BURMESE PRIVATE SECTOR REPS DISCUSS ECONOMY WITH

C O N F I D E N T I A L SECTION 01 OF 04 RANGOON 000836

SIPDIS

STATE FOR EAP/MLS, INR/EAP
DEPT PASS TO USDA
DEPT PASS TO USAID
PACOM FOR FPA
TREASURY FOR OASIA, OFAC

E.O. 12958: DECL: 10/28/2018
TAGS: EFIN ECON PGOV IMF BM
SUBJECT: BURMESE PRIVATE SECTOR REPS DISCUSS ECONOMY WITH
IMF

REF: A. RANGOON 698

B. RANGOON 663

C. RANGOON 596

RANGOON 00000836 001.2 OF 004


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

Summary
--------------


1. (C) During a roundtable discussion between the IMF
Article IV Consultation team and Burmese private sector
business and economic observers, participants discussed
problems in the banking industry, the use of informal
channels for fund transfers and capital financing, the
problems associated with Burma's high inflation, and the need
for exchange rate unification. Participants confirmed the
IMF's assertion that Cyclone Nargis had a much smaller
economic impact on Burma than previously expected. The IMF
team plans to limit recommendations to the GOB to one or two
key reforms, rather than a slate of changes as proposed in
the past. The IMF team agreed that Burma had fallen behind
its neighbors due to economic mismanagement. End Summary.


2. (C) The DCM on October 24 hosted a lively roundtable
discussion for the visiting IMF Article IV team with local
bankers and private economic consultants. Team leader Ranil
Salgado, IMF Deputy Division Chief for Asia and the Pacific,
opened the meeting by noting that in the past, IMF Article IV
teams had proposed to the GOB a package of necessary economic
reforms - with little success. As a result, this year the
IMF will recommend one or two key reforms, which may be more
realistic to implement. Salgado and his team emphasized that
while the GOB has achieved some positive results in the past
few years, including higher tax revenues and liberalization
of the agriculture sector, problems such as an inefficient
multiple exchange rate system, high government expenditures,
high inflation, and a poorly developed banking sector remain.


Need to Tackle Inflation
--------------


3. (C) U Maw Than, former Rector of the Myanmar Institute
of Economics, noted that Burma's high inflation rate,
estimated at 40 percent, is the main reason for the lack of
economic growth and the proliferation of informal financial
mechanisms. The GOB continues to finance its deficit by
printing money, and people are unwilling to deposit money
into banks because the 17 percent interest rate does not come
close to covering the rise in prices. Inflationary pressure
in Burma will continue to increase unless the government
reduces deficit spending, stops printing money at will, and
increases revenue collection. Several other participants
echoed U Maw Than's concerns about the negative impacts of
persistent high inflation.


4. (C) IMF Senior Economist Tubagus Feridhanusetyawan noted
that according to Burma's Central Statistical Office,
inflation has remained steady at 28 percent (as of June
2008),although Cyclone Nargis caused a slight increase to 31
percent in May. SGS Consultant U Kyaw Tin commented that
this rate was too low, but that the general trend is
accurate. The economic effects of Cyclone Nargis have been
less than previously expected; other rice growing regions
have made up the rice shortfalls expected from the Irrawaddy

RANGOON 00000836 002.2 OF 004


Delta, foreign assistance has helped cyclone victims regain
some of their livelihoods, and inflation increased modestly
immediately after Nargis but has returned to pre-Cyclone
levels, he stated.

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


5. (C) Several Burmese participants complained to the IMF
about the inefficiencies of the financial sector,
particularly the highly segmented financial market and
restrictions on private bank activity. Since 2003, private
banks have been unable to open bank branches, must restrict
deposits, and do little lending. The Central Bank, private
consultant U Soe Win noted, lacks operational independence
and the technical capacity to make financial sector
recommendations to the government. He requested that the IMF
again make 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." The Burmese banking sector, he stressed, must be
allowed to take on and manage risks. He also noted that the
GOB should also clearly define the role of state-owned banks,
ensure fair competition between private and state-owned
banks, allow foreign banks to operate in Burma, and promote
Central Bank independence.


6. (C) In the absence of a strong banking sector, all
participants agreed, Burmese citizens are forced to turn to
the informal sector for financial transactions and access to
credit. Burmese Economist Winston Set Aung confirmed that
most people use informal channels, known as the hundi/hawala
system, to transfer money (Ref A) from outside the country.
Within Burma, the informal sector also provides loans, with
interest rates ranging from three to twenty percent,
depending on available collateral, he noted. Seventy percent
of all borrowing in Burma occurs through informal channels,
either because banks are unable to offer loans or because
Burmese lack the collateral necessary to secure a bank loan.
Participants confirmed Salgado's observation that formal
credit is rationed in Burma, so only those who have access to
formal lending, i.e. cronies and regime relatives, can
benefit from current financial sector regulations.


7. (C) IMF Economist Feridhanusetyawan inquired about
whether the GOB has ever issued bonds to raise money and
provide an outlet for domestic savings. SGS Consultant U
Kyaw Tin pointed out that the Burmese people lack faith in
the banking and financial systems, and that any bond would
have to offer an interest rate high enough to overcome
Burma's high inflation rate, i.e., greater than 40 percent.
Several attendees noted that those Burmese who have money to
save prefer to do so by either buying U.S. dollars or gold,
speculating in forward markets (e.g., for rice and other
agricultural commodities),or by buying property. As one put
it, as a result of the pressure to earn returns that will
keep up with inflation, "We have become a nation of
gamblers." The majority of Burmese, however, are unable to
save money; anything they do have, they keep in their homes
rather than in banks.

Exchange Rate Discrepancies
--------------


8. (C) The IMF team also inquired about the impact of
Burma's multiple exchange rate regime, which establishes

RANGOON 00000836 003.2 OF 004


different unofficial exchange rates depending upon the
transaction. (Note: While the official rate is 6 kyat/1 USD,
the black market rate is 1270 kyat/1 USD. Additionally,
there are six other exchange rates where the kyat/USD rate
varies by transaction. Please see Rangoon 137 for a complete
description.) For years, the GOB has been reluctant to make
any adjustments in the exchange rate system; Salgado
commented that this year was not likely to be any different.
U Soe Win, a former Central Bank Governor, commented that the
GOB should have unified rates more than 10 years ago, but has
been afraid that it would increase prices and lead to public
unrest. The participants agreed that almost all Burmese use
the black market exchange rate, and concluded that the
official rate is only useful for the regime to exaggerate its
national income accounts.


9. (C) Feridhanusetyawan confirmed that the GOB doubled the
amount of FEC in the market, from 20 to 40 million, after
Cyclone Nargis, which accounted for a large but temporary
FEC/U.S. dollar exchange rate discrepancy (Refs B and C). He
inquired about whether businessmen engaged in arbitrage to
earn money on the FEC/U.S. dollar spread. Participants noted
that some businesspeople with cash in hand had exploited the
differential, but most did not. Feridhanusetyawan commented
that the GOB - through state-owned enterprises such as
Myanmar Economic Holdings Ltd. (MEHL) or Myanmar Economic
Corporation (MEC) - could have profited handsomely from the
exchange rate discrepancy. U Soe Win noted that most GOB
officials do not have the economic sophistication to realize
the opportunity; moreover military-owned operations such as
MEHL or MEC follow orders rather than make independent
economic decisions.

Little Access to Data
--------------


10. (C) At the end of the discussion, the businessmen
praised the IMF as one of the few organizations that can
obtain economic data from the GOB. One of the participants
observed that while select economic information 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 in any event. Salgado noted that officials have
been very forthcoming with statistics, although transmission
is often delayed. He also explained that the IMF Article IV
consultation enables different branches of the GOB, including
the Central Bank, to see financial data to which they
otherwise have no access.

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


11. (C) The IMF Article IV team appears to be taking a
rational approach in trying to understand Burma's economic
problems, though most of Burma's economic policies defy
logic. We constantly hear complaints about how difficult it
is to do business here -- one must be connected, willing to
pay bribes, creative with regard to informal financing, and
tolerant of the inefficiencies and uncertainties concerning
commercial regulations. The roundtable event provided the
IMF with the opportunity to hear from those directly affected
by the GOB's poor economic policies. The IMF team recognizes
clearly that economic growth in Burma requires macroeconomic
reforms. From our perspective, its plan this year to focus
on one or two important (and political feasible) reforms,

RANGOON 00000836 004.2 OF 004


rather than a laundry list of policy changes, makes sense.
The IMF members will provide an outbrief to the Embassy on
their meetings with GOB officials before departing Burma on
November 5.
DINGER