VZCZCXRO7501
PP RUEHDT RUEHHM RUEHNH
DE RUEHCHI #0101/01 1960526
ZNR UUUUU ZZH
P R 150526Z JUL 09
FM AMCONSUL CHIANG MAI
TO RUEHC/SECSTATE WASHDC PRIORITY 1104
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHCHI/AMCONSUL CHIANG MAI 1186

UNCLAS SECTION 01 OF 03 CHIANG MAI 000101 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: AORC ECON EFIN EINV ETTC PGOV PHUM PREF SMIG
SUBJECT: EXPERT ON BURMESE ECONOMY SPEAKS ON MICROFINANCE 
 
REF: A)  RANGOON 142  B)  08 RANGOON 698 
 
CHIANG MAI 00000101  001.2 OF 003 
 
 
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Summary and Comment 
 
------------------- 
 
 
 
¶1.    Dr. Sean Turnell, a leading expert on Burmese economics, 
spoke at Payap University, Chiang Mai on July 2, providing 
attendees a basic foundation for understanding Burma's current 
economic situation.  Dr. Turnell briefly explained Burma's 
chaotic past, the evolution of its financial system, and the 
problems hindering the emergence of a viable financial sector. 
Dr. Turnell stated that hope is not lost for Burmese finance, as 
the microfinance industry is growing and providing small amounts 
of capital to needy borrowers. 
 
 
 
¶2.    Comment: Microfinance in Burma is bittersweet.  On the one 
hand, microfinance gives access to credit where needy Burmese 
can obtain funding to pursue a number of ventures.  On the other 
hand, microfinance in itself is not going to bring about the 
needed changes to manipulate the overall micro or macroeconomic 
situation in Burma.  The junta's economic policies are the major 
hindrance to economic development in Burma.  The Burmese 
military regime needs to restructure the financial system, 
ensure bank credibility, and engage the rest of the world in 
trade before substantial economic development occurs, stated 
Turnell.  End Summary and Comment. 
 
 
 
--------------------------------------------- 
 
A Turbulent History with Tumultuous Economics 
 
--------------------------------------------- 
 
 
 
¶3.     Dr. Turnell began his presentation with an explanation of 
the chaotic history of Burmese economics and microfinance since 
the 1850s, when Burma was an English colony and the largest rice 
exporter in the world - a position it held until World War II. 
At this time, a majority of financial services were provided by 
Chettiars who lent money to farmers who used their land as 
collateral.  As commodity prices crashed during the Great 
Depression, Burmese farmers defaulted or walked off their land, 
leaving the Chettiars with 50 percent of cultivable land. 
 
 
 
¶4.   In 1942, the Japanese invaded Burma causing the Chettiars 
to flee the country.  The Japanese seized vast tracts of land 
and established their own currency and monetary institutions in 
Burma, but upon Japan's defeat in World War II, domestic legal 
tender became worthless.  After the Japanese withdrawal, the 
British were not able to reassert control and allowed Burma to 
become independent.  The fledgling government attempted to 
create financial stability by enacting a currency board and a 
number of protectionist policies.  In 1962, the military took 
control, implementing backward economic policies that exploited 
the majority of the population.  These policies continue to 
reward military cronies and marginalize average citizens to this 
day, Turnell stated. 
 
 
 
¶5.   In the 1980s, the junta nationalized all banks, 
demonetarized the kyat to thwart speculators, and provided rural 
credit only through exclusive advance purchase of crops. 
Turnell noted the gap between the price the government paid and 
the actual market price for crops reached a high when the junta 
charged rice producers seven hundred percent on their product. 
It was around this time that the people began to riot and the 
junta crushed all demonstrations by killing thousands of 
protestors in 1988. 
 
 
 
¶6.   Following the protests, the junta allowed private banks to 
open and gave permission to foreign banks to operate in Burma 
(although none could operate effectively).  With a lack of 
oversight, competition, and customers outside the government, 
Dr. Turnell stated that many Burmese banks turned to suspect 
business practices such as money laundering, fraud, ponzi 
schemes (a fraudulent investment operation that pays returns to 
separate investors from their own money or money paid by 
 
CHIANG MAI 00000101  002.2 OF 003 
 
 
subsequent investors rather than from any actual profit earned) 
to earn a profit.  This unsustainable banking system led to 
another crash in 2003 where the government exchange rate ranged 
between five and six kyat per USD, while the black market rate 
surpassed 1,200 kyat per USD. Today, both government and black 
market exchange rates hover around these respective ranges with 
the government rate being significantly undervalued. 
 
 
 
----------------------- 
 
A Plethora of Problems 
 
----------------------- 
 
 
 
¶7.   Dr. Turnell said the current Burmese economy is plagued by 
a number of afflictions including high inflation, total 
disregard for property rights, widespread distrust in the 
currency, high levels of corruption, numerous economic 
sanctions, and a general dearth of capital.  Due to the total 
lack in consumer confidence and market stability, it is no 
wonder that there are no viable financial institutions or 
significant levels of FDI, he opined. 
 
 
 
----------------------------- 
 
Green Shoots in Microfinance? 
 
----------------------------- 
 
 
 
¶8.   Even though the Burmese financial sector is in shambles and 
essentially controlled by the military, Dr. Turnell reports that 
microfinance is a growing industry working to provide 
individuals the financing they need.  Although there are a 
number of small institutions and informal micro lenders in 
Burma, PACT (Program for Accountability and Transparency) funded 
by UNDP, is by far the largest issuer of small loans.  According 
to Turnell, PACT claims to reach approximately 300,000 Burmese 
borrowers, issuing loans based on the Grameen method where 
groups are formed to borrow and hold each member responsible for 
their portion of the loan.  Lending is progressive, as a strong 
track record of repayment leads to larger loans. 
 
 
 
¶9.   Dr. Turnell stated that the average loan is approximately 
32 USD, while the cost of writing the loan is 11 USD.  For this 
reason, PACT charges an interest rate between thirty-eight and 
forty-five percent.  Although this interest rate sounds high, 
Dr. Turnell said that people can receive exceptionally high 
returns from their loan. 
 
 
 
¶10.    While microfinance provides financing to some Burmese, 
Dr. Turnell opined that the future of microfinance in Burma is 
questionable.  The military junta does not give micro lenders 
any legal status, restricts the areas in which they can operate, 
and is prone to expropriate money (Note:  Embassy Rangoon notes 
this has not happened since 2004.  End note.), provides a 
hostile macroeconomic climate, and does not help to capitalize 
the institutions looking to support the people.  Operating micro 
lenders could be shut down or taken over at any time and 
absorbed into a state apparatus characterized by inefficiencies 
and corruption, he observed. 
 
 
 
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Question and Answer 
 
------------------- 
 
 
 
¶11.   In response to audience questions, Dr. Turnell provided 
the following observations: 
 
 
 
--Microfinance is not a strong stimulant to economic 
development.  Capital is the most important input for sustained 
development. 
 
CHIANG MAI 00000101  003.2 OF 003 
 
 
 
 
 
--Micro lenders tried to work with commercial banks, but the 
junta disallowed joint cooperation.  (Note:  Embassy Rangoon 
reports micro lenders are successfully operating in Burma 
without government intervention.) 
 
 
 
--Micro lenders are faring well during the economic crisis. 
PACT reports high repayment rates as the poor rarely default on 
their debts as they will find a way to repay.   Dr. Turnell 
reports 90 percent repayments (ten percent defaults). 
 
 
 
--About ten percent of local borrowing and lending happens 
informally between acquaintances. 
 
 
 
--seventy-five percent of remittances are used for survival 
purposes (food, shelter, clothing).  Very little is used for 
income generation or business development. 
 
 
 
--Remittance flows to Burma are down approximately 30 percent 
from 2008 due to the economic crisis (Ref A).  Although there 
are no official numbers, many Burmese laborers in the tourism, 
construction, and garment industries are being laid off. 
Additionally, the fall in commodity prices negatively affects 
Burmese migrants as wages in the gas and agriculture sectors are 
falling. 
 
 
 
--Dr. Turnell listed the methods used to send remittances to 
Burma: Forty-four percent of remittances are transferred by 
hundi, a system in which monetary value is transferred via a 
network of dealers or brokers from one location to another (Ref 
B).  This transaction does not involve the transfer of 
currencies, rather, products and services are exchanged. 
Twenty-two percent of remittances enter Burma through carriers 
or merchants who actually bring cash over.  Family members going 
to and from Burma with cash account for another twenty-two 
percent of remittances.  Only six percent of remittances flowing 
into Burma arrive via formal methods through Burmese banks. 
 
Four percent of remittances enter by a migrant hiring an 
accomplice to hustle cash into Burma.  Two percent of 
remittances arrive by other methods. 
 
 
 
--The vast majority of Chinese FDI in Burma is in the oil, gas, 
and mining sectors.  There are a number of Chinese pawn shops, 
small time money lenders, and merchants operating in Burma. 
Aside from these industries, Burma receives very little FDI in 
sustainable growth industries. 
 
 
 
--The economic sanctions did not stop Chinese investment in 
Burma. 
 
 
 
--The economic sanctions are well-founded, as state agencies 
would become stronger without them. 
 
 
 
¶12. This cable was coordinated with Embassy Rangoon. 
ANDERSON