US embassy cable - 05SANSALVADOR2764

UNCLAS SECTION 01 OF 03 SAN SALVADOR 002764 
 
SIPDIS 
 
STATE PASS USAID FOR SBRENT AND USTR FOR FSIDDIQI 
STATE ALSO PASS MCC FOR FMCNAUGHT 
USDOC FOR 3134/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
USDOC ALSO FOR 4332/ITA/MAC/MSIEGELMAN 
TREASURY FOR MFRANCO 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, KTDB, ES 
SUBJECT: HEALTH AND EDUCATION SPENDING UP IN EL SALVADOR'S 
2006 BUDGET 
 
REF: San Salvador 1626 
 
Summary and Introduction 
------------------------ 
1.  On September 29, Minister of Finance Guillermo Lopez 
Suarez submitted the government's $3.3 billion budget 
proposal for 2006, an 11.6 percent increase over the budget 
approved for 2005.  The Ministry of Education would see 
funding increase by 5.6 percent, while the Ministry of 
Health would receive an additional 13.6 percent.  Other 
government institutions working in the area of health and 
education would also see budget increases under the 
proposal.  The budget also includes $14.4 million in funding 
for Red Solidaria, the government's anti-poverty program 
that focuses on the 32 most impoverished municipalities in 
the country.  Increased tax revenues and additional bond 
offerings will finance the budget increase; the fiscal 
deficit is forecast at about 2.7 percent of GDP.  We expect 
that defections from the communist-led FMLN over the last 
year will result in a smoother approval process than in 
years past.  End summary and introduction. 
 
Spending on Social Issues to Increase 
------------------------------------- 
2.  President Saca's governance plan, "Secure Country," aims 
to improve social conditions through the expansion of 
education and health services.  The 2006 budget, which 
President Saca presented to the Legislative Assembly on 
September 30, includes modest increases in social spending 
supportive of his plan.  The government proposes spending 
about $1.094 billion on health, education, and related 
social programs, up 6.2 percent from the $1.030 billion 
budgeted for 2005.  Looking at the consolidated government 
budget, which includes spending by decentralized government 
agencies, the government proposes a $1.585 billion budget, 
up 8.9 percent from $1.456 billion in 2005.  Commenting on 
the budget, Saca said "This budget is focused on social 
development, while maintaining a commitment to fiscal and 
macroeconomic stability." 
 
Long-Term Commitment to Education 
--------------------------------- 
3.  Education reform led by the Ministry of Education during 
the last decade has produced significant achievements in the 
areas of access to education, curriculum development, 
teaching strategies, testing systems, and decentralization. 
Nonetheless, challenges persist, particularly in poor, rural 
areas, where enrollment and literacy rates remain low.  The 
government's Plan 2021, a long-term strategy that aims to 
achieve Millennium Development Goals for education, focuses 
on improving education-completion rates for the whole 
population and increasing the competitiveness of the 
workforce. 
 
4.  Included in Plan 2021 are specific targets for spending 
on education for the next 15 years: 3.1 percent of national 
income in 2005, 4.2 percent in 2009, and 6.3 percent in 
2021.  The 2006 budget proposal includes $510.7 million for 
the Ministry of Education, a 5.6 percent increase over last 
year's $483.4 million.  Total spending on education for 
2006, including spending by municipalities and independent 
government agencies, is not yet available, but is expected 
to increase over last year's $519 million. 
 
Healthcare Spending to Increase 
------------------------------- 
5.  Since 2001, the Ministry of Health has decentralized its 
operations to provide healthcare through health centers 
located near rural and urban population centers.  President 
Saca's "Secure Country" governance plan recognizes that to 
achieve universal healthcare coverage, government spending 
must increase.  Under the plan, funding for the Ministry of 
Health (one of several providers of healthcare to the 
public) would increase from a current 1.6 percent to 3.0 
percent by 2009.  In 2006, the Ministry of Health, which 
operates public health centers that offer free preventative 
care and vaccines, is budgeted to spend $313.1 million, up 
13.6 percent over the $275.5 million budgeted for 2005. 
Meanwhile, national hospitals are budgeted to receive $248.7 
million in 2006, up 10.4 percent from $225.3 million in 
2005. 
 
6.  Total government spending on healthcare in 2005 is 
estimated at $688 million.  That amount includes government 
support for Social Security Institute hospitals and health 
units, Ministry of Defense public healthcare programs 
(including an anti-dengue campaign), and other public health 
programs, in addition to the Ministry of Health and national 
hospitals' budgets.  Detailed budget data is not yet 
available to arrive at a similar estimate for 2006, but 
given the increase in the Ministry of Health and hospitals' 
budget, it is likely that total spending will increase 
compared to 2005. 
 
Funding Budgeted for Anti-Poverty Program 
----------------------------------------- 
7.  To bring economic development to poor, rural 
communities, the government launched a national poverty 
program called Solidarity Network (Red Solidaria) in March 
2005 to assist families in 100 municipalities affected by 
severe and high extreme poverty (Ref. A).  The program, 
which will focus initially on the poorest 32 municipalities, 
is budgeted for $14.6 million in 2006:  $7.4 million will go 
toward direct subsidies of $15-20/month for single mothers 
who send their children to school, $800,000 will support 
local NGOs' health and education programs, and $6.4 million 
will go toward infrastructure projects.  The Ministries of 
Health and Education will support the program by directing 
funding from their own budgets to these poorest 
municipalities. 
 
Other Budget Initiatives 
------------------------ 
8.  President Saca has committed to making social issues the 
central focus of his presidency, but the budget also 
reflects commitments he has made elsewhere.  The budget 
proposed includes a 12.7 percent increase in funding for the 
Ministry of Economy, to establish a new Consumer Protection 
Agency and to support projects in support of CAFTA-DR 
implementation.  The Labor Ministry would see its budget 
increased from $7 to $8.6 million and the underfunded, 
fledgling Tourism Ministry from $200,000 to $5.8 million. 
Fulfilling a promise made in February 2005, the budget also 
includes a pay raise for 76,000 government employees 
(excluding independent agencies that have their own pay 
scales, as well as medical and teaching staff at the 
Ministries of Health and Education), allocated as follows: a 
10 percent increase for those who earn less than $400/month, 
an 8 percent increase for between $401 and $700; a 6 percent 
increase for between $701 and $1,000, and a 3 percent 
increase for over $1,000.  The president, vice president, 
ministers and vice ministers would receive no raise. 
 
9.  Although the budget does include an overall spending 
increase of $346 million, increasing spending on health and 
education--while maintaining the fiscal responsibility 
required to keep a good credit rating--has required the 
government to propose a number of budget cuts as well. 
Overall, capital spending would decrease 4.6 percent, from 
$462.3 million in 2005 to $441.2 million in 2006. 
 
10.  Several ministries would see their budgets sharply cut; 
details are unavailable on what programs in particular will 
be affected.  The Foreign Ministry would see its budget 
slashed by 28.4 percent, falling from $43.6 million in 2005 
to $31.2 million in 2006, while the budget for the 
Environmental Ministry would be cut from $13.6 million to 
$7.7 million.  The most difficult tradeoff is the proposed 
budget cut for the Ministry of Governance, which is 
responsible for public security; that ministry would see its 
budget cut from $196 million to $187 million. 
 
11. Two ongoing natural disasters--a volcanic eruption and 
extraordinary rains over the past two weeks--are likely to 
complicate the government's budget planning.  The government 
will be forced to deal with a range of social and economic 
challenges caused by evacuations and infrastructure damage. 
Already, officials have announced that it will cost $178 
million to respond to the crisis, but that figure could rise 
quickly.  Using these funds, and others provided by external 
sources in response to the disaster, President Saca has said 
his government will focus on disaster mitigation, including 
drainage and levee improvements to prevent floods and 
mudslides. 
 
Financing the Budget 
-------------------- 
12.  The government proposes financing nearly a quarter of 
the budget, $846.8 million, through loans ($183.1 million) 
and bond sales ($663.7 million).  Tax revenues, which have 
increased substantially over the last year thanks to 
improved tax collection, are expected to contribute $2.362 
billion to government coffers, up 10.2 percent over last 
year's budgeted $2.048 billion.  Other sources of income 
(investment returns and assets sales, for example) would 
account for another $129 million.  Under this scenario--and 
with economic growth forecast at 3.5 percent and inflation 
at 2.5 percent--the government projects a fiscal deficit of 
2.7 percent of GDP and a level of debt of 38.5 percent of 
GDP for 2006.  This excludes $400 million in anticipated 
pensions payments and other smaller financial commitments. 
Minister of Finance Guillermo Lopez Suarez, commented in 
local newspapers that "The macroeconomic figures are 
sustainable, and the deficit is lower compared to 2005, 
which was 3.3 percent [of GDP]." 
 
Comment: Swift Budget Approval More Likely 
------------------------------------------ 
13.  We expect that budget approval for 2006 (the fiscal 
year runs concurrent with the calendar year) will come more 
easily this year than last for President Saca and his ARENA 
party, thanks to the defection of seven FMLN deputies over 
the last year.  In fact, it was last year's budget battle 
that began the exodus.  With only 24 deputies now (down from 
31), the FMLN alone cannot muster enough votes to block the 
budget, which requires a simple majority, or the 
international financing, which requires a two-thirds 
majority.  ARENA will look to the new Democratic 
Revolutionary Front (FDR), and other smaller parties, to put 
together the votes needed.  We expect deputies from those 
parties to be amenable to ARENA efforts to secure their 
support, but based on prior experience, that support could 
come with a cost to the government in other areas. End 
comment. 
 
BUTLER