Myanmar’s economy remains fragile as reform reversals weaken prospects
YANGON, July 21, 2022 –Myanmar’s economy has faced a series of external and internal disruptions that have hampered recovery from the sharp contraction in economic activity last year. The lack of a substantial rebound in growth – with GDP in 2022 still estimated to be around 13% lower than in 2019 – means that livelihoods and coping mechanisms will continue to be strained. . About 40% of the population lives below the national poverty line in 2022, ending nearly a decade of progress in poverty reduction, according to the World Bank’s Myanmar Economic Monitor released today.
Myanmar’s economy is expected to grow by 3% in the fiscal year ending September 2022, following an 18% contraction last year. Weak economic activity is indicative of the range of constraints facing Myanmar’s economy. These include a sharp rise in the prices of imported inputs and consumer goods, partly attributable to the war in Ukraine; high levels of domestic conflict; power outages; and continued disruptions in the logistics and financial sector. Recent political changes have added to the challenges for businesses. Onerous business licensing requirements, the abandonment of the managed floating exchange rate regime and the imposition of foreign currency refund rules have led to shortages of key imported inputs and held back exporters. Uncertainty among businesses has increased due to the rapid release of new policy instructions, including exemptions to previously imposed restrictions, followed by subsequent attempts to revoke those exemptions.
“Myanmar suffered one of the worst economic contractions in the world last year, and the limited growth we expect this year leaves its economic recovery far behind other countries,” said World Bank Director Mariam Sherman. for Myanmar, Cambodia and Lao PDR. “This will continue to test the resilience of the people of Myanmar, as household incomes dwindle and coping mechanisms to food insecurity and poverty are increasingly strained amid ongoing internal conflict.”
While the overall economy has faced headwinds, some sectors have stabilized or recovered over the past twelve months, driving the modest growth expected for this year. Some businesses reported operating at a higher proportion of capacity in 2022 than in 2021, particularly in manufacturing, and exports of manufactured goods are picking up. Construction activity also picked up as work on several projects resumed after a long pause last year, and the pipeline of permits issued increased. An increase in mobility to workplaces, retail outlets and transport hubs has supported overall activity, although consumer spending indicators are weak.
“Despite severe constraints, economic activity has picked up in some regions over the past year, demonstrating the resilience of Myanmar businesses,” said the World Bank’s Lead Myanmar Economist, Kim Edwards. “However, industries more dependent on domestic demand face challenges from falling household incomes and rising prices, while agricultural production remains constrained by rising input prices, transport disruptions and ongoing conflicts.
The surge in inflation disrupted the operations of all businesses. The latest data available indicates that CPI inflation increased to 17.3% (year-on-year) in March. Increases in world oil prices have led to pronounced increases in domestic fuel prices and transportation costs, as well as the cost of running diesel generators to compensate for recurring power outages. The depreciation of the kyat, supply chain disruptions and the fallout from rising transport prices have led to price increases for a wider range of imported inputs, reducing already thin profit margins.
Beyond the projected 3% growth in 2022, the outlook remains weak and subject to substantial risks. Domestic prices for food, fuel and other imported inputs are likely to remain high in the short to medium term, limiting both production and consumption. The balance of payments situation is of growing concern, with the shortage of US dollars already limiting the availability of several imported products, including fuel. High levels of conflict in many parts of the country are expected to continue to limit productive activity. As a result, a return to pre-pandemic levels of economic activity is unlikely in the near term, unlike the rest of East Asia and
Pacific region, where the GDP of all major countries is estimated to have recovered above 2019 levels or is expected to do so in 2023.
Recent policy changes are likely to have longer-term effects: inhibiting potential growth, worsening macroeconomic instability and hampering the efficient allocation of resources. Trade and exchange restrictions reversed previous reforms aimed at liberalizing trade and unifying the exchange rate. The increased promotion of import substitution and self-sufficiency reverses much of the increased openness and liberalization that has been a key driver of Myanmar’s strong growth during the most of the last decade. These policy changes have also allowed authorities to better control the allocation of resources in the economy, which is likely to benefit some, but which ends up diverting resources from their most efficient use. Lessons from Myanmar’s economic history suggest that to the extent these trends continue, investor confidence and the business environment will weaken further, limiting Myanmar’s long-term growth potential.