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.