IMF CONDUCTS ARTICLE IV CONSULTATIONS

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000838

SIPDIS

SIPDIS

STATE FOR EAP/MLS;
PACOM FOR FPA
TREASURY FOR OASIA:SCHUN

E.O. 12958: DECL: 09/07/2017
TAGS: BM ECON EFIN IMF PGOV
SUBJECT: IMF CONDUCTS ARTICLE IV CONSULTATIONS


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Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4
(b,d)


1. (C) Summary: An International Monetary Fund (IMF) team
visited Burma August 22-September 4 for annual Article IV
consultations. The team found that despite improvements in
revenue collections and more than $2 billion in oil and gas
revenues, the GOB capital expenditures remain high, resulting
in a continuing large fiscal deficit. Inflation continues to
soar, which the GOB cites as a reason to not unify exchange
rates. The GOB is unable to reconcile national accounts to
determine a realistic GDP figure, but the IMF estimates
Burma's real GDP growth to be 3-4 percent, rather than the
12-13 percent touted by the generals. The IMF remains
concerned about declining capacity among government economic
officials and has offered technical assistance to upgrade
skills. The team did not provide detailed findings to us for
confidentiality reasons, but they will be made available to

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the Board. Embassy Rangoon requests a copy of the report
after it is sent to the Board. End Summary.


2. (C) The IMF team was led by Leslie Teo and included
representatives of the World Bank and the Asian Development
Bank. They met Central Bank, Finance, Budget, Planning,
Statistics, Customs, Mining, Energy, Oil and Gas, Electric
Power, Construction, Labor, Industry, Education, Agriculture,
Social Welfare, and Health officials. In addition, they met
with directors of selected State-Owned Enterprises, official
and private bankers, the Chamber of Commerce, and
representatives of Embassies and UN agencies. Unlike last
year, the team did not meet with the Prime Minister (who is
dying in Singapore),although Teo noted that, on a technical
level, this year's discussions were better than last year's.
The team noticed clear capacity issues: experienced, erudite
civil servants are reaching retirement and their replacements
have lower-quality education and little to no exposure to the
world outside of Burma. A key Ministry of Finance contact, a
qualified economist who openly and frankly discusses economic
issues with the IMF, will be retiring shortly and the IMF is
concerned that there are few government officials who could
fill that role. To upgrade skills, the IMF will provide GOB
officials with technical assistance. Teo told us that he
expected that the team's recommendations would be relayed to
the Cabinet, but doubted the Senior General would review the
report.

Resource Allocation and Rising
Inflation Key Concerns
--------------


3. (C) The IMF team arrived in Rangoon just as protests broke
out against fuel price hikes. GOB technocrats claimed credit
for reducing the subsidy going to imported fuel. The IMF
quickly tried to distance itself from any responsibility when
they met with us earlier. Teo said the IMF had never urged
the GOB specifically to reduce that subsidy and acknowledged
the need to educate officials about the importance of taking
into consideration the social implications of policies and
measures to alleviate the impact on the poor.


4. (C) The IMF team told us that Burma's economy is not
performing at the level it should, given the country's
abundant resources and economic potential. The IMF rejected
government GDP growth estimates (12.7 percent in 2006) as
unrealistic, and stated that growth was only 3-4 percent.
The team estimates that real 2007 growth rates will hover
around 4 percent, due to increased production in the
agricultural and oil and gas sectors. Teo also emphasized
that because of increased tax collection and lower spending

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by state-owned enterprises, the government reduced the budget
deficit from 463.4 billion kyat in FY05 to 235.8 billion kyat
in FY06. The IMF believes, however, that the increased
revenues will not offset the surge in capital expenditures in
FY07, and the budget deficit will reach 4-5 percent of GDP.
However, the IMF, working with GOB experts, has found it
difficult to reconcile national accounts to determine a
realistic GDP figure.


5. (C) The real problem, Teo noted, is not the growth rate,
but rather how resources are allocated. The country fails to
see the benefits of growth, as money is controlled by the
military and not spent on education, health, and social
welfare programs that would benefit the poor and raise the
collective standard of living. Despite more than $2 billion
in oil and gas revenues, a majority of Burmese remain poor.
In a departure from the usual Fund advice, the IMF strongly
recommended the GOB increase expenditures on health and
education.


6. (C) Although he could not discuss the statistics in
detail for confidentiality reasons, Teo estimated that the
money supply remains stable at between 2.5 and 3 trillion
kyat. The IMF team estimated that year-on-year inflation was
between 30-40 percent, which is lower than the Embassy
estimate of 57 percent. Inflation is fueled by a loose
monetary policy (printing money),which finances the deficit.
Technical-level officials remain concerned about inflation,
and the government is in the process of updating its consumer
price index, which is based on 1987 prices and uses an old
data basket, to better reflect the current situation. The
IMF suggested that the GOB change its deficit finance plan
and recommended ways to improve Burma's investment climate to
attract new investment.


7. (C) Teo commented that the market rate of the kyat did
not appear to be depreciating dramatically, signifying that
inflation was not spiraling out of control. The market kyat
rate has reached 1350 kyat for one US dollar following the
recent fuel price hike, a 10 percent decline from a year ago.
The IMF reiterated its advice that the government unify the
exchange rate (which varies from the official rate of 6
kyat/$1 on up). Once again, the officials expressed great
reluctance to make any adjustments, and pointed to the
growing inflation rate as a reason against adjusting the
exchange rate at this time.

Some Improvements
--------------


8. (C) The news is not all bad, the IMF explained, citing
positive developments in both the policy and technical
arenas. Teo reiterated the government's success at reducing
the deficit to GDP ratio due to a 50 percent increase in tax
collections and lower spending by state-owned enterprises.
The team also emphasized improvements in the trade sector,
including the streamlining of the process for import and
export licenses, which has improved the balance of payments.
On the technical side, the GOB continues to work with the IMF
to strengthen anti-money laundering efforts, including
improving banking supervision. The team also praised the
GOB's recent actions to make more of its financial data
available to the public on the Central Statistics Agency's
website.

Comment
--------------


9. (C) The IMF team zeroed in on a key point: despite huge

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potential, Burma's severe economic problems result from
mismanagement. As long as the senior generals maintain
power, the economy will continue to decline. They are
interested in increasing revenues but have no intention of
sharing them with the people. Only the military seems
surprised that public discontent has begun to boil over.

VILLAROSA