Budget restraints

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.