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.