Mon, 08 Nov 2004

Government struggles to cut deficit

The Jakarta Post, Jakarta

Soaring oil prices raising government spending on the fuel subsidy, and coupled with the shortfall in a number of revenue targets, has left the government under intense pressure to avoid a wider-than-expected 2004 budget deficit.

As against a full-year target of Rp 26.3 trillion (some US$2.9 billion), or 1.3 percent of gross domestic product (GDP), the budget deficit has already reached Rp 27.4 trillion as of Oct. 31, according to Minister of Finance Yusuf Anwar.

"That's about 1.4 percent of GDP," Yusuf said at a gathering to break the fast over the weekend.

While the global oil price has forced the government to spend more on the fuel subsidy, and the transfer of funds to regions under the revenue-sharing mechanism, slow progress in various revenue generating sources has made things even worse.

Under the revenue-sharing scheme, the central government has to split revenue derived from natural resources -- notably oil and gas -- with producing provinces and regencies. The revenue allocation for these funds will go up in accordance with the upward movement of the price of oil in the international market.

On the budget revenue front, the tax revenue target for example, which makes up the lion's share of the state budget's funding sources, has yet to fully pick up with only two months to go before the budget year ends.

As of Oct. 31, the tax office had collected some 75 percent of the full-year target, the ministry's Director General for Taxation Hadi Purnomo said, with the remainder standing at some Rp 61 trillion.

The tax office raked in Rp 178 trillion in the January to October period, from a total target of Rp 238.5 trillion, said Hadi.

A higher-than-expected budget deficit would make it difficult for the government to fulfill its pledge to gradually reduce the deficit and achieve zero-deficit by as early as 2006.

Such a prospect could undermine the financial market's confidence in the economy. The 2004 deficit target was the lowest in the past three years, following a deficit of 2.5 percent of GDP in 2002 and 1.8 percent in 2003.

But more crucially, the higher deficit should spell extra problems for the cash-strapped government, as it requires more funds to cover it -- something the government is finding more and more hard to do these days.

The government is already struggling to finance the initial 1.3 percent deficit target, which traditionally comes from both internal and external sources.

With proceeds from the privatization of state companies falling short of the target, the government has no choice but to jack up revenue from its divestment program, with plans to sell its remaining stakes in a number of recapitalized banks -- BCA, Niaga, Permata, BII -- already high on the agenda.

If the government fails to provide the financing from domestic sources, turning to foreign loans would be most likely. Based on the 2004 budget, the government expects some Rp 21.7 trillion in foreign loans for deficit financing.

Despite the concerns, Yusuf remained optimistic the deficit target was still achievable. "We still have time. And I am still convinced that we can achieve it."

Mulia Nasution, the ministry's Director General for State Treasury, also shared the same optimism.

"Traditionally, in the last two months of the year, tax revenue increases sharply, mostly from big companies that want to close their yearly balance sheet," said Mulia.