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