"Executive Summary Since the beginning of 2022, Myanmar’s economy has faced a series of external and domestic shocks. The war in Ukraine has caused steep increases in global prices of fuel and fertilizer, which have passed through to a broader range of goods and services. This has led to a sharp rise in input costs across all industries, and fueled inflation which in turn further strained real household incomes. Domestic electricity shortages have also impacted households and businesses across the country. The security environment has deteriorated further in northern and southern regions, while Chin and the Dry Zone remain embroiled in severe conflict. This has disrupted economic activity, with one fifth of all firms (and two fifths of all agricultural firms) surveyed by the World Bank in May 2022 indicating that conflict was the most important challenge to their operations. Notwithstanding these shocks, some parts of the economy have stabilized and even recovered somewhat since late 2021, demonstrating the resilience and adaptability of Myanmar’s businesses. Firms have reported operating at higher capacity in 2022 than in 2021, particularly in the manufacturing sector. The manufacturing Purchasing Managers’ Index reached neutral levels in the first half of 2022, after a long period of contraction. Garment manufacturers – mainly reliant on external demand –seem to have recovered relatively strongly, as demonstrated by the ongoing expansion in manufactured exports since mid-2021. Construction activity has also picked up as work on several projects has restarted after a long pause last year. This improvement in economic activity has been supported by a rise in mobility, with workplace mobility returning to pre-pandemic levels in June after substantial dips in 2021. The fourth wave of COVID-19 transmissions was much less severe than expected in January, with the number of recorded cases (and the severity of those cases) significantly lower than during the third wave in mid-2021. But activity in other industries and services remains weak, as declining real household incomes have weighed on domestic demand. Despite the recovery in mobility at retail and transport venues, World Bank household survey results from April 2022 suggest that real consumption – particularly of discretionary nonfood items – had declined from a year earlier. Household survey results indicate that job losses, reduced work hours and lower wages and incomes from household farms and businesses have all contributed to a reduction in nominal household incomes. Real household incomes were further eroded by sharply rising inflation, with the latest available data indicating that CPI inflation accelerated to 17.3 percent (yoy) in March, driven by sharp increases in the prices of food and fuel. The weakness in private consumption was corroborated by the May 2022 firm survey results, which indicated that retail and wholesale firms’ sales had fallen by more than a quarter from a year earlier. Rising costs have affected the operations of all businesses, squeezing profit margins. Increases in global oil prices – exacerbated by the Ukraine conflict – have driven pronounced increases in domestic fuel prices and transport costs, as well as in the cost of running diesel generators to compensate for recurring electricity outages. Over the first half of 2022, the local price of fuel rose by around 70 percent. Kyat depreciation, supply chain disruptions and the spillover effects of higher transport prices have resulted in price increases for a broader range of imported inputs, squeezing already thin profit margins. Increases in the price of fertilizer and other agricultural inputs have prompted a reduction in their use, with negative implications for future crop yields. Despite a narrowed current account deficit, external balance of payment pressures have become acute. The current account deficit narrowed in the year ended September 2021, due to a narrower goods trade deficit (with imports contracting by more than exports in FY2021), sharply lower travel and other services receipts, and a 30 percent decline in recorded overseas remittances. But there were more pronounced pressures on the financial account, with foreign direct investment down by about two thirds from the previous year, substantial outflows of foreign currency deposits, and sharp declines in other net financing flows through the year. Together these resulted in a recorded reduction in foreign exchange reserves of close to US$ 1 billion in the September quarter 2021. To the extent that these trends have continued, it is plausible that foreign exchange reserves have fallen to insufficient levels as at mid-2022 (with some reserves also inaccessible due to foreign sanctions). More recent data indicates that the US dollar value of goods imports has increased by more than goods exports in the first half of 2022, driven largely by rising imports of intermediate inputs, while FDI commitments remained very weak. This implies that neither net trade flows nor FDI flows have provided additional support to the balance of payments this year. External pressures have been compounded by reversals of previous policy reforms. Undoing previous gains in macro-economic management, the authorities abandoned the managed float exchange rate regime, fixing the official reference exchange rate at an overvalued level not reflective of market supply and demand. In a bid to stem foreign exchange pressures the authorities also imposed foreign exchange restrictions. This has led to shortages of US dollars and a growing spread between official and parallel market rates (which had reached around 20 percent as at mid-July). In combination with onerous import license requirements, these foreign exchange restrictions have led to particularly significant impacts on the domestic supply of fuel, resulting in shortages and the emergence of a parallel fuel market to circumvent the authorities’ efforts to impose price controls. Meanwhile, the imposition of kyat conversion and surrender requirements on foreign exchange earnings (and deposits) has effectively acted as a tax on exporters, with signs that the external price competitiveness of agricultural exports has been adversely affected since these measures were imposed in April. A recent central bank direction requiring banks to facilitate the temporary suspension of foreign loan repayments is intended to ease external liquidity pressures, but if implemented will likely reduce the creditworthiness and market access of Myanmar’s corporate and financial sectors. While cash liquidity constraints appear to be easing, weak financial sector balance sheets are constraining credit growth. Discussions with industry representatives indicate that non-performing loan and delinquency rates are high, having continued to rise since the start of the pandemic in 2020, with banks providing relief and rescheduling repayments on a customer-by-customer basis. Ongoing declines in asset quality have in turn prompted a cautious approach to new lending. While withdrawal limits remain in place, it has become easier to obtain kyat from ATMs and bank branches, in part due to a recovery in bank deposits. The fiscal position has deteriorated, accompanied by shift of public spending away from critical public services. Tax collection declined from 6.5 percent of GDP in FY2020 to 4.9 percent of GDP in FY2021. Losses in large energy State Economic Enterprises (SEEs) have also contributed to an overall decline in revenue (in nominal kyat terms) of almost 30 percent. The fiscal deficit rose to around 9 percent of GDP in FY2021, with spending also falling – due to weak budget execution – but by less than the decline in revenue. Given reductions in other financing sources, there has been a return to reliance on central bank financing, in another sign of reversal of previous macro-fiscal reforms. Despite the critical importance of health, education, and social protection for livelihoods and human capital accumulation, public spending on these services has declined and budget allocations to these sectors have been sharply curtailed. The impacts of COVID-19 and the aftermath of the military coup are estimated to have erased nearly a decade of poverty reduction progress. Estimates based on the latest available data indicate that poverty has doubled compared with its level in March 2020, with about 40 percent of the population now living below the national poverty line in 2022, matching levels of poverty a decade ago. Inequality is estimated to have worsened, with those already poor falling into deeper destitution. Moreover, household survey data indicate a movement of labor away from service industries and into agriculture over the past 18 months, as internal migration from cities to rural areas has been used as a coping mechanism to deal with job loss. However, this shift to lower productivity agriculture implies an overall decline in labor productivity, which in turn has dampened household incomes. Lower household incomes in conjunction with higher food and fuel prices and ongoing credit/liquidity constraints have magnified risks of food insecurity, though these risks may have been at least partially offset by a pick-up in subsistence production. Household surveys indicate that coping mechanisms are under increasing strain, with over half of all households reporting cuts to non-food consumption, and significant proportions across the income distribution reporting cuts to food consumption, borrowing from friends and family, and sales of assets. While livelihoods have come under increased stress since 2020, public sector support has declined sharply, with virtually no households reporting receiving any form of social assistance in May 2022, in contrast to the 43 percent of households which reported receiving cash assistance in October 2020. Amid persistent domestic and external headwinds, the economy is projected to only recover modestly in FY2022, implying continued pressure on incomes and livelihoods. Following the estimated 18 percent contraction in FY2021, GDP is projected to increase by 3 percent in the year to September 2022. The absence of a substantial rebound in FY2022 – with GDP still around 13 percent lower than in 2019 – is indicative of the severe supply- and demand-side constraints that continue to impact economic activity. At the aggregate level, the slight upward revision of our growth projection from the 1 percent growth forecast in the January MEM reflects the much less severe than expected impact of the fourth wave of COVID-19 in February and March. The manufacturing and construction sectors are driving most of the modest growth expected this year, with services sector activity constrained by weak demand and agricultural production hampered by higher input prices, logistics constraints, and conflict. Inflation is projected to remain elevated given persistent impacts from kyat depreciation, logistics constraints, and still-high global prices (despite a recent easing in some food and fertilizer prices). CPI inflation is projected to average 15 percent in FY22, with year-on-year inflation peaking in the second half of the year). The current account deficit is expected to widen slightly, with goods imports increasing by more than goods exports in the year to date, and services exports expected to remain weak. The fiscal deficit is expected to remain elevated in the twelve months to September 2022. Both expenditure and revenue outturns worsened significantly in FY21, and only a partial improvement in each is expected in the following 12 months..."