Get real with the budget

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.