VZCZCXYZ0001
PP RUEHWEB

DE RUEHLP #1095/01 1102051
ZNR UUUUU ZZH
P 202051Z APR 06
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 8943
INFO RUEHAC/AMEMBASSY ASUNCION 5778
RUEHBO/AMEMBASSY BOGOTA 3068
RUEHBR/AMEMBASSY BRASILIA 6931
RUEHBU/AMEMBASSY BUENOS AIRES 4174
RUEHCV/AMEMBASSY CARACAS 1474
RUEHPE/AMEMBASSY LIMA 1438
RUEHMN/AMEMBASSY MONTEVIDEO 3728
RUEHQT/AMEMBASSY QUITO 4116
RUEHSG/AMEMBASSY SANTIAGO 8659
RHEHNSC/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS LA PAZ 001095 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/AND AND WHA/EPSC 
TREASURY FOR SGOOCH 
ENERGY FOR CDAY AND SLADISLAW 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV EAID BL
SUBJECT: BOLIVIA'S 2006 BUDGET: STRONG STATE PRESENCE 
 
 
¶1. Summary: The Morales administration sent a revised 2006 
public budget proposal to Congress on March 24.  The revised 
budget includes additional appropriations for health and 
education, while cutting salaries for government workers. 
Although the new administration has not yet released its 
economic plan, the proposed budget sends a clear signal that 
the GOB will emphasize social spending and public 
investment.  Overall budget figures are the same as the 
previous 2006 budget submitted during the last quarter of 
2005, including a predicted 4.1 percent deficit.  However, 
Finance Ministry contacts informed us that the GOB has 
several other spending proposals in the hopper that could 
more than double the current projected deficit.  End 
Summary. 
 
GOB SUBMITS REVISED BUDGET TO CONGRESS 
-------------------------------------- 
¶2. On March 24, 2006, the new administration submitted a 
revised 2006 budget to congress.  The proposed budget 
contains no significant overall revenue and expenditure 
changes, but shifts funds among sectors.  Announced 
government worker salary cuts will become effective at the 
end of April, and the savings will be reallocated to finance 
a seven percent raise for health and education workers. 
 
PRINCIPAL ECONOMIC GROWTH AND CURRENCY ASSUMPTIONS 
--------------------------------------------- ----- 
¶3. The 2006 public budget is based on several questionable 
assumptions about the GOB's still undefined macroeconomic 
policy.  The new administration assumes an economic growth 
rate of 4.1 percent and an inflation rate of 3.4 percent for 
¶2006.  The boliviano is expected to devalue at a slower rate 
than in previous years; the budget projections assume an 
average exchange rate of 8.12 bolivianos per US dollar.  The 
GOB is also expecting a 3 to 5 percent efficiency increase 
in tax and customs collections, a possibility if 
institutional reforms in the tax service are carried out. 
 
BUDGET BREAKDOWN 
---------------- 
¶4. The expenditures budget for 2006 is USD 4.2 billion, 
equal to about 40 percent of the projected nominal GDP of 
USD 10.6 billion. Revenues are expected to total 3.8 
billion, or 36 percent of projected GDP.  Of this aggregate 
amount, royalty and tax revenues represent 63 percent, which 
demonstrates the GOB's increasing reliance on tax 
collection, particularly from the hydrocarbons industry, 
vice other forms of revenue. 
 
¶5. The largest items in the budget are government salaries 
 
and procurement of goods and services, which make up 62 
percent of total current expenditures and 49 percent of the 
total expenditure budget, which is comprised of current and 
capital expenditures.  Also notable is approximately USD 410 
million of payments for pensions and USD 756 million for 
public investment.  Domestic and foreign public debt service 
payments are expected to total USD 320 million in 2006. 
 
FISCAL DEFICIT PROJECTIONS 
-------------------------- 
¶6. The 2006 fiscal deficit is expected to be around USD 440 
million, which by our calculations reaches 4.1 percent of 
projected GDP.  However, according to the draft budget, the 
deficit is projected to be 3.7 percent of GDP.  In either 
case, the anticipated deficit for 2006 is lower than 
previous projections for this year, despite additional 
expenses arising from MAS campaign promises.  However, 
several possible expenses, such as those resulting from a 
promised minimum wage increase, have not been included in 
the budget because they have not yet been approved. 
Unofficial estimates for such additional expenses reach 3 to 
4 billion bolivianos (USD 375 to 500 million).  These 
additional expenses would more than double the GOB's 
projected fiscal deficit. 
 
¶7.  While the overall deficit is expected to reach USD 440 
million in 2006, the Bolivian Treasury anticipates a gap of 
USD 500 million, partially due to insufficient cash flow 
from regional government accounts to central government 
balance sheets.  This gap will likely be covered by Central 
Bank loans. 
 
¶8. The Bolivian fiscal deficit will be financed from 
external and domestic sources.  For 2006, Bolivia has 
received external funding commitments from the World Bank, 
the Inter-American Development Bank, the Andean Development 
Corporation, the Agriculture Development Fund, Korea, 
Brazil, Spain, France, Italy, China, and Germany.  Internal 
funds will be provided by the domestic Administration 
Pension Funds.  For 2006, the administration plans to fund 
approximately 55 percent of the deficit, or USD 240 million, 
from external sources and 45 percent, or USD 200 million, 
from domestic sources.  Total public debt service payments 
are expected to account for 8 percent of government 
expenditures, which comes to USD 320 million. 
 
PUBLIC INVESTMENT 
----------------- 
¶9. The GOB's fiscal policy aims to stimulate the economy by 
increasing public investment.  Total public investment is 
projected to be approximately USD 760 million for the year 
(or 7 percent of GDP), which represents an 18 percent 
increase from the previous year's budgeted investment.  The 
majority of these funds will be transferred to regional and 
municipal governments, with the departments of Santa Cruz, 
Tarija, La Paz, and Cochabamba receiving two-thirds of the 
USD 760 million.  Eighty-two percent of the public 
investment budget is earmarked for infrastructure and social 
projects. 
 
COMMENT: POLITICAL PROMISES MIGHT TRIGGER FISCAL DEFICITS 
--------------------------------------------- ----------- 
¶10. Extraordinary revenues from special taxes and donations 
helped the GOB attain a record low fiscal deficit of two 
percent in 2005.  As these revenues and donations may 
decline this year and the GOB's "safety net" relationship 
with the IMF ended in March 2006, fiscal restraint will be 
crucial to ensuring a continued low deficit.  However, the 
GOB is likely to increase spending, particularly for public 
investment, in order to strengthen the role of the state in 
the economy, stimulate employment, and maintain its 
popularity.  Increased spending could buoy support for the 
administration, but could backfire if it reaches the point 
of undermining macroeconomic stability.  End comment. 
 
BREAKDOWN: BUDGET 2006 
(Millions of USD) 
------------------------------------ 
 
REVENUES                       3,765 
 
Current Revenues               3,545 
     Operating Revenues          611 
     Tax Revenues              2,135 
     Royalties                   267 
     Donations                    53 
     Other Revenues              478 
 
Capital Revenues                 220 
 
EXPENDITURES                   4,206 
 
Current Expenditures           3,316 
     Salaries                    994 
     Proc. Goods and Services  1,052 
     Foreign Debt Service        300 
     Total public transfers      500 
     Other current expenditures  468 
 
Capital Expenditures             890 
 
OVERALL PUBLIC DEFICIT           440 
 
FINANCING                        440 
 
     Domestic                    202 
     Foreign                     238 
 
--------------------------------------------- --- 
Source: Ministry of Hacienda. Public Budget 2006 
 
GREENLEE