Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 73899-MM

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 287.75 MILLION

(US$440 MILLION EQUIVALENT)

TO THE

REPUBLIC OF THE UNION OF MYANMAR

FOR A

REENGAGEMENT AND REFORM SUPPORT CREDIT

DECEMBER 17, 2012

Poverty Reduction and Economic Management Department

South East Asia Country Department

East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the

performance of their official duties. Its contents may not otherwise be disclosed without World

Bank authorization.

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THE REPUBLIC OF THE UNION OF MYANMAR

Government Fiscal Year April 1- March 31

Currency Equivalents Currency Unit: Myanmar Kyats

US$1 = 852 Kyats

(Exchange rate effective November 30, 2012)

Weight and Measures Metric system

Abbreviations and Acronyms

ACH Automated Clearing House MC Money Changer

AD Authorized Dealer MDA Ministries, Departments, and Agencies

ADB Asian Development Bank MEB Myanmar Economic Bank

AH Acceptor and Holder MFI Microfinance Institution

AIDS Acquired Immunodeficiency Syndrome MMSE Myanmar Microfinance Supervisory

Enterprise

ASEAN Association of Southeast Asian Nations MOFR Ministry of Finance and Revenues

ATM Auto Teller Machine MOI Ministry of Industry

CBM Central Bank of Myanmar MPU Myanmar Payment Union

CBML Central Bank of Myanmar Law NGO Non-Governmental Organization

CEDAW Convention on the Elimination of all forms of

Discrimination against Women

NLD National League for Democracy

DFID Department for International Development NPV Net Present Value

DPO Development Policy Operation NSPAW National Strategic Plan for the Advancement

of Women

DPL Development Policy Lending OECD Organization of Economic Co-operation and

Development

EITI Extractive Industries Transparency Initiative PAC Public Accounts Committee

FC Financial Commission PC Planning Commission

FDI Foreign Direct Investment PEFA Public Expenditure and Financial

Accountability

FIL Financial Institutions Law PER Public Expenditure Review

FX Foreign Exchange PFM Public Financial Management

FY Fiscal/Financial Year RRSC Reengagement and Reform Support Credit

GDP Gross Domestic Product RTGS Real Time Gross Settlement

GNP Gross National Product SDR Special Drawing Rights

GOM Government of Myanmar SEE State Economic Enterprise

ICA Investment Climate Assessment SME Small and Medium Enterprise

ICT Information and Communications Technology SMP Staff Monitored Program

IDA International Development Association SOCB State Owned Commercial Bank

IFC International Finance Corporation SOE State Owned Enterprise

IRD Internal Revenue Department TA Technical Assistance

ISN Interim Strategy Note TBD To be determined

ICT Information Communication Technology UK United Kingdom

IEG Independent Evaluation Group UNDP United Nations Development Program

IMF International Monetary Fund UNICEF United Nations International Children’s

Emergency Fund

KIO Kachin Independence Organization USAID United States Aid for International

Development

LDP Letter of Development Policy VAT Value Added Tax

MADB Myanmar Agricultural Development Bank WBG World Bank Group

MBL Microfinance Business Law WTO World Trade Organization

Vice President : Pamela Cox

Country Director : Annette Dixon

Sector Director : Sudhir Shetty

Sector Manager : Mathew Verghis

Country Manager : Kanthan Shankar

Task Team Leader : Khwima Nthara

THE REPUBLIC OF THE UNION OF MYANMAR

REENGAGEMENT AND REFORM SUPPORT CREDIT

TABLE OF CONTENTS

I. INTRODUCTION ........................................................................................................................ 1

II. THE COUNTRY AND ECONOMIC CONTEXT .................................................................... 2 A. Political context .................................................................................................................. 3

B. Economic context ............................................................................................................... 4

C. Recent economic developments ........................................................................................ 10

D. Macroeconomic outlook ................................................................................................... 13

E. Debt sustainability ............................................................................................................ 14

III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESS ...................... 17 A. Myanmar’s development strategy ..................................................................................... 17

B. Coordination ..................................................................................................................... 17

C. Consultations .................................................................................................................... 18

D. The Government’s Gender Strategy ................................................................................. 19

IV. BANK SUPPORT TO THE GOVERNMENT PROGRAM .................................................. 19 A. Link to the Interim Strategy Note ..................................................................................... 19

B. Relationship with other bank operations ........................................................................... 20

C. Coordination with the IMF and other donors.................................................................... 20

D. Lessons learned ................................................................................................................. 22

E. Analytical underpinnings .................................................................................................. 22

F. Incorporating gender dimensions ...................................................................................... 23

V. THE PROPOSED DEVELOPMENT POLICY CREDIT ...................................................... 23 A. Overall description ............................................................................................................ 23

B. Program development objective ....................................................................................... 24

C. Operation design ............................................................................................................... 24

D. Policy areas ....................................................................................................................... 24

VI. OPERATION IMPLEMENTATION ....................................................................................... 39 A. Poverty and social impact ................................................................................................. 39

B. Environmental aspects ...................................................................................................... 40

C. Credit Administration, Disbursement, and auditing ......................................................... 41

D. Fiduciary Assessment ....................................................................................................... 41

E. Risks and Mitigation ......................................................................................................... 42

LIST OF BOXES Box 1: Key Government Consultation Platforms and Initiatives on Economic Reforms .......................... 18

Box 2: Good Practice Principles for Conditionality .................................................................................. 38

LIST OF FIGURES

Figure 1: Myanmar’s Main Source of Imports (2010) ................................................................................ 7

Figure 2: Myanmar’s Main Export Destinations (2010) .............................................................................. 7

Figure 3: Indicators of public and publicly guaranteed external debt under alternative scenarios ............ 16

Figure 4: Broad overview of scope of the reform program under the Myanmar DPO .............................. 25

LIST OF TABLES

Table 1: Myanmar: Selected Economic and Financial Indicators, 2008–13 ................................................ 6

Table 2: Myanmar: Summary Consolidated Government Operations ....................................................... 12

Table 3: Myanmar’s External Debt Outstanding and Arrears, as at December 2012(Million US$) ......... 14

Table 4: Implementation status of agreed prior actions ............................................................................. 37

ANNEXES Annex 1: Timetable of Key Processing Events.......................................................................................... 44

Annex 2: Letter of Development Policy .................................................................................................... 45

Annex 3: Myanmar DPO Policy Matrix .................................................................................................... 51

Annex 4: Myanmar—IMF Letter of Assessment....................................................................................... 53

Annex 5: Country at a Glance .................................................................................................................... 56

The Re-engagement and Reform Support Credit was prepared by a team led by Khwima Nthara (Senior Economist,

EASPT) and under the guidance of Sudhir Shetty (Sector Director, EASPR), Annette Dixon (Country Director),

Mathew Verghis (Sector Manager,EASP3), and Kanthan Shankar (Country Manager). The core team members were

as follows: Shabih Mohib (Senior Economist), Ratchada Anantavrasilpa (Senior Financial Specialist), James Seward

(Lead Financial Sector Specialist), Nataliya Mylenko (Senior Financial Specialist), Douglas Addison (Senior

Economist), Vikram Raghavan (Senior Counsel), Christopher Fabling (Senior Financial Management Specialist),

James Monday (Senior Environmental Engineer), Andrea Woodhouse (Senior Social Development Specialist),

Maria Ionata (Country Program Officer), Luc Lecuit (Senior Operations Officer), Nik Myint (Country Officer),

Doris Chung (Senior Program Assistant), Angkanee Luangpenthong (Team assistant), Tasanee Chokwatana (Senior

Executive Assistant), Thawdar Sann (Team Assistant), Manuela Adl (Division Manager), Ivar Andersen (Manager),

Angelique DePlaa, (Lead Operations Officer), Ed Mountfield (Manager), Antonella Bassani (Director), William

Battaile (Senior Economist), Saswata Jana (Financial Officer), Vinay Chugh (Financial Officer), Carlos Cavalcanti

(Senior Economist), Aristeidis Panou (Counsel), Mark Walker (Chief Counsel), Antony Toft (Deputy General

Counsel, Operations), Miguel Oliveira (Senior Finance Officer), Markus Kostner (Social Development Sector

Leader)

i

CREDIT AND PROGRAM SUMMARY

THE REPUBLIC OF THE UNION OF MYANMAR

REENGAGEMENT AND REFORM SUPPORT CREDIT

Borrower Republic of the Union of Myanmar

Implementing

Agency

Ministry of Finance and Revenue

Financing Data IDA Credit of SDR 287.75 Million (US$440 Million equivalent)

The credit has a final maturity of 40 years including a grace period of

ten years.

Operation Type Development Policy Operation

Main Policy Areas The main policy areas supported are: (a) strengthening macroeconomic

stability through development of the financial system, improving

exchange rate policy, and instituting fiscal discipline; (b) enhancing

transparency, accountability, and external oversight in the management

of public finances, improving revenue management through tax policy

and administration and improving budget planning and preparation, and

(c) improving the climate for investment by increasing access to finance;

establishing a financial sector infrastructure to facilitate business

transactions; reducing barriers to entry and the cost of starting and

doing business; and removing barriers to trade.

Key Outcomes The following outcomes are expected as a result of the proposed

operation:

An exchange rate regime that is more supportive of private sector

development

Increase in public expenditures on pro-poor sectors due to more

inclusive and transparent budgeting

Expansion in bank credit to unbanked men and women

Increase in foreign direct investment

Increase in the volume of international trade

Full clearance of arrears to IDA

Program development

Objective(s) and

Contribution to the

ISN

The DPO’s development objectives are two-fold (i) to support

Myanmar’s critical reforms for strengthening macroeconomic stability,

improving public financial management, and improving the investment

climate, which will in turn help grow the economy, create jobs, and

reduce poverty; and (ii) to facilitate the clearance of Myanmar’s arrears

to IDA, which is required in order to restore normal relations between

Myanmar and the World Bank.

The proposed Myanmar Reengagement and Reform Support Credit

contributes to all the areas of strategic focus under the Interim Strategy

Note. First, the operation also contributes to the ISN pillar on

transforming institutions since it supports critical policy and institutional

reforms for attaining macroeconomic stability, improving public

ii

financial management, and improving the investment climate. Second,

the DPO will support the ISN pillar on building confidence by sending a

strong signal of the World Bank’s support for the reforms. Finally, the

DPO contributes to the ISN pillar on preparing the way for the

resumption of a full country program since the proceeds will be used to

support Myanmar's foreign exchange needs, including those associated

with IDA arrears clearance. The Bank’s full country program can only

resume after arrears are cleared.

Risks and Risk

Mitigation

Macroeconomic risk: There is a risk that a suboptimal sequence of

reforms could lead to deterioration in the macroeconomic framework due to

the significant changes that are being implemented in a context of limited

capacity. For example, a modern monetary policy framework is still

being designed as is the treasury function. Relatedly, increased access

to commercial and concessional borrowing increases the risk of debt

distress. Further, the Government has adopted a policy of granting

greater operational autonomy to SEEs which were previously managed

in the same way as other Government ministries and departments, by

being funded through the budget. Given that the financial management

capacity of these entities is not known, there is risk that they could be a

source of contingent liabilities. Finally, as the economy opens up, a

surge in imports poses a risk to the country’s macroeconomic program

by putting pressure on foreign reserves. To mitigate these risks, the IMF

is supporting the authorities through a Staff Monitored Program (SMP).

Further, the Bank is also working with the IMF and other donors in

providing the required TA for establishing a robust framework for

macroeconomic management.

Political risk: First, although a number of ceasefire agreements have

been signed with armed rebel groups, political settlements are yet to be

attained. Furthermore, a ceasefire agreement is yet to be reached with

one of the armed groups, the Kachin Independence Organization (KIO).

Therefore, a return to wide-scale conflict could destabilize the existing

political environment. Second, reforms are still in their early days.

Myanmar’s future depends on the nature of compromises reached between

multiple stakeholders with often incompatible interests. There is a risk of a

backlash especially if some well-intentioned reforms end up having

negative consequences in the short-term. The 2015 elections are shaping up

to be an important turning point for the longer term sustainability of the

reforms. To mitigate these risks, the World Bank and other donors will be

working to support various initiatives in Government for consolidating

peace and the reform process, including through support to the planned

Peace Center, supporting community based projects that will generate quick

tangible dividends to communities, and support to institution building so

that reforms transcend personalities.

iii

Implementation capacity risk: Following a long period of

underinvestment in public institutions, education and the civil service,

there is a concern that institutional capacity will be a binding constraint

in implementing the reforms and improving service delivery so that the

benefits of reforms are distributed widely. While donor support is a

mitigating mechanism for the lack of institutional capacity, there is an

additional risk that aid will not be coordinated and will thus not have the

desired impact. These risks can be mitigated by donors actively seeking

to scale up support to address the capacity issues, while the Government

takes the lead in actively managing donor support. It will be important

that non-traditional donors are also brought into the process. The

Government has recognized the importance of donor coordination and

set up a high level Foreign Aid Management Coordination Committee to

manage the coordination of aid.

Operation ID P 133706

1

IDA PROGRAM DOCUMENT

THE REPUBLIC OF THE UNION OF MYANMAR

REENGAGEMENT AND REFORM SUPPORTCREDIT

I. INTRODUCTION

1. This program document proposes a Reengagement and Reform Support Credit

(RRSC) to the Republic of the Union of Myanmar for SDR287.75 (US$440 million

equivalent). It will be a standalone development policy operation (DPO) program aimed at

supporting the full normalization of relations between Myanmar and the World Bank as well as

the Government’s efforts to undertake critical institutional and policy reforms in the

implementation of its medium-term development strategy. In terms of IDA resources, Myanmar

is eligible for exceptional support as a reengaging country. Since Myanmar is projected to be at a

low risk of debt distress after arrears clearance, IDA resources will be provided on credit terms,

per the stipulations of the credit allocation system agreed with IDA donors for the IDA 16 period

(FY12-FY14).

2. In less than two years, a reformist administration has ushered Myanmar on an

unprecedented path of political and economic reforms. After decades of military rule and

ethnic conflict, a civilian administration was sworn in on March 30th, 2011 following elections

that were held in December 2010. The new Government immediately embarked on a range of

political and economic reforms aimed at attaining national reconciliation, good governance, and

economic development. Some of the key political reforms have included the re-admission of the

country’s opposition leader Aung San Suu Kyi and her party into the country’s mainstream

politics, the signing of ceasefire agreements with the majority of ethnic armed groups some of

which have waged war with the Government for the past six decades, large-scale releases of

political prisoners and re-admittance into the country of former critics of the Government, and

increased freedom of expression. Key economic reforms include discussion of the budget in

Parliament for the first time and publication of the budget, adoption of a more liberal exchange

rate policy, relaxation of trade restrictions, rationalization of tax rates, and fiscal decentralization.

3. Going forward, the Government realizes that a key challenge will be to ensure that

these reforms translate into improved living standards for the majority of the population,

and that gains registered are sustained. Following years of political and economic repression,

Myanmar remains one of the poorest countries in the East Asian region. The challenge for the

Government is to ensure that the reforms being implemented translate into positive and tangible

benefits for the majority of the Myanmar people. Similarly, it will be critical that the current

reform momentum transcends individual personalities and that any gains are sustained.

4. In order to deal with these challenges, the Government is seeking to undertake

further reforms and in this endeavor, is seeking the support of the international

community. There is recognition by Government that significant policy and structural

bottlenecks remain in the economy that would prevent the country from realizing its potential,

and that more and far reaching reforms will therefore be necessary. It is for this reason that in

June 2012, the President announced a second wave of reforms which he said were aimed at

2

achieving higher rates of growth that would be necessary if to achieve a more significant

reduction in poverty.

5. Considering the Government’s commitment, and the pace and scale of the reform

process, a window of opportunity exists for the international community to help ensure that

the reforms succeed and are sustained. The authorities believe that development partners

could contribute significantly to meeting the country’s financing needs and providing global

knowledge and policy advice that Myanmar critically needs as it continues with its reform

agenda. After being closed to the outside world for a long time, the Government is keen to learn

from the experiences of other countries that have gone through transitions, and therefore see

development partners as key to facilitating that knowledge transfer and peer learning process.

Further, the increased presence of donors will have a positive signaling effect on potential

investors, particularly to sectors outside natural resources.

6. It is against this background that the proposed development policy lending support

is being extended. The support is consistent with the Bank’s Interim Strategy Note (ISN) for

Myanmar and institutional guidelines on the clearance of arrears. While risks exist, in Staff’s

assessment, they are outweighed by the benefits, and costs of inaction.

7. The program document is divided into six sections, including this introduction.

Section II discusses the country context which gives an overview of Myanmar focusing on the

political and economic context, recent economic developments, macroeconomic outlook, and

debt sustainability. Section III presents the Myanmar Government’s development program;

section IV discusses how the Bank is supporting the government’s program, while section V

describes the proposed DPO. Section VI outlines implementation issues, including risks and

mitigating measures.

II. THE COUNTRY AND ECONOMIC CONTEXT1

8. Myanmar is one of the largest countries in South East Asia, both in terms of land

size and population. At 676,578 km2, it is the largest in mainland South East Asia, larger than

Thailand (513, 120 km2) and second only to Indonesia (1,904,569 km

2) in the ASEAN region..

The last population census was conducted in 1983, but it is estimated that there may now be

between 48-60 million people, which would put Myanmar around 5th

position in the region after

Indonesia, the Philippines, Vietnam, and Thailand. It shares borders with India, Bangladesh,

China, Laos and Thailand. Myanmar is an ethnically diverse country. It is believed that there are

at least 135 distinct ethnic groups and 108 different ethno-linguistic groups in Myanmar.

Administratively, the country is divided into seven states and seven regions which represent the

tier below the Union (Central) Government.

1 The main sources of data and information under this section are various Government of Myanmar data sources

including the data released on the website of the Ministry of National Planning and Economic Development by the

Central Statistics Organization, various IMF and World Bank Reports, the UNDP/SIDA funded Integrated

Household Living Conditions Survey Report (2009-2010), and other published academic reports.

3

A. Political context

9. Myanmar is leaving behind decades of isolation, fragility, and conflict, which began

with armed insurgencies in the border areas soon after independence that eventually provided the

justification for an army coup by General Ne Win in 1962, who pursued an isolationist “Burmese

path to socialism” that included a nationalization of the economy and a severing of linkages with

the outside world. While some of the country’s self-imposed isolation ended following Ne

Win’s resignation in 1988, the government’s suppression of the political opposition at that time

made it the target of a broad range of international sanctions. Despite intermittent attempts to

forge peace with armed ethnic groups (notably a series of ceasefires in the late 1980s and early

1990s) and tentative efforts at economic reform and political opening (including Myanmar’s

accession to ASEAN in 1997 and a limited opening towards foreign investment), the country’s

potential has been held back by poor governance and sanctions.

10. However, since the new Government came to power, it has undertaken far reaching

steps towards improving the political environment. In particular, significant steps have been

taken towards reconciliation with people having different political views. For example, there has

been a phased release of political prisoners, including the largest such release in Asia’s history

when a total of 651 prisoners were freed at once. Further, exiled critics of the Government have

been encouraged to return home and are being welcomed. The Government also reached out to

the opposition leader Aung San Suu Kyi which resulted in her party being re-registered as a legal

political party. Following parliamentary by-elections on 1 April 2012, the NLD became the

largest opposition party in parliament, with Aung San Suu Kyi and 42 other NLD delegates

taking their parliamentary seats in May 2012. The Government has also embarked on an

important process of reconciliation with ethnic minorities, reaching ceasefires with several armed

groups and renewing ceasefires that had come under strain. Finally, civil and political freedoms

have also significantly improved. After enacting the necessary laws, formation of trade unions

and public gatherings are now allowed for the first time in 20 years. There is increased freedom

of expression and the Government has been holding workshops to consult stakeholders,

especially the media, on a new media law that is being drafted.

11. As a result of the improved political situation, the international community has been

reengaging. In recognition of these developments, the international community has been taking

steps in the direction of normalizing relations with Myanmar. For example, there has been a

number of high profile visits to Myanmar by western leaders; most western Governments have

removed or suspended the economic and financial sanctions, including travel bans imposed on

most politicians, and are re-establishing diplomatic relations with the country; and donors are

taking steps towards re-engagement. For instance, Japan has announced a plan for resolving

Myanmar’s arrears to it which consists of a phased cancellation of two-thirds of the arrears and a

re-scheduling of the balance that will pave the way for the resumption of normal lending. Other

development partners, including the World Bank, have also started discussing with the

Government authorities modalities of re-engagement. Further, the ASEAN has accepted

Myanmar’s bid to take up the chairmanship of the association in 2014.

4

12. Remaining political challenges include reaching political settlements with ethnic

groups that have signed ceasefire agreements and resolving the plight of the Rohingyas in

the western state of Rakhine. Myanmar has 11 major armed ethnic groups spread across seven

states, and many smaller groups and militias. Ceasefires have been agreed or renewed with 10

out of the 11 groups. However, an agreement with the Kachin Independence Organisation (KIO)

has not yet been reached. Further, the negotiations will now need to focus on coming up with

permanent political settlements with the groups. In order to improve the chances of finding long

lasting peace, the Government is planning to establish a Peace Center whose role will be to

improve the coordination of the peace process between government, international organizations,

civil society, NGOs, and donors. An ongoing challenge relates to the conflict in the North

Western state of Rakhine involving the Rohingyas.

13. Myanmar is governed as a presidential republic with a bicameral legislature

consisting of the 440-seat People's Assembly (lower house) and the 224-seat National

Assembly (upper house). However, 25 percent of the seats in Parliament are still reserved for

the military. The current constitution is the third since it gained independence from Britain in

1948 and was published in September 2008 after it was adopted through a referendum in May

2008. As mentioned earlier, the current head of state was inaugurated on March 30th

, 2011, after

winning the December 2010 general elections.

B. Economic context

14. Myanmar is one of the poorest countries in the South East Asian region2. The

country’s GDP is approximately US$50 billion, but with population figures ranging between 48

million and 60 million, per capita income is estimated to be in the range of $800 - $1,000. A

nationwide integrated household living conditions survey conducted by UNDP, UNICEF, and

Sida in 2009-2010 found that 26 percent of the population was living below the poverty line

which was estimated at USD1 dollar a day. However, caution is urged in the interpretation of data,

since the surveys did not include populations in parts of the border areas, potentially masking large

pockets of poverty and skewing final results. The country’s level of infrastructure development is

still very low. About 75 percent of the population has no access to electricity and power outages

are common throughout the country. Almost half of the roads are not passable during the

monsoon rainy season while railways are old and rudimentary, with few repairs since their

construction in the late 19th

century. Telecommunications and internet access is also very limited.

Most social indicators are also poor. For example, 32 percent of children under five suffer from

malnutrition, the highest in the East Asia region. Myanmar’s government has been spending the

least percentage of its GDP on health care of any country in the world.

15. Gender disaggregated data are still scanty but the little available present a picture

of women being poorer and more disadvantaged than their male counterparts in

Myanmar. The constitution provides for equal treatment and opportunity of citizens irrespective

of race, birth, religion, official position, status, culture, sex and wealth in the areas of public

2 A key limitation in understanding the development challenges in Myanmar is the lack of accurate and consistent

data, especially at the national level. Confounding statistics give at best a partial picture of the country, especially

given the diversity across the country. The last national census took place in 1983, and population figures used

today range from 48 to 61 million, with an estimated 3 million people living abroad. Similarly, there are divergent

data on indicators from economic growth and national income to health and education outcomes.

5

employment, occupation, trade, business, technical know-how and vocation, exploration of art,

science, and technology. It contains further specific provisions for protecting the rights of

women. Myanmar is also a signatory to the Convention on the Rights of the Child and the

Convention on the Elimination of All Forms of Discrimination against Women. However, in

practice, inequalities still exist between men and women. For example, women's participation in

the labor market is low at 63.1 percent compared to 85.1 percent for men; women make up only 4

percent of members in parliament. Education data from a 2010 national household survey paints a

very positive picture of the situation in Myanmar but has been widely criticized on grounds that

it did not cover many conflict areas. Myanmar’s maternal mortality rate in Myanmar is estimated

at 360-380 per 100,000 births which is the highest in the region.

16. Myanmar has lagged some of its richer neighbors, because of its checkered political

history, bad economic policies, and its isolation from the international community. At

independence, it was one of the wealthiest countries in South-East Asia and used to be the

world's largest exporter of rice. However, as previous regimes pursued more centralist policies,

its economy started deteriorating while the other countries in the region flourished. For example,

it is estimated that at some point, 15,000 firms and businesses were nationalized. There was also

pervasive Government interference in the economy including setting prices of basic

commodities, having multiple exchange rates, imposing restrictions on imports and exports,

controlling foreign and local investments, and interfering in the banking and financial systems.

Because of the isolationist policies, outside information was obstructed through controlled

imports of news and a state-dominated press. Therefore Myanmar did not benefit from any cross-

fertilization of knowledge and transfer of technology that played a prominent role in the

development of the East Asian tiger economies. Even revenues from natural resources such as oil

faltered (until foreign investors were invited to sign natural gas concessions) as production limits

were limited to the level of technology available to the state, which did not want onshore foreign

intervention at that time. Rural households also found it difficult to invest significantly in

agriculture for a number of reasons, including lack of secure legal title to their land holdings and

lack of access to formal sources of finance.

17. Although the gas sector is the highest contributor to foreign reserves and fiscal

revenues, agriculture is still the dominant sector in terms of contribution to national output

and people’s livelihoods. The country has large natural gas reserves, with current production

accounting for 33 percent of export revenues and 75 percent of fiscal revenues. The contribution

of the gas sector will likely increase by 2014. Contracts were signed in July 2010 for two other

gas fields (Shwe and Zawtika), with reserves that will almost double existing capacity and

potential to increase annual production by about 60 percent in 2014/2015. However, agriculture

is currently still the largest contributor to national output and to people’s livelihoods. It accounts

for 43 percent of GDP, generates about 54 percent of employment, and provides livelihoods to

more that 70 percent of the population. The major agricultural product is rice which covers about

60 percent of the country's total cultivated land area and accounts for 97 percent of total food

grain production by weight. Other prominent agriculture products are pulses, forestry products,

fisheries, and livestock. Apart from gas and agriculture products, Myanmar is also a major

exporter of gems. Manufacturing is still in its infancy, and is largely limited to agro-processing.

The nascent garments and textiles industry was at one time vibrant, but was decimated by poor

policies and sanctions.

6

Table 1: Myanmar: Selected Economic and Financial Indicators, 2008–13

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13Est. Est. Proj. 3/

Real GDP and pricesReal GDP 12.0 10.3 10.6 10.4 … …Staff working estimates of real GDP 5.5 3.6 5.1 5.3 5.5 6.3Agriculture 4/ 8.0 3.4 4.7 4.4 4.4 4.2Industrial production 5/ 21.8 3.0 5.0 6.3 6.5 7.2Services and trade 12.9 4.2 5.8 6.1 6.3 8.5Consumer prices (period average) 32.9 22.5 8.2 8.2 4.0 6.1Consumer prices (end of period) 28.8 9.2 7.1 8.9 5.0 6.1

Public sector operations 6/Total revenue (including grants) 14.1 13.0 11.7 13.0 13.0 19.3Total expenditure 7/ 17.9 15.5 16.9 18.4 19.0 24.6Overall balance -3.8 -2.4 -5.2 -5.5 -6.0 -5.3Central bank financing 2.7 3.0 3.1 4.2 2.8 1.6

Domestic public debt 16.4 16.7 19.9 22.9 25.1 25.3

Money and creditBroad money 21.0 23.4 34.8 36.3 26.3 28.6Domestic credit 22.1 24.0 34.8 34.4 25.1 28.0

Government (net) 23.3 25.6 34.4 28.5 16.6 14.0Credit to private sector 16.7 16.2 36.9 65.4 60.1 48.0

Balance of payments Trade balance 924 302 72 796 -10 -1,313

Exports 6,446 7,241 7,139 8,980 10,170 11,308Imports -5,522 -6,938 -7,067 -8,184 -10,180 -12,621

Current account balance (excluding grants) -99 -1,038 -991 -590 -1,331 -2,120Overall balance 239 -405 -28 -333 -522 1,124Gross official reserves

In millions of U.S. dollars 2,039 2,254 2,909 3,309 3,818 5,071In months of total imports 3.2 3.5 3.8 3.5 3.3 4.0

External debtTotal external debt (including arrears) 12,305 12,744 13,207 13,643 14,632 12,251(In percent of GDP) 2/ 61.0 40.6 37.5 30.1 28.4 23.1External debt arrears 7/ 8,365 8,825 9,323 9,850 10,592 2,372

Terms of trade (in percent change) -1.1 2.8 4.5 -7.5 7.1 3.4

Exchange rates (end of period)Official exchange rate (kyat per U.S. dollar) 5.2 5.8 5.7 5.4 5.2 …

Parallel rate (kyat per U.S. dollar) 8/ 1,110 992 1,004 861 824 864

Central bank reference rate (kyat per U.S. dollar) 8/ 851

GDP in billions of kyats 23,336 28,778 32,351 36,436 39,719 44,797GDP in millions of U.S. dollars 2/ 20,182 31,367 35,225 45,380 51,444 53,140

Sources: Until FY2009/10 the authorities, with some adjustments by IMF staff; from FY2010/11 IMF staffestimations and projections.

2/ Before FY2012/13, GDP converted at a weighted exchange rate, where the official and FEC market rates are weighted with about 8 and 92 percent, based on the respective shares of public and private sectors in GDP.

4/ Including livestock, fishery, and forestry.5/ Including manufacturing, power, energy, construction, and mining.6/ Consolidated public sector; includes the Union government and state economic enterprises. 7/ For 2012/13 incorporates the terms of bilateral arrears clearance agreement with Japan, World Bank and AsDB.8/ The exchange rate for FY2012/13 is as of November, 16, 2011

3/ The authorities adopted a managed float on April 1, 2012.

(Percent change; unless otherwise indicated)

(In percent of GDP)

(Annual percentage change)

(In millions of U.S. dollars, unless otherwise indicated)

1/ Fiscal year (April–March).

7

18. Myanmar’s major trading partners are regional, with Thailand, China, Singapore

and India (Figure 1 and Figure 2). Myanmar’s trade has been limited to the region because of

international sanctions. China has been the main source of imports while Thailand has been

Myanmar’s main export destination. As mentioned above, the country’s principal export product

is natural gas. Other major exports are wood products, pulses and beans, fish, rice, clothing, jade

and gems. Its principal imports are fabrics, petroleum products and crude oil, fertilizer, plastics,

machinery, transport equipment, cement and construction materials, and food products and

edible oils.

Figure 1: Myanmar’s Main Source of Imports

(2010) Figure 2: Myanmar’s Main Export Destinations (2010)

Source: IMF Direction of Trade Statistics

19. Going forward, the country’s economic opportunities lie in its strategic location

within a large regional and global export market, vast untapped natural resources, and the

improving prospects for trade, investment, and development aid as it re-engages with the

wider international community. Being close to the large export markets of China, India, and

other countries in the ASEAN region places Myanmar in an advantageous position for an export-

led transformation of its economy, particularly in areas where it has a comparative advantage

such as natural gas, agriculture products, textiles, and minerals. The market potential for

Myanmar’s products in these countries remains large. Second, there are still significant

opportunities for Myanmar to increase production and export levels in its natural resource sector.

Finally, with many Governments lifting sanctions on Myanmar and development partners re-

engaging, the country will start enjoying favorable market access opportunities in OECD

countries as well, and will have expanded opportunities for inflows of portfolio and direct

investments. Similarly, the country will also be able to benefit from financial and technical

support from development partners.

39%

23%

13%

5% 4%

15%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%40%

16% 14%

6% 3%

22%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

8

20. In order to fully exploit these opportunities, ensure sustainable and responsible

extraction of natural resources, and achieve broad-based development, certain critical

challenges need to be overcome. These include weak institutions, a poor business environment,

a huge infrastructure deficit, and under-developed service sectors. After years of

underinvestment and poor policies, filling the energy gap and improving the road network is key

to attracting investors and improving service delivery. Further, development of the

telecommunications industry and the financial sector has the potential to catalyze development in

many areas. In order to build investor confidence and ensure sustainable and responsible

extraction of natural resources, maintenance of a stable macro-economy, creation of strong legal

systems, and greater transparency and accountability will be essential. Finally, the majority of

the population will be expecting these opportunities to be broadly shared. This will therefore

require undertaking policies and initiatives that seek to empower people to participate in

productive economic activities, provide social protection for the vulnerable. In addition, it will

require reforms in the public financial management system that seek to facilitate improvements

in the delivery of services.

21. Decades of underinvestment have taken a toll on public institutions and the civil

service. The reach of government and its ability to provide services, in particular in rural areas,

remains limited. Health, education, and agricultural extension services all suffer from having

been underfunded for extended periods of time. Salaries of many civil servants – in particular at

the lower levels of the bureaucracy and those in rural areas – are often insufficient to cover living

costs, although the FY2012/13 budget provided a significant raise to civil servants. Partly as a

result of these limitations, households have relatively high out-of-pocket costs to access public

health and education services (a 2007 survey showed out of pocket expenditures accounting for

84 percent of total spending on health). A lack of funds to cover the cost of transportation has in

many cases confined agricultural extension workers to the areas they can reach easily.

22. Corporate governance of larger companies and financial institutions is still limited

as most are closely held by families and elite groups. Patronage and state capture have been

significant features of the economy, with firms close to the government undertaking public

investment projects in return for concessions and/or access to natural resources. In addition,

accounting and auditing are weak across the board and enforcement of regulations is uneven,

including unequal treatment among state-owned enterprises (or those with close links to the

state) and private firms. Furthermore, a substantial portion of economic activity in Myanmar is

informal, with small and medium-sized enterprises accounting for over 90 percent of the

country’s enterprises.

23. Poor regulations, a lack of enforcement, and extractive investment have also done

significant harm to Myanmar’s environment. Once considered the last frontier of biodiversity

and with a long tradition of sound forest management practices, Myanmar today is facing the

results of extensive deforestation as a result of both increased commercial logging and illegal

logging activities, particularly in border areas. This has led to soil erosion, landslides, and

decreased soil fertility, depriving many families of their traditional sources of income. Similarly,

overfishing, including by foreign vessels, is endangering the livelihoods of fishing villages.

9

24. Myanmar has had a history of corruption reported to be widespread in various

parts of the public sector, including through offers of large infrastructure contracts to

cronies or in return for bribes. Bribery has been common at every level of Government in the

past because of weak institutions of transparency and accountability. It is believed that the

practice started with the Myanmar tradition and culture of paying respects along with gift items

but was further complicated by low salaries in the public sector. As a result, amongst other

factors highlighted earlier, corruption has also contributed significantly to Myanmar’s

underdevelopment. If not tackled, the problem could undermine Myanmar’s transition to a

market economy by increasing the actual costs and risks for potential private investors, both

domestic and foreign. Further, if not tackled, corruption could undermine the trust that the

citizens are expected to have on the Government’s overall capability to govern.

25. With the ongoing spate of reforms, some aspects of governance have improved,

including the fight against corruption. The government has made efforts to improve

transparency, with the national budget being presented and debated in Parliament for the first

time in 2012 (leading to significant cuts in the Executive’s proposal), and subsequently published

in national newspapers. The government established a Financial Commission and undertook a

significant de-concentration of budgeting and planning functions, including a move towards

more bottom-up planning and budgeting. Myanmar also has a semi-independent Auditor

General whose purview spans the entire public sector. Restrictions on media have been lifted,

leading to greater coverage of previously sensitive topics such as corruption. Finally, to show its

commitment towards the fight against corruption, the new Government has recently submitted a

draft law on anti-corruption, which seeks to ensure that corruption is investigated and that those

who are involved in it are prosecuted.

26. An ongoing assessment suggests that the public financial management system has

some strong features. Budget classification is consistent across various ministries and

departments but not in line with international standards. Systematic reporting exists by ministries

and State Economic Enterprises (Myanmar’s equivalent of State Owned Enterprises) to the

Ministry of Finance and Revenue, the Ministry of National Planning and Economic

Development, and that such reports are cross checked for accuracy with the Central Bank of

Myanmar, the Myanmar Economic Bank, and the Myanmar Foreign Exchange Bank. The

external audit function is well established, financial audit coverage is high, agencies respond to

audit opinions, and the newly established Public Accounts Committee of the Parliament provides

an appropriate forum for discussing audit report and the budgetary bill.

27. Notwithstanding these strengths, the PFM system has a number of weaknesses. The

system is characterized by a high degree of informality and process based systems. In particular,

foundational and legal underpinnings have lagged the system. As the regulatory system has

lagged the practice, ministries have adopted different approaches which are not fully articulated.

There is considerable de-concentration of authority to ministries and state economic enterprises

(SEEs). A high degree of virement powers are held at ministry level. Ministries determine their

own procurement systems although the general guiding principle is that these must be open

tender, based on Presidential Regulation. The control environment appears to be relatively weak

and financial management capacity of SEEs is variable. There is also limited availability of

public fiscal information and the system is largely manual, with very limited use of ICT. The

10

extent of off-budget and quasi-public spending is not clear, as is the role of the military in the

economy.

28. In line with the new constitution, Myanmar has from 2011 moved from a centralized

unitary form of government to a hybrid system of central local relations, falling somewhere

between unitary and federal systems. While the Union (central) level of government has sole

legislative authority and key financing responsibilities, regions and particularly states (both first

order sub-national government units) exercise varying degrees of autonomy in service delivery

and administration. In particular, the 14 states and regions have their own parliaments and

executive governments, headed by a Chief Minister. They also prepare their own budgets which

have to be approved by their respective parliaments. However, unlike in fully fledged federal

systems, the state and regional budgets also need to be approved by the national parliament.

Further, there are no publicly known guidelines or formulae, if at all they exist, that guide

vertical allocation of resources between central and the lower tier of government and horizontal

allocation, amongst the 14 states and regions.

C. Recent economic developments

29. The Myanmar economy continued to accelerate in 2011/12. Real GDP growth has

increased steadily from 3.6 percent in 2008/09 to 5.5 percent in 2011/12 and is projected at 6.3

percent in 2012/13.3 On the supply side, the manufacturing and services sectors were behind this

acceleration: real growth in agricultural value-added (43 percent of total GDP) fell from 4.7

percent in 2009/10 to 4.4 percent per annum in 2010/11 and 2011/12. Heavy flooding in in some

parts of the country in August 2012 may have a further negative impact on real agricultural

growth. Demand side drivers included higher fiscal spending before the April 2012 by elections,

growth in commodity exports, and strong investment.

30. Inflation has been easing because of the positive impact of recent economic reforms

and falling food prices, although higher international food prices and domestic non-food

costs have been pushing inflation up again in recent months. Although the CPI price index

suffers significant deficiencies, adjusted figures suggest that prices have been falling in recent

months. Inflation during the period 2009- 2011 had been around 8 percent but is now estimated

to have declined to around 5 percent year-on-year. This is partly because of the new

Government’s efforts to move away from financing the fiscal deficit by printing money towards

use of treasury bonds. The other reason has also been falling domestic food prices which have

the dominant weight in the consumer price index. However, there are indications that prices

have been going up again in recent months, driven by higher international food prices and

increasing prices of non-food commodities such as housing. Since Myanmar’s economy does

not yet have developed money or capital markets and has been largely closed to the outside

world, the impact of the Eurozone crisis on capital flows has not had any effect on Myanmar’s

monetary aggregates, and hence, on domestic inflation.

3 IMF staff estimates. Official estimates are twice as high and flat through 2010/11. Official estimates for 2011/12

are not available yet.

11

31. The introduction of a managed exchange rate system in April 2012 has been

relatively smooth. Until this reform was introduced, the official exchange rate was pegged to

the SDR at 8.5 Kyat per SDR. Based on this exchange rate, the USD had for a long time been

trading at 6 Kyat with a wide range of unofficial rates used within the economy that were much

closer to the level of 800 Kyat to the U.S. Dollar. The new system involves daily sealed bids

from certain domestic banks to the CBM for specific quantities of foreign currency. Overall, the

nominal exchange rate has depreciated by about 4 percent since it was floated. As at November

30, 2012, it was trading at 852 Kyats per one US dollar compared to 819 Kyats on the first day of

trading when it was floated in April.

32. Money supply growth has been slowing. Growth in broad money supply (M2) has

slowed in 2011/12 to 26.3 percent from 36.3 percent in 2010/11 and 34.8 percent in 2009/10.

Broad money growth is expected to slow even further to 18.8 percent in 2012/13. Growth in

private sector credit exceeded that of net credit to the government for the first time in many

years, increasing by 65.4 percent in 2010/11 and 60.1 percent in 2011/12. By contrast, net credit

to the government grew by 28.5 percent and 16.6 percent respectively, in the same years. The

administratively controlled central bank policy rate was reduced to 10 percent at the start of

2012-13 from 12 percent previously. In addition, since September 2011, the deposit and lending

rates were cut by a cumulative 4 percentage points to 8 and 13 percent, respectively. The

September adjustment also placed the Treasury bond rates above the minimum deposit rate,

which provides an incentive for banks to hold Treasury bonds, and helped reduce deficit

monetization.

33. The fiscal deficit of the consolidated government worsened from -5.5 percent of

GDP in 2010-11 to -6.0 percent in 2011/12. While total revenues remained unchanged at 13.0

percentage of GDP, expenditures increased from 18.4 percent to 19.0 percent of GDP. As a

consequence, the stock of domestic public debt grew from 22.9 percent of GDP in 2010/11 to

25.1 percent of GDP in 2011/12.

34. Myanmar’s current account deficit has been increasing recently. In 2011/12, the

current account deficit was at -2.5 percent of GDP, up from -1.2 percent in 2010/11. This was

because of a worsening trade balance as imports grew at a much higher rate (24.4 percent) than

exports (13.3 percent). The Government has been easing restrictions on imports as well as

exports, and this development shows that the response has been stronger on the imports side. The

current account deficit is projected to increase further to -3.9 percent of GDP in 2012/13.

35. Although the current account deficit has increased, the nominal external reserve

position has been improving. Gross official reserves grew from US$2.9 billion or 3.8 months of

imports in 2009/10 to US$3.3 billion in 2010/11. In 2011/12, reserves increased further to

US$3.8 billion although this is equivalent to 3.3 months of imports because the import

requirement has also increased.

36. The natural resource sector continues to attract foreign direct investment. Portfolio

capital flows remain limited and therefore recent developments have mostly been on account of

inflows of foreign direct investments. In 2011/12, the overall external balance registered a deficit

of -1.0 percent of GDP. However, due to the projected increase in foreign direct investment from

12

3.8 percent of GDP to 4.5 percent, it is expected that the overall external balance in 2012/13 will

register a surplus of 2.1 percent.

Table 2: Myanmar: Summary Consolidated Government Operations

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 1/ 2013/14 2014/15

Prel. Prel. Est. Proj. Proj. Proj.

(In billons of kyats)

Consolidated accounts

Revenue 2/ 3,285 3,753 3,777 4,736 5,144 8,652 9,952 11,360

Of which: Revenue from gas exports 7 9 8 10 12 1,952 2,254 2,672

Tax 875 1,045 1,077 1,318 1,610 1,888 2,177 2,540

Nontax 2,410 2,707 2,700 3,418 3,534 6,671 7,643 8,667

Grants 1/ 0.2 0.3 0.5 0.3 0.2 93.6 131.7 153.2

Expenditures 4,177 4,450 5,463 6,722 7,536 11,024 12,560 14,167

Current 2/ 2,557 2,767 3,035 3,519 4,483 6,660 7,583 8,549

Capital 1,620 1,683 2,428 3,203 3,053 4,364 4,977 5,618

Current balance 728 985 743 1,217 661 1,992 2,369 2,811

Overall balance -892 -697 -1,686 -1,986 -2,391 -2,372 -2,608 -2,807

Financing 892 697 1,686 1,986 2,391 2,372 2,608 2,807

Foreign financing 2.0 1.7 1.6 1.1 1.6 960.0 1,046.5 1,151.5

Foreign loans (net on accrual basis) 1/ 0.4 -0.9 -1.3 -1.75 -0.7 960.0 1,046.5 1,151.5

Disbursements 3/ 1.3 1.1 1.0 0.7 1.1 1,200.2 1,366.7 1,501.7

Amortization due 4/ -0.8 -2.0 -2.3 -2.5 -1.8 -240.1 -320.2 -350.2

Change in external arrears 1/ 1.6 2.7 2.9 2.9 2.3 0.0 0.0 0.0

Interest 1.2 1.3 1.3 1.2 1.2 0.0 0.0 0.0

Principal 0.4 1.3 1.6 1.7 1.1 0.0 0.0 0.0

Domestic financing 890 696 1,684 1,985 2,390 1,412 1,562 1,655

Central bank credit 641 852 1,004 1,522 1,131 702 468 331

Bank financing 62 118 640 371 527 651 1,064 1,322

of which:

Treasury bonds 62 118 640 371 527 669 1,064 1,322

Other 5/ 187 -274 40 92 733 59 30 2

Sources: Budget Department, Ministry of Finance and Revenue; and IMF staff estimates and projections.

1/ Converted at the official exchange rate before FY 2012/13, when the official exchange rate is replaced by a market-determined exchange rate.2/ Consolidated revenue includes all revenue receipts of union government and SEEs . Consolidated current expenditures include current expenditures of union government and SEEs.3/ Includes additional loans from bilateral and multilateral creditors.4/ Includes payments of principal on loans that still exists after the arrears clearance and that are associated with rescheduling.5/ Includes privatization receipts, sales of government assets, and statistical discrepancy.

13

D. Macroeconomic outlook

37. Myanmar‘s growth prospects over the medium-term remain positive, although the

strength of growth performance will depend on how well the economy responds to

investment and trade opportunities as most economic sanctions are lifted. It is expected that

in the medium-term growth will increase to around 7 percent if the reform momentum is

maintained, and could even be higher, as the economy opens up to the outside world and the

Government continues on its reform path. In particular, foreign direct investment is expected to

increase in the financial sector, telecommunications, gas and mineral sector, textile, energy, and

tourism. Similarly, the tradable sectors, particularly agriculture, textile, and mineral sector are

expected to grow as Myanmar starts benefiting from export markets in Europe and America. A

combination of these factors should see growth accelerate further in the medium term. However

the extent of growth acceleration will depend on how well the country responds to these

opportunities and the sustainability of reforms.

38. Similarly, fiscal prospects remain positive as revenue increases are likely to outstrip

expenditure increases. In the medium term, it is expected that revenues will increase noticeably

for a number of reasons. First, there will be a substantial increase in gas revenues when the two

gas projects of Shwe and Zawtika come on stream in 2014. As mentioned earlier, these have

potential to increase gas production in Myanmar by 60 percent. Second, as other sectors grow

due to increased trade and investment, non-gas revenues are also expected to increase. Finally,

there are prospects for increased tax revenues as the country undertakes tax policy and

administration reforms. Meanwhile, expenditures are also expected to increase but are likely to

lag behind revenue increases. It is expected that there will be increases in infrastructure spending

particularly in energy and transport sectors as the country tries to close the infrastructure deficit

which could be a binding constraint to growth. At the same time, it is expected that the

Government will increase spending on social sectors as the country tries to catch up with

regional patterns. Similarly, the 2015 general elections are likely to put pressure on the budget.

On balance, is it expected that the fiscal deficit will decline from 6 percent in 2011 to around 4½

percent

39. Inflation is expected to remain moderate, at around 5 percent year on year. This will

be due to a combination of supply and demand side factors. It is expected that increased

investment will increase the supply of goods and services. While increased investment and

consumption expenditure would put pressure on prices, initiatives towards the substitution of

deficit monetization with bond financing as well as improved reserve money targeting are

expected to have a dampening effect on prices.

40. The trade and current account balances will continue to be under pressure due to

projected higher increases in import demand vis-à-vis exports. In spite of the expected surge

in exports due to increased gas production as well as increases in other export commodities, it is

expected that import demand for investment and consumption goods will be relatively higher as

further restrictions are relaxed. Over the years there has been a pent-up demand for imports due

to various forms of import restrictions, such as in the importation of vehicles, most of which are

now being relaxed. Further, as the country opens up to foreign investment, demand for imported

14

investment goods will increase before exports catch up. Therefore on balance, it is expected that

the current account will worsen to 5½ percent of GDP.

E. Debt sustainability

41. Myanmar’s total external debt outstanding is estimated at US$15 billion as at

December 2012, which is equivalent to 28 percent of GDP, and of which 72 percent (US$11

billion) is in the form of arrears. Table 1 below provides a detailed breakdown of arrears and

current debt outstanding by various creditors. In terms of arrears, 92 percent (US$10.1 billion)

are owed to the Paris Club of which arrears to Japan alone (US$6.6 billion) account for 65

percent. Other major Paris Club creditors are Germany, France, and Norway. Arrears to

multilateral institutions account for 9 percent of the total, with 5 percent due to the ADB and 4

percent to IDA. As can be seen, Myanmar does not have arrears to non-Paris Club members or to

commercial creditors. This is because the country has been servicing debts to those bilateral

creditors that did not impose sanctions. As at October 31, Myanmar’s actual arrears to IDA were

US$411 million.

42. To normalize relations with the international community, the Government has been

discussing with the various creditors on modalities for clearing the arrears, and significant

progress has been made that would see the arrears decline in the coming year. In April

2012, the Japanese Government reached an agreement with the Myanmar Government on how

arrears to Japan would be cleared. Similarly, agreement has been reached on a coordinated

approach to clearing Myanmar's arrears to IDA and ADB of which the proposed DPO is an

integral part. A resolution of Myanmar's arrears to Paris Club Creditors, consistent with the

implementation of the agreement with Japan, is also expected to be reached soon after Board

discussion of the DPO.

Table 3: Myanmar’s External Debt Outstanding and Arrears, as at December 2012(Million US$)

Principal

Arrears

Interest

Arrears

Late

Interest

Total

Arrears

% Share

of Total

Arrears

Current

Outstanding

Debt

% Share of

Total

Current

Debt

Outstanding

Total

Debt

% Share of

Total Debt

Outstanding

(Arrears +

Current)

Grand total 4,851 1,239 4,891 10,984 100 4,341 100 15,345 100

Multilateral creditors 747 183 0 933 8 717 17 1,670 11

IDA 324 89 0 416 4 490 11 926 6

ADB 423 94 0 517 5 202 5 719 5

OPEC 0 0 0 0 - 25 1 25 0

Bilateral creditors 4,104 1,056 4,891 10,051 92 3,524 81 13,575 88

Paris Club 4,104 1,056 4,891 10,051 92 364 8 10,415 68

Japan 3,384 826 2,372 6,581 60 79 2 6,661 43

Germany 463 166 758 1,388 13 227 5 1,615 11

Other 257 64 1,761 2,082 19 57 1 2,139 14

Non Paris Club 0 0 0 0 - 3,160 73 3,160 21

China 0 0 0 0 - 2,929 67 2,929 19

Other 0 0 0 0 - 231 5 231 2

Commercial creditors 0 0 0 0 - 100 2 100 1

Sources: Data provided by the Myanmar Authorities, Paris Club, and World Bank

15

43. A debt sustainability analysis (DSA) on Myanmar has recently been conducted

jointly by IMF and Bank staff. The DSA has made the following assumptions under the

baseline scenario: (i) GDP growth is expected at 7½ percent in the long-term; (ii) inflation will

be around 4¾ percent; (iii) the primary fiscal deficit will narrow from about 4.3 percent in

FY2011/12 to 2¼ percent in the medium-term; (iv) revenues will increase significantly from

11.4 percent of GDP in 2011/12 to 20.3 percent of GDP in the medium term and to 21.9 percent

of GDP in the long-term, owing to the positive impact of a higher exchange rate and an expected

substantial increase in gas exports revenues; (v) growth in exports will average around 12.3

percent while the growth in imports will be around 14 percent; (vi) the current account will

remain in deficit and stabilize around -5.5 percent of GDP in the long-term; (vii) new financing

needs will be met by both foreign direct investment and disbursements of medium and long-term

debt from bilateral and multilateral creditors.

44. The conclusion of the DSA is that due to the presence of arrears, Myanmar can be

classified as being in debt distress. However, going forward, if these arrears were to be

cleared, Myanmar would be at low risk of debt distress. As the graphs in Figure 3 show,

Myanmar’s debt-burden indicators including arrears are generally low and remain below the

critical thresholds during the projection period under the baseline and when subjected to the most

extreme shock. In spite of these favorable indicators, Myanmar is currently assessed to be in

debt distress given the presence of arrears.

Overall macroeconomic assessment

45. While risks remain, Myanmar’s macroeconomic policies are broadly appropriate. The authorities have limited tools especially for conducting monetary policy, but also for fiscal

policy. Nonetheless, operating within these constraints, macroeconomic policy has sought to

contain inflation such as taking steps to limit monetization of the fiscal deficit. The introduction

of a managed float exchange rate system will ease pressure on the external balance. Most key

macroeconomic aggregates are at reasonable levels and the outlook is positive. At around 5

percent, inflation is moderate. Similarly, while a fiscal deficit of 6.2 percent in FY2011/12 is

relatively high, it is projected to fall in the short to medium-term. Debt indicators remain low

while gross official reserves are above the 3 months of import cover that is sometimes used as a

critical benchmark. Further, the IMF and other donors are providing support on macroeconomic

issues, including through intensive monitoring which reduces risks to the macroeconomic

framework in the context of weak capacity and further strengthens the already positive

macroeconomic outlook.

16

Figure 3: Indicators of public and publicly guaranteed external debt under alternative scenarios

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in 2022/23. In figure b. it corresponds

to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a

Exports shock and in figure f. to a One-time depreciation shock

0

2

4

6

8

10

12

14

16

18

20

2012/13 2017/18 2022/23 2027/28 2032/33

Baseline Most extreme shock 1/ Threshold

f.Debt service-to-revenue ratio

0

5

10

15

20

25

30

35

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2012/13 2017/18 2022/23 2027/28 2032/33

Rate of Debt Accumulation

Grant-equivalent financing (% of GDP)

Grant element of new borrowing (% right scale)

a. Debt Accumulation

0

5

10

15

20

25

30

35

2012/13 2017/18 2022/23 2027/28 2032/33

b.PV of debt-to GDP ratio

0

50

100

150

200

250

2012/13 2017/18 2022/23 2027/28 2032/33

d.PV of debt-to-revenue ratio

0

2

4

6

8

10

12

14

16

2012/13 2017/18 2022/23 2027/28 2032/33

e.Debt service-to-exports ratio

0

20

40

60

80

100

120

140

2012/13 2017/18 2022/23 2027/28 2032/33

c.PV of debt-to-exports ratio

17

III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESS

A. Myanmar’s development strategy

46. The Government has prepared a five-year development plan for the period 2011-

2015 and which has since been submitted to parliament for discussion. The plan outlines

various initiatives, in terms of programs and investments that the Government will undertake in

order to achieve the following strategic objectives: (i) agricultural development; (ii) balanced

growth among regions and states; (iii) inclusive growth; and (iv) improving the quality statistics.

These objectives are in turn translated into further operational detail, for example with a “Rural

Poverty Alleviation and Development Framework” identifying eight tasks covering a broad

agenda for rural development, including developing the agricultural production sectors,

developing micro saving and credit enterprises, rural energy, and social and economic

development of rural areas. This plan builds on a long tradition of planning in Myanmar and is

particularly noteworthy for a commitment to accurate statistics as a pillar for better planning.

47. Additionally, the specific reform initiatives that will underpin the implementation of

the five year development plan are contained in the “Framework for Economic and Social

Reform” that is under preparation and which will form the basis for further consultations.

The framework will seek to give coherence to the government’s reform efforts. It will also aim to

articulate the sequence in which they are to be implemented, and identify areas where further

analytical work and consideration of options is required. In terms of scope, the reform

framework will cover the following areas: macro-economic reform; sector policy reform; the

social and environmental dimensions of development; national harmony and regional

development; improving governance; and repositioning Myanmar in the international

community.

B. Coordination

48. To ensure that Myanmar’s medium-term development strategy is properly

coordinated across the various sectors and tiers of Government, a Planning Commission

has been established. The Commission is headed by the President and includes Union Ministers

and chief ministers from all regions and states. The role of the Planning Commission will be to

guide medium-to-long term economic planning and development in the country. The

Government is increasingly taking a leadership role in donor coordination including through the

high level Foreign Aid Management and Coordination Committee.

18

C. Consultations

49. Government has consulted on the reforms implemented and planned, including

those underpinning the proposed operation. In a break from past practice, the new

administration made has sought to move away from a top-down approach to planning and policy

formulation to a seeking the views of various stakeholders including, at grassroots, will be taken

into account. In the early stages of the reform, several workshops have been organized by

Government for purposes of consulting stakeholders on the design of various reforms. Box 1

below outlines some of the consultation workshops organized. In a significant step towards

institutionalization of consultations, the debates in Parliament on legislation are usually rigorous

and often televised and covered in the print media.

50. Going forward, the Government also plans to undertake further consultations on

the framework for economic and social reform before it is finalized. The reform framework

has drawn on recommendations from the workshops referred to above and Government agencies

have provided comments on the draft document. The plan now is to solicit comments from all

other stakeholders. In this regard, the Government plans to hold additional consultation

Box 1: Key Government Consultation Platforms and Initiatives on Economic Reforms

The Government has used various platforms and initiatives for purposes of seeking stakeholder views

on the reform process. For example, a workshop was held from May 20-22, 2011 at the Myanmar

International Convention Centre in Nay Pyi Taw. The theme of the workshop was “National

Workshop on Rural Development and Poverty Alleviation in Myanmar.” Participants included

Government officials, civil society representatives, private sector, and the media.

Soon thereafter, a watershed national workshop was organized by the Office of the President from

August 19-21, 2011 at the same venue. This workshop was titled “National Workshop on Reforms for

Economic Development of Myanmar.” Some of the topics covered at the workshop included

“corruption: causes, consequences, and cures” and “Exchange Rate Reforms”. Like the first

workshop, participants came from within and outside Government. Most significant was the fact that

the workshop was also attended by the President himself and the opposition leader, Daw Aung San

Suu Kyi, at the personal invitation of the President.

Another notable workshop was held from November 7-8 in Yangon with the title “Workshop on the

Development of the Financial Sector in Myanmar and its role in supporting inclusive Economic

Growth and Poverty Reduction”. Some of the topics covered were “Role of the Financial Sector in

Supporting Growth and Poverty”, “Reform of the Banking Sector,” “Development of a Capital

Market”, and “Strengthening of the Central Bank”. Daw Aung San Suu Kyi attended this workshop

again, and for the first time, donor representatives were also invited.

Besides these workshops which have been organized by the executive branch of Government,

Parliament is increasingly becoming a forum for national debate. All bills that go to Parliament are

now published in local newspapers and the public is invited to submit views and comments. For

example, relevant to this operation is the fact that the budget bill, the foreign exchange management

bill, and the foreign investment bill were all widely debated in parliament before being passed, and

public inputs were solicited. With regard to the foreign investment bill, the speaker of the lower house

of parliament went further to organize a special workshop to seek stakeholder views on the bill.

19

workshops in states and regions. There are also plans to seek comments from development

partners.

D. The Government’s Gender Strategy

51. A national plan to enhance gender equality and empower women is underway, but

the capacity to implement the plan is limited. As mentioned earlier, the 2008 Constitution

grants equal rights, opportunities and legal protection to all citizens, and Myanmar is a signatory

to the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW).

The Ministry of Social Welfare, Relief and Resettlement, and the Myanmar National

Commission on Women’s Affairs oversee the implementation of CEDAW. In addition, the

government is developing a National Strategic Plan for the Advancement of Women (NSPAW)

2012-2021 which includes 12 key activity areas along the lines of the Beijing Platform of Action.

While the government is working on enhancing women’s status and protection, there is a need to

enhance public perceptions of the importance of gender equality in development, and to

strengthen the capacity of national institutions to effectively implement CEDAW and the

proposed NSPAW.

IV. BANK SUPPORT TO THE GOVERNMENT PROGRAM

A. Link to the Interim Strategy Note

52. Before the Board approved a pre-arrears clearance grant on November 1, 2012 to

support a Community Driven Development (CDD) project, The Bank had not approved

any new projects in Myanmar since 1987. The Bank’s first project in the country was approved

in May 1956, supporting the Government’s rehabilitation and modernization of the railway (damaged

during World War II) and inland water transport sectors. There have been a total of 35 projects in

Myanmar. In 1998, the Government went into arrears to IDA but has remained a member. In the

period since 1987, the Bank has supported only one project in Myanmar, the “Avian Influenza

Support” project financed by the Avian and Human Influenza European Union trust fund and

implemented through the Food and Agriculture Organization, which was closed in 2011. IFC has not

had any engagement in Myanmar to date.

53. The proposed Myanmar DPO is consistent with the Bank’s strategy for supporting

re-engagement in Myanmar as outlined in the ISN for the period FY13-14. The Myanmar

ISN was discussed by the Board on November 1st, 2012 together with the CDD project referred

above and an IFC investment in ACLEDA Myanmar which is a microfinance institution. The

strategy has been prepared to support re-engagement with Myanmar as the country goes through

a triple transition – from an authoritarian military system to democratic governance, from a

centrally-directed economy to market-oriented reforms, and from conflict to peace in the border

areas. In so doing, the ISN draws on the WBG’s experience in other countries, and the findings

of the 2011 World Development Report on Conflict, Security and Development, in particular in

its emphasis on a continuous effort on transforming institutions and building confidence. At the

same time, the ISN aims to lay the foundation for the resumption of a full country program,

including by supporting diagnostic work to build a shared understanding of key development

challenges facing the country.

20

54. The DPO is explicitly provided for in the ISN under the pillar on preparing the way

for the resumption of a full country program. The ISN focuses on three pillars: the first aims

at supporting government’s efforts to transform institutions to allow them to deliver for citizens;

the second at building confidence in the ongoing reform process; and the third at preparing the

way for the resumption of a full country program. Under preparing the way for resumption of a

full country program, the strategy provides for the provision of a DPO to Myanmar to support

the government's reform program with proceeds used to support Myanmar's foreign exchange

needs, including those associated with IDA arrears clearance.

55. The reforms to be supported by the DPO are also consistent with the pillars on

transforming institutions and building confidence. The ISN emphasizes the need for strong

institutions to effectively manage and sustain Myanmar’s triple transition. Institutional reforms

are seen as critical to help the authorities successfully mediate competing demands, steer an

increasingly complex economy, and navigate the country on its development path. As stated

earlier, strong institutions will also be important for investors to have confidence in the country.

Therefore, the policy and institutional reforms being supported under this program will

contribute towards achieving this strategic objective of the ISN.

B. Relationship with other bank operations

56. The DPO is also closely linked to on-going and planned Bank diagnostic tasks and

projects. A Public Expenditure and Financial Accountability (PEFA) assessment funded by

DFID is at an advanced stage of being finalized. It is in the course of carrying out the PEFA

assessment that the Bank has already been able to provide policy advice on specific requests,

including in areas being supported by the proposed DPO. Once completed, recommendations

from the PEFA assessment and a planned Public Expenditure Review (PER) will inform the

design of further reforms that need to be implemented in public financial management which is

one of the policy areas covered by the proposed DPO. The policy dialogue under the DPO is

providing useful insights into some of the key areas which planned future support will need to

cover. Possible future TA projects will ensure that some of the specific reforms supported under

the planned DPO are sustained through the provision of the required capacity building support.

Finally, the Bank and IFC plan are carrying out diagnostic work and providing TA in the areas of

financial sector reform and private sector development funded by AusAID. The dialogue under

the DPO has provided useful insights in designing the scope of this support. Further, the planned

TA will in turn generate relevant knowledge and help build institutions and strengthen capacity

that is necessary for the sustainability of reforms supported by the proposed DPO.

C. Coordination with the IMF and other donors

57. In preparing the operation, the Bank has consulted with the IMF on the assessment

of Myanmar’s macro-economy and its outlook. Although the Fund has not had a formal

program in Myanmar, it has maintained a surveillance relationship through the Article IV

consultations. IDA staffs have neon participating in most of these Fund surveillance missions. In

preparing this operation, there has been close collaboration with the Fund particularly in the

preparation of a joint DSA. Further the IMF has been consulted on the assessment of the macro

economy and its outlook, and has provided a letter of assessment which is attached in Annex 4 of

this document.

21

58. The Bank also collaborated with the Fund in other areas, particularly PFM and

financial sector reforms. In PFM, the Bank team working on the PEFA assessment collaborated

closely with the IMF team that carried out a review of Myanmar’s PFM system. The teams had

joint meetings when the missions overlapped and also peer reviewed each other’s reports.

Similarly, the IMF and World Bank teams have collaborated in providing support and policy

advice to the authorities on financial sector reforms, including through the fielding of joint

missions.

59. More recently, Bank Staff have also collaborated with the IMF during the

preparation of an SMP. A Fund mission was fielded during November 5-23, 2012 to discuss

the details of the program. The Bank was asked to provide comments on the draft briefing paper

prepared by Fund staff ahead of the mission. The Bank team also fully participated in the

mission and has provided comments on draft staff report on the program. Further, Bank Staff

were consulted on specific issues that fall under the purview of the Bank. The proposed SMP

seeks to support the authorities’ efforts towards maintaining macroeconomic stability during the

reform process and laying the foundations for lasting macroeconomic stability by building a

macroeconomic framework, and developing the institutions and instruments to use it effectively.

It will cover the period through December 2013, and will be monitored through semi-annual

reviews using quantitative and structural benchmarks. The specific quantitative and structural

benchmarks agreed under the program seek to ensure low and stable inflation within a consistent

macroeconomic framework, build international reserve buffers in light of the on-going

liberalization of imports and foreign exchange regime, and continue building institutions and

instruments needed to ensure macroeconomic stability.

60. There has also been close coordination with the ADB in preparing this operation in

the context of a collaborative approach to arrears clearance. Myanmar’s arrears to the ADB

stand at around US$517 million. As part of a coordinated international approach to arrears

clearance, World Bank and ADB staffs have collaborated closely throughout the process. After

the authorities expressed interest to normalize relations with the international community, the

two institutions indicated that the clearance of arrears owed to them would be a pre-requisite for

normal lending relations to resume. Subsequently, the process of reconciling the arrears amounts

commenced and to assist the authorities in clearing the arrears, a joint note laying down possible

approaches was prepared by the two institutions. In the end, the authorities settled for the option

of clearing the arrears using a bridge loan. Over the next several months detailed consultations

with the Government of Myanmar, the Asian Development Bank and the bridge financier took

place to iron out the details of the transaction. This included several joint missions in Myanmar,

and a series of technical discussions between the parties involved in the IDA transaction.

22

D. Lessons learned

61. This operation builds on lessons emerging from DPOs in fragile environments,

especially those prepared as part of a reengagement process. Similar DPOs have been

prepared for Guinea (2011), Togo (2008), Cote D’voire (2008), Liberia (2007), and Central

African Republic (2006). One common feature in all these operations, which is also highlighted

in an IEG report on engaging with fragile states, is that they carefully focused on politically

feasible reforms that can build momentum for future changes, with a particular emphasis on

restoring and strengthening basic state functions. In other words, the key lesson is to strike an

appropriate balance between ambition and realism. This lesson is even more relevant for

Myanmar which is emerging from a much longer period of fragility and isolation than the

countries listed above.

62. The choice of critical prior actions has also drawn from the experiences of other

countries that have gone through transitions on the need to strike the right balance

between policy changes and institutional reforms. One of the key lessons from the Bank’s

engagement in supporting reforms in countries that have gone through transition such as

Vietnam is that there was greater emphasis on policy changes with less attention paid to building

institutions. For example, the focus in Vietnam was more on getting the exchange rate right and

less on how it was to be set and managed. As will be seen from the policy matrix to be presented

later in the document, this operation has learnt from this experience by having prior actions that

seek to build institutions, such as through the passage of laws, and prior actions that focus on

actual changes in the way of doing things.

E. Analytical underpinnings

63. In spite of the Bank’s long absence in Myanmar, the majority of reforms supported

under this operation are consistent with the Bank’s recommendations from analytical work

conducted before the suspension of formal operations. For example, a 1995 comprehensive

Country Economic Report on Myanmar analyzed critical issues the country was facing in the

areas of macroeconomic stability, getting the structure of incentives right for exports and private

sector development; and in reforming state owned enterprises. A comprehensive Economic and

Social Assessment was further conducted by the Bank in 1999 and also included analyses on

macroeconomic policy, private sector development, and strengthening the role of Government in

poverty reduction.

64. Although it has been a while since the above reports were produced, their findings

and recommendations have remained valid, and have been reconfirmed by recent non-

bank analytical work and policy dialogue. Examples of specific recommendations that have

been reconfirmed in recent reports such as the 2012 IMF Staff Report on Article IV consultations

(and subsequent IMF country team and technical missions) but which featured in earlier Bank

reports include the need for unification of Myanmar’s multiple exchange rates; the need for

Central Bank operational autonomy, financial sector modernization and removal of overly

restrictive controls on financial intermediation; rationalization of certain taxes and improved tax

administration. Recommendations for achieving broad-based growth through structural reforms

focus on improving the investment climate through removal of non-tariff barriers to trade,

elimination of foreign exchange controls, and reduction in company licensing and registration

23

costs. These are recommendations that the Bank has consistently made in various discussions on

Myanmar and which have informed the design of this operation.

65. More recently, the Bank has been conducting a Public Expenditure and Financial

Accountability (PEFA) Assessment which has informed the design of this operation in the

area of public financial management. In light of the current operating environment, the PEFA

is being carried out with funding from DFID under a fee-based service agreement and is at an

advanced stage of being finalized. One of the key findings of the PEFA is the limited availability

of public fiscal information, stemming from the closed nature of the previous political

environment. It is for this reason that the proposed operation supports the efforts that the

authorities are now making in improving transparency in the management of public resources,

including in the area of natural gas revenues.

F. Incorporating gender dimensions

66. The Bank is planning to fill existing knowledge gaps in the gender area while

utilizing available entry points for incorporating gender dimensions in its operations. As

mentioned earlier, disaggregated data with gender dimensions remains scanty. In order to

properly support the Government in promoting gender equality, the donors will be investing in

filling data and knowledge gaps in this area. In particular, there are plans to support a population

census as well as the next round of national household living conditions survey. Given that

peace is returning to most areas that were previously in conflict and therefore not accessible, it is

expected that the new data will be more representative of the situation in the country and will

therefore provide useful insights into challenges that remain in order to improve gender equality.

Meanwhile, the Bank will be utilizing all possible entry points to incorporate gender dimensions,

including those available in this operation.

V. THE PROPOSED DEVELOPMENT POLICY CREDIT

A. Overall description

67. The proposed DPO is a standalone operation whose aim is to support the

Government’s medium-term policy and institutional reform program in three main policy

areas: (a) strengthening macroeconomic stability, (b) improving public financial management,

and (c) improving the investment climate. These policy areas constitute the main pillars of the

DPO.

68. The critical prior actions supported by the DPO are a combination of actions that

seek to build institutions and those that relate to changes in policies and practices. These

can be summarized as follows:

Strengthening macroeconomic stability: two prior actions are supported under this

policy area. The first seeks to improve the exchange rate institutional framework and

policy through the passage of a foreign exchange management law and the floatation of

the local currency while the second seeks to institute measures for ensuring fiscal

discipline by including a borrowing limit in the budget law.

24

Improving public financial management: the DPO also supports two prior actions

under this policy area. The first seeks to achieve a more inclusive budget by increasing

allocations to education and health, and the second seeks to improve budget transparency

through the publication of the budget law.

Improving the investment climate: there are three prior actions under this policy area.

The first seeks to improve access to finance by permitting commercial Banks to accept

additional types of assets as collateral while the second seeks to reduce barriers for

foreign investments through the enactment of a foreign investment law while the third

seeks to remove barriers to trade through the abolition of a policy that required importers

to “export first” in order to access foreign exchange.

B. Program development objective

69. The DPO’s program development objective (PDO) is two-fold (i) to support Myanmar’s

critical reforms for strengthening macroeconomic stability, improving public financial

management, and improving the investment climate, which will in turn help grow the economy,

create jobs, and reduce poverty; and (ii) to facilitate the clearance of Myanmar’s arrears to IDA,

which is required in order to restore normal relations between Myanmar and the World Bank.

PDO Level Result: At the end of the program period, the main result of this operation will

be the full clearance of IDA arrears from a baseline value of $411 million as at October 31,

2012, to zero.

C. Operation design

70. The amount of the credit is estimated at around US$440 million equivalent under

IDA terms and to be disbursed in a single tranche. Upon approval of the credit and

effectiveness of the Financing Agreement, and at the request of the authorities, the proceeds of

the credit would be disbursed to support the Government’s foreign exchange needs including

through the reimbursement of a bridge loan extended to clear Myanmar’s arrears to IDA. In

order to ensure that the bridge loan is adequate to cover any exchange rate fluctuations between

the time the facility amount was determined and the date arrears will be cleared, the bridge loan

amount, and hence the DPO, incorporates a 5 percent operating margin. The actual amount of

arrears on the day they will be cleared will be notified to the borrower and any unused margin

will be cancelled from the Credit.

D. Policy areas

71. This section describes in more detail the reform program supported by the DPO. The key measures (prior actions) under this broad reform program are summarized in a policy

matrix that is presented in Annex 3 while Figure 4 below provides a broad overview of the scope

of the reform program. Following the structure presented in Figure 4, this section presents a

detailed description of the issues under each policy area and under each reform objective and

concludes each policy area with the expected key outcomes at the end of the program period. At

25

the end of the section, Table 4 presents the implementation status of the prior actions. It must

also be mentioned that these prior actions have been identified selectively. Therefore, as will be

observed, the prior actions do not feature under every reform objective.

Figure 4: Broad overview of scope of the reform program under the Myanmar DPO

Policy Area 1: Strengthening macroeconomic stability

Prior actions:

1. Enacted the Foreign Exchange Management Law and introduced a managed float system of

exchange rate determination

2. Included a limit on borrowing in the Union Budget Law for Fiscal Year 2012/13

72. The Government recognizes that macroeconomic stability and predictability is a

crucial foundation for growth and poverty reduction. In this context, it has embarked on

several reforms aimed at creating the essential building blocks for macroeconomic management.

In particular, it recognizes that attaining macroeconomic stability will entail the pursuance of

prudent monetary and fiscal policies so that key macroeconomic variables such as inflation,

interest rates, exchange rates, budget deficits, and international reserves are conducive for

productive economic activities to flourish. Consequently, Government has started taking the

necessary first steps to build a modern financial system that would be amenable to monetary

Main policy areas Reform objectives

Strengthening

macroeconomic

stability

Laying the foundations for improved monetary policy through

development of the modern financial system

Improving exchange rate policy

Improving tax policy and administration

Improving budget planning and preparation

Enhancing transparency, accountability, and strengthening external

oversight in the management of public finances

Improving the

investment climate

Improving the financial sector infrastructure to facilitate business

transactions

Reducing barriers for foreign investments

Removing barriers to trade

Improving access to finance

Improving public

financial

management

Instituting fiscal discipline

26

policy making based on market-based principles. The Government has also taken more specific

steps to improve exchange rate policy, and carried out the necessary measures to start instituting

fiscal discipline.

Laying the foundations of improved monetary policy through the development of a modern

financial system

73. The financial system in Myanmar is very small and inefficient, coming out of a

transition from a form of centralized economic structure. It is still at the earliest stages of

development and lags far behind its neighboring countries and most low income economies. For

example, Myanmar has some of the lowest levels of penetration of financial services in the world

with domestic credit to GDP at 8.2 percent – one of the lowest in the world. The overall level of

deposits is 17.6 percent of GDP, low compared to other low income economies.

74. The Central Bank is not currently a traditional, operationally independent entity

with clearly defined roles, however reforms are now underway. Under the current legal

framework, the CBM lacks autonomy to carry out its functions; it is currently structured as a

department of the Ministry of Finance and Revenue (MOFR). The CBM provides resources to

finance the government deficit and manages the new, managed floating exchange rate system,

but it has no monetary policy role. It is also the primary regulator and supervisor of financial

institutions. In order to change this situation, the GOM has drafted a new Central Bank of

Myanmar Law (CBML). Under the new CBML, conflicts of interest will be removed, the CBM

will be strengthened both in terms of autonomy status and its accountability, and the functions

and powers of the CBM will be strengthened to execute monetary policy. Going forward, the

CBM will need substantial improvement in a wide range of capacities and systems to carry out

its newly granted functions once the CBML is passed. In addition, the state owned commercial

banks (SOCBs) will have to be substantially restructured and the central banking functions that

some of the SOCBs carry out will have to be transferred to the CBM. The CBM is receiving

assistance from the IMF and World Bank on the draft CBML.

75. Apart from the improving the legal framework, the Government also recognizes the

critical need for the CBM to be reorganized for it to assume its new role as a monetary

policy making institution. As mentioned above, the CBM is currently structured as a

department in the Ministry of Finance and Revenues. Most departments at the CBM as they

currently exist are not consistent with the structure of a traditional central bank. In order to

support the implementation of the CBM’s expanded and strengthened mandate, the Cabinet

approved a new organizational structure for the Central Bank in July 2012. The new

organizational structure provides for oversight of the Central Bank by a Board of Directors

which will include significant representation by independent directors, and provides for a

significant increase in staff numbers as well as broader and deeper skills.

76. Going forward, strengthening the CBM’s regulatory, supervisory, analytic, and

policymaking functions will also be critical. The CBM will need to deal both with the existing

the financial system, and the changing environment of a more open economy, the development

of government debt and money markets, and the 2015 regional financial integration of ASEAN.

27

The Bank is providing TA in this area and is collaborating with other development partners such

as the IMF.

77. In addition to reforms focused at the CBM, reforms are also underway aimed at

modernizing the financial system more broadly. First, given its urgency, the Government has

initiated the process of drafting a new Financial Institutions Law (FIL). Myanmar’s current legal

framework for the financial sector falls below international standards and urgently needs

wholesale modernization in all aspects, particularly with respect to the banking sector in areas

such as corporate governance, accounting, capital adequacy, loan classification and provisioning,

liquidity requirement, and other areas. Second, the authorities are formulating a financial sector

development master plan to ensure a systematic approach to reforms in the sector. In both cases,

the Bank is providing TA with funding from AusAID.

Improving exchange rate management institutional framework and policy

78. For a long time, Myanmar pursued a fixed, multiple, and restrictive exchange rate

policy that was damaging to the economy. The official exchange rate was greatly over-valued

as evidenced by the huge margin between its value that the rate in trading in unofficial markets.

As stated earlier, the Government applied different exchange rates for different purposes and

players in the economy. Further, until recently, only state owned commercial banks were

officially license to buy and sell foreign exchange. This policy has been a source of distortions

and uncertainty in the economy, and had far reaching effects including on Myanmar’s external

competitiveness, fiscal framework, and business environment.

79. In order to create a conducive environment for a market-based exchange rate

system, the CBM has increased the number of authorized foreign exchange dealer licenses,

and issued them to private banks for the first time. The CBM has recently issued three types

of foreign exchange dealer licenses; Money Changer License (MC), Foreign Exchange Acceptor

and Holder (AH) and Authorized Dealer (AD). In September 2011, CBM issued MC licenses to

17 private banks and AD licenses to 3 state-owned banks and 11 domestic private banks. The

MC license holders are allowed to open exchange counters to deal with trading of foreign

currency and local currency kyat at market rate while the AD license holder may engage in

handling, buying, selling, collecting and dealing in foreign exchange.

80. Meanwhile, the Government has started taking steps towards unification of the

exchange rate. On April 1, 2012, the CBM introduced a managed floating exchange rate system.

The new system involves daily sealed bids from certain authorized domestic banks to the CBM

for specific quantities of foreign currency. Besides, an interbank exchange market is in the

process of being established to allow the CBM to intervene and influence the exchange rate. The

initial trading band was set at 820 kyats to the US Dollar on April 1, 2012, plus or minus 2

percent.

81. At the same time, in order to ensure that the new exchange rate policy is anchored

in a robust institutional framework, the Government has passed a Foreign Exchange

Management Law (FEML). The law provides the CBM with powers to regulate, manage and

develop the foreign exchange markets. The FEML also allows for much greater flows of foreign

28

exchange into and out of Myanmar, which may facilitate foreign investment and trade.

However, there are risks associated with opening the capital account more fully, and thus the

CBM will have to be vigilant in monitoring and supervising the markets to ensure stability and

buffer against sudden inflows or outflows of funds. Further, priority will still need to be given to

eliminating inefficiencies as well as regulatory treatments that lead to wide-spread use of

informal markets.

Instituting measures for fiscal discipline

82. The Government recognizes that instituting fiscal discipline is essential towards the

creation of a stable macroeconomic environment. In the past, Myanmar’s economy was

characterized by high inflation as the Government simply instructed the Central Bank to print

more money in order to finance the budget deficit. This was exacerbated by the fact that even

commercially oriented SEEs were almost always guaranteed funding from the budget, even for

raw materials. As the Government seeks to achieve private sector led growth, it recognizes

ensuring fiscal discipline will be critical to creating a stable macroeconomic environment where

inflation is low and the private sector is not crowded out in the money market. As a result, it has

embarked on a number of reforms aimed at institutionalizing fiscal discipline in its conduct of

fiscal policy.

83. First key actions the Government has introduced to institute fiscal discipline seek to

reduce the dependence of SEEs on the budget, reduce deficit monetization, and limit

annual borrowing. In particular, starting from FY2012/13, the Government introduced a limit

on the level of Government subsidy that would be funded directly through the budget for

meeting SEE raw material requirements. This means that SEEs are in this fiscal year expected to

finance some of their raw material requirements using revenues generated from their commercial

activities. Further, as mentioned in Section II, the Government has also started taking steps

towards the reduction of deficit monetization. In particular, the Government has established a

bond market auction system with so that the Government should be able to borrow from the

money market to meet its financing needs than through the printing of money. Finally, since

borrowing is inevitable, the Government has included a limit on borrowing in the Union budget.

This limit is explicitly specified in the Union Budget Law.

84. Going forward, a number of further reforms are planned. Some involve the

completion of the ones already started while others will be new initiatives. For example, in

developing a modern financial system, the Government plans to eventually pass the new Central

Bank of Myanmar Law as well as the Financial Institutions Law. Under improving exchange rate

policy, the authorities plan to achieve full unification of the exchange rate. Finally, under

instituting fiscal discipline, the plan is to introduce further reforms for reducing the impact of

SEEs on the budget. In this context, it will be important that such reforms are informed by

rigorous analytical work. A planned PER will include a study of the impact of SEE’s on

Myanmar’s fiscal program and will therefore help fill some of the existing knowledge gaps.

29

Expected outcomes on ensuring macroeconomic stability: At the end of the program period, it

is expected that these critical actions for improving exchange rate policy institing fiscal

discipline will be manifested in the following outcomes: (i) more efficient foreign exchange

market evidenced by a reduction in the margin between the official and parallel market exchange

rate; and (ii) a reduction in the budget deficit-to-GDP ratio.

Policy Area 2: Improving Public Financial Management

Prior actions:

1. Increased allocations to education and health in the FY2012/13 budget

2. Published the Union Budget Law in a local newspaper

85. The Government has been undertaking significant public financial management

reforms since 2011. On the revenue side the focus of the reforms has been on simplification of

revenue policy and fostering transparency in revenue administration. This is expected to enhance

compliance and increase revenue collections in an efficient and accountable manner.

Concurrently, expenditure side reforms have been aimed at fostering inclusive budgeting and

planning whilst enhancing transparency, and strengthening external oversight. These reforms are

geared to promote efficiency and accountability in managemnt of public finances. This section

presents a summary of the PFM reforms supported by this Development Policy Operation as well

as the government’s further reform plans.

Increasing non-gas revenues through improved tax policy and adminstration

86. The Ministry of Finance and Revenue has started implementing a number of tax

policy and administration reforms in order to improve on Myanmar’s very low tax revenue

effort. It is estimated that in FY2011/12, the total revenue-to-GDP ratio was 13 percent. Of this,

tax revenues accounted for only 4.1 percent. From FY2012/13 the Government: (i) replaced

gross profit tax with net profit tax, (ii) increased taxable income thresholds for salary earners and

brought public servants into the tax net; (iii) abolished differential corporate tax rates on foreign

exchange earnings; (iv) rationalized commercial tax on most goods and services to 5 percent and

reduced the number of different tax rates applied, as well as increasing the number of services

subject to the commercial tax. These reforms are aimed at simplification of revenue in order to

enhance compliance and increase revenue collections in an efficient and accountable manner.

87. The Government has also taken steps to improve transparency of tax policy and its

administration. In April 2012 the Government published the revised personal income tax code

and corporate tax code in both Myanmar and English on the website of the Internal Revenue

Department (IRD). The IRD also published and distributed a simplified guide to taxpayers for

calculating taxable income based on the revised tax code for all major tax instruments. This was

followed up by a countrywide taxpayer outreach program, including training to tax officials on

application of the revised tax laws.

30

88. However there are still significant shortcomings in tax policy. Myanmar does not

have a unified tax code which compromises the consistency of the overall tax policy and leads to

tax cascading. Major tax instruments are legislated separately and are quite dated, different tax

laws allow for significant leeway in granting tax exemptions without estimating tax

expenditures. Additionally the rate structure of commercial taxes could be simplified further for

efficiency.

89. Tax administration also faces major challenges. Myanmar practices the administered

tax assessment system which allows for significant collusive interactions between taxpayers and

collectors. Although the government has implemented a General Index Registration system for

taxpayers, only 0.4 percent of the population is registered. Additionally, the GIR number is used

only within a specific geographical area. It is not unique and can duplicate across regions and

tax-type directorates. The same taxpayer may have multiple GIRs if she/he operates in different

types of businesses in different regions. As such the GIR is not an effective control mechanism

and fails to facilitate communication with third parties. The compliance management system is

weak, showing collection rates of less than 30 percent for Commercial Tax and 60 percent for

Income Tax.

90. The Government is cognizant of these weaknesses and is planning to address these

deficiencies looking ahead. In this regard, the Ministry of Finance plans to develop a sequenced

revenue policy and administration reform program which focuses to further simplify revenue

policy, modernize administration, enhance revenue transparency, and promote compliance.

Potential reform elements include: (i) comprehensive revision of tax policy along with rules and

regulations governing tax administration; (ii) modernizing the tax assessment system; (iii)

strengthen taxpayer identification system concurrent with progressively building a modern risk-

based tax audit system; (iv) develop more efficient and modern tax instruments; and (v) improve

the arrears management system. These reforms will require significant change management,

institutional restructuring and capacity enhancement.

Ensuring a more inclusive budget

91. Establishment of the Union, Region and State parliaments and election of the new

government in 2011 has heralded a fundamental change in the Government’s quest for a

more inclusive budget in a country with many ethnic groups. Prior to 2010 the budgeting and

planning system was top-down with the head of state signing off on the budget without any

external consultation or scrutiny. This changed with the establishment of the Parliamentary

system of government and establishment of regional and state parliaments. Starting with fiscal

year 2012/13, the government separated regional and state budgets from the Union budget. This

is aimed at giving people at grass root levels the opportunity to have a greater say in the

allocation of budgetary resources for meeting their development needs.

92. Since budgeting and planning in a decentralized system needs to be coordinated, the

Government has also established new institutions. First, township level planning committees

were established to provide inputs into the formulation of regional and state budgets. Second,

the Union Financial Commission (FC) was established to coordinate the Union budget with

31

regional and state budgets. The FC is chaired by the President and comprises the Minister for

Finance and Revenue (Secretary), Chief Ministers from the regions and states, the Minister for

National Planning and Economic Development, the Auditor General and the Attorney General.

The FC reviews the proposed union and state and regional level budgets and subsequently

submits them to Parliament for approval. Third, in June 2012, the Government also constituted

the Planning Commission (PC) – chaired by the President and comprising the Minister for

National Planning and Economic Development (Secretary), all Union Ministers, all Chief

Ministers from Regions and States, the Union Auditor General, and the Attorney General. The

PC shall coordinate the formulation and implementation of the National Development Plan along

with providing high level guidance to agencies on project implementation issues on a case-by-

case basis.

93. The budget is not well aligned with development priorities, but some improvements

are now being made. One of the characteristic features of past budgets has been the dominance

of allocations to defense, while allocations to such critical sectors as health and education have

been relatively very low even compared to peers and neighboring countries. In order to ensure

that the budget is more inclusive, the Government has started the process of realigning the

budget to critical development priorities. In the FY2012/13 budget, allocations to health and

education were significantly increased. The allocation to education was more than doubled from

310 billion Kyats in FY2011/12 to 752 billion Kyats in FY2012/13. At the same time, the

allocation to health was more than quadrupled from 92 billion Kyats in FY2011/12 to 392 billion

Kyats in FY2012/13.

Enhancing transparency in the management of public finances

94. Since 2011 the government has also been undertaking reforms aimed at enhancing

transparency of public finances. In FY2012/13 the Government changed the budget and

accounting processes to use a more market based exchange rate for foreign currency transactions.

This reform is significant as it allows for greater transparency in tax collections from foreign

transactions and also allows agencies greater realism on the expenditure side by minimizing the

need for fictitious adjustments on expenditures made in foreign exchange. Furthermore, in

addition to publishing in the Official Gazette as has been the tradition, the Union Budget Law for

FY2012/13 was for the first time also published in a local newspaper which is more widely

accessible to the public. This marks a significant step towards improved transparency since the

published budget provides such useful information as recurrent and capital expenditures for each

ministry and transfers to states and regions.

95. The government has expressed its intent to implement the Extractive Industries

Transparency Initiative. Based on a formal invitation from the government, the EITI

Secretariat visited Myanmar in June 2012 to discuss the mechanics of the EITI with authorities.

The authorities are now considering the appointment of the appropriate EITI Champion and the

independent external EITI national coordinator. The discussions are being facilitated by the

UK’s Department for International Development and the Bank is providing technical support.

32

96. Notwithstanding these positive developments, fiscal transparency remains quite

constrained and practice based, hence the need for legislation. The legislative instruments

and the financial regulations are mostly silent on disclosure of fiscal information. The

publication of the FY2012/13 budget in the newspapers was simply based on the

recommendations of the PAC. Myanmar does not publish some of the fiscal information that

frameworks like PEFA consider good practice. These include in-year budget reports; year-end

financial statements; external audit reports; information contract awards; and financial resources

availed to primary service units such as elementary schools and primary health clinics. Hence,

there is significant room for legislatively mandating greater fiscal disclosure and ensuring

compliance.

97. The authorities appreciate the weaknesses that still remain and are thinking

through an appropriate PFM reform program to address these challenges sequentially. In

this regard, the Ministry of Finance and Revenue together with the Ministry of National Planning

and Economic Development are undertaking a comprehensive review of the PFM system4 in

order to articulate a sequenced PFM reform action plan. Some of the core reform elements could

focus on: (i) updating and revising the financial rules and regulations to be in-line with the new

budget-planning practices in the short term and progressively developing an organic budget law

over time; (ii) institutional restructuring, improving data management, including reporting and

accounting, upgrading information technology and capacity building to deliver on core PFM

mandates; (iii) articulating clearly the central-local government fiscal relations system while

incorporating measures to mitigate risks of contingent liabilities that may arise from borrowings

by state and regional governments; and (iv) improving public procurement system. Apart from

these, the Government also plans to formally become a member of the EITI and commence

implementation.

Expected outcome on improving public financial management: At the end of the program

period, it is expected that the critical policy actions of increased budgetary allocation to health

and education and increased transparency of the budget will result in increased actual public

expenditures on health and education.

4 With technical inputs from the Public Expenditure and Financial Accountability Assessment (WB, on-going), IMF

Public Finance Management Assessment (on-going), and the Public Expenditure Review (WB, planned).

33

Policy Area 3: Improving the Investment Climate

Prior actions:

1. The Central Bank of Myanmar has permitted commercial banks to accept various additional

forms of collateral

2. Enacted the Foreign Investment Law

3. Abolished an export first policy on access to foreign exchange for importers

98. As opportunities for trade and investment open up for Myanmar, improving the

climate for investment will be critical. Ultimately, the most sustainable way of delivering the

dividends of peace, democracy, and economic reforms will come by empowering people to

participate in productive income earning activities. It is for this reason that the Government is

committed to carrying out reforms for increasing private sector investment in the country,

whether foreign or domestic. Increased private sector investment provides opportunities for self

and wage employment, and therefore poverty reduction. Furthermore, increased business

activities and higher employment result in the expansion of the tax base, and hence increased

revenues which can be used to improve the delivery of public services. The reforms that the

Government has been carrying out to improve the climate for investment seek to improve access

to finance, improve the financial infrastructure (platform) to facilitate business transactions,

reduce barriers to entry and the cost of starting and doing business, and removing barriers to

trade.

Improving access to finance

99. Today, the Myanmar people rely on informal financial services at a very high cost.

Access to formal financial services has been extremely limited and significant unmet demand for

financing remains. It is estimated that no more than 10 percent of population use formal financial

services and formal bank financing reaches only a small sub-set of firms. In the absence of

reliable and accessible formal financial services, the population in both urban and rural areas

turns to informal lenders paying interest rates of up to 20 percent a month. Qualitative surveys

indicate high levels of indebtedness. This lack of financial intermediation is a significant

contributor to Myanmar’s lower levels of economic growth as compared to the region.

100. The Government has taken various measures to improve access to finance. In order

for Myanmar to achieve long-term, broad-based economic growth, it will need a functioning

financial system that provides access to financial services to all types of firms, as well as

households. As a first key step, the Government passed the Microfinance Business Law (MFL)

in November 2011. According to Government plans for improving access to finance, the formal

banking system will be supervised and regulated by CBM while the Myanmar Microfinance

Supervisory Enterprise (MMSE) will take the lead in microfinance sector. The MMSE was

established to serve as a secretariat of the Microfinance Supervisory Committee after the

enactment of the MFL. This law provides a legal basis for the establishment of deposit taking

and non-deposit taking microfinance institutions (MFIs). Currently, the MMSE granted

34

microfinance license to 51 providers by July 2012 and plan to issue 22 licenses more in the near

future.

101. The Microfinance supervisory body was developed from a lending operator but

segregation of duty is now underway. The MMSE was recently upgraded from a lending arm

of GOM to in the chief supervisory body for the Micro-Finance sector. However, the MMSE still

operates both lending operations and supervisory functions, which may lead to a conflict of

interest. It is planned to formally segregate lending functions from supervisory body. In

addition, the MMSE has very limited capacities and knowledge of supervising financial

institutions and thus, there is a risk given the rapid pace at which the MMSE is licensing MFIs.

The MMSE is now receiving technical assistance from the World Bank on enhancing capacities

and the regulatory framework.

102. Reforms are also being implemented to facilitate the expansion of bank lending

more widely. For example, the CBM allowed commercial banks to accept new forms of

collateral including gold, three exportable crops (rice, beans and pulses, sesame), bank deposits,

and personal and organization guarantees in addition to the existing immovable properties.

Besides, there are plans to develop the policy framework for credit information systems in the

CBML, which will help build credit histories of borrowers to enable them to access additional

funds from banks at potentially more favorable terms. These reforms may result in expansion of

bank credit to unbanked individuals and businesses.

Improving the financial sector infrastructure to facilitate business transactions

103. The lack of financial infrastructure poses a major constraint to the CBM’s ability to

execute its functions, and to the overall development of the sector and ultimately to the

efficiency of the economy. Myanmar’s economy is being largely run on a cash basis with high

dollarization and the financial system lacks basis financial infrastructure, including critically a

payment system, which poses a major constraint to the CBM in monitoring, analyzing and

policymaking. Progress in building an interbank payments system has begun, but check clearing

between banks is still manual. Also, the system of automated teller machines (ATMs) is not

coherent and the banks’ systems cannot yet communicate with each other, nor is there any form

of mobile phone or internet banking available.

104. Several reforms have been implemented to improve financial services with easy

accessibility. Firstly, the CBM relaxed its deposit control and allowed commercial banks to

accept deposit up to 25 times of its capital base. Although this is a step in the right direction, the

CBM will need to move to more modern approaches to this, with a focus on standard capital

ratios, which would likely result in more flexibility for many banks to expand. Secondly, the

CBM has also allowed commercial banks to offer more financial products including hire

purchase and foreign exchange services. Also, the CBM continues to allow the expansion of

bank branch networks, especially for the private banks. Currently, state-owned Myanmar

Economic Bank (MEB) has the most branches network (325 branches) and the Myanmar

Agricultural Development Bank (MADB) has 223 branches. In comparison, 19 private banks

have 332 branches in total; of which 14 private banks have 20 branches or less. Again, the CBM

will have to move away from its current approach of requiring additional capital per bank branch

35

to an overall view of capital for each bank, which should also enable many banks to expand their

outreach more rapidly.

105. The Government has also started payment system reform by introducing the

Myanmar Payment Union (MPU). As a critical and initial step, the CBM launched the MPU

with 17 commercial banks to develop the network for retail payments (i.e., credit cards) and

ATMs. The CBM also plans to implement payments system reform, in particular setting up a

national payment system covering Real Time Gross Settlement and Automated Clearing House

(RTGS/ACH) system. This reform will reduce the risk of a costly payment default and the

possibility of a generalized crisis. This also will eventually decrease the reliance on cash-based

transactions and form the basis for other banking business, such as mobile banking and internet

banking.

Reducing barriers for foreign investment

106. The Government sees attracting high quality foreign investment in key sectors of the

economy as critical to Myanmar’s development. For example, it sees foreign investors playing

a critical role in building the needed infrastructure, such as in telecommunications and energy.

There is also an appreciation that foreign investors can bring technological know-how and

resources not available in Myanmar, and can transfer this to build capacities within the country.

In 2012, the GOM passed the Foreign Investment Law in order to increase foreign direct

investment (FDI). This is a needed first step to bringing in foreign investors as it will provide

clarity on the sectors eligible for investment, how investments need to be structured and licensed,

and what to expect in the process.

107. In anticipation of an increase in demand for business registration as the investment

climate improves, the Government has also started undertaking initiatives for reducing the

transaction cost of starting a business. For a long time, there was only one office in the whole

country for registering a company, located in the capital city, Nay Pyi Taw. Recent increases in

the number of new companies registering have led to congestion at the office, which has

contributed to an increase in in the transaction cost of starting a business. Further, now that the

Foreign Direct Investment Law has been passed, the Government anticipates that demand for

company registration will increase even further. In this regard, an additional company

registration office has been opened in Yangon. There are plans to open a third office in

Mandalay and to introduce a one-stop service and to streamline procedures for registration. In

order to reduce transaction costs for businesses already in operation, the Government has also

extended the registration renewal period from 2 years to 3 years. Going forward, the Directorate

of Investment and Companies Registration is will be receiving TA from the ADB to develop a

roadmap for upgrading the companies registration process itself.

36

108. In parallel, the Government is also taking steps to develop the domestic private

sector, particularly small and medium scale enterprises. In this regard, an SME Center has

been established under the Ministry of Industry (MOI) with the objective of establishing an

institutional and regulatory framework for SME development. This center will also be

responsible for coordinating and developing an SME Policy / Master Plan to help those domestic

entrepreneurs who wish to start up small and medium scale businesses.

Removing barriers to trade

109. The Government also recognizes that removing barriers to trade is critical to

creating a conducive environment for investment and has therefore also undertaken a

number of measures in this direction. First, although Myanmar has been a long time member

of the WTO, it has never gone through a trade policy review exercise. As part of its reform

agenda, the Government has now formally requested the WTO for the review to be undertaken

and preparations for the exercise are now underway. Second, in order to facilitate import and

export processes, the Ministry of Commerce has commenced a pilot of automatic import and

export licensing for a selection of commodities. Third, the Government has relaxed barriers to

trade in the importation of several major agricultural commodities and other products. Examples

include prepared canned foods, confectionary, fruits, and vehicles. Finally, and more critically,

the Government has relaxed some of the restrictions that were in place on access to foreign

exchange. In particular, on April 1st, it abolished the export first policy where previously, only

those importers who had earned foreign exchange through exports could be allowed to buy

foreign exchange for imports. This means that businesses focused on the domestic market faced

limitations on capacity to import goods and services required to meet their capital and operating

requirements. Ultimately, it also limited the country’s capacity to trade internationally.

Expected outcomes on improving the investment climate: At the end of the program period, it

is expected that critical reforms for improving access to finance, reducing barriers to entry and

the transaction costs of starting a business, and removing barriers to trade will result in the

following outcomes: (i) Expansion in bank credit to unbanked men and women based on a wider

range of collateral to be monitored by an increase in the percentage share of credit to the private

sector, (ii) Increase in foreign direct investment, and (iii) Increase in the volume of international

trade

37

Table 4: Implementation status of agreed prior actions

No Policy area and reform

objective

Prior action Implementation

status

Policy Area 1: Strengthening macroeconomic stability

1 Improving exchange rate

management institutional

framework and policy

Enacted the Foreign Exchange Management

Law and introduced a managed float system of

exchange rate determination

Met

2 Instituting measures for fiscal

discipline

Included a limit on borrowing in the Union

Budget Law for Fiscal Year 2012/13

Met

Policy Area 2: Improving public financial management

3 Ensuring a more inclusive

budget

Increased allocations to education and health in

the FY2012/13 budget

Met

4 Enhancing transparency in the

management of public

finances

Published the Union Budget Law in a local

newspaper

Met

Policy Area 3: Improving the investment climate

5 Improving access to finance The CBM has permitted commercial banks to

accept various additional forms of collateral

Met

6 Reducing barriers for foreign

investments

Enacted the Foreign Investment Law Met

7 Removing barriers to trade Abolished export first policy on access to

foreign exchange for importers

Met

38

Box 2: Good Practice Principles for Conditionality

Principle 1: Reinforce Ownership

The policy areas being supported by the DPO are aligned to the Government’s strategic objectives

as outlined in the five year development plan and reform priorities as outlined in the draft

framework for social and economic reform. Further, all the prior actions were identified in

consultation with the Government. In turn, as described in an earlier section, the Government has

consulted widely in the formulation of the policy and institutional changes represented by these

prior actions. It has used various platforms for undertaking these consultations.

Principle 2: Agree up front with the government and other financial partners on a coordinated

accountability framework

There are no other development partners who will be contributing financial resources to the DPO.

However, the preparation has been done in close collaboration with the ADB in the context of a

coordinated approach to arrears clearance. Agreement has been reached with Government and the

ADB on joint monitoring of the reform program.

Principle 3: Customize the accountability framework and modalities of Bank support to country

circumstances

Implementation and monitoring arrangements have been appropriately customized to Myanmar’s

own institutional arrangements. The Ministry of Finance and Revenue has the role of coordinating

other ministries and agencies in the fulfillment of prior actions supported by the operation.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement

While the DPO supports a broad medium-term reform program, only a few critical actions have

been selected as conditions for disbursement. As outlined in the program document and

summarized in the policy matrix presented in the annex, the reform program underpinning this

operation is broad. However, a conscious effort was made with the authorities to identify critical

actions as conditions for disbursement. The critical actions identified are those with the highest

potential impact on achieving the program’s development objectives.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-

based financial support

Since this is a standalone operation, monitoring of progress will be with respect to the program

outcomes contained in the results matrix rather than the prior actions. In this context, the process

will be transparent since it will be led by the Government’s own implementation arrangements and

in coordination with the ADB. Progress review meetings will be held with relevant focal persons

from each ministry and agency.

39

VI. OPERATION IMPLEMENTATION

A. Poverty and social impact

110. Past and ongoing research highlights the ways in which previous policies have hurt

the lives of ordinary people in Myanmar, particularly in rural areas, which have

necessitated the need for reform. These studies include previous research supported by the

World Bank in Myanmar, such as the Post-Nargis Social Impacts Monitoring (2008-2010) and

the ongoing Qualitative Social and Economic Monitoring of livelihoods in Myanmar (2012).

Such problems included issues related to landlessness, a lack of credit, high interest rates, and

high household debt burdens, which have affected poor and especially landless households the

most and made it difficult for households to cope with shocks. Households have employed a

variety of coping mechanisms to help cope with hardship, including migration and seeking

remittances from relatives, but many of these, such as reducing consumption of food, taking

children out of school and selling or pawning land and other assets, have a negative long-term

impact, and in rural areas households have struggled. Against this background, the reforms

supported under this operation are therefore expected to have a beneficial impact on the poor,

given that they are meant to help address some of these problems.

111. The prior actions for strengthening macroeconomic stability are expected to benefit

the poor, both men and women, through reduced inflation and interest rates. The passage of

the exchange rate management law provides a robust framework for the management of the new

exchange rate policy. Given the paucity of household survey data, a thorough empirical analysis

for assessing the distributional effects of adopting a managed float exchange rate system is

currently not possible. Nonetheless, it is expected that this policy change will have limited

negative effects on the poor. First, depreciation of the local currency following the floatation of

an exchange rate usually tends to result in increased inflation in the short-term as the cost of

imported commodities rises. However, because the vast majority of the private sector had

already been using the parallel market exchange rate which was already high, the adoption of a

managed float has not had any noticeable negative impact on inflation. Second, the depreciated

exchange rate has had a muted impact on inflation because of other policy reforms with

countervailing effects such as the reduction in deficit monetization.

112. Similarly, the prior actions under the policy area on improving the public financial

management are aimed at improving the quality of spending in Myanmar, which is

expected to benefit the poor. Increased allocations to education and health are usually expected

to benefit the poor, especially if allocated to primary and secondary education and primary health

care. The publication of the budget is expected to ensure that citizens are informed about

resources mobilized by Government and how they are eventually utilized through the budget to

meet their development needs.

113. The prior actions under improving the investment climate are also expected to be

beneficial to the poor in Myanmar through increased opportunities for self-employment

and wage employment. The fact that commercial banks are now allowed to accept new forms

of collateral will increase credit access, especially to poor men and women who rely on

microloans. Once passed, the Foreign Investment Law and the abolition of the “export first”

40

policy for access to foreign exchange by importers are expected to boost economic activities in

the country. This will result in the creation of more job opportunities for the poor. Given

Myanmar’s potential in the garment sector, women are expected to benefit even more from new

investments since the sector tends to employ relatively more women than men.

B. Environmental aspects

114. The specific reforms supported by the proposed DPO are not likely to have

significant direct effects on the country’s environment, forests and other natural resources.

The first two policy areas focus on improving macroeconomic and public financial management

which would not have any direct impact on the environment. However, there is a possibility that

policy area on improving the investment climate may have an indirect impact on the environment

since some of the ensuing investments may not be environment friendly. Given that Myanmar is

emerging from international isolation and that capacity in Government remains weak, a big

environmental agenda lies ahead. Other development partners are providing TA to Government

to more broadly strengthen environmental governance in Myanmar.

Implementation entity

115. Implementation of this operation is being coordinated by the Union Ministry of

Finance and Revenue. However, the actual implementation of the DPO supported reforms will

be done by relevant government ministries, departments, and agencies that are mandated to carry

out the respective reforms. Each agency has a focal person who is responsible for mobilizing

fellow Government officials for meetings and for compiling information and documentation

required for the DPO supported program.

Implementation capacity and available TA

116. Due to weak implementation capacity, the Bank in partnership with the ADB, IMF

and other development partners is providing relevant TA to the extent possible under the

current authorizing environment. Because Myanmar is still in non-accrual status, it is not yet

possible for the Bank to provide TA lending. However, in the context of the diagnostic work that

is currently underway and funded by other development partners, the Bank has been able to

provide policy advice in certain areas as requested by the Government. For example, we have

already been providing policy advice public financial management and financial sector reforms,

including microfinance. Similarly, the IMF has been supporting the Government on

macroeconomic reforms, including central bank reform. The ADB has also been providing

short-term TA with trust funding from Japan in the areas of tax policy and administration, and in

trade policy reform.

Program monitoring and evaluation

117. Monitoring and evaluation of the reform program will be undertaken jointly by the

Bank and Government teams. The Government team will meet regularly to monitor progress in

implementing the reform program supported by the operation. Apart from the policy and

institutional reforms to be implemented by the Government, an M&E framework has also been

developed. The framework describes expected outcomes at the end of the program, the

41

monitoring indicators and specific end of program targets. A Bank mission will be fielded after

one year to assess if the program outcomes have been achieved.

C. Credit Administration, Disbursement, and auditing

118. Credit amount and waivers to Operational Policies 13.00 (Signing of Legal

Documents and Effectiveness of Loans and Credits) and 13.40 (Suspension of

Disbursements). The Recipient is the Republic of the Union of Myanmar, represented by the

Ministry of Finance and Revenue. The Credit is for 287,750,000 Special Drawing Rights

(US$440 million equivalent). Over and above the usual conditions for effectiveness (receipt of a

legal opinion satisfactory to IDA, the macroeconomic program being satisfactory, and the reform

program on track), Board approval is being sought subject to an additional effectiveness

condition which is reflected in the Financing Agreement, requiring Myanmar’s arrears to the

Bank to be cleared first before the Credit can be disbursed. The Credit will only be released in

one tranche following notification by the Association of Effectiveness of the Financing

Agreement.

119. This operation entails two waivers. The first waiver is to OP13.40 (Suspension of

Disbursements) which provides that no new credits be presented to the Board for approval when

a member country’s credits are in non-accrual status. The second waiver is to OP 13.00 (Signing

of Legal Documents and Effectiveness of Loans and Credits), which does not permit the Bank to

sign legal agreements for a credit if there are overdue payments from the borrower. Both

waivers, which have been endorsed by Management, are necessary to facilitate the complex

transactions involved in the clearance of Myanmar’s arrears.

120. Disbursement mechanism. The proposed operation will follow IDA’s disbursement

procedures for development policy credits. Upon approval of the Credit, effectiveness of the

Financing Agreement, and fulfillment of the disbursement conditions, the proceeds of the Credit

will be disbursed by IDA for direct reimbursement to the institution that extended the bridge loan

for the arrears clearance.

121. Reporting and accounting. The government will provide an irrevocable instruction to

IDA for direct disbursement to the institution that will extend the bridge loan. As a due diligence

measure, IDA will obtain written confirmation from the bridge lender that funds have been

received.

122. Closing date: The expected closing date of the Credit will be October 31, 2013.

D. Fiduciary Assessment

123. While Myanmar’s financial management systems remain weak, the overall fiduciary

risk to this operation is rated as ‘low’ because the whole credit amount will be disbursed

into an account outside the Government system. As stated above, while the recipient of this

credit is the Government of the Republic of the Union of Myanmar, an irrevocable instruction

will be issued to disburse the proceeds of the credit directly into an account belonging to the

institution that will extend the bridge loan to the Government.

42

E. Risks and Mitigation

124. Potentially, the risks to the program are high, and are of three main types. The first

is macroeconomic; the second is political risk while the third is the risk due to weak

implementation capacity of the reform program. The three main risks outlined above are

compounded by the paucity of data and knowledge gaps. However, since this operation is aimed

at paving the way for the Bank’s full re-engagement, the country will soon have an enhanced

level of support, including for tackling some of the identified risks and weaknesses. For example,

a multi-donor group that includes the Bank has already started discussing with the authorities a

systematic approach and corresponding TA for improving the quality of data and statistics in

Myanmar.

Macroeconomic risk

125. There is a risk that a suboptimal reform program could lead to deterioration in the

macroeconomic framework due to the significant changes that are being implemented in the

institutions for economic management in the context of limited capacity. For example, a

modern monetary policy framework is still being designed as is the treasury function. Relatedly,

increased access to commercial and concessional borrowing increases the risk of debt distress.

Further, the Government has adopted a policy of granting greater operational autonomy to SEEs

which were previously managed in the same way as other Government ministries and

departments, by being funded through the budget. Given that the financial management capacity

of these entities is not known, there is risk that they could be a source of contingent liabilities.

Natural gas prices can be volatile and a shock to world natural gas price could be destabilizing

given the importance of gas exports for Myanmar’s balance of payments. A mitigating factor

here is that Myanmar’s natural gas exports are under long term contracts with the price

determined by a complex formula that should smooth volatility. Finally, as the economy opens

up, a surge in imports poses a risk to the country’s macroeconomic program by putting pressure

on foreign reserves. To mitigate these risks, the IMF is supporting the authorities through an

SMP. Further, the Bank is also working with the IMF and other donors in providing the required

TA for establishing a robust framework for macroeconomic management, including for debt

management.

Political risk

126. In these early days of the transition, there is a risk to the stability of the political

situation in Myanmar, including the peace process and the reform program. First, although

a number of ceasefire agreements have been signed with armed rebel groups, political

settlements are yet to be attained. Furthermore, a ceasefire agreement is yet to be reached with

one of the armed groups, the Kachin Independence Organization (KIO). Therefore, a return to

wide-scale conflict or an escalation of the conflict in Kachin could destabilize the existing

political environment. Second, reforms are still in their early days. Myanmar’s future depends

on the nature of compromises reached between multiple stakeholders with often incompatible

interests. There is a risk of a backlash especially if some well-intentioned reforms end up

having negative consequences in the short-term. The 2015 elections are shaping up to be an

important turning point for the longer term sustainability of the reforms. To mitigate these risks,

43

the World Bank and other donors will be working to support various initiatives in Government

for consolidating peace and the reform process, including through support to the planned Peace

Center and supporting community based projects that will generate quick tangible dividends to

communities and support to institution building so that reforms transcend personalities.

Implementation capacity risk

127. The systemic problem of capacity constraints in Government will be another risk to

the program that could also cause delays in the implementation of reforms. Since the

country has been isolated for a long period of time, it has not benefited from cross-country

transfer of knowledge or from outside technical assistance in managing the economy. As a result,

while political will to implement reforms is strong, the technical capacity to carry these reforms

remains weak. For example, as outlined earlier, outlined earlier, the country is still in the process

of establishing a proper framework for macroeconomic management as it emerges from years of

international isolation. This is especially a concern since the authorities do not yet have in place

all the instruments for macroeconomic management to ensure macroeconomic stability at a time

when they are embarking on several reforms, which are altering the fundamental economic

landscape. Similarly, there are institutional capacity weaknesses for carrying out reforms in the

other policy areas such as public financial management and the investment climate. In order to

mitigate this risk, concerted efforts are already underway by donors, including the World Bank,

to provide the required TA for strengthening the Government’s capacity to carry out reforms.

128. Overall assessment of risks: In IDA’s assessment, although risks to the operation are

high, potential benefits outweigh the residual risks and warrant IDA’s assistance for

implementing critical policy and institutional reforms in a coordinated fashion with other

development partners, while supporting risk mitigation actions to maximize the sustainability of

the reform agenda.

44

Annex 1: Timetable of Key Processing Events

Concept Review Meeting: October 10, 2012

O.C. Decision Meeting: October 31, 2012

Appraisal: November 5, 2012

Negotiations: November 6, 2012

Board Presentation: January 22, 2013

Expected Effectiveness: January 25, 2013

Closing Date: October 31, 2013

45

Annex 2: Letter of Development Policy

Dr. Jim Yong Kim

President

The World Bank

1818 H Street, NW

Washington, D.C. 20433

Dear Dr. Kim,

Subject: Myanmar’s Letter of Development Policy

On behalf of the Government of the Republic of the Union of Myanmar, I write to

request for a Development Policy Credit of US$440 million equivalent from the International

Development Association (IDA) to be provided through the Myanmar Reengagement and

Reform Support Program. The program will support our reform initiatives while the proceeds of

the credit will help to meet our foreign exchange needs as we clear Myanmar's arrears to IDA

and other development partners in the context of our re-engagement with the international

community.

Since coming to power on March 30th, 2011, the current administration has embarked on

a wide range of reforms aimed at re-integrating Myanmar with the international community and

improving the living standards of our people. This letter outlines some of the key reforms that we

have already implemented and those that we intend to carry as we move ahead.

Economic Situation

Myanmar is one of the least-developed countries in Southeast Asia. A recent survey does

show that the poverty head count index declined from 32 percent to 26 percent index between

2005 and 2010 but the overall incidence of poverty is still very high. Poverty incidence is around

twice as high in rural than urban areas, with the result that rural areas account for almost 85% of

total poverty. Although poverty incidences are high in nationality areas such as Chin, Rakhine

and Shan States, two central regions account for the highest shares of those in poverty-

Ayeyawaddy (19%) and Mandalay (15%) due to their high populations.

Other indicators of human development are also low relative to other countries in

Southeast Asia - life expectancy for example is only 62.7 years and the mean years of schooling

for adults is only 4. Myanmar has made some progress towards achieving its Millennium

Development Goals (MDGs). However, Myanmar's performance matches that of other ASEAN

nations on only a small number of indicators (gender parity in education, for example). In

46

general, Myanmar is striving to keep up with its ASEAN neighbors as well as progress made in

other developing regions towards attaining MDGs.

Within ASEAN, Myanmar most similarly resembles the much smaller countries of Laos

and Cambodia, and lags significantly behind Thailand, Malaysia and Vietnam on MDG

indicators. When Myanmar's indicators are viewed in the context of ASEAN countries, as well

as against averages in other developing regions across the world, it becomes clear that there is

much room for improvement to reach the 2015 targets. This fact is also reflected in Myanmar's

ranking in the "Low Human Development" category in the recent Human Development Report

(2011), compared with Laos, Cambodia, Vietnam and Thailand who are all ranked in the

"Medium Human Development" category.

The Government of Myanmar (GOM) has estimated that it has achieved 10.4% GOP

growth rate in 2011, while the IMF has estimated at 5.3%. Inflation has decreased from double-

digit rate in 2009-2010 to 8.2% in 2011, and it is likely to even decrease further to around 3%

this year. Myanmar is expected to face only weak inflationary pressures in the rest of 2012-13

mainly due to combined effects of falling global food prices as well as surplus of agriculture

produce; however, such scenario can be abruptly changed in case of unforeseen shocks and

disasters. Given the onset of deflation in the first half of 2012, the rate of inflation has eased to

2.6% in mid-2012. By end of 2011, trade balance remains positive with a healthy trade surplus of

800 million dollars; however, imports are also estimated to pick up from 2012 onward.

Myanmar's Reform Framework

The reforms the administration has been undertaking and plan to implement going

forward are outlined in the Framework for Economic and Social Reforms (FESR). The FESR

draws upon guidelines set by the President as well as the existing priorities set in the Fifth Five-

Year Plan and other annual sector plans and priorities. It sets out the policy areas where

Myanmar will undertake necessary economic and social reforms in the next three years while

laying the basis for subsequent long-term reforms that ought to be implemented. While the

framework is focusing on delivering immediate and tangible benefits to the people of Myanmar

in the shortest possible time frame, it also aims for two broad objectives that are attainable in the

medium-term: First, it seeks to move the on-going reform process forward and make it

irreversible so that Myanmar can become a modern developed nation that meets the aspirations

of its people for a better life. Second, it seeks to accelerate Myanmar's greater integration with

the international community where her cooperation and support can be counted upon in meeting

the regional and global challenges of the twenty-first century. In saying that the FESR aims at

meeting the aspirations of the people of Myanmar, "people" is used in an all-inclusive sense. It

includes members of the Tat-ma-daw, civilians, ethnic nationalities, and members of the

Myanmar community abroad. It is also envisaged that the FESR will help Myanmar achieve

sustained economic growth and poverty reduction, which in turn will facilitate further progress in

the national reconciliation and democratization process currently underway, facilitating

synergistic progress of economic and political advancement necessary for this country to

establish itself as a modern developed nation.

47

The FESR emphasizes on the need to move Myanmar towards a market-driven economy,

adopt a bottom-up approach to planning, and move from direct to indirect levers of government

policy in nourishing the development of free markets. It identifies four main policy priorities as

follows: (a) Sustained industrial development in catching up with global economies while

keeping up momentum of agricultural reforms and attaining poverty alleviation and rural

development (b) Equitable sharing of resources, budgetary or foreign aid, among regions and

states while promoting foreign and local investments for regional development, (c) Effective

implementation of people-centered development through community-driven, participatory

approaches to improvement of education, health and living standards, (d) Reliable and accurate

statistics and information to inform public policy decisions.

Guided by the above policy priorities, the FESR outlines specific reforms and strategies

under six pillars as follows: (i) macroeconomic policies for growth, stability and poverty

reduction, (ii) sector policies for inclusive growth and poverty reduction, (iii) social,

environment and cultural dimensions of development, (iv) national harmony and regional

development, (v) improving governance, and (vi) repositioning Myanmar in the international

community. This letter seeks to highlight the key reforms we have already undertaken and plan

to implement, some of which are being supported by the Development Policy Operation (DPO).

In this regard, the reforms in this letter are presented under the three policy areas covered by the

DPO as follows: strengthening macroeconomic stability, improving financial management, and

improving the investment climate.

Strengthening macroeconomic stability

GOM recognizes that maintaining macro-economic stability is critical to putting the

economy on a sustainable high growth path while tackling poverty and ensuring effective use of

the country's rich natural resources. To this end, significant reforms have already been

undertaken and further reforms are planned. On April 1, 2012, the GOM embarked on a process

of exchange rate unification by introducing a managed float exchange rate system. A formal

inter-bank foreign exchange market was established to be mediated by the Central Bank of

Myanmar (CBM). Further, in August, a foreign exchange management law was enacted to

provide a legal framework for managing the new policy regime. In order to complete the process

of exchange rate unification, the GOM also plans to remove the remaining restrictions against

exchange rate convertibility and phase out the use of foreign exchange certificates with a

redemption plan by 2013.

GOM has also undertaken appropriate legal and institutional preparations to be able to

grant operational autonomy and accountability to the independent CBM and is collaborating with

international financial institutions in building the competency and capacity of CBM. The

Government is also preparing a financial sector master plan as the basis for major reform of the

financial sector covering both public and private institutions as well as the development of the

capital market. Part of the plan will be development of the banking sector and strong

encouragement of competition between the private banks in boosting commercial credit and

other financial instruments available to the public.

48

On the fiscal front, the budget deficit in FY2011/12 has been narrowed due to lower

capital spending. The GOM suspended major public works and construction projects by strictly

scrutinizing the cost-benefit of these undertakings; therefore, deficit reduction became more

sustainable despite of recent increase in pensions and temporary tax exemptions on key

agricultural exports. The adoption of a market-based exchange rate in April 2012 is expected to

further reduce the budget deficit in FY2012/13. By having a series of in-depth debates on the

FY2012/13 budget, the new parliament is also contributing to lower deficit targets by vigorously

scrutinizing spending priorities and reallocating more resources to poverty reduction, health and

education while cutting major capital spending. To ensure that fiscal discipline is instituted, the

budget law for FY2012/13 includes a borrowing limit. Further, the CBM is gradually limiting the

role of deficit monetization by facilitating more effective use of bond financing, particularly the

development of a retail market for treasury bonds, which would further improve the effective

implementation of monetary policy in the country. It plans to introduce further measures to

completely eliminate deficit monetization.

Improving public financial management

The Government of Myanmar also appreciates that improving public financial

management through the budget process will be central to achieving its development objectives.

In the FY2012113 budget, the Government increased allocations to education and health which

have generally been underfunded in the past. In order to ensure transparency and accountability

in managing public resources, the approved budget law was published in the Government

Gazette and the local New Light of Myanmar newspaper.

With the assistance of international financial institutions, GOM is also undertaking a

public expenditure and financial accountability assessment (PEFA) and is planning to conduct a

public expenditure review (PER) to provide the basis for more fundamental reforms of fiscal

policy and public expenditure management. Once these reviews are finalized, a sequenced

reform action plan will be prepared to guide implementation of more detailed reforms in the area

of public financial management.

The Ministry of Finance and Revenue (MOFR) has also begun reforming its tax policies

and revenue administration. In August 2011, the Internal Revenue Department (IRD) abolished

the withholding tax on imports, and also simplified commercial tax on domestic sales to nine tax

rates in April 2012. The IRD also plans to introduce single tax payer identification and self-

assessments to expand the tax base, while plans are underway to replace the commercial tax with

a general sales tax. GOM also plans to convert the existing commercial tax regime into a value-

added tax system using the invoice-credit system. GOM is also actively learning from experience

in other countries in order to mobilize a significant public education campaign prior to the

adoption of such a change.

Given GOM's reliance on non-tax revenue from extractive industries, the MOFR is now

developing a medium-term public expenditure framework that can streamline all revenue flows

and effectively target them to building infrastructure and human capital. Also, as part of the

process of reforming management of natural resources, the government is committed to

implementing the Extractive Industry Transparency Initiative (EITI), which requires

49

governments to publicly disclose their revenues from oil, gas and mining assets, and for

companies to make parallel disclosures regarding payments.

Improving the Investment Climate

In order to ensure that Myanmar maintains and accelerates further its recent high growth

rates, the Government is steadily implementing measures to improve investment and business

environment. In November 2012, it enacted a new Foreign Investment Law (FIL). The new law

permits increased ownership by foreign firms while introducing a series of tax breaks and easing

restrictions on the lease of land. The GOM is also preparing the final passage of new law on

Special Economic Zones (SEZ), which is expected to provide additional incentives in strategic

locations along the 1300-mile long coastal region in Myanmar.

The government is also planning to build capacity among the domestic judiciary with

regard to their regulatory enforcement and intermediations. The investment commission is

currently undergoing a reform process to become an independent board where non transparent

licensing practices will be eliminated. Meanwhile, the GOM is cooperating with international

financial institutions to conduct a comprehensive investment climate assessment to determine the

full spectrum and magnitude of constraints to private sector development. GOM is also taking a

vigorous approach to reducing the transaction costs facing firms in doing business. It will reduce

burdensome regulations and remove restrictive and unnecessary government controls while

streamlining he company registration process and incentives.

Improving access to finance is also a critical part of Government policy for improving the

investment climate. A Microfinance Law has been passed to improve access to credit by small

and micro-enterprises. More broadly, the CBM has allowed commercial banks to accept a wide

range of collateral from borrowers. It will also encourage public savings through private banks as

well as development of financial instruments such as hire-purchase agreements, mortgage

packages and other credit instruments. CBM also plans to support efficient financing of trade and

export of manufacturing goods, and consider permitting foreign banks to finance externally

oriented economic activities. It will also introduce a policy framework for credit information

systems and credit bureaus in the Central Bank of Myanmar Law and issue underlying

regulations.

Given the previous history of trade imbalances, Myanmar adopted an "export first" policy

in 1997 while imposing strict limits on import. However, the policy discriminated against

businesses that were oriented towards the domestic market. Therefore, as part of current reforms

for improving the business environment, the export first requirement for importers wishing to

access foreign exchange has now been abolished. GOM has also liberalized import of vehicles,

particularly of low fuel use vehicles and passenger buses, in order to ease the burden of high cost

of transportation in major urban centers. It has also introduced e-licensing systems for export and

import businesses on a pilot basis and plans to introduce this fully once the pilot is proved to be

successful. GOM expects that the easing of economic sanctions imposed on Myanmar by

Western countries will provide more market access for exporters, which will compensate

potential trade imbalances from liberalization measures.

50

Presently, Myanmar’s export structure is heavily focused on a few primary commodities -

natural resources, notably gas and wood, along with agricultural and marine products. GOM will

therefore pursue an active policy of encouraging the diversification of export products while

promoting value-added processes for primary commodities, including by focusing on improving

support services in areas of trade financing, market access and trade facilitation. It will also carry

out more liberalization measures such as setting up of national single-window, liberalizing

services as well as removing all non-tariff barriers in accordance with the 2015 targets for

ASEAN integration. GOM will also emphasize further cooperation with the World Trade

Organization in removing all its trade barriers as well as with international chambers of

commerce in promoting business-to-business collaboration. It will also strengthen regulatory

capacities to improve inspection and quality assurance services for both export and import

operations and set up a new public facility on consumer protection.

Conclusion

In conclusion, I am confident that the outlined reforms will help Myanmar realize its

potential as it re-engages with the international community and seeks to improve the living

standards of its people. In this regard, we believe that the support from the World Bank for our

reform efforts through the Development Policy Operation will be critical to ensuring their

success and sustainability. I would therefore like to reiterate the Government of Myanmar's

appreciation for the support received under this program. We look forward to the World Bank's

full re-engagement with Myanmar as we work towards the development of our country.

Yours sincerely,

Win Shein

Union Minister

Ministry of Finance and Revenue

51

Annex 3: Myanmar DPO Policy Matrix

No Policy area and related

reform objective

Prior-actions Planned further

reforms

Expected outcomes Monitoring indicators Baseline

values

Target

values (Oct

2013)

Project Development Objective: (i) to support Myanmar’s critical reforms for strengthening macroeconomic stability, improving public financial management, and improving the

investment climate, which will in turn help grow the economy, create jobs, and reduce poverty; and (ii) to facilitate the clearance of Myanmar’s arrears to IDA, which is required in

order to restore normal relations between Myanmar and the World Bank.

PDO Level Expected End of Program Outcome: Arrears to IDA are cleared

Monitoring Indicator: Amount of arrears to IDA

Baseline Value: $411 million as at October 31, 2012

Target Value: Zero (0) by October 2013.

Policy Area 1: Strengthening macroeconomic stability

1 Improving exchange rate

management institutional

framework and policy

Enacted the Foreign Exchange

Management Law and

introduced a managed float

system of exchange rate

determination

Unified exchange rates

within Myanmar

More efficient foreign

exchange market

evidenced by a

reduction in the

margin between

official and parallel

market exchange rate

Margin between official

and parallel exchange

rate

Responsibility: Central

Bank of Myanmar

5%

(May 2012)

<5%

2 Instituting measures for

fiscal discipline

Included a limit on borrowing in

the Union Budget Law for Fiscal

Year 2012/13

Introduces further

measures for

eliminating deficit

monetization

Reduction in deficit to

GDP ratio

Deficit to GDP ratio

Responsibility: Ministry

of Finance and Revenue

(Budget Department)

-6.0%

(2011/12)

<-6.2%

Policy Area 2: Improving public financial management

3 Preparation of a more

inclusive budget

Increased allocations to

education and health in the

FY2012/13 budget

Development of a

sequenced PFM reform

action plan and

commences

implementation

Real increase in actual

public expenditures on

education and health

Actual public

expenditures on

education and health

Responsibility: Ministry

of Finance and Revenue

(Budget Department)

Estimated

actual

expenditure

for education

= Kyat 310

billion

(FY2011/12)

& Health =

Kyat 92

billion

(FY2010/11)

Actual

expenditures

in

FY2012/13

> actual

expenditures

in

FY2011/12

in real terms

4 Enhancing transparency

in the management of

public finances

Published the Union Budget

Law in a local newspaper

Government makes

further progress in

transparency by joining

the EITI

Policy Area 3. Improving the investment climate

5 Improving access to

finance

The Central Bank of Myanmar

has permitted commercial banks

Introduce a policy

framework for credit

Expansion in bank

credit the private

% increase in credit to

the private sector

59.9%

(FY2011/12)

% increase

at least

52

No Policy area and related

reform objective

Prior-actions Planned further

reforms

Expected outcomes Monitoring indicators Baseline

values

Target

values (Oct

2013)

to accept various additional

forms of collateral

information systems

and credit bureaus in

the Central Bank of

Myanmar Law and

issue underlying

regulations

sector to reach more

unbanked men and

women based on a

wider range of

collateral

Responsibility: Central

Bank of Myanmar

higher than

20% in

2012/13

6 Reducing barriers for

foreign investments

Enacted the Foreign Investment

Law

Developed a plan for

streamlining the

company registration

process

Increase in foreign

direct investment

Actual value of annual

FDI

Responsibility: Ministry

of National Planning

and Economic

Development (DICA)

Kyat 3,477

billion in

2011/12

Value

greater than

Kyat 3,477

billion in

real terms

7 Removing barriers to

trade

Abolished an export first policy

on access to foreign exchange

for importers

Introduced an automatic

import and export

licensing scheme

Increase in the volume

of international trade

Total value in annual

international trade

Responsibility: Ministry

of Commerce

Kyat 18

billion in

2011/12

Value higher

by at least

1.5%

53

Annex 4: Myanmar—IMF Letter of Assessment

MYANMAR—ASSESSMENT LETTER FOR THE WORLD BANK

DECEMBER 7, 2012

Myanmar is in the midst of a historic political and economic transition. After decades of

isolation and conflict, the new government of Myanmar has started an ambitious program of

political and economic reforms with the aims of becoming a modern developed nation and better

integrating Myanmar with the international community. The authorities have already taken steps

to improve their macroeconomic management capacity and begun implementing reforms in key

policy areas, including the exchange rate regime, financial sector and central bank reform, and

the fiscal sector.

Partly as a result, economic performance has improved. In FY 2011/12, growth accelerated

slightly to 5½ percent, bolstered by foreign investment in energy. Inflation fell to 5 percent y/y,

almost half of that the previous year, mainly due to declining food prices, and supported by

reduced central bank financing of the budget deficit. Despite a widening of the current account

deficit to 2½ percent of GDP, FDI inflows saw international reserves rise to US$4.2 billion at

end-September, covering 3¼ months of recorded prospective imports of goods and nonfactor

services. The fiscal deficit rose moderately to 6 percent of GDP. Credit to the private sector

continues to grow rapidly, at 63 percent y/y at end-July, but from a very small base (8¼ percent

of GDP), mainly due to structural factors.

The short-term outlook is favorable. Notwithstanding the difficult external environment,

Myanmar’s economic prospects have improved, reflecting reform momentum and improved

business sentiment following the suspension of sanctions. In FY2012/13, growth is projected to

accelerate to 6¼ percent on the back of rising investment. Inflation is expected to pick up to

around 6 percent, as food prices bottom out. The budget deficit is projected to decline to about

5¼ percent of GDP, with increased spending on health, education and infrastructure. Due to

recent import liberalization and the lifting of some exchange restrictions, the current account

deficit is expected to widen to 4 percent of GDP. Nevertheless, gross international reserves are

projected to rise to around 4 months of imports mainly due to continued robust FDI inflows.

There are several risks to the outlook. On the downside, the main domestic risks arise from

limited implementation capacity. Separately, a potential escalation of the ethnic conflict in

Rakhine state and other border regions could undermine confidence and slow reforms. Global

economic uncertainty also weighs on the outlook, although Myanmar remains mostly insulated

from developments in advanced markets. Myanmar’s largely agriculture-based economy also

remains vulnerable to severe weather events as well as global commodity price shocks. On the

upside, faster response from foreign investors to ongoing reforms could further boost FDI and

growth.

Medium-term prospects appear promising. Over the next five years, growth is projected to

rise to around 7 percent, provided the reform momentum is maintained. The current account

deficit is expected to rise to 5½ percent of GDP, reflecting increased import demand for

investment and consumption goods, and financed mainly by higher FDI. Gas exports, forecast to

peak in FY2014/15, should help boost international reserves and government revenue. Spending

54

on health and education is projected to increase, consistent with the authorities’ goals. Improved

revenue performance, however, should see the medium-term fiscal deficit narrow to around 4½

percent of GDP, which remains sustainable even under conservative revenue and foreign aid

assumptions.

A debt sustainability analysis (DSA) suggests that Myanmar is classified as in debt distress

due the presence of arrears. However, the planned resolution of arrears to the World Bank,

Asian Development Bank and Japan would reduce arrears by more than half. Rescheduling of all

arrears on concessional terms and a gradual reduction in reliance on nonconcessional borrowing

as assumed under the DSA baseline, would change the rating to low risk of debt distress. The

standard stress tests do not reveal significant vulnerabilities for external debt under the baseline

although risks to public debt sustainability could emerge in the event of a permanently higher

primary fiscal deficit, permanently lower growth over the medium to long term, or a large

depreciation of the exchange rate. The authorities recognize that a successful resolution of

arrears is essential for Myanmar to re-engage with the international community and ensure debt

sustainability.

Fund relations. The authorities have agreed ad referendum with Fund staff on a 12-month staff

monitored program (SMP) through December 2013 to support their macroeconomic goals, which

include raising growth in a sustainable way, opening the economy, reducing poverty, and

achieving greater equity. To realize these goals, the government recognizes the need to preserve

macroeconomic stability, build a framework and institutions for macroeconomic management,

and continue reforms in key economic sectors. The SMP incorporates critical steps in these

areas. Its central objectives are three-fold: maintaining low and stable inflation within a

consistent macroeconomic framework; building international reserve buffers in light of the on-

going liberalization of imports and the foreign exchange regime; and continuing to build the

institutions and instruments needed to ensure macroeconomic stability. The program takes into

account capacity constraints and focuses on realistic but ambitious measures that equip Myanmar

to manage the risks arising from opening up and liberalizing the economy. It emphasizes moving

toward a unified exchange rate and a more independent monetary policy at an early stage, and

prioritizes strengthening the supervisory and regulatory framework before further financial

liberalization to guard against vulnerabilities that may arise from dismantling financial sector

controls in a rapidly changing environment. On the fiscal front, limiting deficits and ensuring

their noninflationary financing will be key to maintaining macroeconomic stability. The program

therefore envisages initial steps to increase tax revenues to allow higher spending on priority

areas while limiting central bank financing and reducing dependence on natural resource

revenues over time. In all these areas, the authorities’ policies will continue to be supported by

IMF technical assistance in coordination with other development partners.

55

56

Annex 5: Country at a Glance

57

58

Bhamo

Hsipaw

Shingbwiyang

Myingyan

Meiktila

Pyapon

Mergui

Kawthuang

Sandoway

Kengtung

Namsang

Aunglan

Pyinmana

Putao

Lashio

Katha

Ye

Namhkam

Bago

Hakha

Davei

Hpa-An

Loikaw

Sittwe Magway

Pathein

Sagaing

Mawlamyine

Taunggyi

Myitkyina

Mandalay

YANGON

NAY PYI TAW

SAGAING

BAGO

AYEYAWADY

TANINTHAYI

YANGON

MAGWAY

MANDALAY

KACHIN

CHIN

RAKHINE

KAYAH

MON

KAYIN

SHAN

NAY PYI TAWNAY PYI TAWUNION TERRITORYUNION TERRITORYNAY PYI TAWUNION TERRITORY

Mouths of the Ayeyawady

Chind

win

Thanlw

in

Ayeyaw

ady

Ayeyawady

Bay of

Bengal

AndamanSea

Gulf ofThailand

Mer

gui

Arc

h ip

e la

go

Arakan Yoma

ChinHi l l s

Daw

na Range

Hkakabo Razi(5,881 m)

90°E

90°E

95°E 100°E

100°E

25°N

20°N

15°N 15°N

20°N

25°N

10°N

MYANMAR

0 50 100 150

0 50 100 150 Miles

200 Kilometers

IBRD 39565

OCTOBER 2012

MYANMAR

CITIES AND TOWNS

STATE AND REGION CAPITALS

NATIONAL CAPITAL

RIVERS

STATE AND REGION BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.