YANGON—The International Monetary Fund is urging Myanmar to build more financial institutions in order to achieve further development and continuous growth, a senior official said on Tuesday.
“I think the government’s decision last year to establish an autonomous central bank is a very important one. Myanmar needs to build more institutions to manage its economy. The central bank is crucial to that,” Matt Davies, who led the IMF mission to Myanmar, told Eleven Media on Tuesday.
“It takes a while for any institution to build itself,” he said, adding that the financial sector is crucial for facilitating growth.
“Measures to invest in infrastructure, electricity, health, and education are really worth laying the foundation for that growth.
And make sure that the government budget is moving in the right direction. It takes a long time to turn the budget around. I believe the future (of Myanmar) will be very bright.”
Davies told a press conference yesterday that Myanmar’s current economic outlook remains favourable.
Positive signs for future
“Real GDP growth in the 2012-13 fiscal year reached 7.3 percent, led by services and manufacturing. We expect it to rise further to 7.5 percent this fiscal year and 7.75 percent in 2014-15. Credit to the private sector is expected to decline from its current high levels but remain rapid, at around 30 percent,” he said.
The fiscal deficit in 2013-14 is expected to land roughly in line with the budget target of 5 percent of GDP, but should fall to 4.5 percent in FY 2014-15, as a result of one-off revenues from telecommunications licences.
Davies also pointed out that inflation is still a cause of concern for the Southeast Asian country.
“However, inflation is expected to exceed 6 percent by the end of 2013-14 and remain elevated in 2014-15. Also, the external current account deficit in is expected to widen further, to about 5 percent of GDP in this period. As a result, the government’s accumulation of international reserves during 2013-14 was slower than projected.”
Overall reserves remain stable, and accumulation should pick up in 2014-15 as foreign direct investment and other inflows outweigh the current account deficit, he said.
Risks remain on horizon
The mission chief mentioned emerging risks to the country’s economic outlook, with an emphasis on limited macroeconomic management capacity amidst inflation pressures.
“Inflation remains elevated and there are pressures from rapid money and credit growth, kyat depreciation and possible electricity price hikes. International reserves are still low and vulnerable to shocks,” said Davies.
He emphasised that the central bank of Myanmar requires full budgetary autonomy and a strengthened market framework in order to implement effective monetary policy. In July last year, the central bank became autonomous from the Ministry of Finance. In July this year, one year after the transition period, the bank aims to achieve full autonomy.
“Full operation of autonomy may take some time. It may take longer (than July). But I think the government has a policy to reform the central bank as a fully autonomous body,” said Davies.
“The CBM’s reserves grew rapidly in 2013 through transfers from state banks and it now holds most of the government’s international reserves, as envisaged in the CBM law. This progress needs to be consolidated and made automatic so that CBM can accumulate further reserves to provide a larger cushion against external shocks.”
The fiscal deficit targets for 2013 were achieved by a comfortable margin. The authorities remain committed to a fiscal deficit target of 5 percent of GDP, which strikes an appropriate balance between financing development and maintaining stability, Davies said.
“However, while monetary policy tools are still being developed, fiscal policy has to bear the burden of macroeconomic stabilization. Monetization of the deficit should therefore be quickly reduced to moderate inflation pressures. Tax revenue is growing quickly but remains low; to enable increased spending, it should be boosted by broadening the tax base and improving compliance.”
Reform efforts applauded
The mission chief praised the Myanmar government’s reforms on the last day of the 12-day mission.
“Myanmar is undergoing an exciting transition. Recent economic reforms include adopting a floating exchange rate and removing exchange restrictions; establishing an autonomous central bank; and significantly increasing spending on health and education. The authorities aim to build on these gains and achieve sustained, strong, and inclusive growth,” he said, adding that the authorities made good progress last year on their macroeconomic reform priorities.
Davies also pledged to continue the IMF’s support of the Myanmar government’s implementation of its economic reform agenda.
“We are prepared to assist the authorities in a range of ways, including policy advice, monitoring of the reform progress, and intensive and tailored technical assistance delivered in close coordination with other donors to support capacity building.”
The IMF has been supporting Myanmar in a wide range of activities, including ensuring macroeconomic stability, building a framework and institutions for effective macro-economic management, building the central bank’s reserves, maintaining an appropriate fiscal deficit, liberalising the foreign exchange market, and building monetary and fiscal policy tools and institutions.
The mission visited Myanmar from January 9 to 21 for the second and final review of the Staff- Monitored Programme (SMP) for 2013. The mission met with central bank governor Kyaw Kyaw Maung, Union Minister for Finance Win Shein, other senior government officials, representatives of the private sector, and donors.
Source: ELEVEN Myanmar