Myanmar Economic Monitor, July 2021: Progress threatened resilience tested

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Executive Summary

In February 2021 the military assumed power in Myanmar, setting back the country’s democratic transition, and immediately impacting an economy that had already been weakened by COVID-19. The February coup – together with the most recent third wave of the pandemic, which rapidly worsened in June and July – has had significant economic impacts, much larger than those observed after the earlier surge in COVID-19 cases that began in September last year. GDP is projected to fall by 18 percent in FY2021 (year ended September), consistent with a broad-based contraction across all sectors (Figure ES 1). Coming on top of very weak growth in FY2020, this would mean that the economy is around 30 percent smaller in September 2021 than it would have been in the absence of the dual shocks of COVID-19 and coup. Demand has been hit by reduced mobility, lower incomes and employment, logistics and transport constraints, and a reduction in new investment and new orders. Critical health, education, and business services have been disrupted, due in part to the Civil Disobedience Movement (CDM) and associated worker strikes which emerged as a protest against the coup. Liquidity shortages and banking sector disruptions have limited businesses’ ability to pay employees and suppliers. Internet access was heavily restricted through the three months to April. Together with ongoing protests and security fears, these shocks have weakened consumption, investment, and trade, and constrained businesses’ operations and the supply of labor and inputs.

This economic deterioration will be hugely damaging to livelihoods, which for many were already under severe strain. Around one million jobs could be lost, equivalent to 4 to 5 percent of total employment in 2019, and many other workers will experience a decline in their incomes due to reduced hours or wages. This is compounding the welfare challenges faced by the poorest and most vulnerable – including those that were hit hardest by COVID-19 in 2020 – leading to an additional increase in poverty, heightened food security risks, and deeper destitution for those already poor. The share of Myanmar’s population living in poverty could more than double by the beginning of 2022, compared to levels before COVID-19 hit. Even in October 2020, around half of all households had reported reducing food or non-food consumption in response to the surge in COVID-19: with savings now drained even further, additional declines in household consumption are expected, with corresponding impacts on nutrition. Human capital gains of the last couple of decades also have the potential to be eroded. Schools were closed throughout the 2020-2021 year, and closed again in July due to the third wave of COVID-19. Questions remain around the timing of re-opening, the attendance rates of teachers and pupils, and the quality of education that will be provided when schools eventually do reopen.

While the initial economic impacts of the coup were extremely severe, in May and June there were early signs that constraints were easing in some areas. Mobility at retail and transport venues improved after the Thingyan holiday in April, and there were reports that factory workers, bank staff, and some public servants had returned to work. Several international apparel buyers resumed placing new orders with garment manufacturers, and logistics bottlenecks eased. There was also some loosening of restrictions on internet access, with nightly blockages on fixed line broadband connections ending, and some internet applications accessible with mobile data, although only certain online services have been ‘whitelisted’ for use.

Yet overall economic activity remained weak throughout this period. Manufacturing survey data for May and June indicate that output and employment continued to decline from already very low levels (albeit at a slower rate than previous months), while input price pressures grew. All available information suggests that construction activity and employment have remained at very low levels. Farmers have been affected by lower farmgate prices, higher imported input prices, and limited access to credit. Exports in the five months up to and including June 2021 were 18 percent lower than the equivalent period in 2020, while imports were 26 percent lower. In a survey conducted in June, more than three quarters of firms across the country said that the impacts of the coup were worse than what was experienced during 2020 after the second wave of COVID-19.
Firms’ confidence about the future is extremely weak, and there is ongoing uncertainty and concern about how the environment for doing business will evolve.

In addition to its direct health impacts, the third wave of COVID-19 is expected to further weaken economic activity in the final (September) quarter of FY2021, and potentially well into FY2022. The current trajectory of case numbers and positivity rates indicates that the recent resurgence in COVID-19 is a severe threat to lives, livelihoods, and the economy. These impacts have the potential to be significantly worse than what was observed in 2020, given the much weaker state of the economy in mid-2021, and the current lack of capacity in the public health system to adequately respond. Stay-at-home measures and precautionary behavior will restrict mobility, further weaken consumption and investment, and result in additional disruptions to businesses’ operations. External trade will also be constrained by recently imposed closures of border crossings.

A lack of liquidity has made it more difficult for individuals and businesses to make and receive payments, and continues to constrain economic activity. Despite bank branch re-openings and several interventions from the Central Bank of Myanmar (CBM), physical currency remains in short supply, at least in part due to a shortage of the raw materials needed to print banknotes. Access to banking services remains limited. Banks are continuing to impose strict withdrawal limits, and long queues at bank branches and ATMs persist. Trust in the formal banking sector appears to have largely diminished, with informal systems and markets emerging to allow customers to access physical kyat currency and make payments.

As at mid-July, the kyat reference rate had depreciated by around 23 percent against the US dollar since the end of January. The CBM has sold US dollars into the market to mitigate downward pressure on the exchange rate and alleviate foreign currency shortages, but reports indicate that US dollars remain difficult to access. At the same time, the exchange rate depreciation, together with trade and logistics constraints (and external factors in some cases), has led to significant price rises for imported goods. Fuel prices are up around 50 percent since the end of January. But weaker demand, particularly for discretionary purchases, is likely to have partly offset these inflationary pressures. Nevertheless, average annual inflation of 6 percent is projected for FY2021, which would be consistent with a significant acceleration in inflation in the second half of the year.

The fiscal position will be further strained by the dual shocks of COVID-19 and coup, which are affecting revenue collection and financing. In recent years fiscal policy has been structurally constrained by low revenue collection, with tax revenues at around 6 percent of GDP among the lowest in the world. With limited deficit financing options, the further reduction in revenues will limit the envelope for spending on critical public services, in an environment where the capacity to spend effectively is also likely to be constrained. Alternatively, a return to reliance on large-scale CBM financing is possible, but this would unwind gains made in recent years to reduce deficit monetization and could potentially have significant impacts on the exchange rate, inflation, and the overall credibility of macroeconomic management.

Amid substantial uncertainty around the magnitude and duration of recent economic shocks, there are large risks associated with these projections. Relatively severe economic impacts already appear to have persisted for longer than what was assumed even in March, when we projected a 10 percent contraction in GDP in FY21.
The third wave of COVID-19 will have substantial additional economic impacts in the September quarter, although the magnitude of these impacts will depend on how the outbreak evolves. In the near term, the outlook will depend on the public health response and the impact of containment measures, the actions of the military authorities, the persistence of the resistance and civil disobedience movements, the political and security situation, and the responses of the private sector and external investors and trading partners.

Over the longer term, recent events have the potential to jeopardize much of the development progress that has been made over the past decade. Through their impact on the fundamental drivers of economic growth – physical capital, human capital, and productivity – the impacts of the dual shocks could persist for many years into the future. Foreign Direct Investment (FDI) commitments have fallen, with implications not only for the capital stock, but also for access to foreign skills and technology, which are critical for the development of local industry. High levels of uncertainty about the future evolution of the economy and economic policy are reducing the incentives to invest. Since February the environment for doing business has worsened considerably, impacting productivity across the economy as scarce resources are allocated toward dealing with supply-side constraints. Lost months of education at school and university are of critical concern, including because of the longer-term implications for the accumulation of human capital and productive capacity. With these fundamental drivers of long-term growth at risk, there are already early signs of increased dependence on extractive and/or illicit activities, and a return to the inward-looking policies that have characterized much of Myanmar’s history. But moves in these directions would unwind much of the progress that has been made over the past decade to open the economy and build a foundation for more inclusive, sustainable growth.