IMF warns against short-term risks

 

In the second review under the staff-monitored programme (SMP), the IMF highlighted low international reserves, elevated inflation, and undeveloped monetary policy tools as the short-term risks to the economy.

“Notwithstanding these risks, the overall economic outlook is favourable…Macroeconomic policy should therefore focus on building on the successes achieved under the SMP,” it said.

Highlighting the success of the SMP are macroeconomic stability preserved and all quantitative and structural benchmarks met. Progress in building the institutions for economic management has also been made, though much remains to be done.

CBM’s reserves, at 90 per cent of total government reserves, are barely enough to cover four months of imports. Meanwhile, inflation is expected to exceed 6 per cent by end of the 2013/14 fiscal year and remain elevated in the next fiscal year, due to rapid money and credit growth, kyat depreciation and electricity price hikes. 

In 2013, the kyat was on the downward trend against US dollar. It ended the year at nearly Ks 990 per dollar, before strengthening this year to slightly above Ks 960 in April. The weakening in the kyat in 2013 passed on to local prices, pushing up inflation. 

Matt Davies, head of IMF mission to Myanmar, said after his visit in January that international reserves are still low and vulnerable to shocks.

At present, the Central Bank of Myanmar (CBM) has not yet held all international reserves of the country. The recently-enacted law requires the transfers of such reserves from state banks. According to Davies, that boosted the CBM’s reserves rapidly in 2013.

Overall reserves (owned by the state and held by the CBM and state-owned banks) stood at $4.7 billion (around 3.2 months of prospective imports) at end-2013.

“This progress needs to be consolidated and made automatic so that CBM can accumulate further reserves to provide a larger cushion against external shocks. CBM also requires full budgetary autonomy and a strengthened market framework in order to implement effective monetary policy,” said Davies.

In the second review report, the IMF said that significant foreign exchange inflows from the sale of telecommunications licenses are expected over the next three to nine months, as well as rising FDI and loan disbursements over the course of 2014/15. This should allow reserve accumulation to resume. 

It also suggested that CBM’s foreign exchange policy put more emphasis on conserving and building international reserves and less on limiting exchange rate flexibility. 

“If well managed, additional inflationary pressures would be contained and could be controlled through use of monetary policy tools.”  

Meanwhile, foreign exchange inflows to the government and state economic enterprises (SEEs) should be automatically channeled to the CBM.

In the letter of content dated February 18, the Myanmar’s authorities are committed to continue building on the successes achieved under the SMP. 

Looking forward, we will continue building on the successes achieved under the SMP.

“We expect them (reserves to increase to over 3 months of imports during 2014/15 and will seek to increase them further to further safeguard external stability. We will also continue strengthening the CBM’s monetary and exchange policy framework and tools, which will be required to keep inflation in check and manage foreign inflows. The CBM will also continue to enhance the foreign exchange market; we intend to remove final exchange restrictions soon which will enable us to accept our Article VIII obligations in the first half of 2014,” said the letter signed by Finance Minister Win Shein and CBM Governor Kyaw Kyaw Maung.

They also noted that the 2014/15 budget will include tax policy measures to allow the country to further expand development spending while keeping the deficit below 5 per cent of gross domestic product (GDP). 

“We believe this target will remain appropriate through the medium term and will continue actively pursuing public financial management reforms to enhance revenue and improve the efficiency and effectiveness of public expenditure,” they said.

The IMF also noted in the second review report that administrative reforms to boost revenue and public financial management need to be driven forward. 

Meanwhile, monetary policy tools need to be developed urgently to counter inflationary pressures. Achieving a reserve money target consistent with maintaining broad stability in inflation and the real exchange rate will likely require significant sterilisation operations in 2014/15, and thus rapid deployment of effective monetary policy tools. This will lay the ground for the development of wholesale money and bond markets, and ultimately liberalisation of retail interest rates.

One concern is on the bureaucracy capacity to facilitate the reforms. 

“Myanmar authorities are pursuing a wide-ranging economic reform programme against a background of political liberalisation. Challenges are formidable, however, as the authorities’ capacity to design and implement far-reaching reforms and absorb international assistance is being stretched.”