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Viewing cable 07RANGOON463, BURMA: INFLATION SKYROCKETS, ECONOMIC

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Reference ID Created Released Classification Origin
07RANGOON463 2007-05-17 08:23 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Rangoon
VZCZCXRO8086
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
RUEHLO/AMEMBASSY LONDON 1940
RUEHNE/AMEMBASSY NEW DELHI 3852
RUEHUL/AMEMBASSY SEOUL 7389
RUEHTC/AMEMBASSY THE HAGUE 0619
RUEHKO/AMEMBASSY TOKYO 4941
RUEHCI/AMCONSUL CALCUTTA 1113
RUEHCN/AMCONSUL CHENGDU 1130
RUDKIA/AMCONSUL CHIANG MAI TH 0974
RUEATRS/DEPT OF TREASURY WASHDC
RUEHGV/USMISSION GENEVA 3131
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unpublished inflation rate for December 2006 was 18.5 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