Fiscal sustainability: How sustainable will it be?<\/p>\n
Muhammad Chatib Basri<\/p>\n
Looking at the prospects of the world economy in 2003 is like
\nlooking at a silhouette. You can see the big picture, but you
\ncannot tell the details. In the big picture we can see that while
\nthere are continuing indications that a global recovery is well
\nunderway, the details show that the economic recovery is likely
\nto be weaker than anticipated.<\/p>\n
The pace of recovery in the United States is now expected to
\nbe slower than earlier. In Europe projections have also been
\nreduced somewhat with domestic demand likely to pick up more
\nslowly than previously expected. In Japan, domestic demand
\nremains weak.<\/p>\n
The direct effects of the slow world economic recovery will
\nobviously affect Indonesia through trade. In addition, it is
\nlikely the growth of the Indonesian economy in 2003 will be
\naffected by the Bali blast.<\/p>\n
In this situation, growth will be very much dependent on two
\nmajor components: private consumption and the government budget.
\nPrivate consumption will very much depend on the government's
\nability to keep the inflation rate down. At the same time, any
\nhope of growth can only be expected to come about if the
\ngovernment allocates the budget to sectors that have high
\nmultiplier effects.<\/p>\n
Our economic simulation shows that increase in government
\ninvestment by 10 percent can increase economic growth by 0.4
\npercent to 0.5 percent.<\/p>\n
In addition, as pointed out by Ikhsan from The Economy and
\nSocial Research Institute at the School of Economy, University of
\nIndonesia (LPEM-FEUI), the cost of poverty alleviation has
\nincreased five times compared to the pre-crisis era. In a
\nsituation in which the government budget is dominated by
\nrepayment of domestic and foreign debts, it is difficult to
\nexpect there will be budget expansion that can stimulate the
\ndomestic economy and alleviate poverty. As a result, a fiscal
\nadjustment program will be needed.<\/p>\n
There are three scenarios for fiscal adjustment. First, if
\nthere is no increase in government expenditure. Under this
\nscenario, fiscal deficit and financing gap problems will
\nobviously be overcome. Albeit, this scenario is not consistent
\nwith the economic recovery as we cannot expect economic stimulus
\nfrom this scenario.<\/p>\n
Second, if there is a significant increase in government
\nexpenditure. This scenario will obviously match the demand for
\neconomic recovery. However, it will create a larger financing gap
\nand keep the debt ratio to GDP relatively high. Although it fits
\nwell with the economic stimulus, this scenario will harm the
\nsustainability of the government budget.<\/p>\n
Third, under this scenario, the government is expected to
\nimprove macroeconomic stability and make some adjustments in both
\nrevenue and government expenditures. This scenario requires a
\nwell targeted subsidy, tax reform, debt restructuring and
\nprivatization.<\/p>\n
In fact, there is some improvement in the debt ratio. The
\nratio of government debt to GDP in mid 2002 has been cut to 72
\npercent from an earlier 106 percent in 2000 and 91 percent in
\n2001. This is an outcome of prudential macroeconomic policies and
\nsuccessful government external debt rescheduling in the Paris
\nClub III meeting last April. In fact, the government is now
\ntrying to obtain loans of more than US$1 billion from the World
\nBank (high case scenario).<\/p>\n
However, in order to obtain this, Indonesia is required to
\nimplement the economic reform program.<\/p>\n
On the domestic debt front, the government plans to have a
\ndomestic debt re-profiling that applies to fixed rate recap
\nbonds. The plan will put in effect recap bonds maturing in 2004
\nheld by main recap banks. For recap banks, it is important to
\neventually convert the bonds to liquid assets either by direct
\nselling in the market or through an Asset to Bond Swap Program
\nwith the Indonesian Bank Restructuring Agency (IBRA). Otherwise,
\nthe recapitalized banks would be left with a large amount of non-
\nliquid assets. In this case, banks not only would face a cash
\nflow problem but also can hardly resume their financial
\nintermediary function.<\/p>\n
Although some efforts have been done in the debt
\nrestructuring, the reverse is true for the case of privatization.<\/p>\n
The progress has been very slow. The failure of the government
\nto reach its privatization target in 2001 is an indication of the
\ngovernment's lack of resoluteness in carrying out privatization.
\nFortunately, the divestment of Indosat has been successful and
\ncan contribute around Rp 5.5 trillion to the government's
\nrevenue.<\/p>\n
In 2002 the Indonesian government has been successful to
\ncollect around Rp 8 trillion from privatization which is higher
\nthan the initial target Rp 6.5 trillion.<\/p>\n
Taken into account the problem of fiscal sustainability, like
\nit or not, the Extended Fund Facility (EFF) program, which has
\nbeen extended until the end of 2003, will still be needed for two
\nreasons:<\/p>\n
First, the main prerequisite for an economic recovery is to
\nimplement government policies and discipline. Like it or not,
\namidst several political interests and the wildly spreading
\neconomic interests, the IMF's pressure is needed to remind the
\ngovernment of its target of economic recovery.<\/p>\n
Second, to fulfill the requirement of the Paris Club III
\nagreement that the IMF reform program is still in place. However,
\nthe legislature has already asked the government not to extend
\nthe IMF program after the end of 2003. There is a lingering
\nconcern of how the exit strategy will be and how far the fiscal
\nconsolidation program has been prepared to anticipate such
\ndecisions. To many people's chagrin, so far the debate on the IMF
\nprogram has only focused on the issue of whether we need the IMF
\nor not, not on the action plan to warrant that our fiscal
\ncondition will be sustainable in the future and thus what action
\nmust be made to anticipate this.<\/p>",
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