IMPACT OF THE FINANCIAL CRISIS ON BURMA'S

C O N F I D E N T I A L SECTION 01 OF 04 RANGOON 000181 SENSITIVE SIPDIS STATE FOR EAP/MLS, INR/EAP, EEB DEPT PASS TO DEPT OF AGRICULTURE DEPT PASS TO USAID BANGKOK FOR USAID, USDA PACOM FOR FPA TREASURY FOR OASIA E.O. 12958: DECL: 03/20/2019 TAGS: EAGR ECON EFIN PREL PGOV BM SUBJECT: IMPACT OF THE FINANCIAL CRISIS ON BURMA'S AGRICULTURAL SECTOR REF: A. RANGOON 84 ¶B. RANGOON 178 ¶C. RANGOON 001 RANGOON 00000181 001.2 OF 004 Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4 (b and d). Summary -------------- ¶1. (C) According to a study undertaken by a Harvard team and international NGO International Development Enterprises (IDE),Burma's agricultural sector has been significantly affected by the world financial crisis, increasing food insecurity, and poverty concerns. The report estimates that overall agricultural output will decline in 2009 as farmers scale back production due to decrease in demand and lack access to credit. Burma's landless and daily wage earners continue to struggle to survive as the number of available jobs drops. IDE reports a general feeling of despair among those in the agricultural sector, and farmers interviewed claim that the current economic situation is "unprecedented" in Burma's history. Agricultural contacts agree with the report's findings, noting that Burma's production of beans and rice could decline between 20-40 percent in 2009 if current conditions persist. A downturn in the agricultural sector could have longer-term ramifications for Burma's overall economy. End Summary. Agricultural Sector Hit Hard -------------- ¶2. (SBU) The world financial crisis continues to affect Burma's economy, despite the GOB's contrary assertions (Ref A). Although the rate of growth in all sectors, including trade, manufacturing, and services, has decreased, the impact of the financial crisis is most evident in Burma's agricultural sector, which accounts for 44 percent of GDP and employs more than 16 million workers (Ref B). According to a study commissioned by international NGO IDE, Burma's agricultural sector is at a "breaking point." Working with three consultants from Harvard University, IDE staff in February interviewed more than 500 farmers, retailers, traders, and millers in more than 100 townships throughout Burma before reaching their final conclusions. (Note: the report is not yet published.) ¶3. (SBU) During a March 13 workshop on livelihoods and food security hosted by the European Commission, Debbie Aung Din Taylor and Jim Taylor, Directors of IDE, presented the report's findings: -- Since November 2008, both domestic and international agricultural buyers have had difficulty securing access to credit. Many international traders cannot secure Letters of Credit, necessary for imports and exports, because banks are more hesitant to issue loans. In Burma, private and government banks have reduced lending (Ref A). Informal lenders have less liquidity, as Burmese businessmen, unable to turn a profit because buyers have no access to credit, are RANGOON 00000181 002.2 OF 004 increasingly defaulting on existing formal and informal loans. -- As a result of the lack of credit, agricultural sales at the local level are down by 40-90 percent in some markets, reducing the overall income farmers and those in the supply chain earn. -- Additionally, depressed world commodity prices, particularly of rice and beans, have reduced commodity prices on the local market. Farmers who are able to sell their crops do not earn enough to cover their high production costs, making it impossible for them to repay any outstanding loans. Farmers reportedly are selling their personal food stocks to earn as much cash as possible. The average farmer is in debt between 500,000-700,000 kyat (USD 500-700). That is nothing to an American farmer, but an overwhelming amount in Burma where the average salary is USD 40 a month. -- As noted in Ref B, farmers in Mandalay and Sagaing Divisions increased production in 2008. Farmers and traders have had limited success in exporting this rice due to lower worldwide demand and the high prices demanded by Burmese traders (Ref C). Consequently, there is a rice surplus in certain markets, which further depresses prices and makes it difficult for farmers to earn a profit. -- Due to limited profits and reduced access to cash from informal money changers (their primary source of funds),many farmers are traveling to larger cities to pawn their personal effects for kyat. -- Farmers report that they will plant for smaller crops in 2009, resulting in decreased agricultural production. As farmers find it more difficult to both sell their product and pay back existing loans, they will have less money to spend on agricultural inputs such as seeds and fertilizer and temporary labor. -- The number of landless people may increase in 2009. In 2006 the Food and Agricultural Organization (FAO) estimated that between 35-53 percent of Burma's rural population were landless. The IDE study concludes that landlessness is highest in the Irrawaddy Delta -- between 50 to 70 percent of households -- while Burma's overall landless rate is 40 percent. If farmers are unable to plant crops and if the Burmese Government responds by taking back land, the rate of landlessness would increase. (Note: Under Burmese law, the GOB has the right to reclaim any agricultural land not used in production.) -- Wage employment is becoming scarcer. Landless Burmese rely on temporary jobs for employment. If farmers with land reduce production, the number of temporary or seasonal jobs will fall, creating a greater dearth of wage employment. -- The inefficiency of agricultural production further depresses prices. IDE reports that weak infrastructure, including poor roads and lack of electricity, as well as GOB agricultural policies, including restrictions on the movement RANGOON 00000181 003.2 OF 004 of rice between states and divisions and complex export requirements, eat into profits earned by farmers. In Burma, a rice farmer only earns 30 percent of the final export price compared to 50 percent in Vietnam. -- The current conditions in the agricultural sector are "unprecedented." Farmers across the board lament that they see no end to the current financial crisis and believe it will have long-lasting developmental implications for Burma. The lack of access to credit and the drop in sales are interrelated, and the continuation of both phenomena will only compound the financial problems in the agricultural sector. ¶4. (C) Our agricultural contacts confirm IDE's findings, noting that small farmers -- defined as those who plant six acres or less, accounting for 60 percent of Burmese farms -- are the hardest hit. U Kyaw Tin, Managing Director of SGS Consultants, noted that most small farmers are heavily in debt, often taking out loans for up to USD 1,000 to cover cultivation costs for the typical six-acre holding. If farmers cannot sell their existing crops, even at a loss because their prospective buyers have no access to credit, they cannot borrow funds to finance their next crop. SGS Agriculture Expert Aung Kyaw Htoo forecasts that agricultural production, particularly of rice and beans, could drop by between 20-40 percent nationwide in 2009 if the current situation does not improve. How to Help the Agricultural Sector -------------- ¶5. (C) Both IDE and our agricultural contacts opined that the GOB needs to recognize and take steps to alleviate the impact of the financial crisis on the agricultural sector. According to Aung Kyaw Htoo, SGS Consultants has recommended that the Ministry of Agriculture, working through the Agricultural Development Bank, increase financing for small farmers, who can currently borrow up to 8,000 kyat an acre per season. While not a long-term solution, it would help farmers maintain their livelihoods this year and perhaps find their way out of debt. Jim Taylor argues that the GOB and NGOs need to assist the most vulnerable, providing them with access to food which would free up income to pay for other expenses. WFP Country Director Chris Kaye agrees, emphasizing how WFP's cash for school and cash for work programs successfully assist the most vulnerable (Ref B), providing them with education or job skills they can use in the future. ¶6. (C) Ministry of Agriculture Deputy Director of Agricultural Planning U Than Aye told us that some officials within the Ministry of Agriculture recognize the effects of the financial crisis on Burma's agricultural sector. Several Ministry of Agriculture officials were present at IDE's presentation. Nevertheless, the Ministry has yet to put forth any proposals on how to help the farmers cope, although the Agricultural Planning Division is soliciting advice from NGOs on how to best assist farmers. U Than Aye opined that because the Minister of Economic Planning, instrumental in RANGOON 00000181 004.2 OF 004 the GOB budgeting process, believes that Burma is immune to the financial crisis, it may be difficult for the Ministry of Agriculture to obtain support for any assistance programs. Comment -------------- ¶7. (C) We find IDE's claims that the world financial crisis is having a significant impact on Burma's agricultural sector credible, although we do not expect a "collapse," as IDE's Harvard team reportedly has predicted. The GOB has yet to take an active role in addressing the economic downturn, although Ministry of Agriculture officials continue to monitor domestic food prices because they know high food prices have sparked political unrest in the past. We suspect that if indeed the situation is as dire as predicted, the GOB will step forward, perhaps drawing on its reportedly ample reserves to cushion farm credit and thereby reduce potential political risk. Also, it is worth remembering that resilient Burmese farmers have long learned to live with low wages, few jobs, and food shortages. We will continue to monitor the situation, as a steep downturn in the agricultural sector would have long term impact for Burma's economic growth. VAJDA