House prepared to amend budget

JAKARTA (JP): House of Representatives Speaker Akbar Tandjung said on Wednesday that the legislature was ready to meet with the government to quickly complete the planned revision of the 2001 state budget that has become a prerequisite for the disbursement of the crucial International Monetary Fund (IMF) loan.

Akbar said that various assumptions set under the current budget were no longer realistic amid the weakening rupiah and soaring interest rate.

"... The House is ready to revise quickly the 2001 state budget ... together with the government," he said in a speech at the opening of the House's second session period after a one month recess.

"The demand of the IMF to revise the current budget is in line with the thinking of the House ...," he added.

The current state budget is facing the risk of a much greater deficit which may lead to a severe fiscal catastrophe unless additional measures are quickly taken.

The deficit problem has become the main focus of talks between the government and the IMF special mission during the past two weeks.

Visiting IMF deputy director for Asia Pacific Anoop Singh told key legislators during a meeting last week that the IMF would sign a new agreement on economic reform measures with the government only after the budget revision plan had been approved by the legislature.

The signing of the new agreement would pave the way for the disbursement of the third US$400 million loan tranche of the IMF $5 billion bailout fund for Indonesia which was delayed last year due to signs that the government was wavering in its implementation of the agreed reform agenda.

"The loan may not be large in terms of the amount, but its significance and implications are enormous, particularly in reviving international confidence in the country's economic recovery," Akbar said.

Akbar's statement may help quell worries that the House, which is currently embroiled in a political battle with President Abdurrahman Wahid, may try to block the government's plans to revise the state budget and resolve the growing deficit problem.

Earlier this week, Coordinating Minister for the Economy Rizal Ramli told the Consultative Group on Indonesia (CGI), which groups together the country's usual donors, that the government expected to be able to complete the budget revision with the House sometime in the middle of May.

Akbar said that cutting down spending and raising tax revenue would be inevitable to help resolve the deficit problem, particularly as the House wanted the government to focus on domestic financing to plug the budget gap.

"For this reason, the House is also urging the government to try to accelerate the sale of assets (under the control of the Indonesian Bank Restructuring Agency or IBRA) and the privatization of state-owned enterprises," he said.

Legislators have been perceived as a potential obstacle to the smooth sale of IBRA assets and privatization program as evidenced in the past, amid rising nationalistic sentiment and worries of a "fire sale".

The government initially set the current budget deficit at 3.7 percent of gross domestic product (GDP), but unless measures are immediately taken, the deficit could expand to the dangerous level of 6 percent of GDP as expenditure increases, particularly due to the weakening of the rupiah and rising domestic interest rates.

The government and the IMF, however, have reached a broad agreement to maintain the deficit at 3.7 percent of GDP by taking what Finance Minister Prijadi Praptosuhardjo has called a package of fiscal adjustment measures.

The government has yet to fully disclose the details of the package, which consists essentially of five measures focussing on increasing domestic revenue and cutting down spending.

According to a government document leaked to the media earlier this week, the budget revision includes a new exchange rate assumption of Rp 9,600 per U.S. dollar, an inflation rate of 9.3 percent, economic growth of 3.5 percent, and the benchmark interest rate of Bank Indonesia SBI promissory notes assumed at 15 percent.

Under existing budget assumptions, the exchange rate is set at Rp 7,800 per dollar, inflation at 7.2 percent, economic growth at 5 percent and SBI rate at 11.5 percent.

The rupiah is now hovering around the Rp 12,000 per dollar level, year-on-year inflation has reached around 10 percent during the past couple of months, and the SBI rate is already at 16.09 percent.

According to the document, which reportedly has been prepared solely by Rizal's office, the government has to come up with additional funding of around Rp 39 trillion in order to check the deficit at 3.7 percent of GDP.

The document says that around Rp 3 trillion would be generated by raising tax and excise revenue, including income tax and value-added tax; and another Rp 2.5 trillion from non-tax revenues.

The government also plans to further reduce fuel and electricity subsidies by around Rp 5.6 trillion, and save another Rp 8.9 trillion by streamlining and refocusing development spending.

Boosting the efficiency and effectiveness of fiscal decentralization funds would also save a further Rp 7.9 trillion.

The government also plans to issue bonds and sell shares in state enterprises to resource-rich provinces, generating around Rp 5.2 trillion.

The document says that this would allow the government to raise the proceeds target from the privatization program by around Rp 2.2 trillion.

It adds that the remainder is expected to come from foreign loans. (rei/dja)