More structural reforms urged

 

The executive board concluded the Article IV consultation1 with Myanmar on September 24.

“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,” they said.

The directors also underscored the importance of upgrading regulation and supervision of the banking sector in anticipation of entry by foreign banks. The consultation was completed before the Central Bank of Myanmar (CBM) decided to award banking licenses to 9 foreign banks. 

Myanmar authorities are commended for the continued progress with their economic reform programme, which has contributed to strong growth. 

Yet, while the medium and long-term economic prospects are favourable, Myanmar’s economy faces risks in the short run as fiscal buffers are thin and the capacity to develop and implement policy remains constrained. Myanmar is recommended to further its efforts in reinforcing policy and institutional frameworks and pursue structural reforms. Continued technical assistance from the Fund and other international institutions remains critical given Myanmar's vast transformational needs and limited capacity, they said.

The IMF has maintained the positive view towards Myanmar’s economic development and outlook.

After the 8.25 per cent growth in the 2013-14 fiscal year (April-March), the economic growth is expected to average 8.25 per cent in the next few years, led by rising gas production and investment. Inflation is expected to remain under control at around 6 per cent 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. International reserves held by the central bank increased to US$4.5 billion by end-March, covering 2.75 months of prospective imports. While the base remains low, broad money and private sector credit continue to grow rapidly, at 32.25 and 58.5 per cent year on year, respectively in February.

With transfers from the government to states and regions increasing significantly, the underlying fiscal deficit is set to widen to around 5.5 per cent of GDP in 2014-15, but further one-off revenues should bring the headline deficit to around 4.5 per cent of GDP. In the medium term, the underlying fiscal deficit is projected to again decline to below 5 per cent of GDP.

The headline fiscal deficit in 2013-14 is estimated at 1.5 per cent of GDP. A debt sustainability analysis indicates that Myanmar is now at a low risk of debt distress, the IMF said.

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.

Though, 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 materialise in the near term.

Myanmar is also urged to ensure a prudent orientation of fiscal policy that addresses its development needs while safeguarding debt and macroeconomic sustainability. The country is commended for its strategy to keep fiscal deficits below 5 per cent of GDP. Yet, additional efforts to mobilise 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.