Jan 31, 2012

IMF notes Myanmar’s ‘potential’ in Article IV mission

The government faces a “historic opportunity to jump-start the development process and lift living standards”, the International Monetary Fund said at the conclusion of its Article IV Mission to Myanmar last week.
The IMF delegation issued a press release via the state-run New Light of Myanmar newspaper on January 25 following its January 9-25 visit, during which the team met with government officials and other “key counterparts”.
Ms Meral Karasulu again led the mission, which followed the latest Article VIII Mission in December 2011.
“Myanmar has a high growth potential and could become the next economic frontier in Asia, if it can turn its rich natural resources, young labour force, and proximity to some of the most dynamic economies in the world, into its advantage,” Ms Karasulu said.
“Delivering on these expectations with inclusive and sustainable growth should start with establishing macroeconomic stability. This process has already begun with plans underway to unify the exchange rate and lift exchange restrictions on current international payments and transfers. As this essential process continues, channelling the reform momentum to improving monetary and fiscal management and to structural reforms would allow taking full advantage of the positive effects of exchange rate unification,” she added.
Ms Karasulu said further modernising the economy would involve a process of removing “impediments to growth by enhancing the business and economic climate, modernising the financial sector, and further liberalising trade and foreign direct investment”.
She said the government’s recent efforts “go in the right direction” that would benefit from “broader consultation with stakeholders and using the best international practices distilled from other countries’ experiences”.
The release said exports of commodities and higher investment supported by robust credit growth and improved business confidence would increase Myanmar’s real gross domestic product (GDP) to 5.5 percent in the 2011-12 financial year, and 6pc in the 2012-13 year.
Inflation stood at 4.2pc for the 2011-12 year and was expected to rise to 5.8pc in 2012-13 “as the recent decline in food prices phases out”.
The IMF said the Myanmar kyat has appreciated by about 32pc since 2009-10, adding that the “appreciation pressures are primarily due to large foreign inflows into the economy, which cannot find an outlet due to exchange restrictions on current international payments and transfers”.
“Reforming the complex exchange rate system is a priority to eliminate constraints on economic policy,” Ms Karasulu said, adding that the Central Bank of Myanmar is already performing the technical work in order to “establish the necessary market structure for this important process.”
However, the press release said unification of the exchange rate would require moving away from the export first policy, perhaps by allowing all foreign currency bank account balances to be used to purchase imports, easing import licensing requirements and improving access to the foreign currency exchange counters.
“A successful exchange rate unification would require improvements in all areas of macroeconomic management … start[ing] with establishing a monetary policy framework to focus on price stability. The authorities’ plan to grant operational autonomy and accountability to CBM is a welcome first institutional step towards this goal,” the release said.
“While the recent reduction in interest rates is welcome, we do not see room for further interest rate cuts in the near term in light of the buoyant growth expectations and the inflation outlook. Within the current regulatory constraints on financial intermediation and impediments to productive investment, lower real interest rates would risk channelling savings to potentially speculative outlets, such as real estate.
“The onus of stimulating productive investment is now on structural policies to reduce barriers to private sector development and improve financial intermediation,” it said.
“Further reducing inflation would require stopping the financing of the fiscal budget deficits through money creation,” it added.
The release also applauded the decision to discuss the national budget in this sitting of the hluttaws, which commenced on January 26, because it provided an “historic opportunity to redefine national spending priorities and bring fiscal transparency”.
“We welcome the authorities’ plans to reorient spending to health and education, while targeting a moderate fiscal deficit, which we project to be about 4.6pc of GDP, about 1pc lower than the last year’s deficit. A prudent fiscal policy is essential to maintain macroeconomic stability, especially during the exchange rate unification process,” it said.
It added that a market-determined exchange rate would also clearly show the losses made by state economic enterprises. The release said the fiscal balance was expected to improve when the Shwe and Zawtika natural gas projects came online but suggested that the revenues “should be used to build human capital and infrastructure. These are key priorities to alleviate poverty and reduce bottlenecks to industrialisation”.
However, it warned that additional revenues, “primarily from non-resource-based sources”, needed to be identified to “safeguard fiscal sustainability and prevent boom-and-bust cycles associated with fluctuations in commodity prices”.
“There is room to increase revenues by improved tax policies that should emphasize direct taxation over indirect taxes to protect the poor. In this regard, recent efforts to simplify the structure of several taxes are welcome and should go further, while reforms to tax administration remain essential to broaden tax bases and reduce tax avoidance,” it said.
“Modernisation of the financial system should be expedited to facilitate broad-based growth,” the release said.
It added that banks needed to begin by phasing out deposit-to-capital ratios and expanding the list of collateral beyond landed property to all crops.
Banks also needed to expand their networks, especially in rural areas because it is “essential to increase access to finance”.
“Nurturing a stronger commercial banking culture requires price competition … A level playing field between state and private banks, including in the areas of regulation and supervision, is critical to promote competition,” it said, adding that allowing joint ventures with foreign banks would help to develop the industry’s technology and best prepare it for ASEAN financial integration in 2015.
The release also highlighted the need to provide more credit to the agricultural sector, which about 70pc of the population relies on for income.
“Besides increasing lending facilities of Myanma Agriculture Development Bank and micro finance, private banks should also be encouraged to lend to agriculture. The planned land reform provides a unique opportunity, and should ensure that land titles of farmers can be used as collateral. However, credit alone will not suffice to increase rural growth, which is essential to alleviate poverty. Investment in rural infrastructure, including through community-driven development initiatives, and spending on health and education, are also essential,” it said.
Action needed to be taken to facilitate foreign direct investment assistance in areas other than energy, the release said. These should include the elimination of exchange restrictions on current international payments and transfers.

Source:  Myanmar Times


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