On August 28, the Executive Board of the International Monetary Fund (IMF) concluded the 2015 Article IV consultation¹ with Myanmar.

Myanmar’s economic growth remains strong, but macroeconomic imbalances have increased significantly over the past year. Real GDP growth for fiscal year (FY) 2014/15 (April-March) is estimated to have reached 8.5 percent, while inflation rose to 8 percent (y/y) in May, up from 4 percent in October 2014, reflecting mainly strong domestic demand. The fiscal deficit increased to 3 percent of GDP in FY 2014/15, while credit to the private sector continued to grow strongly at 35 percent (y/y) in March, albeit lower than in FY 2013/14. The current account deficit widened to over 6 percent of GDP, largely reflecting a rapidly rising trade deficit. The official reference exchange rate came under strong downward pressure and depreciated by about 20 percent from Sept 2014 to July 2015. At end-March 2015, the Central Bank of Myanmar’s (CBM) foreign reserves covered around 3 months of imports.

The Myanmar economy is set for strong growth this year amid signs of overheating. The economy is expected to grow by 8.5 percent, reflecting strong growth momentum and expansionary macroeconomic policies. The projected increase in the fiscal deficit in the FY 2015/16 budget will provide an expansionary stimulus and contribute to strong credit growth and a rising current account deficit. With higher deficit anticipated, CBM financing of the deficit is likely to remain significant while credit growth is expected to accelerate. As a result, inflation is expected to rise further in FY 2015/16 and the current account deficit to widen.

Downside risks to growth and stability in the near term have increased, and have been amplified by recent floods. Lower natural gas prices would further reduce export earnings and government revenue, and could also lead to lower-than-expected FDI (Foreign direct investment) inflows in the medium to long run. A sharper-than-expected slowdown in China’s growth would also have a negative impact on Myanmar through the trade channel. Moreover, a tightening of monetary policy in the United States could strengthen the U.S. dollar and put renewed downward pressure on the kyat. Increasing vulnerabilities resulting from rapid credit growth, a widening current account deficit, and an expansionary budget pose increasing risks to price and external stability. Despite its overall benefits, the ongoing liberalization of the financial sector, with the admittance of new foreign banks this year also comes with risks as the CBM’s regulatory and supervisory capacity is still relatively weak. On the other hand, a well-received election outcome and peace process may provide an upside surprise, resulting in higher-than-expected FDI inflows.

Executive Board Assessment²

Executive Directors welcomed Myanmar’s strong growth momentum and the advancement of the authorities’ reform programs. Noting signs of economic overheating and the impact of the recent floods on the economy, Directors urged the authorities to strike a balance between the need to support economic recovery and reconstruction and the imperative to maintain macroeconomic stability.

Directors stressed the importance of containing the fiscal deficit to address the signs of economic overheating. At the same time, they noted that additional resources may be needed for recovery and reconstruction spending, with support from development partners. Noting the low revenue collection, large development needs, and the necessity to ensure fiscal sustainability, Directors encouraged the authorities to broaden the tax base, prepare for the introduction of a value-added tax, limit tax incentives, condition transfers to states and regions on implementation capacity, and further reprioritize expenditures. Directors welcomed the authorities’ commitment to implement the Extractive Industries Transparency Initiative Standard. While commending the authorities for launching treasury bill auctions, Directors also stressed the urgency of allowing the interest rate at T-bill auctions to rise in order to attract higher bid volumes and terminate the Central Bank of Myanmar’s (CBM) financing of fiscal deficits.

Directors encouraged the authorities to tighten monetary policy in order to reduce macroeconomic vulnerabilities arising from the signs of overheating. Given the recent floods, it was also noted that some flexibility in monetary tightening may be needed should the floods lead to a spike in demand for liquidity. The October target date for the implementation of the recalibrated reserve requirement should be maintained, and the CBM should be prepared to increase the reserve requirement and scale up deposit auctions should signs of second-round effects from food price increases on inflation emerge. Directors welcomed the recent move by the CBM to realign its reference exchange rate with the wider market exchange rates, and noted the importance of maintaining exchange rate flexibility to cushion Myanmar from exogenous shocks and maintain external competitiveness in light of its relatively high inflation.

Directors stressed that existing prudential measures should be enforced and, where needed, tightened, in order to contain credit growth and reduce financial sector risks. The CBM should speed up the issuance of remaining prudential instructions and the strengthening of its supervisory capacity, particularly in view of the entry of nine foreign banks this year. Reforming state-owned banks and strengthening the supervision of policy banks and non-bank financial institutions will also be critical to safeguarding financial stability. Directors highlighted the importance of compiling and releasing consistent financial soundness indicators and of implementing measures on anti-money laundering and combating the financing of terrorism to protect Myanmar’s correspondence bank relationships.

Directors emphasized that implementing the structural reform agenda is essential to achieve inclusive and sustainable growth. Measures should focus on further improving the business environment, financial inclusion, health services, and education. Further improvements in institutional capacity, supported by continued technical assistance, and better economic statistics will be important to enhance macroeconomic management.