Joanne Collins, Jakarta – Indonesia will unveil on Friday a draft budget constrained by a mountain of debt that has left President Megawati Sukarnoputri's government with barren coffers and few options to prove it can fix the shattered economy.
The new government has given little away on what to expect but economists are betting on a conservative blueprint for 2002 with slightly more aggressive revenue targets.
Jakarta will also be banking on a last minute reprieve from the Paris Club of official creditors, which it has asked to reschedule an additional $6 billion of debt which falls due between April 2002 and March 2004.
It is unclear how much of that debt will mature next year, but analysts said the deal would likely free up funds for urgent development or social spending. Paris Club officials, due to meet on Monday, will also decide on the second phase of last year's $5.8 billion debt deal, which amounts to $2.8 billion and will impact the 2002 budget.
That deal is conditional on an active IMF programme and is set to be approved following Jakarta's recent breakthrough with the Fund after an eight-month deadlock.
No miracles
The budget – due to be presented to parliament at 8:30am on Friday – will test the government's ability to tackle nuts and bolts fiscal matters but no one is expecting miracles.
The budget will also need approval from parliament, often a thorn for recent Indonesian governments, and depend on a stable rupiah to avoid a revision of the figures as happened mid-2001.
"This budget is just going to be the usual sort of budget. It's not going to kickstart the economy," said Fauzi Ichsan, global markets economist at Standard Chartered Bank in Jakarta. "They will be playing around with the figures and keeping the budget deficit at a reasonable level to please the IMF – that's reality, they can't do much," he added.
A preliminary budget deficit of 2-3 percent of gross domestic product (GDP) was agreed between Jakarta and the IMF last week, down from this year's 3.7 percent forecast. Indonesia will also be relying on generous pledges from the umbrella group of donors, the Consultative Group for Indonesia (CGI), when it meets in November to help plug that deficit.
The CGI pledged $4.8 billion last year but donors will expect Jakarta to crank up asset sales in return for a similar reward. Not a cent has been raised from a 6.5 trillion rupiah ($725 million) privatisation target and the powerful bank restructuring agency (IBRA) still holds billions of dollars worth of assets it took over during the Asian economic crisis of the late 1990s.
"If the government can sell off some key bank or telco assets in the next three months then perhaps we can expect the target to be increased for next year's budget," said an analyst from Merrill Lynch in Jakarta.
Bonds a headache
Indonesia's massive bank rescue programme, one of the world's most costly, will continue to sap the budget with interest and principal payments on recapitalisation bonds estimated at around 81.5 trillion rupiah for 2002, similar to this year's 82 trillion.
That cost will rise following parliament's decision late on Tuesday to approve an additional 40 trillion rupiah of bonds for a deposit guarantee scheme to further prop up the banking sector. Parliament is also considering a government proposal to replace a large chunk of troubled Bank Internasional Indonesia's (BII) debt with some $1.05 billion worth of bonds.
Development funds scarce
With the cost of servicing total public debt of $150 billion – or 115 percent of GDP – Indonesia has little left to maintain basic infrastructure, neglected after four years of crisis.
"Its not about GDP growth, the inflation rate, the exchange rate, or the SBI, the biggest problem the government will face next year is still domestic debt because over time our domestic debt burden will be increasing and that is a source of fiscal unsustainability," said Raden Pardede, from state-run Danareksa Securities.
Another analyst added: "The only option they have is if they're seen to be doing a good job by the World Bank they could get a little bit more development expenditure to play with."
Lowering hefty oil subsidies will also ease pressure on the budget and economists say the stronger rupiah will lessen the need for the price support.
Preliminary figures from the Finance Ministry show Jakarta will raise fuel prices by an average 30 percent in January.
The draft budget will reflect regional autonomy laws that took effect in January and which give local areas 30 percent of gas revenues and 15 percent from oil.
Jakarta this week said it wanted to change the controversial laws, casting confusion over outlays for the regions.
"The government will probably try to restrain disbursing more funds to the regions. The allocation may be the same but in reality it could be less," Standard Chartered's Ichsan said.