Budget deficit may widen to 1.3 percent of GDP

Rendi A. Witular, The Jakarta Post, Jakarta

This year's state budget deficit is likely to soar far above initial forecasts unless immediate measures are taken to contain surging spending on fuel subsidies amid high global oil prices and soaring fuel consumption at home, the Minister of Finance says.

Jusuf Anwar estimated on Monday the deficit could jump to 1.3 percent of the gross domestic product (GDP), or about Rp 35.2 trillion (US$36.2 billion), from projections of 0.8 percent of GDP, or Rp 20.3 trillion,

"The government's cashflow is still manageable, but it will be hard in the future to maintain it following the soaring cost of the fuel subsidy," Jusuf said after meeting President Susilo Bambang Yudhoyono.

According to Jusuf, the 1.3 percent deficit was calculated based on the assumption that global oil prices stood at US$60 a barrel throughout the year, oil output stayed less than 1.125 million barrels a day, and domestic fuel consumption remained high at 59.6 million kiloliters.

With these assumptions, the Ministry of Finance estimates that the costs of the fuel subsidies would rise to Rp 123 trillion for the year.

The 2005 state budget has allocated only Rp 76.5 trillion for the subsidies, assuming an average annual oil price of US$45 a barrel, a rupiah-U.S. dollar exchange rate of Rp 9,300 and fuel consumption at 59.6 million kiloliters.

The government is scheduled to submit its second state budget revision to the House of Representatives in late August, with the main agenda likely to be seeking additional funds for fuel subsidy spending.

Analysts say by carrying the cost of the subsidy the government is putting at risk the country's fiscal stability and the economy as a whole.

They fear that the country's currently stable macro-economy will be severely impacted by the widening deficit, which will reduce the government's ability to provide funds for social and economic emergencies and to service its massive debts to foreign creditors.

A widening deficit also puts confidence in the country's economy at risk, jeopardizing the already slumping rupiah and triggering inflationary pressure and higher interest rates -- all things that can put the brakes on economic growth.

Jusuf said the Ministry of Finance and several economic analysts were currently working to find effective ways to ease the deficit problem, including a further review of the fuel subsidy system.

He however, refused to confirm whether the review would include a cut in subsidies, as demanded by several economists and business lobby groups.

"I cannot disclose what kind of measures will be taken; they are still being discussed.

"But we will certainly review the allocation system for the fuel subsidy... I guess you can deduce what I mean buy that," he said, without elaborating.

The government launched a public energy conservation campaign last week, which many have criticized as ineffective.

Instead, its critics say, the government should reconsider its fuel subsidy policy and hike fuel prices again.

According to the finance ministry, the government has already spent some Rp 46 trillion on fuel subsidy payments to state oil and gas company PT Pertamina -- more than half of its full-year allocation.