Govt eyes economic stimulus for 2003 against Bali impact

The Jakarta Post, Jakarta

The government says it will increase development spending for 2003 to stimulate business activity amid a likely economic slump in the wake of the Bali bombings, but adds the move will inflate its state budget deficit target.

"The budget deficit will be revised because of the additional stimulus for the economy," Finance Minister Boediono told reporters on Monday.

He declined to say how much spending would increase.

He said the Oct. 12 bomb explosions in Bali was hurting the economy so that more money should be spent on development to minimize the impact.

The terrorist strike, which killed nearly 200 mainly foreign tourists, has dealt a blow not only to the tourism sector but also to the overall investment climate in Indonesia.

"Before the Bali tragedy, we predicted a 2003 budget deficit of 1.3 percent of GDP. Now we're reviewing whether the figure remains a feasible target," Boediono said, referring to gross domestic product which measures the total value of a country's annual product and service output.

At 1.3 percent of GDP, the initial deficit target stood at Rp 26 trillion (about US$2.8 billion).

With the gloom over the tourism sector, and a dent in business confidence undermining investment and consumption growth, the tax office has said potential losses in tax revenue could amount to Rp 10.8 trillion (about US$1.17 billion)

Lower than expected state revenues have been the main concern for a wider deficit, but Boediono explained the planned stimulus package would widen the hole in the budget.

He defended the plan, saying it would encourage much needed business activities at a time when security jitters were draining investment initiatives from the private sector.

Local banks have been slow in channeling fresh loans to the private sector while foreign investment is scarce with more capital flowing out of the country than in.

Higher investment spending will help push economic growth, which is long seen as the best recipe to reduce the country's unemployment rate of at least 38 million people.

Economic growth is also the cure to help tens of millions of Indonesians out of poverty as well as to reduce Indonesia's debt burden on the budget.

However to effectively reduce unemployment and poverty, the economy must grow by at least 5 to 6 percent each year.

Growth was 3.3 percent last year, and the government is expecting 4 percent rate this year although economists say that figure is unlikely now after the Bali bombing.

Boediono said the government would revise downwards its 2003 economic growth target to below 5 percent.

The government is reviewing its 2003 state budget assumptions and a team from the International Monetary Fund (IMF) arrived last week to help assess the impact of the Bali bombing.

Under the unrevised budget draft, development spending was earmarked at Rp 54.5 trillion, or some 2.8 percent of GDP.

"Since the assessment is still taking place, I can't say yet which sector will have its allocation increased," Boediono said.

Economists have said the 2003 state budget did not offer much room for a stimulus package, pointing the budget was designed more to service debt payments rather than drive the economy.

More than 40 percent of the current state budget is allotted to paying both foreign and domestic debts, or a total of Rp 136.35 trillion in interest and principle payments.

The government has said it was expecting creditor countries to provide additional financing to help cope with the Bali impact.

So far only Japan has signaled its willingness to raise the amount of loans to Indonesia. Japan is Indonesia's biggest bilateral creditor.