BURMA'S IMPORTERS TAKE ANOTHER BLOW

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000764

SIPDIS

SENSITIVE

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

E.O. 12958: DECL: 06/17/2014
TAGS: ETRD ECON PGOV BM
SUBJECT: BURMA'S IMPORTERS TAKE ANOTHER BLOW

CLASSIFIED BY: COM CARMEN MARTINEZ FOR REASONS 1.4 (B,D)


1. (SBU) SUMMARY: A PLAN TO STICK IMPORTERS WITH HUGE NEW
CUSTOMS EXPENSES IS PAR FOR THE COURSE. IT ADVANCES THE
GOB'S DUAL ECONOMIC PRIORITIES -- RAISING REVENUE WITHOUT
REFORMING THE DECREPIT TAX SYSTEM AND DISCOURAGING IMPORTS.
THE IMPACT ON THE ECONOMY IS HARD TO PREDICT. FLOURISHING
SMUGGLING AND UNDERINVOICING MAY NEGATE MUCH OF THE BURDEN,
BUT THERE COULD BE SOME INFLATIONARY PRESSURES. END SUMMARY.

SMOOT-HAWLEY BURMA STYLE


2. (SBU) BURMESE AUTHORITIES HAVE INCREASED DRAMATICALLY THE
COST FOR IMPORTERS BRINGING THEIR PRODUCTS IN LEGALLY. AS
USUAL THERE WAS NO WARNING OF THIS MOVE AND NO OFFICIAL
ANNOUNCEMENT OR EXPLANATION. HOWEVER, IMPORTERS TELL US THAT
CUSTOMS OFFICIALS ON JUNE 15TH BEGAN ASSESSING DUTY FOR THEIR
PRODUCTS AT AN EXCHANGE RATE OF 450 KYAT/$. PREVIOUSLY THE
RATE WAS 100 KYAT/$. THUS, TO BRING IN A $100 PRODUCT
FACING, SAY, A 5 PERCENT TARIFF THE IMPORTER WOULD HAVE TO
SHELL OUT 2250 KYAT (ROUGHLY $2.40 AT THE BLACK MARKET RATE)
IN DUTY RATHER THAN 500 KYAT (ABOUT 55 CENTS) UNDER THE
PREVIOUS SYSTEM.


3. (SBU) ON TOP OF THIS, THE MINISTRY OF FINANCE HAS RAISED
TENFOLD THE COMMERCIAL TAX, PAYABLE ON ALL IMPORTED ITEMS
MEANT FOR RESALE EXCEPT FOR FIVE ESSENTIAL COMMODITIES. THIS
TAX WAS REDUCED 90 PERCENT IN 1996 DURING THE LAST ADJUSTMENT
OF THE CUSTOMS EXCHANGE RATE. IT HAS NOW BEEN RETURNED TO
ITS 1996 LEVEL. THE OVERALL SITUATION FOR IMPORTERS HAS BEEN
FURTHER EXACERBATED BY A 15 PERCENT DEPRECIATION OF THE KYAT
OVER THE LAST MONTH (THUS INCREASING THE COST OF "EXPORT
DOLLARS" NEEDED TO APPLY FOR AN IMPORT LICENSE).


4. (SBU) THIS NEW POLICY IS NOT ILLOGICAL (THE GOB NEEDS
REVENUE AND IMPORTERS HAVE BEEN BENEFITING SINCE 1996 FROM A
TAX BREAK AND AN EXCHANGE RATE FAR BELOW MARKET LEVEL) AND IT
FITS WELL INTO THE GOB'S TWIN ECONOMIC "STRATEGIES" OF
SEEKING NEW SOURCES OF REVENUE AND LIMITING IMPORTS.
HOWEVER, IT BURDENS AN ALREADY TROUBLED SECTOR AND WILL DO
LITTLE TO FIX LARGER SYSTEMIC PROBLEMS WITH REVENUE
ENHANCEMENT. IN LIEU OF CREATING A FUNCTIONING INCOME TAX
SYSTEM, AUTHORITIES HAVE IN RECENT MONTHS SOUGHT TO RAISE
MONEY BY IMPOSING HUGE NEW CAR TAXES, SHAKING DOWN LOCAL AND
FOREIGN BUSINESSES, AND ARE NOW EXPANDING CUSTOMS REVENUE
WITHOUT RAISING TARIFFS. SIMILARLY, FOR SEVERAL YEARS NOW
THE GOB HAS TRIED TO CONSERVE FOREIGN EXCHANGE AND PROMOTE
IMPORT SUBSTITUTION INDUSTRIES BY STARVING THE ECONOMY OF
IMPORTS -- THOUGH PREDICTABLY BANNED OR RESTRICTED IMPORTS
FLOW FREELY OVER THE BORDER FROM THAILAND AND CHINA.

CRANKY CRONIES


5. (C) ACCORDING TO A WELL-CONNECTED BUSINESSMAN, WHEN
HEARING OF THIS NEW POLICY -- ALLEGEDLY HATCHED BY TRADE
POLICY COMMITTEE CHAIRMAN, AND SPDC NUMBER TWO, VICE SENIOR
GENERAL MAUNG AYE -- THREE OF THE SPDC'S TOP BUSINESS CRONIES
APPROACHED PRIME MINISTER GENERAL KHIN NYUNT TO COMPLAIN.
APPARENTLY THE PM PROMISED TO RAISE THE ISSUE WITH BIG MAN
SENIOR GENERAL THAN SHWE AT THE NEXT CABINET MEETING, BUT
WOULD NOT COMMIT TO ANY FAVORABLE RESULT.

COMMENT: BLACK MARKET WILL SAVE THE DAY


6. (C) IT IS HARD TO PREDICT THE IMPACT ON THE ECONOMY OF
THIS MOVE. WITH THE BANKING SYSTEM STILL IN TATTERS,
BUSINESSPEOPLE WILL BE HARD PRESSED TO COME UP ON SHORT
NOTICE WITH HUGE QUANTITIES OF KYAT TO PAY OFF THEIR LARGE
NEW CUSTOMS LIABILITIES. HOWEVER SO MANY OF BURMA'S IMPORTS
(PARTICULARLY CONSUMER GOODS) COME "DUTY FREE" VIA BLACK
MARKET SMUGGLING OR THROUGH WIDESPREAD ABUSE HERE OF THE
INTERNATIONAL DUTY FREE SYSTEM. THERE IS ALSO A LONG
TRADITION OF UNDERINVOICING OF IMPORTS AND THEN SETTLING THE
DIFFERENCE INFORMALLY VIA THE GLOBAL HONDI REMITTANCE
NETWORK. THESE TWO MODALITIES WILL CERTAINLY BECOME MORE
POPULAR TO EVADE THE NEW COSTS. HOWEVER, THE POLICY COULD
HAVE AN INFLATIONARY IMPACT, BUMP UP THE VALUE OF THE DOLLAR,
AND DRAMATICALLY LIMIT THE VOLUME OF SOME CRUCIAL IMPORTED
INPUTS. END COMMENT.
MARTINEZ