The crisis budget

The crisis budget

The 1999/2000 State Budget starting in April will remain a
crisis-spending program albeit to a lesser degree than the
current one. The bulk of the budget will still go to routine
operating expenditures and social safety-net programs. The
massive bank restructuring and preparations for, and holding of,
the general election in June will take up another sizable piece
of the budget, leaving a tiny portion for investment
(development).

Also similar to the current budget, the next one will be
heavily influenced by politics, notably the legislative election
in early June and presidential election in November.

However, preparations for the next budget seem to be much
better and based on more realistic assumptions, unlike the
present one which had to be revised several times because of the
arrogance on the part of the now bygone Soeharto administration,
which stubbornly refused to acknowledge and factor in the
economic crisis in its spending plan.

More encouraging to note is what is likely to be the first
real sign of greater transparency in the budget-making process.
For the first time in over 30 years, the government publicly
announced most of the key assumptions used for its budget
proposal more than five weeks before it will be unveiled to the
House of Representatives. Under Soeharto's New Order
administration, such key indicators were disclosed only when the
President revealed the budget proposal to the House in the first
week of January.

Economic assumptions for the next State Budget, as announced
by finance minister Bambang Subianto last week, appear to be
fairly realistic. The rupiah's exchange rate is envisaged at an
average 7,500 to the dollar, up from the 9,500 average for the
current fiscal year. Inflation is projected at between 15 percent
and 20 percent, down from more than 76 percent this year, and the
budget deficit at 6 percent of the gross domestic product,
against 8.5 percent in the current fiscal year. International oil
prices are projected at a range of $11.50 to 12.50/barrel.

Gross domestic product growth is projected around plus or
minus 1 percent, meaning that economic activities will expand by
a range of 14 percent to 16 percent from the drastic shrinkage of
about 15 percent predicted this calendar year.

Another development which will be a great boon to the economy
is projected interest rates of between 20 percent and 30 percent,
down sharply from as high as 70 percent in September and 38
percent last week. It will go a long way in greasing the wheels
of the economy, especially because bank lending, virtually at a
standstill now, will likely resume soon after the completion of
the bank recapitalization program scheduled for the end of March.

As private investments will likely remain on hold at least
until the appointment of a new administration later next year,
and while the public sector, preoccupied with its contingency-
spending plan, cannot make any meaningful investment, bank
lending then will become the main source of the lifeblood --
liquidity -- to the economy. It was therefore not an exaggeration
for the finance minister, the central bank's governor and the
chief economic minister to assert last week that the bank
recapitalization program is crucial for economic recovery.

Progress in the settlement, or rather the restructuring, of
the huge corporate foreign debt will be vital for keeping the
rupiah stable around the current levels of 7,400-7,500. A stable
rupiah is in turn a key to sound budget planning.

Though the stronger rupiah will help decrease price subsidies
for such imported commodities as rice, soybeans and fuel, the
1999/2000 budget will still be much larger than the current one
to cover spending for broader social safety net programs,
interest rate subsidies for credits to farmers and small firms,
the costs of bank restructuring and preparations and holding of
the general election. A likely increase of at least 20 percent in
the salaries of civil servants and members of the Armed Forces,
though negligible in real terms in view of the more than 76
percent inflation this year, will add significantly to the
budget.

As revenues will, at best, remain stagnant, the coming state
budget, like its predecessor, will depend largely on
international aid funds, notably those from the International
Monetary Fund, World Bank and Asian Development Fund and Japan.

However realistic and conservative the assumptions seem to be,
the biggest pitfall to all the estimates lies in the political
field. Uncertainty in the run-up to legislative elections is
still highly likely, a factor which ultimately keeps investors
clear of the country.