IMF Executive Board Concludes 2019 Article IV Consultation with Myanmar

Via IMF (Den Internationale Valutafond)

The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on February 28, 2020. The staff report reflects discussions with the Myanmar authorities during December 5–19, 2019 and is based on the information available as of February 11, 2020. It focuses on Myanmar’s near and medium-term challenges and policy priorities and was prepared before COVID-19 became a global pandemic and resulted in unprecedented strains in global trade, commodity and financial markets. It, therefore, does not reflect the implications of these developments and related policy priorities. These developments have greatly amplified uncertainty and could heighten downside risks around the outlook. Staff is closely monitoring the situation, including related policy responses from the authorities, and will continue to work on assessing its impact in the Myanmar economy.

Washington, DC –
the Executive Board of the International Monetary Fund (IMF) concluded
the Article IV consultation with Myanmar.

[1]

Economic activity in FY2018/19 remained below levels seen in the last
decade. Growth is expected to be subdued at 6.5 percent in FY2018/19,
up slightly from 6.4 percent in FY2017/18 on account of a modest fiscal
stimulus and one-off increase in gas exports. Domestic demand remains
weak reflecting slowing credit growth, a correction in real estate
prices and declining investments. Subdued economic activity has
narrowed the current account deficit as imports fell while exports,
especially textiles, held up despite global headwinds. The narrower deficit offset weaker FDI and other
inflows allowing reserves and the kyat to stabilize. Headline inflation
stood at 8.6 percent at end-September due to one-off factors such as
higher electricity tariffs and food and fuel prices.

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Medium-term growth is likely to remain subdued. Growth in FY2019/20 is
expected to moderate slightly to 6.4 percent as continued uncertainty
weighs on investor sentiment in the runup to the November 2020
elections. This slowdown is despite the fiscal stimulus envisaged in
the FY2019/20 budget, which is appropriate given cyclical weakness.
Starting FY2020/21, bank deleveraging is likely to slow credit and GDP
growth as legacy problems are addressed. Inflation is expected to fall
to 6–7 percent range in the medium term as recent one-off factors
abate.

Risks to the outlook have shifted further to the downside. On the
domestic front, growth could underperform if fiscal spending does not
pick up. Rising NPLs and undercapitalization in some private banks
could precipitate systemwide distress with large macro-financial
spillovers. Renewed conflict and limited progress on the ongoing
refugee crisis would continue to limit donor financing and dampen
investor sentiment. On the external front, risks include the impact of
global trade tensions, higher crude oil prices, a slowdown in China,
and natural disasters. An upside risk is that growth is boosted by the
planned scaling up of infrastructure and human capital spending and
full implementation of the Myanmar Sustainable Development Plan.
However, these projects need to be carefully managed to contain fiscal
risks.

Executive Board Assessment

[2]

Executive Directors noted that economic activity remains below
potential in the face of stronger domestic and external headwinds. In
the near‑term growth is likely to remain subdued due to the correction
in the real estate market, weaker donor financing and investor
sentiment, in part related to the ongoing humanitarian crisis in
Rakhine, and macro financial spillovers from bank deleveraging.
Directors agreed that a second wave of fiscal and structural reforms
should focus on peace, stability and good governance to boost growth,
help achieve the Sustainable Development Goals (SDGs) and realize
Myanmar’s favorable long‑term prospects.

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Directors emphasized the elevated systemic risks and the urgent need to
address fragilities in the banking system. They noted that the extension granted by the Central Bank of
Myanmar (CBM) for banks to comply with capital adequacy and large
exposure limit requirements should be used to enhance monitoring
and diagnostics. The CBM should also encourage banks to restructure viable loans,
recapitalize and prepare a comprehensive financial sector restructuring
strategy, including contingency plans in the event of further distress.
In addition, Directors urged the authorities to fully implement
international reporting standards to allow a more comprehensive
assessment of the banks’ financial situation.

Directors noted that the current monetary policy stance helps keep
market rates at positive real levels and broad money growth on a
declining trend. They commended the successful transition to a
market‑determined reference exchange rate mechanism and plans to
introduce interest payments on excess reserves. Directors believed that
further upgrades in the monetary framework and interest rate
liberalization would help enhance the transmission mechanism.

Directors agreed that a mildly expansionary fiscal stance in the
near‑term was appropriate. They also noted that it would be critical to
enhance revenue mobilization along with public financial management
reforms to scale up SDG‑related spending in a sustainable manner.
Directors regretted the spike in central bank financing towards the end
of last fiscal year. They encouraged the authorities to improve cash
management and undertake proactive debt issuances to avoid a repetition
in this fiscal year, and to phase out CBM financing in next fiscal year
as originally envisaged. Over the medium term, the planned scaling up
of infrastructure investment needs to be well managed with due regard
to fiscal risks.

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Directors agreed that capacity development will be crucial to support
the ambitious structural and policy reforms, with some reprioritization
to account for absorptive capacity constraints and rapidly evolving
needs. They also noted that governance and corruption vulnerabilities
need to be addressed, along with gaps in the AML/CFT framework
identified by the Asia and Pacific Group.