Averting fiscal crisis

The government said on Tuesday that it had devised ways to "fix" the major problems that threatened to blow the 2001 state budget deficit into an unmanageable fiscal crisis. This official assurance does not, however, mean that the threat of a ballooning fiscal deficit to as large as Rp 88 trillion (US$8.2 billion) or 6 percent of the gross domestic product (GDP) has been removed. What the government meant by fixing is simply new calculations and plans on paper. For example, the economic growth estimate will be revised down from 5 percent to between 3.25 and 3.75 percent, the average exchange rate of the rupiah against the U.S. dollar from 7,800 to 9,600, average interest rate from 11.5 percent to 15 percent and inflation from 7.2 percent to between 9 percent and 9.5 percent.

To maintain the budget deficit target at 3.7 percent of GDP under the new assumptions, the government will intensify tax collection efforts, slash investment spending, further reduce subsidies, speed up asset sales and the privatization of state companies, and realign budgetary appropriations for local administrations. These measures are expected to generate Rp 35.3 trillion in additional revenue to bring the total receipts to Rp 282 trillion, as opposed to the Rp 263 trillion originally envisaged in the budget, and to cut total spending to Rp 336 trillion. This will bring the total deficit to Rp 54 trillion and not Rp 88 trillion, as estimated without the additional measures.

But the juggling of the numbers and the factoring in of the new assumptions are easier said than done. The actual numbers will still depend on developments, not only in the economic sector, but more importantly in the political arena, which is strewn with land mines and can explode into anarchy.

We wish the government good luck in its new assumptions, and revenue and expenditure targets. We nevertheless cannot help but feel that many of the targets are either too elusive or too ambitious.

Expecting Rp 3 trillion in additional revenue from income tax at a time when the economic growth is projected to be 2 percentage points lower than the original target seems to be a mission impossible, especially in view of the grossly inefficient tax collection system and the high incidence of corruption among tax collectors. The promise by a weak and increasingly unpopular government to further cut fuel and electricity subsidies by Rp 5.6 trillion sounds hollow. The plan to slash almost Rp 9 trillion from an already meager investment budget of Rp 44 trillion could deprive people of the need for more basic infrastructure and consequently increase inefficiency.

Even more questionable is the Rp 3 trillion increase in the revenue target set for asset sales and the privatization of state companies, given the imbroglios that have plagued several big transactions by the Indonesian Bank Restructuring Agency, such as the $380 million sale of 25 plantation firms to Malaysia's Guthrie and the $65 million acquisition by Canadian Manulife Financial Corp. of a 40 percent stake in an insurance company. Who will buy the assets offered by IBRA if deals with this government agency are vulnerable to legal complications?

The government has yet to propose the budget revisions to the House of Representatives next month, and only after these amendments are approved will the International Monetary Fund (IMF)'s executive board consider a new reform package (letter of intent) from the government. As it usually takes two to three weeks before the IMF board endorses a letter of intent, the third $400 million loan tranche from the IMF, which has been held up since December due to Indonesia's failure to meet reform targets, may only be released in late June or early July at the soonest.

This development is quite ominous indeed because the April 2000 agreement on the rescheduling of $2.8 billion in government debts with the Paris Club of sovereign creditors is tied to a new Indonesian reform agreement with the IMF.

Needless to say this is a very critical period for the nation, especially if the House's widely expected second memorandum of censure against President Abdurrahman Wahid early next week sets off mass violence, as the President's fanatical supporters have threatened.

The embattled President should therefore realize, just for once, that this vulnerable situation could easily turn into a self-fulfilling crisis whereby even the most sound economic policy would not matter anymore as the market would no longer want to give the country the benefit of the doubt.