Govt to use aid to finance subsidies

Govt to use aid to finance subsidies

JAKARTA (JP): The government, faced with sharply lower tax
revenues and the need to provide huge subsidies for basic
commodities, will have to depend largely on overseas funding to
finance its pared-down budget, Minister of Finance Bambang
Subianto said yesterday.

"This is our only option to offset the lower tax revenue," he
told members of the House of Representatives (DPR) Commission
VIII, which oversees the state budget and finance, research and
technology.

He explained that the Rp 15 trillion in revenues expected from
the sale of state-owned companies this year would not be enough
to cover the huge subsidies the government planned to provide for
essential commodities.

"Printing money is the worst alternative," he said, pointing
out that it would worsen the already skyrocketing inflation rate
which has exceeded 50 percent in the year's first five months.

He said tax revenues in the 1998/1999 fiscal year would be
much lower than those in 1997/1998 since the economic crisis had
pushed most companies into the red.

Director General of Taxes Effendi Ritonga said that as of June
22, tax revenue totaled only Rp 15.7 trillion, compared to the Rp
57.4 trillion target set for the current fiscal year starting
last April.

Bambang said Exim Bank of Japan had disbursed US$1 billion in
trade loans to the country, and that other donor institutions and
countries would act soon on their loan commitments after the IMF
and the government signed a new letter of intent scheduled to
take place today.

"These foreign loans are our only alternative now to secure
our state budget," he said, adding that a revised version of the
budget and its assumptions would be announced today.

An IMF team led by its Asia-Pacific director, Hubert Neiss,
has been in Jakarta for two weeks to review the country's
economic reform programs sponsored by the Fund.

The IMF is expected to disburse its next $1 billion tranche to
Indonesia, part of a $10 billion commitment, early next month.
The Fund has already disbursed $4 billion.

The IMF bailout package is considered a key to unlock another
$33 billion cash pool committed by several donor countries and
institutions last November.

Bambang said the 1998/1999 budget would have to be expanded to
accommodate increasingly needed subsidies for basic commodities
like rice, fuel, electricity, medicines and fertilizer.

The government originally set its subsidies for basic
commodities and fuel at Rp 12.3 trillion. Much larger subsidies,
however, are required as a result of the rupiah's weak
performance against the U.S. dollar, he said.

He added that the government would have to slash spending on
infrastructure projects.

House members urged the government yesterday to consider
rescheduling the installments and interest payments on its
foreign debts, which according Bambang, totaled $51.7 billion as
of April.

This total does not include another $5.9 billion owed by
state-owned companies.

Bambang argued that although a debt rescheduling was possible,
the option would have to be studied thoroughly, especially with
regard to its impact on market confidence in Indonesia.

The finance minister added that the government would continue
to guarantee bank deposits and maintain the existence of the
Indonesian Bank Restructuring Agency (IBRA) set up in January.

"IBRA is in charge mainly of restoring the country's ailing
banks to sound institutions and recovering the huge liquidity
credits pumped into problem banks by the central bank," he said.

Bambang said that as of June 22, Rp 144 trillion in liquidity
credits had been injected into the country's troubled banks. The
amount is significantly larger than the Rp 133 trillion figure
reported by Bank Indonesia on Tuesday for the period up to June
19.

Bambang was the first chairman of IBRA, but resigned after two
months reportedly due to pressure from politically powerful
bankers who were upset over his tough stance on ailing banks.

He was appointed finance minister last month by President B.J.
Habibie.

On Monday, Bambang appointed Glenn S. Yusuf, the former
director general for financial institutions, as the new chairman
of IBRA, replacing Iwan Prawiranata, who now only serves as a
director at the central bank.

Glenn said yesterday an asset management company would be set
up next month to take over and manage the bad debts of problem
banks as part of the effort to recover central bank credits.

Meanwhile, a senior finance ministry official said yesterday
that international auditors were assessing the country's banks
and that the process would be completed next month.

"Judging from the preliminary assessment, many banks may fail
to meet the government's new capital adequacy ratio (CAR) of 4
percent by the end of this year," he said.

The CAR requirement was reduced last week from 8 percent,
which was based on the internationally accepted capital standard,
in a bid to help banks meet regulations.

"I think banks which fail to meet the 4 percent CAR will have
to be closed," he said.

The government has shut down 23 banks since the economic
crisis started in July. IBRA is currently overseeing 48 banks, of
which seven have been taken over by the agency. (rei)