State budget proposal for 1995-96

State budget proposal for 1995-96

President Soeharto yesterday unveiled the annual draft state
budget before a plenary session of the House of Representatives
(DPR). Transcript of the budget appears in a condensed unofficial
translation form on this page and Page 5.

JAKARTA: As a nation, we ended the year 1994 full of hope and
joy. We have achieved considerable progress, although we still face
many problems and challenges.

There was quite a severe draught during the second semester of
last year. Consequently, the growth of the agricultural sector is
predicted to be rather slowed and we may not be able to reach the
targeted growth of 3.3 percent.

On the other hand, the industrial sector shows more encouraging
growth. Our effort in driving the industrial sector as the motor of
development has shown results.

Export growth was a bit depressed, such as illustrated by the
relatively slow growth of exports compared to the previous year.
Meanwhile, imports have increased, especially non-oil/gas.

Based on this illustration, economic growth in 1994 is expected
to surpass that of 1993, namely 6.5 percent. With this trend, the
target of economic growth in the first year of Repelita VI of 6
percent will be quite far surpassed. We are also going to exceed the
targeted average economic growth rate of 6.2 percent in Repelita VI
(Sixth Five Year Plan, 1994-1999).

The prospect of our economy in 1995 is predicted to remain
promising. Various opportunities for higher economic growth are
presenting themselves.

Investment is expected to continue to increase. The
deregulation on investment, industry, trade, banking and others
adopted during these last few years has already shown some results.
Apart from directly raising national production, the increase in
investment also serves as a catalyst and stimulus for other
activities that will, in the end, generate greater economic
movement. Increased investment will also expand employment
opportunities, which means raising the people's income.

The prospect of exports is also quite heartening. We hope the
pace of our exports will rise again this year. A number of
opportunities will emerge because the world economy -- which has a
great influence on our export growth -- tends to be improving in
1995.

We estimate the production sector will have better growth
compared to last year's. We hope there will not be any prolonged dry
spell this year, so the agricultural sector will have a better
growth. We also hope our continuous efforts to stimulate the
industrial sector will bring about even greater results, so we can
meet the demand of our own domestic market and increase exports.

We have to prevent any disturbances to economic stability,
because it will be a setback or a hindrance to the smooth
implementation of development. This is the reason why we must never
be negligent. We have to take into consideration all possibilities
and take the correct policy measures to ensure continued economic
stability.

In 1994, inflation was 9.24 percent. Although it remains one
digit, it was already to high, much higher than the projected
estimate of 5 percent for Repelita VI.

The somewhat overheated economy was also exemplified by the
current account deficit. Until the third trimester of 1994, the
current account deficit was estimated to reach around US $2.2
billion. This was quite a substantial increase compared to that of
the same period in the previous year. This was caused by the slower
export growth and increased imports, besides the service expenses
that have also risen. The current account deficit for the year 1994
will e greater than for 1993. Whereas the foreign exchange reserves
can still be maintained for five months of imports.

We must also be constantly cautious in dealing with the issue
of foreign debts. Development requires substantial investment funds
and this cannot be totally provided by domestic resources. Therefore
we see to it that external funding remain complementary. The greater
amount of debts that reaches maturity, especially Government debts,
the debt-servicing will increase. What we have to watch carefully is
debts incurred by the private sector, which often is difficult to
predict. We are adopting a free foreign exchange system and in an
increasingly open global economy, there will be a swifter capital
flow.

We must pay serious attention to what I have just mentioned, to
ensure that our economic growth, which is expected to remain high,
will not become counter-productive. We all have to see to it that
the high economic growth rate is in tandem with a robust economy,
that brings benefits to the society, namely an even greater
prosperity.

Production capabilities alone will not surface. It must also be
accompanied by the ability to compete, both at home and in the
international market. The issue of protection has been widely
discussed during these last few months. This issue is closely
related to our competitive capabilities. Obviously, a strong
technological base and solid economy are needed for establishing a
strong and dependable industry. This is especially true in a
situation and where global competition is becoming more fierce.

Our horizon must reach far ahead in planning such an
industrialization strategy. We want to build a reliable and self-
supporting national industrial structure, strong enough to withstand
even the severest competition. For this purpose, our industrial base
must be strong. From upstream to downstream, our industry must be
solidly connected so as to ensure its competitiveness and self-
reliance.

Therefore, we should not hesitate to build upstream industries,
if it is really needed to establish strong national industry. We
therefore have to study the economic prerequisites that enable the
satisfactory growth of upstream and midstream industries. Protection
is just one of the mechanisms we can create if it is necessary, but
if must meet certain conditions. First, protection may given for a
limited period and to be gradually reduced.The sooner the better.
Second, protection must nor be contrary to international agreements,
such as GATT, AFTA and APEC. Third, the level of protection must not
stifle or hinder the growth of downstream industries. Excessive
protection will result in higher production costs of downstream
industries and, as a consequence, remove its competitive edge. I am
sure with such an understanding, the question of protectionism does
not necessarily become a long drawn-out issue.

The state budget contains problems we are facing, our
determination and concern, as well as the priorities we set in
carrying out development. Thus, we may say the state budget is one
of the main instruments of a nation to reach its aspirations and
ideals.

The state budget reflects the very fundamental principle of the
people's sovereignty in our life, because it is adopted with the
consent of the people through their representatives in the House of
the People's Representatives.

The development policies must constantly be based on the
Trilogy of Development. Efforts must be made to maintain an
adequately high economic growth by relying on greater national
efficiency and productivity. The active participation of the society
must be developed and motivated by the spirit of partnership in
business. The fruits of development must be enjoyed more fairly and
equitably by the people. National stability ought to be solidly
maintained. The three elements of the Trilogy of Development are
intertwined and must be harmoniously, integrally and complementary
developed.

Based on the message of the Guidelines of State Policy and by
following development plans in Repelita VI, the 1995-'96 Draft State
Budget is thus prepared. Development in the second year of Repelita
VI is the continuation, intensification, expansion, reformation and
deepening of development of the previous year, which is a
sustainable and gradual effort to reach the targets of Repelita VI.

As development is being carried out by the people together with
the Government, the state budget policy must generate, stimulate and
promote development activities by the people. This means development
activities carried out satisfactorily by the people, especially by
the private sector, if possible are not carried out by the
Government. However, the Government gives direction, support and
endorsement. Government investment is primarily aimed at development
activities which are the tasks of the Government and can only be
carried out by the Government, or are more efficient if carried out
by the Government.

Thus, Government investment will be directed more to improve
the quality of human resources, enhancing the quality of life of
Indonesian individuals and society and providing greater equitable
distribution of development and poverty alleviation. The development
of the economic infrastructure remains important. Its development is
aimed more at supporting the growth of various sectors, such as
industry, agriculture and services, including tourism.

In order to raise the efficiency and productivity of the
development budget, the procedure of drafting it continues to be
improved, so development projects become truly linked with each
other, with a view to attaining the objectives of Repelita VI. At
the same time, supervision will be intensified to ensure that
development proceeds efficiently and to avoid leaks and waste.

The development budget is planned in two directions, namely
from top to bottom and from bottom to the top. It is drafted on the
basis of national development policies, macro-economic
considerations and sectoral goals and priorities that are harmonized
with regional potentials and aspirations, as well as taking into
account the real situation in the field.

With these basic ideas and considerations, the Government is
submitting to the Honorable House the 1995-'96 Draft State Budget to
the tune of Rp 78 trillion. Compared to the current fiscal year,
there is an increase of 11.9 percent.

The domestic revenues are projected around Rp 66.3 trillion.
Whereas development revenues are expected to be around Rp 11.7
trillion, consisting of foreign project aid. From this total about
85 percent are from domestic revenues and the balance of almost Rp
12 trillion are from development revenues.

Domestic revenues consist of oil/gas revenues estimated to be
Rp 13.3 trillion, and non-oil/gas revenues of Rp 53 trillion. This
means revenues from non-oil/gas have increased by 80 percent,
compared to 78.5 percent in 1994-'95. This shows the structure of
our state revenues has become stronger.

For the current 1995-'96 Draft State Budget, the oil price is
set at US $ 16.50 per barrel. Indeed, we must continue to be careful
in calculating oil prices, because so many factors are influencing
them and one cannot predict them accurately beforehand. Based on the
estimated oil price, the oil/gas revenues are envisaged to rise by
3.3 percent from the current fiscal year. Based on this calculation,
revenues from the net oil profit are estimated to reach around Rp
1.5 trillion.

As a whole, revenues from non-oil/gas are calculated to rise by
13 percent compared to current revenues. Tax revenues are expected
to increase by 12.3 percent, especially in the revenues from value-
added tax, excise and land and building tax. With the coming into
effect of the new income tax tariff, it will only rise a slight
amount, namely by 2.1 percent. In the long-and medium-terms, income
tax is expected to rise again as a result of greater economic
activities of the people. Hopefully, investment will be stimulated
by regulations with more incentive based on the new tax system.
Meanwhile, revenues from non-tax are predicted to climb by 51.2
percent.

As to routine expenditures, the total amount is envisaged to
reach Rp 47.2 trillion or an increase of 11.5 percent over the
current expenditures. The majority of these routine expenditures is
allocated to personnel expenditures -- both civil servants in the
central and regional governments -- namely around Rp 23.3 trillion
or an increase of 18.3 percent.

The Government realizes the importance of civil servants and
members of the Armed Forces in carrying out governmental tasks,
generating the wheels of development and safeguarding the nation.
The Government is aware of its duty to raise the salary of civil
servants and members of the Armed Forces. However, the state
financial resources also remain limited. Therefore, the salary hike
of civil servants is also still modest. In this connection, the
Government has decided to raise the salary of civil servants,
members of the Armed Forces, pensioned civil servants and retired
Armed Forces soldiers and their widows by 10 percent.

With the total domestic revenues and routine expenditures being
as I have just mentioned, public savings will be Rp 19 trillion,
which means an increase of 9.4 percent compared to the current
fiscal year. This amount is almost equivalent to the target set for
the second year of Repelita VI.

Development revenues from foreign aid are estimated to reach Rp
11.7 trillion. In the second year of Repelita VI, foreign aid is
anticipated to be Rp 11.4 trillion. This rather higher amount than
originally projected for Repelita VI is due to better efficiency and
absorption, so disbursement for the completion of projects receiving
foreign aid is faster.

With total public savings and development revenues, the
development funds available are close to Rp 30.8 trillion, meaning
an increase of 12.4 percent receiving from the current one.

There are ten sectors which have development budgets of over Rp
1 trillion, and there are 5 sectors among them receiving above Rp 2
trillion. Sectors receiving development budgets exceeding Rp 2
trillion are as follows: (1) regional development sector, including
transmigration; (2) transportation sector, including meteorology and
geophysics; (3) mining sector and energy; (4) education, national
culture, belief in God Almighty, youth and sports sector, and (5)
irrigation sector.

The substantial budget for these sectors reflect development
priority in accordance with the message of the 1993 Guidelines of
State Policy, namely: in the economic sector through the development
of economic infrastructure and means -- particularly in the least-
developed regions, rural areas and the eastern part of Indonesia --
as well as in sectors dealing with human resources.

The industrial sector obtained a development budget of Rp 497
billion.

The industrialization process plays an important role in our
national economic development, namely as a force for growth and
enhancement of more equitable income. This means that it must be
able to grow and develop into a highly competitive industry founded
on equally strong industrial, technological and economic structures.
While simultaneously developing export-oriented primary industrial
products, efforts are continued to raise technological capabilities.

The agricultural and forestry sector will receive a budget
amounting to Rp 1.1 trillion.

Agricultural development continues to play an important
and strategic role. In the structural transformation of our national
economy, the contribution of the agricultural sector to the Gross
National Product is indeed declining. However, the agricultural sector
remains the major retainer of the work force, producer of foodstuffs,
earner of foreign exchange and supporter of the industrialization
process, particularly in supplying raw and basic materials.

Forestry development will give priority to the preservation of the
function of forest through the development of sustainable forest
management system, diversification of forest use and products, as well
as enhancement of capabilities and participation of small- and medium-
scale businesses in forestry.

Irrigation development is aimed at developing and managing water
resources in order to meet the demand for water for the people and
other sectors which need it. In addition, efforts are being made to
preserve the continuity of water supply, through the conservation of
soil and water, preservation and control of water erosion, and
prevention of water pollution.

The budget set for developing the irrigation sector will be more
than Rp 2 trillion, a considerable increase by 21 percent. Most of it
or around 60 percent is allocated for areas outside Java.

We understand that the improvement of the quality of human
resources and enhancement of national economic efficiency and
productivity are inseparable from efforts to solve the problem of
manpower. In this connection, a budget of around Rp 170 billion is
reserved for training activities to create and develop qualified,
productive, efficient and effective manpower, imbued with
entrepreneurship, covering the training of technical, managerial and
entrepreneurial skills.

The sector of trade, national business development, finance and
cooperatives are indeed important in a national economy which should be
more efficient and highly competitive. A budget of approximately Rp 534
billion is available. Activities in this sector are mostly conducted by
the business community.

We continue to provide a relatively big budget for the development
of physical infrastructure, especially roads and other transportation
infrastructure and facilities. The development of physical
infrastructure requires considerable funds because economic growth,
equitable distribution, national stability and the realization of the
Archipelagic Principle and National Resilience need adequate
transportation networks to ensure the smooth flow of goods and
services. The budget for this sector is Rp 5.9 trillion, most of which
will be used for development of road infrastructure.

Road development is designed to open isolated regions, border
areas and transmigration sites, as well as to sustain rapidly growing
rural development. Almost 60 percent of the funds for road
infrastructure development is used for road infrastructure development
outside Java. The province outside Java which obtains the largest funds
allocation is Irian Jaya. In the coming fiscal year, we plan to build
more than 1,100 kilometers of new roads, among others for the
continuation of the construction if a southern highway in Kalimantan,
a western highway in Sulawesi, and highway in Seram and Irian Jaya.