Budget deficit could exceed 5% of GDP: Rizal

Budget deficit could exceed 5% of GDP: Rizal

JAKARTA (JP): Coordinating Minister for the Economy Rizal
Ramli warned on Wednesday that the 2001 state budget deficit
could widen to more than 5 percent of gross domestic product
(GDP) from the initial estimate of 3.7 percent of GDP, unless
measures were taken immediately.

Rizal said that more concerted efforts must be made to achieve
the domestic tax revenue target and push the privatization
program in order to prevent the budget gap from widening.

"It (the deficit) could be more than 5 percent of GDP if we
don't do anything," he added in remarks that reinforced a similar
warning made earlier on Tuesday by Minister of Finance Prijadi
Praptosuhardjo.

Prijadi warned of a greater deficit this fiscal year due to
the weakening of the rupiah, rising interest rates, a delay in
the collection of certain taxes and the postponement in some
sectors of the planned fuel price increase.

The deficit in the current state budget is projected at more
than Rp 52 trillion (US$5 billion), particularly because of the
huge costs of servicing domestic and foreign debts and
subsidizing fuel prices.

A deficit as large as 5 percent of GDP or more than Rp 72
trillion would have various damaging consequences on investor
confidence, key economic programs and macroeconomic stability,
analysts have cautioned.

"But we'll intensify tax collection ... We'll also find ways
to cut spending," Rizal added.

Domestic tax revenue this year is targeted at Rp 179.9
trillion, compared with total domestic revenue of around Rp 263
trillion.

But most analysts are increasingly concerned that the
government could miss the tax revenue target after it canceled
plans to impose value added tax at 10 percent on agricultural
products, import duty and luxury tax on Batam Island and income
tax on the central bank.

Some analysts worry that aggressive tax collection could
backfire as such a drive would discourage consumption and limit
new investment, thereby stifling economic growth.

The country's macroeconomic condition has been worsening after
the rupiah dropped last month to a 30-month low of around Rp
11,500 per U.S. dollar and interest rates continued to increase.

The rupiah has been weakened partly by domestic political
problems and the standoff between the government and the
International Monetary Fund (IMF) and adversarial relations
between the President and the House of Representatives.

But relations with the IMF now seem to be improving.

The rupiah ended trading on Wednesday at Rp 10,600 per dollar
compared with Rp 10,450 on Tuesday. The current state budget
assumes an average exchange rate of Rp 7,800 per dollar.

The benchmark interest rate of Bank Indonesia (BI) one-month
promissory notes increased again to 15.79 percent on Wednesday
from 15.58 percent the previous week.

BI has steadily raised the interest rate since January to help
defend the ailing rupiah and check inflationary pressures caused
by the weakening currency and rising cost of imports.

The state budget assumes an SBI rate of 11.50 percent.

Prijadi has said that a 1 percent increase in the SBI rate
could create an additional Rp 2.5 trillion in the interest cost
of the government's bank recapitalization bonds.

About two thirds of the Rp 435 trillion recapitalization bonds
bear an interest rate that floats on the SBI rate.

Meanwhile, noted economist Sri Mulyani dismissed suggestions
that the government would be forced to cut the salary of
government employees due to the increased budget deficit.

She said that such a move was unlikely because it would be
politically suicidal.

However, Sri said that it would be possible for the government
to cut other spending items. This includes deferring the
reimbursement of fuel subsidies to the state-owned oil and gas
company Pertamina or payment of interest on the recapitalization
bonds to the banks.

She said the government must work together with BI to help
improve macroeconomic conditions.

"This will help a lot to bolster the state budget," she said.

She added it was imperative for the government to push through
with its privatization program and the sale of assets under the
Indonesian Bank Restructuring Agency (IBRA).

"This will provide the government with revenue and at the same
time help restore investor confidence," Sri added.

The government has planned to privatize several state
enterprises this year in order to raise around Rp 6.5 trillion in
proceeds to help finance the budget deficit.

The government started the initial public offering of
pharmaceutical firm PT Indofarma on Wednesday as the first
company to be privatized this year.

However, some analysts said that there were signs that the
privatization program might not run smoothly in view of weak
market sentiment and possible opposition from the House.

IBRA is targeted to raise around Rp 27 trillion in cash this
year from asset sales.

But the agency was hit by rumors earlier this week that its
top officials were planning to resign, amid strong intervention
from politicians that hampered the agency's work. (rei)