Government proposes optimistic 2005 draft budget

Dadan Wijaksana, Jakarta

The government proposed a draft law on the 2005 state budget to the House of Representatives on Tuesday, outlining higher economic growth and lower deficit targets.

Minister of Finance Boediono told legislators on the House's budget commission that strong domestic consumption coupled with an increase in exports and investment would accelerate economic growth to between 5 percent and 5.5 percent next year.

The economy is expected to grow by 4.8 percent this year.

"We expect a bigger contribution from exports and investment next year, to ensure more sustainable growth," Boediono told the commission, adding that the assumption was realistic provided there was continuity in the current pace of global economic recovery.

Boediono was accompanied by State Minister of National Development Planning Kwik Kian Gie and Bank Indonesia senior deputy governor Anwar Nasution.

Both Boediono and Kwik acknowledged that such a growth would be insufficient in significantly reducing the chronic problems of poverty and unemployment, but said the target was the most realistic the government could come up with given current conditions.

Indonesia has around 2.5 million new workers entering the job market each year, meaning that its economy has to expand by at least 6 percent to be able to absorb the majority of them.

Analysts have said that only the return of foreign investment could stimulate the economy to be that dynamic -- a tough task considering the lack of confidence on the part of investors toward Indonesia.

The latest data show that in the first quarter of the year, approvals for foreign direct investment (FDI) fell by 41 percent to US$1.5 billion from $2.6 billion in the same period of last year.

Under the draft, the government also set the deficit target at between 0.7 percent and 0.9 percent of gross domestic product (GDP), lower than the 1.2 percent estimate for 2004 and the 1.7 percent reached last year.

A number of financing sources have been earmarked to finance the gap, including from the government's investment funds (RDI), the sales of assets under the Asset Management Company (PPA) and privatization, bonds issues and selective foreign loans.

Elsewhere, both Boediono and Kwik stressed that the proposed draft should serve only as a "baseline budget", which intended to ensure fiscal sustainability as well as provide enough space for the next government and lawmakers to make adjustments.

"The government and lawmakers emerging from the elections could make adjustments on this draft. But we need to proceed with this to avoid a vacuum for the government," Boediono said.

Indicator 2004 Target Estimate Realization 2005 Draft

Growth (%) 4.8 4.8 5.5-5.5

Inflation (%) 6.5 5.5 5.0-6.0

Foreign Exc. (Rp/US$) 8,600 8,500 8,400-8,600

Oil price (US$/brl) 22.0 24.5 22-25

Oil output (mbpd) 1.15 1.05 1.1

Source: Government data