Solid 2002 budget: Necessary but insufficient

What was left unsaid in the proposed 2002 budget is equally important to what was said. Economist Sjahrir discusses the matter.

JAKARTA (JP): Experts, business people and politicians have given high marks to President Megawati Soekarnoputri's proposed 2002 budget. Numbers have been analyzed, factors affecting contraction and expansion put together, and on a scale from 1 to 10, the government received, on average, a solid eight.

It was brave enough to bite the bullet by announcing a 30 percent increase in domestic fuel prices while continuing to allocate funds to repay its foreign debts. This could only have come from a government strongly confident of its public support.

It is important to grasp the significance of the budget in dragging the economy out of the crisis. It is very encouraging that the proceeds from asset disposal and the privatization of state enterprises will be used to redeem government bonds, which in turn will reduce future pressure on the government's budget.

Bear in mind that this budget is a necessary but an insufficient condition for a fully-fledged recovery. It is discouraging that President Megawati hardly used the word "crisis" in her speech as she gave an all encompassing importance to the role of the budget.

Regardless of how impressive the increase in the education, the judiciary and defense budgets, the public will not be as enthusiastic as the legislators who applauded the President's speech. This is a direct result of the lack of public trust towards the legal institutions, the armed forces and the police.

Sadly, a day before Megawati's speech, the Rector of Syiah Kuala University, Prof. Dayan Dawood, a professional economist, was shot dead in Aceh. On Friday the Jakarta Stock Exchange index fell and the rupiah weakened a bit. This had nothing to do with the budget delivered on that day, but it might have something to do with the Aceh tragedy.

A budget is only an instrument, albeit the most important one, of a government's economic policies. It is crucial to understand other policies, some affected, others unaffected, by the budget.

Monetary policy, for one, is not only affected by the budget, but can also affect the budget. During Soeharto's era, we had a monetary council with the central bank governor as one of the members. Now, with the new central bank law, we do not have a monetary council, and the central bank has become an independent institution. Even in the U.S., one sees clear coordination between the Federal Reserve Board chief and the Treasury Secretary.

In Indonesia, one cannot be sure whether effective coordination exists between the finance minister, the central bank governor, and the coordinating minister for the economy. We cannot assess whether the assumption on the interest of three- month Bank Indonesia promissory notes (SBI), at an average of 14 percent for 2002, is the result of coordination among high- ranking officials. Presently, the interest rate is at 17.56 percent and the guaranteed interest rate for the three-month time deposits is 17.35 percent.

In the latest Letter of Intent agreed by the government and the International Monetary Fund, it is clear that there is a tight target for the base money supply. Since the assumption for the SBI rate is crucial given its potential to pressure spending increases on the payment of government bonds, the government should be transparent in explaining the targeted interest rate.

Since we are now heading towards a world recession, it is quite confusing that neither the government nor the President have expressed any views on how the recession will affect us. In fact, the legislature and the government all seem upbeat on the 2002 world economy as reflected in a House of Representatives budget committee paper signed on July 16, 2001.

The fact is, the world economy will worsen with America importing less, and with Japan getting bogged down in its banking sector. All these will have wide implications for East Asia, including Indonesia. Despite all the kudos for the 2002 budget, the external environment will clearly not be positive.

Clearly, the restructuring of companies and the functioning of banks are vital. With the ratio of loans to deposits at 40 percent, Indonesia does not have a functioning banking system. In restructuring and asset selling, it is not clear why the sale of Bank Central Asia should be considered more important than the Cemex deal which has more potential to yield money for the government in a more favorable manner.

At this moment the price earning ratio of BCA is ridiculously low at between three and four times. While the cement industry has definitely been taken over by sales of Indocement and Semen Cibinong to foreign investors, it is clear that there is no reason not to do the same with the state-owned Semen Gresik firm, comprising Semen Padang, Semen Tonasa and Semen Gresik. Even with the 35 percent premium for BCA shares, as state minister in charge of state enterprises Laksamana Sukardi said the government would receive, the price is way too low. These are micro issues which have not been given high priority, and have not been discussed thoroughly by the government and the public.

Witness the fact that Minister Laksamana still has no legal authority over the Indonesian Bank Restructuring Agency, since this authority is still vested in the Ministry of Finance.