Editor’s Note: This is one in a five-part series about the impact of hyperinflation around the world. Follow the series in the related content section.
Sri Lanka and Myanmar are among the more recent examples of countries experiencing high inflation. Sri Lanka crossed the hyperinflation threshold of 50 per cent in 2022 and now looks to be on a path to recovery, albeit a rather tenuous one. Myanmar has not yet breached hyperinflationary levels, with a peak rate of 27 per cent, but the country’s economic situation could worsen depending on how the ruling military junta decides to manage the situation.
Sri Lanka: Imbalance of payments
Sri Lanka needs to import many things, which is expensive for an island nation. After a civil war that ended in 2009, the government prioritized providing goods to the domestic market, as well as costly projects meant to draw more tourists, over augmenting foreign trade. This led to an imbalance that widened as income from exports was limited, while payments for imports continued to rise. Before the collapse, Sri Lanka was importing $3 billion more than it exported – an unsustainable shortfall that meant the country ran out foreign currency.
Sri Lanka’s main exports are tea, textiles, and tourism but fewer tourists came after the 2019 bombings in Colombo — and they stopped coming altogether with the COVID-19 pandemic. On top of this, fertilizers were suddenly banned in 2021 – some say to save money, while the government claimed it was because it wanted to move to organic farming. This backfired when tea and rice crop yields fell by 20 per cent, meaning lower tea export revenues. On top of this, Sri Lanka had to import rice to make up for the lost production.
Sri Lanka’s financial situation deteriorated further as the government continually spent more than it earned, which put pressure on the value of the rupee and cut off access to international capital markets. Soaring inflation and economic disaster ensued.
Running on fumes
By early 2022, there were power cuts and shortages of many staples. There was no fuel for ambulances, as Sri Lanka didn’t have enough foreign currency reserves and suppliers were unwilling to deliver more fuel – even for cash – until past due amounts were paid. In May of that year, the government missed a scheduled interest payment on its foreign debt, for the first time in its history.
Sri Lanka’s ruling Rajapaksa family invested heavily in unproductive assets, leaving the country struggling to service its debt for years. The country borrowed more and more – primarily on the belief that tourism would continue to support the economy. Additional debt came at increasingly higher interest rates, and with previous debts still outstanding, Sri Lanka dug itself into an ever deeper financial hole.
While the country had maintained single-digit inflation since 2009, by mid-2022, prices in Colombo were up 55 per cent from a year earlier. Sri Lanka was officially experiencing hyperinflation while living through its worst economic crisis since gaining independence in 1948. Its currency crashed, losing more than half of its value against the U.S. dollar, interest rates surged to more than 30 per cent (since no one wanted to lend to such a high-risk borrower), and hyperinflation ultimately peaked around 70 per cent.
Recipe for disaster
The Rajapaksa family had ruled Sri Lanka for the better part of two decades. Shortly after becoming president in 2019, Nandasena Gotabaya Rajapaksa, a former military officer, who ruled until 2022, secured absolute executive power with the passing of the 20th amendment to the constitution. This allowed for economic mismanagement and ill-fated experiments, like mandatory organic farming.
Sri Lanka’s reliance on imports and tourism made it vulnerable to exogenous events (like terrorist attacks and COVID), exchange rates, and supply chains. Hyperinflation was largely supply driven, as inventories of essential goods disappeared once imports ceased. Too much money chasing too few goods is a recipe for inflation.
To make matters worse, contrary to highly-indebted nations like the U.S. and Japan, Sri Lanka borrowed mostly in foreign currencies. Firing up the printing press would trigger rampant hyperinflation as a lot of heavily-depreciated rupees would have to be printed and converted to repay debt. Conventional wisdom was ignored, however, and reams of new bills were printed in the 12 months prior to Sri Lanka’s debt default.
Following an extended period of loose monetary policy during the pandemic, the normal correlation between inflation and economic growth was absent as inflation and economic growth moved in opposite directions. But, how can prices rise when consumers have less money to spend? This is due to the inelasticity of demand for staples like food and medicine. Reduced spending will not result in lower inflation for essential goods.
These factors combined to bring about a severe economic collapse.
Getting things under control in Colombo
Sri Lanka owed a lot of money to its lenders relative to the size of the economy, but these debts were not large loans for the issuing countries (in this case, China, India, and Japan). That meant that if Sri Lanka were to default on that debt, it wouldn’t have had a huge impact for the countries that held it, so there was little leverage for Sri Lanka as it tried to negotiate forgiveness or repayment terms on that debt.
In the end, Sri Lanka managed to secure a $3 billion bailout package from the International Monetary Fund (IMF). The first tranche was released in March 2023, but specific conditions had to be met to receive the rest. Given ongoing corruption and governance issues, it might be challenging for Sri Lanka to satisfy those conditions, which could mean long delays to access the rest of the bailout money.
The Central Bank of Sri Lanka began tightening monetary policy in August 2021 by raising the Standing Deposit Facility Rate, which is its key policy interest rate. It was raised three times for a total of 200 basis points, before a significant increase in April 2022 – from 6.5 per cent to 13.5 per cent. At the March 2023 meeting, the final hike brought the rate to 15.5 per cent – 11 per cent higher than the start of the tightening cycle.
In conjunction with monetary policy actions, Sri Lanka also implemented a series of policy measures to reduce its heavy dependence on imports, but it will take some time before this has any discernible effect.
Economic stabilization
By late 2022, Sri Lanka was making headway as inflation declined from peak levels of 70 per cent (year-over-year) in September 2022, to 57 per cent by December. Hyperinflation was eliminated as inflation fell considerably in 2023, to single-digits by June.
Sri Lanka adopted the new Central Bank Act in September 2023, which established domestic price stability as the primary objective, with a secondary one of financial system stability. It also created a separate entity to ensure independent monetary policy decision making.
A resurgence in tourism activity helped boost Sri Lanka’s foreign currency reserves and stabilize the rupee. The economic improvements allowed Sri Lanka to resume importing foreign goods. The supply of goods rose; against the backdrop of a weak economy and still-high interest rates, inflation came down to more normal levels.
Still work to be done
A combination of policy measures implemented by both the central bank and the government proved to be key to Sri Lanka’s swift eradication of hyperinflation. The country was able to bring inflation down to the new target range of three to seven per cent within one year, and have the economy on the mend in only 18 months. Maintaining momentum and continued commitment to the enacted reforms will be critical to Sri Lanka’s recovery from this crisis.
Myanmar: Military coup derails once-promising nation
After its economy languished for decades, Myanmar started opening up to foreign investment in 2011. By 2016, the IMF ranked Myanmar’s economy as the fastest growing in the world. The country cut its poverty rate in half; from 48 per cent in 2005 to just below 25 per cent by 2017. Then came the coup.
The military junta seized power again in February 2021, triggering civil war and economic upheaval in what was one of Asia’s most promising emerging markets. The civil war in Myanmar perpetuated a severe economic crisis. The size of the economy is 10 per cent smaller than it was in 2019, making it the only nation in East Asia whose economy hasn’t returned to pre-pandemic levels.
All this means that Myanmar could be on the brink of hyperinflation.
Socio-economic disaster
Civil war has been rapidly undoing years of hard-fought progress, as the middle class shrinks dramatically and a growing contingent of the population is pushed into poverty, according to the United Nations Development Programme (UNDP).
The middle class was halved in three years, as mounting inflation forced residents to radically reduce spending, even on food. As if poverty doubling isn’t bad enough, people are now poorer, with nearly half the population living on less than 76 cents per day.
Millions in Myanmar are out of work after their workplaces closed or were destroyed. Low or no wages, increasingly expensive commodities, and ongoing violence, which is at its worst since the military takeover, has also led hundreds of thousands to flee the country.
Economic meltdown
Myanmar’s gross domestic product (GDP) contracted roughly 18 per cent in 2021, owing to the effects of the coup and the pandemic. The junta has devastated Myanmar’s economy — leaving the country broke and eviscerating more than a decade of strong economic growth.
Even if the conflict can be contained, growth is expected to remain soft for the remainder of 2024 and into 2025 given slowdowns in agriculture, manufacturing, and trade. The absence of tourism is another economic hit for Myanmar. High inflation and currency volatility round out the grim state of affairs.
Military leaders claimed that the economy was recovering and that GDP would grow by four per cent annually. But, a December 2023 World Bank report forecast growth closer to one per cent. Recent developments could curtail Myanmar’s longer-term development potential in the garment industry and across the broader economy.
The country finds itself in a vicious cycle, with people spending less amid runaway inflation and worsening economic conditions.
The value of Myanmar’s currency – the kyat – has cratered, due to a shortage of foreign exchange. It lost almost half of its value since the takeover, with a 16 per cent drop in the first quarter of 2024 alone, which is causing import prices to soar.
Prices just keep going up
In early 2022, Myanmar was hit by a spike in inflation that made it almost impossible to buy anything with the local currency. Prices were rising rapidly, and even basic necessities like food and medicine became prohibitively expensive.
Consumer prices rose almost 29 per cent in the 12 months ending June 2023, and the continued deterioration in the value of the kyat and escalating turmoil have pushed prices up even more. Household incomes are severely strained and food insecurity is a mounting concern.
Food prices have gone up threefold since the coup, with rice up from 60,000 kyat per kilogram to 180,000. According to a rice dealer in Yangon, the most popular variety went for 3,900 kyat per viss – Myanmar’s traditional unit for rice that equals about 1.6 kilograms – which is a 44 per cent increase since the coup.
The price of cooking oil, which is mostly imported, also skyrocketed. Palm oil prices also tripled after the coup. In August 2023, authorities set the reference wholesale price for palm oil at 4,860 kyat, but this price has little relevance for the average consumer in Myanmar, as it’s only the military, their family members and friends, who can purchase palm oil – or anything really – at reference prices.
Junta-nomics
The term “junta-nomics” was first used to describe the egregious economic mismanagement by military dictatorships in Latin America. It’s now a hashtag on Twitter/X that highlights the self-serving and backward economic policies of military-controlled governments around the world, including Myanmar. It’s a clear sign of corruption and mismanagement that there’s rampant poverty in a country with such abundant natural resources and after so much progress had been made.
Since the 1962 coup, Burmese people have grown accustomed to military rule and a junta that isn’t looking out for their best interests. When the junta, which controls the central bank, announced they would issue higher-denomination banknotes, prices immediately soared and the kyat slumped. Bigger bills are the norm during highly inflationary times, to keep pace with higher prices and lessen the volume of bills needed for transactions.
A Burmese economist commented that releasing higher-denomination banknotes wouldn’t be a problem if the junta printed a limited number and distributed them the way they said they would. But, military rulers aren’t known for transparency or honesty when it comes to monetary matters. And right now, they’re desperately short on funds needed to support their war efforts and pay government employees.
Desperate times
The crisis in Myanmar has gotten so bad that the ruling junta is turning to Russia for support and help running elections. This would’ve been unthinkable under democratically-elected leadership.
Myanmar also has the dubious distinction of becoming the world’s top producer of opium (in 2023), surpassing Afghanistan, according to the UN Office on Drugs and Crime. Opium production expanded as the military relies on illicit activities for much of its funding, making it a lucrative source of income.
Myanmar has also become a global hub for online scam operations, where workers are trafficked into the country and forced to work for criminal gangs that operate heavily-secured camps along the border with Thailand.
Headed for hyperinflation?
Inflation remains worrisomely high, but well shy of the 29 per cent rate reached in mid-2023, according to the World Bank. While the junta has not yet resorted to the printing press, the fear is they will eventually do so, as they become increasingly cash strapped.
Myanmar’s economy recovered from its 2021 nadir, when GDP contracted by 18 per cent, but it’s still 12 per cent lower than prior to the coup.
As such, there are many who surmise that the World Bank’s cautious scenario of one per cent growth in 2024 may be beyond reach.
