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)