US embassy cable - 03RANGOON448

UNCLAS SECTION 01 OF 02 RANGOON 000448 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/BCLTV, EB 
BANGKOK FOR FAS 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
USPACOM FOR FPA 
 
E.O. 12958: N/A 
TAGS: EAGR, ETRD, ECON, BM, Economy 
SUBJECT: CAN BURMA'S RICE REFORMS WORK? 
 
REF: 02 RANGOON 1292 
 
1. (SBU) Summary: Rice merchants are nervously anticipating 
the impending privatization of Burma's rice markets.  Though 
the long-term benefits of this step are manifold, a hurried 
implementation of this drastic policy could have some 
unwelcome side effects in the short haul.  End summary. 
 
GOB Washes it's Hands of Sticky Rice Trade 
 
2. (SBU) The GOB is preparing to turn over to the private 
sector all aspects of the rice trade, according to the Union 
of Myanmar Chamber of Commerce and Industry (UMCCI), and the 
Rice Millers' and Merchants' Associations.  According to the 
businessmen, beginning with the next monsoon crop (sowed in 
June, harvested in October/November), farmers will be exempt 
from their usual mandatory advance sales to the government, 
and merchants will be allowed (with a few significant 
restrictions) to freely sell and export rice. 
 
3. (SBU) This sudden change of policy came as a bolt from the 
blue on March 31, when Secretary Two (Lt. Gen. Soe Win) 
called a snap meeting of the UMCCI and top rice merchants. 
According to a UMCCI official, as far as he knew, there had 
been no prior deliberations on changing rice policy, although 
the UMCCI and others had been lobbying for some time for the 
move.  There's also little evidence that the GOB had been 
consulting with international agriculture or privatization 
experts to draw up an effective strategy.  The official 
speculated that the government has grown increasingly 
concerned with the rising price of rice on the domestic 
market, and wanted to pass on to the private sector the 
responsibility for this sensitive issue. 
 
4. (SBU) The broad outlines of the GOB's privatization 
strategy trickled out in the March 31 meeting and a follow-up 
session on April 5.  Another confab is likely sometime after 
April 20.  Rice merchants say they think an official 
announcement of the policy change should come within the 
month, alongside the formation of a Rice and Paddy Trade 
Steering Committee that will direct and control all aspects 
of the privatization.  As envisioned, the Committee will be 
chaired by Lt. Gen. Soe Win.  Its membership will include the 
Ministers of Commerce, Agriculture, Industry (1), and Energy, 
and six private sector representatives. 
 
Freedom to Buy and Sell...Sort Of 
 
5. (SBU) Though the policy is not yet official, according to 
the UMCCI and rice merchants the regime will no longer 
purchase rice or paddy from farmers, leaving buying and 
milling to the private sector to arrange.  The GOB, through 
the Steering Committee, will determine the domestic demand 
for rice as well as the amount needed to continue 
compensating civil servants and the military.  There will 
also be a undetermined buffer built in for emergency and 
required ASEAN stockpiles.  The rice merchants will be 
required to sell this total amount to the Ministry of 
Commerce's Myanmar Agriculture Produce Trading (MAPT) company 
either at cost or at the prevailing market price. 
 
6. (SBU) Existing agricultural traders, as well as a number 
of new private export firms the UMCCI hopes to establish, 
will be free to export any surplus above this calculated 
amount.  The government will take its usual 10 percent export 
tax, and will require the exporter to exchange an additional 
50 percent of its export earnings with the GOB at a 
yet-undetermined rate.  The regime will also earn income from 
renting out MAPT warehouses to private exporters. 
 
Private Sector Sweats Lack of Technology, Education 
 
7. (SBU) Though the private sector representatives with whom 
we spoke were quite enthused about their new opportunity, 
they were also quite anxious.  They complained they'd been 
given no time to prepare for this change, and were now 
rushing around trying to organize Rice Merchants' Association 
branches across the country.  Additionally, they admitted 
that the private sector had no infrastructure to provide 
education and technology to farmers and merchants, keys to 
the success of this experiment.  Right now, a UMCCI official 
said, they were banking on promises of continued government 
support and a new program of loans or grants to help upgrade 
badly outdated milling equipment.  Without the education and 
new technology, one rice merchant warned, there's no way 
Burmese rice will compete in the long term. 
 
8. (SBU) Financing will also be a problem.  With only a 
couple of month's warning, rice growers will be stuck this 
season without the traditional government advance purchase 
payments that, while unfairly low, were still the farmers' 
main source of cash to purchase seeds, fertilizer, fuel, and 
other inputs.  It is unclear whether the GOB's Myanmar 
Agricultural Development Bank will expand its currently 
paltry agricultural loan program to make up for this 
shortfall.  With the demise of the private banking sector, 
rice merchants and farmers may have to turn to the existing 
informal lending networks, with their exorbitant interest 
rates, in order to take full advantage of their new 
opportunity. 
 
Will Prices Fall? 
 
9. (SBU) With no preparation for change and a steep curve for 
improvement of technology and education, the hoped-for supply 
boom could be at least a season or two off.  However, newly 
liberated merchants are licking their lips over the potential 
demand for exports of Burmese paddy and milled rice, despite 
lackluster quality.  Bangladeshi traders clamor for as much 
paddy as they can grab, sparking robust border trade (legal 
and illegal) along the Rakhine State-Bangladesh frontier. 
Likewise, large global rice traders (such as Malaysia's 
Petronas) regularly come up short when the GOB suddenly 
re-allocates export rice for domestic consumption. 
 
10. (SBU) For rice traders, however, the devil of the new 
policy will lie in its details.  Rice has always been a 
politically sensitive product in Burma, and the government 
has in its hands more than enough power to ensure that the 
new market freedoms do not disrupt domestic supplies.  MAPT 
may exert effectively a right of first refusal on all major 
rice contracts; the government can cancel the export permits 
of companies whose actions threaten to be disruptive to 
markets; and, if all else fails, can simply ban rice exports. 
 Though they claim to have full faith in the GOB's 
intentions, traders are, of course, aware of this.  They have 
seen the business of foreign traders in beans and pulses 
handicapped by the decision last year to cease issuing 
permits to trade for foreign firms.  As a result, whatever 
the opportunities companies may see emerging from the new 
government rice policy, entrepreneurs almost certainly will 
move cautiously in risking their capital in these untested 
waters. 
 
11. (SBU) That said, government action in this area is 
welcome.  This may be a one-off move by the GOB, but it also 
could be the first step toward broader agricultural reforms 
that the Japanese, in particular, have been pushing as part 
of their economic adjustment programs.  If these first steps 
go well, others could follow. 
Martinez