Govt to cut 2003 budget deficit to 1% of GDP

Govt to cut 2003 budget deficit to 1% of GDP

Dadan Wijaksana, The Jakarta Post, Jakarta

The government aims to slash the state budget deficit to 1
percent of gross domestic product (GDP) next year from the 2.5
percent estimated for this year, according to Minister of Finance
Boediono.

He said on Monday that the target would require a further
reduction in subsidies and pumping up tax revenue to help offset
huge budget spending, particularly on debt repayment.

"We predict the (2003) deficit to stand at one percent ...
obviously we will have to further cut subsidies and increase
revenues from taxes," Boediono told reporters on the sidelines of
a meeting with the House of Representatives budget committee.

He did not elaborate.

Such an unpopular policy, however, may meet strong opposition
from politicians as it would create more difficulties for the
hard-pressed public, already suffering from the effects of years
of economic crisis. Cutting down further on fuel subsidies, for
instance, would inevitably raise fuel prices.

The government, however, doesn't have the luxury to run
another huge deficit in the budget if it wants to create stable
macroeconomic conditions, crucial for luring badly needed
investment to push economic growth.

The government is targeting economic growth of between 4
percent and 6 percent in 2003 compared to the 4 percent projected
for this year.

Inflation is targeted at between 7 percent and 9 percent, the
rupiah exchange rate at between Rp 8,500 and Rp 9,500 per U.S.
dollar, the interest rate on Bank Indonesia three-month SBI
promissory notes at 12.5-14.5 percent, and the oil price at
between $19 and $20 per barrel.

Analysts have said that a lower Bank Indonesia interest rate
would help reduce the deficit as it would cut down on state
budget spending to cover the interest on the government bonds
issued to bail out ailing banks.

The government issued more than Rp 430 trillion worth of bonds
to recapitalized banks. The interest on the bonds is linked to
the interest rate on Bank Indonesia three-months SBI notes, which
for this year is targeted to average 14 percent.

Bank Indonesia has been allowing the interest rate to decline
since the beginning of this year. This trend will continue if
inflationary pressures ease and the rupiah continues to
strengthen.

Boediono said that the relatively optimistic economic targets
for next year were based on better political conditions at home,
coupled with a rapid recovery in the global economy.

Meanwhile, the House Budget Committee and the government
agreed on Monday on the importance of seeking ways of dealing
with the government's huge debt problem, especially domestic
debt.

Debt repayments have been putting great pressure on the state
budget, which analysts said had limited the ability of the budget
to finance development programs important for pushing economic
growth.

The state budget for this year has to allocate around Rp 90
trillion for debt repayments. This accounts for some 26 percent
of state expenditure.

The latest data show that the country's total debt as of
December last year stood at $134.8 billion, or some 90 percent of
this year's predicted GDP of some $160 billion.

Around $60 billion of the debts are domestic ones resulting
from the issuance of bonds to bail out banks in the late 1990s.