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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