State budget in disarray

State budget in disarray

The Indonesian state budget for the current fiscal year is
being threatened with a much larger deficit because revenue
targets set for most major sectors will most likely fail to
materialize due to various external and internal factors while
total spending will probably overshoot its target.

Analysts already forecast a budget deficit of as much as 5
percent of the gross domestic product, much higher than the
target of 3.5 percent. This trend is quite worrisome because, in
the virtual absence of private investment, public sector spending
is expected to be a major source of stimulus to the economy.

The biggest shortfall is predicted in domestic tax receipts,
which are supposed to contribute more than 75 percent of total
revenues, due to the postponement of several tax measures and
lower-than-expected economic growth. The finance ministry
estimated last week that the postponement of several tax measures
such as value-added-tax on agricultural products, import duty and
luxury sales tax on Batam island, would by itself cut tax
receipts by between Rp 9 trillion and Rp 10 trillion (US$1
billion). Moreover, the overall tax receipt target is also under
threat by the lower-than-estimated economic growth.

Worse still, spending targets will probably overshoot because
of the postponement of the general fuel price increase, the
higher-than-budgeted foreign debt burdens due to the steadily
depreciating rupiah, and the heavier domestic debt burden caused
by the steady rise of the central bank's benchmark interest rate.

The rupiah rate assumed for the January-December, 2001 budget
is Rp 7,800 but the actual rate since the beginning of the year
has always been above Rp 9,000, even surpassing the Rp 10,000
point as from early last month. The central bank's benchmark
interest rate, assumed at an average of 11.5 percent, has hovered
above 14 percent over the past nine weeks and is now even higher
than 15.5 percent, thereby increasing the interest burden of the
Rp 430 trillion bank recapitalization bonds, of which two thirds
bear a floating interest rate.

The government did raise fuel prices for large industrial
users and ocean-going ships as of Sunday, by 50 percent and 100
percent, but these users account for only about 20 percent of
total fuel consumption. As fuel used by household consumers,
public utilities and public transportation remain subsidized,
total fuel subsidies for the fiscal year will surely be larger
than the Rp 41.3 trillion allocated in the state budget.

Yet more discouraging are the revenue targets set for the
sales of state companies and asset recovery and debt
restructuring by the Indonesian Bank Restructuring Agency (IBRA)
which amount to Rp 6.5 trillion and Rp 27 trillion, respectively.
It is now already four months into the current fiscal year but
none of the dozen state companies designed for privatization are
yet at an advanced stage of sales preparation.

Still more worrisome are the sales of assets by IBRA because
of the imbroglios that have been dogging several major
transactions, including those involving the Manulife insurance
company, the sales of 25 plantation firms to Malaysia's state-
owned Guthrie and a multi-million dollar toll road project in
Jakarta to another Malaysian investor.

Foreign investors, the only potential buyers of the more than
Rp 600 trillion worth of assets that have to be sold by IBRA to
support the state budget and maintain the nascent economic
recovery, will certainly shun any new deals with IBRA. As long as
the legal entanglements over the asset sales remain unresolved,
it will be mission impossible for IBRA to achieve its revenue
target, leaving yet another big hole in the budget.

Chief economic minister Rizal Ramli last week hinted at the
possibility of accelerating the disbursement of about $17 billion
in government foreign loans still outstanding in a bid to
stimulate the economy. However, as most of the loans not yet
disbursed are tied to specific projects that require local
counterpart funds, the viability of this alternative source of
pump priming is also in great doubt, given the lower than
expected domestic revenues.

The only feasible alternative that is now available to cover a
portion of the possible huge shortfall in revenue are more
intensive efforts to raise revenue from domestic sources, notably
income tax, asset recovery by IBRA and sales of state companies.

But the biggest obstacle to these efforts are the adversarial
relations between President Abdurrahman Wahid and the House of
Representatives, which has questioned almost every major deal
made by IBRA. As long as the House tends toward assuming a priori
that the government is trying to deceive it with any major deal
made by IBRA, then the state budget will end up in tatters with
devastating repercussions on the budding recovery.