Budget restraints

The decision by the House of Representatives on Tuesday to release the PricewaterhouseCoopers full audit on Bank Bali will pave the way for the resumption of US$4.7 billion in international aid held up since September, thereby securing state budget revenues for the second half of the 1999/2000 fiscal year ending in March.

The aid suspension, prompted by the politically charged scandal, has unnerved the market for fear that the government might resort to printing money to plug its budget hole or cutting fuel or electricity subsidies at the risk of triggering social and political instability. The long-awaited publishing of the report also enables the government to start negotiating a new set of reform programs with the International Monetary Fund (IMF), which is heading the $43 billion bailout for Indonesia.

Securing state budget financing is quite crucial, especially now when only public sector spending can provide the badly needed stimulus to get market demand growing as most businesses, deprived of working capital loans as an impact of the crippled banking sector, are operating far below designed capacities.

But since tax revenues will likely remain slack due to the slower than expected recovery of the economy and it will take some time before new investment takes place even though the political uncertainty has been resolved after the installment of a new government with full legitimacy, foreign aid will continue to play a major role in the state budget, at least until 2001 when the economy is expected to pick up at a much faster rate.

One should not read too much into a recent statement by the new finance minister, Bambang Sudibyo, that the state budget posted a surplus of Rp 17 trillion during the first half (April to September) as a result of the steep rise in international oil prices. What Bambang seemed to calculate was simply a surplus on a provisional cash-flow basis, failing to take into account lower than expected revenues to be raised from the privatization of state companies and by the Indonesian Bank Restructuring Agency (IBRA). Moreover, the higher oil prices will double fuel subsidies to Rp 20 trillion and raise electricity subsidies to more than Rp 10 trillion from a mere Rp 2 trillion last fiscal year.

The new minister for investment and state enterprises, Laksamana Sukardi, disclosed on Monday that the $1.5 billion revenue target set for privatization of state enterprises would not likely be achieved. IBRA, which has been demoralized by the Bank Bali scandal since it was revealed in July, has been able to raise only about Rp 8 trillion of the Rp 17 trillion it was tasked to collect.

Planning for the next budget starting in April will be more daunting as domestic debt service payments alone, imposed by the issuance of about Rp 600 trillion in treasury bonds to finance bank restructuring and recapitalization, could reach as high as Rp 50 trillion, compared to Rp 34 trillion in the current fiscal year.

Since the $4.2 billion in foreign debts rescheduled last year under the Paris Club covered only loans due to mature in March, government foreign debt service burdens will increase again next fiscal year. Without another rescheduling agreement for at least $6 billion in debts due within the next two years, the government could suffer an unsustainable, explosive deficit.

Hopefully, with better cooperation with the IMF, the high legitimacy of the new government would pave the way for debt rescheduling negotiations with Paris Club creditors. But even with another foreign debt rescheduling, the next state budget will still see a deficit, though not likely as high as 5.8 percent of gross domestic product estimated for the current fiscal year.

The government simply has no leeway for tightening the budget too quickly, not only because of ballooning subsidy spending and debt service burdens. It is also because the government is the only sector that can right now generate a stimulus to the economy until domestic and foreign investment resumes after the removal of political uncertainty. The main challenge is how to balance the objectives of fiscal stimulus and fiscal sustainability.