IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-51970) ON A CREDIT IN THE AMOUNT OF SDR MILLION (US$ 440 MILLION EQUIVALENT) TO THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-51970) ON A CREDIT IN THE AMOUNT OF SDR MILLION (US$ 440 MILLION EQUIVALENT) TO THE REPUBLIC OF THE UNION OF MYANMAR FOR A REENGAGEMENT AND REFORM SUPPORT PROGRAM April 30, 2014 Report No: ICR3099 Poverty Reduction and Economic Management Sector Unit Southeast Asia Country Department East Asia and Pacific Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective as of January 31, 2014) Currency Unit = Kyats 984 Kyats = US$ 1 FISCAL YEAR April 1 March 31 WEIGHTS AND MEASURES Metric system ADB ASEAN CPF DO DPO DPL DSA DTIS FDI GDP HIPC ICA ICR IDA IMF ISN ISR M&E JBIC PDO PEFA PER QEA QSA SDR SCD SMP WBG ABBREVIATIONS AND ACRONYMS Asian Development Bank Association of Southeast Asian Nations Country Partnership Framework Development Objective Development Policy Operation Development Policy Loan Debt Sustainability Analysis Diagnostic Trade and Integration Study Foreign Direct Investment Gross Domestic Product Highly Indebted Poor Countries Investment Climate Assessment Implementation Completion and Results Report International Development Association International Monetary Fund Interim Strategy Note Implementation Status and Results Report Monitoring and Evaluation Japan Bank for International Cooperation Program Development Objective Public Expenditure and Financial Accountability Public Expenditure Review Quality at Entry Quality of Supervision Special Drawing Rights Systematic Country Diagnostic Staff Monitoring Program World Bank Group Regional Vice President : Country Director : Sector Director : Country Manager : Sector Manager : Project Team Leader : ICR Team Leader : ICR Primary Author : Axel van Trotsenburg Ulrich Zachau Sudhir Shetty Kanthan Shankar Mathew Verghis Khwima Nthara Khwima Nthara Richard Record

3 MYANMAR REENGAGEMENT AND REFORM SUPPORT PROGRAM TABLE OF CONTENTS DATA SHEET... ii A. Basic Information... ii B. Key Dates... ii C. Ratings Summary... ii D. Sector and Theme Codes... iii E. Bank Staff... iii F. Results Framework Analysis... iii G. Ratings of Project Performance in ISRs... v H. Restructuring (if any)... v IMPLEMENTATION COMPLETION AND RESULTS REPORT Program Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1: Bank Lending and Implementation Support/Supervision Processes Annex 2: Beneficiary Survey Results Annex 3: Stakeholder Workshop Report and Results Annex 4: Summary of Borrower's ICR and/or Comments on Draft ICR Annex 5: Comments of Cofinanciers and Other Partners/Stakeholders Annex 6: List of Supporting Documents Map... 23

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5 MYANMAR REENGAGEMENT AND REFORM SUPPORT PROGRAM DATA SHEET A. Basic Information Country: Myanmar Project Name: Reengagement and Reform Support Program Project ID: P L/C/TF Number(s): IDA ICR Date: 04/30/2014 ICR Type: Core ICR Lending Instrument: DPL Borrower: Republic of the Union of Myanmar Original Total Commitment: XDR million Disbursed Amount: XDR million Revised Amount: XDR million Implementing Agency: Ministry of Finance Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 10/10/2012 Effectiveness: 01/25/ /25/2013 Appraisal: 11/05/2012 Restructuring(s): Approval: 01/22/2013 Mid-term Review: Closing: 10/31/ /31/2013 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Highly Satisfactory Moderate Highly Satisfactory Highly Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Highly Satisfactory Government: Highly Satisfactory Quality of Supervision: Highly Satisfactory Implementing Agency/Agencies: Highly Satisfactory Overall Bank Performance: Highly Satisfactory Overall Borrower Performance: Highly Satisfactory C.3 Quality at Entry and Implementation Performance Indicators QAG Assessments (if Implementation Performance Indicators Rating any) Potential Problem Project at No Quality at Entry (QEA): None any time (Yes/No): Problem Project at any time Quality of Supervision No None (Yes/No): (QSA): DO rating before Not applicable Closing/Inactive status:

6 D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Banking Central government administration General education sector 7 7 General industry and trade sector Health 6 6 Theme Code (as % of total Bank financing) Macroeconomic management Other financial sector development Public expenditure, financial management and procurement Regulation and competition policy Trade facilitation and market access 7 7 E. Bank Staff Positions At ICR At Approval Vice President: Axel van Trotsenburg Pamela Cox Country Director: Ulrich Zachau Annette Dixon Sector Manager: Mathew Verghis Mathew Verghis Program Team Leader: Khwima Nthara Khwima Nthara ICR Team Leader: Khwima Nthara ICR Primary Author: Richard Record F. Results Framework Analysis Program Development Objectives (from Program Document) The DPO s development objectives were two-fold (i) to support Myanmar s critical reforms for strengthening macroeconomic stability, improving public financial management, and improving the investment climate, which will in turn help grow the economy, create jobs, and reduce poverty; and (ii) to facilitate the clearance of Myanmar s arrears to IDA, which was required in order to restore normal relations between Myanmar and the World Bank. Revised Program Development Objectives (as approved by original approving authority) Not applicable. (a) PDO Indicator(s) Indicator Indicator 1 : Baseline Value Arrears to IDA are cleared Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Value US$ 411 million Zero Zero Date achieved 10/01/ /31/ /31/2013 The Reengagement and Reform Support Program was approved by the World Bank board of executive directors on January 22, Subsequently, the Government of Myanmar repaid arrears to IDA totaling US$ 419,604, on January 25, 2013 with financing from a bridge loan provided by the Government of Japan. On the same day, IDA disbursed a credit for an equivalent amount to the Government of Myanmar to repay the bridge loan, and the remaining Comments balance of the DPO was cancelled. As of January 25, 2013 Myanmar was no longer in arrears to IDA, the suspension of disbursements has been lifted and credits restored to accrual status. Following clearance of IDA and ADB arrears, and a year of implementation of an IMF Staff Monitored Program (SMP) during 2013, bilateral arrears are also now fully cleared with only minor procedural steps remaining.

7 (b) Intermediate Outcome Indicator(s) Original Target Values Indicator Baseline Value (from approval documents) Strengthening macroeconomic stability Indicator 1 : Formally Revised Target Values Actual Value Achieved at Completion or Target Years Improving exchange rate management institutional framework and policy reduced margin between official and parallel exchange rate Value 5.0 percent <5.0 percent 0.2 percent Date achieved 05/01/ /31/ /31/2013 Comments Indicator 2 : According to the August 2013 review of the IMF Staff Monitored Program, the margin between official and parallel exchange rates had fallen to just 0.2 percent. Instituting measures for fiscal discipline reduced deficit to GDP ratio Value -6.0 percent <-6.2 percent -3.7 percent Date achieved FY2011/12 10/31/2013 FY2012/13 Comments Improving public financial management Indicator 3 : Value Data from the August 2013 review of the IMF Staff Monitored Program shows that the budget deficit for the fiscal year was estimated to have been reduced to 3.7 percent. Government s own target is for a budget deficit of below 5.0 percent of GDP. Preparation of a more inclusive budget actual increase in public expenditures on education and health Education: 310b kyats Health: 92b kyats Actual expenditures in FY2012/13 > actual expenditures in FY2011/12 in real terms Education: 764b kyats Health: 400b kyats Date achieved FY2011/12 10/31/2013 FY2012/13 World Bank staff estimates for actual public expenditures on education and health prepared via BOOST (a World Bank tool used for analysis of public spending) show substantial increases, Comments with nominal expenditures on education more than doubling to 764 billion kyats in the fiscal year, and nominal expenditures on health quadrupling to 400 billion kyats over the same period. Improving the investment climate Indicator 4 : Improving access to finance increased share of credit to the private sector Value 59.9 percent >20 percent increase 49.9 percent Date achieved FY2011/12 10/31/2013 FY2012/13 Comments Indicator 5 : IMF SMP data shows a continued rapid expansion in bank credit to the private sector, with annual growth in fiscal year estimated to be 49.9 percent, above the target benchmark of 20 percent minimum growth. Reducing barriers for foreign investment increased foreign direct investment Kyat 3,477 billion Value greater than Kyat Value US$ 2.8 billion (US$ 2.0 billion) 3,477 in real terms Date achieved FY2011/12 10/31/2013 FY2012/13 Comments Indicator 6 : The baseline value of Kyat 3,477 billion for FDI in 2011/12 appears to be overstated and/or has since been revised down by the authorities. IMF SMP estimates show a substantial increase in FDI from US$ 2.0 billion in fiscal year 2011/12 to US$ 2.8 billion in fiscal year 2012/13, a 40 percent increase. Other data sources show increases of a similar magnitude, suggesting an overall strongly upward trend over the period of analysis. Removing barriers to trade increased volume of international trade US$ billion Value higher by at least 1.5 US$ 18.43billion Value (US$ 20.7 billion) percent (US$ 22.8 billion) Date achieved FY2011/12 10/31/2013 FY2012/13

8 Comments The results framework for the original Program Document refers to a baseline figure of Kyat 18 billion for the volume of international trade in 2011/12. This is assumed to be a mistake with Kyats substituted for US Dollars. Government s own figures for international trade (total exports plus imports) show 1 percent increase over the program period, from US$ billion in 2011/12 to US$ billion in 2012/13. IMF SMP data shows a 10 percent increase in total international trade from US$ 20.7 billion in 2011/12 to US$ billion in 2012/13, substantially in excess of the benchmark target, with the difference from official data sources attributed to faster growth in imports. G. Ratings of Project Performance in ISRs Date ISR No. DO Archived Not applicable. H. Restructuring (if any) Not applicable. IP Actual Disbursements (US$ million)

9 MYANMAR REENGAGEMENT AND REFORM SUPPORT PROGRAM IMPLEMENTATION COMPLETION AND RESULTS REPORT 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal The Reengagement and Reform Support Program was prepared in the midst of a triple transition in Myanmar: from an authoritarian military system to democratic governance; from a centrally directed economy to a market-oriented economy; and from 60 years of conflict to peace in its border areas. These transitions, which remain incomplete, have the potential to create opportunity and shared prosperity for the people of Myanmar and for the country to resume its place as one of the most dynamic economies in Asia. As the largest country in mainland Southeast Asia, Myanmar has one of the lowest population densities in the region, with fertile lands, significant untapped agricultural potential and a rich endowment of natural resources. Its geographic location at the intersection of China and India, two of the world s most dynamic economies, makes it well positioned to resume its traditional role as a regional trading hub and a key supplier of minerals, natural gas and agricultural produce. In the 1990s, relations between Myanmar and the international community deteriorated. Due to the country s poor human rights record, western governments and institutions imposed various types of sanctions. The country s regime at the time responded by stopping the servicing of credits to governments and institutions that it considered unfriendly. Myanmar stopped servicing credits to IDA in early 1998 and was subsequently declared a member not in good status in September The implication was that while Myanmar remained a member of the World Bank, all credits already approved but not fully disbursed were cancelled and the country was no longer eligible for new lending. Since 2011, the government has been implementing an ambitious economic, political and governance reform program. Some of the economic reforms have been aimed at removing economic distortions. Examples include floating of the currency, introduction of new fiscal regulations to rationalize personal income tax and reduce consumption tax. Structural reforms have also been undertaken aimed at developing the private sector and stimulating foreign direct investment, liberalizing the telecommunications sector, and undertaking a review of the financial sector to better promote access to finance, and establishing a business environment that is more conducive to job creation. Going forward, the government realizes that a key challenge will be to ensure that reforms translate into improved living standards for the majority of the population, and that gains registered are sustained. Following years of political and economic repression, Myanmar remains one of the poorest countries in East Asia and the Pacific, with an estimated GDP per capita of US$ 868 in 2012/13 and a poverty headcount of 25.6 percent, according to a 2010 national 1

10 household survey 1. The country also performs poorly on most indicators of human and social development. For example, 32 percent of children under five suffer from malnutrition. Limited access to and the poor state of infrastructure are major impediments to providing basic health and education services and for economic development. Almost half the roads are not passable during the monsoon season. In order to begin dealing with these challenges, the government sought to move away from isolation and engage the support of the international community. There was a recognition by the government that significant policy and structural bottlenecks remain in the economy that would prevent the country from realizing its potential, and that more and further reaching reforms would therefore be necessary. As a result of the improved political and human rights situation, the international community began to reengage, with a number of steps taken towards the normalization of relations with Myanmar. These included a number of high profile visits to Myanmar by western leaders, the removal or suspension of economic and financial sanctions, and the reestablishment of diplomatic relations. Major creditors, including Japan, the Asian Development Bank (ADB) and the International Development Association (IDA) began to discuss modalities for reengagement. Perhaps most symbolically, the Association of Southeast Asian Nations (ASEAN) accepted Myanmar s bid to take up the annual rotating chairmanship of the regional bloc in Considering the government s commitment, and the pace and scale of the reform process, a limited window of opportunity existed for the international community to help ensure that the reforms succeeded and were sustained. After being closed to the outside world for a long time, the government was keen to learn from the experiences of other countries that have gone through similar transitions, and therefore saw development partners as key to facilitating that knowledge transfer and peer learning process. In addition, the increased presence of donors was expected to have a positive signaling effect on potential higher quality investors, particularly in diversified sectors outside the natural resources. However, the presence of arrears presented a major obstacle to reengagement with the international community. Of Myanmar s total debt stock of US$ 15 billion (estimated as of end December 2012) some US$ 11 billion was in the form of arrears that had accumulated during the period of sanctions and isolation. The bulk of these arrears (approximately 92 percent) were owed to Paris Club debtors, and arrears to Japan alone were 65 percent of the total. Arrears to multilateral institutions were around 9 percent of the total, with 5 percent due to the ADB and 4 percent to IDA. It was against this background that the proposed Development Policy Operation (DPO) was prepared. Before the World Bank board of executive directors approved a pre-arrears clearance grant in November 2012 to support a Community Driven Development project, the Bank had not approved any new projects in Myanmar since World Bank activities in Myanmar were suspended in 1988 as part of broader sanctions by western countries and institutions following a deterioration in human rights and political repression of pro-democracy demonstrations. In 1998, the government ceased repaying prior credits and subsequently went into arrears to IDA. Recognizing the opportunity to reengage with the authorities and support the nascent reform program, a DPO was prepared consistent with the Bank s Interim Strategy Note (ISN) for Myanmar and with institutional guidelines on the clearance of arrears. While significant risks 1 More recent estimates by the World Bank suggest that the poverty headcount rate may actually be as high as 37.5 percent, significantly higher than previously reported. 2

11 existed, in Staff s assessment these were considered to be outweighed by the benefits, and by the costs of inaction. The ISN for Myanmar, which was approved in November 2012, aimed to lay the foundation for the resumption of a full country program, including by supporting diagnostic work to build a shared understanding of the key development challenges facing the country. The approach drew upon the experience gained by the World Bank Group (WBG) in other countries, and in particular upon the lessons from the 2011 World Development Report on Conflict, Security and Development. The ISN focused on three pillars: the first aimed at supporting government s efforts to transform institutions to allow them to deliver for citizens; the second at building confidence in the ongoing reform process; and the third at preparing the way for the resumption of a full country program. The third pillar of the ISN, on preparing the way for the resumption of a full country program, provided for the provision of a DPO to assist the government s reform program with the proceeds used to support Myanmar s foreign exchange needs, including those associated with the clearance of arrears to IDA. As a reengaging country, Myanmar was eligible for exceptional support and since the country was projected to be at low risk of debt distress after arrears clearance, IDA resources were provided on credit terms. The reforms supported by the DPO were also consistent with the ISN pillars on transforming institutions and building confidence. 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) The DPO s development objectives were two-fold (i) to support Myanmar s critical reforms for strengthening macroeconomic stability, improving public financial management, and improving the investment climate, which would in turn help grow the economy, create jobs, and reduce poverty; and (ii) to facilitate the clearance of Myanmar s arrears to IDA, which was required in order to restore normal relations between Myanmar and the World Bank Group. The following specific outcomes were expected as a result of the operation: An exchange rate regime that is more supportive of private sector development; An increase in public expenditures on pro-poor sectors due to more inclusive and transparent budgeting; An expansion in bank credit to unbanked men and women; An increase in foreign direct investment; An increase in the volume of international trade; and, Full clearance of arrears to IDA. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification The PDO was not revised. 1.4 Original Policy Areas Supported by the Program (as approved) The main policy areas supported by the program where: (a) strengthening of macroeconomic stability through development of the financial system, improved exchange rate policy, and the instituting of fiscal discipline; (b) enhanced transparency, accountability and external oversight in the management of public finances, improved revenue management through better tax policy and administration, and improved budget planning and preparation; and, (c) improvements to the climate for investment by increasing access to finance, establishing financial sector infrastructure 3

12 to facilitate business transactions, reducing barriers to entry and the cost of starting and doing business, and removing barriers to trade. 1.5 Revised Policy Areas (if applicable) Not applicable. 1.6 Other significant changes Not applicable. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance The Reengagement and Reform Support Program was prepared as a standalone, single tranche DPO aimed at supporting the full normalization of relations between Myanmar and the World Bank Group, as well as the government s efforts to undertake critical institutional and policy reforms as part of the implementation of its medium-term development strategy. The operation was prepared in a very short space of time, representing a limited window of opportunity for the reengagement process. Upon approval of the credit, the proceeds were disbursed to support the government s foreign exchange needs including through the reimbursement of a bridging loan extended to clear Myanmar s arrears to IDA. The use of a bridging loan mechanism was selected by the government as the preferred option for clearance of arrears to both IDA and the ADB after consideration of a number of alternatives. The complexity of arrears clearance operations, with the need to reconcile and agree on the debt stock across creditors when the debt has not been serviced in years, setting up and establishing a bridge local process (complicated in Myanmar s case by sanctions on financial institutions) in the context of countries where the government and Bank have not established procedures for working together, means that such operations are usually time consuming and subject to delay. The critical prior actions supported under the DPO were considered to represent a combination of actions that would contribute to implementation of the government s medium term policy and institutional reform program. The following table lists the agreed policy areas and prior actions of the program across the three areas of engagement. Policy areas Prior actions Status (a) Strengthening macroeconomic stability 1 Improving exchange rate Enacted the Foreign Exchange Management Law Met management institutional framework and policy and introduced a managed float system of exchange rate determination 2 Instituting measures for fiscal discipline Included a limit on borrowing in the Union Budget Law for Fiscal Year 2012/13 Met (b) Improving public financial management 3 Ensuring a more inclusive budget Increased allocations to education and health in the FY2012/13 budget Met 4

13 4 Enhancing transparency in the management of public finances (c) Improving the investment climate 5 Improving access to finance Published the Union Budget Law in a local newspaper The Central Bank of Myanmar permitted commercial banks to accept various additional forms of collateral Enacted the Foreign Investment Law 6 Reducing barriers for foreign investments 7 Removing barriers to trade Abolished export first policy on access to foreign exchange for importers Met Met Met Met 2.2 Major Factors Affecting Implementation The DPO was prepared at a critical time when the government was attempting to reach out to the international community for support to its nascent economic and social reform program. After a long period of disengagement, preparation of the operation provided a vehicle for the WBG to reengage with the authorities and establish the basis of a new partnership with the government. The lack of familiarity with Bank operations among client counterparts, as a result of the prolonged period of disengagement from the WBG, posed an additional set of challenges. The Bank responded very quickly to positive signals from the government and benefitted from a responsive and decentralized task team based in the newly established country office in Yangon, and with technical guidance (particularly on the complex process of arrears clearance) from specialized staff in Washington, DC. The ISN provided for a series of analytical activities much of which has been financed via trust fund arrangements to rebuild the knowledge base on Myanmar, and the operation was informed by economic and sector work on a range of issues including a Public Expenditure and Financial Accountability Assessment (PEFA), a Public Expenditure Review (PER), an Investment Climate Assessment (ICA) and diagnostic technical assistance on financial sector development. However, at the time of preparation most of these analytical products remained work in progress. Thus, the prior actions that formed the program reflected mostly a series of higher level or first order policies necessary for laying the foundations of a more modern, market based economy. Given the weak underlying knowledge base, the limited absorptive capacity of a government only just beginning to reengage with the international community, and due to the shared challenges it was appropriate that the operation was prepared in close cooperation with other development partners. Macroeconomic monitoring and the essential review of the adequacy of the macroeconomic framework was undertaken jointly with the International Monetary Fund (IMF) during the preparation and implementation of a Staff Monitored Program (SMP). The SMP, which was prepared concurrently with the DPO, and subsequently satisfactorily implemented, aimed to support the authorities in their efforts towards maintaining macroeconomic stability during the reform process, and in laying the foundations for continued sound and stable macroeconomic policies. A joint Debt Sustainability Analysis (DSA) prepared by the World Bank and IMF ahead of preparation provided a detailed assessment of Myanmar s stock of outstanding debt and with the full clearance of arrears the country was projected to be at low risk of debt distress thereafter. 5

14 Similarly preparation of the operation was closely coordinated with the ADB with a shared approach to arrears clearance adopted by the two multilateral development banks along a common timeline 2. An arrears clearance note was prepared jointly by IDA and the ADB outlining three main options: (i) financing of the arrears with the government s own resources; (ii) financing of the arrears with grants from bilateral donors; and if either of the first options were insufficient, (iii) financing of the arrears via bridging loans to be repaid via policy based lending from the two institutions. An additional possible option for IDA was for Myanmar to be grandfathered into the Highly Indebted Poor Countries (HIPC) initiative. After due consideration, the authorities elected to use bridging loans provided by the Government of Japan through the Japan Bank for International Cooperation (JBIC) to clear arrears to both IDA and the ADB. Close coordination, including joint missions, continued between the three institutions throughout the preparation, approval and subsequent disbursement of the DPO. There were significant similarities in the policy areas covered by the ADB s policy based loan and IDA s DPO 3 and the ADB arrears clearance operation was disbursed against prior actions that covered a similar scope of policy areas. The operation also benefitted from emerging lessons of successful engagement by development partners in a post conflict environment, including the need to build institutions for longer term stability and to show early results from the reform process. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Monitoring took place in two phases. The first involved keeping track of progress in the implementation of the agreed prior actions for the DPO, particularly those that were still outstanding, as well as executing the various steps for the arrears clearance transaction itself. On the former, the team had regular contact with the authorities, including through meetings, to monitor implementation of the outstanding prior actions and gather the required documentary evidence. Similarly, a checklist of steps to be followed was prepared for the arrears clearance transaction itself. In this context, there was close coordination by IDA s central departments in Washington, the Bank team in the field, the Government of Myanmar, JBIC, and the ADB, in executing the transaction. As a result, the DPO proceeds were disbursed and utilized as planned. In particular, the Government used the funds to repay a short-term bridge loan contracted from JBIC for the clearing of arrears to IDA. The second phase of monitoring involved keeping track of progress in the implementation of the reform program beyond the prior actions, and keeping track of progress towards the achievement of expected outcomes of the reform program as presented in the results matrix of the program document. In this regard, monitoring was undertaken as part of the Bank s engagement with the Government of Myanmar on various fronts. For example, monitoring of progress on the macroeconomic program and reforms in other areas was being done through preparation of the biannual Myanmar Economic Monitor (MEM) and participation in IMF missions on Article IV Consultations and review of the SMP. Similarly, progress on PFM reforms was being monitored during the preparation of the PFM Modernization Project jointly funded by IDA, the United Kingdom and Australia, as well as during the on-going PER. 2 At the time of preparation, Myanmar s arrears to the ADB were estimated to stand at US$ 517 million. The presence of arrears similarly constrained the depth of engagement in Myanmar by the ADB prior to clearance. 3 The four output (policy) areas covered the ADB s policy-based loan were as follows: (i) Macroeconomic stability fiscal sustainability, and strengthening public finance; (ii) Improving investment, trade, and financial integration; (iii) Stimulating rural development for inclusive growth; and (iv) Promoting Human Capital Development for Inclusive Growth 6

15 2.4 Expected Next Phase/Follow-up Operation (if any) The successful completion of the Reengagement and Reform Support Program, and the full clearance of arrears to IDA in FY13 allowed for the resumption of normalized relations between Myanmar and the World Bank Group. Subsequently, a number of Investment Project Financing projects were prepared in FY14 (on energy, telecommunications and public finance management) as provided for under the ISN 4. This in turn has allowed for the movement towards a full country engagement under a new Country Partnership Framework (to be prepared in FY15), informed by a Systematic Country Diagnostic (on which work commenced in FY14). The Reengagement and Reform Program Support Program also had a strong signaling effect and set the stage for bilateral creditors to clear their arrears. Future plans are for the establishment of a programmatic series of development policy loans to provide a platform for policy dialogue with the authorities in support of Myanmar s medium term reform program. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The operation was prepared at a time when the authorities were reaching out to the international community for support in the implementation of Myanmar s economic and social reform program. The DPO provided support to key areas of this reform program and by providing for the full clearance of arrears to IDA allowed for the resumption of a full WBG country program aligned with and in support of the government s medium term strategy. Similarly, the operation has formed a core part of efforts by the WBG to achieve the ISN goals of paving the way for normalized relations with Myanmar, building confidence in the reform program, and in supporting the establishment of modernized institutions. Finally the strong focus of the operation on preparing the ground for sustained economic growth, improving the quality of public spending (including on health and education), and through the implementation of investment climate policies that will lead to the creation of jobs, has collectively helped contribute towards the achievement of the WBG twin goals of ending extreme poverty and boosting shared prosperity. The clearance of arrears to IDA has paved the way for an enlarged WBG engagement in Myanmar, resulting in a scale up of IDA lending during the ISN period, growth in WBG nonlending activities and an expanded country presence. Similarly, the preparation of a SCD is laying the foundation for much enlarged WBG country program under a new Country Partnership Framework (CPF) from FY Achievement of Program Development Objectives The overall expected result at the end of the program period was full clearance of arrears to IDA, therefore allowing the resumption of normalized relations between Myanmar and the WBG. The program was approved by the World Bank board of executive directors on January 22, Subsequently, the Government of Myanmar repaid arrears to IDA totaling US$ 419,604, on January 25, 2013 with financing from a bridge loan provided by the Government of Japan. On 4 The IDA pipeline in Myanmar continues to grow, and at the time of ICR preparation further operations are planned for delivery in FY15 on health, education, agriculture and river basin management. 7

16 the same day, IDA disbursed a credit for an equivalent amount to the Government of Myanmar to repay the bridge loan, and the remaining balance of the DPO was cancelled. As of January 25, 2013 Myanmar was no longer in arrears to IDA, the suspension of disbursements was lifted and credits restored to accrual status. Thus, the primary PDO outcome indicator for the operation was unambiguously achieved, just three months after the concept note for the operation was discussed. The framework for the Reengagement and Reform Support Program, provided for three main policy areas strengthening macroeconomic stability, improving public financial management, and improving the investment climate each with a series of related reform objectives, as illustrated below. Main policy areas Strengthening macroeconomic stability Reform objectives Laying the foundations for improved monetary policy through development of the modern financial system Improving exchange rate policy Instituting fiscal discipline Improving tax policy and administration Improving public financial management Improving budget planning and preparation Enhancing transparency, accountability, and strengthening external oversight in the management of public finances Improving access to finance Improving the investment climate Improving the financial sector infrastructure to facilitate business transactions Reducing barriers for foreign investments Removing barriers to trade Strengthening macroeconomic stability. The expected outcomes under the first policy area were that the authorities would, by the end of the program, have undertaken critical actions for improving exchange rate policy and fiscal discipline, leading to: (i) a more efficient foreign exchange market evidenced by a reduction in the margin between the official and parallel market exchange rate; and (ii) a reduction in the budget deficit-to-gdp ratio. Policies underpinning the DPO included the enactment of a new Foreign Exchange Management Law and the introduction of a managed float system of exchange rate determination (Prior Action #1). This resulted in almost complete elimination of the margin between the official and parallel exchange rates from a baseline value of 5.0 percent, to an estimated 0.2 percent in the following year. The dismantling of Myanmar s previous system of fixed, multiple exchange rates was an important part of efforts to reduce damaging distortions in the economy. Reform efforts in this area have continued, including crucially the establishment of an independent Central Bank in July 8

17 2013 (previously the Central Bank was under the supervision of the Ministry of Finance), as part of efforts to strengthen the credibility of monetary policy. Similarly, the introduction of a limit on borrowing in the Union Budget Law for Fiscal Year 2012/13 (Prior Action #2) resulted in a sharply reduced budget deficit down from a baseline deficit of 6.0 percent of GDP in FY2011/12 to 3.7 percent of GDP in FY2012/13. Instituting fiscal discipline is an important part of efforts to establish a more stable macroeconomic environment. Government subsequently adopted a budget deficit ceiling of 5 percent of GDP. Nevertheless, continued efforts will be required to further improve macroeconomic management and stability, not least of which will be to reduce the budgetary dependence of State Economic Enterprises on government accounts. Improving public financial management. The expected outcomes under the second policy area were that by the end of the program period, the authorities would have undertaken critical policy actions to increase actual budgetary allocations and expenditures on health and education, and increase overall transparency in the budget process. Increased allocations to education and health in the FY2012/13 budget (Prior Action #3) resulted in sharply increased actual expenditures on these two sectors, both of which had been neglected over a sustained period of time during Myanmar s isolation. Actual nominal expenditures on education are estimated to have more than doubled over the program period (from 310 billion kyats in 2011/12 to 764 billion kyats in 2012/13). Similarly, actual nominal public expenditures on health are estimated to have quadrupled over the same program period (from 92 billion kyats in 2011/12 to 400 billion kyats in 2012/13). This is an important first step towards efforts to make the budget more inclusive and to show the results of Myanmar s transition in a tangible way. However, increases in social expenditures will need to be sustained over a prolonged period and be accompanied by further sectoral reforms if changes in higher level social outcome indicators in the health and education sectors are expected to be achieved. Similarly, experience from other countries suggests that outcome indicators among more remote communities, particularly ethnic minorities and disadvantaged groups, can be slow to respond to increases in public spending if such increases are not accompanied by more targeted policies. The publication of the Union Budget Law in the local press (Prior Action #4) was also an important part of efforts to improve transparency in the budget process and went beyond previous and more restricted publication in the official gazette. However, further efforts will be required including through stronger legislation to enforce continued disclosure and through the adoption of international standards, such as under the Extractive Industries Transparency Initiative, on disclosure of the proceeds from Myanmar s natural resource endowments. Improving the investment climate. The expected outcomes under the third and final policy area were that reforms to improve access to finance and reduce barriers to business entry and trading across borders would contribute towards an expansion in bank credit to unbanked men and women based on a wider range of collateral, an increase in foreign direct investment, and an increase in the volume of international trade. Reforms underpinning the DPO included changes by the Central Bank of Myanmar to the forms of collateral that commercial banks are permitted to accept a wider range of forms of collateral (Prior Action #5). Allowing the use of non-traditional collateral beyond property, including gold, exportable crops and a number of type of guarantees, was an important part of efforts to expand access to finance in Myanmar. Annual growth in credit to the domestic private sector grew at 49.9 percent in FY2012/13, substantially in excess of the target benchmark set in the program 9

18 document of above 20 percent year on year growth. Continued reform efforts are underway with the preparation of a new modernized Financial Institutions Law (being drafted with support from the World Bank). The enactment of a new Foreign Investment Law (Prior Action #6) in 2012 added clarity to the sectors eligible for foreign investment, with greater detail provided on how investments should be structured and licensed, and what investors should expect from the state. This was an important step towards attracting higher quality foreign direct investment (FDI) in the key sectors that are critical to the development of Myanmar s economy, but deeper efforts will be required to reduce the actual costs of doing business and ensure that a more predictable and transparent business enabling environment is put in place. Follow on efforts are now being undertaken to merge the Foreign Investment Law with the Myanmar Citizens Investment Law into a unified investment law. Similarly, institutional strengthening will be required including efforts to establish an independent investment promotion agency. FDI increased strongly during the program from US$ 2.0 billion in 2011/12 to US$ 2.8 billion in 2012/13, in excess of the target intermediate outcome indicator. The abolition of the export first policy on access to foreign exchange for importers (Prior Action #6), which previously restricted foreign exchange for the purchase of imports to firms that earned foreign exchange through exports, was similarly an important part of efforts to remove distortions in the economy that acted as barriers to increased trade competitiveness. As with foreign investment, substantial further efforts will be required to close the gap between Myanmar s current regulatory framework for trade and that seen in comparable ASEAN economies. Reform efforts have continued with reductions in the number of products subject to export and import licenses. Further identification of critical trade reforms will emerge from the Diagnostic Trade and Integration Study (DTIS) exercise that Myanmar is commencing in 2014 (with support from the World Bank). Estimates of foreign trade (the sum of imports and exports), show growth in response to reforms over the program period with total trade increasing from US$ 20.7 billion in to US$ 22.8 billion in 2012/13 according to IMF estimates (the rate of increase is slower according to government data). 3.4 Justification of Overall Outcome Rating Rating: Highly Satisfactory The overall outcome rating is judged to be Highly Satisfactory given the strong relevance to the authorities of the program supported by the DPO, the strong ownership exercised by the government throughout its reengagement process, the successful clearance of arrears to IDA allowing for a full resumption of a country partnership between Myanmar and the WBG, and due to positive results achieved across all outcome indicators. The complex operation was designed and delivered quickly despite the need to work with a government that was not used to dealing with the international community, and with a bridge financier (Japan) that was playing this role for the first time. The operation successfully set the stage for full reengagement by the World Bank Group. The policy reforms have also been sustained. Arrears clearance with IDA was followed by the development of a track record of good macroeconomic management and completion of the SMP with the IMF that further set the stage for bilateral arrears clearance in While the overall risks ahead remain moderate, not least those associated with managing the continued transition to democratic governance, the 10

19 Reengagement and Reform Support Program was clearly a landmark operation that played a key part in the commencement of Myanmar s renewed economic and social development path. Furthermore, arrears clearance created the space for the international community to support the reform program, partially mitigating the risk of backsliding. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development Research suggests that after a long period of isolation, households in Myanmar are highly vulnerable to the effects of economic and environmental shocks, and have limited tools and coping strategies available to manage the impact of risks. Using a different methodology for estimating the poverty line (including a more comprehensive measure of welfare that captures health costs and expenditure on durables), new estimates show that Myanmar s headcount poverty rate is significantly higher than the 25.6 percent originally reported. However, despite the high poverty rate, a comparatively low Gini index suggests that income is not especially unequally distributed in Myanmar. Figure 1: Poverty Headcount (2009/10) Figure 2: Gini Index (2009/10) Source: World Bank staff estimates Implementation of the reform program supported by the DPO should have beneficial effects on the poor by helping to establish a more stable macroeconomic environment with reduced inflation and interest rates. Similarly, the prior actions on public financial management resulted in sharply higher public spending on health and education, indeed considerably higher than expected at the time of preparation, in two areas that are likely to directly benefit the poor and where Myanmar has previously lagged well behind peers. Finally, a more open investment environment with increased credit flowing to the domestic private sector and increased foreign investment and trade should all contribute to a higher rate of job creation for all. The share of domestic credit flowing to the private sector remains very low in Myanmar compared to similar countries. However, experience from other countries suggests that women often benefit disproportionately from eased access to credit when formal access to finance constraints are lifted, and from employment generation arising from foreign investment, particularly in sectors such as garments, footwear and tourism where Myanmar has high potential for development. 11

20 However, none of these gains are automatic and further efforts will be required to ensure sustainable implementation of policies and continued focus on ensuring that the disadvantaged groups, including the poor, women and ethnic minorities, are able to access improved public services and benefit from the opportunities provided by more stable and faster growing economy. (b) Institutional Change/Strengthening A key objective of the DPO was to contribute towards the establishment of stronger institutions for macroeconomic management, and to help Myanmar lay the foundations for sustained growth and shared prosperity. Longer-term capacity and institutional development will take considerable time, and will require deep capacity building investment through vehicles such as the Public Financial Management Modernization Project approved by the IDA Board in early Nevertheless, incremental gains in institutional strengthening were made during the course of the program, with key policy steps taken to establish strong regulatory frameworks in particular for fiscal and monetary policy. (c) Other Unintended Outcomes and Impacts (positive or negative, if any) The operation had a number of positive impacts that were not initially foreseen. The shared challenges associated with addressing the build-up of arrears facilitated a coordinated approach between IDA and ADB. Experience was also gained through working towards arrears clearance in cooperation with the Government of Japan, which provided the bridge financing (the first time that Japan has provided a bridge loan to support arrears clearance to a multilateral development bank). Similarly the weak underlying knowledge base on macroeconomic issues resulted in a joint approach by the Bank and IMF in engaging in shared policy dialogue on macroeconomic and structural issues. In addition, at a time of rapid reengagement with a multitude of development partners, the preparation of the DPO played a key role in improving inter-agency coordination across government agencies on issues associated with macroeconomic stability, public financial management and regulation of the investment climate. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops A meeting was undertaken with key government stakeholders involved in the Reengagement and Reform Support Program to solicit post operation feedback and contributions to the ICR process. In broad terms the authorities concurred that the DPO provided policy support during a period of substantial and fast paced reforms, and that the full clearance of arrears to both IDA and the ADB was a critical step in Myanmar s development process. 4. Assessment of Risk to Development Outcome Rating: Moderate While performance of the operation was strong with progress recorded across all outcome indicators, Myanmar remains in the early stages of its transition. Institutions remain fragile and the country continues to face key distributional and political challenges. Evidence from other post-conflict environments suggest that gains can be easily reversed. Hence there are continued risks to the development outcomes of the operation. The sustained progress for more than a year and the growing involvement of the international community mitigates the risk of backsliding on the reform program, notwithstanding the overall political risks. 12