Indonesia to unveil tight budget amid protests

October 2, 2000
Web posted at: 9:39 AM HKT (0139 GMT)

JAKARTA, Indonesia (Reuters) -- Indonesia's fledgling democratic government is due to unveil a lean draft 2001 budget on Monday with little room to stimulate growth even as protests over Jakarta's economic management raise fears of fresh civil unrest.

The budget, the 11-month-old government's second, will be heavily tailored to restructuring the wrecked banking sector and shifting money to newly-empowered provinces, leaving little in the coffers to help rebuild the shattered economy.

Many of the details have already been revealed.

The draft budget -- the government's first calendar year accounts -- will show a deficit of more than 52 trillion rupiah (US$6 billion), despite windfalls from higher world oil prices and savings from lower fuel subsidies.

Several groups opposed to the price hike said they planned to stage large protests in the capital, where more than 18,000 police have been placed on high alert.

Hundreds of protesters rallied in Jakarta against the cut to fuel subsidies, which pushed up fuel prices an average 12 percent from Sunday.

Demonstrators marched through the city centre to the presidential palace. There were no initial reports of trouble. The rally follows several other protests on Friday.

Under reforms agreed with the International Monetary Fund (IMF) in return for foreign aid to keep the battered country afloat, Jakarta must cut back its fuel subsidies.

Potentially explosive

But the move is potentially explosive because it includes the kerosene many poor Indonesians use for cooking and lighting and because of the flow-own effect on other prices. Previous efforts to raise fuel prices have sparked unrest and riots.

The budget will be presented to parliament by Vice President Megawati Sukarnoputri. President Abdurrahman Wahid is overseas.

It will then be debated by MPs with final approval expected in November. It predicts economic growth of 4 percent to 5 percent in 2001, from around 4 percent this year.

"The ability of the government to stimulate the economy through this budget will be very limited," said Ferry Hartoyo, head of research at Vickers Ballas.

"If anything, their fiscal policy will curb growth."

The budget must appease Indonesia's donors, some of whom have threatened to cut vital funds after renewed violence in West Timor, including the murder of three U.N. aid workers.

Indonesia will be seeking $4.8 billion from donors for disbursement in 2001 at an annual meeting of the Consultative Group on Indonesia (CGI) in Tokyo in two weeks.

These funds, combined with asset sales, will be vital to plug the 2001 deficit, estimated by some analysts to be five percent of GDP. Comparisons with the 2000 budget are difficult because that applied to a truncated year from April to December.

"It does seem that some donors are dissatisfied with developments in Indonesia and what effect that will have within the consultative group is very difficult to estimate," said John Dodsworth, the IMF's senior resident representative in Jakarta.

The Fund, leading a multibillion dollar foreign bailout for Jakarta, said the 2001 budget would be one of consolidation.

Analysts polled by Reuters said the swelling cost of bank recapitalisation would pose the biggest burden.

The government has said it would earmark 56.5 trillion rupiah for interest payments on bank recapitalisation bonds, which together with foreign debt interest payments of 53 trillion rupiah, will make up more than one third of budget expenditure.

While key details have been released, some unknowns remain.

Revenue sharing

One is the impact of revenue sharing with Indonesia's provinces, which could see more than 60 trillion rupiah in natural resources receipts siphoned off to provincial and district authorities.

The revenue sharing, part of an autonomy package which takes effect from January, aims to appease long-running anger at Jakarta's hold over state funds.

The IMF said implementing decentralisation would be the government's biggest budgetary challenge in 2001.

The other variable is revenue targets from asset sales by the Indonesian Bank Restructuring Agency (IBRA) and privatising state-owned entities.

Analysts say the government is targeting 20-30 trillion rupiah in asset sales next year and will either have to come down hard on recalcitrant debtors or offload assets at a discount.

The powerful IBRA is charged with raising 18.9 trillion rupiah in 2000. By mid-September it had raised 9.23 trillion rupiah.

On 2001 macroeconomic forecasts, the government will settle on an exchange rate of 6,800-7,800 against the U.S. dollar.

Copyright 2000 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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