US embassy cable - 02RANGOON1468

UNCLAS SECTION 01 OF 02 RANGOON 001468 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
CINCPAC FOR FPA 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EINV, EFIN, BM, Economy 
SUBJECT: BURMESE ECONOMY: YES WE HAVE NO BANANAS...OR 
ANYTHING ELSE 
 
REF: A. RANGOON 1292 
 
     B. RANGOON 1248 
     C. RANGOON 1233 
     D. RANGOON 958 
 
1. (SBU) Summary:  The regime's continued mismanagement of 
the Burmese economy has given another push to its downward 
slide in recent months.  The government's increasing reliance 
on trade restrictions, rather than fiscal and monetary policy 
measures, has slashed imports and halted temporarily the 
plummeting of the kyat.  However, this hamfisted approach 
will leave key structural issues completely unaddressed and, 
in the long run, do more harm than good.  End summary. 
 
Trade: 'Tis Better to Give than Receive 
 
2. (U) GOB trade figures for the first half of 2002 reflect 
an improving trade balance for Burma.  According to 
government statistics, exports have risen about 10.5 percent 
while imports have plummeted over 35 percent.  As a result, 
the government can brag of the first trade surplus in many 
years.  However, the reality for the economy is much more 
negative. 
 
3. (SBU) The decline in imports reflects a number of factors 
-- including the closure of the Thai border for several 
months over the summer.  Even more significantly, however, 
the government has actively discouraged imports over the past 
year in hopes of conserving foreign exchange.  In recent 
weeks, import requests, all of which must be cleared at the 
highest levels, have been regularly denied or edited.  The 
government requires that all foreign exchange spent on 
imports be offset by export earnings.  Also, according to a 
1998 regulation, 80 percent of an entity's imports must be 
off a government-approved list of "essential" items -- a list 
that frequently changes and often has little to do with what 
is truly essential to the economy. 
 
4. (SBU) Exports rose during the same period largely because 
of Burma's increasing role as an exporter of seafood and a 
strong early showing for rice exports.  However, exports for 
the full year may sink due to a sharp decline in exports of 
garments and textiles to the United States and growing 
questions over the availability of rice stocks.  Reliable 
sources have told us that rice warehouse managers sold much 
of their stock when prices started to rise, expecting to buy 
it all back when prices fell.  Continuing high prices have 
made this impossible.  As a result, exports are being pinched 
during the second half of 2002.  For the government, the 
choice will be between fulfilling export goals and keeping 
the people fed.  As in the past, we expect the government to 
choose political stability over exports. 
 
Inflation: Countdown to Blast Off 
 
5. (SBU) Inflation, meanwhile, will worsen in upcoming months 
as import controls are felt.  During the August-October 
period, the overall consumer price index rose 7.4 percent 
(with the CPI of imports leading the way with a nearly 10 
percent jump).  The price of key edible staples rose even 
faster, with rice up 14.3 percent, beans up an average of 10 
percent, and fish paste up 12.5 percent. 
 
6. (SBU) Official import limitations, of course, have only a 
partial impact on the supply of goods.  Despite government 
efforts to crack down on illicit as well as legal imports, a 
robust black market in consumer goods and other imported 
materials has always managed to keep consumers and producers 
well supplied.  However, as in the past, prices will increase 
across the board, reflecting the risks and costs associated 
with smuggling and black marketing. 
 
Exchange Rate:  Riding the Roller Coaster 
 
7. (SBU) The dollar rate for the kyat has gyrated wildly 
during the past three months.  After hitting an all-time high 
of 1310 kyat to the dollar on September 25, the kyat 
appreciated nearly 24 percent to 1000 kyat/dollar by the end 
of October, before again dropping to about 1075 kyat/dollar. 
 
8. (SBU) There are at least three reasons for the short-term 
strengthening of the kyat.  First, the military-controlled 
Union of Myanmar Economic Holdings, Ltd. (UMEHL) lost its 
lucrative right to import diesel and cooking oil.  Because 
UMEHL, unlike other importers, was not required to pay for 
its imports with export earnings, the holding company had 
been a major consumer of black market dollars.  With its 
operations now curtailed, the demand for foreign exchange in 
the black market has fallen sharply.  Second, the authorities 
cracked down on the widely popular, but illegal, gambling 
networks.  The organizers of these gambling rings were large 
consumers of black market dollars, daily changing their large 
kyat earnings into dollars (in effect funding capital 
flight).  Finally, seasonal factors have played a role, 
including a demand for kyat to fund harvest purchases, and an 
influx of foreign exchange as the tourist season gets 
underway. 
 
9. (SBU) The kyat's recent strength, of course, will not 
endure, if only because the currency will shortly have to 
cope not only with the nearly inevitable breakdown of the 
government's trade controls, but also with the irresistible 
force of the government's annual budget financing, which is 
felt most clearly in the months from February through April. 
Each year at that time, the GOB drops several hundred billion 
kyat into the market, with a predictable impact on the kyat's 
value against all other currencies. 
 
Investment: Bottoming Out 
 
10. (U) The foreign investment situation could not be worse. 
During the first half of 2002, investment was down 97 percent 
from the same period a year earlier.  During the first half 
of 2002 there was only a single approved investment, by a 
Hong Kong textiles firm, for a mere $1.5 million.  Opaque 
policymaking, corruption, government interference, and a 
generally bad investment climate were the prime factors 
behind the decline.  This year, as a result, seems a total 
loss.  However, the numbers could get a small bump up next 
year from expected investment in mining in the north, and in 
the off-shore energy sector. 
 
Comment 
 
11. (SBU) Watching the GOB manage the Burmese economy is like 
watching a man trying to tie his shoes with one hand.  The 
GOB has only one policy tool -- trade restrictions (coupled 
with arrests) -- that it knows how to use at all, and it uses 
that tool in every contingency.  Prices too high?  Restrict 
trade!  Kyat depreciating?  Restrict trade (and arrest 
people)!  Investment falling?  Restrict trade (and 
investment)!  Never, ever, however, is there any effort to 
develop some balance in the government's fiscal operations, 
or any restraint in regard to monetary policy.  Given that 
approach, there is really little one can expect except 
increasing financial imbalances, soaring prices, and 
eventually collapsing production.  Sad to say, but that is 
the future of the Burmese economy.  End comment. 
Martinez