BURMESE PURCHASING POWER DECREASING AS PRICES RISE

UNCLAS SECTION 01 OF 03 RANGOON 000901

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, EEB/IFD/ODF
PACOM FOR FPA
TREASURY FOR OASIA:SCHUN

E.O. 12958:N/A
TAGS: ECON EFIN PREL BM
SUBJECT: BURMESE PURCHASING POWER DECREASING AS PRICES RISE

REF: A) RANGOON 846 B) RANGOON 749

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1. (SBU) Summary. The sudden increase of fuel prices in mid-August
triggered an immediate increase in commodity and transportation
costs. Although many of these prices have fallen since their
initial hike, prices are still higher than pre-August 15 levels.
Only a few companies increased wages for their workers to counteract
the higher prices and most urban have to get by with their normal
monthly salary, which averages less than $30/month. Inflation
continues to rise and the kyat has depreciated 5 percent since
August 15. While lower-class Burmese feel the effects of declining
purchasing power, companies must grapple with higher overhead costs
and lower profit margins. End Summary.

Effects of the Fuel Price Hike
--------------


2. (SBU) On August 15, the Burmese Government, without prior
warning, increased fuel prices between 66 and 100 percent on
gasoline, diesel fuel, and natural gas (Ref B). Transportation
companies raised their prices accordingly and in the days following,
bus fares rose between 100-300 percent and taxi fares more than
doubled in downtown Rangoon, from 1000 kyat to 2500 kyat
($0.75-1.85). The public was outraged, and beginning August 21,
democracy leaders organized protests against the government which
continue today. The GOB, attempting to undercut the momentum of the
protests, verbally instructed all transportation companies to reduce
fares. Although transportation prices are no longer as high as they
were at the end of August, we find them to be higher than pre-August
15 levels. Taxi fares are now anywhere between 500 and 1000 kyat
higher ($0.37-0.75),regardless of destination. While bus drivers
reduced fares by 40 percent, they also altered bus routes, forcing
people to take more than one bus to get to their final destination,
which require a separate fare for each bus.


3. (SBU) The fuel price hike also triggered a rise in commodity
prices. During the past month, we visited several wet markets to
observe the price fluctuations. On August 15, prices of meat, eggs,
rice, and oil rose between 50 and 100 percent, and many Burmese
rushed to the markets to purchase food before prices could skyrocket
further. Food sellers complained to us that they had no control
over prices, as they had to compensate for higher transportation
costs. They also mentioned that people appeared to be doing
without: many of their customers began to shop elsewhere. Two
weeks after the fuel hike, basic commodities prices began to fall by
100-200 kyats per day ($0.07-0.15),although the cost of certain
luxury food items, such as beef, shrimp, and goat meat, remained
high. By mid-September, prices in the wet markets stabilized,
although at a rate of 500-1000 ($0.37-0.75) kyats higher than
previous levels. While Embassy price figures for a basket of 36
domestic and imported items show a 3.8 percent increase in prices
since July, we estimate that an analysis of all prices would show an
increase of more than 5 percent.

Depreciation of the Kyat,
Reduced Purchasing Power
--------------


4. (SBU) Higher transportation and commodity prices greatly affect
urban Burmese, many of whom cannot afford these higher prices. The
75 percent of the population living in rural areas barely reaches
subsistence levels. According to the Chamber of Commerce, only a
few companies raised wages for their workers between 5,000-10,000
kyat a month, but the majority of businesses, including government
offices, did not. A few companies, such as City Mart and Daewoo
International, provided their workers with a transportation subsidy
to help offset costs, although this subsidy did little to address
rising commodity prices. Several Burmese on the street told us that

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because they earn less than $30 a month, they are finding it
difficult to pay their rent and other bills, let alone cover the
rising costs of food.


5. (SBU) Between August 15 and September 18, the kyat depreciated 5
percent, from a market value of 1305 kyat/$1 to 1370 kyat/$1.
(Note: The official exchange rate remains pegged at 6 kyat/$1. End
Note). Local economists attribute the depreciation to high fuel
prices, the current political turmoil, and the lack of a stable
exchange rate system. Higher prices, compounded by the depreciation
of the kyat, contribute to a loss of purchasing power, forcing many
lower-class Burmese to do without.


6. (SBU) Win Win Tint, Managing Director of City Mart, Burma's
largest supermarket chain serving middle to upper class customers,
explained that despite the devaluation of the kyat, her stores have
seen a surge in customers since August 15. According to Win Win
Tint, the average customer spends 6,000 kyat ($4.50) per trip. She
commented that their money does not go as far as it used to; people
spend the same amount of money, but buy fewer products. People have
begun to shop more in supermarkets since August 15 because the
quality of food is better and the prices of goods, which are based
on previous orders and inventory, are more stable than in the local
markets. Other local supermarkets, including Ocean, Asia Light and
Orange, also confirmed an increase in customers since mid-August.

Impact on Businesses
--------------


7. (SBU) In meetings with businessmen over the past month, we
inquired about the impact of the fuel price hike on their
operations. All businessmen pointed to the same trend - rising
overhead costs. Business owners pointed to the new demands for
higher wages and reliance on generators - which use a substantial
amount of fuel - to provide electricity as reasons for the higher
overhead costs. Win Win Tint noted that since the first fuel price
hike in October 2005, City Mart's operating costs have increased by
more than 50 percent. Higher overhead costs cut into profits, and
many local companies have seen a drop in their profit margins.
Despite lower profits, companies that want to compete have to keep
prices relatively stable. Win Win Tint asserted that because of the
decreasing purchasing power of the kyat, businesses are unable to
increase their prices to cover rising costs. Instead of paying
higher prices, people will just stop buying expensive products.
Companies instead have to focus on ways to cut costs, which often
means reducing staff.


8. (SBU) Taxi drivers also complain about the high costs of fuel.
Whereas before August 15, many could eek out a living, many taxi
drivers find themselves barely breaking even. Customers refuse to
pay steep prices for taxi rides, and taxi drivers can only increase
fares by an average of 750 kyat ($0.55). Because they have to pay
such high prices for fuel and cannot recoup the costs by charging
higher fares, many taxi drivers have told us that they limit their
driving area to locations where there are many people. They also
explained how they are waiting for tourist season to begin in
November, as they can charge visiting foreigners higher fares than
the Burmese.

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


9. (SBU) The GOB continues to make uninformed economic decisions,
with little regard to how they will affect the people. The
unannounced and unexplained fuel price hikes put additional
inflationary pressure, which we estimate has reached 57 percent, on
a stumbling economy. The generals live isolated from the people and
personally benefit from rising oil and gas prices. Their detachment

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from what ordinary people are experiencing economically also leaves
them out of touch with increasing popular discontent. We see no
evidence that recent events have caused them to modify their views.
Arresting people who dare to speak out critically does nothing to
address the underlying cause of discontent.

VILLAROSA