Get real with the budget
The revised government budget for the 1998/1999 fiscal year, as presented by Minister of Finance Mar'ie Muhammad to the House of Representatives yesterday, was much more realistic than the original draft presented by President Soeharto on Jan. 6.
Whether it is realistic enough, however, depends on follow-up government actions in dealing with the economic crisis. But here is a hint: Soon after the announcement, the rupiah's exchange rate plunged to Rp 15,000 to the dollar and only recovered after Bank Indonesia intervened. The market was not impressed, and is not even willing to give the government the benefit of the doubt. The chief message from the market was not so much that the budget was unrealistic, but that it had no relevance to the problem at hand.
To be fair, we have to credit the government for moving swiftly after President Soeharto signed the letter of intent with the International Monetary Fund on Jan. 15 to carry out sweeping economic reforms. On Wednesday, the head of state issued seven executive orders and directives to start implementing the reforms, including the dismantling of various business monopolies and privileges. Yesterday, Mar'ie unveiled the revised budget.
The budget, setting total spending at Rp 147.2 trillion, is calculated using an exchange rate of Rp 5,000 to the dollar, with assumptions of zero economic growth and 20 percent inflation. All spending items have been adjusted upwards according to the new exchange rate. The lone exception is for the fuel subsidy, which was cut in line with the government's pledge to phase it out.
The original budget set spending at Rp 133.5 trillion, using an exchange rate of Rp 4,000 to the dollar, while projecting a 4 percent economic growth rate and 9 percent inflation. It was way out of touch with reality. But, looking at the market sentiments, the revised budget could easily end up looking just as ambitious. The rupiah's exchange rate has remained above the Rp 10,000 level, shooting up to Rp 17,000 Thursday, while recovering only after government intervention.
The fact of the matter is the IMF reform package is only half of the solution to the crisis. The other half -- the question of the massive corporate debt -- has not been addressed, either in the reform package, or in the budget speech yesterday.
The corporate debt -- put at US$66 billion of which $20 billion is due soon -- was what set off the chain reaction which led to the massive dollar buying, which in turn depressed the rupiah.
The government has stubbornly resisted calls to bail out these debtors, which include some of the country's largest business groups. It is a catch-22 situation. Bailing them out is politically unacceptable, but is economically desirable -- if not to save the companies, at least to save hundreds of thousands, and probably millions of jobs. The government has only been willing to assist in renegotiating the debts, but not beyond that.
Now with its budget revised, perhaps there is another compelling reason for the government to address the corporate debt one way or another, and to bring the exchange rate down to the targeted level. It is not only in the interest of the government to have a stable currency. The volatile rupiah makes it difficult for any company to do business, let alone to plan ahead.
The government is already going half way with economic reforms and the budget revision. All these endeavors would come to nought if it fails to address the other half of the problem.