IMF Executive Board Concludes 2019 Article IV Consultation with Myanmar
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.
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.
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.
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.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
