Sander Thoenes, Jakarta – President Suharto presented a draft budget to parliament yesterday that would breach targets agreed with the International Monetary Fund and presumes exchange, inflation and growth rates that many economists consider unrealistic.

The budget for the fiscal year 1998-1999, balanced at Rpl33,491bn (£11.1bn), would not meet a surplus target of one per cent of gross domestic product as agreed with the International Monetary Fund and other lenders in October as part of a bail-out package worth $38bn.

Mr Suharto said the government assumed -an exchange rate of 4,000 rupiah to the US dollar, 4 per cent growth in GDP and 9 per cent inflation. But the rupiah made its biggest ever drop yesterday, hitting 7,700 before closing around 7,250 to 7,350 rupiah to the dollar, and many economists are predicting recession and double digit inflation.

The budget would leave the current account deficit half a percentage point above the 2 per cent of GDP target and fail to reduce fuel subsidies, a large drain on the budget - both recommendations of the IMF.

In the absence of major economic reform announcements in recent weeks, investors had been looking to the budget as a litmus test of President Suharto's commitment to implementing the rescue program agreed with the 1MF.

"There's a 50-50 per cent chance that the IMF will have to walk away from Indonesia in March because it does not add up," said William Keeling, senior adviser at Dresdner Kleinwort Benson, the brokerage. "Economically this place is like Sarajevo. Tax revenues will collapse."

"The government will have to work very hard to realise the domestic revenue targets, especially taxes," said Sri Mulyani Indrawati, an Indonesian economist. "With negative economic growth, their expectation of a 13.1 per cent rise in VAT revenues is unrealistic. Income tax will drop further than the 9.5 per cent fall they predict. Development spending should be cut further. The government seems to Iack a sense of urgency."

While Mr Suharto's speech lacked new steps to tackle the economic crisis, the very fact he reiterated that Indonesia was "fully committed to implement" the IMF recommendations quelled fears that the president had grown disenchanted with the ability of the aid package to revive investor confidence. "We must certainly not lose the momentum," Mr Suharto said.

Mr Suharto also pledged to meet IMF requirements to speed up privatisation, improve management of state enterprises and include some of the many extra-budgetary funds into the budget. Subsidies, hidden in past budgets, would be listed more clearly and value added tax exemptions would be abolished.

Mr Suharto pledged to reduce politically sensitive subsidies on imported fuel and electricity prices "at the right moment." This led some observers to predict that this budget, which takes effect from April 1, may yet be changed to meet the surplus target after presidential elections on 11 March.

The draft budget's target for foreign debt payments was Rp30,240bn, up 57.2 per cent in rupiah terms. Regardless of the exchange rate used, any increase would be more than offset by a rupiah-denominated rise in oil and gas revenues and aid receipts. The IMF in Washington declined an initial comment.