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 RANGOON 00000859 001.2 OF 003 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 RANGOON 00000859 002.2 OF 003 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 RANGOON 00000859 003.2 OF 003 -------------- ¶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