Govt fears larger deficit due to high oil prices

Govt fears larger deficit due to high oil prices

Dadan Wijaksana and Rendi A. Witular, Jakarta

The government will submit, as early as July, a revision to the
2004 state budget to the House of Representatives -- earlier than
scheduled -- which is likely to include a higher assumption for
oil prices and a larger budget deficit.

Minister of Finance Boediono said on Wednesday that, with the
country having become a net oil importer since March, the soaring
oil price would have a severe impact on the budget, as it would
increase the allocation required for fuel subsidy as a
consequence.

Usually, the revision to the annual state budget is submitted
to the House sometime in September; however, Boediono said the
revision was needed so the budget would better reflect a variety
of recent developments.

"We're still working on the calculation of the subsidy with
the House budget committee. But for sure, even if the oil price
falls, it is unlikely to reach the level we had assumed earlier,"
Boediono told lawmakers at House Commission IX on financial
affairs during a hearing.

The 2004 budget has allocated some Rp 14.5 trillion for fuel
subsidies, based on an average oil price assumption of US$22 per
barrel.

At present, crude oil prices are hovering at a record high of
more than $40 per barrel, with state oil and gas firm PT
Pertamina saying that, at that level, the fuel subsidy could
nearly triple to some Rp 40 trillion (about $4.35 billion) and
cause a larger deficit.

Head of the fiscal analysis directorate at the Ministry of
Finance Anggito Abimanyu admitted that the budget deficit could
grow if no adjustments were made.

"There is a possibility of an increase in deficit, although we
are still trying to reach the initial target," he said, referring
to the deficit of 1.2 percent of gross domestic product (GDP), as
stated in the 2004 budget.

The country, despite being a member of the Organization of
Petroleum Exporting Countries (OPEC), is now a net oil importer
as it imports more crude than it exports -- meaning that a rise
in global oil price would have a more harmful than beneficial
impact on the budget.

In the January to May period, the oil price averaged $30 per
barrel, prompting calls from several lawmakers on the House
budget commission, including its chairman Abdullah Zainie, for
the government to revise the state budget oil price assumption
from $22 per barrel to $30 per barrel.

Director General of Financial Institutions at the Ministry of
Finance Darmin Nasution has calculated that under the $30 per
barrel assumption, and with continued rising prices, the fuel
subsidy could soar to Rp 36 trillion from an initial allocation
of Rp 14.5 trillion.

Under the same scheme, windfall profits -- extra revenues the
government gains from selling oil at a higher price than assumed
in the budget -- would still be able to cover the soaring fuel
subsidy and leave the budget balanced.

However, Darmin added, taken in combination with the revenue-
sharing mechanism -- a ruling that requires the central
government to split revenues from natural sources with oil-
producing regions -- the government would suffer an additional
deficit of Rp 1 trillion to Rp 1.5 trillion by the end of the
year.

A higher-than-expected deficit would hamper the government's
attempts to gradually reduce the deficit, and reduce its
dependence on foreign loans, which have accounted for most of the
deficit-funding requirement.