Compromise budget
The 2000 budget, the first prepared by President Abdurrahman Wahid's administration, appears to be the best compromise spending plan the government can draw up amid the persistent economic woes and social instability in several provinces which have adversely affected local resource-based industries.
The nine-month budget -- a transition to the new fiscal year that will be realigned to the calendar year beginning in January 2001 -- is designed mainly to convince foreign creditors of the government's commitment to fiscal sustainability, to placate separatist sentiments in several resource-rich provinces and to improve the precondition for creating good governance.
The plans to increase fuel and electricity prices by 20 percent and 30 percent respectively, despite the hardships the majority of people are already suffering, reflect the government's determination to push ahead with economic reforms and avoid a fiscal-deficit time bomb that could destroy macroeconomic stability.
By sharply increasing the amounts appropriated to the provinces and allowing local administrations to manage a much bigger portion of public-sector investments, the government is trying to assure local administrations of its resoluteness to fully decentralize the decision-making process and to give provinces a much bigger share of the wealth derived from their natural resources.
Proposing a 20 percent across-the-board salary increase of government personnel, despite the severe budget restraints, is part of a long-term program to reform the civil service in a bid to build good governance, which is one of the primary goals of the Abdurrahman administration.
However, one should not expect any stimulus from the budget for the depressed economy because, as chief economics minister Kwik Kian Gie himself acknowledged, the spending plan is simply a survival budget to weather the crisis until the macroeconomic condition becomes more solid to allow for stronger recovery next year.
Even though on an annualized basis, the 2000 budget plans an 11.2 increase in spending to a total of Rp 183.07 trillion (US$26.45 billion) with a resulting deficit of Rp 45.4 trillion, it will end up having a contractive effect because a stepped-up tax effort will drain more than Rp 97.78 trillion from the private sector. Moreover, domestic and foreign debt servicing alone will take up almost Rp 60 trillion, the bulk of which will go to paying interest on treasury bonds issued to recapitalize the crippled banking industry.
Increasing tax revenue by more than 23.60 percent at a time when the economy is projected to grow only by 3.8 percent -- even this estimate is seen by private-sector analysts as too optimistic -- is indeed a very tall order. But the options seem to be severely limited, given the decreased accessibility to foreign loans due to the country's already unmanageable debt burden and the heavy exposure of almost all major creditors to Indonesia.
This restriction makes it all the more imperative to speed up asset sales by the Indonesian Bank Restructuring Agency and the privatization of state companies. This asset unloading will cover half of the budget deficit, with the other half to be filled by new foreign borrowings.
With a bare-bones public sector budget, the government appears to be opting for the right priority: focusing its policies and its meager investment budget on further improving the macroeconomic environment for stimulating private-sector activities. By accelerating the already behind-schedule bank restructuring, checking inflation at less than 5 percent, steadily lowering the central bank's benchmark interest rate to the present less than 12 percent and maintaining the rupiah's exchange rate to around 7,000 to the dollar, the government hopes to fuel a higher pace of private-sector activities as the locomotive for economic recovery.
Hopefully, the fractious House, with its 10 factions compared to only four in the past, will be quite sensible in deliberating the proposed budget, especially with regard to the planned increase in fuel and electricity prices, so that our economy will be able to weather this tumultuous transitional period to enter a more stable environment next year.
The signing of a new agreement with the International Monetary Fund also on Thursday not only clears another loan disbursement to buffer Indonesia's foreign reserves but also would contribute further to accelerating the process of regaining investor confidence in the country's economy.
However, a significant improvement in the macroeconomic condition will not help much if social unrest in various provinces continue because the most promising businesses at this time are local resource-based industries such as plantations, fisheries, mining, forest-based and tourist-related industries.