Budget discipline stressed
One may read into Finance Minister Mar'ie Muhammad's reaffirmation last week of the government's imperative to maintain tight budget and fiscal discipline and come up with worrisome assumptions. The statement may also raise eyebrows coming on the heels of the recent debate over budgetary allocations for the procurement of 39 used warships from Germany.
Regardless of the preceding events, however, Mar'ie's precautionary note actually served to reiterate the basic directive President Soeharto gave to all officials when he unveiled the austere 1994/95 budget to the House of Representatives in early January. We saw the minister's statement as a much-needed reminder, especially in view of the potential threats to both the state budget and economic stability. We should also remember that last year the state budget, for the first time in over 20 years, suffered a Rp 1.8 trillion deficit due to the lower-than- estimated oil prices, forcing the government to draw down part of its Rp 5 trillion reserves.
Budget and fiscal discipline are also the theme of the 1994 World Bank report on Indonesia entitled Indonesia: Stability, Growth and Equity in Repelita VI which will be the main topic of discussion at the next annual meeting of Indonesia's creditor consortium, the Consultative Group on Indonesia, in Paris next month.
Given Indonesia's foreign debt of over US$90 billion and with debt service burdens already occupying more than 30 percent of its export earnings, keeping government expenditures and debts in check reduces the vulnerability of the fiscal authority to interest rate increases overseas and at the same time enhances the credibility of fiscal policies. Since about 45 percent of the debt stocks are denominated in yen, the level of indebtedness and debt service burdens are also vulnerable to fluctuations in the yen-dollar exchange rate.
The oil and gas sector, which contributes some 25 percent to government revenues, does not appear promising either. International oil prices still tend to be volatile on the low side. We will be lucky to get an average price of $16/barrel - the price used by the government to estimate its receipts from the hydrocarbon sector - for the whole fiscal year. Neither will non-oil exports provide much respite. In fact, their growth rate seems to have flattened out. That is worrisome indeed because the tax receipts expected from the non-oil sectors account for 57 percent of total internal revenues.
Then we should be extra careful about our inflation rate which amounted to almost 4.5 percent during the year's first five months alone. Inflationary pressure from higher-than-budgeted government spending, not to mention off-budget expenditures, will make it more difficult for the government to maintain monetary stability.
Monetary stability is even more crucial for a country like Indonesia which pursues an open-capital account because this policy exposes the economy to expectational shifts regarding inflation, rupiah depreciation, export performance and its impact on foreign reserve holdings. Given all those constraints and the vulnerability of the state budget to potential external threats that lie beyond our control, we cannot afford uneconomical projects. Nor can we set ourselves new ambitious targets. This is, we think, the context within which we should heed Mar'ie's warning. His precaution should be taken as a guardpost to keep us on our toes before things become unmanageable.