Myanmar Economic Monitor, December 2023: Challenges amid Conflict
Executive Summary
Economic conditions have deteriorated in the past six months, with the signs of recovery observed in the first half of 2023 proving to be fragile and short-lived. Macroeconomic volatility resumed, with the kyat depreciating by around 18 percent against the US dollar over the three months to the end of September. More recently, armed conflict has escalated across the country, severely disrupting lives and livelihoods, blocking major transport routes and trade channels, and heightening uncertainty around the economic outlook. The latest available CPI data reveals inflation of 28.6 percent over the year to June 2023, but the subsequent kyat depreciation and rise in conflict has led to a further increase in prices in the period since. Power shortages have persisted, creating further challenges for businesses and households. And while the authorities have made a range of frequent and in some cases punitive market interventions, they have generally been unsuccessful in restoring stability in key prices.
Conflict has escalated across much of Myanmar since October causing displacement, labor shortages, and increased logistics costs (Figure ES 1). The UN estimates that more than half a million people have been newly displaced due to the rise in conflict since late October, adding to the 2 million people who were already displaced. Armed clashes have disrupted vital trade routes, particularly in the northern Shan state, which is a major hub for border trade with China. Operations at several border crossings with Thailand and India have also been disrupted. This has implications for Myanmar’s international trade across land borders, which accounted for 40 percent of its exports and 21 percent of its imports in the six months to September 2023. Key transport routes within Myanmar have been blocked, restricting the movement of people and trade of goods, and leading to shortages of food and other basic items in local markets.
Renewed pressure on the exchange rate and inflation has been triggered by a combination of internal and external developments (Figure ES 2 and Figure ES 3). The depreciation coincided with the announcement of U.S. sanctions on two large state-owned banks, the imposition of restrictions on cross-border payments by international banks, and the launch of a higher denomination 20,000-kyat banknote which fueled renewed inflation and devaluation expectations. Fears of a reduction in foreign exchange inflows stemming from these developments reinforced ongoing pressure on the balance of payments associated with a reduction in merchandise exports, a moribund international tourism sector, and a lack of foreign investment. The resulting exchange rate depreciation is being reflected in price pressures which have been exacerbated by elevated conflict and logistics constraints. According to WFP data, the prices of six major food items (rice, pulses, edible oil, onions, eggs and tomatoes) have increased by an average of 16.6 percent annually between 2017 and June 2023. Various efforts to fix prices of fuel and food items at non-market levels have resulted in supply disruptions and in several cases have proven unsustainable.
Interventions to encourage foreign currency inflows and regulate exchange rates have generally been ineffective in restoring stability, while exacerbating uncertainty and market distortions. Foreign currency surrender requirements have been maintained (though partially eased), limiting Myanmar exporters’ ability to benefit from the depreciating kyat. However, these measures have done little to address foreign currency shortages. Multiple exchange rates are in operation in Myanmar and the spread between the official and the parallel market rate has widened, with persistent shortages of foreign currency at the below market rates. This in turn has constrained the issuance of import licenses, contributing to shortages of imported inputs and consumption goods. At the same time, a lack of clarity around the implementation and enforcement of frequently changing and often non-transparent instructions has raised uncertainty and increased compliance costs.
Power outages have persisted throughout the year, indicating underlying structural challenges in the energy sector. Outages have remained severe despite the onset of the rainy season, which in normal circumstances tends to stabilize hydropower output. This has been largely due to a drop in gas-generated supply and conflict-related disruptions to power transmission and generation infrastructure. Power blackouts in residential areas and industrial zones have lasted for extended periods, impacting businesses and households. On average, recently surveyed garment firms estimated their total losses attributable to power outages to be equivalent to 31 percent of their total annual sales in 2022, due in large part to the cost of running generators to substitute for power from the grid.
Against this challenging backdrop, indicators of economic activity have generally deteriorated since mid-2023. In the September 2023 round of the World Bank Firm Survey, firms reported operating at 56 percent of their capacity on average, 16 percentage points lower than in March 2023 (Figure ES 4). While all firms suffered setbacks, the reduction in operating capacity was steepest in the services sectors, including wholesale and retail trade, following a large reported decrease in sales from a year earlier. The manufacturing purchasing managers index contracted in October and November as firms reported a drop in output and new orders (Figure ES 5). Floods, conflict, high input costs, and trade restrictions have limited the ability of farmers to benefit from favorable export prices, and curtailed the investments needed to support future production. Compared with the same period a year earlier, merchandise exports contracted by 11 percent in the six months to September 2023, in part reflecting slowing global demand (Figure ES 6). FDI commitments have remained very weak.
Meanwhile, fiscal space remains constrained, with a widening deficit in large part financed directly by the central bank. The fiscal deficit widened to 6.4 percent of GDP in the year-ended March 2023, reflecting a contraction in revenue that more than offset a modest decline in spending. Spending on goods and services declined by almost 2 percentage points of GDP, partly offset by an increase in capital spending. Alarmingly, the combined spending on education and health has fallen to around 2 percent of GDP, down from almost 4 percent in 2019/20. Central bank financing is estimated to have covered around 70 percent of gross public financing needs (about 4.8 percent of GDP) in the year to March 2023.
Household incomes continue to be stretched by the cumulative impact of recent shocks. In the first half of 2023, 40 percent of households surveyed in IFPRI’s Myanmar Household Welfare Survey reported lower income compared with the previous year, while only 25 percent reported an increase. The analysis further shows that median real incomes fell by 10.2 percent between the June quarter 2023 and a year earlier. Food prices have risen further from already high levels, outpacing the wage increases of most workers. Results from IFPRI’s Agri-food System Monitoring in Myanmar revealed that the cost of a healthy diet increased by 111 percent between June 2020 to August 2023. Analysis based on Myanmar Living Conditions Survey (MLCS) and WFP survey data shows that poorer households are particularly exposed to high food price inflation. The increase of the de facto minimum wage by 21 percent in October – the first increase since May 2018 – will do little to mitigate the impacts of this high food price inflation (28.6 percent in June) on food security.
