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 RANGOON 00000901 001.2 OF 003 ¶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 RANGOON 00000901 002.2 OF 003 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 RANGOON 00000901 003.2 OF 003 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