Habibie's budget

Habibie's budget

President B.J. Habibie's speech outlining the government's
spending plans in the House of Representatives on Tuesday was
exceptionally long for a bare-bone budget that essentially offers
little to stimulate Indonesia's depressed economy. The speech,
which lasted for two hours and 15 minutes, was not only tortuous
for House members to sit through, it was disproportionate in
length given that only 11 months remain before his administration
has promised to make way for a new, democratically elected
government.

With little to discuss by way of the budget, Habibie took the
opportunity to indulge in an elaboration of his vision and to
defend some of his more controversial policies. The speech also
provided an insight into where his priorities lie, and more
importantly, what can be expected by way in terms of new
policies. His warning about the "untoward" behavior of the press,
for example, could signal the imminent return of closer
government control of the media. By instructing the Armed Forces
to take firm measures to restore security and order, while at the
same time arguing that mobilization of the masses has been the
source of social unrest, Habibie hinted at a tough clampdown on
student protests, if and when they resume after Ramadhan.

When the President did eventually get round to explaining the
government's spending plans, he gave little reason for cheer. The
sole exception was when he announced a plan to raise civil
service and Armed Forces salaries and pensions. The government
has rarely used fiscal policy to invigorate the economy, and the
1999/2000 budget looks to be no exception, even with the nation
desperately searching for the first green shoots of recovery.

In all fairness, the budget includes massive provisions for
various social safety net programs. These programs are needed to
provide relief to those worst affected by the economic crisis.
The government is also forging ahead with its attempt to promote
its concept of a people's economy by providing massive subsidies
to interest rates on over a dozen loan schemes devised to help
small and medium-sized enterprises and cooperatives. Funds
allocated to recapitalize commercial banks make up another major
part of the budget. Using Rp 18 trillion to bail out mismanaged
banks may seem rather excessive, but a healthy banking system is
central to economic recovery.

Given the limited funds available to the government, there
will be precious few new public investment projects initiated in
the coming year, and what modest spending plans the government
has hinge on its ability to raise revenues. Here, the government
has very few options. With weak global oil prices dragging oil
and gas revenues down and the all pervading recession squeezing
its ability to increase taxes and levies in other sectors of the
economy, the government plans to resort to greater foreign
borrowing to cover the expected budget deficit.

In drafting the budget, the government has assumed a zero
growth rate in the 1999/2000 financial year, an inflation rate of
17 percent, world oil prices averaging at US$10.5 a barrel, and
an exchange rate of Rp 7,500 to the American dollar. These
assumptions appear somewhat conservative given that in 1998,
Indonesia's economy contracted by 13 percent and inflation rose
to nearly 77 percent. The current budget, after numerous
revisions, was recalculated assuming $13 per barrel of oil and an
exchange rate of Rp 10,000 to one dollar.

Despite the tenuous nature of the assumptions used to draft
next year's budget, there is a larger and more telling "if" upon
which the accuracy of the government's financial planning hinges.
The budget assumes that the markets and the public will have
strong confidence in the government, which in turn hinges on
political and social stability, neither of which can be
guaranteed.

In spite of his lengthy budgetary speech, Habibie failed to
address the question of political stability convincingly. His
apparent desire to restrict student protests, when the student
movement is just about the only effective means of checking
government power, is likely to stir the students into further
action. Furthermore, establishing a civilian militia in the face
of widespread objections will only serve to antagonize the
public, giving rise to the prospect of yet more clashes and
confrontations and even less stability in our already turbulent
country. If either of these misdirected ventures were to take
place, even the most conservative budgetary assumptions would
come to appear wildly optimistic.