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Cablegate: Burma: Inflation Skyrockets, Economic

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OO RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGO #0463/01 1370823
ZNR UUUUU ZZH
O 170823Z MAY 07
FM AMEMBASSY RANGOON
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6058
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1417
RUEHBY/AMEMBASSY CANBERRA 0294
RUEHKA/AMEMBASSY DHAKA 4539
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RUEHNE/AMEMBASSY NEW DELHI 3852
RUEHUL/AMEMBASSY SEOUL 7389
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RUEHKO/AMEMBASSY TOKYO 4941
RUEHCI/AMCONSUL CALCUTTA 1113
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RUDKIA/AMCONSUL CHIANG MAI TH 0974
RUEATRS/DEPT OF TREASURY WASHDC
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RHEHNSC/NSC WASHDC
RUEKJCS/SECDEF WASHDC
RUEKJCS/JOINT STAFF WASHDC
RUCNDT/USMISSION USUN NEW YORK 0772
RUEHBS/USEU BRUSSELS

UNCLAS SECTION 01 OF 03 RANGOON 000463

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS;
PACOM FOR FPA

E.O. 12958: N/A
TAGS: ECON PGOV BM
SUBJECT: BURMA: INFLATION SKYROCKETS, ECONOMIC
MISMANAGEMENT CONTINUES


RANGOON 00000463 001.2 OF 003


1. (U) Summary: In 2006, Burma's inflation rate rose to a
staggering 57 percent, fueled by poor economic policies,
higher input costs, further devaluation of the kyat, and
higher fuel costs among other factors. While the poor
continue to suffer, the middle class continue to struggle,
and the well-connected continue to profit, deteriorating
economic conditions could transform the country's downward
slide into instability. End summary.

2. (SBU) In March, the end of Burma's fiscal year, the
inflation rate rose to a staggering 57 percent, according to
the Embassy's monthly survey of prices. During 2006-2007, we
estimated inflation averaged 39 percent per month in contrast
to the previous two years when the average inflation rate was
below 20 percent. The Economic Minister claimed that
inflation was up only 16.44 percent in September 2006 and the
government's Central Statistical Organization's (CSO)
unpublished inflation rate for December 2006 was 18.5
percent. Nevertheless, most local economists dispute the
official inflation rate and agree that it is well over 50
percent.

What's Causing the Inflation?
-----------------------------

3. (U) Three official actions have raised prices across the
Burmese economy: reductions in fuel subsidies in October
2005 that drove fuel prices up 733 percent overnight; April
2006 civil service salary increases; and a ten-fold increase
of electricity charges in May 2006. Burma's inflation is
fueled by a combination of corruption, exchange rate
depreciation, and deficit spending. Despite the government's
claim it is implementing a "clean government program" and
cracking down on massive corruption in the Customs
Department, widespread corruption continues in the
Immigration Department, the police force, justice offices,
the Yangon City Development Committee, and other government
agencies and offices. The simplest official act requires a
bribe to accomplish. Citizens must bribe officials to obtain
telephone lines, cell phones, electricity meters, ID cards,
and drivers' licenses.

4. (U) Severe energy shortages continue to drive up the cost
of doing business and try the patience of the Burmese who
sweat through long, hot nights without fans or air
conditioning, and who often must get up in the middle of the
night to cook their meals and do their laundry, to take
advantage of the few hours they are supplied with
electricity. The frequent power cuts, fuel rationing, and
the sharp increases in fuel costs force businesses to spend
more on back-up generators and transportation, in turn,
raising the cost of production. The government's persistent
budget deficits and yearly supplementary budget allotments on
non-productive activities such as defense and non-productive
infrastructure also contribute to inflation. As a result,
the Central Bank just prints more money, fueling inflation.
This in turn contributes to the depreciation of the kyat,
further driving up the prices of imported good on which more
people depend.

Domestic Production Down, Uncertainty Up
----------------------------------------

5. (SBU) Although the Burmese government continues to claim
a 13.2 percent growth in GDP for 2006, reality does not
support the GOB's fantasy figures. The regime's claimed
achievements starkly contradict visible, widespread poverty
and mounting economic hardship. One senior economist told us

RANGOON 00000463 002.2 OF 003


increasing inflation is exacerbated by declining production
levels in both the government and private sectors, and
capital expenditures on construction resulting in huge budget
deficits. The GOB has spent an enormous amount of money on
infrastructure construction (like its new capital Nay Pyi
Taw) with little investment in the manufacturing sectors, he
said. To finance the resulting deficit, the Central Bank
increased the money supply. To combat the resulting
inflation, the government must collect more taxes, which
people can evade by bribing officials. He also noted that
the high-level of uncertainty in Burma's economy continues to
discourage private entrepreneurs from expanding business.

6. (SBU) The government's inaccurate official data results
in bad economic policy decisions. A business contact
recently told us that some price increases were directly
caused by a conflict between official information and the
reality of the market. A recent example is the government's
decision to grant export permits for onions and rice, based
on inaccurate data showing a market surplus of these items.
When exporters bought stocks in the market to make up the
required volume, prices of these basic commodities quickly
tripled. Rice prices continue to rise and are expected to
rise further due to an anticipated decrease in summer rice
crop acreage caused by this year's hot weather, low water
supply, and the rising cost of diesel fuel needed to pump
water for irrigation. Fertilizer costs are also expected to
increase due to the recent flooding that damaged fertilizer
stocks. Speculation drives up commodity prices as those with
money, faced with few opportunities to invest safely and
protect the value of their money, purchase commodities in
large quantities pushing up prices.

Interest Rates Cannot Keep Up With Inflation
--------------------------------------------

7. (SBU) In order to reduce the money supply, the Central
Bank of Myanmar (CBM) announced an increase in the savings
deposit rate from 10 percent to 12 percent per annum. But
inflation far outpaced the new rate. A private banker told
us that, in the past, the reserve requirement for private
banks was 10 percent of total demand deposit. On April 2,
the CBM increased the reserve requirement to 10 percent of
all deposits, including demand deposits, savings account
deposits, and fixed income account deposits. All in a futile
effort to decrease the money supply, the banker said.

How Does the Middle Class Manage?
---------------------------------

8. (U) Despite skyrocketing inflation, the middle-class
salary earners manage to make ends meet, though their
purchasing power continues to diminish. We receive reports
that the middle class have shifted to lower quality foods and
other purchases. Civil servants have a leg-up due to the
salary increase the government granted in April 2006,
although they have been affected by the necessity to split
family costs between the new capital and Rangoon. Staff in
private firms have either been paid reasonable salary levels
or been granted generous cost of living allowances to match
civil service salaries.

The Cronies Continue to Profit - As Well as the Regime
--------------------------------------------- ---------

9. (SBU) The regime's cronies or "national entrepreneurs" as
they are sometimes known, continue to rake in large amounts
of income due to their favored status in receiving government

RANGOON 00000463 003.2 OF 003


funded projects, licenses, and business permits allowing them
to generate high returns and more wealth. They are often
business partners of regime family members or well-connected
to the ruling generals. Apart from the cronies,
military-backed Myanma Economic Holdings Ltd. (MEHL)
continues to monopolize most business in Burma. Founded by
the military government in 1990, MEHL was created to provide
extra income for the top military families and junta cronies.
Eleven companies operate under MEHL conducting banking,
trading, manufacturing, transportation, mining, agriculture,
services, and real estate transactions. No private company
can compete against this mammoth. A business source told us
that MEHL recently received coveted and carefully controlled
licenses to import 2001 and 2002 model Toyotas from Japan for
about $7000 each. These were sold to high-level army
officials for about $142,000 each, who in turn re-sold the
cars to private individuals for $181,820.

11. (SBU) Comment: Burma's military regime sustains itself
by exploiting its natural resources, without considering
long-term economic consequences. Revenues from oil and gas,
mines, gems, and timber support the government's hard
currency needs, preventing a total economic breakdown. But
it has no plan to get the overall economy growing. The
generals do not listen to trained economists; instead they
resolve economic issues on an ad hoc basis. In this
deteriorating environment, no one will invest. And so the
downward spiral continues, with the people becoming ever more
discontented. The breaking point gets ever nearer.
VILLAROSA

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