Fiscal outlook distressing

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.