State budget's power to boost economy limited

State budget's power to boost economy limited

The government has unveiled the 1998/1999 draft state budget
amounting to Rp 133.49 trillion (US$33.3 billion based on a rate
of Rp 4,000 to the dollar) or an increase of 32.1 percent from
the current budget. Economist Sri Mulyani Indrawati, a researcher
at the University of Indonesia's Institute for Economic and
Social Research discusses the impact of the budget plan on the
country's economy.

Question: How do you see the state budget plan for 1998/1999,
which strives for a 32.1 percent increase in both revenue and
spending?

Mulyani: Generally speaking , the budget plan is too
optimistic. The impact of the budget plan on the economy will not
be significant because the increase in revenue is influenced more
by expected incomes from the oil and gas sector and from foreign
aid, while the spending increase is merely based on price
increases. The spending of rupiah derived from the two sectors
can theoretically expand monetary supplies but high inflation and
increases in cost structures, which are caused by the volatility
of the rupiah's exchange rate, will limit the budget's capability
to boost the economy.

Q: The government is expecting a 9.5 percent decrease in revenue
from income tax to Rp 26.33 trillion but a 13.1 percent increase
in value-added tax revenue to Rp 27.83 trillion. Are these
targets realistic?

M: About 60 percent to 70 percent of the government's income tax
revenue usually comes from big companies which are now mostly
affected by the rupiah's sharp depreciation against the U.S.
dollar. Their foreign exchange losses will severely affect the
government's income tax collection in 1997/1998 and 1998/1999.
Because the rupiah is likely to remain highly volatile this year,
its revenue from income tax may fall up to 20 percent. The
expectation of a 13.1 percent increase in value-added tax
collection is also unrealistic because a 4 percent GDP growth
will not boost domestic sales of goods that much.

Q: The government projects a 57.2 percent increase in foreign
debt services to Rp 30.2 trillion based on Rp 4,000 to the dollar
during 1998/1999. What do you think?

M: It is difficult to expect the dollar's value, which exceeded
Rp 7,000 on Tuesday (and more than Rp 8,000 yesterday), to
average at Rp 4,000 in 1998/1999. And yet, the allocation of Rp
30.2 trillion for debt servicing has been too high and too
burdensome to our economy. The government, therefore, needs to
negotiate with its creditors on the possible rescheduling or
recalculation of its debt repayments.

In the future, if there is no financial reengineering, the
government's budget will be very much dominated by debt
servicing. As a result, the budget can no longer be used as an
effective fiscal instrument to control and manage the
macroeconomy.

Q: The government has promised to generate a budget surplus worth
1 percent of GDP (projected at Rp 671 trillion in 1998/1999) but
such a surplus is not included in its budget plan. Which part of
its expenditures will the government cut to generate that
surplus?

M: The first alternative will be cutting investment by suspending
some projects, while the second alternative will be reducing the
Rp 10 trillion subsidy for domestic sales of fuel. But reducing
the subsidy is very sensitive to political developments.

Q: Is the government realistic in expecting the economy to expand
4 percent in 1998?

M: Achieving a 4 percent GDP growth is doubtful because lower
than expected revenues from income tax and value-added tax will
limit spending for development projects. Development spending may
also be cut if the government wants to generate a budget surplus.
Furthermore, high inflation and high interest rates will also
limit the multiplier effect of the budget. A growth of 1 percent
to 2 percent will be more realistic.

Q: Can the inflation rate in 1998 be curbed at 9 percent as
expected by the government because the dollar's rate against the
rupiah value has now far exceeded Rp 4,000 and domestic fuel
prices may have to be raised later this year?

M: Even without any increase in fuel prices until December,
curbing this year's inflation rate at that low level is
impossible. Increases in the prices of imported products are
likely to raise the inflation rate to between 13 percent and 15
percent this year. The University of Indonesia's Institute for
Economic and Social Research projects the inflation rate above 15
percent if the rupiah's rate against the dollar averages at Rp
8,000 during the year.

Q: Will the government's decision to freeze the salaries of its
personnel affect public services?

M: Yes, seriously. The real value of civil servants' salaries, on
the one hand, will decrease due to high inflation and the sharp
depreciation of the rupiah. But on the other hand, civil
servants, at this difficult time, are required to implement
economic reform, create clean governance and reduce intervention
into business activities. I am even afraid that the reform
package recommended by the International Monetary Fund might not
be carried out thoroughly because of inadequate bureaucratic
support.

Q: How do you see the allocation of development expenditures?

M: The composition is good because the government is placing
priority on projects aimed at a more equitable distribution of
income and improvement of infrastructure for the distribution of
goods. (riz)