Lower interest rates key for deficit control

Fitri Wulandari The Jakarta Post Jakarta

Although the state budget deficit in the first semester of this year turned out to be much lower than predicted, economists said the government still had to work extra hard to maintain a "favorable domestic environment" to help ensure that the full- year deficit would not inflate beyond the safe limit.

Raden Pardede said that the favorable environment would give room for Bank Indonesia to continue to guide interest rates lower, which in turn would ease the burden of the state budget in covering the interest cost of government bonds.

"A one percent increase in interest rates means the government must pay an additional Rp 2.3 trillion (US$258 million) in domestic debt. Lowering interest would certainly ease the government's burden," Raden told The Jakarta Post over the weekend.

The government issued over Rp 430 trillion worth of bonds to recapitalize ailing banks in the late 1990s. The bond interest rates is attached to the interest rate of Bank Indonesia SBI promissory notes.

For this year alone, the state budget must allocate some Rp 60 trillion for interest payments -- the largest expenditure item.

If the government manages to control this expenditure, the 2002 state budget deficit would not explode beyond the Rp 42 trillion or 2.5 percent of gross domestic product limit.

The Ministry of Finance recently reported that for the first semester of 2002, the budget deficit was Rp 7.1 trillion or 16.8 percent of this year's limit of Rp 42 trillion.

The number was much lower than earlier predicted by the government and the International Monetary Fund at Rp 14 trillion.

Analysts, however, explained that with a fraction of the recap bonds to mature in the second half, combined with signs of the rupiah weakening once again, Bank Indonesia could be prompted to raise interest rates for the second semester which would endanger the deficit target.

Umar Juoro said the government must somehow lower domestic debt burdens because that was the only way to compensate for the slumping exports and foreign direct investment.

"There is no significant chance to increase revenue from other sectors. This (lowering domestic debt) is the only way," he told The Post.

The interest rate for one-month SBI notes have been on a declining trend since the beginning of the year amid a stronger rupiah and slowing inflation. The rate is currently less than 15 percent compared to more than 18 percent late last year.

But the rupiah has been under heavy pressure lately, breaking the Rp 9,000 level for the first time in two months last week. Analysts said that in addition to global uncertainty, and the upcoming August Annual Session of the People's Consultative Assembly (MPR) investors were getting increasingly jittery. A weak rupiah could reignite inflation.

In terms of first half revenue, the government managed to get Rp 130.5 trillion, compared to the full-year target of Rp 301 trillion.

Expenditure in the first semester reached Rp 137.6 trillion, compared to the 2002 target of Rp 344 trillion.

For revenue, however, the two economists have different opinions on whether the government should continue to rely on taxes as the main source of income.

Raden agreed that the government must focus on tax to increase revenue.

Tax still makes up 70 percent of the budget revenue with this year's target of Rp 219.6 trillion. According to the Ministry of Finance, as of June, the government managed to raise Rp 130 trillion in taxes.

Meanwhile, Umar voiced a different opinion saying that relying on taxes would only burden the economy which at present was driven mainly by domestic consumption.

"Pushing taxes as the main source of revenue would only put pressure on economic activities and domestic consumption," Umar said.

Umar said what the government should do was to improve the domestic climate to lure more investors back in. For eyebox

The State Budget performance in the first semester 2002

Full-year target 1st Semester

------------------------------------------- Deficit Rp 42 trillion Rp 7.1 trillion

Revenue Rp 301 trillion Rp 130.5 trillion

Expenditure Rp 344 trillion Rp 137.6 trillion