Budget assumptions are realistic, says economist

JAKARTA (JP): The government's economic assumptions in the 2000 State Budget are realistic but a drastic cut in government subsidies would affect the numbers, an analyst said.

A noted economist at Gadjah Mada University, A. Tony Prasetiantono, said over the weekend the exchange rate, economic growth and inflation targets cited by the government were in line with his own calculations.

"The exchange rate target is quite realistic," Tony told The Jakarta Post.

"But it's difficult to reach the Rp 6,500 level because there are still (political) disturbances. I think the most realistic level is around Rp 7,000," he said.

Finance minister Bambang Sudibyo unveiled the government's assumptions for the April to December 2000 State Budget last week during a hearing with the House of Representatives Commission IX for budget and finance.

Bambang said the next state budget would be based on the assumption of an exchange rate of between Rp 6,500 and Rp 7,500 to the U.S. dollar and international oil prices of between US$16 and $19 per barrel.

Bambang also said the budget assumed economic growth of between 2 percent and 3.5 percent, and inflation of between 4 percent and 6 percent.

The rupiah plunged to as low as 17,000 to the dollar last year as the economic crisis deepened, compared to Rp 2,450 to the dollar before the crisis began in July 1997.

At the height of the crisis, inflation soared to more than 77 percent and the economy contracted by more than 13 percent.

The rupiah has regained much of its strength, particularly following the democratic election of President Abdurrahman Wahid in October. The local currency is currently hovering at around 7,200 to the dollar.

Tony said it would be better if the rupiah did not strengthen to the 6,000 level because it would adversely effect the country's export competitiveness.

Tony also said the budget's inflation target would not be attainable if the government made drastic cuts to subsidies.

The government plans to cut fuel and electricity subsidies gradually next year in a bid to create fiscal sustainability.

The International Monetary Fund and the World Bank are also pushing for a cut in the subsidies. The IMF is organizing a multibillion dollar bailout fund for Indonesia.

Sources say the government and international donors are still debating the size of the subsidy reductions.

Tony said the subsidies were not good for the country's economy and state budget, but a drastic cut in the subsidies, particularly for fuel, could cause unrest.

"I'm afraid that a 50 percent hike in fuel prices could cause social chaos," he said.

"But a 10 percent hike is still tolerable," he added.

He stressed that timing and assuring that people could continue to afford fuel and electricity were crucial in realizing the planned subsidy reductions.

Tony also said an increase in fuel prices would trigger a jump in the prices of other basic commodities.

Former president Soeharto raised fuel prices last year at the recommendation of the IMF, triggering social unrest which led to his resignation as president.

Bambang said cutting subsidies would help the government finance planned increases in the salaries of government employees and military personnel.

There have been demands, particularly from legislators, to raise the salaries of government employees and military personnel by more than 100 percent. Those making the demand say the government should use the funds raised from a boom in oil prices to finance the pay raises.

The current state budget ending in March 2000 assumes an oil price of $10.50 per barrel, but oil prices soared in the middle of last year and now hover at around $25 per barrel.

However, Bambang said the budget could not support such large salary increases for government employees and military personnel.

The government is considering an increase of more than 20 percent.

"A 20 percent increase means nothing because inflation was more than 77 percent last year. I think the budget could still afford a 50 percent increase," Tony said.

He said the government should not rely on booming oil prices to finance the salary increases, but should raise funds from the sale of state-owned companies, by incorporating off-budgetary finances into the state budget and switching part of the budget's development expenditure into routine expenditure.

"It's public knowledge that some 30 percent of development expenditure is siphoned off by government employees, so why not switch that amount into routine expenditure," he said.(rei)