The budget dilemma

Preparing the draft 2001 state budget that will be unveiled to the House of Representatives next week should be one of the most daunting jobs for the one month-old Cabinet, notably its economic team. The biggest challenge is how to make the spending plan reasonably realistic and conducive for strengthening the foundations of the nascent economic recovery in order to sustain and accelerate it.

The dilemma, though, is that a pragmatic budget requires what the International Monetary Fund terms in its latest annual assessment of Indonesia as fiscal consolidation. This essentially calls for painful measures, which are politically unpopular. First of all, the planned increase in domestic fuel prices, already delayed since April, will have to be implemented next month. Another delay of just a few months would sabotage the effort to restore fiscal sustainability and could lead the budget to a devastating deficit explosion.

Next on the urgent reform agenda is the implementation in January of the laws on fiscal decentralization and regional autonomy that will cause a massive drain on the central government's revenues but which is crucial for political stability and preservation of national unity.

Preliminary estimates indicate that some Rp 60 trillion (US$7 billion) or 26 percent of total revenues envisaged in 2001 fiscal year beginning in January will be allocated to provincial and district administrations. The dilemma here is that citizens and local administrations, especially in resource-rich provinces, have been demanding that full-fledged fiscal decentralization start immediately in January. The danger, however, as IMF directors warned in their Sept. 14 review of Indonesia, is that a fiscal decentralization process that is too fast could pose considerable risks to fiscal sustainability as well as to the delivery of essential public services. How the central government manages a pragmatic and phased process will affect political stability in provinces where separatist sentiments are high.

The financial burden of the fiscal decentralization process will be especially taxing on the central government in view of its huge domestic and foreign debt, currently estimated at more than $143 billion, including the equivalent of $67 billion in treasury bonds issued to recapitalize banks.

The finance ministry has estimated that around Rp 110 trillion or more than one third of total spending next year will go to paying interest on bonds and to servicing foreign debts. The estimate on foreign debt servicing has taken into account the rescheduling of $8.5 billion in principal foreign debt to sovereign creditors maturing between 2000 and 2002 that was concluded last April.

Since total revenues for the coming fiscal year are projected at only Rp 230.3 trillion, the budget will end up with an estimated deficit of Rp 53 trillion or as much as 4 percent of gross domestic product. This is the portion expected to be funded from proceeds of the privatization of state companies and the sales of assets by the Indonesian Bank Restructuring Agency (IBRA) and new loans from creditors.

However, since the country's foreign debts are already huge and most creditors' exposure in Indonesia is already close to their respective ceilings, significant new foreign loans will likely be hard to come by, especially in view of the negative international sentiment towards Indonesia after the recent killings of three United Nations workers in West Timor.

Given the severe restrictions on state finances, the impact of the state budget on the economy will most likely be contractive or, at best, neutral. Hence, a much higher pace of the sales of more than Rp 500 trillion worth of assets held by IBRA and privatization of state companies is crucial to accelerate the recovery, currently fueled mainly by private consumption.

IMF directors see progress in these two areas as quite slow. As of last month, or only four months before the end of the current fiscal year, IBRA has collected only about Rp 10 trillion of its Rp 19 trillion revenue target. Even more disappointing is that not a single cent of the Rp 6.5 trillion revenue target set for the sales of state companies has been realized.

Accelerating the pace of asset sales and debt restructuring by IBRA are indeed pivotal not only to reduce government debt but, more importantly, to stimulate new investment and capital inflow, without which the budding economic recovery will not be sustainable.