Megawati submits contractionary but workable budget

Sat, 08 Sep 2001, 00:00 WIB | Source: JP

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.

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