Identifier
Created
Classification
Origin
08RANGOON892
2008-11-18 03:20:00
CONFIDENTIAL
Embassy Rangoon
Cable title:  

BURMA: IMF CONDUCTS ARTICLE IV CONSULTATIONS

Tags:  EFIN ECON PGOV IMF BM 
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FM AMEMBASSY RANGOON
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8409
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHBY/AMEMBASSY CANBERRA 1637
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RUEAIIA/CIA WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEKJCS/DIA WASHDC
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RHEHNSC/NSC WASHDC
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RUEKJCS/JOINT STAFF WASHDC
RUCNDT/USMISSION USUN NEW YORK 2113
RUEHBS/USEU BRUSSELS
C O N F I D E N T I A L SECTION 01 OF 04 RANGOON 000892 

SIPDIS

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

E.O. 12958: DECL: 09/19/2018
TAGS: EFIN ECON PGOV IMF BM
SUBJECT: BURMA: IMF CONDUCTS ARTICLE IV CONSULTATIONS

REF: A. RANGOON 836

B. RANGOON 604

C. RANGOON 596

D. RANGOON 663

RANGOON 00000892 001.2 OF 004


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

Summary
-------

C O N F I D E N T I A L SECTION 01 OF 04 RANGOON 000892

SIPDIS

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

E.O. 12958: DECL: 09/19/2018
TAGS: EFIN ECON PGOV IMF BM
SUBJECT: BURMA: IMF CONDUCTS ARTICLE IV CONSULTATIONS

REF: A. RANGOON 836

B. RANGOON 604

C. RANGOON 596

D. RANGOON 663

RANGOON 00000892 001.2 OF 004


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

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


1. (C) An International Monetary Fund (IMF) team visited
Burma October 22-November 6 for annual Article IV
consultations. While the IMF estimates Burma's real GDP
growth in 2008 will be 4 percent, rather than the 13 percent
touted by the GOB, the team remains unable to reconcile
national accounts to determine a realistic GDP figure.
Visiting IMF officials also expressed concern about Burma's
large fiscal deficits caused by high infrastructure
expenditures (including construction in Nay Pyi Taw),
multiple exchange rates (which the GOB refuses to unify),and
persistent high inflation. The IMF cited declining capacity
among government economic officials and has offered technical
assistance to upgrade skills. Its detailed findings will be
made available to the Board, although visiting officials
declined to share them with us due to confidentiality
concerns. Embassy Rangoon requests a copy of the report
after it is sent to the Board. End Summary.


2. (C) The IMF team was led by Ranil Salgado and included
representatives of the World Bank and the Asian Development
Bank. The team met the Central Bank Governor, Minister of
Agriculture, Minister of National Planning, and officials
from the Ministries of Finance, Statistics, Social Welfare,
and Health. Additionally, they met with businessmen and
private bankers, the Chamber of Commerce, and representatives
of select Embassies and UN agencies. (Note: Last year's IMF
team met with additional GOB ministries and agencies. End
Note.) The team noticed clear capacity issues: experienced,
erudite civil servants are reaching retirement and their
replacements have lower-quality educations and little to no
exposure to the outside world. The IMF's key Ministry of

Finance contact, a qualified economist who openly and frankly
discussed economic issues with the IMF, retired in early
2008; the IMF has yet to find a GOB official to fill that
role.

IMF Recommendations
--------------


3. (C) At an inbrief with Post at the beginning of its
Article IV Consultations, the IMF team told us it would limit
recommendations to the GOB to one or two key reforms, rather
than a slate of changes as proposed in the past (Ref A).
However, the IMF decided against this initial plan. Salgado
told diplomats at a November 5 briefing that the GOB faces
clear and fundamental economic problems, and he argued that
to recommend only a few changes would be irresponsible.
Similar to last year, the IMF made the following
recommendations to the GOB:

--Unify exchange rates, eliminating the gap between the
official and black market rates for kyat;
--Create and maintain an independent Central Bank;
--Reduce the budget deficit in order to combat inflation;
--Create capital markets (including a bond market) to further
reduce inflation;

RANGOON 00000892 002.2 OF 004


--Update its CPI index to accurately measure inflation;
--Continue to liberalize the agricultural sector;
--Balance the budget; and
--Further strengthen its anti-money laundering legislation.

Salgado told us he expected that the team's recommendations
would be relayed to the Cabinet, but he doubted Senior
General Than Shwe and other top leaders would review the
final report.

Lower GDP Growth and Higher Budget Deficits
--------------


4. (C) The IMF team told diplomats and UN officials during
its outbrief that Burma's economy is not performing at the
level it should, given the country's abundant resources and
economic potential. The IMF rejected GOB GDP growth
estimates (13 percent in 2008) as unrealistic. Instead, the
team estimates that the real 2008 growth rate will hover
around 4 percent, due to increased production in the
agricultural and oil and gas sectors. Embassy officials
noted at the briefing that given the decreasing price of
natural gas on the world market, GDP growth could be even
lower. The IMF team agreed and noted that despite working
with GOB experts, the team remains unable to reconcile
national accounts to determine a realistic GDP figure.


5. (C) The GOB informed the IMF team that revenues from tax
collection increased in FY07, resulting in a lower budget
deficit. We pointed out that the figures the GOB provided to
the IMF team were different from those in the published FY08
budget. The GOB's actual budget deficit in FY07 was 1.7
trillion kyat (USD 1.4 billion),substantially higher than
the FY06 budget deficit of 235.8 billion kyat (USD 196
million). The GOB predicts a budget deficit of 415 billion
kyat for FY08-09 (USD 377 million),which does not include a
budget supplemental (Ref B). The IMF requested that we
provide them with our analysis of the FY08 GOB budget; we did
so before they departed Rangoon.

Resource Allocation and High Inflation Key Concerns
-------------- --------------


6. (C) The real problem, Salgado noted at the briefing, is
not the growth rate, but rather how resources are allocated.
The GOB fails to see the benefits of growth, as money is
controlled by the military and not spent on education,
health, and social welfare programs that would benefit the
poor and raise the collective standard of living. Despite
more than USD two billion in annual oil and gas revenues, a
majority of Burmese remain poor (Ref B). (Note: Salgado
acknowledged that the GOB maintains two budgets -- a kyat
budget, which it publishes annually, and a U.S. dollar
budget. The IMF during its trip was only able to reconcile
the kyat budget, and could not state whether the GOB used any
revenues in the USD budget for national programs. End Note.)
The IMF again strongly recommended the GOB increase
expenditures on health and education.


7. (C) Although he could not discuss the statistics in
detail for confidentiality reasons, Salgado estimated that
the money supply remains stable at between 2.5 and 3 trillion
kyat. IMF Economist Tubagus Feridhanusetyawan told diplomats
that there was a substantial increase in the FEC supply after
Cyclone Nargis, as the GOB replaced U.S. dollar-denominated
aid contributions with FEC. The IMF team, using GOB figures,
estimated that year-on-year inflation was around 30 percent.

RANGOON 00000892 003.2 OF 004


Inflation continues to be fueled by a loose monetary policy
-- printing money -- which finances the deficit. The
government has yet to update its consumer price index, which
is based on 1987 prices and uses an old data basket; its
inflation figures thus do not reflect the current situation.


8. (C) Salgado commented that the market rate for the kyat
does not appear to be depreciating dramatically, signifying
that inflation is not spiraling out of control. The IMF
reiterated its advice that the government unify the exchange
rate (which varies from the official rate of 6 kyat/1 USD to
1275 kyat/1 USD on the black market). Once again, GOB
officials expressed great reluctance to make any adjustments,
and pointed to the growing inflation rate as justification
for inaction.


9. (C) We pointed out at the briefing that GOB financial
figures are not reliable and do not accurately measure
inflation. (Note: Embassy and UN calculations estimate
inflation at 50 percent nationwide). We also highlighted
that lower prices are not necessarily an indication of
reduced inflation, but are related at least in part to GOB
price controls. The Singapore DCM emphasized that the
nationwide perception is that inflation is increasing, rather
than decreasing as the GOB claims. UNDP officials stated
that Burmese spend approximately 70 percent of their salaries
on food; sustained high levels of inflation will only erode
their purchasing power, bringing more people under the
poverty line.

Economic Impact of Nargis
--------------


10. (C) According to Salgado, the IMF team had expected
Cyclone Nargis would have significantly affected Burma's
economic development. After the two-week visit, the IMF team
was more optimistic about the country's recovery, noting that
agricultural production in the Delta is expected to be
significantly higher than reported in July in the Post Nargis
Assessment Report (PONJA) report. The IMF team also heard
from Tripartite Core Group (TCG) members that many Burmese
were returning to their livelihoods, speeding up economic
recovery. Government officials told the IMF team that the
GOB had pledged 80 billion kyat (USD 67 million) for cyclone
relief and recovery, although only obligated 30 million kyat
(USD 25,000) to date for agriculture, infrastructure, and
social welfare recovery. The IMF team encouraged the GOB to
quickly fulfill its pledge to assist cyclone victims.


11. (C) The IMF team reviewed the facts around the FEC
depreciation (Ref C),and praised the GOB for taking steps to
resolve the reasons for the depreciation (Ref D). UN
Resident Coordinator Bishow Parajuli interjected that the TCG
played an important role in managing the FEC situation, as
the Ministry of Planning initially refused to discuss the FEC
depreciation. The IMF argued that in addition to allowing UN
agencies and NGOs to pay vendors through direct dollar
transfers, the GOB also took further measures to make the FEC
more attractive vis-a-vis the U.S. dollar and kyat -- for
example, the GOB now allows Burmese to buy petrol and diesel
at competitive FEC rates, thereby increasing the demand for
FEC.

IMF Sees Some Improvements
--------------


12. (C) The news is not all bad, the IMF explained, citing

RANGOON 00000892 004.2 OF 004


positive developments in both the policy and technical
arenas. Salgado emphasized improvements in the trade sector,
including the streamlining of the process for import and
export licenses, which has improved the balance of payments.
We pointed out that the GOB has only streamlined import and
export permits for foods coming into Burma via the Rangoon
International Airport -- less than 5 percent of total imports
and exports; it still takes between two weeks to one month
for the GOB to grant import/export permits. Additionally, we
noted that trade in Burma is dependent upon more than just
permits -- Burmese Customs determines how long it takes for a
shipment to enter the country. Even if a company can obtain
a permit within two weeks, it still faces delays on the
customs side. UN officials agreed and warned the IMF team
about taking GOB information at face value.


13. (C) Feridhanusetyawan reported that the GOB
successfully liberalized the agricultural market during the
past year by lifting export restrictions on all but one
product: rice. (Note: The GOB lifted the ban on rice
exports shortly after the IMF team departed Burma.) The IMF
team urged the GOB to continue liberalizing the trade sector,
including reducing tariffs on non-agricultural products.


14. (C) On the technical side, the IMF officials stated
that the GOB continues to work with the IMF to strengthen
anti-money laundering efforts, including improving banking
supervision. The team also praised the GOB's recent actions
to make more of its financial data available to the public on
the Central Statistics Agency's website. We informed the IMF
team that these statistics are not available to those who try
to view the website from within Burma.

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


15. (C) The IMF Article IV team seized on some of the major
GOB policy failures and their effects -- poorly allocated
resources, high inflation and fiscal deficits, relatively low
growth for such a resource-rich country, and endemic poverty.
However, the IMF officials -- all but one new to Burma --
demonstrated a poor grasp of the details and seemed to
underestimate the economic and financial challenges facing
Burma. More troubling, the IMF team displayed a willingness
to accept the GOB's explanations and economic statistics at
face value, and appeared genuinely surprised when diplomats
and UN officials challenged their assumptions. The IMF team
took copious notes at the outbrief with diplomats and UN
officials, and we hope the collective interventions of
Rangoon-based staff will factor into the IMF's evaluation.
There are no grounds for a positive assessment of Burma's
economy, which continues to deteriorate due to the regime's
mismanagement. The IMF's final report should reflect that
fact.

VAJDA