Myanmar’s multiple exchange rate framework, introduced in mid-2022, has substantially affected agricultural incentives. By requiring exporters to convert part of their foreign exchange earnings at below-market exchange rates, the system depressed domestic prices of export crops. At the same time, foreign exchange shortages and import restrictions increased the cost of imported agricultural inputs. Both exchange rate regulations and international agricultural prices, however, have changed substantially over the past four years. This note examines how these changes have affected domestic agricultural prices and the incentives facing producers and traders during the current monsoon season.
Key Findings - Download the Report
- The implicit export tax and export margins have declined substantially, bringing local prices closer to international prices. The implicit export tax – the wedge between the international prices converted at formal and parallel exchange rates – was high when the multiple exchange rate framework was introduced but has since declined, reflecting changes in the share of export earnings that exporters are required to surrender at below-market exchange rates. At the same time, the exchange rate regime has compressed export margins, in some cases to zero or below, contributing to a reorganization of agricultural export markets. Foreign exchange shortages and the “Export First Policy” appear to have encouraged agricultural exporters to partner with importers that can access foreign exchange at more favorable rates. Such arrangements allow some agricultural exporters to mitigate the effects of the implicit export tax and remain active despite low or negative margins from exporting directly.
- Import restrictions and foreign exchange constraints have increased the domestic prices of imported agricultural inputs. Urea – the most important inorganic fertilizer used in the country – has, however, remained broadly aligned with international prices, partly because of the government’s fertilizer reference-price system. The system appears to have limited increases in urea prices for farmers, although it has also constrained the margins of agro-input retailers.
- The profitability of fertilizer use has deteriorated substantially. Although fertilizer-use incentives remain better than during the initial period of the Russia-Ukraine war, they are significantly worse than in most recent years. Moreover, fertilizer is only one component of farmers’ production costs. Sharp increases in mechanization costs, driven by higher fuel prices, and in agricultural wage rates, associated with substantial outmigration, suggest that overall farm incomes during the current monsoon season are under considerable pressure.