Cablegate: Burmese Economy: Yes We Have No Bananas...Or

This record is a partial extract of the original cable. The full text of the original cable is not available.

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
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

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