Government's fiscal responsibility a faint hope

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.