Financing the budget
Financing the budget
Sven Sandstrom, vice president of the World Bank, which chairs
the country's creditor consortium -- the Consultative Group on
Indonesia (CGI) -- outlined early this week major challenges the
new government will encounter in drafting its 2000/2001 budget
beginning in April. He suggested that prospects of obtaining new
large foreign loan commitments could be minimal, given the
already heavy exposure of most major creditors to Indonesia, and
the government's monstrous debt service burden, which has
exceeded 50 percent of the country's total export earnings.
Sandstrom instead offered assistance to the government in
optimizing revenues from domestic sources.
Although Sandstrom did not state the issue explicitly, his
message was loud and clear: the government can no longer expect
the almost US$8 billion in new pledges received from the CGI last
year. The pledges plugged the government's budget hole for the
1999/2000 fiscal year ending in March. Of even more concern is
that another $2 billion in additional aid is yet to be sought
from CGI, which will hold its annual meeting in Paris later this
month. The additional funds are necessary, because the budget
deficit for the current fiscal year was estimated at around $10.3
billion, or 35.4 percent of the total budget.
The budget deficit for the next fiscal year will most likely
remain considerable, despite a significant improvement in the
country's macroeconomic condition. Positive indicators are
reflected by the slight economic recovery in the first half, a
strengthening rupiah, declining interest rates and falling
inflation. However, the economic gains remain highly vulnerable.
Their sustainability depends on an accelerated pace of reform
measures, especially banking and corporate restructuring, and
resolution of more than $63 billion in corporate (private)
foreign debts. Other key stabilizers will be the smooth election
of a new president and the establishment of a new, credible
government in November.
The greatest demands on the upcoming state budget will stem
from servicing about $70 billion in government foreign debts and
Rp 351 trillion in domestic debts, incurred by the issuance of
treasury bonds to recapitalize distressed banks, and from fuel,
power and food subsidies.
Sandstrom said the government was approaching the World Bank's
loan concentration limit for a single large borrower, thereby
limiting the scope for additional large borrowing in future
years. Further debt rescheduling under the Paris Club is less
likely, following last year's agreement by major sovereign
creditors to reschedule $4.2 billion in principal payments for a
period of between 11 and 20 years.
Given these restrictions, the government will have to turn to
domestic alternative sources, viz. the reduction of subsidy
spending, accelerated sales of state companies and the recovery
of bad loans and sales of fixed assets, which were taken over
from closed-down and nationalized banks and are now under the
management of the Indonesian Bank Restructuring Agency (IBRA).
However, at a time when most people are already suffering the
brunt of the economic crisis, reducing subsidy spending would be
political suicide for the new government. Hence, the most
plausible, and the most challenging, alternative sources of
revenues are the sales of state companies and the recovery of bad
debts and assets.
Fortunately, the privatization program, which performed
poorly and achieved less than a third of its $1.5 billion target
last year, has picked up steam this year. Buoyed by a regionwide
stock market rebound and improving economic indicators in the
country, the policy has thus far generated more than $880 million
for the state's coffers, or almost 60 percent of the $1.5 billion
target set for the current fiscal year ending next March. The
bullish outlook of the Jakarta Stock Exchange will hopefully
further accelerate the sales of the 10 state companies set for
the year.
The most difficult task -- and one that is a political
minefield -- is the recovery of over Rp 351 trillion in bad debts
and assets currently managed by IBRA. The complicity of many
well-connected businesspeople with a sizable portion of the
debts, the difficulty of assessing asset quality, and depressed
market conditions makes for a delicate and complex collection
process. IBRA has thus far recovered less than Rp 1.4 trillion of
the Rp 17 trillion it was assigned to contribute to the current
state budget. The agency's asset and debt recovery performance is
so crucial for meeting the budget needs that it should be the
focus of any World Bank assistance to maximize domestic revenues.