Fiscal Management Reform in Myanmar (lessons drawn from Japanese experiences)

SAN SAN OO

Visiting Scholar

Policy Research Institute

Ministry of Finance, Japan

Tokyo, Japan 18 October 2016

1. Fiscal Situation in Myanmar

2. Fiscal Management Reform in Myanmar

3. Overview of Fiscal Situation in Japan

4. Findings and Recommendations Through

Learning Lessons from Japanese Experience

2

1. Fiscal Situation in Myanmar

3

The Objective of the Paper

4

The purpose of this paper is to learn lessons from Japanese

fiscal management reform through successful experience in the

area of analyzing the budget system, financing budget deficit,

public infrastructure investment, and saving mobilization in

order to lead to the contribution of policy recommendations

toward the Myanmar Public Finance Reform Program.

General Government Fund Procedure

Union Fund Account

Union Level Organizations

Union Ministries

Region/State Fund Accounts

Region/State Level Organization and Ministries

(1) Self-administered Division/ (5) Self-administered Zones

Yangon City Development Committee

Mandalay City Development Committee

Municipalities

5

• New Fund Procedure was practiced from 1-10-2011

6

Overall Budget Situation Union + 7 Regions/7 States (FY 2016-2017 BE)

(Kyat in billion)

Financing the Region/

State Budget Deficit

Union Government

provided Grant to State

and Region

Government

(1,688 billion Kyat)

Particular Union Region/

State Total

Revenue 16,979 2,250 19,229

Current Revenue 15,319 2,085 17,404

Capital Revenue 197 115 312

Financial Revenue 1,463 50 1,513

Expenditure 20,267 2,250 22,517

Current Exp. 15,292 947 16,239

Capital Exp. 4,454 1,291 5,745

Financial Exp. 521 12 533

Deficit -3,288 -3,288

GDP 84,128

Deficit to GDP 3.91% 3.91%

Source: Budget Department, Ministry of Planning and Finance, Myanmar.

Tax, Revenue, Expenditure and Budget Deficit

as a Percentage of GDP

Year 2011-

2012

2012-

2013

2013-

2014

2014-

2015

(PA)

2015-

2016

(RE)

2016-

2017

(BE)

Tax to GDP 3.65% 6.58% 7.69% 9.99% 8.78% 7.39%

Revenue to

GDP 13.94% 23.71% 24.49% 25.79% 24.56% 20.18%

Expenditure

to GDP 17.46% 26.15% 25.70% 26.99% 29.58% 24.09%

Deficit to

GDP 3.52% 2.44% 1.22% 1.20% 5.03% 3.91%

7

Source: Budget Department, Ministry of Planning and Finance, Myanmar. (Citizen Budget 2016-2017)

Actual Budget Disbursement Position

(FY 2011-2012 to 2014-2015) Budget Estimate (BE), Revised Estimate (RE), Provisional Actual (PA)

2011/12 2012/13 2013/14 2014/15

BE 7,476,129.41 12,006,287.09 16,141,055.63 19,291,407.07

RE 8,465,742.32 13,531,071.74 16,755,398.31 19,443,315.86

PA 8,212,477.65 11,820,418.42 14,910,681.34 17,613,373.67

-

5,000,000.00

10,000,000.00

15,000,000.00

20,000,000.00

25,000,000.00

Total Expenditure Comparison (Kyat in Million)

8

Source: Budget Department, Ministry of Planning and Finance, Myanmar.

Net acquisition of nonfinancial assets, using capital

expenditure, to total expenditure (Using select

countries)

Country 2012-2013 2013-2014

(Est)

2014-2015

(Proj)

2015-2016

(Proj)

Myanmar 32.7 32.2 27.3 27.3

Mongolia 27.5 32.7 27.5 25.7

Cambodia 41.9 42.0 36.3 34.7

Laos 51.1 41.6 44.2 40.0

9

(%)

Source: IMF Article IV Consultation Staff Reports (2015, 2014)

Financing of Budget Deficit

• There are two ways of financing the Budget Deficit.

External Financing (Foreign Grants and Loans, which creates

many burdens on our country because of the Interest Rate and

Debt Burden).

Domestic Financing (the government may finance the deficit

by selling treasury bills to the Central Bank of Myanmar and

treasury bonds to the Public).

• FY 2015-2016 estimate, debt to GDP ratio is 38.1%.

10

Public Debt As A Percent Of GDP

2011-2012 2012-2013 2013-2014 2014-2015 2015-2016

External Debt to GDP 13.6% 14.2% 16.1% 14.4% 16.7%

Domestic Debt to GDP 21.3% 21.1% 20.3% 18.9% 21.4%

Total Debt to GDP 34.9% 35.3% 36.4% 33.3% 38.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

External Debt & Domestic Debt to GDP Ratio

11 Source: Budget Department, Ministry of Planning and Finance, Myanmar. (Citizen Budget 2016-2017)

2. Fiscal Management Reform in

Myanmar

12

Fiscal Management Reform in Myanmar

I. Public Finance Management Reform

II. Tax Resource Management

III. State Economic Enterprises Reform

IV. Intergovernmental Fiscal Relationship

V. Medium Term Fiscal Framework

13

Changes in Budgetary Management

• Fiscal Decentralization - budget and fund procedure changed

since 2011

• Improve budget process - Incremental to Policy Based by

Medium Term Fiscal Framework

• Increase level of expenditure in policy priority areas

• Improve tax administration and tax revenue and fiscal

transparency (publishing Citizen Budget)

• Budget Law and Budget Submission Law

• Institutional Reform

• Implementation of Modernization of Public Finance

Management project

14

I. Public Finance Management Reform

15

Myanmar: Modernization of Public Finance Management Project

Budget

Planning

PAC

PAPRD

IRD

Treasury

MEB

AGO

Key

Im

ple

men

tin

g A

gen

cies

IDA 16

Credit (World

Bank)

MDTF (Grant from

DPs)

Budget

Allocation

Pro

ject

Fin

an

cin

g

Executive Secretariat PCAU FMU

Committees and Units for Implementation

M-MPFMp

A.

Revenue Mobilization

B.

Budget Preparation and Planning

C.

Budget Execution

D.

External Oversight

E.

Capacity Building

II. Tax Resource Management

• Changed tax collection system from Office Assessment

System (OAS) to Self-Assessment System (SAS).

• Established Large Tax Payer Office and plan to establish

Medium Tax Payer Office and Small Tax Payer Office.

• Increase revenue from Natural Resource revenues.

• Considers joining the Extractive Industries Transparency

Initiative (EITI) in order to promote public awareness about

how countries manage their oil, gas and mineral resources.

16

III. State Economic Enterprises (SEE) Reform

• SEEs account is a major contributor for Myanmar’s fiscal

operation. SEEs have made a contribution to the Union budget,

25% of the tax and non-tax.

• About 50% of total revenue comes from SEEs (FY 2016

Estimate).

• SEEs revenue mainly depends on the selling of oil and gas.

• Some of the SEEs are operating at a loss.

17

State Economic Enterprise Reform (Cont.)

• The SEEs reform has started since 2012-2013 (FY).

• Quasi expenditure system, permitted to borrow at a 4% interest

rate from the financial institution of state owned banks.

• Profitable SEEs have to pay a contribution of 20% of their net

profit to the state fund, and an income tax of 25% of their net

profit, and they can carry 55% of net profit to their own fund

account in the next year.

• The non-profitable SEEs do not need to contribute the income

tax and contribution tax to the state fund account.

• Some SEEs did not perform well in terms of quality.

• These problems are a disturbance to the SEEs reform. 18

IV: Intergovernmental Fiscal Relationship

• Before 2011, the budget system had only one State Fund

Account. Based on the 2008 constitution, the Union and State

and Region Fund Account System started.

• The State and Region governments are allowed to collect taxes

for its required fund as prescribed in schedule 5 of the

Constitution of Myanmar (2008).

• Central Government Grant Allocation Method (Using MTFF).

– Union Government has been using the MTFF (formula) since 2015-

2016 in order to systematically provide subsidies.

19

IV: Intergovernmental Fiscal Relationship (Cont.)

• In 2015-2016, we used three indicators:

Total Population (Development needs)

Poverty Index (Development needs)

Per Capital GDP (Fiscal Constraints)

• In 2016-2017, we considered to add three more indicators:

Area (Development needs)

Urban Population as percent of total state population (fiscal

constraints)

Per Capital tax collection (Fiscal Constraints)

20

Union and Region/State Budget allocation ratio

0

10

20

30

40

50

60

70

80

90

100 96.7793.08 92.61

86.17 87.80 88.30

3.236.92 7.39

13.83 12.20 11.70

RevenueUnion

Region/State

0

10

20

30

40

50

60

70

80

90

100 96.0393.94 92.32

86.7089.66 90.21

3.976.06 7.68

13.3010.34 9.79

Expenditure Union

Region/State

per

cen

tag

e

21

Source: Budget Department, Ministry of Planning and Finance, Myanmar.

Union provides the deficit of Region/State Budget

0

160.201

437.038

498.280

1,477.820

1,706.525 1,688.219

0

200

400

600

800

1000

1200

1400

1600

1800

2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Grant for financing

Kyats in billion

22

Source: Budget Department, Ministry of Planning and Finance, Myanmar.

V. Medium Term Fiscal Framework and Budget Transparency

• The Medium Term Fiscal Framework (MTFF) has been

introduced in fiscal year 2015-2016.

• MTFF is a policy based budgeting system and is combined

with “bottom up planning” and a “top-down budgeting

system”.

• MTFF specifies the “Ceiling” for ministry-wide budget

expenditures by calculating using macroeconomic

assumptions.

• According to the open budget survey, the Myanmar open index

in 2015 was 2 on November 2015.

• The Ministry of Finance released citizen budgets for 2015-

2016.

• Trying to publish the pre-budget statements, executive’s

budget proposal, enacted budgets, in-year reports, mid-year

review and year-end report.

23

3. Overview of Fiscal Situation of Japan

24

GENERAL Account Total Revenue (%)(FY 2016 Initial Estimate)

Special Deficit

Financing Bond

29.3

Construction

Bond

6.3%

Income Tax

18.6%

Corporate Tax

12.6%

Consumption

Tax

17.8%

Other

10.6%

Other

Revenue

4.8%

Other

33.2%

25

• Main Revenue comes from issuance of bonds 35.6%

(construction bond 6.3% and financing bond 29.3%)

Source: Japanese Public Finance Fact Sheet 2016, Ministry of Finance, Japan.

General Account Total Expenditure Position (FY 2016)

10%

14%

33% 16%

6%

6%

5% 10% Interest payment

Redemption of National Debt

Social Security

local allocation Tax

public work

Education and science

National Deference

other

26

• Biggest potion of expenditure is Social Security Expenditure 33%

• Redemption of National Debt 14%

• Interest payment 10%

Source: Japanese Public Finance Fact Sheet 2016, Ministry of Finance, Japan.

The Budget Cycle in Japan

• Running PDCA (Plan, Do, Check and Action) cycle,

performance based budgeting.

(a) Planning the budget (Plan).

(b) Executing the budget (Do).

(c) Evaluating the budget execution in the context of

achieving the policy agenda (Check).

(d) Making use of evaluation results for the budget planning

(Action).

27

Financing the Budget Deficit

(Issuance of Construction Bonds and Special Financing Bonds)

• From the end of World War II to FY 1965, had strictly

followed a balanced budget policy.

• In FY 1965, had been running a budget deficit, the government

issued “Construction Bonds” from FY 1966.

• Issued “Special deficit financing bonds” from FY 1975 to FY

1989.

• In the late 1970s, the fiscal deficit expanded rapidly and the

ratio of bond to total expenditure reached the first peak of

34.7%.

• However, improvements in social security service (FY 1973 is

known as the First Year of High Level Social Welfare) and an

increase of public work were caused by the rapid expansion of

expenditure.

28

Financing the Budget Deficit (cont.)

• Formulated budget without issuing special financing bonds in FY 1990.

• Declined government bonds issued in FY 1991 and recorded 9.8% of total

expenditure.

• Increased government bond issuance by 22.4% of total expenditure in FY

1994 because of unexpected natural disaster.

• Started spending cut versus revenue increase policy in the 1980s to 1990s.

• In 1997, the government raised the consumption tax rate to 5%.

• Concrete fiscal consolidation targets and spending limit on major

expenditure categories. Bonds issued decreased to 21.6% of total

expenditure.

• In 2000, a policy package for new economic development towards the

rebirth of Japan was issued and government issuance for bonds increased to

38.5% of total expenditure.

29

Fiscal Investment and Loan Program (FILP)

• According to a World Bank policy research report (1993),

East Asia has a remarkable record of high and sustained

economic growth in the period of 1965 to 1990.

• High performing Asian Economies (HPAES) included Japan,

Hong Kong, the Republic of Korea, Singapore, Taiwan,

Indonesia, Malaysia and Thailand.

• They had the diversities of experience, the variety of

institutions and a great variation in policies.

30

Successful program of saving to investment mobilization

• Drew on funds from postal savings and made loans to special

accounts and government agencies.

• Utilized the FILP to meet the needs of the people and the

changing economic and social conditions and to compliment

private-sector business.

The FILP (Before the reform in 2001)

• Postal savings, pension reserves and other sources went to the

national government as mandatory deposits of FILP funds.

• Absorbed 20-40% of household savings during the rapid

growth period.

• Interest rate is 4.7%, based on the interest rate of government

bonds.

• Focused on establishing a core industrial base.

31

Fiscal Investment and Loan Program (FILP) (cont.)

The FILP (After the reform in 2001)

• Introduced market based fund raising, elimination of the

mandatory deposit of all postal savings and pension reserves,

main financial source from FILP bonds by government, surplus

in special accounts and other public entities, industrial

investment that are dividends from private companies, and

FILP agency bonds.

The FILP plan for FY 2016

• The estimated amount of the FILP plan for FY 2016 was

initially 13,481.1 billion yen.

• In line with government growth strategies, including the

promotion of infrastructure export, support for regional

revitalization, education, welfare and medical services, and

local government.

32

Fiscal Investment and Loan Program (FILP) (Cont.)

Japanese Central Government Grant Policies

• Two types of grants are provided, unconditional and

conditional grants.

• Unconditional grants are lump-sum transfers from central to

local governments, called tax-sharing grants.

• In FY 2015, 33.1% from income tax and corporate tax, 50%

from liquor taxes, 22.3% from consumption tax (Japan’s VAT)

and local corporate tax are included in the tax sharing sources

under the unconditional grant system.

33

Budget system reform (2002)

• Focused on performance and results to be inputted into the

process of budget examination through improved analytical

instruments for more transparent, efficient and effective budget.

• Budget examiners start inspections in April, and publish their

inspection reports in July before budget requests from line

ministries.

• The budget examination in July or August is expected to

reflect the budget examiner’s findings.

• In case the projects are not implemented as effectively and

efficiently as expected, they take necessary actions:

① Scrap or reduce the budget for the items; or

② Review the implementation, check bottlenecks and urge the

implementing ministries to take corrective actions.

34

Current Comprehensive Reforms

• “Fiscal Consolidation” and “Enhancement and Sustainability

of the Social Security System” were executed simultaneously.

• The government introduced a fiscal Consolidation Plan called

“The Plan to Advance Economic and Fiscal Revitalization”

according to the Cabinet Decision on June 30, 2015.

• The First Three Year Plan (FY 2016-18), where the government

will intensively proceed with “Integrated Economic and Fiscal

Reforms” as an “Intensive reform period,” will use benchmarks

of the reform efforts such as:

Ratio of the primary deficit to GDP to around -1% for FY

2018,

The government is making effort for expenditure without

presupposing an increase except social security expenditure,

Local government expenditures shall also be controlled in

line with the efforts by the central government.

35

4. Findings and Recommendations

36

(1) Budget preparation

37

Budget

Japan Myanmar Findings &

Recommendations

• Line Ministries started to

perform self evaluation

in 2001.

• Budget examiners started

Inspection of Budget

Execution and making

inspection reports before

budget requests from

line ministries in 2002.

• PDCA (Plan, Do, Check

and Action) Cycle.

• Analyze the Line

Ministries’ requests in

line with existing

government policies and

instructions.

• Budget cycle (MTEF)

based on policy, drawing

the budget, and enacting

the budget law.

• Execution, reporting and

auditing.

• Consider budget

allocation through their

performance

(Performance based

budgeting).

• Introduce budget

implementing analysis.

(2) Budget Allocation – focus on infrastructure

38

Budget

Japan Myanmar Findings &

Recommendations

• Focused on infrastructure

development and used

higher capital

expenditure on

construction.

• Issued “Construction

Bonds” from FY 1966 to

1974 to address fiscal

deficit in 1965.

• Capital expenditure is

about 23% in FY

2016-17 (Estimated).

• Revised Estimate is

always higher than

basis estimate.

However actual

disbursement is always

underestimated, it

shows that the line

ministries could not

use budget expenditure

effectively.

• Issued bonds for

deficit financing.

• Consider the

tradeoff between

maintaining deficit

target and

increasing

allocation of capital

expenditure.

(3) Budget compilation

39

Budget

Japan Myanmar Findings &

Recommendations

• Used spending cut versus

revenue increase policies

in the 1980s to 1990s.

• Started a “Minus

Ceiling” system in FY

1984.

Line ministries have to

request less than 90% of

the last year’s current

expenditures and 95% of

the previous year’s

investment expenditures.

• Expenditure, maintain a

deficit to GDP ratio that

is not more than 5%.

• MTFF specifies the

“Ceiling” for ministry-

wide budget expenditures

by calculating with

macroeconomics

assumptions.

• Coordination between

expenditure policy and

revenue policy.

40

Tax Policy Japan Myanmar Findings &

Recommendations

• Introduced consumption

tax with 3% rate in 1989

and increased to 5% in

1997.

• Current consumption tax

is 8% and plan to raise

consumption tax to 10%.

• No natural resource tax.

• Shifting from

administrative to self-

assessment system and

preparing for the Value

Added Tax (VAT)

introduction.

• Tax to GDP ratio is

lower than other

neighboring countries.

• Added 5 new taxes from

natural resources.

• Target - 10% tax-to-

GDP ratio by 2018.

• Strengthen revenue

mobilization and

administration.

• Strengthen tax

administration and tax

policy.

• Enhance transparency on

extractive industries.

41

Fiscal Investment and Loan Program

Japan Myanmar Findings &

Recommendations

• Successful saving to

investment mobilization

program.

• Before 2001, funds

came from postal

savings and pension

reserves.

• Eliminated funds from

the savings and the

reserves.

• Most of the fund came

from issuance of FILP

bonds in 2001.

• Moderate savings.

• Traditional savings plan

is buying gold and

jewels.

• Improve public

awareness on financial

inclusion.

• Change people’s

mindsets on saving.

42

Government Bonds Japan Myanmar Findings &

Recommendations

• Special Deficit

Financing Bonds 1975-

1989 and terminated in

1990.

• The bonds outstanding

were 25% of GDP and

the debt service cost

exceeded 10% of the

budget expenditure in

1979.

• Raised revenue through

bonds amounted to

35.6% of total in 2016.

• Internal debts burden

arising.

• Bond market is still at a

very early stage of

development.

• Deficit financing

coming from the bond

market, and less and

less credit from the

CBM.

• Expected about 60% of

this deficit will be

financed through

foreign financing, and

the remaining 40% of

the deficit will be done

through domestic

financing.

• Improve deficit

financing method

through bond issuance

system.

• Debt sustainability

analysis and technical

assistance.

• Increase public

awareness.

43

Fiscal Transfer – from Central to Local

Japan Myanmar Findings &

Recommendations

• The Japanese’s grant

policy for local

government.

• Three types of fiscal

transfer from Central

government to Local:

Central government

subsidy, Local

allocation tax, and

Local transfer tax.

• Using systematic

calculation for local

allocation tax grant.

• Union government

provides grants to

Region and State

governments.

Allocation Tax.

Grant for special

purposes.

Borrowing loan.

• Considering six

indicators; total

population, poverty

index, area, urban

population as a

percentage of state

population, per capital

tax collection, and per

capita GDP.

• Reasonable budget

transfer method

between Central and

Local government.

Conclusion

(1) Consider the tradeoff between maintaining the deficit

target and increasing allocation of the capital expenditure

portion and priority on infrastructure as a policy

implementation.

(2) Consider a performance based budget allocation system.

(3) Require strengthening revenue mobilization and

administration.

(4) Improve budget deficit financing method through bond

issuance system.

(5) Introduce a reasonable budget transfer method between

Central and Local governments. 44

Thank You

45