Government's fiscal responsibility a faint hope

There is no way to paint a bright picture illustrating Indonesia's fiscal outlook for 2002. Too many lingering problems remain that will haunt next year's budget.

Huge debt repayment, a continued high level of subsidies (especially fuel subsidies) and increased funding for regencies eat up most budgetary spending.

Meanwhile, regarding income, problems are noticeable on the potential for dwindling revenues from falling crude oil prices coupled with the expected slower pace of privatization and sale of assets.

The 2002 budget, approved by the House of Representatives on Oct. 25, targets a total state revenue of Rp 301.9 trillion (about US$30 billion) and foresees state expenditures of Rp 344 trillion.

Therefore, the budget deficit for next year will be Rp 42.1 trillion -- or equal to 2.5 percent of the country's Gross Domestic Product (GDP).

The deficit could grow bigger since some elements in the budget, especially foreign debt servicing, are not yet finalized.

According to World Bank projections, the government's foreign debt, due next year, totals US$15.5 billion in principal and another $5.4 billion in interest payments.

Out of those amounts, the government allocates for the budget only Rp 41.5 trillion (about 4.5 billion) to pay amortization of foreign debt, and another Rp 27.4 trillion for interest.

It is expected that the remaining debt principal and interests would be rescheduled through the Paris Club of creditors.

Judging by Indonesia's success in rescheduling US$5.8 billion in foreign debt principle that was due this year, the government is confident it will get further rescheduling from its creditors -- for both the principal and interest on its foreign debt for the 2000 budget year.

But even if the government manages to get secure rescheduling of its debt as it wants, the problem on foreign debt servicing does not stop here.

The rupiah's volatile exchange rate against the U.S. dollar adds uncertainty for year 2002 budget, as this will affect the government's foreign debt servicing.

The 2002 budget assumes an average rupiah exchange rate of 9,000 against the U.S. dollar, while in reality, the rupiah is now traded in the market at over Rp 10,000 per U.S. dollar.

If the rupiah remains weak at over Rp 10,000, foreign debt servicing will increase by at least 10 percent from that allocated in the budget.

Weak rupiah would also eventually affect the government's interest payments on its mounting domestic debt.

If the rupiah continues to struggle next year, interest rates would stay high, adding burden to government spending, as much of its domestic debt is tied to the central bank benchmark rates.

The 2002 budget assumes that benchmark interest rates of Bank Indonesia promissory notes average at 14 percent annually, while current benchmark rates stay above 17 percent.

According to data at the Finance Ministry, government bonds will mature in 2002 total by Rp 11.56 trillion, compared to Rp 8.8 trillion this year.

For this domestic debt, the government plans to re-finance some of them that fall due next year, by issuing new bonds totaling Rp 3.93 trillion.

In addition, next year, the government plans to repay some expensive domestic debts using proceeds from privatization of state companies and sales of assets pledged by failed debtors in exchange for their debts.

The proceeds that target the privatization program for next year are set at Rp 6.5 trillion, while the sale of assets under the Indonesian Bank Restructuring Agency (IBRA) is expected to rake in some Rp 48.2 trillion.

Of those amounts, some 25.7 trillion would be used to repay the domestic debt.

On top of that, the government has also to cash out Rp 59.6 trillion for interest payment. And this amount could increase again, depending on the level of benchmark interest rates.

Therefore, making the rupiah stronger against the dollar next year would save much for government spending in terms of foreign and domestic debt servicing.

Pursuing longer-term stability and strength of the rupiah would help the government's fiscal burden very much, due to its mounting foreign and domestic debt.

Currently, the government is shackled by its huge foreign debt of $72 billion and domestic debt of $60 billion, and this will continue to saddle state budgets for a long run.

Unlike foreign debt, which has been accumulated mostly over the past 35 years, the huge public domestic debt has arisen only in the past three years as a result of the government's decision to bail out banks and their owners.

Both foreign debts and domestic debts would continue to constrain fiscal policies, as the government has not enough revenue streams to repay those debts.

Domestic revenue streams for next year are also in question if they could meet the budget target of Rp 344 trillion.

Revenues from the oil and gas sector, which are projected to reach Rp 99 trillion this year, will drop 26 percent to Rp 73 trillion next year, assuming that crude oil price would drop to $22 per barrel.

Worse still, international crude oil prices are currently dropping below $20 per barrel, adding more concerns over the government's revenue from oil and gas.

To counter this, increasing non-oil tax revenues would become the only viable alternative to maintain the budget deficit at 2.5 percent.

The government has targeted to boost tax revenues from mostly non-oil income tax and value added tax (VAT), respectively at Rp 88.8 trillion and Rp 70 trillion, a sharp increase from Rp 69 trillion and Rp 53 trillion.

However, slapping the increase on the income tax and VAT is a risky business, as it would affect businesses and consumer spending.

The high rate of income taxes on business would eventually affect business activities and higher VAT targets -- the easiest way to increase tax revenue -- and would discourage consumer spending.

And this would eventually affect economic growth.

Therefore, rather than seeking the easiest way to get bigger tax returns from VAT and bigger income tax from existing taxpayers, the government should broaden its tax base, by way of making more people pay taxes as they should.

According to the government data, only one million of the country's 220 million people have their own personal tax identification numbers. Worse still, only half actually file their annual income tax returns.

Tax officials estimate the potential number of eligible tax payers exceeds 20 million people. Therefore, if the government spends more money to target these people, it would be able to finance its spending without borrowing more money from foreign creditors.

However, if the fiscal situation stays like it is now -- with a low tax collection rate and a high level of foreign and domestic debt -- the government will be destined to continue borrowing money to plug budget deficits.