US embassy cable - 04RANGOON764

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000764 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
USPACOM FOR FPA 
 
E.O. 12958: DECL: 06/17/2014 
TAGS: ETRD, ECON, PGOV, BM, Economy 
SUBJECT: BURMA'S IMPORTERS TAKE ANOTHER BLOW 
 
CLASSIFIED BY: COM CARMEN MARTINEZ FOR REASONS 1.4 (B,D) 
 
1. (SBU) SUMMARY: A PLAN TO STICK IMPORTERS WITH HUGE NEW 
CUSTOMS EXPENSES IS PAR FOR THE COURSE.  IT ADVANCES THE 
GOB'S DUAL ECONOMIC PRIORITIES -- RAISING REVENUE WITHOUT 
REFORMING THE DECREPIT TAX SYSTEM AND DISCOURAGING IMPORTS. 
THE IMPACT ON THE ECONOMY IS HARD TO PREDICT.  FLOURISHING 
SMUGGLING AND UNDERINVOICING MAY NEGATE MUCH OF THE BURDEN, 
BUT THERE COULD BE SOME INFLATIONARY PRESSURES.  END SUMMARY. 
 
SMOOT-HAWLEY BURMA STYLE 
 
2. (SBU) BURMESE AUTHORITIES HAVE INCREASED DRAMATICALLY THE 
COST FOR IMPORTERS BRINGING THEIR PRODUCTS IN LEGALLY.  AS 
USUAL THERE WAS NO WARNING OF THIS MOVE AND NO OFFICIAL 
ANNOUNCEMENT OR EXPLANATION.  HOWEVER, IMPORTERS TELL US THAT 
CUSTOMS OFFICIALS ON JUNE 15TH BEGAN ASSESSING DUTY FOR THEIR 
PRODUCTS AT AN EXCHANGE RATE OF 450 KYAT/$.  PREVIOUSLY THE 
RATE WAS 100 KYAT/$.  THUS, TO BRING IN A $100 PRODUCT 
FACING, SAY, A 5 PERCENT TARIFF THE IMPORTER WOULD HAVE TO 
SHELL OUT 2250 KYAT (ROUGHLY $2.40 AT THE BLACK MARKET RATE) 
IN DUTY RATHER THAN 500 KYAT (ABOUT 55 CENTS) UNDER THE 
PREVIOUS SYSTEM. 
 
3. (SBU) ON TOP OF THIS, THE MINISTRY OF FINANCE HAS RAISED 
TENFOLD THE COMMERCIAL TAX, PAYABLE ON ALL IMPORTED ITEMS 
MEANT FOR RESALE EXCEPT FOR FIVE ESSENTIAL COMMODITIES.  THIS 
TAX WAS REDUCED 90 PERCENT IN 1996 DURING THE LAST ADJUSTMENT 
OF THE CUSTOMS EXCHANGE RATE.  IT HAS NOW BEEN RETURNED TO 
ITS 1996 LEVEL.  THE OVERALL SITUATION FOR IMPORTERS HAS BEEN 
FURTHER EXACERBATED BY A 15 PERCENT DEPRECIATION OF THE KYAT 
OVER THE LAST MONTH (THUS INCREASING THE COST OF "EXPORT 
DOLLARS" NEEDED TO APPLY FOR AN IMPORT LICENSE). 
 
4. (SBU) THIS NEW POLICY IS NOT ILLOGICAL (THE GOB NEEDS 
REVENUE AND IMPORTERS HAVE BEEN BENEFITING SINCE 1996 FROM A 
TAX BREAK AND AN EXCHANGE RATE FAR BELOW MARKET LEVEL) AND IT 
FITS WELL INTO THE GOB'S TWIN ECONOMIC "STRATEGIES" OF 
SEEKING NEW SOURCES OF REVENUE AND LIMITING IMPORTS. 
HOWEVER, IT BURDENS AN ALREADY TROUBLED SECTOR AND WILL DO 
LITTLE TO FIX LARGER SYSTEMIC PROBLEMS WITH REVENUE 
ENHANCEMENT.  IN LIEU OF CREATING A FUNCTIONING INCOME TAX 
SYSTEM, AUTHORITIES HAVE IN RECENT MONTHS SOUGHT TO RAISE 
MONEY BY IMPOSING HUGE NEW CAR TAXES, SHAKING DOWN LOCAL AND 
FOREIGN BUSINESSES, AND ARE NOW EXPANDING CUSTOMS REVENUE 
WITHOUT RAISING TARIFFS.  SIMILARLY, FOR SEVERAL YEARS NOW 
THE GOB HAS TRIED TO CONSERVE FOREIGN EXCHANGE AND PROMOTE 
IMPORT SUBSTITUTION INDUSTRIES BY STARVING THE ECONOMY OF 
IMPORTS -- THOUGH PREDICTABLY BANNED OR RESTRICTED IMPORTS 
FLOW FREELY OVER THE BORDER FROM THAILAND AND CHINA. 
 
CRANKY CRONIES 
 
5. (C) ACCORDING TO A WELL-CONNECTED BUSINESSMAN, WHEN 
HEARING OF THIS NEW POLICY -- ALLEGEDLY HATCHED BY TRADE 
POLICY COMMITTEE CHAIRMAN, AND SPDC NUMBER TWO, VICE SENIOR 
GENERAL MAUNG AYE -- THREE OF THE SPDC'S TOP BUSINESS CRONIES 
APPROACHED PRIME MINISTER GENERAL KHIN NYUNT TO COMPLAIN. 
APPARENTLY THE PM PROMISED TO RAISE THE ISSUE WITH BIG MAN 
SENIOR GENERAL THAN SHWE AT THE NEXT CABINET MEETING, BUT 
WOULD NOT COMMIT TO ANY FAVORABLE RESULT. 
 
COMMENT: BLACK MARKET WILL SAVE THE DAY 
 
6. (C) IT IS HARD TO PREDICT THE IMPACT ON THE ECONOMY OF 
THIS MOVE.  WITH THE BANKING SYSTEM STILL IN TATTERS, 
BUSINESSPEOPLE WILL BE HARD PRESSED TO COME UP ON SHORT 
NOTICE WITH HUGE QUANTITIES OF KYAT TO PAY OFF THEIR LARGE 
NEW CUSTOMS LIABILITIES.  HOWEVER SO MANY OF BURMA'S IMPORTS 
(PARTICULARLY CONSUMER GOODS) COME "DUTY FREE" VIA BLACK 
MARKET SMUGGLING OR THROUGH WIDESPREAD ABUSE HERE OF THE 
INTERNATIONAL DUTY FREE SYSTEM.  THERE IS ALSO A LONG 
TRADITION OF UNDERINVOICING OF IMPORTS AND THEN SETTLING THE 
DIFFERENCE INFORMALLY VIA THE GLOBAL HONDI REMITTANCE 
NETWORK.  THESE TWO MODALITIES WILL CERTAINLY BECOME MORE 
POPULAR TO EVADE THE NEW COSTS.  HOWEVER, THE POLICY COULD 
HAVE AN INFLATIONARY IMPACT, BUMP UP THE VALUE OF THE DOLLAR, 
AND DRAMATICALLY LIMIT THE VOLUME OF SOME CRUCIAL IMPORTED 
INPUTS.  END COMMENT. 
MARTINEZ