Identifier
Created
Classification
Origin
09CHIANGMAI101
2009-07-15 05:26:00
UNCLASSIFIED
Consulate Chiang Mai
Cable title:  

EXPERT ON BURMESE ECONOMY SPEAKS ON MICROFINANCE

Tags:  AORC ECON EFIN EINV ETTC PGOV PHUM PREF SMIG 
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VZCZCXRO7501
PP RUEHDT RUEHHM RUEHNH
DE RUEHCHI #0101/01 1960526
ZNR UUUUU ZZH
P R 150526Z JUL 09
FM AMCONSUL CHIANG MAI
TO RUEHC/SECSTATE WASHDC PRIORITY 1104
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHCHI/AMCONSUL CHIANG MAI 1186
UNCLAS SECTION 01 OF 03 CHIANG MAI 000101 

SIPDIS

E.O. 12958: N/A
TAGS: AORC ECON EFIN EINV ETTC PGOV PHUM PREF SMIG
SUBJECT: EXPERT ON BURMESE ECONOMY SPEAKS ON MICROFINANCE

REF: A) RANGOON 142 B) 08 RANGOON 698

CHIANG MAI 00000101 001.2 OF 003


-------------------

Summary and Comment

-------------------



UNCLAS SECTION 01 OF 03 CHIANG MAI 000101

SIPDIS

E.O. 12958: N/A
TAGS: AORC ECON EFIN EINV ETTC PGOV PHUM PREF SMIG
SUBJECT: EXPERT ON BURMESE ECONOMY SPEAKS ON MICROFINANCE

REF: A) RANGOON 142 B) 08 RANGOON 698

CHIANG MAI 00000101 001.2 OF 003


--------------

Summary and Comment

--------------




1. Dr. Sean Turnell, a leading expert on Burmese economics,
spoke at Payap University, Chiang Mai on July 2, providing
attendees a basic foundation for understanding Burma's current
economic situation. Dr. Turnell briefly explained Burma's
chaotic past, the evolution of its financial system, and the
problems hindering the emergence of a viable financial sector.
Dr. Turnell stated that hope is not lost for Burmese finance, as
the microfinance industry is growing and providing small amounts
of capital to needy borrowers.




2. Comment: Microfinance in Burma is bittersweet. On the one
hand, microfinance gives access to credit where needy Burmese
can obtain funding to pursue a number of ventures. On the other
hand, microfinance in itself is not going to bring about the
needed changes to manipulate the overall micro or macroeconomic
situation in Burma. The junta's economic policies are the major
hindrance to economic development in Burma. The Burmese
military regime needs to restructure the financial system,
ensure bank credibility, and engage the rest of the world in
trade before substantial economic development occurs, stated
Turnell. End Summary and Comment.



--------------

A Turbulent History with Tumultuous Economics

--------------




3. Dr. Turnell began his presentation with an explanation of
the chaotic history of Burmese economics and microfinance since
the 1850s, when Burma was an English colony and the largest rice
exporter in the world - a position it held until World War II.
At this time, a majority of financial services were provided by
Chettiars who lent money to farmers who used their land as
collateral. As commodity prices crashed during the Great
Depression, Burmese farmers defaulted or walked off their land,

leaving the Chettiars with 50 percent of cultivable land.




4. In 1942, the Japanese invaded Burma causing the Chettiars
to flee the country. The Japanese seized vast tracts of land
and established their own currency and monetary institutions in
Burma, but upon Japan's defeat in World War II, domestic legal
tender became worthless. After the Japanese withdrawal, the
British were not able to reassert control and allowed Burma to
become independent. The fledgling government attempted to
create financial stability by enacting a currency board and a
number of protectionist policies. In 1962, the military took
control, implementing backward economic policies that exploited
the majority of the population. These policies continue to
reward military cronies and marginalize average citizens to this
day, Turnell stated.




5. In the 1980s, the junta nationalized all banks,
demonetarized the kyat to thwart speculators, and provided rural
credit only through exclusive advance purchase of crops.
Turnell noted the gap between the price the government paid and
the actual market price for crops reached a high when the junta
charged rice producers seven hundred percent on their product.
It was around this time that the people began to riot and the
junta crushed all demonstrations by killing thousands of
protestors in 1988.




6. Following the protests, the junta allowed private banks to
open and gave permission to foreign banks to operate in Burma
(although none could operate effectively). With a lack of
oversight, competition, and customers outside the government,
Dr. Turnell stated that many Burmese banks turned to suspect
business practices such as money laundering, fraud, ponzi
schemes (a fraudulent investment operation that pays returns to
separate investors from their own money or money paid by

CHIANG MAI 00000101 002.2 OF 003


subsequent investors rather than from any actual profit earned)
to earn a profit. This unsustainable banking system led to
another crash in 2003 where the government exchange rate ranged
between five and six kyat per USD, while the black market rate
surpassed 1,200 kyat per USD. Today, both government and black
market exchange rates hover around these respective ranges with
the government rate being significantly undervalued.



--------------

A Plethora of Problems

--------------




7. Dr. Turnell said the current Burmese economy is plagued by
a number of afflictions including high inflation, total
disregard for property rights, widespread distrust in the
currency, high levels of corruption, numerous economic
sanctions, and a general dearth of capital. Due to the total
lack in consumer confidence and market stability, it is no
wonder that there are no viable financial institutions or
significant levels of FDI, he opined.



--------------

Green Shoots in Microfinance?

--------------




8. Even though the Burmese financial sector is in shambles and
essentially controlled by the military, Dr. Turnell reports that
microfinance is a growing industry working to provide
individuals the financing they need. Although there are a
number of small institutions and informal micro lenders in
Burma, PACT (Program for Accountability and Transparency) funded
by UNDP, is by far the largest issuer of small loans. According
to Turnell, PACT claims to reach approximately 300,000 Burmese
borrowers, issuing loans based on the Grameen method where
groups are formed to borrow and hold each member responsible for
their portion of the loan. Lending is progressive, as a strong
track record of repayment leads to larger loans.




9. Dr. Turnell stated that the average loan is approximately
32 USD, while the cost of writing the loan is 11 USD. For this
reason, PACT charges an interest rate between thirty-eight and
forty-five percent. Although this interest rate sounds high,
Dr. Turnell said that people can receive exceptionally high
returns from their loan.




10. While microfinance provides financing to some Burmese,
Dr. Turnell opined that the future of microfinance in Burma is
questionable. The military junta does not give micro lenders
any legal status, restricts the areas in which they can operate,
and is prone to expropriate money (Note: Embassy Rangoon notes
this has not happened since 2004. End note.),provides a
hostile macroeconomic climate, and does not help to capitalize
the institutions looking to support the people. Operating micro
lenders could be shut down or taken over at any time and
absorbed into a state apparatus characterized by inefficiencies
and corruption, he observed.



--------------

Question and Answer

--------------




11. In response to audience questions, Dr. Turnell provided
the following observations:



--Microfinance is not a strong stimulant to economic
development. Capital is the most important input for sustained
development.

CHIANG MAI 00000101 003.2 OF 003





--Micro lenders tried to work with commercial banks, but the
junta disallowed joint cooperation. (Note: Embassy Rangoon
reports micro lenders are successfully operating in Burma
without government intervention.)



--Micro lenders are faring well during the economic crisis.
PACT reports high repayment rates as the poor rarely default on
their debts as they will find a way to repay. Dr. Turnell
reports 90 percent repayments (ten percent defaults).



--About ten percent of local borrowing and lending happens
informally between acquaintances.



--seventy-five percent of remittances are used for survival
purposes (food, shelter, clothing). Very little is used for
income generation or business development.



--Remittance flows to Burma are down approximately 30 percent
from 2008 due to the economic crisis (Ref A). Although there
are no official numbers, many Burmese laborers in the tourism,
construction, and garment industries are being laid off.
Additionally, the fall in commodity prices negatively affects
Burmese migrants as wages in the gas and agriculture sectors are
falling.



--Dr. Turnell listed the methods used to send remittances to
Burma: Forty-four percent of remittances are transferred by
hundi, a system in which monetary value is transferred via a
network of dealers or brokers from one location to another (Ref
B). This transaction does not involve the transfer of
currencies, rather, products and services are exchanged.
Twenty-two percent of remittances enter Burma through carriers
or merchants who actually bring cash over. Family members going
to and from Burma with cash account for another twenty-two
percent of remittances. Only six percent of remittances flowing
into Burma arrive via formal methods through Burmese banks.

Four percent of remittances enter by a migrant hiring an
accomplice to hustle cash into Burma. Two percent of
remittances arrive by other methods.



--The vast majority of Chinese FDI in Burma is in the oil, gas,
and mining sectors. There are a number of Chinese pawn shops,
small time money lenders, and merchants operating in Burma.
Aside from these industries, Burma receives very little FDI in
sustainable growth industries.



--The economic sanctions did not stop Chinese investment in
Burma.



--The economic sanctions are well-founded, as state agencies
would become stronger without them.




12. This cable was coordinated with Embassy Rangoon.
ANDERSON