Myanmar is faced with economic downside risks which should be addressed to ensure a smooth growth path, says the International Monetary Fund's representative in the union.
Though the economy is expected to continue enjoying high growth of 8.5 per cent this financial year, like the previous year, several downside risks are imminent, says Yongzheng Yang, chief of IMF mission to Myanmar.
He adds that the risks to stability include persistent dollar strength, low natural gas prices, rapid credit growth, an expansionary budget and a widening trade deficit. He said the potential risks could affect the economy given weak capacity and thin policy buffers.
“I think the economy is facing downside risks right now. Risk management is therefore very important," Yang said at the press conference on July 1, as the mission completed its two-week consultation with Myanmar officials.
The economic growth rate should remain high thanks to strong domestic demand. Meanwhile, an increase in fiscal deficit in 2015-16 will buoy domestic demand and credit growth.
However, together with pent-up demand, this might further push up inflation, which was 8 per cent in May. The current account deficit could also widen, from 6 per cent of gross domestic product in 2014-15.
In the past fiscal year, loan growth was robust, at 36 per cent. The 2014-15 fiscal deficit stood at 3 per cent of GDP, but the effective ratio was 5.5 per cent if one-off telecoms and natural gas revenues were excluded. As foreign direct investment (FDI) inflows were lower than expected, the foreign reserves held by the Central Bank of Myanmar remained below three months of imports.
“It is very important that both fiscal and monetary policies are tightened to reduce inflation, to reduce the current fiscal deficit and to set more stable exchange rates. This will also slow credit expansion and reduce financial sector risks,” Yang said.
On the monetary side, he urged a more flexible exchange rate.
While the US dollar has strengthened against all other currencies, the depreciation pace of the kyat has quickened in the past couple of months due to the rigid rate. The central bank’s reference rate is now set once a day and this stays despite market volatility. Expecting further depreciation, some hoard dollars which exacerbates the situation. On July 1, when the official reference rate was set at Ks1,110, the black market rate was as high as Ks1,180. As imports are denominated in dollars, its appreciation pushes up prices and causes inflation.
Yang said that a more flexible rate is needed to stabilise expectations. The rate should reflect market conditions. Once the gap of official and unofficial rates is narrowed, dollar demand will be contained and the supply of foreign currencies will return to the market.
“CBM FX sales to importers should occur at competitively determined market rates to reduce risks of excessive drains on international reserves… The only way to address inflationary pressure is tightening monetary and fiscal policies,” he says, adding that the kyat has depreciated notably although it has remained largely unchanged in real effective terms.
The IMF has been advising the central bank on strengthening its capacity in monetary policy handling and banking supervision. Although pleased with the current efforts launched after it became an autonomous body, Yang says the CBM still needs to work more closely with ministries on policy formation, particularly the Ministry of Finance.
On the fiscal side, the deficit should be reduced through an increase in tax revenue and expenditure re-prioritisation, he adds.
“We quite often see there is a need for increasing expenditure on health, education and infrastructure. The government should reduce expenditure on some areas that are not essential to make more room for prior expenditure. That will keep expenditures more lively and effective,” Yang explains.
He also suggested transferring resources to the states and regions, depending on their implementation capacity and spending responsibilities. Still, such disbursement should also be transparent.
Myanmar can substantially increase its tax revenue by minimising tax incentives, strengthening tax compliance and promptly implementing the commercial tax on telecommunication services, he says.
“The government needs to check whether these incentives are effective or not. The government should also improve tax administration by ensuring that all taxpayers should pay taxes according to the law. In order to do that, you need to increase resources. Through that, Myanmar can collect much more revenue than before to reuse for the benefit of the citizens,” he says, adding that Myanmar has a very low revenue to GDP ratio, far below countries in similar stages of development.
According to the CIA Factbook, Myanmar's tax revenue was estimated to be only 4.5 per cent of GDP in 2014. The IMF figure was higher at 7 per cent. The rate is the lowest in Asean, which averages above 15 per cent.
Yang notes that maintaining stability and further reforms would create fiscal space to boost public investment, strengthen banking regulation and supervision to maintain financial stability, and improve the business environment to support inclusive growth. He says building the institutional capacity for macroeconomic management is the key to addressing Myanmar’s huge development challenges.
When asked about the political risks that may arise from the general election due to be held later this year, Yang says the IMF is quite optimistic about the political climate.
“As in many countries, Myanmar also has the risk of political instability. But we hope Myanmar can manage to do well in the election process and maintain the growth momentum,” he adds.