BURMESE PRIVATE SECTOR VIEWS OF THE ECONOMY

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000859

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 09/21/2016
TAGS: EFIN ECON PGOV IMF BM
SUBJECT: BURMESE PRIVATE SECTOR VIEWS OF THE ECONOMY

REF: RANGOON 838

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


1. (C) Summary: The Charge on September 4 hosted a
roundtable discussion for the IMF Article IV Consultation
team with Burmese private sector business and economic
observers. The Burmese roundtable participants discussed
problems in the banking industry, the rampant problem of
illegal border trade, the viability of special economic
zones, and lack of access to financial data. The IMF team
agreed that Burma had fallen behind its neighbors due to
mismanagement and serious political issues. End Summary.


2. (C) The Charge on September 4 hosted a lively roundtable
discussion for the IMF team with local bankers and private
economic observers. The roundtable began with the IMF team,
led by Leslie Teo, providing a broad overview of their
findings. Teo concluded that the Burmese economy is not
performing at the level it should given Burma's economic
potential and resource abundance. Teo and his team
emphasized that the GOB has achieved some positive results,
including higher revenues due to increased tax collections,
improved balance of payments, and liberalization of the
agriculture and oil and gas sectors. However, problems
remain: multiple exchange rates, high expenditures that
outpace revenues, high inflation, and poor resource
allocation (Reftel).

Trade and the Border Areas
--------------


3. (C) After the overview, business participants had a
vigorous discussion of the trade sector. Although the IMF
affirmed that the GOB streamlined the import/export license
process and liberalized the trade of agriculture and oil and
gas products, Burmese participants commented that Burma's
trade situation has not really improved. Businesses must
obtain export earnings before they can legally import, and
while some companies obtain import licenses within 7 days,
the majority still wait up to 21 days for approval. Although
the government claims that it allows rice exports, the GOB
has yet to approve export licenses for commercial companies.
Trade consultant U Kyaw Win noted that rice production in
2007 had decreased due to higher production costs, and
questioned the government's prediction of a two million
metric ton surplus of rice. Legal rice exports do not occur,
he noted, and most exports of rice are illegally sent over
the border to Thailand and Bangladesh.


4. (C) Winston Set Aung explained that based on his survey
of Burma-Thai border trade, he found that 60 percent of
border trade is illegal, and much of this trade enters Burma
through 15 illegal border points. While the Burmese do not
keep good records, Thai officials are aware of what enters
and exits Thailand. Most of the trade, Winston noted, flows
into Burma rather than into Thailand. The majority of
illegal exports to Thailand consist of rice and timber
products. The GOB is unable to control this trade, and
Winston suspects that even more illegal trade occurs on the
Burma-China border. The fact that most trade does not go
through legal channels also means that it does not get
recorded, which explains why reconciling national accounts is
so difficult, IMF economist Lisbeth Rivas added.

Financial Sector Difficulties Abound
--------------


5. (C) Several Burmese bankers complained to the IMF about
the current financial sector, specifically the highly
segmented financial market and restrictions on private bank

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activity. Since 2003, private banks cannot open bank
branches, must restrict deposits, and so do little lending.
The Central Bank, KBZ Bank Consultant U Than Lwin noted,
lacks operational independence and the technical capacity to
make financial sector recommendations to the government. U
Sein Maung, Chairman of First Private Bank, requested that
the IMF make strong recommendations regarding the need to
improve financial operations, level the playing field between
state and private banks, and allow private banks to act like
banks.


6. (C) Ake Lonnberg, IMF Senior Financial Expert, agreed
with the banker's criticisms of the current system. The IMF
recommended that the GOB improve banking supervision to
support the growth and development of private banks. The
Burmese banking sector, he stressed, must be allowed to take
on and manage risks. He also noted that the GOB must also
clearly define the role of state-owned banks, ensure fair
competition between private and state-owned banks, and allow
foreign banks to operate in Burma. Inflation will continue
to be a problem until the Central Bank stops funding the
large budget deficit by printing money, he added.


7. (C) The IMF also discussed with the GOB the wide
variation between the official exchange rate (6 kyat/$1) and
the market rate (1350 kyat/$1). Teo confirmed that the
Burmese officials continue to be reluctant to make any
adjustments in the exchange rate system. The Burmese
participants said almost all Burmese used the market rate
anyway, and concluded that the official rate distorts Burma's
national income accounts. Teo acknowledged that the team had
also been unable to resolve differences about Burma's
national accounts and GDP, but indicated some GOB receptivity
to technical assistance in this area.

Special Economic Zones: Way of the Future?
--------------


8. (C) Cyrus Talati, a World Bank Economist, informed us
that although the GOB plans to establish five special
economic zones (SEZs) by 2015, officials have little
understanding about how the SEZs would function. He believes
that the GOB's interest in SEZs stems from China's success
with these zones, and that ASEAN will help the government
establish them. The GOB has yet to approve a long-pending
SEZ draft law, which provides investment incentives,
including a five-year tax holiday, exceptions for high tech
industries, and favorable land leases. Talati noted that the
government wants foreign banks to provide financial services
in the SEZs, although it remains unclear how these foreign
banks would be regulated.


9. (C) Winston Set Aung, who advised the GOB on the SEZ law,
described the financial incentives as necessary to attract
foreign companies and banks. Local entrepreneurs then
pressured the government to extend those same investment
incentives to them. Winston pointed out that the draft law
fails to create a level playing field for foreign investors,
who under current law pay higher taxes and are penalized by
the exchange rate system. (Note: Foreign companies must pay
all bills in foreign exchange at the official exchange rate,
while local companies pay in kyat at the market rate. End
Note.) Another participant noted GOB plans for an SEZ along
the Thai border that will do contract farming. The GOB, he
explained, sees the SEZs as industrial zones that will
produce for domestic consumption rather than as export zones.
The Charge cited the Thai Ambassador as interested in the
SEZs to keep the Burmese working in Burma rather than
Thailand while receiving Thai-level wages. However, he could
never get any go-ahead from the GOB.

Little Access to Data

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--------------


10. (C) At the end of the discussion, the businessmen
praised the IMF as one of the few organizations that can
obtain information from the GOB. One of the participants
observed that while selected economic data is available on
the internet, the GOB closely controls all fiscal data.
Budget information, which is printed annually, is not widely
distributed and many Burmese doubt the quality of the
statistics. Teo said that officials had been very
forthcoming with statistics, but acknowledged that many of
the categories of statistics they received from the GOB were
marked N/A. The participants requested that the IMF share
the information collected, but Teo explained that the IMF
cannot print or distribute the information without GOB
permission. Teo pointed out that some of the financial data
is available in the International Financial Statistics, but
that not all of the information is current.


11. (C) Even though the Burmese participants have
repeatedly made the same points that the IMF is making,
senior levels of the government are not willing to listen.
Teo allowed that the technocrats are interested, but admitted
that the IMF did not have the high-level meetings that they
had last year and are unsure that their recommendations will
be read at the senior levels. One participant suggested that
next year, the IMF should bring an astrologer if they want to
attract the attention of the senior generals.

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


12. (C) While the IMF is aware of the Burma's economic
problems, it does not fully understand how the economic
system works. Businessmen constantly complain to us about
how difficult it is to do business here -- one must be
connected, willing to pay bribes, or tolerant of the nebulous
regulations regarding investment. The roundtable event
provided the IMF with the opportunity to hear from those
affected by the GOB's poor economic policies. The IMF
appreciated the real world insights they received last year
at the roundtable we hosted, and specifically asked if we
would organize another this year.

VILLAROSA