Press Release No. 14/462

Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with Myanmar

October 6, 2014

On September 24, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Myanmar.

Growth is accelerating and the external balance remains stable. Output growth is estimated to have risen to 8¼ percent in fiscal year (FY) 2013/14 (April-March). Inflation has broadly stabilized, and stood at 6 percent (year-on-year, y/y) in April 2014. After depreciating in 2013, the exchange rate has stabilized. The current account deficit is estimated to have widened to 5½ percent of GDP in 2013/14, but to have been more than financed by foreign direct investment, new loans, and inflows related to telecommunications licenses. International reserves held by the Central Bank of Myanmar (CBM) increased to US$4.5 billion by end-March, covering 2¾ months of prospective imports. While the base remains low, broad money and private sector credit continue to grow rapidly, at 32¼ and 58½ percent (y/y), respectively in February. The headline fiscal deficit in 2013/14 is estimated at 1½ percent of GDP. A debt sustainability analysis indicates that Myanmar is now at a low risk of debt distress.

The economic outlook is favorable. Growth is expected to average 8¼ percent in the next few years, led by rising gas production and investment. Inflation is expected to remain under control at around 6 percent over the medium term. The current account deficit is projected to remain broadly stable, while the CBM’s international reserves are forecast to continue to increase rapidly as foreign inflows intensify. With transfers from the Union Government to states and regions increasing significantly, the underlying fiscal deficit is set to widen to around 5½ percent of GDP in 2014/15, but further one-off revenues should bring the headline deficit to around 4½ percent of GDP. In the medium term, the underlying fiscal deficit is projected to again decline to below 5 percent of GDP.

Medium and long-term prospects remain strong, but require sustained policy and institutional reforms even as the authorities’ capacity is being strained. In order to achieve rapid and inclusive growth, it is vital to maintain near-term macroeconomic stability while building modern institutions and sound policy frameworks to manage the budget and financial sector.

Risks arise from thin external and fiscal buffers, particularly as the authorities’ capacity to develop and implement policies and absorb technical assistance is being stretched. The entry of foreign banks will burden nascent supervisory capacity and challenge monetary and exchange rate management, particularly in the face of continuing demand-side pressures on inflation. At the same time, structural fiscal risks are building as tax exemptions increase even as expenditure pressures rise. External borrowing for off-budget operations is also increasing. On the upside, large one-off inflows from concession fees for oil and gas exploration could materialize in the near term

Executive Board Assessment²

Executive Directors commended the authorities for the continued progress with their economic reform program, which has contributed to strong growth. Directors noted that while the medium and long-term economic prospects are favorable, Myanmar’s economy faces risks in the short run as fiscal buffers are thin and the capacity to develop and implement policy remains constrained. Accordingly, Directors recommended further efforts to reinforce policy and institutional frameworks and pursue structural reforms. Directors agreed that continued technical assistance from the Fund and other international institutions remains critical given Myanmar's vast transformational needs and limited capacity.

Directors welcomed the advances made in developing monetary policy tools, but saw need for a more vigorous deployment of these tools to manage the impact of foreign inflows, and keep reserve money and inflation under control. Priority should be given to improving liquidity forecasting, and developing a market for treasury bonds. Deficit monetization also needs to continue to be scaled back. Directors supported the policy of smoothing exchange rate fluctuations while not targeting a specific rate. Noting that international reserves remain low, they urged the establishment of an automatic mechanism to transfer public sector foreign exchange earnings to the central bank. Furthermore, Directors encouraged the authorities to strengthen over time the central bank’s internal systems, particularly in accounting and reserves management.

Directors emphasized the importance of a prudent orientation of fiscal policy that addresses Myanmar’s development needs while safeguarding debt and macroeconomic sustainability. They supported the strategy to keep fiscal deficits below 5 percent of GDP and underscored that off-budget borrowing needs to be carefully controlled. Additional efforts to mobilize revenues are also necessary to allow increases in social spending and public investment. Priority should be given to cutting back exemptions, strengthening tax administration, and preparing for the introduction of a VAT. Directors stressed the need to strengthen public financial management.

Directors underscored the importance of upgrading regulation and supervision of the

banking sector in anticipation of entry by foreign banks. They also cautioned against the

establishment of additional policy banks and encouraged the authorities to ensure that their operations do not pose financial and fiscal risks. Directors recommended addressing the remaining deficiencies in the anti-money laundering framework.

Directors stressed that continued progress with structural reforms is necessary to ensure macroeconomic stability and spur inclusive growth. Reform efforts should focus on investments in infrastructure, expanding education and health services, boosting access to finance, improving the business climate, and diversifying exports. Improving economic statistics is also essential.