US embassy cable - 05RANGOON599

UNCLAS SECTION 01 OF 03 RANGOON 000599 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA 
USPACOM FOR FPA 
 
E.O. 12958: N/A 
TAGS: ECON, PGOV, BM, Economy 
SUBJECT: THE GENERALS' FAIRY TALE BUDGET 
 
REF: 04 RANGOON 770 
 
1. (SBU) Summary: Burma's new fiscal year budget tells a tale 
of reduced budget deficits due to spending cuts and strong 
revenue growth by Burma's state-owned firms.  Unfortunately, 
this same tale is told every year, with the ending inevitably 
changed by supplementary appropriations and inaccurate 
revenue projections.  One thing is certain, the budget speaks 
volumes about regime priorities: the GOB will spend about 
$400 per soldier and a mere dollar and a half per citizen on 
health and education.  Chronic budget deficits, and the 
government's inability or unwillingness to address structural 
problems, will create inflationary pressures.  Limited 
liquidity and a stilled economy will help counteract the 
upward movement of prices.  End summary. 
 
Same Old Story 
 
2. (SBU) The GOB recently released its annual budget for FY 
2005-06 (April-March), including with it the official record 
of supplementary appropriations to the previous year's budget 
(always a huge sum).  The budget is not publicized broadly, 
instead appearing quietly in the back pages of the 
hard-to-find and rarely read "Burma Gazette."  As usual, the 
numbers put down on paper are unreliable, established as they 
are in an opaque process.  As there is no parliamentary or 
other oversight of government spending, the budget figures 
are also merely guidelines, to be added to at the whim of the 
senior generals either through a formal mid-year 
supplementary appropriation (reported post facto in the 
following year's budget report) or off-book. 
 
3. (SBU) In FY 2004-05, the GOB granted itself supplementary 
appropriations that boosted total expenditures by 24 percent 
from the original budget and created a budget deficit 12 
percent higher than already lofty expectations.  The amount 
added to the budget, especially in the defense category, from 
off-book expenditures is unknown but likely impressively 
large.  Though we assume that there are significant 
government revenues that do not appear in the official ledger 
-- non-tax income that ends up partially or totally in 
regional officials' pockets -- this is offset to a degree by 
overstatement of ministries and state-owned enterprises (SOE) 
of their expected revenues in the year ahead (there are no 
published revisions to the receipts side of the budget). 
Another recurrent problem in reading the GOB's budget is the 
exchange rate issue.  There are multiple official exchange 
rates for various government and SOE transactions (ranging 
from 6 kyat/$ to 450 kyat/$), and a multitude of informal 
exchange rates that hover around the 1000 kyat/$ rate.  The 
budget report gives no indication which exchange rates are 
used for calculations -- particularly troublesome when 
looking at data of heavy import or export-focused SOEs or 
ministries. 
 
4. (SBU) Because of the difficulties in taking the budget at 
face value, we will limit our analysis to trends and changes 
in stated budgetary priorities rather than closely examining 
the actual figures.  The budget deficit expectation is also 
an important indicator.  Because monetization is the GOB's 
only real mechanism to finance any deficit, the deficit 
figure in the past has been closely linked with inflationary 
spikes. 
 
Rosy Predictions Based on What? 
 
5. (SBU) The GOB envisions a boost in receipts of 24.2 
percent in 2005-06, primarily due to the cheerful prediction 
of a 26 percent rise in revenue from Burma's moribund SOEs. 
It also foresees a 2.6 percent rise in tax collection 
(probably due in large part to a recent revision of the 
exchange rate used for assessing customs duty).  Burma's 
ability to collect taxes is among the worst in the world, 
with collections in 2004-05 of only 2.3 percent of GDP (using 
the regime's tainted GDP numbers).  The budget also foresees 
a rise in expenditures, but only of 14 percent from last 
year's predicted outlay.  The report notes that this figure 
is actually a 10 percent reduction from the revised 2004-05 
spending levels.  Overall, the new budget promises a 65 
percent drop in the deficit (based on the last year's 
post-supplementary deficit spending). 
 
And the Winners Are... 
 
6. (SBU) It comes as no surprise that the 2005-06 budget 
shows the Ministry of Defense (MOD) as the big winner.  After 
a 54 percent increase in 2004-05, the MOD's budget rose an 
additional 12 percent in 2005-06 -- though down 5 percent 
from the FY 2004-05 actual expenditure.  The MOD share of 
overall government spending is the same as last year (9.5 
percent of total spending and 24 percent of allocations for 
Burma's 32 ministries).  Assuming a military of 400,000 
people, the MOD's initial 2005-06 budget (which likely only 
covers some operating costs, not procurement) comes out to 
377,000 kyat (about $400 at market rates) per uniformed 
capita.  Unlike any other public sector employer, the 
military provides full benefits for the armed forces, 
including housing, health care, subsidized food, and 
education.  The education and health care reserved for those 
in the service, and their families, are far superior to any 
offered to the general public. 
 
7. (SBU) As normal, initial 2004-05 budget figures show 
year-on-year cuts for nearly every ministry (and even larger 
cuts from 2004-05 revised appropriations).  However, 2005-06 
budgets for the Ministries of Electric Power and Transport 
have been boosted 52 and 31 percent respectively, though they 
still make up only 2 and 2.5 percent of total budgeted 
expenditures respectively.  Due to the supplementary 
appropriations, we expect few of these promised cuts to 
remain standing by year's end. 
 
Social Services Short-Shrifted 
 
8. (SBU) Despite a doubling (in kyat terms) in the last two 
years, the GOB's spending on public health remains 
appallingly low.  Though it does not include all official 
health expenditures, the 2005-06 appropriation for the 
Ministry of Health declined 17 percent from the final figure 
for 2004-05 (though it is up slightly from last year's 
initial budgeted amount).  The budgeted amount for 2005-06 
comes out to 400 kyat (about $0.40 at the current market 
rate) per capita.  Funding for education is better.  The 
Ministry of Education received a surprisingly large 15 
percent boost in the 2004-05 supplemental budget, though its 
2005-06 outlay is down nearly 40 percent from that peak.  The 
budgeted amount for 2005-06 comes out to 1070 kyat (about 
$1.10 at the current market rate) per capita. 
 
State-Owned Enterprises Remain Huge 
 
9. (SBU) The dozens of state-owned industries take up a huge 
portion of the annual budget (on both sides of the ledger), 
and a large part of the budget deficit.  The 2004-05 initial 
budget had SOE receipts equal to 63 percent of total 
revenues, a number predicted to rise to 64 percent in 
2005-06.  However, expenditures to the weak state firms are 
also predicted to rise 15 percent this year from initial 
2004-05 budget levels (or drop 7 percent if the revised 
2004-05 figures are used).  The 2005-06 prediction is that 
SOE expenditures will remain about 59 percent of total GOB 
expenses (or 1.5 times the amount expended on all ministries 
combined).  The expected SOE deficit this year is 20 percent 
less than last year's final deficit, though the deficit will 
certainly rise as inevitable supplemental appropriations are 
made to struggling SOEs.  Even using the more conservative 
figures, the SOEs' losses will make up 30 percent of the 
predicted budget deficit for 2005-06. 
 
10. (SBU) The GOB data do not disaggregate the numbers for 
SOEs.  Surely a small minority, especially high-value 
exporters like Myanmar Timber Enterprise, are doing better 
than others.  However, overall the deficits created year 
after year by these companies are the single largest problem 
for the GOB's fiscal account.  The IMF, in its most recent 
Article IV report, noted the GOB's refusal to rationalize 
these money losing SOEs as one of Burma's most serious 
structural problems (along with the related problem of 
multiple exchange rates). 
 
Comment: Budgetary Crisis Persists 
 
11. (SBU) Despite optimistic predictions of progress, we 
don't think this year will be much different from the recent 
past.  Nothing has been done to fix the economy's chronic 
problems -- weak tax collection; unreformed, inefficient, and 
money losing state-owned firms; unreliable statistics 
collection, etc.  Likewise, the regime still does not really 
grasp the importance of budgetary discipline, with unbridled 
supplementary appropriations and unchecked spending for 
military procurement and support of the SOEs that should be 
privatized or shut down.  The IMF predicted in March that 
inflation would increase to 50 percent in the "medium term" 
due to monetization of Burma's persistent deficit.  However, 
we think that the ongoing economic slowdown and unrelenting 
liquidity crunch will counteract to some degree these 
inflationary pressures.  End comment. 
Martinez