Compromise budget

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.