures (authorities’ position)
- Fiscal reforms and public finance management (PFM) strengthening are ongoing, including Myanmar Modernization of Public Finance Management Project with development partners.
- Treasury Department established; Treasury bill auction introduced in January 2015 to reduce central bank deficit financing.
- Plans to issue Treasury bills with different maturities, lower minimum face amounts, and switch to multiple pricing auctions.
- Tax reforms: introduce value-added tax and property tax, broaden tax base, improve tax administration; Large Taxpayer Office established in 2014.
- Monetary and exchange rate reforms: moved towards a managed float, enacted new Central Bank Law, introduced deposit auction and Treasury bill auction after CBM autonomy in July, 2013.
- Reserve requirement: new reserve requirement introduced in April 2015 with full compliance required by October 2, 2015.
- Planned institutional changes: abolish CBM discount window and replace with overnight window when CBM Net system fully implemented in 2016.
- Exchange rate regime adjustments: steps to reduce divergence between official reference rate and market rate and abolish multiple exchange rates starting from July 13, 2015.
- Authorities request to retain the multiple currency practice under Article VIII, Section 3 until August 27, 2016 or the conclusion of the next Article IV consultation with Myanmar, whichever is earlier.

### Financial sector supervision and stability
- Financial sector rapidly expanding; authorities committed to strengthening regulatory and supervisory framework.
- Progress: upgrading prudential regulations, revising supervisory framework, developing supervisory techniques in line with international standards, and enhancing supervisory capacity with assistance from international partners and the Fund.

*Prepared by Asia and Pacific Department, August 24, 2015; Statement by Ms. Pornvipa Tangcharoenmonkong and Ms. Nwe Ni Tun, August 28, 2015.*

### 23. In order to achieve greater access to international markets, the CBM, on

### _cr15267 - 23. In order to achieve greater access to international markets, the CBM, on

### Foreign bank entry and supervisory capacity
- October 1, 2014: CBM granted preliminary approval to nine foreign banks to begin preparations to commence banking operations in Myanmar.
- CBM has issued final licenses to eight of the nine foreign banks, enabling them to begin their operations.
- Authorities are concurrently strengthening the capacity of supervisors to supervise and regulate foreign banks.
- Expected effects: promote greater use of technology and encourage international standard practices in the banking industry.

### Financial infrastructure and legal framework modernization
- Laws and regulations enacted:
  - Foreign Exchange Management Law (August 2012)
  - Central Bank of Myanmar Law (July 2013)
  - Securities Exchange Law (July 2013)
  - Regulations of Foreign Exchange Management Law (September 2014)
- Financial Institutions of Myanmar Law (FIML) and CBM rules and regulations are in the final stages.
- Rules and regulations under the FIML are expected to further modernize financial institutions.

### AML/CFT reforms and supervisory tools
- Anti-money Laundering and Counter Terrorism (AML/CFT) Law enacted in March 2014; accompanying regulations are being drafted with high priority.
- IMF TA project developed supervisory tools to assist CBM in strengthening AML/CFT legal framework and aligning with FATF Recommendations.
- January 27, 2015: CBM issued a Risk Management Guidance Note for banks.
- An updated risk based CDD Directive has been prepared with the assistance of IMF and will be issued soon to address FATF concerns identified in the Public Statement.

### Securities market development
- Securities Exchange Law (July 2013) enabled establishment of the Securities Exchange Commission (SEC) to supervise and manage the securities market.
- Authorities adopted a concrete plan to establish a stock exchange in late 2015.

### Financial access, payments, and technological innovations
- Steps to increase financial inclusion and access:
  - Expand branch network of the banking system
  - Encourage microfinance
  - Enhance innovations in ATMs, point-of-sale systems and mobile banking
- Payment and settlement systems: plan to further enhance with establishment of the CBM Net system.

### Interbank markets and money market development
- Interbank Market Steering Committee to undertake continued and extensive efforts towards establishment of a functioning and active interbank FX market and money market.

### Institutional capacity building and technical assistance programs
- Ongoing programs include:
  - “Modernizing the Funds, Payment and Securities Settlement Systems” project
  - Developing the interbank foreign exchange market and money market
  - Implementing new accounting standards
  - Preparing a financial sector development master plan
- Technical assistance from the regional and international community supports these efforts.

### Macroeconomic and structural reforms
- Comprehensive macroeconomic reforms deemed critical to maintaining economic stability, promoting sustainable growth and reducing poverty.
- Investment climate and business environment reforms:
  - New Foreign Investment Law (2012) provides foreign companies access to a wide range of new businesses, longer term leases, favorable tax incentives with various tax and customs duty exemptions, and improves transparency of foreign investment regulations and implementations.
  - Establishment of Special Economic Zones (SEZs) supported by a new SEZs law (January 2014).
  - Development of the National Export Strategy (NES) in cooperation with the International Trade Centre (ITC) and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ).
- State enterprise reforms and SME support:
  - Some state economic enterprises (SEEs) privatized, especially in industrial and manufacturing sectors, helping to reduce the fiscal deficit.
  - Authorities emphasize improving legal framework and funding for SMEs.
  - Various laws relating to industrial sectors enacted to transform Myanmar into an industrialized economy.
- Telecommunications and social sectors:
  - Progress in issuing telecom licenses to foreign companies.
  - Commitment to promote inclusive growth through improving health and education services.
- Statistical capacity: authorities recognize importance of timely macroeconomic statistics and committed to further efforts.

### Constraints, assistance, and outlook
- Authorities appreciate the Fund’s constructive policy advice and technical assistance.
- Given vast challenges and limited TAs available only to some reform areas, the economy faces significant difficulties in expediting comprehensive reforms.
- Authorities believe technical assistance, capacity building and advice from regional partners and the international community will enable Myanmar to overcome remaining challenges and achieve long-term economic development goals.
- Authorities express gratitude to the Fund as well as to the World Bank and the ADB for their support and policy recommendations, and look forward to continued support and cooperation.

*Source: IMF staff report excerpt (content unit: _cr15267 - 23. In order to achieve greater access to international markets, the CBM, on).*

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