Part 2 of 2: The 2006 state budget: Out of wonderland?

Part 2 of 2: The 2006 state budget: Out of wonderland?

Kahlil Rowter, Jakarta

Beyond next year's budget numbers there is a larger concern:
regional government provision of services. The key question is:
has regional autonomy which resulted in financial bonanza
accompanied by fiscal responsibility? The problem is that tax and
natural resource revenues divested to regional government is done
in a formulaic manner.

On the other hand provision of services is more difficult to
gauge compared to centralized verification in the past. This has
resulted in insufficient provision of services that may have
caused an increase in reported cases of malnutrition; re-surface
of polio and other unfortunate outcomes.

It should not be a tall order to come up with a methodology to
ensure that the service level achieved during centralized era be
matched or even surpassed in the current system.

Enforcement, however, would be more difficult as regional
governments answer to their respective local parliaments. But if
we look at the makeup of these local parliaments, most are filled
by local representatives of national parties. Hence it should be
the responsibility of these parties, with active assistance from
the government, to ensure that a high minimum standard of basic
services are provided to their local voters. Welfare improvement
of these voter-citizens should after all be the aim of the
government and parties, local or national.

Difficulties in ensuring local government compliance to
service standards maybe responsible for slow disbursement of
foreign aid. Complaining to central government authorities mean
little when the problem lies with regional governments.

In the future, aid officers are well advised to deal directly
with regional governments where the projects will be located in
the end. To ensure a productive working relationship a certain
minimum level needs to be established in planning, execution and
monitoring competence at the regional level. Aligning training
programs to this end should start immediately. Otherwise expect
further delays in aid absorption.

It should be first noted that the House of Representatives has
not officially approved the 2005 budget. The question now is the
status of this budget. With ever increasing oil price, the fuel
subsidy keeps on rising and so too the deficit. There are
additional risks stemming from privatization revenues and sale of
government bonds the rest of the year at an ever increasing
yields.

Simply bandying about the possibility of drawing down last
year's budget suplus will not soothe the market. For one the
actual surplus figure itself is not widely known. Next comes the
verification of its status which entails verification of all
revenue and expenditure items. And then comes parliamentary
approval. These processes will not be easy or fast.

The expenditure pattern itself is different this year with
very little spent in the first half. The government rationalized
this by stating the new state finance law makes it difficult for
several ministries to drawdown monies.

Probably of more concern is the uncertainty over cash
availability in the second semester with increased fuel subsidies
and potential shortfall in deficit financing. Even if these
concerns can be abated, a flood in spending in the second half
risks increasing inflation which is already at a higher than
expected trend. Otherwise, the pre-funding done by several
vendors reported for several ministries will end up creating
losses for these contractors.

A cash drain now could make them unable to pre-finance next
year's government related activities. And this will make it
difficult to find qualified vendors next year that will want to
bid for government projects at a reasonable price.

Fuel price hike, the compensation scheme, ways to come up with
the money to finance oil subsidies and filling in the deficit are
the purview of the government. But how these policies are
discussed and not just how they are eventually decided upon
affects market perception and expectations.

Granted, most countries are facing difficulties from the rise
in oil prices. But how this international pressure is transmitted
to the domestic economy is where the government can play a
crucial role.

What we have not seen is a more flexible set of economic
policies to convince us to stop quetioning whether the economy is
still on track and that the current oil price induced pressures
are only temporary. It is high time for the government to do just
that. The initiative needs to be regained. Otherwise the
pessimists might just have their day.

The writer is Head of Economic and Fixed Income Research
Mandiri Sekuritas. This article is personal opinion.