State budget not meant to cure economic crisis

The government has unveiled a draft budget worth Rp 218.2 trillion (US$27.27 billion) for fiscal 1999/2000, with a deficit of Rp 77.40 trillion which will be covered by foreign aid. Economist Kwik Kian Gie comments on the planned budget, which will mark a 17.3 percent decline from the level of the current fiscal year.

JAKARTA (JP): Indonesian economists mostly agree that the country's current economic crisis has been caused by overinvestment but they are divided over whether such a crisis can be cured.

Some of the economists say that the crisis, marked by economic depression, can be overcome by propping up the purchasing power of society. Perhaps they are right, but how can the country generate fresh funds to help increase this purchasing power when the economy has been in a situation of overinvestment?

The overinvestment was caused by excessive flows of foreign loans aimed at compensating for the country's lack of domestic savings. As the debts have accumulated in abundance, foreign investors are doubtful whether the domestic borrowing parties can repay their borrowings. That is why some foreign capital has been flowing out of the country again, while the inflow of foreign investment is at a halt now.

The only foreign investment that can be expected to enter the country at present is aid for the government because large domestic corporations are still facing problems in paying off their huge offshore debts. But the government's capacity to absorb foreign aid has a limit beyond which donors will doubt its capability of repaying its debts.

However, within such a condition some prominent economists have surprisingly suggested that Indonesia continues to increase its foreign debts to reinvigorate the economy. This can be seen from the government's budget plan.

In a bid to reinvigorate economic activities, the government is trying to introduce a deficit budget for 1999/2000. Even though the total budget will decline in absolute terms (to Rp 218.2 trillion in 1999/2000 from Rp 263.88 trillion estimated for 1998/1999), it will be expansive in nature because the government's domestic spending will be bigger than the funds it plans to generate from local sources. It expects to finance part of its spending with foreign aid, which is projected to reach $11.2 billion. The draft budget does not clearly state whether the aid will be totally derived from its traditional donors -- countries and organizations associated with the Consultative Group for Indonesia (CGI).

The increase in foreign aid will surely bolster inflation rates, which have already been boosted by the printing of large sums of money for the financing of support loans to ailing commercial banks. The International Monetary Fund (IMF) has now told Indonesia to stop printing new additional money.

The House of Representatives (DPR) has also criticized the government's draft budget because it is unrealistically expecting a high increase in domestic revenue from taxation.

To help increase the government's revenue from domestic sources, the Econit economic advisory group suggested last week that the government intensify fund raising from the forestry and plantation sectors.

It is possible to take measures to increase the government's revenue from these two sectors but such measures will not be relevant to the state budget for 1999/2000. Introducing new measures to increase the collection of funds from the two sectors will take a long time and require drastic changes in the morality of all parties concerned. Those parties will have to change their orientation from rent-seeking to honest practices to uphold the interests of the nation.

The proposals above indicate that many economists still believe that the economic crisis, which has been caused by overinvestment, can be cured and they, therefore, are still trying to look for a quick solution to it. However, they will always find difficulties in looking for sources of fresh funds.

So, the best theory to face the current crisis is "just wait until a new equilibrium is achieved at the lowest level." The government and other parties cannot do much to overcome the crisis before the new equilibrium is achieved.

Therefore, DPR members must be careful and bear these considerations in their mind when they have meetings with the government for the deliberation of the draft budget, which will be used as an instrument to control the country's macroeconomy.

Whether or not the projections on inflation, oil prices, economic growth, exchange rates, etc. used to make calculations for the planned budget are realistic cannot be judged at present because it is very difficult now to predict future economic developments.

It is also difficult to judge whether or not the allocations of funds under the planned budget are in the people's favor because any judgment will depend on different interests.