State budget not meant to cure economic crisis

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.