Collapse of Myanmar’s Fiscal Space

Ten months after the 1 February coup, Myanmar’s fiscal position is in a parlous state. It is painfully clear that the coup has badly impacted the economy.  Revenue sources have dwindled, and the State Administration Council (SAC) junta has turned to rely on non-tax revenues mainly from oil, gas and mining sectors.

The SAC has also responded by reverting the fiscal calendar back to the 1 April-31 March schedule — which Myanmar adhered to between 1974 and 2019. In 2018, the National League for Democracy (NLD) government changed the country’s fiscal calendar to run from 1 October to 30 September of the following year. The SAC has published a six-month mini-budget covering the period 1 October 2021 to 31 March 2022, to shore up shrinking fiscal space and cover up dwindling revenue sources.

As a low-income country, Myanmar’s fiscal position has been made more precarious by the Covid-19 pandemic which started in early 2020. The International Monetary Fund (IMF) has warned that low-income countries face more difficulties recovering from income losses incurred during the pandemic, due to their smaller fiscal capacity and lower vaccination rates. The IMF also recently highlighted policy trade-offs in pandemic recovery measures, including increasing the limited fiscal space caused by the pandemic.

For a developing country like Myanmar, enlarging fiscal space is crucial to containing the Covid-19 spread, and salvaging the economy. Mobilising fiscal and monetary resources and allocating these resources effectively and efficiently were salient among the economic measures in the NLD government’s Covid-19 Economic Response Plan (CERP), in its 2019-2020 fiscal year. In that period, Myanmar received support from international donors for CERP amounting to 1 per cent of GDP (excluding in-kind support).

In the 2020-21 fiscal year, NLD government budget expenditures amounted to 27.5 per cent of GDP (total Myanmar Kyat or MMK34.6 trillion) vis-a-vis revenues of 22.1 per cent of GDP (total MMK27.85 trillion). The NLD budget showed that Myanmar’s finances were already tenuous before the coup, with the net budget deficit amounting to MMK 6.75 trillion, or 5.4 per cent of GDP. International donors funded MMK 1.5 trillion recurrent expenditure in this fiscal year; these were mainly loans from the World Bank (WB), Japan International Cooperation Agency (JICA) and Asia Development Bank (ADB). Despite international support and Myanmar being one of the 44 recipients of the IMF’s Debt Service Suspension Initiative (DSSI), the country spent about 1.7 per cent of GDP in 2020 implementing CERP fiscal measures. This is largely in line with IMF estimates that low-income countries deploy less than 2 per cent of GDP on average in fiscal measures responding to the pandemic.

Myanmar’s fiscal space was already under pressure in 2020 when the Covid-19 pandemic occurred. Following the 1 February coup this year, the banking and currency crisis and the Covid-19 third wave further exacerbated Myanmar’s economic recession. The coup also pushed Myanmar’s already-precarious fiscal position into collapse. Following the coup, major Official Development Assistance (ODA) partners, including WB, IMF, ADB and JICA suspended their loan disbursements and ongoing projects. In April, a joint survey report by foreign business chambers in Myanmar highlighted that the coup had affected almost all companies operating in Myanmar, regardless of nationality, and that most of them were planning to leave after September if the situation did not stabilise.

The SAC’s mini-budget and national plan moves are thus attempts to prove its governing capacity. Despite obvious deteriorating conditions, the SAC seems to wish to refute the fact that the economy will continue to worsen in 2022.

At this time of writing, the situation is far from stable. The participation of civil service employees across major economic sectors in the Civil Disobedience Movement (CDM) had affected the economy earlier, and the public’s refusal to pay electricity taxes has cost the SAC regime trillions of kyats in revenue.  

The SAC’s reversal of the NLD’s change of the fiscal calendar, and the six-month mini-budget may be an effort to increase expenditure and implement an expansionary fiscal policy. Total public expenditure for this period was over MMK18.14 trillion vis-a-vis revenues of MMK12.58 trillion.  The SAC’s National Plan projects GDP growth of 3.8 per cent for the six-month period, which is unrealistic. Essentially, the SAC has tabled a six-month budget which is just a little over half of that NLD 2020-2021 budget. Perhaps the Council is seeking to show, rather unsuccessfully, that Myanmar’s fiscal space has been largely unaffected by the political ructions since the coup.

In the NLD’s mini-budget effective 1 October 2018, expenditure was MMK10.547 trillion vis-a-vis revenue of MMK8.526 trillion. The projected deficit was just over MMK2 trillion. Then, however, the economy was growing well, at above 6 per cent. It is a different story today. The deficit for the SAC’s mini-budget is over MMK5.5 trillion while the economy is in deep recession. To cover this deficit, the SAC may resort to monetisation or printing money. This may lead to increased inflation and further currency depreciation.   

It is impossible to enlarge the fiscal space without support from international donors. Sadly, after the coup, Myanmar lost the opportunity to access funds from the IMF’s Special Drawing Rights (SDRs) allocations which amount to about US$650 billion, and from other funding sources. With the economy projected to contract more than 18 per cent in 2021, the SAC cannot rely on tax revenues either.

The SAC’s mini-budget and national plan moves are thus attempts to prove its governing capacity. Despite obvious deteriorating conditions, the SAC seems to wish to refute the fact that the economy will continue to worsen in 2022.

The near-term outlook for the Myanmar economy thus seems to be a continuation of the spiral downward, with Covid-19 and the coup creating a humanitarian disaster. Granted, members of the Association of Southeast Asian Nations (ASEAN) and the international community are striving to address the humanitarian fallout. But what is happening in Myanmar today, compounded by the escalating conflicts all over the country, is of such a scale and scope that cannot be addressed effectively by humanitarian assistance mechanisms alone. The impact of Myanmar’s crumbling fiscal space and continued economic deterioration will have repercussions long into the future.

2021/272