Rendi Akhmad Witular and Urip Hudiono, Jakarta – The Indonesian economy remains exposed to possible slower economic growth this year as government spending, which plays a key role in fueling the economy, continues to fall far behind schedule.

While the government has huge amounts of cash at its disposal, there have been virtually no major spending initiatives nor any concrete key economic policies this year that are capable of giving the economy the boost it needs.

Bureaucrats in the central and local administrations are primarily at fault for the sluggish spending, with most of the available money apparently invested in government bonds and the stock market for short-term gains before finally being put to work on tangible projects.

The Finance Ministry has reported that only around 5 percent of planned 2006 government spending actually took place during the first quarter.

According to this year's budget, government spending is set at Rp 647.7 trillion (US$71 billion), some Rp 48.1 trillion of which is allocated for the procurement of goods and services, Rp 45.02 trillion for capital spending and Rp 77.96 trillion for routine expenditure. Another Rp 220.1 trillion is allocated for the local government sector.

During the first quarter alone, the government had available cash amounting to around Rp 117.9 trillion, excluding carry-over funds from the 2005 budget, which amounted to Rp 15 trillion.

"The low level of spending is really disrupting economic activities here. It will definitely affect the government's economic growth target," Finance Minister Sri Mulyani Indrawati told The Jakarta Post recently.

Higher government spending is needed to offset a slowdown in the economy after the private sector found itself badly affected by last year's double fuel price hike, which triggered higher inflation and soaring interest rates.

Mulyani explained that among of the factors leading to low expenditure were the slow pace of bureaucratic reform and corruption in the public service.

While remaining optimistic that spending would accelerate soon, Mulyani failed to specify any concrete measures through which this would be brought about, especially given that the central government no longer has direct management control over local administrations.

In fact, it is difficult to see how spending will be higher in the coming months as most local administrations now prefer to invest their funds in high-yielding financial market instruments.

The ongoing campaign against corruption has also had the unexpected result of making officials nervous about spending state money on development projects, fearing that they could be accused of corruption if something went wrong.

"Unless the government really accelerates spending, there will be no improvement in the economy. We had hoped that the government could really play a greater role this year," said economist Fauzi Ichsan of Standard Chartered Bank in Indonesia.

Although he expressed optimism that the economy would grow at 5.5 percent this year – slower than Mulyani's forecast of 5.7 percent – Fauzi warned that first quarter growth would be less than expected at about 4.3 percent. If this comes to pass, it would be the lowest growth for the last seven quarters.

Bank Mandiri economist Martin Panggabean shared Fauzi's concern, saying that first quarter growth was likely to be in a range of between 4.5 percent and 4.75 percent due to the lack of investment.

"First quarter growth could have potentially reached 6.5 percent. But due to unrealized government spending, coupled with slowing activity in the real sector and declining consumer purchasing power, this figure will not be attained," said Martin.

He explained that the situation could become even worse in the next quarter given the fact that oil prices were likely to remain at above $70 per barrel, thus triggering higher global inflation and requiring the government to spend more on fuel subsidies.

Rising oil prices in the middle of last year caused a mini meltdown in the Indonesian economy, Southeast Asia's largest, after the government decided to contain runaway fuel subsidy spending by raising prices.

Meanwhile, the International Monetary Fund (IMF) raised its 2006 growth forecast for Indonesia from 5 to 5.8 percent, with rising Japanese consumer spending and faster-than-expected expansions in China and India being the main driving factors.

However, the Fund warned that threats to Asian economic growth included avian influenza, rising oil prices and a possible increase in trade protectionism in developed countries.

Breakdown of 2006 government spending

• Wages and benefit spending on Rp 77.95 trillion state employees and pensioners
• Procurement spending Rp 48.09 trillion
• Capital spending Rp 45.02 trillion
• Interest and debt servicing Rp 76.62 trillion
• Subsidies Rp 79.5 trillion
• Social spending Rp 27.31 trillion
• Miscellaneous spending Rp 36.55 trillion
• Contingency spending Rp 36.55 trillion
• Local government spending Rp 220.1 trillion

Total Rp 647.7 trillion

Source: Finance Ministry