US embassy cable - 03RANGOON563

UNCLAS SECTION 01 OF 03 RANGOON 000563 
 
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: BURMA: WHO WILL PAY THE PRICE FOR FREEING RICE? 
 
REF: RANGOON 448 
 
1. (C) Summary: The GOB's official announcement of its rice 
liberalization policy answered the questions: who, what, 
where, and when.  However, why, how, and how much are still 
vague.  Until these questions are answered, the success of 
the new policy will be uncertain.  However, we are encouraged 
by the direction the government seems to be taking in the 
agricultural sector, and hope that it will continue.  End 
summary. 
 
Unfunded Mandates 
 
2. (SBU) The details of the government's new rice policy, 
announced officially on April 24, were largely as reported in 
reftel.  However, there are four key areas left unaddressed 
or vague in the regime's announcement.  First and foremost is 
the question of funding for the new reform policy.  The 
government avows that it will no longer force farmers to sell 
in advance, at prices well below the market, a certain number 
of baskets of paddy.  Instead, the GOB will procure from 
merchants at their "purchase price" whatever milled rice (or 
unmilled paddy) it needs for supplementing the incomes of 
civil servants and the military.  Ministry of Agriculture and 
Irrigation (MOAI) officials tell us that the GOB, through the 
newly formed "Myanmar Rice Trading Steering Committee," will 
play a role in setting this "purchase price" though it will 
be market-driven. 
 
3. (SBU) It is unclear how the regime will finance these new, 
more expensive purchases.  Even if the government buys 
cheaper paddy from merchants, the Ministry of Commerce's 
Myanmar Agriculture Produce and Trading (MAPT) company could 
face procurement costs as much as 40 billion kyat (roughly 
$40 million) higher than last year.  In the government's 
recently published budget, there is no increase reflected in 
expected expenditures for the Ministry of Commerce or MAPT. 
However, supplementary appropriations are legal and routine, 
and deficits, including the deficits of state economic 
enterprises like MAPT, are funded automatically by the 
Central Bank.  In short, if all else fails, there is always 
the printing press. 
 
4. (SBU) A high-ranking MOAI official agreed that MAPT would 
be on the hook for much larger procurement expenses than 
before, and that this issue would have to be monitored 
closely.  However, he pointed out that expanded production in 
the long run should drive down domestic prices, and thus 
MAPT's expenses.  Also, under the policy proposal the 
government is set to benefit richly from expected increases 
in rice exports.  The government already nets 10 percent from 
a tax on all exports, a practice that will continue. 
However, in this new export regime, traders will have to turn 
over 50 percent of after-tax foreign exchange earnings to the 
government, in exchange for 50 percent of the trader's 
documented kyat expenses, plus some "acceptable," but yet 
undetermined, profit margin. 
 
5. (SBU) There is also the possibility that the government 
may choose to cover the cost of the new policy with new 
taxes, particularly on agriculture.  Up to now, the only 
significant taxes farmers paid in Burma were those implicit 
taxes applied through government procurement at below market 
prices.  With that procurement now ended, farmers should be 
fair game for new and more efficient taxes, particularly 
taxes on land.  Part of the proceeds from these taxes could 
be applied, if the government sees fit, to the cost of a rice 
subsidy. 
 
6. (SBU) Another option would be for the government to cut 
its rice subsidies to government employees (about 80 million 
baskets per year) and/or replace it with a salary increase. 
Rumors of such an increase have been floating around for 
several months.  However, this raise did not materialize with 
the commencement of the new fiscal year (April 1), and there 
is no hint from the budget numbers that such a huge increase 
in spending is in the cards.  Absolute cuts in the rice 
subsidy, meanwhile, are possible, but would be politically 
unlikely. 
 
No Credit, No Education, No Problem! 
 
7. (SBU) The serious question of credit was also not 
addressed in the GOB's policy proclamation.  Starting this 
monsoon crop cycle (June), farmers will not receive the 
advance procurement payments from MAPT that, while small, 
were the main source of credit for purchasing fertilizer, 
seeds, diesel fuel, and other inputs.  According to the MOAI 
official, this issue has not been resolved.  The banking 
sector will be little help, with private banks under water 
and the state-owned Myanmar Agricultural Development Bank 
lending a maximum of 5,000 kyat ($5) per acre.  MOAI and rice 
merchants forecast that farmers will muddle through by taking 
loans, at high interest rates, from the large informal 
financial sector and, ironically, by making advanced sales to 
consortia of rice merchants and to MAPT. 
 
8. (SBU) Similarly, the question of needed technology and 
education was left unresolved.  A Union of Myanmar Federation 
of Chambers of Commerce and Industry (UMFCCI) official told 
us that his organization was working with FAO to establish 
some small training seminars for entrepreneurs and possible 
fact-finding trips to the newly liberalized rice markets of 
Vietnam and Cambodia.  However, he complained that the regime 
had made no mention of any new training programs or education 
above the existing, inadequate agricultural extension and 
research programs.  The MOAI Director General for Planning 
admitted that there had been no new money extended for 
training and education in the recent Ministry budget despite 
his division's regular requests.  However, his division and 
the Ministry were working informally to get whatever 
technical advice it could from Japan, South Korea, and from 
Burma's ASEAN neighbors. 
 
Why Now? 
 
9. (SBU) Perhaps only Than Shwe's astrologer knows for sure 
why the SPDC chose to introduce such a major new initiative 
just before planting began.  We believe the new policy had 
been building momentum for some time, influenced by intense 
lobbying from the UMFCCI and the MOAI, and a number of other 
factors.  First, domestic pressure on the government due to 
record high rice prices was making rice a political hot 
potato.  The transfer of responsibility to the private sector 
will give the GOB a scapegoat should the price of rice 
continue its upward climb.  Second, SPDC Senior General Than 
Shwe was reportedly much impressed during his recent visit to 
Vietnam by that country's success in liberalizing its rice 
exports, adding to the regime's comfort level in privatizing 
its own rice market.  Leaders here often return from abroad 
with "good ideas" that are announced and implemented with 
unusual alacrity. 
 
10. (SBU) Another factor that cannot be ignored is the 
influence of the work Japanese economic experts have been 
doing with their Burmese counterparts to put together a 
comprehensive economic structural reform roadmap.  High on 
the list of priorities is the need for agricultural reform, 
particularly of the rice sector.  According to a MOAI 
official, this advice had significant resonance among some 
Burmese government officials.  The Japanese ambassador to 
Burma agreed with this assessment, telling the COM recently 
that he thought Japan's agricultural recommendations had had 
a definite impact on the GOB's decision to open the rice 
market. 
 
Rice Liberalizations Good, But Not Enough 
 
11. (SBU) Traders are also questioning their ability to buy 
and sell on a country-wide basis.  Right now, military 
commanders in the countryside are under orders to maintain 
local self-sufficiency, and have powers to block trade across 
district lines if that self-sufficiency is threatened.  As a 
result, in late April in northern Shan state, the regional 
commander was posting signs forbidding any transfers of rice 
between districts in southern Kachin and northern Shan 
states, even as the new rice liberalization measures were 
being announced.  If the new rice marketing policies are to 
work properly, the government will have to not only free the 
trade, as it has, but also unify the market by curtailing the 
powers military commanders now have to limit commerce.  If 
that is not done, the free market policies will have, at 
most, only localized effects. 
 
12. (SBU) Likewise, rice liberalization cannot succeed in an 
economic policy vacuum.  Without complementary reforms (such 
as a reduction of price inflation and re-establishment of 
some functioning formal financial system), farmers and 
merchants will not be able to take full advantage of the 
benefits of a free rice market. 
 
Only the Beginning? 
 
13. (SBU) It's hard to know at this early stage whether rice 
liberalization is the vanguard of a host of agricultural 
reforms or just an isolated action.  Businessmen, rice 
merchants, foreign diplomats, and government officials are 
all in the dark.  We can hope, though, that the move on rice 
will give courage to those in the private sector and various 
ministries who have been pushing for fundamental agricultural 
and economic reform measures.  MOAI officials have told us 
they are going to push for a reform of the agriculture 
taxation system as soon as possible.  The Japanese government 
is trying to further bolster economic reformers by outlining 
clear objectives and strategies.  We too can assist by 
providing examples of U.S. "best practices" and offering 
whatever we can to the anemic, but burgeoning, private 
agricultural sector. 
Martinez