Belt-tightening measures, subsidy cuts seal new budget

Belt-tightening measures, subsidy cuts seal new budget

The Jakarta Post, Jakarta

President Megawati Soekarnoputri unveiled on Friday the 2004
state budget draft, which would cut the amount of costly
subsidies on fuel and electricity and limit development spending
as part of belt-tightening measures to bring government finances
back in order.

Total expenditures are projected at Rp 368.79 trillion
(US$44.43 billion), slightly lower than the current budget of Rp
370.59 trillion. Revenue is set to increase by 2.3 percent to Rp
343.88 trillion.

Under the draft, next year's budget deficit would shrink to
1.2 percent of gross domestic product (GDP) from the 1.8 percent
estimated for this year.

Over the past two years, the government has been forced to
implement belt-tightening measures, at the request of the
International Monetary Fund, to establish fiscal stability
following the late 1990s financial crisis. The budget deficit was
about 3.7 percent of GDP three years ago.

This is important to show investors the government can
prudently manage its finances, particularly as it seeks loans
from foreign creditors and tries to raise funds on the
international bond market to help finance the 2004 budget. It
will be doing all this at a time when the IMF will no longer take
an active role in designing the country's economic policies.

"The ending of the IMF program represents a test and a
challenge for us to show our credibility in implementing economic
programs," Megawati told lawmakers when delivering her budget
speech.

Under the proposed budget, which will be debated by lawmakers
next month, the amount of subsidies will be reduced to Rp 23.31
trillion from Rp 25.46 trillion.

Subsidies on fuel products will be cut to Rp 12.69 trillion
from Rp 13.2 trillion, while the electricity subsidy will be
reduced to Rp 3.44 trillion from Rp 4.52 trillion. Other
subsidies such as those for fertilizer and credits for farmers
would also be affected.

Development spending will be limited to Rp 68.10 trillion,
compared to Rp 65.13 trillion under the current budget. Some
sectors like agriculture, cooperatives, tourism and regional
development could suffer from the lower spending next year.

Of the total expenditures next year, Rp 68.5 trillion will go
to paying interest on government bonds issued in the wake of the
financial crisis. Despite the huge amount, this is 16 percent
less than the amount allocated for this year.

The government will have to work hard to raise funds at home
and overseas to finance the fiscal gap next year. A large part of
this will come from domestic bond sales of about Rp 28 trillion,
and loans from the Consultative Group on Indonesia of about Rp
26.5 trillion. The government also plans to raise about $400
million through an international bond issue.

Under the draft budget, the government hopes to raise Rp 10
trillion from the privatization of state-owned companies and the
sale of remaining assets under the Indonesian Bank Restructuring
Agency.

The government also hopes to increase tax revenue by 6.6
percent to Rp 271 trillion. This will largely come from income
tax and value added tax.