Megawati submits contractionary but workable budget

From: The Jakarta Post

On Friday President Megawati Soekarnoputri unveiled the 2002 draft state budget at a House of Representatives' plenary session in Jakarta. The text and tables can also be accessed on www.thejakartapost.com.

It indeed required extra effort to finish the Draft of the 2002 State Budget (APBN) in the midst of this seemingly uncertain situation. There are a number of issues that need to be considered in finding the solutions, which is also difficult.

I am of the opinion that we all know and understand the situation. To date we do not have many first-class options at our disposal. More than often, we have to select the most appropriate option from a wide range of less favorable choices. This is also the case in selecting the ways and means to materialize them. The resources at our disposal are indeed limited. Not only does it require restructuring, at the same time we need to optimize them, taking into account all their attending limitations.

It was under such circumstances that the preparation and drafting of the 2002 State Budget had to be carried out. In accordance with the parameters set by the 1999-2004 State Policy Guidelines (GBHN), this Draft was prepared based on the 2002 Annual Development Plan (REPETA) that is part of the 2000-2004 National Development Program (Propenas). There are five national priorities, which are: to develop people's welfare; to develop a political system that is democratic and able to maintain the nation's unity and cohesion; to speed up economic recovery; to improve regional development; and to uphold the law. All of these have been used as parameters to prepare and draft the 2002 State Budget.

These national priorities are principally in line with the program of the Gotong Royong Cabinet. Apart from preparing all necessary measures to facilitate the next general election, these efforts are done in view of our determination to continuously carry out reform and democratization in all aspects of the life of the nation through a clearer framework, path and agenda while continuously improving respect for human rights.

Evaluation of the overall situation has led to the consideration to translate all-important aspects in the above priorities into Cabinet programs. Dynamic developments in society and the demand to manage the changes in a much faster way have influenced the drafting of the programs. If carefully observed, it will be seen that these programs are still within the framework of those priorities as mandated by the State Policy Guidelines and the Propenas.

Allow me to start by fielding the main rationales that underlined the drafting of various plans and activities as well as its quantitative translation into this Draft State Budget. The detailed version can be verified in the attached Financial Note.

The first point concerns welfare. This issue has overwhelmed us, which in the end points at the basic problem of welfare. All the Cabinet programs I disclosed as an extract of the important aspect of our five national priorities indeed contain people's welfare.

In the field of people's welfare, development is directed toward the delivery of basic social services such as education, health and social welfare, in particular for the poor as well as for the handling of refugee-related issues.

Social welfare is also affected by the unresolved problem of unemployment due to the lingering economic crisis, which has yet to be fully worked out.

Much more attention is therefore due to the education sector. I believe that we all agree on the importance of this issue for the sake of national sustainability. Results of education development that we have so far achieved must be hastened further through the nine-year compulsory primary education program. Added and improved access to educational services both within and outside schools -- expected to continue along with improved education -- need to be further improved given the increasingly emerging roles and initiatives of the people.

Equally serious attention should also be paid to the development of a political system that is more democratic and able to maintain the integrity of the Unitary State of the Republic of Indonesia, and to nurture the nation's unity and cohesion. There is surely much homework to be done in this area. There are many steps to be taken to deal with the various political uprisings and, at the same time, to strengthen political stability. There are various regulations that need to be reviewed to meet public aspirations, including the way general elections are conducted.

Also crucial is the threat to national integration and the disruption to people's sense of security, as well as efforts to meet the minimum required weaponry system and steps to improve the professionalism of the Indonesian Military and the National Police. These measures are part of the Cabinet programs to prepare for the 2004 general election which must be safe, orderly, discreet and direct, to preserve the unity and cohesion of the Unitary State of the Republic.

In line with this direction of thought, there are efforts to restore the image as well the dignity and trust of the international community in our nation-state. It is against this backdrop and also in a bid to maintain the nation's unity and cohesion that I prioritized visits to countries of the Association of Southeast Asian Nations; and this month I plan to visit the United States of America to speak before the United Nations General Assembly, and Japan.

We are also trying to further nurture economic cooperation, including within the framework of the Asia Pacific Economic Cooperation forum and to strengthen Indonesia's preparedness in view of the upcoming ASEAN Free Trade Area. All these are part of the Cabinet programs in an attempt to pursue a free and active foreign policy, to restore the image of the state and nation, and to regain international confidence -- including that of donor institutions and investors -- in the Indonesian government.

Given the burden of unemployment and the increasingly urgent need to create new job opportunities, the steps to invite investments have become even more pressing. For this purpose, the government is trying to lay down new policies in the investment sector. All these are indeed needed to resume the running of the national economy, which has almost collapsed.

I am convinced that we can all see that the recovery of our national economy will become an initial step to create jobs and alleviate poverty. Our ability to decrease the level of poverty and the number of the needy depend upon the success of our economic recovery program. It must be admitted that the realization of these objectives will be mainly determined by the role of the private sector, for the state indeed lacks funds. Therefore, to speed up economic recovery, there is also a need to accelerate the sales of assets derived from banking restructuring and the privatization of state-owned enterprises, and to speed up the restructuring of the private sector's debts as well as to restore banking functions.

To provide a legal foundation for this assets-selling program or the privatization of state-owned firms, I have recently submitted a bill aimed at regulating the sale of these assets.

Apart from investments, one source expected to grow is non-oil and gas exports. Steps to improve these exports are to be continued by eradicating distribution barriers, overcoming workers' problems, reducing trade impediments with industrialized countries and widening export markets.

To deal with decreasing infrastructural support caused by the ongoing economic crisis, the government plans to revive public participation. For this purpose, various policies and regulations will be perfected to encourage this participation, such as by restructuring tariff policies and deregulating licensing in the energy sector, including electricity, transportation, post, telecommunications and informatics.

The main concept on regional development relates to the funds transferred (to the regions). In this area there are, however, still some problems that require our serious attention.

First, there is a need to wisely and carefully observe the division of the balanced funds and the possible regional financial loans. This sober attitude is needed, for the negative impact of a local government's financial instability will definitely have a national bearing.

Second, the utilization of the balanced funds to meet the local government's duties and responsibilities to society in their respective regions can be carried out in an orderly and disciplinary fashion in line with existing regulations.

Third, there is a need to have an iron will to eradicate barriers to trade and investment that may decrease the income of the regions concerned.

Fourth, there is a need to reinforce the principles of administering natural resources, and existing and future infrastructure, to achieve maximum benefit for all, instead of instigating the break away of our nation and state.

Apart from the above problems, another equally important issue is to uphold the law. Through the Cabinet programs, the government is determined to execute legal supremacy and to consistently instill a sense of security in society, and to eradicate corruption, collusion and nepotism (KKN). The handling of KKN and human rights cases are still priorities. As such, improved effectiveness of the judiciary institutions and of other law enforcement agencies, including their professionalism, will also be given more attention.

These are the main rationales underpinning the formulation of the Draft of the 2002 State Budget.

The fiscal policy for 2002 is designed in two frameworks. First, to create a continuous balance between the need for state spending with sources of revenue and financing of development.

Second, to enhance regional autonomy by relinquishing tasks and responsibilities to the regions, along with the provision of sufficient funds. The government is aware that determining the amount of these funds is not easy. By taking into account the allocation of the 2001 balanced funds and various difficulties faced by the regions, measures have been taken to rectify estimations for 2002. These are all aimed at balancing the funds with the responsibilities entrusted to the regions, which should reflect the principles of a just and fair distribution, and minimize interregion gaps. The objective is to have all regions progress together within the Unitary State of the Republic. The willingness to share the burden and work together to overcome problems will strengthen us as a nation.

Apart from those two frameworks, the drafting of the 2002 State Budget certainly took into consideration the estimated growth of the national economy. For 2001, economic growth is expected to be lower than that of 2000, which was recorded at 4.8 percent. This estimation is based on the weakening of non-oil and gas exports during the first semester of 2001 that decreased by 2.2 percent compared to the same period in the previous year.

This situation cannot be separated from the weakening of the rupiah. Up to the end of July, the rupiah's value still indicated a worsening trend, with its average value at around Rp 10,900 to the U.S. dollar. The weakening of the rupiah contributed to higher inflation, apart from other factors such as the increase in fuel prices. From January to July 2001, inflation reached 7.7 percent. An annual calculation reveals an inflation growth of 13 percent, followed by higher interest rates, similar to previous periods. The three-month interest rate of Bank Indonesia promissory notes (SBIs) rose from 14.8 percent in early January 2001 to around 17.6 percent in the third week of August 2001.

We are thankful that one main factor which significantly influenced the economy -- political instability -- has been settled wisely and peacefully. We are also thankful that the market has placed sufficient confidence in the Cabinet. In recent weeks, we have witnessed the tendency of the rupiah to gain ground compared to the previous period. This is still temporary, and it is therefore increasingly important for us to use the best of the momentum to ensure that this improvement is sustained.

In general, economic growth in 2001 is estimated to merely top 3.5 percent. Against this background the need to remain vigilant is crystal clear, for the numbers of the needy and the unemployed are still high. This sluggish growth will impede the creation of job opportunities, while skyrocketing inflation will definitely decrease people's real incomes. It is this that has led to demands of higher workers' wages, which has in turn ended in social tension.

It is therefore urgent to settle the root of the problem, through sufficient economic growth while maintaining price stability.

In relation to economic growth, I would like to reiterate the importance of the role of investment. To this end the government has prepared several measures to encourage investment.

Through the adoption of these measures it is expected that the economy in 2002 may grow better and that the rate of unemployment and the poor can be reduced. Also, the rupiah is expected to remain stable at an average of Rp 8,500 to the dollar. If all this can be achieved, inflation should be curbed and the three- month interest rates of Bank Indonesia promissory notes can decrease.

The budget calculation is also based on estimated oil production and prices on the international market. Oil production in 2002 is set at 1.23 million barrels per day; and to reduce uncertainty in the implementation of the budget in 2002, given its sensitive nature vis-a-vis the value of the rupiah and the SBI interest rate. The international price of oil is set at a conservative level of US$22 per barrel.

State revenue in the 2002 budget is set at Rp 291.4 trillion, which is 17.3 percent of gross domestic product. This is not an easy task. For the sake of efficiency and fairness, various tax deferments will be further reduced. The policy in this area will be based on intensification and extension of the tax base.

In addition, state revenue earned from nontax state income (PNBP) is estimated at Rp 72.6 trillion. This amount is projected to be collected from the improved health and performance of state-owned firms and from a review of government earnings from profits of the state-owned companies. Another measure is to intensify the collection of due debts owed to regional governments and region-owned enterprises.

Some of the revenue will be disbursed for routine expenditures estimated at Rp 196 trillion. The other two main spending areas are for bond interest rates for banks estimated at Rp 61.1 trillion, and the fuel subsidy. For this purpose an all-out effort will be made to immediately enable the Indonesian Bank Restructuring Agency to restructure assets under its care, the results of which will partly be used to retire government bonds.

A similar heavy burden is the fuel subsidy in 2001. Despite the increase of domestic prices, the subsidy remains high at Rp 53.8 trillion. This amount is higher than that set aside for the development budget of Rp 45.5 trillion. Fuel consumption continues to increase, generating a heavier burden of subsidy. A subsidy reduction, therefore, becomes more compelling, for otherwise we will not have sufficient funds to finance development activities. Not only is the fuel subsidy incorrectly targeted, it has encouraged overseas smuggling, thereby reducing domestic supply.

Considering the aforementioned, the choice only highlights the need to raise domestic prices. Obviously, it is a heavy, yet unavoidable decision to maintain the sustainability of the state budget as a prerequisite for economic recovery. The balance obtained from a subsidy reduction would increase development funds available to fulfill the basic needs of people.

In a bid to lessen the burden of the low-income people as a result of the price hikes, compensatory programs will be carried out. In order not to repeat past experiences, such programs would be carefully prepared from the very beginning, as part of the process of formulating and deliberating the Draft State Budget for 2002, to ensure smooth running of the programs when the price increases are effected. Besides this, the government continues to make appropriation for supporting special rice market operations aimed at ensuring the availability of rice at a price affordable to the poor people.

Allow me now to submit the main development budget for 2002. As a result of the strong commitment to fiscal sustainability by reducing the amount of debts, funds for development become more limited. Although the nominal amount of the budget is increasing, its ratio against the GDP will decrease from 3.1 percent in 2001 to 2.8 percent in 2002. This limited budget urges the regions to take up bigger responsibilities in accordance with the larger amounts of funds that will be transferred to them. Nominally, the budget for development for 2002 is Rp 47.1 trillion, of which Rp 22.7 trillion will be locally financed and Rp 24.4 trillion will be funded by foreign loans.

The development budget fully managed by the central government will be directed more for improving the people's welfare, especially through the provision of basic needs in a more just and evenly distributed manner, the improvement of income, and the creation of jobs and the maintenance of the physical infrastructure. Some of the budget will also be spent for supporting the endeavors to create good governance and to restore order and security.

On this occasion I am not going to dwell upon the allocation of the budget in every single sector. The more detailed allocation has been distributed to the distinguished members of the House. As a general picture, however, I would touch on some of the proposed budget allocation for some sectors.

In an attempt to fulfill the basic needs of the people, the government has earmarked for the education, and health and social welfare sectors a budget of Rp 11.6 trillion and Rp 4.3 trillion, respectively. The budget allotted for the latter two uses up one third of the total development budget, while the education sector takes 24.7 percent.

The educational budget will be used for improving enrollment at elementary schools, especially the intensification of the nine-year compulsory education program, improving the quality of education, providing scholarships for children of poor families, procuring textbooks and improving the quality of teachers and other educational officials through a series of trainings.

The funds allocated for the sector of health and social welfare are intended to broaden the coverage of basic health services for the poor, homeless children, elderly citizens, the handicapped, socially disadvantaged persons, as well as for the victims of natural disasters and social unrest.

Hence, the budget allocation also serves as an effort to improve the people's income through job creation. Such an effort will be decided mostly by the people themselves, while the government will facilitate the program through the improvement of infrastructure.

The funds allocated for the agriculture, fishery and irrigation sectors are intended to strengthen food sufficiency through the improvement of food and fishery production, the enhancement of production and consumption diversification, the empowerment of farmers and rural people through the distribution of farm inputs such as seeds, fertilizers, medicines, and the expansion of market network and the improvement of supervision and information services. For the irrigation subsector, the funds are mainly directed for the maintenance and rehabilitation of irrigation networks.

The funds for the transportation and communication sectors are aimed at maintaining and rehabilitating the facilities and infrastructure for transportation services to ensure safe transportation and facilitate services to remote areas.

Accordingly, these four sectors I earlier expounded on, namely education, health and social welfare, agriculture, fishery, irrigation, transportation and communication sectors, together take up 61.3 percent of the total budget.

Besides aiming at improving the people's welfare, the central government budget is also directed at creating good governance, public order and security. To this end, the law and defense and security sectors also deserve a significant increase of budget of 48.4 percent and 40.9 percent, respectively.

The budget in the legal sector will be utilized to improve law enforcement by cracking down on KKN and human rights abuses, enforcing discipline in law enforcers, creating a clean judiciary and respect for human rights, and continuing the process of legislation within the framework of economic recovery.

While the budget for the defense and security sector will be spent for anticipating disturbances of security and public order by providing adequate equipment to enforce law and order as well as preventing crimes.

State expenditures on various sectors I previously dwelled upon form only some parts of the government undertakings as various other development activities will be implemented by regional governments. To support these programs, the government sets aside an amount of Rp 90.3 trillion for balanced funds. Despite the fact that it is the regions which have the full authority to utilize the funds, I hope that the budget will be spent in accordance with their scope of responsibility based on the principles of regional autonomy.

In total, government expenditures, including the balanced funds for the regions, total Rp 332.4 trillion. Accordingly, the budget deficit for 2002 is expected to reach Rp 43 trillion or 2.5 percent of GDP. This figure is less than the 3.7 percent estimated for the current fiscal year. The smaller deficit allows the government to decrease new foreign borrowings in line with the commitment to fiscal sustainability.

The financing of the deficit will be derived from both domestic and foreign resources. Domestic resources for financing are the proceeds from the privatization of state-owned companies and sales of the assets managed by IBRA. The privatization of state-owned enterprises will be executed in a more selective fashion and is estimated to contribute Rp 4.0 trillion to the state budget, while asset sales by IBRA are targeted to reach Rp 21.5 trillion.

These are the main programs of the government, including the proposed budget. We have a huge amount of homework and a tough task ahead, while difficult choices have to be made. However, only with the spirit of togetherness, mutual help and high discipline in implementing our common commitment will, we hope, all these problems, God willing, be solved, to lead us to a better future.

With the same spirit, we will fully cooperate with the House to deliberate the draft budget for the 2002 fiscal year. I hope the deliberation can be concluded according to the schedule so that regional governments will have ample time to formulate their respective budgets, ready for implementation early next year.the distribution of farm inputs such as seeds, fertilizers, medicines, and the expansion of market network and the improvement of supervision and information services. For the irrigation subsector, the funds are mainly directed for the maintenance and rehabilitation of irrigation networks.

JP/Megawati submits contractionary but workable budget