GOB STILL "IMAGINING THE POSSIBILITIES" IN THE BUDGET

UNCLAS SECTION 01 OF 02 BELMOPAN 000343 SIPDIS SENSITIVE DEPT FOR WHA/CEN (ROIS BEAL) E.O. 12958: N/A TAGS: ECON EFIN ETRD PGOV SUBJECT: GOB STILL "IMAGINING THE POSSIBILITIES" IN THE BUDGET REF: BELMOPAN 336 -------------- SUMMARY -------------- ¶1. (U) On July 14 2008, Prime Minister Dean Barrow presented the national budget for FY 2008/2009 budget. It is a relatively balanced budget of US$412.4 million, up by 12.2% over last year's revised figure of US$367.7 million. Much of the increase results from capital III expenditures aimed at projects such as paving the Placencia Road and the Southern Highway with funding sourced mainly through grant receipts and soft loans - much of it from ROC/Taiwan and Venezuela. End Summary. -------------- BUDGET HIGHLIGHTS -------------- ¶2. (U) At a meeting of the House of Representatives on July 14, Prime Minister and Minister of Finance Dean Barrow introduced the delayed national budget for FY 2007/2008. In his opening remarks the Prime Minister pointed out that, "not even in the face of the moral, political, and economic wasteland bequeathed to us by those that for ten years plundered our resources, do we give any talk of despair, any contemplation of the slough of despond." ¶3. (U) The PM reported that the economy slowed with the Gross Domestic Product (GDP) growth rate falling from 5.3% in 2006 to 1.6% in 2007. The GDP growth rate is forecast at 2.0% for 2008. Notwithstanding higher world prices, inflation slowed to 2.3% for the year, though the first quarter of 2008 has already showed a sharp 4.7% increase. Exports grew by only 0.3% while imports rose by 4.9% resulting in a widening of the trade deficit and a more than doubling of the external current account deficit to 3.4% of GDP. Outstanding external debt at the end of 2007 stood at US$971.8 million, while gross international reserves were US$108.5 million -- about 2.3 months of export coverage. It is a relatively balanced budget of US$412.4 million, up by 12.2% over last year's revised figure of US$367.7 million and reflects a small deficit (.31%). -------------- A CLOSER LOOK -------------- ¶4. (SBU) Income. Increases in expected revenues are derived largely from petroleum taxes (reftel) and foreign sourced grants and loans. ROC/Taiwan has already provided a US$25 million grant to support the budget. Venezuela's recently sweetened Petrocaribe deal is likely to cover at least that much this year. The Caribbean Development �A;Bank (CDB) has indicated it would provide over US$12 million in small loans to spur business development and Mexico, OPEC, Kuwait, the European Union, the International Development Bank, and the United Kingdom are included in the revenue lines as major contributors - several million US each. Note: Last week, the GOB was issued a notice to pay an arbitration judgment resulting from the former government's improper dealings for nearly US$5 million. When Poloff met with the Finance Director to discuss the budget, he stated that the money would come from the Petrocaribe deal and that he was specifically instructed not to include this potential payment in the budget because the GOB is likely to appeal it. End Note. ¶5. (SBU) Domestic financing for the budget is expected to come from increased economic activity "imagining the possibilities" as the UDP's election campaign slogan states. However, already this year two sizeable companies - Maya Papaya and Eagle Produce -- announced they will be closing down and laying off hundreds. ¶6. (U) The GOB announced several tax breaks including the removal of the General Sales Tax (GST) on a wide range of over-the-counter and prescription medicines and medical supplies and from certain food items such as powdered milk, chicken, vienna sausage, cooking oil, coffee and tea. This is a direct effort, in the PM's words, to assist the poor. The GOB also announced the provisions of import duty exemptions for agricultural machinery. ¶7. (U) Expenditures. As previously mentioned, the PM is interested in starting a small loan program to encourage the development of small businesses by year end through the CDB. The PM allocated several million dollars in educational subsidies for tuition and books as well as a food subsidy program. The largest expenses, however, are associated with infrastructure improvements - specifically the paving of the Placencia Road and the Southern Highway in addition to the permanent bridge at the Kendal crossing of the Sittee River to replace the one washed away by Tropical Storm Arthur. BELMOPAN 00000343 002 OF 002 -------------- THE OPPOSITION'S RESPONSE -------------- ¶8. (U) The budget debate is taking place over the next few days but the leader of the opposition party (People's United Party (PUP)) has already publicly commented that the budget is 'hollow'. He maintains that several of the projects in the budget reflect the fruition of projects the PUP already had in the pipeline. -------------- COMMENT -------------- ¶9. (SBU) The budget does not reflect a significant deviation from the past. Grants and soft loans will still represent a significant component of financing. Apart from reopening the Development Finance Corporation there are no new initiatives that will allow the government to address its long-term financial difficulties. The GOB continues to impose price ceilings on staple food items like flour and rice and provide agricultural subsidies using funds from the petroleum industry. Over the long run these subsidies/ceilings will only create more market inefficiencies. Consequently, the increase in fuel costs and commodity prices coupled with a tight fiscal position will continue to place pressure on the budget. The current situation presents a major challenge for the GOB to reduce its outstanding debt. And although self-reliance is not often a primary goal in Belize, the GOB will need to focus on serious economic development and investment opportunities in order to "realize the imagined possibilities." End Comment. HILL