Thu, 27 May 2004

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.