BURMA: FY09-10 BUDGET SHORT ON DETAILS BUT CLEARLY

UNCLAS SECTION 01 OF 04 RANGOON 000377 SIPDIS STATE FOR EAP/MLS, INR/EAP, PACOM FOR FPA TREASURY FOR OASIA, OFAC E.O. 12958: N/A TAGS: ECON ETRD EFIN PREL PGOV PINR BM SUBJECT: BURMA: FY09-10 BUDGET SHORT ON DETAILS BUT CLEARLY DEMONSTRATES THE REGIME'S PRIORITIES RANGOON 00000377 001.4 OF 004 Summary -------------- ¶1. (SBU) The Burmese Government published its FY09-10 budget in late May, along with FY08-09 supplementary expenditure figures. As in the past, the GOB's budget publication provides only general guidelines, with little explanation of spending. The largest proportion of public funds will go to State-owned Enterprises (SOEs),the Ministry of Defense, and the "Government" (covering public works, including Nay Pyi Taw construction). GOB spending on health and education remains the same as last year, totaling less than two percent of the budget, or less than one percent of GDP. The GOB predicts a budget deficit of 624 billion kyat for FY09-10 (USD 624 million at current market exchange rates). If past budgets are any indication, the FY09-10 budget deficit should be higher than targeted, despite limited GOB efforts to improve revenue collection. End Summary. SOEs Dominate the Budget, Military Spending Up -------------- - ¶2. (SBU) The Burmese Government published its consolidated public sector budget in the Burma Gazette, a publication with limited distribution and readership, in late May, more than one month after the Cabinet passed the State Budget Law for the new fiscal year. Burma's fiscal year runs from April 1-March 31. The official FY09-10 budget provides general guidelines and funding amounts, leaving out any explanation of how each agency will spend its allotted money. Multiple exchange rates are used but not identified. Despite the lack of specific information, the budget gives an indication of GOB priorities. ¶3. (SBU) According to the budget, the GOB's spending for FY09-10 is expected to total 5.534 trillion kyat (USD 5.5 billion at current market rates),up 13 percent from FY08-09's 4.887 trillion kyat budget (before the supplemental). The GOB's spending priorities remain the same as last year. SOEs receive 62 percent of the budget, with most operating at a deficit. The Ministry of Defense and the "Government," which includes spending on public projects such as the construction of Nay Pyi Taw, receive approximately 10 and 7 percent of the budget respectively, with Defense receiving a 58 percent increase over last year's amount and "Government" receiving 27 percent more. GOB spending on health and education remain stagnant, at less than four percent of the total budget, or less than one percent of GDP. -------------- -------------- FY09-10 Expenditures In Billion Kyat -------------- -------------- Recipient FY08-09 FY08-09 FY09-10 % of % of w/supp. Total GDP* -------------- -------------- Total 4887 5597 5534 100.00 18.7 SOEs 3211 3396 3211 62.66 10.9 Government 361 642 360 6.52 1.2 Defense Min. 354 364 561 10.14 1.2 Finance Min. 182 235 235 4.26 1.1 Education Min. 167 176 167 0.92 0.8 Agriculture Min. 137 203 131 2.38 0.6 RANGOON 00000377 002.7 OF 004 Electric Min. 101 141 101 1.92 0.4 Construction 88 111 119 2.16 0.3 Home Affairs 52 54 58 1.06 0.2 Health 44 47 50 0.09 0.2 -------------- -------------- Note: FY09-10 GDP is estimated at 29.5 trillion kyat. ¶4. (SBU) The GOB projects revenues will total 4.910 trillion kyat (USD 4.9 billion) a 10 percent increase from last year's figures. The majority of anticipated revenues will be generated by SOEs, including those working in the extractive industries. A much smaller amount will come from taxes. Together, those two categories are expected to account for 98 percent of total income, and are to increase by four and 26 percent respectively over last year's returns. The GOB also predicts that the Ministry of Defense will increase its revenues by 58 percent, the Ministry of Agriculture will bring in 9 percent higher revenues, and the Ministry of Finance will earn 316 percent more compared to last year, though all from a low base. -------------- -------------- FY09-10 Revenues In Billion Kyat -------------- -------------- Source FY7-08 FY08-09 FY09-10 % of est. GDP -------------- -------------- Total 3178 4472 4910 16.62 SOEs 2086 2795 2912 9.87 Cont. from SOEs 501 853 938 3.23 Taxes 530 740 935 3.21 Defense Min. 18 27 41 0.13 Agriculture Min. 9 11 12 0.02 Finance Min. 5 7 25 0.08 Construction Min. 6 7 5 0.02 Health 5 6 8 0.03 -------------- -------------- Note: FY09-10 GDP is estimated at 29.5 trillion kyat. ¶5. (SBU) During IMF Article IV consultations in November 2008, GOB officials pledged to reduce the budget deficit by increasing tax revenues and eliminating corruption. However, the GOB's FY09-10 projected deficit of 629 billion kyat (USD 629 million) represents a 50 percent increase from the FY08-09 budgeted deficit (before adding the budget supplemental). Since FY03-04, the Burmese Government has steadily increased its budget deficit from 131 billion kyat in FY03-04 to 415 billion kyat in FY08-09. -------------- -------------- FY09-10 Budget Deficit In Billion Kyat -------------- -------------- FY07-08 FY08-09 FY09-10 % GDP for FY09-10 -------------- -------------- Total -558 -415 -624 2.1 -------------- -------------- Supplemental Appropriations Break the Bank -------------- RANGOON 00000377 003.8 OF 004 ¶6. (SBU) The Burmese government usually releases a supplementary budget later in the fiscal year reflecting higher expenditures; its total annual deficits are thus greater than in the initial official budgets. For example, the FY08-09 supplementary appropriation added an additional 743.9 billion kyat (approximately USD 743 billion at current rates) to that year's budget, raising expenditures by more than 15 percent over projected totals. ¶7. (SBU) As in previous years, "Government" received the largest allocation of additional funding (USD 282 million), approximately half of FY08-09's supplemental appropriation. Businessmen explained that money likely funded ongoing construction costs in Nay Pyi Taw, as well as other government infrastructure projects. SOEs received the second largest amount - 185 billion kyat (USD 185 million),a 65 percent budget increase. The Ministry of Defense received an additional 9 billion kyat (USD 9 million) and the Ministry of Finance received 53 billion kyat (US 53 million). In response to Cyclone Nargis, the GOB allocated an additional 77 billion kyat (USD 77 million) to the Ministry of Agriculture while the Ministry of Social Welfare received 44 billion kyat (USD 44 million). Weak Revenue Generation -------------- ¶8. (SBU) During last year's IMF Article IV consultations, IMF representatives highlighted the need for the Burmese Government to improve its tax administration and modify its widespread discretionary tax exemptions. According to IMF officials, the GOB replied that one of its goals is to reduce the budget deficit by addressing the main causes: weak revenue collection, losses from inefficient SOEs and SEEs, unrestrained government spending, and budget expenditures for non-productive uses, such as defense and construction. However, business contacts reported that the GOB did little to modify its tax structure in 2008, leading them to question the government's prediction of a 27 percent increase in tax revenues in FY09-10. ¶9. (SBU) Over the past few years, authorities have attempted to increase revenues through stricter enforcement of income taxation and through an informal 2007 Customs valuation rate hike from 450 kyat/$1 to between 800 and 1200 kyat/$1, depending on the product and its origin. While GOB officials privately argue that this rate hike indicates an effort to reconcile the various exchange rates, it instead complicates Burma's already complex informal exchange rate system. ¶10. (SBU) According to the FY09-10 budget data, most SOEs will operate at a loss. Even with extractive industries presumably posting sizable profits, the net SOE loss is predicted to be roughly 484 billion kyat (USD 484 million) -- though this estimate could be too low. State-Owned Enterprises registered a loss of 601 million kyat in FY08-09, substantially more than GOB initial estimates of 450 billion kyat. According to budget publications, SOEs lost 800 billion kyat in FY07-08, 436 billion kyat in FY06-07, and 549 billion kyat in FY05-06. ¶11. (SBU) Corruption at all levels remains a problem in Burma, which affects the GOB's ability to collect revenue. RANGOON 00000377 004.4 OF 004 While the government cracked down on crooked Customs officials in 2006, the payment of bribes on the borders continues, according to business contacts. Corruption is also rife in other GOB agencies, including the Internal Revenue Department, Immigration, and the Yangon Central Development Committee. Comment -------------- ¶12. (SBU) While the published budget provides a general guideline of how the GOB will allocate its funds, the lack of details in the document -- and the general unreliability of GOB statistics -- make it impossible to obtain an accurate picture of Burma's fiscal situation. This problem is compounded by the lack of spending discipline by senior leaders, who will likely continue allocating money for pet projects with little oversight or regard for planned appropriations. Despite the GOB's stated intention to reduce the budget deficit, another increase is far more likely due to uncontrolled spending, SOE losses, and the lack of tax reform. Burma's economic future remains troubled. DINGER