BURMA'S BUDGETEERS WAVE MAGIC WAND

UNCLAS SECTION 01 OF 02 RANGOON 000770 SIPDIS SENSITIVE STATE FOR EAP/BCLTV, EB COMMERCE FOR ITA JEAN KELLY TREASURY FOR OASIA JEFF NEIL USPACOM FOR FPA E.O. 12958: N/A TAGS: EFIN ECON PGOV BM SUBJECT: BURMA'S BUDGETEERS WAVE MAGIC WAND REF: A. RANGOON 764 ¶B. RANGOON 223 ¶C. 03 RANGOON 1316 ¶1. (SBU) SUMMARY: BURMA'S FY 2004-05 STATE BUDGET MAGICALLY APPEARED IN LATE APRIL, SPORTING FIGURES AND PREDICTIONS FROM UNKNOWN SOURCES. UNSURPRISINGLY, THE MILITARY GETS A BOOST, BUT SO DO HEALTH AND EDUCATION. THE INITIAL TAKE CALLS FOR A REDUCED DEFICIT DUE TO INCREASED TAX RECEIPTS AND AN IMPROVED STATE-OWNED SECTOR. HOWEVER, THERE IS NO OBVIOUS JUSTIFICATION FOR THIS OPTIMISM, SO WE EXPECT LITTLE IMPROVEMENT TO THE GOB'S BOTTOM LINE THIS FISCAL YEAR. END SUMMARY. PICK A NUMBER, ANY NUMBER ¶2. (SBU) AS IF BY MAGIC, THE GOB MADE APPEAR, IN A MUSTY CORNER OF THE APRIL EDITION OF ITS MONTHLY BURMESE LANGUAGE GAZETTE, ITS FY 2004-05 (APRIL-MARCH) BUDGET. THE BUDGET HAS NOT BEEN PUBLISHED IN THE NEWSPAPER OR FOR WIDE PUBLIC DISTRIBUTION SINCE 2001. THE NUMBERS ARE PURE HYPOTHESIS, ESTABLISHED IN AN OPAQUE PROCESS INVOLVING THE VARIOUS MINISTRIES AND THE TOP SPDC BRASS. AS THERE IS NO PARLIAMENTARY OR OTHER OVERSIGHT OVER GOVERNMENT SPENDING, THE BUDGET FIGURES ARE ALSO MERELY GUIDELINES, AUGMENTED BY AN ANNUAL SUPPLEMENTARY BUDGET THAT IS ONLY REVEALED POST-FACTO AT THE END OF THE FISCAL YEAR. IN FY 2003-04, THE GOB GRANTED ITSELF A SUPPLEMENTARY BUDGET THAT INCREASED ADMITTED EXPENDITURES 34 PERCENT AND BALLOONED THE BUDGET DEFICIT 382 PERCENT FROM INITIAL ESTIMATES. ¶3. (SBU) THE BUDGET NUMBERS, EVEN INCLUDING THE SUPPLEMENT, ARE OFTEN UNDERSTATED. MUCH GOVERNMENT SPENDING, PARTICULARLY ON THE MILITARY SIDE, OCCURS OFF THE BOOKS. LIKEWISE, SIGNIFICANT NON-TAX GOVERNMENT REVENUE IS NOT REPORTED BY REGIONAL MILITARY AND CIVIL OFFICIALS WHO PREFER TO KEEP IT FOR THEMSELVES RATHER THAN TURN IT IN TO THE CENTRAL FUND. ANOTHER PROBLEM IS THAT THE BUDGET REPORT DOES NOT INDICATE AT WHAT EXCHANGE RATE THE NUMBERS, IN KYAT, ARE CALCULATED. WE ASSUME A 6 KYAT/$ RATE (THE OFFICIAL GOB RATE),THOUGH OTHER RATES ARE POSSIBLE FOR CERTAIN REVENUES AND EXPENDITURES. FOR EXAMPLE, UNTIL JUNE 15TH, CUSTOMS REVENUE WAS CONVERTED AT THE 100 KYAT/$ RATE (REF A). ¶4. (SBU) MORE INTERESTING THAN THE QUESTIONABLE FIGURES, THEREFORE, ARE THE TRENDS AND BUDGETARY PRIORITIES AND THE FORECASTED BUDGET DEFICIT OR SURPLUS. IN THE PAST, THIS LATTER FIGURE HAS BEEN AN IMPORTANT INDICATOR OF INFLATION -- SINCE THE GOB ALMOST ALWAYS PRINTS MONEY TO FINANCE ITS BUDGET SHORTFALLS. MAKING SOCIAL SPENDING DISAPPEAR ¶5. (SBU) OVERALL, THE GOB EXPECTS EXPENDITURES TO DIP 4.3 PERCENT FROM THE TOTAL FY 2003-04 FIGURE (INCLUDING THE SUPPLEMENTARY APPROPRIATION). THE SINGLE LARGEST LINE ITEM IN THE FY 2004-05 BUDGET IS FOR THE DEFENSE MINISTRY, WITH NEARLY 10 PERCENT OF THE PROJECTED EXPENDITURES. DEFENSE'S BUDGET IS UP 54 PERCENT FROM LAST YEAR'S INITIAL FIGURE AND, AS MENTIONED, IS LIKELY FAR BELOW THE ACTUAL AMOUNT SPENT ON MILITARY AFFAIRS. IT IS ALSO LIKELY ONLY A STARTING POINT. IN FY 2003-04 THE SUPPLEMENTARY BUDGET ADDED A GENEROUS 57 PERCENT TO THE AMOUNT INITIALLY BUDGETED FOR THE MINISTRY. ¶6. (SBU) SOCIAL SPENDING DOES NOT FARE AS WELL. THOUGH THE GOB IS EARMARKING NEARLY 6 PERCENT OF THE BUDGET FOR THE MINISTRY OF EDUCATION, THE MINISTRY OF HEALTH WILL ONLY GET 1.5 PERCENT OF EXPENDITURES -- THOUGH THIS IS UP 108 PERCENT FROM ITS FY 2003-04 INITIAL ALLOTMENT. THE HEALTH NUMBER IS ALSO UNDERSTATED AS SEVERAL OTHER MINISTRIES CONTRIBUTE TO THE OVERALL HEALTH SPENDING PICTURE. ¶7. (SBU) OTHER PRIORITIES FOR 2004-05 ARE: FINANCE AND REVENUE (5.5 PERCENT OF THE BUDGET),CONSTRUCTION (4.6 PERCENT),AND AGRICULTURE AND IRRIGATION (3.8 PERCENT). STATE-OWNED FIRMS: FROGS TO PRINCES? ¶8. (SBU) OPTIMISTICALLY, THE GOB HAS PROJECTED FY 2004-05 REVENUES TO JUMP 31.5 PERCENT, LED BY AN EXPECTED 73 PERCENT INCREASE IN TOTAL TAX RECEIPTS AND 31.5 PERCENT INCREASE IN REVENUES FROM DOZENS OF ANTIQUATED STATE-OWNED ENTERPRISES (SOES). THE BUDGET ALSO CALLS FOR A 9.5 PERCENT DECLINE IN EXPENDITURES FOR THE SOES. HOWEVER, THESE PROJECTED DECLINES OFTEN TURN INTO INCREASES OVER THE COURSE OF THE YEAR AS THE COMPANIES CONTINUE TO HEMORRHAGE MONEY. IN FY 2003-04 THE SOES RECEIVED A 44 PERCENT BONUS IN THE SUPPLEMENTARY APPROPRIATION PROCESS. LIKEWISE WE ARE DUBIOUS THAT THE GOB WILL BE ABLE TO MILK ANOTHER 73 PERCENT FROM A ESSENTIALLY NON-EXISTENT TAX COLLECTION SYSTEM. ¶9. (SBU) THE BUDGET ENVISIONS AN ANNUAL DEFICIT THAT IS 52 PERCENT DOWN FROM LAST YEAR'S POST-SUPPLEMENT DEFICIT. HOWEVER, THE PROJECTED DEFICIT IS 132 PERCENT LARGER THAN THE INITIAL FY 2003-04 PROJECTED DEFICIT. THE ROSY 2004-05 PREDICTION IS BASED ON THE HUGE REVENUE ENHANCEMENTS MENTIONED ABOVE PLUS A PROJECTED 67 PERCENT DECLINE IN THE SOES OVERALL OPERATING DEFICIT -- WHICH MADE UP 58 PERCENT OF THE '03-'04 TOTAL DEFICIT POST SUPPLEMENT. ¶10. (SBU) LIKE THE EXPECTED REVENUE INCREASES, IF PAST IS PROLOGUE WE THINK THE EXPECTED SOE IMPROVEMENTS ARE ALSO WISHFUL THINKING. IF THE COMPANIES GET THE SAME 44 PERCENT BOOST FROM THE FY 2004-05 SUPPLEMENTARY APPROPRIATION THAT THEY DID FROM THE FY 2003-04 ONE, THE SOES' DEFICIT WOULD RISE 29 PERCENT COMPARED THE FY 2003-04 DEFICIT. COMMENT: BUDGETARY PRESTIDIGITATION ¶11. (SBU) BECAUSE THERE IS NO COMMENTARY PRESENTED ALONG WITH THE BUDGET NUMBERS, AND THE FIGURES GIVEN ARE SO FLEXIBLE, IT IS HARD TO MAKE FIRM PREDICTIONS ABOUT THE FUTURE OF BURMA'S DOMESTIC FINANCES. HOWEVER, WE WOULD BE SURPRISED IF THE BUDGETARY SITUATION IMPROVED MUCH THIS YEAR. THERE IS NO SIGN THAT THE REGIME INTENDS TO REFORM ITS TAXATION SYSTEM AND ITS HALF-HEARTED REVENUE ENHANCEMENT PLANS TO DATE ARE EASILY DEFEATED BY THE HUGE UNTAXED INFORMAL ECONOMY (REFTELS). LIKEWISE, WE'VE SEEN NO EVIDENCE OF ANY PRIVATIZATION OR OTHER RATIONALIZATION OF THE STATE-OWNED SECTOR THAT WOULD ACCOUNT FOR THE EXPECTED IMPROVEMENT IN ITS COLLECTIVE BOTTOM LINE. END COMMENT. MARTINEZ