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Myanmar Economic Monitor: Challenges Amid Conflict (December 2023)

Core Content

The Myanmar Economic Monitor (MEM) is a semiannual report produced by the World Bank's Myanmar office, analyzing the country's economic conditions and outlook amid ongoing conflict and macroeconomic instability. The report highlights the deterioration of economic conditions over the past six months, with recovery efforts proving fragile and short-lived. Key challenges include high inflation, a depreciating kyat, power shortages, and a widening trade deficit, all exacerbated by conflict and related disruptions.

Main Views

• Economic Volatility: The past six months have seen increased economic volatility due to conflict, which has disrupted trade routes, raised logistics costs, and created uncertainty.
• Inflation and Currency Depreciation: Inflation remains high, with the CPI at 28.6 percent year-on-year in June 2023. The kyat has depreciated by about 18 percent against the US dollar in the last three months, contributing to further inflationary pressures.
• Power Outages: Persistent power outages, worsened by reduced gas supply and conflict-related infrastructure damage, have significantly impacted businesses and households.
• Trade and Investment: The trade deficit has widened, and FDI commitments have remained weak. Trade disruptions and foreign exchange constraints have limited the ability of businesses to operate and compete internationally.
• Fiscal Constraints: Fiscal space is limited, with revenues still below pre-pandemic levels. The fiscal deficit reached 6.4 percent of GDP in the year ended March 2023, largely financed by the central bank.
• Labor and Migration: Migration has become a key coping mechanism, with many low-skilled workers leaving for Thailand and other countries. This has led to labor shortages and long-term human capital concerns.
• Garment Industry Challenges: The garment sector, a major contributor to employment and growth, has been severely impacted by conflict, logistics issues, and macroeconomic instability. Its potential for expansion is curtailed, with firms focusing on survival rather than growth.

Key Information

Economic Conditions

• Volatility: Economic conditions have become more volatile, with a significant drop in firm operating capacity from 72 percent in March 2023 to 56 percent in September 2023.
• Inflation: Consumer price inflation remains high, with an annual average of 28.6 percent in June 2023, and is expected to stay above 20 percent in the year ending March 2024.
• Exchange Rate: The kyat has depreciated by about 18 percent against the USD over the past three months, with multiple exchange rates in operation and a widening gap between official and parallel market rates.
• Power Shortages: Power outages have persisted throughout the year, with severe impacts on both residential and industrial areas. Garment firms estimate losses of up to 31 percent of annual sales due to power outages.

Trade and Investment

• Trade Deficit: The trade deficit has widened, with merchandise exports declining by 11 percent in the six months to September 2023.
• FDI Commitments: Foreign direct investment has remained weak, with no significant inflows reported.
• Border Disruptions: Conflict has disrupted key border trade routes, particularly with China, and has affected logistics and supply chains, reducing export capacity and increasing costs.

Fiscal and Monetary Policy

• Fiscal Deficit: The fiscal deficit is projected to remain elevated at 5.7 percent of GDP in the fiscal year ending March 2024.
• Public Debt: Total public debt is expected to remain stable at just over 60 percent of GDP.
• Central Bank Financing: Central bank financing has covered a significant portion of budget deficits, but this has not addressed underlying fiscal constraints.

Social and Human Impact

• Household Incomes: Household incomes have been negatively impacted by recent shocks, with 40 percent of surveyed households reporting lower income compared to the previous year.
• Food Inflation: Food prices have risen sharply, outpacing wage increases, with the cost of a healthy diet increasing by 111 percent from June 2020 to August 2023.
• Labor Migration: Migration has become a coping mechanism, with many low-skilled workers leaving for Thailand and other countries, affecting labor availability and human capital.

Garment Industry Analysis

• Potential for Growth: The garment industry has significant potential to drive employment, labor productivity, and income growth, similar to other East Asian countries.
• Challenges: Recent developments have curtailed this potential, with firms facing operational challenges, reduced competitiveness, and limited access to foreign currency and imported inputs.
• Firm Operations: Only 18 percent of firms plan to upgrade their operations in the next three years, with most continuing under the low-value CMP model.
• Impact on Workers: The de facto minimum wage increase of 21 percent in October has not significantly offset the high inflation affecting food security.

Outlook and Risks

• Growth Prospects: Near-term growth is expected to remain weak, with GDP projected to grow by 1 percent in the year ending March 2024.
• Inflation: Inflation is expected to stay high, driven by balance of payments pressures, currency depreciation, and supply constraints.
• Downside Risks: Risks include further conflict escalation, worsening power outages, trade disruptions, and continued foreign currency shortages. These could have long-term impacts on living standards, labor productivity, and human capital.

Conclusion

The Myanmar Economic Monitor highlights the severe economic challenges faced by the country due to ongoing conflict and macroeconomic instability. The report underscores the need for policy reforms and improved market mechanisms to restore economic stability and growth potential, particularly in key sectors like the garment industry.