US embassy cable - 03RANGOON79

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000079 
 
SIPDIS 
 
STATE FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
CINCPAC FOR FPA 
 
E.O. 12958: DECL: 01/10/2012 
TAGS: ECON, EFIN, BM, Economy 
SUBJECT: BURMA: THE ILLUSION OF ECONOMIC STABILITY 
 
REF: A. RANGOON 30 
 
     B. 02 RANGOON 1468 
 
Classified By: CDA a.i., Ron McMullen for Reasons 1.5 (B,D) 
 
1. (C) Summary: Since last Fall, Burma has seen the formation 
of new government economic advisory committees, a relatively 
stable kyat, and slowing consumer price inflation.  Could 
this mean the regime is finally taking real steps to improve 
the economic situation?  Unfortunately not.  The exchange 
rate stability is illusory, the slowing consumer price rises 
mask a still rampant inflation rate.  As for the committees, 
nothing good can come of them.  End summary. 
 
Government Committees: Training Grounds for Corruption 
 
2. (C) As a sign of its earnest efforts to remedy the 
nation's economic woes, the regime established in September 
several committees to monitor and advise on the nation's 
economic crises.  These green ribbon committees, all chaired 
by top SPDC members and military trustees, are ostensibly 
looking at issues ranging from fuel conservation to commodity 
price control.  While this seems encouraging, local 
economists say that such a move is commonplace and rarely 
turns into legitimate reform.  More likely, some opined, 
these committees end up as training grounds for young 
officers on how to take advantage of the country's economic 
distortions for their own benefit. 
 
Exchange Rates: Pressure is Building 
 
3. (SBU) Nonetheless, statistics collected by the Embassy 
show a relatively stable dollar/kyat market exchange rate 
over the past two months.  The kyat raced from 900 in August 
to 1310 kyat/dollar in mid-September before plateauing at 
about 1000 kyat/dollar from October through the end of 2002. 
This value of the kyat is still lower than it was at the 
beginning of 2002 (720 kyat/dollar), and is still 167 times 
below the official rate (6 kyat/dollar).  However, it is 
significant that such stability could come, and endure, 
without any evident economic reforms or positive changes in 
the business climate. 
 
4. (SBU) As we reported in Ref B, this curious period of 
stability is largely due to the government's decision to 
remove a major distorting factor from the foreign exchange 
market.  The military-directed Myanmar Economic Holdings, 
Ltd. (MEHL), not required like other importers to cover their 
import expenses with export revenues, had been a major 
consumer of black market dollars to fund its exclusive right 
to import diesel fuel and palm oil for cooking.  These import 
privileges, unfortunately bred significant corruption and 
higher prices.  Thus, the regime, in cooperation with MEHL's 
new leadership, decided in late 2002 to crack down on MEHL 
and re-assign the right to import diesel and cooking oil to 
state-controlled entities.  This decision in a stroke reduced 
significantly the demand for "uncovered" dollars on the open 
market.  The government also periodically fine tunes the 
exchange rate through "administrative measures" (e.g., 
arresting large money changers). 
 
5. (SBU) The government's increasing miserliness on the 
granting of import licenses also helps to explain the 
stability of the kyat.  Over the past several months, 
importers have complained about regular GOB refusal of 
license requests or extremely slow approval.  Also, they say, 
even approved licenses are regularly for 50 percent less than 
the amount requested.  Reflecting this, the recorded value of 
imports fell throughout 2002 by about 35 percent, according 
to official statistics. 
 
Prices: Consumer Goods Steady, but Inflation Roars 
 
6. (SBU) Despite a drop in the official value of imports, 
there has been no sharp rise in the cost of imported consumer 
goods in Rangoon.  From October through December, the price 
changes of our basket of imported consumer items have been 
about the same, or in one case lower, than the overall 
monthly CPI increase, which itself has slowed over the past 
three months.  The only significant increase in price in 
December's basket came from cooking oil -- perhaps a reaction 
to the new government-controlled importing and distribution 
arrangement. 
7. (C) A number of factors appear to explain this.  First, 
importers tell us that they have kept their volume steady, 
despite tighter import controls, by shifting their purchases 
from better quality, more expensive Thai, Japanese, Korean, 
and western products to cheaper Chinese goods.  Second, for 
consumer goods a virile black market here has kept the supply 
relatively steady, combined with some import substitution 
(particularly in snack foods and dry noodles) and some dip in 
demand commensurate with decreasing standards of living. 
Finally, the import statistics may be somewhat misleading as 
many importers underinvoice to bring in more product for 
their dollar's worth of export revenue, covering themselves 
by converting kyat earnings at the curbside market and moving 
it offshore through the black market exchange system (hon 
ti).  However, importers tell us that Customs has been 
cracking down on this practice lately, unilaterally marking 
up the invoice or requiring proof in the form of export 
records from the country of origin. 
 
8. (C) Furthermore, broader inflation remains a serious 
problem countrywide, especially when combined with stagnant 
wages and the eroding value of the kyat.  We estimate the 
rate for Rangoon in 2002 at about 60 percent.  One of the 
most serious causes is excess money supply due to the Central 
Bank's monetizing of chronic GOB budget deficits.  This, 
combined with a weak banking sector and the depreciation of 
the kyat, has led business people to unload kyat and snatch 
up legal assets (especially real estate, cars, gold, and 
gems) as fast as they can.  The resulting asset bubbles have 
been exacerbated by the boom in informal financial 
institutions that are investing in these same assets their 
surprisingly large deposits (see Ref A).  The high cost of 
transportation and imported fertilizer and tractors, combined 
with supply and distribution problems have also kept rice 
prices at historic high levels.  Likewise, the dysfunctional 
distribution system for fuel has led to steep price hikes for 
black market diesel and gasoline. 
 
Comment 
 
9. (C) In short, there is little evidence that the recently 
stabilized exchange rate has anything to do with any new 
stability in the economy.  While regime policies imposing 
tighter import controls and reining in the greedy MEHL have 
helped economize on foreign exchange and have helped squeeze 
out some corruption from the trading system, there has been 
no real effort to deal with the excess liquidity generated by 
the central government's budget deficit and the still 
expanding operations of the unofficial financial 
institutions.  Absent moves in these areas to deal with the 
rapidly expanding money supply, there is little that tighter 
enforcement of the GOB's current rules can do.  As a 
consequence, most people are still looking to a sharp 
increase in the exchange rate this spring.  Eighteen months 
ago, we forecast an exchange rate of 1800-2000 kyat/dollar by 
the end of Burmese FY 2002-03 (March 31).  Now it appears 
that the exchange rate may come in at the low end of that 
range, but even that will represent a near doubling of the 
exchange rate against the dollar in one year -- not in any 
sense a sign of a stabilizing economy.  End comment. 
McMullen