Megawati places blame, builds a rosy
budget By Bill Guerin
JAKARTA
- In her final annual state-of-the-nation address on
Monday, President Megawati Sukarnoputri, locked in the
mother of all battles for re-election on September 20,
laid some of the blame for past mismanagement of the
region's biggest economy at the door of the
International Monetary Fund (IMF).
Though the
president, still trailing behind her former top security
minister, Susilo Bambang Yudhoyono, ended her delivery
by appealing for a second chance to lead her country -
"This is the moment for Indonesian leaders, including
myself to carry out self-correction," she said - she
also picked up on an earlier admission by the IMF.
Speaking before a plenary meeting of the House of
Representatives (DPR), Megawati said the country's
crippling debt burden was partly due to "wrong IMF
recommendations".
Indeed, the Independent
Evaluation Office, The IMF monitoring body, said earlier
this year that it did not offer its best advice when it
helped Indonesia from October 1997 onwards. As well as
technical errors, the fund failed to understand the
nature of the problems and made mistakes in the way
policy advice was developed and delivered, it conceded.
Indonesia's current debt is around US$150
billion, equivalent to some 65% of its gross domestic
product (GDP). Of this amount, $80 billion is external
debt and $70 billion (Rp650 trillion) is domestic.
Though Indonesia left the IMF program at the end of last
year, it still owes $10 billion to the international
agency.
Macroeconomic stability and the
long-term economic growth outlook depend largely on the
government's ability to further reduce the debt burden,
analysts warn, and Megawati said the IMF should help
tackle the problem so there will be "more funds
available for the welfare of our people".
Megawati paints a better economic
picture Though the macroeconomic picture of
Indonesia shows a nation badly hampered by severe levels
of debt, a substantial budget deficit and massive
unemployment, on Megawati's watch, per capita income has
returned to the level it was before the crisis - around
$1,000 per head - and there has been moderate growth,
lower inflation, exchange rate gains and a slight
increase in foreign exchange reserves.
Megawati
claimed that, despite shortcomings in the battle against
corruption, her government had stabilized the economy.
We have "resolved all sorts of difficulties stemming
from the widespread monetary crisis, which had almost
paralyzed our society and economy," the president said
in her address.
In regard to the debt burden,
she urged the IMF to free up funds for infrastructure
development, which were limited because of the need to
repay the huge public debts, both foreign and domestic.
Megawati said debt repayment would reduce the
government debt-to-GDP ratio to 55% in 2005 from 60.1%
estimated for this year.
Foreign reserves stand
at $35.9 billion, but this is small compared to the $150
billion the country owes. Despite the government's
declared aim to reduce the need for external borrowing,
foreign assistance is still expected to reach $3.1
billion in 2005, an 8% increase on this year.
After referring to the debt, the president moved
on to unveil the draft 2005 budget, which had already
been agreed by the DPR budget committee in June.
Around Rp130 trillion ($14 billion) will be
needed to service interest and principal payments on
debts maturing in 2004, close to half of the projected
revenue of Rp272.17 trillion estimated from taxes this
year. The budget assumes that in 2005, tax revenues will
increase to Rp297.5 trillion, accounting for 78.7% of
total revenues and grants.
Overall revenues are
projected to increase slightly to Rp377.9 trillion in
2005 from Rp343.9 trillion this year.
"The
[expected] increase in tax contribution to the budget
shows that the government is consistent in seeking
domestic funding sources in efforts to establish budget
independence," Megawati said, in reference to her
campaign promise last week to instigate tax reform were
she to be given another term.
Poor
infrastructure hinders investment The country's
poor infrastructure, mainly due to low development
spending, is partly to blame for the lack of foreign
investment, the main growth driver before the crisis.
Investors remain nervous about the same basic problems -
the lack of supremacy of the law, and its compliance and
enforcement, together with frequent breaches of business
contracts and unpredictable court decisions - all of
which add to the negative images in their eyes.
Yet no incentives were offered to attract new
investments. The Investment Coordinating Board said on
Monday that foreign investment approvals had fallen
33.6% to $3.3 billion in the first seven months of 2004
compared to the same period last year; though domestic
investment approvals rose 52.3% to Rp15.77 trillion.
Spending in 2005 would be capped at Rp361
trillion ($39 billion) from Rp368.8 trillion for 2004,
Megawati said. But targeted development spending
accounts for only Rp70 trillion of this.
Among
the key items, Megawati said expenditures on state
personnel are estimated to increase 8.7% to Rp62.2
trillion. "The increase in personnel expenditures is
aimed at increasing the pension benefit for civil
servants and for new recruitment," she explained.
She also told legislators that the government
was earmarking Rp33.6 trillion, 26.3% more than this
year, for subsidies to low-income groups. Spending on
education and health is also to be increased by between
2.8-12%.
Megawati then went on to spell out
several macroeconomic indicators that formed the basic
assumptions behind the budget.
Basic budget
assumptions The assumptions for 2005 include a
higher economic growth rate of 5.4% (compared to 4.8%
pencilled in for this year), a lower budget deficit of
0.8% of GDP (compared to 1.2% assumed under the current
budget) and an oil price average of $24 per barrel
(compared to $22 per barrel).
Generally, most
economists and analysts believe the growth forecast is
too optimistic, given the rising political uncertainty
ahead of the September 20 presidential election, among
other factors.
Though the government has decided
to maintain its assumptions as originally planned,
soaring international oil prices make the economic
targets more than a shade unrealistic. Oil prices
recently reached a record $45 per barrel and are
expected to remain above $30 per barrel for some time to
come.
The oil price assumption also impacts the
amount of fuel subsidies allocated for next year. The
government predicts these will rise to Rp21 trillion, up
26.3% on year, though Megawati said both the government
and parliament had agreed to gradually move away from
price subsidies to specifically targeted subsidies.
The budget deficit in 2005 will be capped to
within Rp16.9 trillion, equivalent to 0.8% of GDP,
compared with this year's estimates of Rp24.4 trillion
and 1.2% respectively.
"The declining deficit
reflects the government's seriousness and commitment in
implementing fiscal consolidation measures in order to
strengthen fiscal sustainability," Megawati said.
The effect of high oil price levels, were they
to be sustained, combined with a possible slow down in
the economies of the United States and Japan,
Indonesia's biggest export markets, would be damaging to
exports and would also push up inflation.
Bank
Indonesia Governor Burhanuddin Abdullah said this month
that the central bank might allow local interest rates
to rise later this year, as inflation rose to 7.2% on
the year in July from 6.8% in June. Abdullah warned that
inflation was likely to remain high through the
remainder of this year.
Megawati said that in
2005 it was predicted to reach only 5.5%.
Consumption, growth to slow The
relatively low inflation and historically low interest
rates that brought easier credit have boosted sales of
consumer goods, like cars, so much so that in the second
quarter of this year consumption contributed a massive
69% to GDP.
However, the consumption-driven
growth slowed in the second quarter of this year to 4.3%
year-on-year, as private consumption, which for three
years has driven the country's economy, appeared to be
on the wane because of rising prices and a weaker
rupiah.
Sanjeev Sanyal, an economist at Deutsche
Bank, sees the reliance on consumption as a bigger
worry. "This exclusive reliance on consumption-led
growth is weighing on the exchange rate and will flow
back into inflation. In turn, this will prompt monetary
tightening. Thus, we expect growth to slow to 3.5% next
year," he said.
A slower rate of growth could
make it more difficult for the central bank to raise
interest rates to stem the ensuing rising inflation and
strengthen the rupiah, but Megawati said the government
expects growth to accelerate next year to 5.4%.
Separately, the government has also announced
more progress on meeting the goals of the White Paper on
economic reform that it adopted to replace the
IMF-backed Letter of Intent.
Confidence in
macroeconomic policy has strengthened, partly because of
the credibility of the policy package, Coordinating
Minister for Economic Affairs Dorodjatun Kuntjoro-Jakti
said last week.
The minister said that 76% of
the 161 action plans committed to in the White Paper had
been completed on schedule. The program will end with
the end of the current government's term in October
2004.
However, Megawati pointed out that the
next government would need to seek financing to cover
both the budget deficit and the increase in debt
servicing for foreign and domestic debts.
The
new administration is expected to retain the budget
assumptions as a baseline for economic planning and
policy making, given that it would have insufficient
time to draft its own budget only two months before the
start of the budget year in January.
But Chatib
Basri of the University of Indonesia and Iman Sugema of
the Institute for the Development of Economics and
Finance were unanimous in their opinion that the targets
were unrealistic and driven by political motives ahead
of the runoff. Megawati was expected to close in on
Susilo after she won official support from the Golkar
party over the weekend.
"They [the government]
are pushing optimism to the limit. But we need more
concrete evidence of that optimism," Fauzi Ichsan, an
economist at Standard Chartered bank in Jakarta, was
quoted as saying.
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