Country Reports

October 6, 2014

Myanmar: Staff Report for the 2014 Article IV Consultation

Description: KEY ISSUES Context: The authorities continue to make progress on their far-reaching political and economic reform program. Key economic reform priorities are being realized. However, macroeconomic and financial risks are building, and capacity constraints are slowing institutional reform. Constitutional amendments are being considered ahead of the 2015 elections, and peace negotiations are continuing despite religious and ethnic tensions. Macroeconomic situation and outlook: Growth is accelerating, with average growth projected around 8¼ percent in the next few years, and inflation should remain broadly stable. After depreciating in 2013, the exchange rate has stabilized. The external current account has widened despite improved export performance but rising capital account inflows should enable Central Bank of Myanmar (CBM)’s international reserves to grow rapidly from their current low levels. Monetary aggregates are growing at double-digit rates. The underlying fiscal deficit in 2013/14 is estimated at 3 percent of GDP and is forecast to widen to around 5½ percent of GDP in 2014/15, but should decline below 5 percent of GDP in the medium term. However, off budget operations could increase the deficit. Risks also arise from capacity constraints and thin fiscal and external buffers. Medium- and long-term prospects: Economic prospects remain strong. Myanmar’s long-run growth potential is estimated at around 7 percent, in line with peer countries’ experience, but sound institutional and policy frameworks need to be built to realize this. Key policy recommendations: Macroeconomic policy challenges are likely to intensify in the short term. Monetary policy tools need to be more aggressively deployed, and mechanisms established to transfer public sector foreign exchange earnings automatically to the CBM. The regulatory framework for the banking sector needs to be urgently upgraded and supervision strengthened, particularly as foreign banks will soon enter. Tax policy and administration should aim at simplifying the system and preparing for the introduction of a value-added tax (VAT). Technical assistance (TA): Capacity building will be crucial to achieve policy objectives. The IMF continues to provide intensive TA in key areas, including in a wide range of CBM operations, tax policy and administration, public financial management and statistics.

October 6, 2014

Portugal: Fiscal Transparency Evaluation

Description: EXECUTIVE SUMMARY Portugal’s practices meet most of the principles of the revised Fiscal Transparency Code at good or advanced levels. A number of areas still present practices at a basic level, but in most of these cases this reflects reforms that have recently been launched and have not yet been fully implemented so as to affect current practices. Indeed, if measured against the practices observed prior to the recent financial crisis, there has been remarkable progress. The challenge is to press ahead with the reform agenda so that all fiscal transparency practices meet good or advanced levels, thus strengthening even further the management of public finances and the associated risks. The key findings of the present Fiscal Transparency Evaluation are: • Fiscal reporting is in line with good or advanced practices, particularly in compliance with EU requirements and ESA 95 standards, but still lacks a sound conceptual accounting framework based on internationally accepted standards. • Fiscal forecasting and budgeting have improved over the last three years, although investment evaluation only meets the basic standard of the Code. • Reporting of fiscal risks is in its infancy and in spite of numerous initiatives undertaken in the last few years, such as the publication of a fiscal risk statement, remains fragmented. The large amount and good quality of information available allows a very preliminary and partial estimate of the public sector net worth and total risk exposure. An estimated negative net worth position of 140 percent of GDP (including the liabilities of the main defined-benefits employment-related pension scheme) and a sizeable exposure to various contingent liabilities, although some of these have a low probability of crystallizing, are reminders of the still fragile status of Portugal’s public finances.

October 6, 2014

Central African Economic and Monetary Community (CEMAC): Selected Issues

Description: This Selected Issues paper focuses on the need of improving liquidity management and the operational framework of monetary policy in Central African Economic and Monetary Community (CEMAC). Disconnected policy and lending rates reflect the ineffective interest rate channel of monetary policy transmission while the shallow domestic banking system and the underdeveloped financial markets induce weaknesses of both the credit and asset price channels. In the absence of an efficient interest rate channel, liquidity plays an important role in the conduct of monetary policy. The CEMAC economy is vulnerable to external shocks and its banking system potentially exposed to liquidity shocks. Successful monetary policy implementation requires a set of appropriate instruments to cope with various liquidity shocks. The origins of the surplus liquidity should be well known upfront and addressed with a suitable combination of measures, including foreign exchange, fiscal and financial system development policies. The paper recommends that the Bank of Central African States should investigate all the means to centralize and analyze relevant information for autonomous factors forecasts, including daily operations of Treasuries and foreign exchange operations from its accounting system, as well as banknotes in circulation.

Notes: Also available in French

October 3, 2014

The Federal Democratic Republic of Ethiopia: Selected Issues Paper

Description: This Selected Issues paper argues that for Ethiopia to continue sustaining robust growth, leveraging the transformation power of the private sector, especially entrepreneurs, is essential. Although Ethiopia’s public sector-led development strategy has delivered strong results over the past decade, it has been facing significant challenges in recent years. A model-based analysis of the country’s investment program indicates that, despite positive long-run growth effects, transition challenges and macroeconomic trade-offs are associated with different financing strategies. Heavy reliance on domestic bank borrowing may require substantial fiscal and macroeconomic adjustments as well as entail a sharp increase in inflation. External commercial borrowing, on the other hand, may ease these adjustments but at the cost of significant increases in debt to gross domestic product ratios. Comparing Ethiopia’s development experience—especially in terms of structural transformation and competitiveness—with that of selected Asian countries indicates differences which point to possible adjustments in Ethiopia’s development approach.

October 3, 2014

The Federal Democratic Republic of Ethiopia: Staff Report for the 2014 Article IV Consultation

Description: KEY ISSUES Context: Ethiopia’s investment-led development strategy has delivered robust growth and progress toward Millennium Development Goals (MDGs). Restrained fiscal and monetary policies have helped maintain macroeconomic stability, although the financing mode of the continuing large-scale investment through public enterprises could risk undermining macroeconomic stability. A cautious policy stance will be critical in preserving the recent gains. Focus of the consultation: The discussions centered on policies to sustain strong economic growth and promote structural transformation. Issues covered included: (i) the policy mix to preserve macroeconomic stability and debt sustainability; (ii) the public sector investment program and its financing; and (iii) financial deepening, export competitiveness and the business climate. Outlook and Risks: Growth is expected to remain strong, driven mainly by agriculture and services. Inflation should continue to remain in single digits, in line with a tight monetary policy. Key downside risks include insufficient financing for infrastructure investment in the Growth and Transformation Plan (GTP), lower prices of main export commodities, and weather-related shocks, particularly a drought. Policy mix: Staff recommendations focused on sustaining a cautious policy stance, prioritization of public investments and closer monitoring of state-owned enterprises to ensure prudent borrowing in the context of a medium-term debt management strategy, enhancing export competitiveness, greater resource mobilization and development of the financial sector, and a more prominent role for the private sector. Structural improvements in the functioning of the money and foreign exchange market and building foreign reserves to at least three months of imports were suggested to enhance resiliency. The need for greater interest rate and exchange rate flexibility and improved competitiveness of the traded goods sector, including through exchange rate adjustment, was underscored.

October 2, 2014

Kenya: Staff Report for the 2014 Article IV Consultation

Description: KEY ISSUES Context: Kenya has embarked on major reforms in line with the 2010 constitution. The new government has started the process of devolution at a fast pace, introducing a reporting framework that allows for monitoring progress and challenges. Macroeconomic stability in a market-friendly environment continues attracting the interest of foreign investors. Kenya placed its first US$2 billion Eurobond at favorable terms, with proceeds to be used to upgrade power generation and transportation. Promising commercial prospects of oil discoveries have the potential of providing significant foreign exchange and fiscal resources. Kenya is actively participating in the integration of East Africa, showing progress in reducing delays from the port of Mombasa to Kampala and Kigali. Kenyan banks export their successful business models through East Africa and other countries in the region, while complying with upgraded prudential regulations. The Central Bank of Kenya (CBK) maintains proactive financial inclusion policies that have been effective in facilitating access to credit by small and medium enterprises. Thanks to legal reforms, the Financial Action Task Force has removed Kenya from its watch list. Recent terrorist attacks and threats have raised security concerns, especially in coastal areas bordering Somalia. Outlook and policies: Growth is projected to accelerate to 5.8 percent in 2014/15 on the back of higher public and private investment and measures to improve the business environment. The 2014/15 budget aims at rebalancing recurrent and development spending. Medium-term fiscal policies intend to bring down the debt burden consistent with the East African Community Monetary Union (EAMU) Protocol convergence criteria. Inflation remains broadly in check, but rising food prices and rapid credit growth require careful monitoring by the CBK. Focus: Discussions centered on the implementation of devolution, in particular on the enforcement of accountability provisions. Some checks and balances are proving effective, such as the required Treasury approval of guarantees for county borrowing. However, a more systematic framework is needed. Staff and the authorities agreed that the scale of transfers to counties magnified government’s cash management problems that need to be addressed with the help of the recently introduced Treasury Single Account (TSA). This would also contribute to more effective monetary operations. Discussions also focused on the design of the legal framework for natural resource management aimed at ensuring consistency with public finance management provisions.

October 1, 2014

Republic of Mozambique: Technical Assistance Report on Reassessment of the Public Accounting Reform Roadmap

Description: The report contributes to the Mozambican authorities on reviewing the implementation of the government’s public accounting reform agenda.

September 30, 2014

Democratic Republic of the Congo: Staff Report for the 2014 Article IV Consultation

Description: KEY ISSUES Context and outlook: Despite strong macroeconomic performance under the Fund- supported program (2009–12) with economic activity steadily accelerating and inflation declining sharply, poverty remains pervasive and the economy vulnerable, exposing this progress to reversal. Limited fiscal space and shocks to revenues often offset by expenditure adjustments have not supported pro-poor and critical investment spending necessary for inclusive growth, giving rise to mounting social demands to share in the benefits of the accelerating growth. Focus of consultation: The discussions focused on medium-term policy measures to preserve macroeconomic stability while promoting inclusive growth, improve transparency and good governance in the natural resources sector; and foster financial stability and development. Key policy recommendations: • Maintain the fiscal anchor of no (net) central bank financing of the budget while creating fiscal space through enhanced domestic revenue mobilization, and improving the quality of public spending through public financial management (PFM) reforms, and building more robust buffers against external shocks. • Implement measures included in the updated governance matrix agreed with the World Bank and the recommendations of the Extractive Industries Transparency Initiative (EITI) and the National Conference on Mineral Resources Management (NCMRM) to enhance transparency and good governance in the management of natural resources. • Accelerate reforms of the Central Bank of the Congo (BCC) and the financial sector by (i) passing the central bank law to strengthen its independence and governance, (ii) completing its recapitalization, and (iii) strengthening its analytical capacity, (iv) disengaging from non-core activities, and (v) implement FSAP recommendations to promote financial sector stability and development.

Notes: Also available in French

September 29, 2014

Sierra Leone: Ad Hoc Review Under the Extended Credit Facility Arrangement and Request for Augmentation of Access, Modification of Performance Criteria, and Financing Assurances Review

Description: KEY ISSUES Background. The Ebola outbreak that started in one district in late May has spread to the entire country, overwhelming already weak institutions and ill-equipped medical facilities. At end-August, over 1000 people were infected and more than a third had died from the disease. The country’s social and economic fabric is also adversely affected by the epidemic. Economic growth has slowed, inflationary pressures have intensified, and new balance of payments and fiscal financing needs have emerged. The epidemic has heightened food insecurity and impacted livelihoods for a large portion of the population, generating additional distress for vulnerable groups. The program. In October 21, 2013, the Executive Board approved a three-year arrangement under the Extended Credit Facility (ECF) for Sierra Leone totaling SDR 62.2 million (60 percent of quota). The first review under the program was completed on June 19, 2014. Preliminary indications are that performance under the program is on track, in spite of weaknesses in budget execution at end-June. The authorities’ requests. In the attached letter of intent, the Sierra Leone authorities are requesting an Ad Hoc review under the ECF arrangement, and an augmentation of access in an amount equivalent to 25 percent of quota (SDR 25.925 million), in a single disbursement. These resources, together with contributions from other donors will help cover balance of payments and budgetary financing needs generated by the Ebola epidemic. The authorities are also requesting a modification of end-December 2014 performance criteria on net domestic bank credit to the central government, and on net domestic assets of the central bank. Safeguard assessment. A safeguards assessment of the Bank of Sierra Leone (BoSL) was completed in March 2014. The BoSL is taking steps to strengthen its safeguards framework and staff is monitoring implementation of the recommendations from the assessment. Staff views. Staff supports the completion of the Ad Hoc review, and the authorities’ requests.

September 29, 2014

Liberia: Ad Hoc Review Under the Extended Credit Facility Arrangement and Request for Augmentation of Access and Modification of Performance Criteria

Description: KEY ISSUES Background. With the highest number of new and cumulative Ebola cases recorded to date, Liberia is the country most affected by the epidemic in West Africa. In addition to exacting a heavy human toll, the Ebola outbreak is having a severe economic and social impact, and could jeopardize the gains from a decade of peace. The largest sectors of the economy (agriculture, services and mining) have been weakened by the epidemic, resulting in significant financing gaps for the fiscal and external accounts. The closure of international borders and, in particular, the internal quarantines are disrupting labor and food supply, leading to shortages of basic commodities, depreciation pressures and higher inflation. Request. The authorities are requesting an ad-hoc augmentation of access under the ECF and an immediate additional disbursement of SDR 32.3 million, equivalent to 25 percent of quota, to help bridge the significant financing need that has emerged in the wake of the outbreak. The authorities are also requesting modification of end-December performance criteria to allow on-lending of the equivalent of the Fund support to the government. Appraisal. Staff supports the authorities’ request for an augmentation of access and immediate disbursement in light of the urgency and size of the balance of payments need. Staff also supports the requested modification of end-December 2014 performance criteria via a program adjustor to allow the on-lending of the additional Fund support to the government. Program status. The third ECF review was concluded on July 3, 2014. Available information indicates that the program remains on track and that continuous PCs are being met. Program financing. The proposed augmentation would complement assistance committed by other stakeholders including US$19 million in additional budget support from the African Development Bank and the World Bank, and would help catalyze support from other donors. The authorities have committed to take the necessary measures to address any residual financing gap.