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 RANGOON 00000838 001.2 OF 003 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 SIPDIS 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 RANGOON 00000838 002.2 OF 003 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 RANGOON 00000838 003.2 OF 003 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