IMF and govt divided over draft state budget

The state budget for 1998/1999 has disappointed the International Monetary Fund. Economist Kwik Kian Gie discusses the budget that may have caused a difference in opinion between the government and the fund.

Question: The IMF is disappointed with the 1998/1999 budget. Can you explain why?

Kwik: The government reached an agreement with the IMF that its budget for 1998/1999 and the following years should allocate a surplus equivalent to 1 percent of the country's gross domestic product (GDP). The budget plans do not explicitly allocate such a surplus. The IMF considers Indonesia as reneging on the agreement.

Q: Can you identify the specific differences of opinion between the government and the fund?

K: The terminology of their concepts shows the difference. The agreement, announced on Oct. 31, 1997, said: "In 1998/1999 and the following fiscal years, the government will target a 'surplus' equivalent to 1 percent of GDP." President Soeharto in his budgetary speech on Jan. 6, said: "The draft budget for 1998/1999 is designed to 'balance' at Rp 133.5 trillion.

It should allocate a surplus of Rp 4.14 trillion because GDP is projected at Rp 414.4 trillion. The budget, therefore, should set total domestic revenues at Rp 107.68 trillion, while spending should total Rp 103.54 trillion, comprising routine spending of Rp 92.38 trillion and development spending of Rp 11.16 trillion. Thus, its surplus would reach Rp 4.14 trillion. The government's draft budget allocates development spending of Rp 41.1 trillion, 3.68 times larger than that agreed on with the IMF.

Because development spending is set at Rp 41.1 trillion, the budget will have a deficit of Rp 25.8 trillion, which will be covered by foreign aid.

In its balance of payments projections, the government expects "official capital inflow" of $9.05 billion. This is confusing because if it is equivalent to (the deficit of) Rp 25.8 trillion, the government is using a conversion rate of Rp 2,851 against the dollar (the budget's official conversion rate is Rp 4,000).

Q: Why has the government labeled the deficit budget as a balanced one?

K: The government has done this for about three decades. It is not surprising if the government uses a term which means different things to other parties. I have long tried to understand it and failed. Some say that the terms "surplus" and "deficit" should be interpreted as "contractive" and "expansive". If we agree to use such terms, we will have to label the budget as expansive or deficit, with a mathematical description following it.

The purchasing power to be absorbed from the people will be equivalent to the expected domestic non-oil revenue of Rp 80.4 trillion, while the purchasing power to be pumped into the market will total Rp 82.8 trillion, consisting of Rp 21.12 trillion for salaries and wages, Rp 10.05 trillion for material expenditures, Rp 12.28 trillion for subsidies to autonomous regions, Rp 1.84 trillion for domestic debt servicing, Rp 15.38 trillion for other routine expenses and Rp 22.1 trillion for rupiah-financed development spending. Thus, the net (expansive) injection of funds into the domestic market will reach Rp 2.4 trillion.

Q: Are there any other projections which may confuse the IMF?

K: I don't know whether the following examples have confused the IMF. I myself am confused with projections that the revenue from value-added tax is expected to increase by 13.1 percent but the revenue from income tax is expected to decline by 9.5 percent. We know that company taxable incomes have a close relationship to the volume of their sales.

Another strange thing is the high rate (74.4 percent) of the increase in domestic non-tax non-oil revenue, which is mostly expected from state-owned companies, including state-owned banks. How can we expect a drastic increase in their profits in a year affected by a serious economic recession?

Q: Some suggested that Indonesia should boost exports while slashing imports instead of reducing expenditures. What do you think about this?

K: It is not realistic in the short term. For 30 years, exports (of goods and services) have never exceeded imports and Indonesia has always suffered current account deficits, except in 1973, 1979 and 1980, when oil prices were booming.

It will be more realistic if we reduce investment and government spending. This will worsen the recession but it will act like a "bitter pill" for our economy.

Because one of the causes of the current economic crisis is over-investment, not under-consumption, we must treat the over- investment if we want to cure the economy. Expanding government's spending will worsen the current account deficit because we will have to increase foreign debt and the savings-investment gap will expand. (riz)