Myanmar development roadmap addresses currency and deficit challenges

Myanmar made significant strides in macroeconomic policy-making in 2018 with the release of the Myanmar Sustainable Development Plan (MSDP), a long-term strategy aimed at achieving peace, economic prosperity and sustainable growth. The MSDP is much more in-depth, detailed, and actionable than previous policies, with stakeholders praising government efforts to implement hundreds of reforms under five broad goals.

The development plan’s second goal is one of the most important for near- and mid-term growth, as it seeks to attain economic stability and strengthen macroeconomic management at a moment when Myanmar is facing significant headwinds at home and abroad. Achieving those objectives will require the state to solve significant challenges, including easing pressure on its external balance of payments, balancing a trade deficit that has risen considerably in recent years and stabilising the kyat, which depreciated steeply against regional and global currencies in 2018, exacerbating inflation and the trade deficit alike.

Other strategies outlined under goal two offer near-term opportunities for improvement. Myanmar’s tax revenue as a share of GDP is the lowest in ASEAN, and the decline in realised revenue that began in FY 2014/15 is forecast to continue in FY 2018/19. However, revenue mobilisation is expected to improve with reforms meant to increase the efficiency of tax collection, such as expanded electronic payments and audits. Moreover, a special goods tax enacted in 2016 should augment public revenue that can be used for investment in infrastructure and bridge the fiscal deficit.

New Development Plan

In August 2018 the government unveiled the MSDP, which runs until 2030. Drafted by the Ministry of Planning and Finance (MPF) in collaboration with the UN, the MSDP integrates the UN’s Sustainable Development Goals, a previous 12-point economic policy and regional commitments under the Greater Mekong Subregion strategic framework as well as the ASEAN Economic Community.

The MSDP is the first substantive macroeconomic policy released since the National League for Democracy formed the country’s first democratically-elected government in over 50 years. In July 2016 the government presented a three-page, 12-point agenda outlining broad objectives on a range of subjects, such as national reconciliation, public financial management, foreign investment, private sector engagement, industrialisation and job creation. However, the 12-point document did not include any action plans, making the MSDP a much-needed successor.

Priorities & Strategies

The MSDP emphasises many of the same intentions while articulating 251 action plans. Its goals are sorted into five broad categories: peace, national reconciliation, security and good governance; economic stability and strengthened macroeconomic management; job creation and private sector-led growth; human resources and social development for 21st century society; and natural resources and the environment for the nation’s posterity. These are anchored in three pillars – peace and stability, which encompasses the first and second goals; prosperity and partnership, for the third goal; and people and planet, which includes goals four and five.

The plan identifies 28 strategies to achieve each goal: under job creation and private sector-led growth, for example, strategies include creating an enabling environment for agricultural expansion, and supporting small- and medium-sized enterprises to boost industrial and service sector job creation.

Goal Two

Attaining economic stability and strengthening macroeconomic management is a critical component of the MSDP. Under this goal, the plan prioritises effective fiscal, monetary and exchange rate policies, improving the country’s balance of payments and maintaining inflation at an appropriate level.

A healthy external balance will be critical for economic stability, although several external and domestic factors are impeding progress. In its May 2018 Myanmar Economic Monitor (MEM), the World Bank reported that the current account balance improved for the third consecutive year, with the deficit shrinking from MMK4.3trn ($3bn) in FY 2015/16 to MMK3.2trn ($2.2bb) in FY 2017/18. Coupled with recent growth, this balancing has reduced the deficit as a share of GDP from 7.2% to 4.7% over the same period. The MEM attributed this to growth in export receipts, which rose from MMK10.2trn ($7.2bn) in FY 2015/16 to MMK13.6trn ($8.9bn) in FY 2017/18, though it also noted that the situation remains fragile.

Imports grew more slowly over the same period, from MMK15.6trn ($11bn) in FY 2015/16 to MMK17.4trn ($12.3bn) in FY 2017/18, and the balance of trade has narrowed accordingly. In FY 2017/18 the deficit stood at MMK3.85trn ($2.7bn), or 5.7% of GDP, down from MMK5.3trn ($3.7bn) and 9%, respectively, in FY 2015/16. While the World Bank projects this will widen in absolute terms between FY 2017/18 and FY 2020/21, it expects exports to grow at a faster clip than imports, which could reduce the trade deficit as a share of GDP.

Additionally, the potential suspension of Generalised Scheme of Preference trade privileges with the EU poses a significant mid-term challenge, while foreign direct investment inflows have also dropped off in the wake of unrest in Rakhine State, further weighing on the export outlook. The macroeconomic outlook is under further pressure from the depreciation of the kyat. The currency lost 18% of its value against the US dollar between April and November 2018, and inflation hit a two-year high of 8.2% year-on-year in August 2018, up from 5.9% in April that year. After the central bank removed the trading band around the kyat-to-dollar reference rate, the kyat lost further value against the currencies of major regional trading partners before stabilising in October 2018. The World Bank projects consumer price index will rise to 8.8% in FY 2018/19.

Taxation & Policy Reforms

The outlook is more positive for the implementation of sub-goal 2.3, which seeks to increase domestic revenue mobilisation through a fair, efficient and transparent taxation system. Boosting domestic revenue generation will allow the government to mobilise infrastructure spending while reducing the debt burden, an important consideration given the fiscal deficit is set to increase to 4.6% of GDP in FY 2018/19, compared to 3.9% and 4.3% in FY 2016/17 and FY 2017/18, respectively.

At 6.4% to 8% of GDP, Myanmar’s tax-to-GDP ratio is one of the lowest globally, although there have been several promising reforms that should address this challenge over the medium term. In 2012 the government amended the Income Tax Law to expand the country’s tax base, allowing taxes to be applied to foreign transactions, and introducing requirements that military-owned companies pay income tax.

The World Bank reports that Myanmar is continuing to implement tax policy changes in spite of significant administrative capacity constraints by moving to a self-assessment system and restructuring its tax administration to focus on taxpayer segments using size criteria. The multilateral financial institution reported that as of May 2018, both the large and medium taxpayer offices were fully-functional and processing self-assessed returns. These reforms have already borne positive dividends. According to the December 2018 MEM, average corporate income tax collected per taxpayer at the large tax office increased by 40% from MMK798m ($564,000) to MMK1.1bn ($778,000) between FY 2016/17 and FY 2017/18.

Balancing the Books

Realised tax collection has failed to keep pace with overall economic growth, however, and total government revenue as a share of GDP declined steadily and substantially between FY 2014/15 and FY 2017/18 from 12.1% to 9.8%. Over the same period, income tax revenue fell from 3.4% to 2.6%, while commercial tax income declined from 2.9% to 2.2%, largely owing to exemptions available to the country’s largest sellers. With tax collection remaining constrained, the government is moving to boost the special goods tax, which was enacted at the beginning of 2016, to improve revenue realisation. While the Union Tax Law of 2017, enacted in March 2018, did not introduce any major changes or tax increases, the 2019 bill will see some reforms. In August 2018 authorities announced that under the Union Tax Law of 2018, taxes on cigarettes, cheroot cigars and alcohol will increase. Taxes will range from between MMK6 ($0.004) and MMK20 ($0.014) per cigarette, while cheroot taxes will range from between MMK0.25 ($0.00017) and MMK1 ($0.00071) per packet. Alcohol will be taxed at between MMK91 ($0.06) and MMK122 ($0.09) per litre. MPF forecasts tax revenues will rise to MMK7.5bn ($5.3m) in FY 2018/19, against MMK6.4bn ($4.5m) in 2017/18.

The government plans to overhaul its income tax code over the next two to three years, bringing it into alignment with its self-assessment regime and further broadening its taxpayer base. These reforms will provide critical support for MSDP’s goal two, ensuring more sustainable long-term macroeconomic growth and helping to mitigate any major mid-term shocks.