US embassy cable - 03RANGOON1197

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 001197 
 
SIPDIS 
 
STATE ALSO FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
USPACOM FOR FPA 
 
E.O. 12958: DECL: 09/23/2013 
TAGS: ETRD, ECON, EPET, PGOV, BM, Economy 
SUBJECT: NO JOY FOR BURMA'S TRADERS 
 
REF: RANGOON 1184 
 
Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D) 
 
1. (SBU) Summary:  After claiming with much fanfare to have 
had a USD 700 million trade surplus last year (a claim 
doubted by most not dressed in a uniform), the Burmese 
government will not likely repeat the farce this year. 
Admittedly making an accurate assessment of Burma's trade 
balance is a fool's errand, as much of the Burmese trade 
balance is unaccounted for (narcotics out, weapons in, and 
everyone cheating on invoices).  However, we can predict that 
if economic bumbling continues, tough new U.S. economic 
sanctions ought to put the official trade balance into the 
red for the current fiscal year (ending March 30, 2004).  End 
summary. 
 
Legally, Exports and Imports are Down... 
 
2. (C) The prognosis for the country's primary export 
commodities is mixed, but generally down.  Imports are also 
suffering from increasingly tight government controls.  We 
are loath to make any firm statement on dollar amounts, as 
reliable statistics are not provided by the GOB.  Numbers we 
can provide are based on GOB data, IMF statistics (based on 
the GOB numbers), or anecdotal evidence gathered from sources 
of varying reliability. 
 
(i) Oil and Gas: This is the anchor for Burma's foreign 
exchange earnings.  It is one of the few sectors that still 
attracts any foreign investment (with a USD 44 million inflow 
in FY 2002-03, according to the GOB).  Reliable energy 
industry sources estimate that natural gas sales to Thailand 
from the offshore Yetagun and Yadana fields will amount to 
USD 650 million - USD 700 million this calendar year (though 
Burmese government estimates are closer to USD 900 million). 
Despite U.S. sanctions that ban the remittance of U.S. 
dollars into Burma, natural gas payments will likely remain 
in U.S. dollars, payable into Burmese government accounts in 
Singapore.  Forecast: Stable and solid foreign exchange 
earner. 
 
(ii) Timber: The official forecast for timber (mostly teak) 
exports, the second largest export in FY 2002-03 accounting 
for about USD 300 million, is bad.  One experienced timber 
merchant told us that the government had not allowed any new 
private cutting permits or private exports of sawn timber 
since May.  The reason is unclear, but the source told us the 
regime was reassessing all private sector contracts to try 
and eradicate, or re-apportion, some of the corruption that 
plagues the timber industry.  Three notes: Unless timber 
exporters find a replacement market, the cut-off of exports 
to the United States could slice USD 3 million off Burma's 
export earnings.  Second, the government has the monopoly on, 
and continues to export, logs and some sawn timber -- with 
tenders now denominated in euro.  Finally, official 
statistics and our forecasts do not take into account the 
significant illegal logging that occurs, particularly by 
businesses operated by Kachin ceasefire groups in the 
Kachin-China border zones.  Forecast: Legally down 
significantly. 
 
(iii) Beans and Pulses: Exports of beans and pulses (9 
percent of exports in FY 2002-03), almost entirely to India, 
will remain a reliable export, though volume and earnings 
will likely dip.  Earnings will be hit by declining quality 
combined with a near monopsony by Indian buyers and soft 
demand.  Agribusiness contacts tell us the beans and pulses 
trade (not easily moved to border trade) has adapted to U.S. 
sanctions by moving offshore, with settlements of contracts 
done in U.S. dollars in Singapore banks.  However, volume is 
still 25 percent off of what it was last year at this time, 
after dropping 50 percent or more in the weeks after the 
sanctions were applied.  Forecast: Down significantly. 
 
(iv) Seafood: Fish and prawns, accounting for about USD 150 
million in FY 2002-03, are a relative bright spot.  The new 
import ban will cut into export earnings and volume -- 
possibly USD 10 million for CY 2003.  However, reliable 
sources have told us some exporters have been sending their 
products to Malaysia and Indonesia for relabeling and onward 
export to the United States.  Also hitting export volume, 
many seafood exporters are voluntarily cutting back their 
business rather than face government pressure to use their 
export earnings to import government-priority items.  On the 
other hand, some opportunistic seafood exporters are taking 
advantage of the situation to expand exports, using euro 
L/Cs, in exchange for GOB promises of import licenses to 
bring in potentially lucrative diesel and palm oil shipments. 
 Also, FDI in the fisheries sector is comparatively good 
(about USD 26 million in FY 2002-03).  Forecast: Stable and 
reasonably reliable foreign exchange earner. 
 
(v) Rice: A real unknown.  Without warning in April the 
government announced the liberalization of rice exports -- a 
long-desired agricultural reform.  Thus far, major private 
sector exporters are wary of jumping in because of very 
uncertain profit margins due to high domestic prices, low 
international prices, and unclear government pricing and 
profit-sharing provisions of the new policy.  However, some 
companies and associations close to the government will take 
the plunge, and the parastatal agricultural product exporter, 
Myanmar Agricultural Product Trading (MAPT), will likely play 
a behind-the-scenes role to ensure the policy has some 
"successes" in its inaugural season.  Production levels are 
still uncertain, with the harvest due to start in October or 
November.  The weather has been OK, but farmers this year 
were forced to plant without access to the credit they 
normally received from the government via controversial 
advance purchasing agreements -- canceled under the new 
policy.  The government has said that only surplus rice that 
is not needed domestically can be exported, but there are not 
reliable statistics for production or domestic demand. 
Forecast: Down, but by how much is not yet clear. 
 
(vi) Garments: The Burmese government does not consider 
garments a major export product, though the sector relies on 
exports to the United States.  The revenue from garment 
exports is in the form of fees for the piece work the Burmese 
factories provide rather than from the sales of the garments 
themselves.  Nonetheless, with the U.S. import ban in place, 
the majority of Burmese garment factories will gradually 
shutter -- one estimate was that 99 factories had shut since 
the new sanctions took hold with a loss of 25,000-40,000 
jobs.  Assuming exports to the United States would have held 
steady for the remainder of CY 2003, Burma's resulting loss 
in foreign exchange will probably be around USD 20 million, 
with a net loss to GOB coffers of perhaps USD 5 million in 
taxes and fees.  Forecast: Basically zeroed out. 
 
3. (SBU) Though overall exports look weaker this year, the 
government has been squeezing tight on imports as well.  The 
regime still requires all import licenses be backed by 
dollars earned by exporting.  Even with these export dollars 
in hand, traders complain heartily of the government's recent 
refusals to approve more than 25-50 percent of an importer's 
request.  Though this import policy has been particularly 
miserly in the last six months, we see it worsening as the 
country's foreign exchange reserves decline due to sanctions 
and drooping exports. 
 
...But What's Law Got To Do With It? 
 
4. (SBU) When pondering trade balances, you have to consider 
the uncountable informal trade flows that wash across the 
Chinese, Thai, and Bangladeshi borders.  There are also a 
number of intangible factors that arise due to the convoluted 
nature of the Burmese economy and the mind-bending 
distortions it creates.  These two aspects of Burma's 
international trade make an accurate assessment of trade 
balance quite tricky. 
 
5. (C) On the export side, Burma remains a major producer of 
illegal narcotics (opium and amphetamine type substances), 
though this export commodity is also suffering from increased 
regional vigilance.  Ceasefire groups also conduct a very 
lucrative and undocumented trade in timber and gems, 
particularly from Kachin State.  Rice paddy is also illegally 
shoveled in vast quantities into the Bangladeshi maw. 
Finally, exporters are famous for lying on their manifests -- 
declaring only 70 percent of the true value of their sales to 
authorities, and receiving the difference in hard currency 
under the table from sympathetic foreign buyers. 
 
6. (C) In recent days, exports are also suffering as imports 
get squeezed.  The reason?  Exporters have made piles of 
money selling their export revenue at a tidy premium to 
importers desperate for cash (remember, importers can only 
import as much as they have export foreign exchange to pay). 
As the demand for legal imports drops, the demand (and thus 
market premium) for the export dollars drops.  The loss of 
this profitable side business is another disincentive to 
exporting at full capacity (see Reftel for discussion of 
other exporting barriers). 
7. (C) Imports are equally mysterious, with most "sensitive" 
government imports such as weapons and military equipment, 
and training and technology for the alleged Magway Division 
nuclear power plant all going off book.  Importers are also 
notorious for undervaluing their shipments, a necessary evil 
with the GOB's reluctance to grant the full amount requested 
for import licenses. 
 
Comment: Can the Government Help? 
 
8. (C) Government financiers and local entrepreneurs are at a 
loss at how the GOB could refloat easily the sinking legal 
trading sector.  Already the government has encouraged 
official trade in hard currency other than dollars, and has 
liberalized the settlement process for legal border trade 
(see Reftel for explanation).  Allowing the private sector to 
engage in barter trade would help exporters and importers as 
would further liberalization of border trade, like loosening 
import license restrictions.  However, in previous 
experiments along these lines the government witnessed a 
sharp rise in imports (and outflow of foreign exchange) with 
little benefit to uncompetitive exports.  With the foreign 
exchange situation likely to get more precarious, we don't 
think the GOB will go down that road again. 
Martinez