Plugging budget hole
Securing the state budget is becoming more difficult at a time when public spending has become the only locomotive expected to fuel economic activities and offset the brunt of last year's 14 percent contraction in the economy. Capital inflow is virtually nonexistent, at least until after the election and installment of a new government later this year. Domestic investment is not prospective, either, because the banking industry, which has ceased lending since last year, will likely remain moribund until the completion of its restructuring in June.
The 1999/2000 State Budget starting in April, although trimmed to a bare-bones spending plan similar to the current one, will have to finance more than 35 percent of its spending with foreign loans because internal revenue has decreased sharply amid the country's worst economic recession of the past 32 years. This dependence may even increase should the internal income projections, assessed by most analysts as too optimistic, especially in regard to tax receipts and earnings from the sale of state companies, fail to meet targets.
Japan's pledge of US$2.4 billion in new aid last week under the Miyazawa Plan for five Asian countries is a great help to meet state budget needs. But the shortfall remains big, though the country's creditor consortium, the Consultative Group on Indonesia (CGI), earlier pledged $4 billion in project aid. Almost another $4 billion has yet to be secured in order to plug the budget hole of $10.3 billion
But foreign borrowing is no longer as easy as the period of robust economic growth enjoyed until 1996. As the country is already saddled with more than $135 billion in foreign debt, more than twice its annual exports, its credit rating, particularly now in the tumultuous period of transition to a new administration, is not viable to enable the government to tap the financial market. Hence, government donors and multilateral creditors, including the World Bank, Asian Development Bank and International Monetary Fund, which are all grouped in CGI, are the only source of foreign funds available to cover the budget deficit.
A great amount of lobbying will be required to talk CGI members into putting up additional aid to meet the remaining $4 billion shortfall at their next annual meeting in Paris in July, one month after the general election. It is a tall order indeed, despite the rapport Indonesia has nurtured with its creditors. Only last September, sovereign members of CGI agreed to reschedule up to 20 years $4.2 billion in principal payments on past debts due in the current and next fiscal years.
There is no alternative for convincing creditors of the legitimacy of Indonesia's plight and maintaining their sympathy but for the government to fully take heed of the warning conveyed at the CGI preliminary meeting in Jakarta last month. The creditors reiterated that further aid to the country is conditional to continued strong and realistic reform measures despite the potential political mine fields ahead.
The message of caution is especially relevant in the run-up to the June election when the government -- faced with the potentially explosive interaction between social and political developments -- is prone to act in short-term interests by dispensing political goodies at the great expense of the long- term good of the economy. There is also a great danger that the government may slack off on key, painful reforms such as the reduction of subsidies, the bank restructuring program and other much-needed structural measures.
Though the creditors did not explicitly state it in their advice, it is nonetheless imperative that the holding of the June 7 general election be successful, which translates into honest and fair. The slightest doubt about the results could deprive the nation of the international support it has enjoyed thus far. Taxpayers, who after all foot the bill for their governments' foreign aid, will be simply unwilling to help a government installed through a questionable, not to say rigged, election.