Identifier
Created
Classification
Origin
03RANGOON79
2003-01-17 03:36:00
CONFIDENTIAL
Embassy Rangoon
Cable title:  

BURMA: THE ILLUSION OF ECONOMIC STABILITY

Tags:  ECON EFIN BM 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000079 

SIPDIS

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

E.O. 12958: DECL: 01/10/2012
TAGS: ECON EFIN BM
SUBJECT: BURMA: THE ILLUSION OF ECONOMIC STABILITY

REF: A. RANGOON 30


B. 02 RANGOON 1468

Classified By: CDA a.i., Ron McMullen for Reasons 1.5 (B,D)

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000079

SIPDIS

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

E.O. 12958: DECL: 01/10/2012
TAGS: ECON EFIN BM
SUBJECT: BURMA: THE ILLUSION OF ECONOMIC STABILITY

REF: A. RANGOON 30


B. 02 RANGOON 1468

Classified By: CDA a.i., Ron McMullen for Reasons 1.5 (B,D)


1. (C) Summary: Since last Fall, Burma has seen the formation
of new government economic advisory committees, a relatively
stable kyat, and slowing consumer price inflation. Could
this mean the regime is finally taking real steps to improve
the economic situation? Unfortunately not. The exchange
rate stability is illusory, the slowing consumer price rises
mask a still rampant inflation rate. As for the committees,
nothing good can come of them. End summary.

Government Committees: Training Grounds for Corruption


2. (C) As a sign of its earnest efforts to remedy the
nation's economic woes, the regime established in September
several committees to monitor and advise on the nation's
economic crises. These green ribbon committees, all chaired
by top SPDC members and military trustees, are ostensibly
looking at issues ranging from fuel conservation to commodity
price control. While this seems encouraging, local
economists say that such a move is commonplace and rarely
turns into legitimate reform. More likely, some opined,
these committees end up as training grounds for young
officers on how to take advantage of the country's economic
distortions for their own benefit.

Exchange Rates: Pressure is Building


3. (SBU) Nonetheless, statistics collected by the Embassy
show a relatively stable dollar/kyat market exchange rate
over the past two months. The kyat raced from 900 in August
to 1310 kyat/dollar in mid-September before plateauing at
about 1000 kyat/dollar from October through the end of 2002.
This value of the kyat is still lower than it was at the
beginning of 2002 (720 kyat/dollar),and is still 167 times
below the official rate (6 kyat/dollar). However, it is
significant that such stability could come, and endure,
without any evident economic reforms or positive changes in
the business climate.


4. (SBU) As we reported in Ref B, this curious period of
stability is largely due to the government's decision to
remove a major distorting factor from the foreign exchange

market. The military-directed Myanmar Economic Holdings,
Ltd. (MEHL),not required like other importers to cover their
import expenses with export revenues, had been a major
consumer of black market dollars to fund its exclusive right
to import diesel fuel and palm oil for cooking. These import
privileges, unfortunately bred significant corruption and
higher prices. Thus, the regime, in cooperation with MEHL's
new leadership, decided in late 2002 to crack down on MEHL
and re-assign the right to import diesel and cooking oil to
state-controlled entities. This decision in a stroke reduced
significantly the demand for "uncovered" dollars on the open
market. The government also periodically fine tunes the
exchange rate through "administrative measures" (e.g.,
arresting large money changers).


5. (SBU) The government's increasing miserliness on the
granting of import licenses also helps to explain the
stability of the kyat. Over the past several months,
importers have complained about regular GOB refusal of
license requests or extremely slow approval. Also, they say,
even approved licenses are regularly for 50 percent less than
the amount requested. Reflecting this, the recorded value of
imports fell throughout 2002 by about 35 percent, according
to official statistics.

Prices: Consumer Goods Steady, but Inflation Roars


6. (SBU) Despite a drop in the official value of imports,
there has been no sharp rise in the cost of imported consumer
goods in Rangoon. From October through December, the price
changes of our basket of imported consumer items have been
about the same, or in one case lower, than the overall
monthly CPI increase, which itself has slowed over the past
three months. The only significant increase in price in
December's basket came from cooking oil -- perhaps a reaction
to the new government-controlled importing and distribution
arrangement.

7. (C) A number of factors appear to explain this. First,
importers tell us that they have kept their volume steady,
despite tighter import controls, by shifting their purchases
from better quality, more expensive Thai, Japanese, Korean,
and western products to cheaper Chinese goods. Second, for
consumer goods a virile black market here has kept the supply
relatively steady, combined with some import substitution
(particularly in snack foods and dry noodles) and some dip in
demand commensurate with decreasing standards of living.
Finally, the import statistics may be somewhat misleading as
many importers underinvoice to bring in more product for
their dollar's worth of export revenue, covering themselves
by converting kyat earnings at the curbside market and moving
it offshore through the black market exchange system (hon
ti). However, importers tell us that Customs has been
cracking down on this practice lately, unilaterally marking
up the invoice or requiring proof in the form of export
records from the country of origin.


8. (C) Furthermore, broader inflation remains a serious
problem countrywide, especially when combined with stagnant
wages and the eroding value of the kyat. We estimate the
rate for Rangoon in 2002 at about 60 percent. One of the
most serious causes is excess money supply due to the Central
Bank's monetizing of chronic GOB budget deficits. This,
combined with a weak banking sector and the depreciation of
the kyat, has led business people to unload kyat and snatch
up legal assets (especially real estate, cars, gold, and
gems) as fast as they can. The resulting asset bubbles have
been exacerbated by the boom in informal financial
institutions that are investing in these same assets their
surprisingly large deposits (see Ref A). The high cost of
transportation and imported fertilizer and tractors, combined
with supply and distribution problems have also kept rice
prices at historic high levels. Likewise, the dysfunctional
distribution system for fuel has led to steep price hikes for
black market diesel and gasoline.

Comment


9. (C) In short, there is little evidence that the recently
stabilized exchange rate has anything to do with any new
stability in the economy. While regime policies imposing
tighter import controls and reining in the greedy MEHL have
helped economize on foreign exchange and have helped squeeze
out some corruption from the trading system, there has been
no real effort to deal with the excess liquidity generated by
the central government's budget deficit and the still
expanding operations of the unofficial financial
institutions. Absent moves in these areas to deal with the
rapidly expanding money supply, there is little that tighter
enforcement of the GOB's current rules can do. As a
consequence, most people are still looking to a sharp
increase in the exchange rate this spring. Eighteen months
ago, we forecast an exchange rate of 1800-2000 kyat/dollar by
the end of Burmese FY 2002-03 (March 31). Now it appears
that the exchange rate may come in at the low end of that
range, but even that will represent a near doubling of the
exchange rate against the dollar in one year -- not in any
sense a sign of a stabilizing economy. End comment.
McMullen