Fri, 03 Mar 2000

2000 budget approved

The House of Representatives has once again demonstrated that it is no longer the rubber stamp for every government policy as it was for the past 30 years. The House approved the 2000 state budget plan on Thursday only after more than one month of vigorous debates and only after making many substantial changes in the final version of the budget.

But a big question remains as to whether the changes in the various items of expenditures and revenue are for the good of the economy or whether the revisions will instead affect the credibility of the budget plan. The market welcomed the budget proposal as pragmatic when it was unveiled to the House in mid- January.

The final budget plan maintains most of the original assumptions made in January, such as economic growth of 3.8 percent, inflation of 4.8 percent and an average exchange rate of Rp 7,000 to the dollar for the April to December 2000 period.

But the assumption for the average oil export price, one of the most important elements of the budget, was revised upward from US$18 per barrel to $20 per barrel. Given the significant role of oil and natural gas as a source of state revenue, the change substantially increases the estimate for total revenue from the hydrocarbon sector by Rp 5.7 trillion ($814 million, based on an exchange rate of Rp 7,000 to the dollar).

A $20 average international price for crude oil for April to December appears realistic since international oil prices have of late been hovering between $28 and $30 per barrel. Even though the Organization of Petroleum Exporting Countries will decide to increase its production quota at its annual meeting later this month, succumbing to pressure from major consumers, such as the United States, the average price will not likely fall to below $20. Last year, for example, Indonesian oil export prices rose from a range of $15.12 to $19.68 between April and August to $21.86 to $24 between September and December.

Most precarious, however, is the substantial increase made for the revenue target to be raised by the Indonesian Bank Restructuring Agency (IBRA) from its asset sales and the privatization of state companies. Tasking IBRA to increase its asset sales by Rp 2.6 trillion to almost Rp 19 trillion for the nine-month period seems unrealistic, given the agency's poor performance in the past year, the quality of the assets under its management and bad experiences of foreign investors in dealing with the agency. IBRA has thus far raised only about Rp 10.5 trillion of the Rp 17 trillion target set for the current fiscal year ending later this month. The process of privatizing state companies has also been bumpy and full of controversy.

Increasing revenue from dividend payments by state companies of Rp 1.28 trillion to Rp 5.28 trillion is also risky in view of the weak economic recovery.

Shedding off Rp 4.3 trillion from the Rp 42.36 trillion originally estimated interest cost on treasury bonds for bank recapitalization is also worrisome. True, this measure could allow bigger appropriations for other spending but it would also mean a delay in the issuance of bonds for bank restructuring, which is so vital for a sustainable economic recovery.

The 12 percent increase in fuel prices, lower than the 20 percent proposed by the government in January, could minimize the risk of mass social unrest. But this populist measure would increase fuel subsidies by Rp 4.16 trillion to Rp 22.46 trillion.

One would therefore see the revised budget with a sense of foreboding. The significant boost in budgeted domestic revenue which prompted the government and the House to agree on substantial increases in fuel subsidies, personnel spending to meet pay rises and development (investment spending) depends on several revenue assumptions that are highly prone to overestimation.

It is therefore most imperative that both the House and the government closely and carefully monitor the budget implementation and should not hesitate to act firmly and speedily to make adjustments to actual developments.