Jakarta – The World Bank has expressed its full support of the government's fiscal adjustment package, which contains various measures to prevent the 2001 state budget deficit from growing out of control.
The Ministry of Finance said in a statement issued on Friday that the support was conveyed by World Bank deputy chairman Jammal Kassum during a meeting with Minister of Finance Prijadi Praptosuhardjo at the 34th annual meeting of the Asian Development Bank in Honolulu, Hawaii.
"[The World Bank] also expects that the discussion with the House of Representatives will progress positively to help revive confidence [in the economy]," the statement said.
The deficit in the current January-December state budget could widen to a critical level of up to 6 percent of gross domestic product (GDP), or about Rp 80 trillion (about US$7.2 billion). Initial projections estimated a deficit of 3.7 percent, which has been shattered by a sharp plunge in the value of the rupiah against the US dollar and rising domestic interest rates.
Senior economic ministers have been involved in intensive meetings over recent weeks to revise the state budget and design measures aimed at restricting the deficit to a safer level of around 3.7 percent of GDP.
The measures contained in the fiscal adjustment package focus on increasing domestic revenue and cutting spending. Among the crucial measures, analysts said, are plans to raise tax revenue and fuel prices.
Although no figure has been fixed, the government may have to increase the value added tax (VAT) from the current level of 10 percent, in a bid to collect more tax revenue which may increase by up to Rp 10 trillion. The government originally targeted nearly Rp 180 trillion in tax revenues. Director General of Tax Hadi Purnomo said on Thursday that, according to the existing law on VAT, the government was entitled to raise the VAT to a maximum level of 15 percent.
The government also plans to reduce the fuel subsidy by a larger amount than initially planned, which may cause fuel prices to increase by an average 30 percent this year. There have been fears that increasing fuel prices could trigger widespread social unrest.
The revised budget will also change: the exchange rate assumption of the rupiah to Rp 9,600 per US dollar from the previous assumption of Rp 7,800 per dollar; the inflation rate to 9.3 percent from 7.2 percent; economic growth to 3.5 percent from 5 percent; and the interest rate of Bank Indonesia SBI promissory notes to 15 percent from 11.5 percent.
Minister of Industry and Trade Luhut B. Pandjaitan said this week that the government would submit the revised budget and fiscal adjustment measures to the House following final approval by the Cabinet on May 16. The House will debate the government proposal, which may need to undergo some changes before being approved by the legislature.
The government was expected to have already started the deliberation process with the House last week, with the hope of completing it by the end of this month.
The International Monetary Fund (IMF) has said that it would only agree to a resumption of talks with the government over its economic bailout program after the House approved the budget revisions.
The IMF canceled the disbursement of its third US$400 million loan tranche to Indonesia late last year upon signs that the government was wavering with the implementation of an agreed economic reform program. The IMF promised the current administration a $5 billion bailout package early last year. The Fund has so far disbursed around $1 billion.
Meanwhile, the IMF said on Thursday that the move by the government to improve its fiscal position offered a good basis for restarting talks on the stalled loan program. "Last week the finance minister informed us of the elements of a fiscal package that would broadly restore the budget deficit target to 3.7 percent of GDP," IMF spokesman Tom Dawson was quoted by Reuters as saying in Washington.