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)