Shock Amid Fragility

Executive Summary 

Prior to the Middle East conflict, Myanmar’s economy was showing signs of stabilization, but activity remained weak and increasingly strained. Economic activity improved modestly through late 2025 and early 2026, supported by partial normalization after the March 2025 earthquake, some improvement in power supply, and pockets of resilience in manufacturing, construction, and services. Firms operated at higher capacity in March 2026 than in October 2025, with manufacturing and construction recording the clearest gains as energy constraints temporarily eased, while agriculture remained relatively resilient despite reduced cultivated area, input shortages, financing constraints, and conflict-related disruptions. However, these improvements had yet to translate into a durable rebound in output and earnings. Output, sales, and profits remained below pre-2021 and pre-earthquake benchmarks, while conflict, weak domestic demand, import restrictions, power shortages, labor market frictions, and limited policy space continued to weigh on activity. Real GDP is estimated to have contracted by 2.0 percent in FY2025/26, despite modest improvement in activity toward the end of the fiscal year.

The recent fuel shock has become the central macro amplifier of Myanmar’s existing fragilities. Fuel supply disruptions linked to conflict in the Middle East sharply increased domestic fuel prices starting in March 2026, as import dependence, limited refining capacity, and scarce foreign exchange have left little room to cushion the external price shocks. The pass-through to the domestic economy has been rapid and broad. Higher fuel prices have raised transport and logistics costs, increased production and distribution costs, and intensified foreign exchange demand for fuel imports. This has pushed up inflation, weakened the kyat, and tightened already binding import and foreign exchange constraints. The shock has also further reduced households’ real purchasing power and added pressure on firms already operating with weak demand, thin margins, and constrained access to inputs and finance.

Inflation has reaccelerated, driven primarily by higher fuel and transport costs. After easing through late 2025, inflation rose sharply again from March 2026, reaching 24.6 percent year-on-year in April. The acceleration was led by transport and other non-food components, reflecting the fuel shock’s direct pass-through to mobility, logistics, and service costs. Food inflation also began to rise again as higher transport costs, supply chain disruptions, and localized shortages fed into staple food prices. Regions more exposed to fuel-dependent supply chains and local scarcities recorded the highest inflation rates. With policy responses focused on rationing and administrative controls, the authorities face difficult trade-offs: measures that conserve scarce foreign exchange and limit price pass-through can help stabilize supply in the short term, but they also risk worsening shortages, creating parallel markets, and sustaining inflationary pressures over time.

External pressures have intensified as higher fuel import costs strain foreign exchange availability and the kyat. Myanmar maintained a merchandise trade surplus in FY2025/26, supported by garment exports despite high reconstruction-related import demand. But this surplus masks rising external stress. Fuel import costs increased sharply after March, natural gas exports continued to weaken as output declined, and foreign direct investment remained subdued. After a period of relative stability in late 2025 and early 2026, the kyat came under renewed pressure from March as higher fuel import demand increased demand for foreign exchange. Parallel market premiums widened, signaling tighter foreign exchange conditions and renewed market segmentation. Remittance inflows continued to provide an important source of foreign exchange, but multiple exchange rates, administrative controls, and import licensing requirements continue to distort market signals, constrain business activity, and limit the economy’s ability to absorb external shocks efficiently.

Headline labor market indicators have held up, but job quality has worsened, adding to household vulnerability. Headline labor force participation and employment rates have remained near pre-2021 levels, but aggregates mask a continued shift toward more informal, part-time, and casual work, June 2026 x The World BankShock Amid Fragility Myanmar Economic Monitor especially in urban areas. Firms report rising migration-related resignations, growing skill mismatches, and more difficulty hiring, reflecting the effects of military conscription, displacement, and weak labor market institutions. Employment has been maintained more through adjustments in operating hours, job type, and informality than through robust demand for labor. This has helped prevent a sharper rise in unemployment, but it has also weakened earnings quality and productivity growth, leaving many workers more exposed to inflation and future shocks.

High poverty and low resilience mean macroeconomic shocks continue to translate into welfare losses. Poverty is estimated at 29.9 percent in 2025, only slightly lower than a year earlier and still far above pre-2021 trends. Poverty remains concentrated in conflict-affected and populous regions, while urban welfare remains particularly weak relative to pre-2021 benchmarks. Casual workers, urban industry workers, female-headed households, people with disabilities, and conflict-affected populations remain especially vulnerable. The fuel shock is likely to compound these pressures by raising transport and food costs, reducing real incomes, and forcing households—especially poorer ones—to cut essential spending.

Fiscal and financial constraints further limit the economy’s shock-absorption capacity. The fiscal deficit is estimated to have widened to 5.5 percent of GDP in FY2025/26, driven by reconstruction spending, election-related outlays, and rising recurrent costs. Revenues were supported by non-tax income, particularly from state-owned enterprises, but tax collection remains weak, reflecting the fragile state of the private sector (see Part III). Budget deficit financing continued to rely mainly on domestic sources, with direct central bank financing declining somewhat while commercial bank financing increased, implying greater sovereign exposure for the financial sector. Public debt remains elevated, and fiscal space is limited. In the financial sector, targeted lending has supported some private activity and post-earthquake recovery but vulnerabilities remain significant. Profitability has weakened, capital buffers are thinning, and households continue to prefer cash over savings deposits, pointing to persistent fragility in financial intermediation. Together, these fiscal and financial constraints reduce the economy’s ability to cushion further shocks and increase the risk that external pressures will feed more deeply into inflation, exchange-rate stress, and weaker growth.

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