State budget hangs in balance over dilemmatic fuel subsidy<\/p>\n
By Reiner S<\/p>\n
JAKARTA (JP): The government is struggling to create a
\ncredible state budget as it attempts to accommodate political
\npressures that often move against economic rationale.<\/p>\n
\"We're facing a dilemma here,\" said long-serving legislator
\nAberson Marle Sihaloho, who is also a member of the House of
\nRepresentatives budget committee.<\/p>\n
The main focus of debate between the government and
\nlegislators in shaping the April-December 2000 state budget is on
\ndeciding the size of subsidies, particularly for the politically
\nsensitive fuel commodity.<\/p>\n
Political factions in the House are, however, often seen as
\ntoo demanding and their proposals sometimes counter to economic
\nrationale.<\/p>\n
The government, for example, might have to bow to the demand
\nto raise the fuel subsidy to Rp 22 trillion from the Rp 18.3
\ntrillion it earlier proposed.<\/p>\n
Aberson said a Rp 22 trillion fuel subsidy, which would
\nrepresent more than half of the nearly Rp 40 trillion in total
\nsubsidies to be allocated in the next budget, might be too high.<\/p>\n
\"With such a huge subsidy for fuel, it will not help solve the
\nhuge unemployment problem, because our capacity to provide
\nsubsidies for productive sectors like the labor-intensive
\nagriculture sector will be very much limited,\" said Aberson, who
\nis an expert on fiscal-related issues.<\/p>\n
\"But if we reduce significantly the fuel subsidy, prices will
\nincrease and people will take to the streets to demonstrate. So
\nwhen are we going to fix the economy?\"<\/p>\n
Indonesia is now moving toward a real democracy following the
\nfall of former authoritarian president Soeharto in May 1998.<\/p>\n
Amid pressure from the International Monetary Fund, which was
\nproviding the country with a multibillion dollar bailout package,
\nSoeharto raised fuel prices in the January before he was forced
\nout of office.<\/p>\n
The People's Democratic Party (PRD) staged a demonstration
\nlast week in front of the Presidential Palace, protesting a
\nplanned increase in fuel prices and electricity rates, which the
\ngovernment plans to raise by 29 percent.<\/p>\n
President Abdurrahman Wahid, who was elected in the country's
\nfirst democratic election in over three decades, unveiled in
\nJanuary the 2000 state budget draft. In the draft, he proposed an
\noil price assumption of US$18 per barrel and a fuel subsidy of Rp
\n18.3 trillion, which would translate into an average 20 percent
\nhike in fuel prices.<\/p>\n
But during a debate between the House budget committee and the
\nMinistry of Finance, legislators pressured the government to
\nraise the oil price assumption to $20 per barrel. Theoretically,
\nthis would provide the budget with Rp 2.6 trillion in additional
\noil revenue which could be used to provide a larger fuel subsidy,
\nlimiting the planned fuel price increase to 10 percent.<\/p>\n
Legislators also pushed the government to boost other sources
\nof revenue to cover other expenditures, including the planned
\nincrease in the salaries of government employees, the electricity
\nsubsidy and subsidies for the agricultural sector and small-scale
\nbusiness sectors.<\/p>\n
Revenue<\/p>\n
The head of the House budget committee, Sukowalujo
\nMintohardjo, told the media last week the government had agreed
\nto raise the revenue from its privatization program to Rp 6.5
\ntrillion from its initial proposal of Rp 5.9 trillion. He also
\nsaid the government agreed to increase the revenue from the sale
\nof assets held by the Indonesian Bank Restructuring Agency to Rp
\n18.9 trillion from Rp 16.2 trillion, and boost tax revenue.<\/p>\n
This statement apparently irritated Minister of Finance
\nBambang Sudibyo, who said these figures were not final.<\/p>\n
The debate of the draft budget began on Jan. 25, and the
\nbudget initially was expected to be approved on Tuesday. But an
\nextended tug-of-war, particularly over the fuel subsidy, has
\nforced the debate to be extended until Thursday.<\/p>\n
The House now enjoys for the first time in decades its
\nbudgetary rights, after being used as a rubber stamp during the
\n32-year rule of Soeharto.<\/p>\n
Bambang has repeatedly told legislators the government could
\nnot easily revise upward its budget assumptions and revenue
\ntarget.<\/p>\n
\"It is too risky for the government to express a too high
\nrevenue target because this will make the budget not credible,\"
\nhe said.<\/p>\n
Senior economist Emil Salim also warned of the risk of the
\nmarket rejecting the government's state budget if the assumptions
\nand revenue target were deemed unrealistic, a scenario which
\noccurred during the transitional administration of B.J. Habibie
\nin 1998.<\/p>\n
\"The budget must be credible ... it must be based on realistic
\nassumptions,\" said Emil, who is also the chief economic adviser
\nto the President.<\/p>\n
The director general of budget, Anshari Ritonga, specifically
\nsaid an oil price assumption of $20 per barrel might be too risky
\nfor the sate budget.<\/p>\n
\"What if oil prices fall below the $20 level during the course
\nof the budget. Where will we get alternative financing to plug
\nthe gap?<\/p>\n
\"Although the price of oil is currently relatively high, we
\nmust be very careful about sharp fluctuations,\" he said, pointing
\nout that the previous state budget assumed an oil price of $17
\nper barrel while the actual average price was little more than
\n$10.50 per barrel.<\/p>\n
Another difficult issue is how to use the extra money from
\nrevised revenue targets, particularly oil revenue.<\/p>\n
\"There's been a difficult debate about whether to use all the
\nadditional oil revenue for the fuel subsidy or to also divert
\npart of it to provide subsidies for education and farmers,\" said
\nthe deputy of the House budget committee, Abdullah Zainie.<\/p>\n
He said a maximum 10 percent hike in fuel prices would only be
\npossible if all the additional oil revenue was dedicated to the
\nfuel subsidy.<\/p>\n
\"So there's now a possibility of a 12 to 13 percent hike in
\nfuel prices,\" he said.<\/p>\n
Noted economist Sri Mulyani said the additional budget
\nrevenue, particularly from oil, must be directed to stimulating
\nthe economy.<\/p>\n
\"It won't be healthy for the state budget if the extra revenue
\nis solely used to finance the fuel subsidy. It's better to use it
\nto finance labor intensive infrastructure projects,\" she said.<\/p>\n
Political risk<\/p>\n
Aberson agreed but said, \"The problem is the huge political
\nrisk (if fuel prices soar too high).\"<\/p>\n
\"Our foreign borrowing is Rp 31 trillion, while the amount of
\nthe subsidies is Rp 40 trillion. This means that we actually
\ndoesn't need the foreign money if we completely abolish
\nsubsidies,\" he said.<\/p>\n
The state budget needs some $4 billion in foreign loans to
\nhelp plug a budget deficit estimated to reach 4.9 percent of
\ngross domestic product.<\/p>\n
Aberson also said both the government and legislators had been
\nslow in campaigning for the necessity of raising fuel prices.<\/p>\n
\"This should have been done during campaigning (for the
\ngeneral election),\" he said.<\/p>\n
Aberson also said the House must continue monitoring the
\nsubsidies to ensure they reach their intended targets.<\/p>\n
The government intends to provide fuel subsidies only for
\nkerosene for poor households, gasoline and diesel for public
\ntransportation and state electricity firm PLN.<\/p>\n
The legislators also pushed the government to boost tax
\nrevenue so the country's tax ratio would increase to 14 percent
\nfrom the current level of around 10 percent.<\/p>\n
\"There's still huge potential for this,\" said Aberson,
\npointing out that some 40 percent of taxes had not gone into the
\nstate's coffers.<\/p>\n
But director general of taxation Mahfud Sidik said it was
\ndifficult for the government to raise taxes given the current
\neconomic situation, as any large increase in taxes could
\ndiscourage investment and limit the creation of new jobs.<\/p>\n
\"But according to my personal judgment, a 9 to 13 percent
\nincrease in taxes is still feasible. Not more than that,\" he
\nsaid.<\/p>\n
The government has proposed tax revenue of Rp 97.8 trillion in
\nthe nine-month state budget draft.<\/p>\n
Mahfud admitted strong political pressure in drafting the
\nstate budget.<\/p>\n
\"We're trying to preserve macroeconomics interests while at
\nthe same time also trying to accommodate political interest,\" he
\nsaid.<\/p>\n
\"There's an art to this process. Both the government and the
\nHouse are still in the learning process of balancing these two
\ninterests.<\/p>\n
\"I think this should be positive to foreign investors because
\nthis reflects a greater democracy in our country,\" he said.<\/p>",
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