IMF official warns Central Bank of inflation risks

 

Inflation is expected to exceed 6 per cent by the end 2013-2014 fiscal year and escalate in the next fiscal year, said Matt Davies, chief of IMF mission to Myanmar, while in Yangon late January.

The mission chief mentioned arising risks to the country’s economic outlook, with emphasis on limited macroeconomic management capacity and narrow cushions.

“Inflation remains elevated and there are pressures from rapid money and credit growth, kyat depreciation and possible electricity price hikes. International reserves are still low and vulnerable to shocks,” Davies said.

He emphasised that the Central Bank of Myanmar requires full budgetary autonomy and a strengthened market framework in order to implement an effective monetary policy.

The Central bank became autonomous in July last year from the Ministry of Finance. In July this year, which is one year after the transition period, the bank aims to achieve full autonomy.

 “Full operation of autonomy may take some time. It may take longer (than July) . But I think the government has policy to reform the central bank as a fully autonomous body,” Davies said.

“The CBM’s reserves grew rapidly in 2013 through transfers from state banks and it now holds most of the government’s international reserves, as envisaged in the CBM law. This progress needs to be consolidated and made automatic so that CBM can accumulate further reserves to provide a larger cushion against external shocks.”

The fiscal deficit targets for 2013 were achieved by a comfortable margin. The authorities remain committed to a fiscal deficit target of 5 percent of GDP, which strikes an appropriate balance between financing development and maintaining stability, Davies said.

 “While monetary policy tools are still being developed fiscal policy has to bear the burden of macroeconomic stabilisation. Monetization of the deficit should therefore be quickly reduced to moderate inflation pressures. Tax revenue is growing quickly but remains low; to enable increased spending it should be boosted though broadening the tax base and improving compliance.”

The concern was expressed though Davies praised the overall improvement in the country’s economy.

“Real GDP growth in 2012-13 fiscal year reached 7.3 per cent, led by services and manufacturing. We expect it to rise further to 7.5 per cent in 2013-14 fiscal year and 7.75 percent in 2014-15 fiscal year. Credit to the private sector is expected to decline from current high levels but remain rapid at around 30 per cent,” he said.

The fiscal deficit in 2013-14 fiscal year is expected to be broadly in line with the budget target of 5 per cent of GDP, but should fall to 4.5 percent in FY 2014-15, as a result of one-off revenues from telecommunications licences.

Aside from inflation, a point of concern is the external current account deficit, which is expected to widen further to about 5 per cent of gross domestic product (GDP) in this period. 

“As a result, the government’s accumulation of international reserves during FY2013-14 was slower than projected,” he said.

Overall reserves still remain above 3 months of imports and accumulation should pick up in FY 2014-15 as foreign direct investment and other inflows outweigh the current account deficit, he said.