Solid 2002 budget: Necessary but insufficient

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.