BURMA SQUEEZES INFORMAL TRADE TO PRODUCE REVENUE

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 001073

SIPDIS

STATE FOR EAP/MLS, INR/TNP, INR/EAP, EB/TPP, EB/ESC,
COMMERCE FOR ITC:JKELLY,
TREASURY FOR OASIA:AJEWELL

E.O. 12958: DECL: 09/20/2015
TAGS: ECON ETRD PGOV PREL BM
SUBJECT: BURMA SQUEEZES INFORMAL TRADE TO PRODUCE REVENUE

Classified By: Econoff TL Manlowe for Reasons 1.4 (b,d)


1. (C) Summary: GOB officials refuse to commit their new
trade regulations to paper, and business reps are too
mistrustful to place orders based on unwritten rules. Recent
announcements of new regulations designed to bring more trade
into the formal sector and increase revenues appear unlikely
to achieve the desired results. Instead, they have only
confused and delayed trade, providing business little
incentive to shift to the formal sector. End summary.

New Regulations
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2. (C) Rangoon and Mandalay businessmen have described for us
problems with the implementation of new GOB trade
regulations. Ministers of Finance and Revenue, Commerce,
Transportation, and Livestock and Fisheries announced new
trade regulations at an August 5 meeting with business
representatives and government officials. When asked if the
regulations, with guidelines for implementation, would be
printed and released officially, the Finance Minister said
they would not, because everyone who needed to know them was
in the room. The new regulations (and some feedback from
business representatives on implementation) include:

-- A waiver of the long-standing requirement for imported
shipments to consist of at least 80% essential items
(machinery, industrial raw materials, agriculture inputs,
medicines, etc.),and no more than 20% luxury goods.
Feedback: Business reps told us that they didn't trust the
verbal GOB announcement, which could be changed at any time,
and most would not try to get a license for luxury goods of
more than 20%. Some that did try, they said, had been
inexplicably refused a license. Also, importer interest in
luxury items is low. Because of weak consumer purchasing
power, these items do not sell as well as essential items,
such as raw materials and industrial inputs.

-- The Cabinet-level "Trade Council", chaired by Vice Sr.
Gen. Maung Aye, now must approve all import and export
licenses (previously necessary only for sensitive shipments).
A new board of business representatives has been set up to
review the prices of goods listed on the application to
reduce government losses from under-invoicing. Feedback:
Sending all imports and exports to the highest government
level for review and approval has created added delays.
Businessmen in Mandalay reported that it took up to three
weeks to get an answer; some refusals had no reason given.
This creates problems both with keeping a promised delivery
date to the buyer and with costs. The kyat has depreciated
approximately 10% since August 15, so exporters lose money by
shipping goods priced at the old exchange rate, and importers
must pay more than they had planned for hard currency.

-- Allowing companies to transfer to another company the
import credit they earned from exporting. Previously, only
exporters who earned hard currency could use those export
earnings to import. Feedback: Illegal transfers between
companies in the past resulted in some significant cases of
fraud, so this should bring transactions above board. This
was generally welcomed by business contacts.

-- Hard currency from sources other than exports, such as
remittances from seamen, and earnings from offshore workers
and garment workers, can now be used to import goods after
paying 10% tax. Feedback: Since most of this money is
repatriated informally, there is little incentive to go
through official channels and incur a 10% loss by paying the
tax. Those that have followed the official policy have run
into difficulty because the relevant GOB officials have not
been issued guidelines, so no one knows what procedures to
follow to collect the tax and give credit for it.

-- A new requirement to identify the exact goods to be
exported before gaining a license to export. Feedback:
Exporters told us they now have to purchase the goods and
submit a photograph with the application. If the license is
denied, they are saddled with goods they are not allowed to
sell. Sources of trade finance hesitate to give credit in
such an uncertain environment. This requirement also creates
a warehousing problem for bulky goods such as beans and
pulses.

Tighter Borders, Broader Problems
--------------

3. (C) Though not announced at the August 5 meetings, border
controls were tightened at about the same time, according to
importers and exporters. GOB military officials are now not
letting many informal shipments through at the border. They
must see official documentation, including proof of payment
of the 10% tax. Businessmen say that, in some cases, the 10%
tax amounts to less than the "fees" they usually would have
to pay to get an informal shipment through the border. With
informal trade, however, they could make three shipments in
the time it takes to get official approval for one, so
ultimately they lose more money. (Note: This applies to
trade in consumer goods and agricultural products. The
impact on larger gray market exports, such as truckloads of
timber, is not yet known. End note.)


4. (C) Some Burmese traders are now also prevented from
bringing their goods right to the border or into China, as
they had before. Now, we were told, Chinese buyers must come
to a collection point inside Burma. This allows stricter
oversight by GOB authorities. When attempting to conform
with the new controls, some businessmen have found that
Chinese banks don't want to open Letters of Credit (L/C's)
for Burmese companies. The Myanmar Economic Bank,
representing the Myanmar Foreign Trade Bank at the border,
prefers only Bank of China L/C business for trade
transactions. Authorities have warned traders against
informal financing and currency exchange.

Comment: Sign Them Up for Trade Policy 101
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5. (C) The GOB may be seeking increased revenues to pay for
higher priced imported fuel, which it continues to subsidize.
Thus, the GOB tries to increase revenue and bring more hard
currency into the formal sector. Strict enforcement of trade
regulations at the border could help, but only if the
regulations are clear, predictable, fair, and efficiently
applied. Refusal to issue regulations in writing, government
servants unsure how to implement, long approval times, and
unexplained license refusals show a lack of understanding
about how to manage trade flows to fill government coffers.
Unnecessary and unpredictable government interference in
trade merely acts as a disincentive. End comment.
Villarosa