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.