Oil boosts revenue
It might be exaggerating to say that the current state budget (1996/1997) has been saved by the 16 percent increase in international oil prices. But the first-half (April to September) implementation of the budget, as reported by Minister of Finance Mar'ie Muhammad, did indicate that actual budget revenue would have been much lower, had it not been for the significant increase in oil tax receipts.
As Mar'ie reported to the House of Representatives on Wednesday, tax receipts from the oil and natural gas sector during the first half totaled Rp 8.3 trillion (US$3.5 billion), or almost 60 percent of the target set for the whole fiscal year. Meanwhile, tax revenues from other sectors reached only 43.6 percent of the target. The other sources of revenue were even worse, with non-tax receipts (mainly profits from state companies and service fees) achieving less than 25 percent of their target and revenue from foreign loans hitting only 34.8 percent of the target.
Even though the $2.65 increase in the price of oil to an average $19.15/barrel during the first half also forced the government to spend Rp 358.5 billion for domestic fuel subsidies instead of gaining Rp 827.8 billion in fuel sale profits as envisaged in the budget, the bottom line was still positive. Every $1 increase in the crude oil price above the price envisaged in the budget generates an estimated $600 million in additional revenue for the government. If the government's spending on fuel subsidies is deducted from this amount, the net additional revenue from every $1 rise in crude oil prices is estimated at $300 million.
The budget performance, however, was nowhere near as worrying as the position of the external balance, whereby the overall balance of payments, for the first time in over a decade, degenerated into a deficit of $200 million. The overall balance used to be made positive by the capital account surplus. However, because the current account deficit (balance of trade in commodities and services) in the first half rose by 14.5 percent to $4.5 billion -- due partly to the deficit in the non-oil trade balance -- the capital flows, though also increasing substantially, could not offset the deficit. The trend has been all the more worrisome because the non-oil trade balance, which posted a surplus between the 1992/1993 and 1994/1995 fiscal years, became a deficit in 1995/1996 due to the slackening growth of exports. No wonder the ratio of foreign debt servicing to total export earnings almost reached 35 percent, which Mar'ie himself viewed as alarming.
Even the rise in capital flows, though helpful, is not an entirely welcomed development, especially from the perspective of monetary management. The capital account ended with a net surplus of $4.3 billion only because of $4.7 billion in net private capital flows, because official capital flows actually posted a deficit of $400 million. But only $2.4 billion of the net private capital flows consisted of direct investments, while the remaining $2.3 billion was made up mostly of portfolio, short- term capital. That makes the country vulnerable to the volatile financial market because the portfolio capital is highly sensitive to noneconomic factors, such as rumors. But given the huge current account deficit, even the speculative capital still contributed to preventing the overall balance of payments deficit from reaching an alarming point.
The central bank has nonetheless tried to curb the inflows of short-term speculative capital because that kind of capital makes monetary management increasingly difficult. Bank Indonesia, for example, widened the rupiah exchange band against the American dollar to 8 percent last September to discourage currency speculation.
The clearest and strongest message conveyed by the worsening external balance position is that it now becomes much more imperative than ever to further improve the climate for investment activities and to bolster the growth of exports. The situation has not yet reached a critical point, but further heavy reliance on short-term capital flows makes the country's balance of payments even more vulnerable.