Fiscal outlook distressing

However chief economics minister Dorodjatun Kuntjoro-Jakti attempts to dispel concerns over the government's severe cash- flow problems, actual developments are showing disturbing trends. His assurance last week that the government was by no means mulling over any spending cuts appeared weak, unless the government holds a sizable sum of undisclosed cash reserves, carried over from unused development budgets in previous years.

The blunt fact is that all factors that are most influential to the 2001 state budget have been moving in the wrong direction, with revenues way below target and spending overshooting budget appropriations.

The central bank's benchmark interest rate which influences the interest cost of the Rp 674.6 trillion (US$64.2 billion at the current rate) in government bonds, averaged 15.81 percent between January and August and has been hovering above 17 percent since September, compared to the average 15 percent assumed for the budget. The government itself has estimated that every 1 percentage point rise in the central bank interest rate increases bond interest costs by Rp 2.5 trillion to Rp 3 trillion.

The rupiah rate against the American dollar averaged 10,326 in the first eight months and has been languishing over Rp 10,300 since September, and the trend so far does not promise any significant strengthening of the local unit, given the gloomy economic outlook. Since the budget assumes an average rupiah rate of 9,600, the weaker rupiah will certainly increase expenditure on foreign debt service payments and fuel subsidies.

Yet more worrying is that the steep rise in costs has not been offset by any increase in revenues. The strongest tendency instead portends much lower-than-expected flows from major revenue streams.

Official statistics show that daily crude oil production averaged only 1.34 million barrels in the first quarter and 1.29 million barrels in the second quarter, compared to the average output of 1.46 million barrels assumed for the budget. No figure was available for natural gas production but its actual performance is not encouraging either due to the stoppage of production for a few months in the Arun field in Aceh. This will certainly cut into income tax and royalty revenues from the hydrocarbon sector, which account for more than 35 percent of total government receipts for this year.

The World Bank disclosed recently that $1.7 billion of the $2.6 billion in foreign program loans allocated for the budget could not be disbursed this year because the government failed to fulfill the reform agenda tied to the loans. This shortfall alone amounts to more than Rp 17 trillion.

Still more disturbing is the utterly slow pace of asset sales and privatization. Not a single cent of the Rp 6.5 trillion revenue target from the sales of state companies has thus far been realized. As of October, only Rp 20.5 trillion of the Rp 27 trillion target from asset sales had been transferred to state coffers.

What are the alternatives for covering the shortfall? There is certainly no leeway for retrenching on the already austere operating budget. Any significant cut in the development budget will hit the poor people and affect the efficiency of the economy as the bulk of the investment budget has been allocated for health and education services and the maintenance of basic infrastructures, which have been crumbling in many areas.

Another alternative -- selling bonds to resource-rich regencies -- seems unattractive to most local administrations.

The most feasible measures are the sales of state companies such as Semen Gresik, Bank Central Asia, Telkom and Indosat and government equities in hundreds of companies now under the management of the Indonesian Bank Restructuring Agency.

Unfortunately, local politics in provinces and misguided nationalist sentiments at the House of Representatives seem to have overpowered the economic logic of asset recovery and privatization. Many things seem unfathomable here. During the 2001 budget debates in the last quarter of 200, the House ordered the government to increase revenues, but almost every time the government wants to make deals it is held hostage to insensible arguments from House members.

Perhaps, the government needs to defer paying House members' salaries just for one month to jolt them to the realization how strapped it has been for cash.

Whatever the case, the government should come up soon with credible explanations about its cash-flow situation, otherwise wild rumors might come to the fore, further heightening Indonesia's sovereign and country risks.