Myanmar’s Economic Reforms: Progress to date, Challenges, and Outlook

1. Myanmar’s Economic Reforms: Progress to date, Challenges, and Outlook By KhwimaNthara, World Bank Senior Country Economist for Myanmar Presented at the New Zealand Thai/Thai Swedish Chambers (First) Networking Event, Bangkok, March 28th, 2013

2. Context • Myanmar is on a triple transition path, from: • Authoritarian military system to democratic governance, • Centrally-directed economy to market-oriented one, and • 60 years of conflict to peacein border areas. • The three transitions are inter-related • Focus of this presentation is on economic reforms: progress to date, challenges faced, and outlook

3. Context (Cont’d) • These reforms are being carried out in stages: • First wave of reforms focused on political reforms and national reconciliation – reaching cease fire agreements with rebel groups , integrating Aung San SuuKyi and her party into main stream politics, releasing political prisoners, easing media restrictions e.t.c. • Second wave of reforms announced in June 2012 focused on developing the economy • Third wave, announced in January 2013, focuses on combating corruption and improving public sector performance by cutting red tape

4. Our Understanding of What the Government is doing in the Area of Economic Reforms

5. Objectives of the economic reforms • Ultimately, the reforms are aimed at ensuring that Myanmar attains its full development potential, especially as trade, investment, and ODA opportunities expand with the easing of international sanctions • By accelerating private sector led growth • By ensuring that such growth is broadly shared, and hence leads to improved living standards for the majority of people: • Through increased employment opportunities (both self and wage employment) • Through improved public services • The Government believes (rightly so) that success in economic reforms will help bolster the peace process and other political reforms

6. What framework has been guiding these reforms? • Initially they were being implemented without a structured framework. The need for reform in certain areas was seen as obvious, necessary, and urgent (e.g. exchange rate policy) • The Government has now prepared a “Framework for Economic and Social Reform” which provides coherence to the reforms and which will serve as a guide for future reforms

7. What is currently informing the specific design of the reforms? • The design of reforms has to date been informed by the following: • Recommendations from advisors within Government • Recommendations stemming from consultations with other stakeholders (civil society, private sector) • Recommendations from parliament • Recommendations from donor supported studies and technical assistance programs

8. What has been the scope of these reforms so far? 1. Scope based on underlying principles • Some seek to transform Myanmar from a centrally planned economy to a more market-based economy e.g. introduction of a more liberal exchange rate regime • Others seek to transform Myanmar from a practice-basedway of doing things to a morerule-based, systematic approach e.g. introduction of rules governing deficit financing 2. Scope in terms of form (nature) of reforms • Some involve changes in the institutional and policy platform (framework) involving more entrenched changes to laws, policies, regulations, and organizational structures e.g. enactment of Foreign Direct Investment Law • Others involve changes in implementation strategies, approaches, and methods - i.e. changes in processes and procedures regarding how things are actually done in practice in the context of a given policy and institutional framework e.g. piloting of an automatic licensing system for selected imports

9. What has been the scope of these reforms so far? (Cont’d) 3. Scope by thematic areas • changes for ensuring macroeconomic stability involving changes in fiscal policies, monetary policies, exchange rate policies, and the organization of the financial sector e.g. reducing the dependency of State Economic Enterprises on the budget • changes for improving public financial management involving changes to the budgeting system, including preparation, approval, execution, monitoring, accounting, reporting, and external oversight e.g. publication of the annual budget law • changes for improving the investment climateinvolving new and more attractive investment incentives and removal of barriers to increased foreign and domestic investment e.g. relaxation of certain restrictions on access to foreign exchange

10. What have been some notable Economic Reforms to date?

11. Reforms for ensuring macroeconomic stability • Introduced a managed float system • Enacted the Foreign Exchange Management Law • Increased the number of authorized forex dealer licenses & issued them to the private sector for the first time • Announced the phasing out of Foreign Exchange Certificates • Drafted the Central Bank of Myanmar law that will among other things, provide greater operational autonomy to the CBM • New organizational structure of the CBM was approved by the Cabinet in July 2012 • New Financial Institutions Law being drafted • Reduced the dependency of State Economic Enterprises on the budget (only 28 percent of raw materials were funded through the budget last year)

12. Reforms for improving public financial management • Due to law tax revenue effort, Government has undertaken measures to simplify tax policies and administration e.g. • rationalized commercial tax on most goods and services to 5% and reduced the number of different tax rates applied • Increased the number of services subject to commercial tax • Improved transparency of tax policy and administration through publication of tax information

13. Reforms for improving public financial management (Cont’d) • Planning to introduce a VAT • Introduced a more inclusive budget by allowing states and regions to prepare their own budgets • Budget allocations are increasingly being aligned to development priorities e.g. allocation to education was doubled last year while the allocation to health was quadrupled. Spending on defense remains high but slowly declining • Budget was published in the local newspapers for the first time last year • Deliberations on the budget in Parliament are now being broadcast on national television • Myanmar has embarked on the path towards joining the Extractive Industries Transparency Initiative (EITI) • Authorities are now planning to put in place a PFM Reform Action Plan

14. Reforms for improving the investment climate • Several measures have been undertaken to improve access to finance: • Microfinance Business Law has been passed • A Microfinance Supervisory agency has been established • More than 80 microfinance licenses have been issued • The CBM has allowed commercial banks to accept new forms of collateral

15. Reforms for improving the investment climate (Cont’d) • Measures have also been undertaken to improve the financial sector policy framework and infrastructure to facilitate business transactions: • Myanmar Payments Union was established to develop the network for retail payments (e.g. through use of credit cards) • The CBM has allowed commercial banks to offer more financial products including hire purchase, foreign exchange services, and insurance services • CBM is now allowing more banks to open.

16. Reforms for improving the investment climate (Cont’d) • Measures are underway to break state monopoly over the telecommunications industry. Licenses will be issued to private service providers soon • Prices of sim cards have been drastically reduced • New Foreign Investment Law and Special Economic Zones Law has been established • Progress on Dawei Port is slow but the Government of Myanmar remains committed to the project

17. Reforms for improving the investment climate (Cont’d) • A second Company Registration Office has been opened in Yangon to ease congestion on the Nay Pyi Taw Office. There are plans to open a third office in Mandalay • Period for renewal of business license has been extended from 2 years to 3 years • There are plans to further streamline procedures for company registration & introduce a one-stop-shop

18. Reforms for improving the investment climate (Cont’d) • Abolished the “export first” policy on access to foreign exchange for importers • Piloted with automatic licenses for imports and exports, then abolished licenses for 166 import products and 152 export products from March 1st, 2013, but by April 1st, all import and export products will be allowed without license.

19. Challenges faced so far • Capacity deficiencies • Daunting task of translating laws into practice • The Government is doing too much too quickly • Donors, corporate sector, politicians, and other high profile visitors taking too much of the Government’s time • Continued use of manual systems • Lack of exposure to international good/best practices • The elephant in the room is not yet asleep • Skeptical international community & lingering sanctions – it seems too much is being expected of Myanmar • Uncertainty over life after 2015 • Poor state of backbone infrastructure & key service industries • Power • Telecommunications • Banking services

20. Outlook • The sustainability of the reforms will depend on the following: • How soon and the extent to which the majority of ordinary people are positively impacted by the reforms • The extent to which the Government is able to handle religious conflicts without needing the military • The extent to which the military feels less threatened by the impact of the reforms • The extent to which the military, particularly the lower ranks, benefits from the reforms • The extent to which the reforms will be institutionalized • Continued goodwill and support from the international community

21. Outlook (Cont’d) • So far, the outlook seems positive, on balance, for the following reasons: • Anecdotal evidence indicates that most ordinary people are appreciating the positive benefits of reforms: • Small and large scale businesses are booming due to increased demand from significantly high levels of visitors to Myanmar • Although prices of certain goods and services have gone up (e.g. rentals in Yangon, transport fares), inflation is generally lower • Consumers are enjoying a wider choice of commodities, especially due to the liberalization of car importation. • No signs of witch hunting and revengefrom both sides of the political divide (ruling party as well as opposition) • There are no indications of the military being overtly excluded from participating in the benefits of economic reforms

22. Outlook (Cont’d) • So far, the outlook seems positive, on balance, for the following reasons: • There is a big rush to promulgate new laws, which will ensure that changes are institutionalized • In spite of lingering sanctions and skepticism in some quarters, goodwill from the international community and commitment for reforms to work remain high

23. Outlook (Cont’d) • The international community needs to recognize that implementing reforms in Myanmar will require a lot of tact, patience, and appreciation of the political economy • So far, the Government seems to be doing things right • If Myanmar continues on this path, it is likely to be the next frontier market in the East Asian Region

24. Thank You!