IMF Cautions Myanmar on Rising Fiscal Risks

The International Monetary Fund warned Tuesday that Myanmar faces rising fiscal risks on the back of foreign borrowings, though the country’s economic outlook appears favorable.

The Washington-based IMF made the assessment after dispatching a team to Myanmar this month to conduct an annual review of the economy.

Matt Davies, the IMF's Myanmar mission chief, said in a statement that decisive implementation of a broad range of policy and structural reforms is critical for sustainable and inclusive economic growth.

Growth picked up in the country after Myanmar's President Thein Sein launched sweeping economic and political reforms on taking power in 2011 following nearly five decades of harsh military rule.

The reforms led to a lifting of long-running international sanctions and efforts to woo foreign investments, boost employment, and beef up infrastructure. 

Growth forecast up

The IMF said the country’s economic outlook is “favorable” with growth expected to accelerate slightly to 8.5 percent in the fiscal year ending March 2015 from 8.25 percent in the previous year, led by rising gas production and investment.

Inflation is expected to remain contained at around 6.5 percent while increasing capital inflows outweigh a widening external current account deficit, the Fund said.

“There are, however, risks to the outlook,” Davies warned in the statement.

“Fiscal and external buffers remain thin and demand-side pressures on inflation and large capital inflows will strain the still-infant macroeconomic management tools,” he said.

The expected entry of foreign banks to the already rapidly growing financial sector will place further demands on macroeconomic policy and stretch scarce supervision capacity, he said.

“Fiscal risks are also rising despite recent reductions in the fiscal deficit. These stem from the use of external borrowing to finance off-budget operations, increasing tax exemptions, and changing relations with state and regional governments and state economic enterprises.”

The IMF forecast that fiscal deficit is expected to remain within the authorities’ target of five percent-of-gross domestic product (GDP)—the broadest measure of goods and services across the economy.

However, it said, this is in part due to large one-off revenues from telecom licenses.

Last year, Myanmar awarded hotly contested telecom licenses to Qatar's Ooredoo and Norway's Telenor to develop the Southeast Asian country's nascent but potentially lucrative telecom industry.

Need to increase tax revenues

The IMF said that Myanmar needs to increase tax revenues to keep the underlying medium-term deficit under five percent of GDP, while also expanding development spending.

Davies said that the ongoing process to make the Central Bank of Myanmar an autonomous body requires continued growth in international reserves, while maintaining a flexible exchange rate regime.

“Further progress in building monetary policy tools is needed to address inflationary pressures and manage foreign exchange inflows,” he said.

The expected introduction of treasury-bill auctions in 2015 will provide a framework for reducing the central bank’s deficit financing and lay the basis for eventual interest rate liberalization, he said.

During the consultation process, the IMF mission met with Minister in President Thein Sein’s Office Soe Thane, Finance Minister Win Shein, Central Bank of Myanmar Governor Kyaw Kyaw Maung, as well as other senior officials, parliamentarians, representatives from private sector and civil societies, donors and the diplomatic community, according to the statement.