Saturday, November 26, 2011

Strong Indonesian Economy, Risky Fiscal

Based on record, Indonesia's economic development is quite good with 6.5 per cent economic growth in first quarter of 2011 due to export and investment performance as well as swiftly capital inflow increasing foreign reserves and strengthening rupiah.
The fiscal condition is also considered good and prudent. Even international rating institutions praise Indonesia's economic performance by improving Indonesia's credit rating closing to investment grade.
However, inflation is still a serious threat. Increasing inflation pressure this year is triggered by increase of world's food and energy price. In addition, there is risk of overheating due to improved economy without watching flow of distribution and limitation of infrastructure. The increase of world's commodities price have implications on fiscal, such as increase of electricity and fuel subsidy.
Food Stabilization Policy
The first test caused by world's food price was wisely responded by the government in the beginning of the year. Domestic food stabilization policy through free import duty on 57 tariff posts related to food, fertilizer, livestock's consumption commodities was proven to be effective to create deflation in March and April.
Unfortunately, the policy was effective only for two months. Inflation returned afterwards. The last position reported by Central Statistics Agency (BPS) was 0.55 per cent inflation in June. Therefore, the year-on-year inflation reached 5.54 per cent which is higher than the 2011 Budget's assumption of 5.4 per cent.
Menawhile, the government seems to be vague in responding issues related to increase of energy price, especially oil price. A number of subsidized fuel consumption control scenarios were mentioned such as limiting subsidized fuel, regulating subsidized fuel consumers, increasing subsidized fuel price, and subsidizing non-subsidized fuel. Nevertheless, there has been no implementation by the government.
The government officials seems to be not in an agreement. The Ministry of Finance has offered option to increase subsidized fuel price by Rp 500 per liter or Rp 1,000 per liter. Yet, the proposal was rejected at the cabinet meeting which discussed about 2011 Revised Budget in the third week of June. In fact, the government is possible to implement the policy based on the Law on 2011 Budget if Indonesian Crude Price (ICP) has gone 10 per cent above the budget assumption of $ 80 per barrel.
Vice Minister of Finance Anny Ratnawati said,’The Revised Budget scenario has been altered. There has been a new assumption. We did not discuss about issues of fuel price increase at the cabinet meeting. We only discussed about the 2011 Revised Budget.’
Coordinating Minister of Economy Hatta Rajasa realized that risk of subsidy increase is inevitable this year because of the oil price increase which has gone above government's expectation. To eliminate the impact, Ministry of Energy and Mineral Resources with Oil and Gas Management Agency (BP Migas) and PT. Pertamina are called for limiting and regulating the consumtpion of subsidized fuel. The policy was chosen because of people's buying power and inflation factors.
She said,’We have not decided whether there will be an increase in fuel price up to now. So, there is no need to make such a speculation’.
The idea of limiting subsidized fuel has actually been frequently mentioned by the government since last year. It should have been implemented since last April. Nevertheless, it is was postponed to July then postponed further to September.
Only Urging
While waiting for the implementation, Ministry of Energy and Mineral Resources with BP Migas and PT. Pertamina can only urge middle and upper class community not to consume subsidized fuel. Urging is usually heard but not executed by the people. To sound more insisting, Minister of Energy and Mineral Resources Darwin Zahedi Saleh feels the need to call for Islamic Priests Assembly (MUI).
Saleh said: ‘We are open to every element in the community, especially MUI, which is an in stitution that we respect. The follow-up is up to MUI.’
Gross Domestic Product
In the 2011 Revised Budget document issued by Ministry of Finance dated 20 June 2011, the state expenditure was projected to increase by Rp 98 trillion to be Rp 1,327.64 trillion if the government does not issue any policy to control subsidized fuel this year. However, the figure can be reduced to Rp 1,316.8 trillion if subsidized fuel price is increased.
Meanwhile, state income and grant can only be optimized by Rp. 45.1 trillion to be Rp. 1,150 trillion from the initial plan of Rp 1,104.9 trillion in the 2011 Budget. If we refer to the prediction in the document, this year 's budget deficit is potential to increase to be Rp 178.09 trillion (2.5 per cent of the Gross Domestic Product [GDP]) without issuing any policy and/or to be Rp 166.75 trillion (2.3 per cent of the GDP) if increase of fuel price is implemented compared to the initial plan as much as Rp 124.65 trillion (1.8 per cent of the GDP).
In accordance to the cabinet's decision, Minister of Finance Agus D.W. Martowardojo underlined that the government will maintain continuation of fiscal this year without adding new loan and preventing increase of subsidized fuel price. Even it this year's budget deficit will be maintained maximally at 2.1 per cent of the GDP.
He said: ‘We feel that deficit in the revised budget will be at 2 per cent. If it reaches that level, there will be a plus/minus of 0.1 per cent. so, it will be 1.9 per cent-2.1 per cent of the GDP.’
He mentioned that the government will save money by cutting non-priority expenditure of governmental institutions up to Rp. 15.4 trillion, increase tax income, and increase the use of excess budget. The concept and the nominal still needs to be discusssed with the parliament at hearing about 2011 Revised Budget.
Anggito Abimanyu, professor of University of Gajah Mada's School of Business, reveals that budget deficit always becomes a sensitive issue among governmental institutions, including the parliament, in his book entitled ‘Reflection and Idea of Fiscal Policy.’
The inability to cover the budget deficit is worried to be able to trigger fiscal and debt crisis such as in Greece and other European countries.
With or without new loan, there will still be other ways to cover deficit. It reminds me about the fiscal condition last year which is similar to this year's. At the time, the government increased the deficit from 1.6 per cent of the GDP (Rp 98 trillion) in the budget to be 2.1 per cent of the GDP (Rp 133.74 trillion) in the revised budget. The final realization of the 2010 deficit was actually only 0.62 per cent of the GDP (Rp 39.5 trillion) and generated excess budget of Rp 47 trillion.
The government must be careful not to occur again. Position of 2011 Budget per June which was still surplus more than Rp 40 trillion must be a warning for the state fund managers, especially governmental institutions. If governmental institutions do not want to be the problem maker, they must soon improve to optimize its spending performance. Only by a healthy fiscal, strong economy will occur.

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