BOLIVIA'S 2006 BUDGET: STRONG STATE PRESENCE

UNCLAS LA PAZ 001095

SIPDIS

SIPDIS

STATE FOR WHA/AND AND WHA/EPSC
TREASURY FOR SGOOCH
ENERGY FOR CDAY AND SLADISLAW

E.O. 12958: N/A
TAGS: ECON EFIN PGOV EAID BL
SUBJECT: BOLIVIA'S 2006 BUDGET: STRONG STATE PRESENCE



1. Summary: The Morales administration sent a revised 2006
public budget proposal to Congress on March 24. The revised
budget includes additional appropriations for health and
education, while cutting salaries for government workers.
Although the new administration has not yet released its
economic plan, the proposed budget sends a clear signal that
the GOB will emphasize social spending and public
investment. Overall budget figures are the same as the
previous 2006 budget submitted during the last quarter of
2005, including a predicted 4.1 percent deficit. However,
Finance Ministry contacts informed us that the GOB has
several other spending proposals in the hopper that could
more than double the current projected deficit. End
Summary.

GOB SUBMITS REVISED BUDGET TO CONGRESS
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2. On March 24, 2006, the new administration submitted a
revised 2006 budget to congress. The proposed budget
contains no significant overall revenue and expenditure
changes, but shifts funds among sectors. Announced
government worker salary cuts will become effective at the
end of April, and the savings will be reallocated to finance
a seven percent raise for health and education workers.

PRINCIPAL ECONOMIC GROWTH AND CURRENCY ASSUMPTIONS
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3. The 2006 public budget is based on several questionable
assumptions about the GOB's still undefined macroeconomic
policy. The new administration assumes an economic growth
rate of 4.1 percent and an inflation rate of 3.4 percent for

2006. The boliviano is expected to devalue at a slower rate
than in previous years; the budget projections assume an
average exchange rate of 8.12 bolivianos per US dollar. The
GOB is also expecting a 3 to 5 percent efficiency increase
in tax and customs collections, a possibility if
institutional reforms in the tax service are carried out.

BUDGET BREAKDOWN
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4. The expenditures budget for 2006 is USD 4.2 billion,
equal to about 40 percent of the projected nominal GDP of
USD 10.6 billion. Revenues are expected to total 3.8
billion, or 36 percent of projected GDP. Of this aggregate
amount, royalty and tax revenues represent 63 percent, which
demonstrates the GOB's increasing reliance on tax
collection, particularly from the hydrocarbons industry,
vice other forms of revenue.


5. The largest items in the budget are government salaries

and procurement of goods and services, which make up 62
percent of total current expenditures and 49 percent of the
total expenditure budget, which is comprised of current and
capital expenditures. Also notable is approximately USD 410
million of payments for pensions and USD 756 million for
public investment. Domestic and foreign public debt service
payments are expected to total USD 320 million in 2006.

FISCAL DEFICIT PROJECTIONS
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6. The 2006 fiscal deficit is expected to be around USD 440
million, which by our calculations reaches 4.1 percent of
projected GDP. However, according to the draft budget, the
deficit is projected to be 3.7 percent of GDP. In either
case, the anticipated deficit for 2006 is lower than
previous projections for this year, despite additional
expenses arising from MAS campaign promises. However,
several possible expenses, such as those resulting from a
promised minimum wage increase, have not been included in
the budget because they have not yet been approved.
Unofficial estimates for such additional expenses reach 3 to
4 billion bolivianos (USD 375 to 500 million). These
additional expenses would more than double the GOB's
projected fiscal deficit.


7. While the overall deficit is expected to reach USD 440
million in 2006, the Bolivian Treasury anticipates a gap of
USD 500 million, partially due to insufficient cash flow
from regional government accounts to central government
balance sheets. This gap will likely be covered by Central
Bank loans.


8. The Bolivian fiscal deficit will be financed from
external and domestic sources. For 2006, Bolivia has
received external funding commitments from the World Bank,
the Inter-American Development Bank, the Andean Development
Corporation, the Agriculture Development Fund, Korea,
Brazil, Spain, France, Italy, China, and Germany. Internal
funds will be provided by the domestic Administration
Pension Funds. For 2006, the administration plans to fund
approximately 55 percent of the deficit, or USD 240 million,
from external sources and 45 percent, or USD 200 million,
from domestic sources. Total public debt service payments
are expected to account for 8 percent of government
expenditures, which comes to USD 320 million.

PUBLIC INVESTMENT
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9. The GOB's fiscal policy aims to stimulate the economy by
increasing public investment. Total public investment is
projected to be approximately USD 760 million for the year
(or 7 percent of GDP),which represents an 18 percent
increase from the previous year's budgeted investment. The
majority of these funds will be transferred to regional and
municipal governments, with the departments of Santa Cruz,
Tarija, La Paz, and Cochabamba receiving two-thirds of the
USD 760 million. Eighty-two percent of the public
investment budget is earmarked for infrastructure and social
projects.

COMMENT: POLITICAL PROMISES MIGHT TRIGGER FISCAL DEFICITS
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10. Extraordinary revenues from special taxes and donations
helped the GOB attain a record low fiscal deficit of two
percent in 2005. As these revenues and donations may
decline this year and the GOB's "safety net" relationship
with the IMF ended in March 2006, fiscal restraint will be
crucial to ensuring a continued low deficit. However, the
GOB is likely to increase spending, particularly for public
investment, in order to strengthen the role of the state in
the economy, stimulate employment, and maintain its
popularity. Increased spending could buoy support for the
administration, but could backfire if it reaches the point
of undermining macroeconomic stability. End comment.

BREAKDOWN: BUDGET 2006
(Millions of USD)
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REVENUES 3,765

Current Revenues 3,545
Operating Revenues 611
Tax Revenues 2,135
Royalties 267
Donations 53
Other Revenues 478

Capital Revenues 220

EXPENDITURES 4,206

Current Expenditures 3,316
Salaries 994
Proc. Goods and Services 1,052
Foreign Debt Service 300
Total public transfers 500
Other current expenditures 468

Capital Expenditures 890

OVERALL PUBLIC DEFICIT 440

FINANCING 440

Domestic 202
Foreign 238

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Source: Ministry of Hacienda. Public Budget 2006

GREENLEE