Budget projects higher growth

Urip Hudiono, The Jakarta Post, Jakarta

The government is upbeat about the economy for the 2006 state budget, projecting higher growth and a lower deficit in its budget draft, despite this year's budget blowout following continually high international oil prices.

Unveiled on Tuesday by President Susilo Yudhoyono in his annual state of the nation address to the House of Representatives, the draft predicts the economy will expand by 6.2 percent in 2006 -- the highest growth since the crisis and slightly higher than this year's expected growth of 6.0 percent.

It also projects a decline in the deficit to 0.7 percent of GDP, after it bulges to an estimated 1 percent for this year.

The targets are based on similarly optimistic assumptions -- that oil prices will average US$40 a barrel next year, that the rupiah exchange rate will settle at Rp 9,400 per U.S. dollar and that inflation will ease down to 7 percent.

Oil prices are presently still above $60 a barrel, the rupiah has recently hit its latest low of Rp 9,900, while July's headline inflation reached 7.84 percent -- all missing their assumed marks in this year's budget.

With high oil prices, coupled with a recent weaker footing of the rupiah pushing up inflation and key interest rates -- all of which dampened consumer spending -- economic growth has declined over recent months.

The Central Statistics Agency (BPS) said recently the economy had grown in the second quarter of the year by only 5.54 percent -- marking a continued economic deceleration for the second straight quarter, having grown by 6.19 percent in this year's first quarter and 6.67 percent in the final quarter of last year.

Despite the decline, Susilo said he was confident that the 6.2 percent GDP growth target would be attainable, betting in part on the expected revival of the global economy next year.

"This will boost our exports, while our consumption demand and investment momentum are also expected to remain strong," he said.

Investment Coordinating Board (BKPM) data shows foreign direct investment has amounted to $4.9 billion in the period ending July, nearly double that in the same period last year. The BPS, meanwhile, reported a 27 percent increase in exports to $40.58 billion during this year's first semester.

Susilo, however, admitted that the growth target would still be unable to reduce the overall level of unemployment and poverty in the country.

"Nevertheless, our economic growth is expected to continue to increase in the years to come, along with our success in overcoming the existing impediments," he said, reiterating the government's vow to improve the country's investment climate by curtailing corruption, ensuring legal certainty for investors and providing tax incentives.

Susilo said next year's budget planned for a deficit of Rp 19.8 trillion (some US$2 billion).

Revenue was targeted at Rp 539.4 trillion -- mostly from taxes, reaching 13.4 percent of the GDP from its current 12.6 percent -- while total expenditure was set at Rp 559.2 trillion. The government said it planned to reduce the burden of the fuel subsidy on the budget from Rp 76.5 trillion to Rp 68.5 trillion.

Susilo's administration aims to achieve a balanced budget by 2007.

To finance next year's deficit, the government will issue more bonds, continue the privatization of state-owned enterprises and conduct sales of state assets managed by the Asset Management Company (PPA).

"We will also still need foreign loans, estimated at some Rp 29.9 trillion," Susilo said, adding however that the government expected the country's debt-to-GDP ratio to continue to decrease next year to 42.8 percent from 49.1 percent this year.

Reacting to the address, many legislators expressed their skepticism about the draft, particularly regarding the oil price assumption, which they suggested should have been set at a more realistic level of between $50 and $60 a barrel.

The House is expected to finish deliberating the budget draft with the government by September.