Budget discipline stressed

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.