Myanmar: Staff Report for the 2017 Article IV Consultation

2017 Article IV Consultation - Press Release; Staff Report; and Statement by the Executive Director for Myanmar

Abstract

2017 Article IV Consultation - Press Release; Staff Report; and Statement by the Executive Director for Myanmar

Context

1. Myanmar’s economy is rebounding and long-term prospects remain strong. The economy is rebounding from the slowdown in 2016/17, and the medium-term outlook remains favorable, albeit moderately weaker than previously anticipated. Strong endowments, such as demographics, competitive labor force and strategic location, continue to underpin convergence. However, the economic transition faces increased downside risk, including from the Rakhine State crisis, and latent banking sector risks which are surfacing as banks adjust to new prudential regulations that upgrade the regulatory framework towards international standards.

2. The humanitarian crisis in Rakhine State has created downside risk, but direct economic impacts have been largely localized. In August 2017, the new government’s focus on the peace process faced a setback, due to the intensification of violence in northern Rakhine State. In the following months, more than 600,000 refugees are estimated to have fled to neighboring Bangladesh. Bangladesh and Myanmar in January 2018 agreed a timeframe for voluntary refugee repatriation that will be closely watched by the international community. The humanitarian crisis in northern Rakhine state has created uncertainty over development partner finance and foreign investor sentiment. While direct economic impacts have been largely localized, the social costs and full impacts of the crisis are yet unfolding.

3. A reinvigorated reform process is needed to sustain growth and achieve the Sustainable Development Goals (SDGs). Myanmar has embarked on a complex reform process, to build institutions and transition to a market-based economy. Reform progress has continued, and several detailed sectoral reform plans have been created. However, the development of an overarching economic roadmap would provide a clear policy context for private sector development. Structural reforms should focus on priority areas with strong productivity payoffs, and making growth more inclusive.

Recent Developments

4. The economy weakened but macroeconomic imbalances were reduced in 2016/17 (Table 1 and Figure 1). The new government faced a challenging first year in 2016/17, with lower-than-expected growth of 5.9 percent. The growth slowdown was mainly due to the temporary suspension of construction permits in Yangon, and weak agricultural production and exports. In addition, the fiscal deficit was lower than expected, at around 2.5 percent of GDP, and down from the election year deficit of 4.4 percent of GDP in 2015/16 (Table 2). The lower fiscal deficit reduced the government’s financing need, causing central bank financing of the deficit to fall in nominal kyat terms, although the target ceiling of 40 percent of domestic financing for 2016/17 was not met. On top of the reduced monetary financing, lower food prices took inflation to 6.8 percent (period average). The fiscal adjustment also contributed to a lower current account deficit, which fell to about 3.9 percent of GDP in 2016/17, from 5.1 percent in 2015/16. The current account deficit has continued to be principally financed by strong FDI, and the real exchange rate and international reserves were broadly stable over 2017 (Table 3 and Figure 2).1 Foreign exchange reserves were US$5.2 billion or around 3 months of prospective imports as of November 2017, still below staff’s assessment of adequate reserve levels (5–6 months of prospective imports).

Table 1.

Myanmar: Selected Economic Indicators, 2013/14–2019/20 1/

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Sources: Data provided by the Myanmar authorities; and IMF staff estimates and projections.

The fiscal year is from April 1 to March 31, up to 2017/18. From 2018/19 onwards the fiscal year is from October 1 to September 30. The six month transition period from April 1, 2018 to September 30, 2018 is shown in the column headed 2018.

Real GDP series is rebased to 2010/11 prices by the authorities.

Union and state/region governments and state economic enterprises.

Excludes one-off receipts from telecoms licenses and signature bonus from gas contracts.

FDI from 2017/18 onwards reflects improved forex transaction data collection, which has caused a break in the data series.

Figure 1.
Figure 1.

Myanmar: Macroeconomic Developments

Citation: IMF Staff Country Reports 2018, 090; 10.5089/9781484349175.002.A001

Table 2.

Myanmar: Summary Operations of the Nonfinancial Public Sector, 2013/14–2019/20 1/

(Consolidated accounts)

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Sources: Data provided by the Myanmar authorities; and IMF staff estimates and projections.

The fiscal year is from April 1 to March 31, up to 2017/18. From 2018/19 onwards the fiscal year is from October 1 to September 30. The six month transition period from April 1, 2018 to September 30, 2018 is shown in the column headed 2018.

State economic enterprises’ (SEEs) contributions comprise profit transfers, income and commercial taxes paid to the Union Government (UG).

Includes proceeds from sales of telecom licenses; and signature bonuses from gas production sharing contracts for on- and off-shore blocks.

Excludes one-off receipts from telecom licenses and gas contracts signature bonuses.

Data on a comparable breakdown for SEEs is not available.

Excludes defense wages and salaries.

Includes mostly grants to subnational governments.

Table 3.

Myanmar: Balance of Payments, 2013/14–2019/20 1/

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Sources: Data provided by the Myanmar authorities; and IMF staff estimates and projections.

The fiscal year is from April 1 to March 31, up to 2017/18. From 2018/19 onwards the fiscal year is from October 1 to September 30. The six month transition period from April 1, 2018 to September 30, 2018 is shown in the column headed 2018.

FDI from 2017/18 onwards reflects improved forex transaction data collection, which has caused a break in the data series.

Figure 2.
Figure 2.

Myanmar: Macro-Structural Developments

Citation: IMF Staff Country Reports 2018, 090; 10.5089/9781484349175.002.A001

uA01fig01

Fiscal Revenue and Expenditure, 2016/17

(In percent of GDP)

Citation: IMF Staff Country Reports 2018, 090; 10.5089/9781484349175.002.A001

Sources: Myanmar authorities; and IMF staff calculations.
uA01fig02

Reserve Money and Inflation

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2018, 090; 10.5089/9781484349175.002.A001

Sources: Myanmar authorities; and IMF staff estimates.
uA01fig03

Private Banks’ Credit Growth: Contribution by Sector

(Contributions to annual growth, in percent)

Citation: IMF Staff Country Reports 2018, 090; 10.5089/9781484349175.002.A001

Source: Authorities’ data.

5. Deceleration of rapid credit growth is having a contractionary impact on corporate investment and the real estate sector while moderating financial stability risks (Figure 3). The banking system is adjusting to new prudential regulations, which are starting to shed light on previously under-reported fragilities. Against this background, credit growth has moderated from its peak though it was still strong at 27 percent (y/y) in September 2017 (Table 4). The slowdown in bank credit has affected corporate activity and contributed to softening in construction and the property market. The reduction in credit exposures to real estate and related lending to conglomerates that began in mid-2016 with the temporary suspension of construction permits in Yangon will help lower systemic risks.

Table 4.

Myanmar: Monetary Survey, 2013/14–2020/21 1/2/

(In billions of kyat at end-period, unless otherwise indicated)

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Sources: Central Bank of Myanmar; and IMF staff estimates and projections.

The fiscal year is from April 1 to March 31, up to 2017/18. From 2018/19 onwards the fiscal year is from October 1 to September 30. The six month transition period is from April 1, 2018 to September 30, 2018. The column headed 2018 shows data for September 2018.

From 2012/13, foreign assets and liabilites are valued at the reference rate (before: at official exchange rate).

Figure 3.
Figure 3.

Myanmar: Macrofinancial Developments

Citation: IMF Staff Country Reports 2018, 090; 10.5089/9781484349175.002.A001

Sources: Myanmar authorities; and IMF staff calculations.

Outlook and Risks

6. The medium-term outlook remains favorable (Table 5). The near-term growth trajectory is weaker than previously expected, due to the subdued pick up in domestic investment and uncertainties related to the Rakhine state crisis, particularly for tourism. However, growth is expected to rebound to 6.7 percent in 2017/18, mainly supported by a recovering agricultural sector, exports, and higher public spending.2 Rice and garment exports are growing at above 40 percent y/y in 2017/18 while natural gas exports are expected to get a boost as contracted prices reset with lag (Figure 1). In addition, Myanmar is poised to benefit from trade service flows associated with oil and gas pipelines from Southern Rakhine state to Kunming, China. Buoyant tax revenues and the 2017/18 supplementary budget are expected to support higher fiscal spending in the second half of 2017/18. Headline inflation is projected to decline to 5.5 percent in 2017/18. Dissipating lower food price effects are expected to cause inflation to increase temporarily before declining back to around 5 percent in the medium term. Over the medium term, growth is expected gradually to pick up towards the estimated potential rate of about 7–7.5 percent, reflecting continued FDI inflows and higher public investment spending and efficiency. In line with development needs, the current account balance is expected to remain in deficit, with the improvement in commodity prices and exports more than offset by growth in FDI and infrastructure related imports.

Table 5.

Myanmar: Medium-Term Projections 2013/14–2022/23 1/

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Sources: Data provided by the Myanmar authorities; and IMF staff estimates and projections.

The fiscal year is from April 1 to March 31, up to 2017/18. From 2018/19 onwards the fiscal year is from October 1 to September 30. The six month transition period from April 1, 2018 to September 30, 2018 is shown in the column headed 2018.

Real GDP series is rebased to 2010/11 prices by the authorities.

Union and state/region governments and state economic enterprises.

Excludes one-off receipts from telecoms licenses and signature bonus from gas contracts.

FDI from 2017/18 onwards reflects improved forex transaction data collection, which has caused a break in the data series.

7. Risks to growth are tilted to the downside. Long-standing weaknesses in the banking sector have surfaced as banks adjust to new regulations, raising the risk of a sharp reversal of previously-strong credit growth. The humanitarian crisis in Northern Rakhine state has created uncertainties regarding DP finance and investor sentiment. The highly targeted U.S. sanctions are not expected to affect the broader economy, but any broadening of sanctions would add to downside risks. The upcoming change in the fiscal year, from October 1, 2018, will challenge limited public sector capacity and may introduce greater risks on revenue and budget under execution. Other risks stem from external sources, including commodity prices, potentially volatile global financial markets, and exposure to spillovers from China. Flood effects were relatively moderate in 2016/17, but natural disasters remain an ever-present risk (Annex 1).

8. A reduction in external financing would raise risks to growth and stability, while the economy could be boosted by reinvigorated reforms and greater use of concessional finance. The Rakhine state crisis has created uncertainty over DP budgetary financing, that may have macroeconomic consequences depending on the authorities’ response. As an illustration, a temporary pause in anticipated DP budgetary financing (0.8 percent of GDP lower compared to the 2017/18 baseline) would result in a cut in spending, lower growth and higher central bank financing.3 An equal cut in spending and higher fiscal deficit would result in a moderate exchange rate depreciation and higher inflation, assuming no indirect negative confidence effects. Under the assumption that the financing shortfall is limited to budgetary financing and does not trigger stability risks, the impacts would be manageable, but economic activity and the poor would be negatively affected. On the other hand, a second wave of reforms and higher public investment using greater concessional finance would raise potential growth and foster inclusion.4

Myanmar: Key Macroeconomic Assumptions

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Source: IMF staff calculations.

Authorities’ Views

9. The authorities broadly agreed with staff’s view of the recent developments and outlook. The authorities noted that the lower deficit was driven by greater fiscal prudence, which had helped to reduce central bank deficit financing and inflation. While limited capacity had hindered budget execution, implementation should improve with the change in the fiscal year. The authorities noted that although lower inflation was welcome, this had also reflected negative food price shocks and reduced farm incomes. Regarding the Rakhine state, they noted that public spending would be redirected to aid the reconstruction along with other efforts to address regional disparities.

A Second Wave of Reforms to Sustain the Growth Momentum

Myanmar’s initial phase of economic liberalization led to an impressive growth take-off; now a second wave of reforms is needed to sustain the momentum. Articulation of an overarching economic roadmap will help to set economic direction and support investor confidence.

10. Myanmar’s initial economic liberalization led to an impressive growth take-off and poverty reduction, underpinned by FDI. The growth take-off has been even stronger than in Myanmar’s fast-growing neighbors and was led by a surge in FDI, with investors attracted by Myanmar’s status as one of Asia’s last frontier markets. World Bank estimates show a sharp decline in the poverty rate, from 48.2 percent in 2004/5 to 42.4 percent in 2009/10, and 32.1 percent in 2015—although 46 percent of the population remains under the near-poverty line.5 The rate of poverty reduction is comparable to early-liberalization success stories in the region.

uA01fig04

Growth Index, Years from Reform Commencement

(Year 0=100)

Citation: IMF Staff Country Reports 2018, 090; 10.5089/9781484349175.002.A001

Sources: World Economic Outlook database; and IMF staff calculations.
uA01fig05

FDI Inflow, Years from Reform Commencement

(Percent of GDP)

Citation: IMF Staff Country Reports 2018, 090; 10.5089/9781484349175.002.A001

Sources: World Economic Outlook database; and IMF staff calculations.

11. Recent reform progress has included the updated prudential regulations and directives pertaining to the banking sector, and good progress on revenue mobilization and statistics. Financial sector reforms have also included developing a benchmark government bond yield curve and liberalizing trade finance activities of foreign bank branches. A civil service reform action plan was released and a rise in the minimum wage was announced recently.6 A higher minimum wage may support more inclusive growth by raising incomes of workers near the poverty line while average labor costs in Myanmar would remain regionally competitive and support continued job creation (see Figure 2). A new Companies Act has been enacted, and is expected to be effective in FY2018/19. The new Companies Act replaces the 1914 Act, and will allow foreigners to take up to a 35 percent stake in Myanmar companies. The recent issuance of bylaws to the January 2016 Condominium Law which clarifies nonresident ownership should help stabilize the softening property market.

uA01fig06

Poverty Reduction Following Economic Reforms

(Change in percent of total population)

Citation: IMF Staff Country Reports 2018, 090; 10.5089/9781484349175.002.A001

Sources: World Bank’s World Development Indicators; and IMF staff calculations.

12. An overarching medium-term plan is needed to provide strategic direction. A well sequenced second wave of reforms and greater infrastructure investment would help Myanmar’s economy to further integrate with global value chains (GVCs).7 Cross-country experience suggests that simultaneous reform in multiple areas can have strong productivity payoffs, due to gains from complementarities, particularly for low income developing countries (LIDCs).8 For Myanmar, increased private sector consultation and development of an overarching medium-term development plan with a fiscal framework, would help to provide strategic direction and facilitate reform implementation. Structural reforms should focus on agriculture, the banking system and interest rate liberalization, infrastructure, trade and the legal framework. Further opening up of the economy to foreign participation building on the new Companies Act (e.g., by allowing majority foreign ownership and reducing sectoral restrictions) will assist in providing opportunities for skills and technology transfer.

uA01fig07

ASEAN Economies: Infrastructure Quality Index, 2016–17

(Index, Highest = 7 and Lowest = 1, weighted by GDP in US$ at current PPP)

Citation: IMF Staff Country Reports 2018, 090; 10.5089/9781484349175.002.A001

Sources: World Economic Forum; and IMF staff estimates.
uA01fig08