State budget aims to revive economy

State budget aims to revive economy

JAKARTA (JP): President Abdurrahman Wahid's government
unveiled on Thursday its first state budget aimed at rebuilding
the crippled banking sector, stamping out corruption and
placating separatist movements in resource-rich provinces.

The April-December 2000 budget draft still relies heavily on
foreign loans, despite attempts to boost domestic revenue but
allocates much bigger appropriations for the provinces.

"Starting in 2000, the aim is to reduce the size of the budget
deficit and generate economic conditions which will, over time,
move the economy toward a position of budget balance or surplus,"
Vice President Megawati Soekarnoputri said in a budget address to
the House of Representatives.

Because of his poor eyesight, Abdurrahman himself could not
deliver his budget speech but he made an of-the cuff-statement to
introduce the budget proposal before he asked Megawati to deliver
his budget address.

Most analysts saw the budget plan as realistic and the Jakarta
Stock Exchange rose by 2.2 percent to close at 670.153 points in
a positive reaction to the spending plan.

The 2000 budget envisages total spending of Rp 183.07 trillion
(US$26.1 billion based on the Rp 7,000 rate assumed by the
government for the next fiscal year), as against total revenue of
Rp 137.69 trillion, thereby ending up with a deficit of Rp 45.37
trillion or 5 percent of gross domestic product (GDP).

The current state budget, ending on March 31, is estimated to
post a bigger deficit of 6.8 percent of GDP.

The next budget will last only nine months as the government
will align its fiscal year with the calendar year, beginning in
January 2001.

About half of the deficit is expected to be financed by
foreign loans and the remainder by the proceeds of asset sales by
the Indonesian Bank Restructuring Agency (IBRA) and the
privatization of state companies.

The government expects to obtain some $4.1 billion in new
loans from major donors grouped under the so-called Consultative
Group on Indonesia (CGI), which will convene for the first time
in Jakarta early next month.

The government is also seeking to reschedule another $2
billion in sovereign debts through the Paris Club of creditor
nations.

The main source of government earnings will be tax revenues,
projected at Rp 97.8 trillion or 71 percent of total revenue and
reflecting an increase of more than 23 percent over the
comparable period in the current fiscal year.

The budget allocates Rp 42.4 trillion, the largest single
expenditure amount, for interest payments on government bonds
issued to finance the bank restructuring and recapitalization
program.

The interest cost of the government bonds in the current 12-
month budget is Rp 34 trillion.

Indonesia's banking sector has been badly hit by the economic
crisis that started in the middle of 1997. The government has so
far closed down 66 banks, nationalized 13 banks, recapitalized
state banks and helped finance the recapitalization cost of seven
private banks. The government also guarantees the obligations of
the closed down banks.

The cost of the bank restructuring and the recapitalization
program, considered a key to economic recovery, is estimated at
more than Rp 600 trillion.

Foreign debt service burdens will amount to Rp 16.6 trillion,
assuming that $2 billion in foreign debts will be rescheduled
under the Paris Club.

The other large routine spending amount is for the salaries of
civil servants, which is predicted to be around Rp 29 trillion,
or a 20 percent rise from the level in the comparable period in
the current fiscal year.

"The salaries of the civil servants must be raised as part of
efforts to stem corruption in order to create good governance,"
the President said in his speech.

The plans to raise the salaries of the civil servants has
become a controversial issue, following reports last week that
higher ranking government officials would enjoy a much greater
pay increase, by up to 400 percent.

The government decided to let the House decide on the thorny
issue.

The new budget assumes an economic growth of 3.8 percent this
year, inflation of 4.8 percent, an average oil price of $18 per
barrel and an average rupiah exchange rate of Rp 7,000 per U.S.
dollar.

"Gradually, should all structural readjustment programs be
carried out properly as planned, economic growth is expected to
arrive at the level of 6 or 7 percent within the next five
years," Abdurrahman said.

"Moreover, this economic growth will be supported by stronger
fundamentals, for it is supported not only by the groups of
businesses but also by the society at large," he added.

"The healthier economy will also strengthen the state's budget
in the future ... The budget deficit is expected to decline from
5 percent of GDP in 2000 to become balanced in 2004," he added.

Another sensitive issue, which will likely incite heated
debates at the House, is the plan to raise fuel and electricity
prices by 20 percent and 30 percent respectively, in a bid to
decrease subsidies.

The 2000 budget sets aside Rp 26.6 trillion for subsidy
payments, mostly for fuel, electricity, food and concessional
credit to farmers. The current budget envisages Rp 28.02 trillion
in subsidy spending.

The government allocates a much bigger appropriation for
provincial administrations and authorizes local administrations
to manage the bulk of public sector investment (development
spending).

Four of the country's richest natural resource provinces,
including Aceh, Irian Jaya, Riau and East Kalimantan are
allocated especially large increases in development expenditure.

The move is an apparent effort to ease separatist sentiments,
particularly in the oil and gas-rich Aceh and mineral-rich Irian
Jaya provinces.(rei)