The Myanmar military’s real weak spot: economic ineptitude

The junta’s gross mismanagement makes it even more unpopular amid currency, trade and banking chaos.
A commentary by Zachary Abuza
2022.09.12
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The Myanmar military’s real weak spot: economic ineptitude Amid shortages and price spikes, drivers line up for fuel in Yangon, Myanmar, on Aug. 12, 2022.
RFA

Sept. 7 marked the first anniversary of the shadow National Unity Government (NUG) of Myanmar’s declaration of a defensive war against the military. Few at the time gave them much hope against a well-armed and brutal military that had ruled the country for all but seven of the past 60 years. But 19 months after the coup, Myanmar’s military is mired in a multi-front war and losing ground. Yet, the junta’s greatest vulnerability is the imploding economy.

The junta’s battlefield losses are real. The military is fighting with diminishing resources against a surprisingly durable alliance of the NUG, some 275 People’s Defense Force paramilitary groups under its chain of command, and several ethnic resistance organizations. There were more than 6,600 individual clashes in the past year.

A new report by the Special Advisory Council, a panel of former U.N. experts, contends that the junta only has effective control over 17% of the country, while the NUG and its allies control 52%. The remainder is contested space, and often the target of indiscriminate shelling against civilian communities and arson which has so far destroyed about 28,000 homes.

In addition, hostilities between junta forces and the well-armed Arakan Army, which has not formally aligned itself with the NUG, are escalating, putting more strain on the military.

The NUG has stepped up its attacks in cities, including bombings and the targeted assassination of military regime officials and their cronies. These attacks undermine the assertions of stability and normalcy from the State Administration Council (SAC), as the junta is formally known, to an urban population unaccustomed to war.

Estimates of junta casualties vary. The NUG says, perhaps optimistically, that 20,000 junta troops have been killed with an unknown number of wounded. (Conventional estimates are that the number of wounded are three times the number of killed in action). Others put the toll much lower, but it’s clear the military is suffering significant losses. It is also facing defections and desertions, while the NUG and allies are capturing more military personnel.

The military continues to wage its “four cuts” strategy, a doctrine based on terrorizing the population into submission. The NUG acknowledges that it has lost some 1,500 resistance fighters and 2,200 civilians in the year; both numbers are probably low estimates.

Yet the military has been unable to cow the civilian population into submission. The civil disobedience movement has continued, with daily protests breaking out across the country.

This year, Myanmar’s kyat has lost 60 percent of its value against the dollar, briefly trading at a record low, below 4,000 kyat to the U.S. dollar, while the official conversion rate is 2,100. Credit: AFP
This year, Myanmar’s kyat has lost 60 percent of its value against the dollar, briefly trading at a record low, below 4,000 kyat to the U.S. dollar, while the official conversion rate is 2,100. Credit: AFP
An Economy in Freefall

While the battlefield situation should concern the military, a greater worry should be the free fall in the economy.

The GDP contracted by 18% in 2021 and estimates for 2022, including the World Bank’s forecast of 3% growth, are overly optimistic.

Inflation was 14% in mid-2022 and is now over 18%, with rice prices up 35-50% and gas prices spiking amid shortages. This, of course, impacts production as many firms rely on generators due to electricity shortages. The International Monetary Fund estimates that 1.6 million jobs were lost in 2022, around 7 percent of the workforce. Forty percent of the population is now living under the poverty line.

The currency lost 60% of its value against the dollar in 2022. The kyat briefly traded at a record low, below 4,000 kyat to the U.S. dollar, while the official conversion rate is 2,100.

So what’s causing the collapse of the kyat?

First is the demand for foreign exchange, which is in very short supply. Indeed, the government issued regulations compelling businesses to sell their foreign exchange to the government at official rates.

Everyone is hoarding foreign exchange and gold, which is now trading at record highs. In September, the government announced the sale of some of its gold reserves to help stabilize prices.

The shortage of foreign exchange is so desperate that in July the Myanmar Central Bank issued orders to companies to stop servicing their $1.2 billion in foreign debts or renegotiate their repayment terms, which will have long-term ramifications for the country’s economic development.

Second is that exports, apart from monthly rents on oil and natural gas, have dried up, including border trade with China. That said, the state-run Myanma Oil and Gas Enterprise is still collecting $800 million per quarter in gas export revenues alone. The pipelines to China and Thailand account for 10% of government revenue. This remains the junta’s financial
lifeline.

Third is that the Myanmar Central Bank is burning through its reserves. Prior to the coup it had $7.67 billion in reserves. Today, the junta claims $6 billion, an overestimate that also includes the $1.1 billion frozen by the United States.

Fourth is that according to the Nikkei Asian Review, the Paris-based Financial Action Task Force is about to put Myanmar on its money laundering blacklist. Only two other states, Iran and North Korea, are on the blacklist. This is the international financial community labeling the SAC as a criminal enterprise, incapable of conducting any financial oversight.

While this does not prevent international businesses from doing business in Myanmar, it adds very onerous reporting requirements for every financial transaction. That alone will deter businesses, including Japanese, South Korean, Singaporean, and Thai firms that have continued to do business with the junta.

The fifth point to keep in mind is that the collapse of the kyat is ultimately about rock-bottom confidence in the military-run administration because of its incompetence. The SAC has moved to consolidate full authority over the central bank. In July, it deployed six lieutenant colonels to oversee operations. The SAC recently replaced the bank’s top leadership with
sycophants. The new chairman survived an assassination attempt in April following the imposition of currency controls, while her deputy served as the Tatmadaw’s chief financial officer.

This handout from local news agency Myaelatt Athan taken on Sept. 7, 2021 shows parts of a destroyed communications tower belonging to the military-owned Mytel telecommunications company, which was damaged by opponents of the military coup, in Sagaing. Credit: AFP/Myaelatt Athan
This handout from local news agency Myaelatt Athan taken on Sept. 7, 2021 shows parts of a destroyed communications tower belonging to the military-owned Mytel telecommunications company, which was damaged by opponents of the military coup, in Sagaing. Credit: AFP/Myaelatt Athan
The country’s banking system is on the ropes. The junta has placed officers in all banks to monitor transactions to make sure funds aren’t making their way to the NUG or the civil disobedience movement. To that end, the SAC impeded the country’s burgeoning mobile banking market, causing irreparable harm, especially to farmers and local merchants.

The dearth of capital needed to carry farmers through the growing season compounds the real problem in the agricultural sector, which is that the lack of foreign exchange has curtailed the import of vital fertilizers and pesticides. The goal of doubling agricultural exports from 2 million tons by 2025 is beyond reach.

The junta’s own Internal Revenue Department acknowledged a 35% decline in revenue in 2021 over the previous year. That is 4.745 trillion kyat ($2.657 billion) in revenue, down from 7.296 trillion kyat ($4.086 billion), due to tax boycotts and a contracted economy.

It’s also worth noting that the military’s two conglomerates, which control more than 100 different companies that dominate Myanmar’s economy, are reeling from sanctions and domestic boycotts. Though we don’t know the extent of losses, the two firms never paid dividends to their “shareholders” (soldiers compelled to buy shares each month based on their rank) in 2021
and are unlikely to do so in 2022.

Major foreign investments, such as the telecoms firm Mytel, a joint venture with the Vietnamese military, are routinely targeted in both bombings and assassination attempts.

So while the military’s fighting force is being hollowed out in clashes and guerrilla attacks across Myanmar, its economic base of support is also under threat. The SAC’s gross mismanagement will allow the NUG to peel away military supporters who see the junta’s economic stewardship as irredeemable. Only a democratically elected government, with the rule of
law and empowered technocrats, will be able to protect their economic interests.

Zachary Abuza is a professor at the National War College in Washington and an adjunct at Georgetown University. The views expressed here are his own and do not reflect the position of the U.S. Department of Defense, the National War College, Georgetown University or RFA.

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