State budget hangs in balance over dilemmatic fuel subsidy
State budget hangs in balance over dilemmatic fuel subsidy
By Reiner S
JAKARTA (JP): The government is struggling to create a
credible state budget as it attempts to accommodate political
pressures that often move against economic rationale.
"We're facing a dilemma here," said long-serving legislator
Aberson Marle Sihaloho, who is also a member of the House of
Representatives budget committee.
The main focus of debate between the government and
legislators in shaping the April-December 2000 state budget is on
deciding the size of subsidies, particularly for the politically
sensitive fuel commodity.
Political factions in the House are, however, often seen as
too demanding and their proposals sometimes counter to economic
rationale.
The government, for example, might have to bow to the demand
to raise the fuel subsidy to Rp 22 trillion from the Rp 18.3
trillion it earlier proposed.
Aberson said a Rp 22 trillion fuel subsidy, which would
represent more than half of the nearly Rp 40 trillion in total
subsidies to be allocated in the next budget, might be too high.
"With such a huge subsidy for fuel, it will not help solve the
huge unemployment problem, because our capacity to provide
subsidies for productive sectors like the labor-intensive
agriculture sector will be very much limited," said Aberson, who
is an expert on fiscal-related issues.
"But if we reduce significantly the fuel subsidy, prices will
increase and people will take to the streets to demonstrate. So
when are we going to fix the economy?"
Indonesia is now moving toward a real democracy following the
fall of former authoritarian president Soeharto in May 1998.
Amid pressure from the International Monetary Fund, which was
providing the country with a multibillion dollar bailout package,
Soeharto raised fuel prices in the January before he was forced
out of office.
The People's Democratic Party (PRD) staged a demonstration
last week in front of the Presidential Palace, protesting a
planned increase in fuel prices and electricity rates, which the
government plans to raise by 29 percent.
President Abdurrahman Wahid, who was elected in the country's
first democratic election in over three decades, unveiled in
January the 2000 state budget draft. In the draft, he proposed an
oil price assumption of US$18 per barrel and a fuel subsidy of Rp
18.3 trillion, which would translate into an average 20 percent
hike in fuel prices.
But during a debate between the House budget committee and the
Ministry of Finance, legislators pressured the government to
raise the oil price assumption to $20 per barrel. Theoretically,
this would provide the budget with Rp 2.6 trillion in additional
oil revenue which could be used to provide a larger fuel subsidy,
limiting the planned fuel price increase to 10 percent.
Legislators also pushed the government to boost other sources
of revenue to cover other expenditures, including the planned
increase in the salaries of government employees, the electricity
subsidy and subsidies for the agricultural sector and small-scale
business sectors.
Revenue
The head of the House budget committee, Sukowalujo
Mintohardjo, told the media last week the government had agreed
to raise the revenue from its privatization program to Rp 6.5
trillion from its initial proposal of Rp 5.9 trillion. He also
said the government agreed to increase the revenue from the sale
of assets held by the Indonesian Bank Restructuring Agency to Rp
18.9 trillion from Rp 16.2 trillion, and boost tax revenue.
This statement apparently irritated Minister of Finance
Bambang Sudibyo, who said these figures were not final.
The debate of the draft budget began on Jan. 25, and the
budget initially was expected to be approved on Tuesday. But an
extended tug-of-war, particularly over the fuel subsidy, has
forced the debate to be extended until Thursday.
The House now enjoys for the first time in decades its
budgetary rights, after being used as a rubber stamp during the
32-year rule of Soeharto.
Bambang has repeatedly told legislators the government could
not easily revise upward its budget assumptions and revenue
target.
"It is too risky for the government to express a too high
revenue target because this will make the budget not credible,"
he said.
Senior economist Emil Salim also warned of the risk of the
market rejecting the government's state budget if the assumptions
and revenue target were deemed unrealistic, a scenario which
occurred during the transitional administration of B.J. Habibie
in 1998.
"The budget must be credible ... it must be based on realistic
assumptions," said Emil, who is also the chief economic adviser
to the President.
The director general of budget, Anshari Ritonga, specifically
said an oil price assumption of $20 per barrel might be too risky
for the sate budget.
"What if oil prices fall below the $20 level during the course
of the budget. Where will we get alternative financing to plug
the gap?
"Although the price of oil is currently relatively high, we
must be very careful about sharp fluctuations," he said, pointing
out that the previous state budget assumed an oil price of $17
per barrel while the actual average price was little more than
$10.50 per barrel.
Another difficult issue is how to use the extra money from
revised revenue targets, particularly oil revenue.
"There's been a difficult debate about whether to use all the
additional oil revenue for the fuel subsidy or to also divert
part of it to provide subsidies for education and farmers," said
the deputy of the House budget committee, Abdullah Zainie.
He said a maximum 10 percent hike in fuel prices would only be
possible if all the additional oil revenue was dedicated to the
fuel subsidy.
"So there's now a possibility of a 12 to 13 percent hike in
fuel prices," he said.
Noted economist Sri Mulyani said the additional budget
revenue, particularly from oil, must be directed to stimulating
the economy.
"It won't be healthy for the state budget if the extra revenue
is solely used to finance the fuel subsidy. It's better to use it
to finance labor intensive infrastructure projects," she said.
Political risk
Aberson agreed but said, "The problem is the huge political
risk (if fuel prices soar too high)."
"Our foreign borrowing is Rp 31 trillion, while the amount of
the subsidies is Rp 40 trillion. This means that we actually
doesn't need the foreign money if we completely abolish
subsidies," he said.
The state budget needs some $4 billion in foreign loans to
help plug a budget deficit estimated to reach 4.9 percent of
gross domestic product.
Aberson also said both the government and legislators had been
slow in campaigning for the necessity of raising fuel prices.
"This should have been done during campaigning (for the
general election)," he said.
Aberson also said the House must continue monitoring the
subsidies to ensure they reach their intended targets.
The government intends to provide fuel subsidies only for
kerosene for poor households, gasoline and diesel for public
transportation and state electricity firm PLN.
The legislators also pushed the government to boost tax
revenue so the country's tax ratio would increase to 14 percent
from the current level of around 10 percent.
"There's still huge potential for this," said Aberson,
pointing out that some 40 percent of taxes had not gone into the
state's coffers.
But director general of taxation Mahfud Sidik said it was
difficult for the government to raise taxes given the current
economic situation, as any large increase in taxes could
discourage investment and limit the creation of new jobs.
"But according to my personal judgment, a 9 to 13 percent
increase in taxes is still feasible. Not more than that," he
said.
The government has proposed tax revenue of Rp 97.8 trillion in
the nine-month state budget draft.
Mahfud admitted strong political pressure in drafting the
state budget.
"We're trying to preserve macroeconomics interests while at
the same time also trying to accommodate political interest," he
said.
"There's an art to this process. Both the government and the
House are still in the learning process of balancing these two
interests.
"I think this should be positive to foreign investors because
this reflects a greater democracy in our country," he said.