BURMA: WHO WILL PAY THE PRICE FOR FREEING RICE?

UNCLAS SECTION 01 OF 03 RANGOON 000563

SIPDIS

SENSITIVE

STATE FOR EAP/BCLTV, EB
BANGKOK FOR FAS
COMMERCE FOR ITA JEAN KELLY
TREASURY FOR OASIA JEFF NEIL
USPACOM FOR FPA

E.O. 12958: N/A
TAGS: EAGR ETRD ECON BM
SUBJECT: BURMA: WHO WILL PAY THE PRICE FOR FREEING RICE?

REF: RANGOON 448


1. (C) Summary: The GOB's official announcement of its rice
liberalization policy answered the questions: who, what,
where, and when. However, why, how, and how much are still
vague. Until these questions are answered, the success of
the new policy will be uncertain. However, we are encouraged
by the direction the government seems to be taking in the
agricultural sector, and hope that it will continue. End
summary.

Unfunded Mandates


2. (SBU) The details of the government's new rice policy,
announced officially on April 24, were largely as reported in
reftel. However, there are four key areas left unaddressed
or vague in the regime's announcement. First and foremost is
the question of funding for the new reform policy. The
government avows that it will no longer force farmers to sell
in advance, at prices well below the market, a certain number
of baskets of paddy. Instead, the GOB will procure from
merchants at their "purchase price" whatever milled rice (or
unmilled paddy) it needs for supplementing the incomes of
civil servants and the military. Ministry of Agriculture and
Irrigation (MOAI) officials tell us that the GOB, through the
newly formed "Myanmar Rice Trading Steering Committee," will
play a role in setting this "purchase price" though it will
be market-driven.


3. (SBU) It is unclear how the regime will finance these new,
more expensive purchases. Even if the government buys
cheaper paddy from merchants, the Ministry of Commerce's
Myanmar Agriculture Produce and Trading (MAPT) company could
face procurement costs as much as 40 billion kyat (roughly
$40 million) higher than last year. In the government's
recently published budget, there is no increase reflected in
expected expenditures for the Ministry of Commerce or MAPT.
However, supplementary appropriations are legal and routine,
and deficits, including the deficits of state economic
enterprises like MAPT, are funded automatically by the
Central Bank. In short, if all else fails, there is always
the printing press.


4. (SBU) A high-ranking MOAI official agreed that MAPT would
be on the hook for much larger procurement expenses than
before, and that this issue would have to be monitored
closely. However, he pointed out that expanded production in
the long run should drive down domestic prices, and thus
MAPT's expenses. Also, under the policy proposal the
government is set to benefit richly from expected increases
in rice exports. The government already nets 10 percent from
a tax on all exports, a practice that will continue.
However, in this new export regime, traders will have to turn
over 50 percent of after-tax foreign exchange earnings to the
government, in exchange for 50 percent of the trader's
documented kyat expenses, plus some "acceptable," but yet
undetermined, profit margin.


5. (SBU) There is also the possibility that the government
may choose to cover the cost of the new policy with new
taxes, particularly on agriculture. Up to now, the only
significant taxes farmers paid in Burma were those implicit
taxes applied through government procurement at below market
prices. With that procurement now ended, farmers should be
fair game for new and more efficient taxes, particularly
taxes on land. Part of the proceeds from these taxes could
be applied, if the government sees fit, to the cost of a rice
subsidy.


6. (SBU) Another option would be for the government to cut
its rice subsidies to government employees (about 80 million
baskets per year) and/or replace it with a salary increase.
Rumors of such an increase have been floating around for
several months. However, this raise did not materialize with
the commencement of the new fiscal year (April 1),and there
is no hint from the budget numbers that such a huge increase
in spending is in the cards. Absolute cuts in the rice
subsidy, meanwhile, are possible, but would be politically
unlikely.

No Credit, No Education, No Problem!


7. (SBU) The serious question of credit was also not
addressed in the GOB's policy proclamation. Starting this
monsoon crop cycle (June),farmers will not receive the
advance procurement payments from MAPT that, while small,
were the main source of credit for purchasing fertilizer,
seeds, diesel fuel, and other inputs. According to the MOAI
official, this issue has not been resolved. The banking
sector will be little help, with private banks under water
and the state-owned Myanmar Agricultural Development Bank
lending a maximum of 5,000 kyat ($5) per acre. MOAI and rice
merchants forecast that farmers will muddle through by taking
loans, at high interest rates, from the large informal
financial sector and, ironically, by making advanced sales to
consortia of rice merchants and to MAPT.


8. (SBU) Similarly, the question of needed technology and
education was left unresolved. A Union of Myanmar Federation
of Chambers of Commerce and Industry (UMFCCI) official told
us that his organization was working with FAO to establish
some small training seminars for entrepreneurs and possible
fact-finding trips to the newly liberalized rice markets of
Vietnam and Cambodia. However, he complained that the regime
had made no mention of any new training programs or education
above the existing, inadequate agricultural extension and
research programs. The MOAI Director General for Planning
admitted that there had been no new money extended for
training and education in the recent Ministry budget despite
his division's regular requests. However, his division and
the Ministry were working informally to get whatever
technical advice it could from Japan, South Korea, and from
Burma's ASEAN neighbors.

Why Now?


9. (SBU) Perhaps only Than Shwe's astrologer knows for sure
why the SPDC chose to introduce such a major new initiative
just before planting began. We believe the new policy had
been building momentum for some time, influenced by intense
lobbying from the UMFCCI and the MOAI, and a number of other
factors. First, domestic pressure on the government due to
record high rice prices was making rice a political hot
potato. The transfer of responsibility to the private sector
will give the GOB a scapegoat should the price of rice
continue its upward climb. Second, SPDC Senior General Than
Shwe was reportedly much impressed during his recent visit to
Vietnam by that country's success in liberalizing its rice
exports, adding to the regime's comfort level in privatizing
its own rice market. Leaders here often return from abroad
with "good ideas" that are announced and implemented with
unusual alacrity.


10. (SBU) Another factor that cannot be ignored is the
influence of the work Japanese economic experts have been
doing with their Burmese counterparts to put together a
comprehensive economic structural reform roadmap. High on
the list of priorities is the need for agricultural reform,
particularly of the rice sector. According to a MOAI
official, this advice had significant resonance among some
Burmese government officials. The Japanese ambassador to
Burma agreed with this assessment, telling the COM recently
that he thought Japan's agricultural recommendations had had
a definite impact on the GOB's decision to open the rice
market.

Rice Liberalizations Good, But Not Enough


11. (SBU) Traders are also questioning their ability to buy
and sell on a country-wide basis. Right now, military
commanders in the countryside are under orders to maintain
local self-sufficiency, and have powers to block trade across
district lines if that self-sufficiency is threatened. As a
result, in late April in northern Shan state, the regional
commander was posting signs forbidding any transfers of rice
between districts in southern Kachin and northern Shan
states, even as the new rice liberalization measures were
being announced. If the new rice marketing policies are to
work properly, the government will have to not only free the
trade, as it has, but also unify the market by curtailing the
powers military commanders now have to limit commerce. If
that is not done, the free market policies will have, at
most, only localized effects.


12. (SBU) Likewise, rice liberalization cannot succeed in an
economic policy vacuum. Without complementary reforms (such
as a reduction of price inflation and re-establishment of
some functioning formal financial system),farmers and
merchants will not be able to take full advantage of the
benefits of a free rice market.

Only the Beginning?


13. (SBU) It's hard to know at this early stage whether rice
liberalization is the vanguard of a host of agricultural
reforms or just an isolated action. Businessmen, rice
merchants, foreign diplomats, and government officials are
all in the dark. We can hope, though, that the move on rice
will give courage to those in the private sector and various
ministries who have been pushing for fundamental agricultural
and economic reform measures. MOAI officials have told us
they are going to push for a reform of the agriculture
taxation system as soon as possible. The Japanese government
is trying to further bolster economic reformers by outlining
clear objectives and strategies. We too can assist by
providing examples of U.S. "best practices" and offering
whatever we can to the anemic, but burgeoning, private
agricultural sector.
Martinez