IMF warns of rising fiscal risks, calls for broad-based reforms

 

During the June 4-17 visit, the mission met with President’s Office Minister Soe Thane, Finance Minister Win Shein, Central Bank Governor Kyaw Kyaw Maung, and other senior officials, parliamentarians, representatives from the private sector and civil society, donor agencies and diplomats.

At the conclusion of the mission, referred to by the IMF as its Article IV Consultation, mission chief Matt Davies made the following said the country was “well placed to build on its recent economic reforms and embark on an extended period of rapid growth, emulating its regional peers”. 

“However, ensuring that this growth is sustainable and inclusive requires decisive implementation of a broad range of policy and structural reforms,” he added.

He described the economic outlook as “favourable”, saying GDP growth was expected to accelerate slightly to 8.5 per cent in fiscal year ending next March from 8.25 per cent in the last fiscal year. Rising gas production and investment would drive growth, Davies said. Inflation is expected to remain contained at around 6.5 percent this fiscal year, while increasing capital inflows outweigh a widening external current account deficit. “Broad money and credit to the economy will continue to expand at double-digit rates,” he said.

The country faces numerous risks, however. “Fiscal and external buffers remain thin and demand-side pressures on inflation and large capital inflows will strain the still-infant macroeconomic management tools,” Davies warned. “The expected entry of foreign banks to the already rapidly growing financial sector will place further demands on macroeconomic policy and stretch scarce supervision capacity. Fiscal risks are also rising despite recent reductions in the fiscal deficit. These stem from the use of external borrowing to finance off-budget operations, increasing tax exemptions and changing relations with state and regional governments and state economic enterprises,” he explained.

He said that completing the Central Bank of Myanmar’s transition “to an autonomous institution with enhanced capacity and better tools will underpin continued macroeconomic stability”. The transition requires continued growth in bank’s international reserves, while maintaining a flexible exchange rate regime, he added. Further progress in building monetary policy tools is needed to address inflationary pressures and manage foreign exchange inflows. The expected introduction of treasury-bill auctions next year will provide a framework for reducing the central bank’s deficit financing and lay the basis for eventual interest rate liberalisation, Davies said.

Although year’s fiscal deficit is expected to remain within the 5 per cent-of-GDP deficit target, this is in part due to large one-off revenues from telecom licences, he said. “Keeping the underlying medium-term deficit under 5 percent of GDP, while also expanding development spending, requires increased tax revenues. This relies on policy reforms that create a system that is easy to comply with and enforce, with minimal exemptions,” he said.

“It also needs further progress in reforming tax administration. Increasing the share of concessional financing will provide space for more development spending,” Davies added.

He also stressed the need for stronger supervision of the banking sector. “Modernisation of the financial sector is making headway, but requires a modernised regulatory system and stronger supervision,” he said. “Implementing modernised prudential regulations as soon as possible that apply to all banks, will lay the foundation for the development of a sound financial system. This is particularly important given the expected entry of foreign banks. In order to allow supervision capacity to develop, and to minimise risks, the issuance of new domestic licenses should be carefully controlled” he explained.

“The IMF will continue to work closely with the authorities on macroeconomic policies and reforms. Our technical assistance and training will continue to intensify under the guidance of the authorities and in coordination with other development partners,” Davies said.