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2004 draft state budget full of challenges.

Announced amid confusing situation

The 2004 draft state budget (RAPBN) announced by the government on August 16, 2003, has come amid high optimism with good signs shown by economic indicators. However, there are also causes for concern with the bomb blast that rocked Jakarta only 10 days earlier. The bomb blast that hit one of the most luxurious hotels in capital city, JW Marriott Hotel and left 11 death and hundreds of others injured, was another proof that there is still laxity in security in the country. Security problem has always been cited as the cause for foreign investors to stay away from the country. Foreign investment is badly needed to help propel the ailing economy.

The rupiah stability at the levels of 8,500-8,600 to the U.S. dollar, low inflation rate expected to be below 10% this year and the benchmark interest rate of Bank Indonesia (SBI) that already fell to less than 10% gave rise to hope that the economy will grow faster.

Observers agreed that assumptions used in the 2004 draft state budget are conservative. Tax revenues are projected to increase from 13.1% in 2003 to 13.5% of the GDP, and expenditures drop slightly from Rp 370 trillion in 2003 to Rp 368 trillion or 0.7% of the GDP. The Budget Committee of the House of Representatives and the finance minister have succeeded in reaching an agreement on macro economic assumptions including economic growth at 4-5%, inflation rate at 6-8% and rupiah level at 8,200-9,200 per U.S. dollar. The interest rate on 3-months SBI is projected at 9-10%, oil price at US$ 20-US$ 23 per barrels and Indonesian production at 1.1 milion-1.15 million barrels per day.

Among the factors on which the rupiah value is predicted include the still attractive interest rate in the country, improvement in the export performance, substantially large foreign exchange reserve and developments of regional currencies. The projection of the interest rate of 9%-19% on 3-month SBI is based on the downtrend of the rate so far this year. Supported by the rupiah stability and downtrend in the inflation rate.

No sign of breakthrough

The figures in the 2004 draft state budget (RAPBN) reflect no breakthrough in strategy attempted by the government in both revenues and expenditures. This is obvious from the absence of significant stimulus in the policy and attempts toward creating fiscal self reliance. The government showed no sufficiently strong commitment to increase development budget that weakens the fiscal driving power and the economic growth remain low. It is clear that there is not enough attempt is made toward reducing unemployment through development projects.

Finance Minister Boediono acknowledged that the 2004 RAPBN is a belt tightening bill. It promises no leapgoging growth in 2004. Having an equal growth as in 2003 is good enough.

In general, the 2004 RAPBN even signals contraction. The expenditure budget dropped from Rp 370.6 trillion to Rp 368.8 trillion. The contribution of RAPBN to Gross Domestic Product (GDP) is estimated to decline from 19.1% to 18.4%. This shows that the government relies more on the private sector to give a boost to economic growth.

The government target to increase revenues in income tax by 10% exceeding the predicted increase in inflation, and economic growth is feared to cause greater contraction. The cut in fuel subsidy is certain to lead to fuel price hike, so is with the electricity tariff--all will contribute to economic contraction.

Indeed, some observers are of the view that a 5% growth target as announced by President Megawati Sukarnoputri, is too optimistic.

Tax boosted

As was in the past years, tax revenues dominated government revenues. Tax revenues account for 79% of the government revenues in the 2004 RAPBN. In the 2001 state budget (APBN) tax revenues were 13.1% of the GDP and in the 2004 RAPBN the ratio is 13.5% with a nominal value up from Rp 254 trillion in 2003 to Rp 271 trillion in 2004.

Income tax (PPh) and value added tax (VAT) are two tax components which will give the largest contribution to domestic revenues namely 81% or Rp 245 trillion. The amount represents a 9% increase from Rp 201 trillion in 2003. The ratio of PPh to GDP increases from 6.2% in 2003 to 6.6% in 2004. The PPh comes mainly from the non-oil/gas sector, while the PPh from the oil and gas sector declines from 0.8% of the GDP to only 0.60% of the GDP.

The tax revenue target in the proposed budget is set at Rp 27.4 trillion, lower 1.9% from Rp 27.9 trillion in 2003. Excise revenue for 2004 are also much lower than earlier expectation of Rp 36 trillion.

One reason for the government for not raising the excise revenue target is the fact that cigarette industry is facing stagnation following the hike in excise tax and retail price (HJE) in 2002 that resulted in a decline in sales that year. In the first half of 2003, excise revenues from cigarette totaled only Rp1 trillion or 40% of the target for 2003. It is almost certain, therefore, that the target figure for 2003 would not be reached.

The government's attempt to improve the performance of cigarette industry by not raising the excise tax and H/E is described as a very positive steps. The cigarette sales volume, therefore, is expected to recover in 2004 with expected improvement in the purchasing power of the consumers. The months of political campaign in the run up to the 2004 election are also expected to contribute to increase in cigarette sales. In the past cigarette sales rose by 6.8% during the months of election campaigns. Machine rolled clove flavored cigarettes, which are considered safer for the health with lower tar and nicotine content, dominate sales.

In 2003, the government relied more on non tax especially on natural resources for revenue, but in 2004, projected revenues from this sector declines sharply to Rp45 trillion from Rp59 trillion.

Tightening expenditures

Under the 2004 RAPBN, state expenditures are projected at Rp 369 trillion (18.4% of GDP), down 0.7 percentage point from 19.11% in 2003. The decline is caused mainly by a decrease in the regional administration budget, while the allocation for the central government is raised.

Under the 2004 RAPBN, the budget for central government expenditures is set at Rp 253.9 trillion or 12.7% of the GDP. The amount rose nominally only slightly from Rp 253.7 trillion in 2003 and its ratio to the GDP is 0.4 percentage point lower than 13.1% in 2003.

Routine expenditures are projected at Rp 185.8 trillion or 9.3% of the GDP, down 0.6 percentage point from it was in 2003. The decline is caused mainly by a cut in subsidy and substantially large payment of loan interest.

The government has reduced oil fuel subsidy to Rp 12.7 trillion from Rp 13.21 trillion because of assumption of a decline in oil price and production.

According to Energy and Mineral Resources Minister Purnomo Yusgiantoro, the assumption used in calculating the 2004 RAPBN for oil price is lower at US$ 21 per barrels compared with US$ 22 in 2003.

The country's oil production is also projected to decline to only 1.15 million barrels per day from 1.27 million barrels in 2003. Purnomo said if the oil is as high as it is at present, the subsidy in 2003 could reach Rp 24 trillion as against the projection of only Rp 13 trillion. That means a shortage of Rp 1 trillion.

In the financial note, the government predicted the oil price in international market will decline. The prices of Brent in January, 2003 was recorded at US$ 31.45 per barrel, down to US$ 28.59 in July. The decline came amid uncertainty in supply after the U.S.-Iraq war.

Indonesia's oil production is projected to average 1.27 million barrels per day in 2003, but so far the production has averaged only at 1.09 million barrels. The minister attributed the shortfall to condition of the oil wells--too old at 25 years--while new wells could not yet operate fully.

The budget for development handled by the central government in 2004 is set at Rp 68.1 trillion, up from Rp 65.1 trillion in 2003, but the ratio to GDP remains at 3.4%.

Financing Budget Deficit

The government is considering issuing international bond valued at Rp 3.48 trillion or 0.2% of the GDP to cover a deficit in the 2004 budget of Rp 24.923 trillion or 1.2% of the GDP.

The sources of fund to covet the budget deficit consist of two main groups namely domestic financing amounting to Rp 39.843 trillion and foreign financing minus Rp 14.92 trillion. Domestic financing includes banking and non banking financing. Foreign financing includes withdrawal of foreign loan (gross) and installments of foreign debt principal.

Foreign loan withdrawal (gross) includes program loan from the Consultative Group on Indonesia (CGI) amounting to Rp 6.525 trillion, project loan Rp 19.966 trillion and international bonds Rp 3.48 trillion.

Starting next year, Indonesia has no more debt rescheduling facility from the Paris Club of official creditors after the termination of the contract with the International Monetary Funds by the end of 2003. Therefore, the country has to repay a debt of Rp 44.891 trillion in foreign debt maturing in 2004. Therefore, foreign financing still has a deficit of Rp14.92 trillion. Domestic financing from the banking sector amounts to Rp 26.338 trillion. Domestic financing from non banking sector includes Rp 5 trillion through privatization of state companies Rp 5 trillion from the sales of assets controlled by the Indonesian Bank Restructuring Agency (IBRA) and Rp 3.054 trillion from state bonds (net). State promissory notes to be issued will amount to Rp 28 trillion (1.4% of the GDP), but repayment of the principals is Rp 18.895 trillion and buy back of bonds will cost Rp 5.6 trillion, leaving Rp 3.504 trillion to be used to help cover deficit. Privatization of state companies will continue either through strategic sales or initial public offering.

Challenges ahead

As said by the finance minister, there are four big challenges potential to cause a setback in the progress toward economic recovery in 2004 namely the general elections, termination of contract with the IMF, threat to state unity and tighter competition in global market. The 2004 election causes worries that it could destabilize state administration. The government, therefore, needs to show a clear working program to convince the public that economic development in 2004 would not be affected under transitional government. Boediono said in addition to good implementation from the political, logistics and social points of view, the program should be good from the budget point of view.

The greatest challenge in 2004 comes as a result of the termination of the cooperation with the IMF and the option taken on post programme monitoring (PPM) which will show the capability of the govemment to cover a deficit in APBN, and find additional source of fund to repay mature foreign debts. The termination of the cooperation with the IMF will mean heavier pressure on the APBN such as in the forms of larger financing requirement without debt rescheduling from the Paris Club, mature bonds and foreign debts, and deficit in the 2004 state budget. The government is also demanded to show credibility in engineering by itself various short term, mid term and long term economic programs to show its consistency in implementing the programs and their supervision.

The 2004 RAPBN is indeed not expected to be fantastic, but Indonesia does not necessarily have to rely on budget for a driving force. The role of the private sector should be greater to function as a locomotive for the economic development.

APBN 2003 and RAPBN 2004

(Rp billion)

 Description 2003

 APBN % of

A. State income and Grants 336,155.5 17.3
 I. Domestic Income 336,155.5 17.3
 1. Tax revenue 254,140.2 13.1
 a. Domestic taxes 241,742.4 12.5
 i. Income tax 120,924.8 6.2
 1. Oil and gas 14,775.7 0.8
 2. Non-oil/gas 106,149.1 5.5
 ii. Value added tax (VAT) 80,789.9 4.2
 iii. Land and Building tax 7,523.6 0.4
 iv. BPHTB 2,401.7 0.1
 v. Excises 27,945.6 1.4
 vi. Other taxes 2,156.8 0.1
 b. International trade tax 12,397.8 0.6
 i. Import duty 11,960.3 0.6
 ii. Export tax/levies 437.5 0.0
 2. Non Tax revenues 82,015.3 4.2
 a. Natural Resources (SDA) 59,395.5 3.1
 b. Profit share from state companies 10,414.2 0.5
 c. Other non tax revenues 12,205.6 0.6
 II. Grant -- --
B. State expenditures 370,591.8 19.1
 I. Central Govt. Expenditures 253,714.2 13.1
 1. Routine expenditures 188,584.4 9.7
 a. Civil servant spending 50,240.6 2.6
 b. Spending on goods 15,427.1 0.8
 c. Payment of debt interest 81,975.2 4.2
 d. Subsidies 25,465.3 1.3
 e. Other routine expenditures 15,476.2 0.8
 2. Development expenditures 65,129.8 3.4
 a. Rupiah development financing 46,229.8 2.4
 b. Project financing 18,900.0 1.0
 II. Regional Expenditures 116,877.7 6.0
 1. Fiscal balance fund 107,490.5 5.5
 a. Production sharing fund 27,895.9 1.4
 b. General allocation fund 76,978.0 4.0
 c. Special allocation fund 2,616.6 0.1
 2. Special autonomy fund and 9,387.2 0.5
C. Primary balance 47,538.9 2.5
D. Budget Surplus/Deficit (A-B) (34,436.3) (1.8)
E. Financing 34,436.3 1.8
 I. Domestic financing 22,450.1 1.2
 II. Foreign financing (net) 11,986.2 0.6
 1. Foreign loan withdrawal (gross) 29,250.0 1.5
 a. Program loan 10,350.0 0.5
 b. Project loan 18,900.0 1.0
 c. International bonds -- --
 2. Instalments of foreign debt principal (17,263.8) (0.9)
 a. Due (44,279.1) (2.3)
 b. Rescheduling 27,015.3 1.4

 Description 2004

 RAPBN % of

A. State income and Grants 343,876.0 17.2
 I. Domestic Income 343,241.8 17.1
 1. Tax revenue 271,022.9 13.5
 a. Domestic taxes 259,159.1 12.9
 i. Income tax 133,169.5 6.6
 1. Oil and gas 12,334.5 0.6
 2. Non-oil/gas 120,835.0 6.0
 ii. Value added tax (VAT) 86,272.7 4.3
 iii. Land and Building tax 8,030.7 0.4
 iv. BPHTB 2,667.9 0.1
 v. Excises 27,404.3 0.6
 vi. Other taxes 1,614.0 0.1
 b. International trade tax 11,863.8 0.6
 i. Import duty 11,548.6 0.6
 ii. Export tax/levies 315.2 0.0
 2. Non Tax revenues 72,218.9 3.6
 a. Natural Resources (SDA) 44,824.9 2.2
 b. Profit share from state companies 10,106.4 0.5
 c. Other non tax revenues 17,287.6 0.9
 II. Grant 634.2 0.0
B. State expenditures 368,799.5 18.4
 I. Central Govt. Expenditures 253,943.1 12.7
 1. Routine expenditures 185,842.4 9.3
 a. Civil servant spending 56,854.1 2.8
 b. Spending on goods 17,769.0 0.9
 c. Payment of debt interest 68,503.2 3.4
 d. Subsidies 23,310.9 1.2
 e. Other routine expenditures 19,405.2 1.0
 2. Development expenditures 68,100.7 3.4
 a. Rupiah development financing 47,500.0 2.4
 b. Project financing 20,600.7 1.0
 II. Regional Expenditures 114,856.3 5.7
 1. Fiscal balance fond 108,243.0 5.4
 a. Production sharing fund 26,415.8 1.3
 b. General allocation fund 79,134.1 4.0
 c. Special allocation fund 2,693.1 0.1
 2. Special autonomy fund and 6,613.4 0.3
C. Primary balance 43,579.7 2.2
D. Budget Surplus/Deficit (A-B) (24,923.5) (1.2)
E. Financing 24,923.5 1.2
 I. Domestic financing 39,843.7 2.0
 II. Foreign financing (net) (14,920.2) (0.7)
 1. Foreign loan withdrawal (gross) 29,971.5 1.5
 a. Program loan 6,525.0 0.3
 b. Project loan 19,966.5 1.0
 c. International bonds 3,480.0 0.2
 2. Instalments offoreign debt principal (44,891.7) (2.2)
 a. Due (44,891.7) (2.2)
 b. Rescheduling -- --

Source: Financial Note 2004
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Title Annotation:Focus
Publication:Indonesian Commercial Newsletter
Geographic Code:9INDO
Date:Aug 26, 2003
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