Government to tighten spending

JAKARTA (JP): The government will tighten spending in the next fiscal year, but will likely refrain from hiking fuel prices.

Total government expenditures in fiscal year 1998/1999 starting April 1 will still rise by a hefty 32 percent to Rp 133.5 trillion, but most increases will go toward servicing its huge foreign debt and subsidizing domestic fuel consumption.

Little of the extra money will go toward bolstering the ailing economy. Civil servants' pay will be frozen and development spending will only increase 5.6 percent.

To underwrite higher spending, the government is banking on increases in oil and gas revenues and in foreign aid receipts.

President Soeharto presented the government's draft budget for fiscal year 1998/1999 before a plenary session of the House of Representatives last night.

A few hours earlier, the rupiah fell to a historic low of Rp 7,750 to the dollar as the economy plunged deeper into its worst crisis in three decades.

The budget was calculated using an average exchange rate of Rp 4,000 to the dollar and an average oil price of US$17 a barrel.

The budget calls for spending to equal revenue at Rp 133.5 trillion ($33.4 billion at the exchange rate of Rp 4,000 to the dollar) in 1998/1999, up from Rp 101.1 trillion this year.

The tone of the budget, presented by economic officials to journalists at the Ministry of Information earlier, and of Soeharto's 60-minute speech at the House was the same: the nation should brace for a very austere year.

"We're passing through very tough and difficult times," Soeharto said in a 27-page speech televised nationwide.

He recalled that national unity and cohesion gave the nation resilience to pass through difficult times in the past.

"With this asset, we are convinced that the storm will pass. We shall reopen the sail of our national ship. We shall command it toward the shore of our destination."

Soeharto said the economy would grow slower this year, by 4 percent, and that inflationary pressure and monetary instability would continue to haunt through 1998.

The government, he said, hoped to smooth the excesses of the stabilization drive through economic reforms and deregulation, focusing on improving efficiency and production and distribution processes and encouraging healthy business practices.

This, he said, would help restore public confidence in the economy and its prospects, and dampen the impact of the monetary stabilization on the inflation rate.

The government has initiated many reform programs designed to restore public confidence, and is determined to see them through.

"It is extremely important to restore such confidence. It is precisely the lack of such confidence that has been behind the myriad of problems that have recently emerged."

The government intended to live within its means and would adjust its spending accordingly with falling revenues, he said.

The government and state companies had already postponed or rescheduled various projects in response to the monetary crisis, and private business sectors must do likewise, he said.

"The spirit of solidarity and willingness to share the burden for the sake of national interest is essential for our success in surmounting the crisis."

Tighter fiscal and monetary policies were important to shore up confidence in the rupiah, he said. "We must stop the erosion of confidence in the rupiah. We must reverse it, because if it continues, our national economic foundation will crumble, obviously with very serious consequences."

However, the President stressed that Indonesia would not abandon the free foreign exchange system, despite the pressure on the currency.

Soeharto did not completely rule out raising domestic fuel prices, saying the subsidy was a huge drain on development funds. "At some time, it will be unavoidable that the price of fuel will be raised to reflect its economic value."

With development spending increasing by less than 6 percent, money will be allocated according to government priorities. Topping the list are poverty alleviation and equitable development programs.

"We're tightening spending. In real terms, spending is down," State Minister of National Development Planning Ginandjar Kartasasmita said in a media briefing.

"We probably won't achieve the targets set out in the Sixth Five-Year Plan. But no matter how difficult the situation gets, we will not cut spending on poverty alleviation, promotion of health and a more equal distribution of income," Ginandjar said.

There will be no significant increase in the total civil service payroll, budgeted at Rp 21.9 trillion.

"Civil servants' pay will not increase or decrease," Minister of Finance Mar'ie Muhammad said. "What is there to cut? Their earnings are small as it is. Even without an increase, their purchasing power has already dropped."

The biggest spending increase will be in servicing the foreign debt, up 57 percent to Rp 30.2 trillion. This reflects changes in the rupiah's value which began the 1997/1998 fiscal year at about Rp 2,300 to the dollar.

Another major spending item will be the fuel subsidy, estimated at Rp 10.1 trillion. With oil priced in dollars, the government is having to fork out more and more money to subsidize domestic fuel consumption each time the rupiah falls.

Development spending will increase 5.6 percent to Rp 41.1 trillion, with foreign aid receipts footing most of the bill.

On the revenue side, oil and gas taxes are envisaged to rise 83.5 percent to Rp 27.3 trillion, while non-oil/gas receipts will increase 9.9 percent to Rp 80.4 trillion.

Income tax revenue will fall 9.5 percent, a figure which even Mar'ie viewed as optimistic given the economic slowdown. "My heart beat fast when I made this projection," he said.

Revenue from value-added taxes will increase, not because of higher sales but because of changes in exchange rates, he said.

Foreign aid receipts will increase 98.1 percent to Rp 25.8 trillion, with Rp 19 trillion in project-related aid and Rp 6.8 trillion in program-related aid.

Government savings -- the difference between domestic revenue and recurrent spending -- will drop from Rp 25.9 trillion envisaged in 1997/1998 to Rp 15.3 trillion in 1998/1999.

The composition of the 1998/1999 budget has a familiar ring -- it is dependent on oil and gas revenues and foreign aid.

Oil and gas will account for 20 percent of government revenues (from 14.7 percent in 1997/1998) and foreign aid another 19.3 percent (from 12.9 percent). Non-oil and gas revenues, which were expected to bring in 73 percent of revenue in 1997/98, will now account for 60 percent next year.

The budget must be approved by the House of Representatives.

Some foreign aid receipts will be disbursed from the $40 billion loan package the International Monetary Fund (IMF) arranged for Indonesia in October.

The IMF has set stringent conditions on the loans, one of them being that the government has to earn a surplus in its budget equivalent to 1 percent of the gross domestic product. This roughly translates to about Rp 4.7 trillion.

Although the draft budget made no reference to the surplus, Mar'ie said the government would still strive to comply with the IMF requirement. "How we'll do that, we will see," he said. (prb/rid/das/emb)

Editorial -- page 4

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