OFFICE OF THE COORDINATING MINISTER FOR ECONOMIC AFFAIRS OF THE REPUBLIC OF INDONESIA PRESS RELEASE The Draft 2007 : Building Hope for a Brighter Future Jakarta, 16 August 2006 The Draft 2007 represents a further step forward in actions taken for systematic implementation of the vision and mission of the United Indonesia Cabinet, set out in the 2004-2009 Medium-Term National Development Plan (RPJMN). The RPJMN has the following key agenda: (i) building a secure and peaceful nation; (ii) creating a just and democratic society; and (iii) bringing greater prosperity to the population. This Threefold Development Agenda is elaborated in the 2007 Government Work Plan (RKP 2007), which sets out nine development priorities: first, poverty reduction; second, job creation and promotion of investment and exports; third, revitalisation of the agriculture, fisheries, forestry and rural development sectors; fourth, improved access and quality of education and health care; fifth, enforcement of the law and human rights, eradication of corruption and reform of the bureaucracy; sixth, strengthened capacity in land affairs, security and public order and conflict resolution; seventh, rehabilitation and reconstruction in Aceh, Nias, Yogyakarta and Central Java and disaster mitigation measures; eighth, accelerated construction of infrastructure; and ninth, development in borderregions and remote areas. These nine priority programmes are mutually reinforcing with the ultimate goal of fulfilling the three-fold agenda of building a secure and peaceful nation with a just, democratic and increasingly prosperous society. The Draft 2007 is built on the assumptions of improved economic performance and greater macroeconomic stability. This is reflected in a higher assumed rate of economic growth, up from 5.8% (Draft 2006 Revised ) to 6.3% (Draft 2007 ), with the inflation projection eased from 8% (Draft 2006 Revised ) to 6.5% (Draft 2007 ) and interest rates down from 12% (Draft 2006 Revised ) to 8.5% (Draft 2007 ). Other assumed macro variables are the exchange rate at Rp 9,300/USD and the average oil price at US$65 per barrel. Reflecting the balance between economic stimulation and fiscal stability is the level of government expenditures, which is retained at about the same proportion as in 2006 at 21%. Furthermore, with better targeted budget allocations and structural policies for improvement in the business climate, the added fiscal stimulus is expected to achieve an optimum level of job creation and bring about reductions in open unemployment by the end of 2007. 1
allocations on Safety Net for Impoverished Households and Improved Quality of Life. Government expenditure priorities are targeted not only at sustaining the momentum of economic growth, but also at providing a safety net for impoverished families and improving the quality of life in Indonesia. Line ministry and government agency programmes supporting these objectives are: Direct Cash Transfers changed to Conditional Cash Transfers in support of education, health and nutrition. Pilot project to be launched in 2007 for 1.7 million households in 6 provinces at a total cost of Rp 4 trillion. The rice aid programme for impoverished households, targeting 15.6 million families with each family allocated 15 kg of rice at Rp 1,000/kg. Health care safety net for 60 million of the poor, covering access to health services at Community Health Service Points (Posyandu), Community Health Centres (Puskesmas) and Class III Hospitals. Limited exemptions from school fees for 9-year basic education and subsidies to assist underprivileged children in attending senior high school. Improved sanitation and access to clean water. Added to this, beginning in 2006 and carrying through 2007, the government allocate substantial budget funds as seed capital for poverty reduction. First, budget-funded activities are expected to create new jobs and will be implemented through open, transparent and competitive procedures. Second, the focus of government spending will be on rural areas and agriculture. Third, the government will carry rural infrastructure development forward through a range of programmes and the use of Special Allocation Funds (DAK). The rural infrastructure programme is expected not only to provide added employment in the short-term, but also create a better climate for business in rural areas. Further efforts to reduce disparities will include a 24% increase in budgeted Special Allocation Funds from Rp 11.6 trillion (Draft 2006 Revised ) to Rp 14.4 trillion (Draft 2007 ). The government will also maintain the fuel and electricity subsidies at significant levels. The fuel subsidy in the Draft 2007 remains at Rp 68.6 trillion, or 1.9% of GDP. The government will make a further Rp 25.8 trillion available for the electricity subsidy. To ease the burden of the fuel and electricity subsidies, the government is promoting the use of alternative energy sources. This involves the construction on non-fuel burning power plants and provision of a Rp 1 trillion subsidised line of credit for the biofuel development programme. Rural development and agriculture also benefit from a larger budget allocation at Rp 14.7 trillion (Draft 2007 ), consisting of Rp 10.1 trillion for agriculture, forestry, fisheries and marine resources and Rp 4.6 trillion for the water resources sector. The government will also increase the fertiliser subsidy by Rp 5.8 trillion or 93% over the Draft 2006 Revised, enabling the targeted 30% profit margin for farmers to be retained. Human development a key budget priority, paving way to meet short and longer term needs. 2
The education sector benefits from the largest allocation of budget funds, as required under the constitutional mandate and reflecting the priority on development of higher quality human resources in Indonesia. The increased allocation is intended to meet targets for poverty alleviation and reduction of disparities through the continuation of limited access to free schooling and special educational scholarships for poor families. In 2007, education will account for 10.3% of the total central government budget. Total central government spending on education is set at Rp 51.3 trillion, compared to Rp 43.9 trillion in the Draft 2006 Revised. The government recognises that this allocation represents only 9.6% of the State under the definition applied by the Constitutional Court. Nevertheless, the actual level of planned expenditure is even higher after taking into account the Special Allocation Funds and General Allocation Funds allocated to salaries, rehabilitation of primary school buildings and procurement of school equipment, as agreed with regional governments. It should be noted that by applying the broad definition of educational expenditures which is in common international use total educational expenditures are already at 4.1% of GDP for 2006 and nearing the international norm of 5% of GDP. For fiscal 2007, the magnitude of expenditures under this new, broad definition will not be known until the regions complete their draft regional budgets. The health sector similarly benefits from a sharply increased allocation at 29% above the Revised 2006, with spending up from Rp 10.4 trillion to Rp 13.4 trillion. Health sector funding will be used to maintain a health care safety net for poor families as mandated in the Social Security Law and to fund improvements in reproductive and child health, thus promoting improved health and learning capacity among young Indonesians. Infrastructure allocated major proportion of spending, up from the previous year. The government is also devoting considerable attention to the development of infrastructure in support of economic growth and job creation. More than Rp 46 trillion of central government spending is allocated for the priority areas of job creation, investment and exports, representing a 31% increase over the Revised 2006 Most of the budget for this sector will be taken up for infrastructure construction by the Ministry of Public Works and Communications. About Rp 30 trillion will be used for highway repair and construction, improvements to irrigation systems, upgrading of roads and rail track construction. Commitment to improved governance: bureaucratic reforms and increased budget for law enforcement Allocations in the Draft 2007 also reflect the government s desire to improve governance and thus strengthen enforcement of the law, eradicate corruption and move forward with bureaucratic reforms. Reflecting this is the Government proposal for a 15% pay rise for civil servants and payment of a 13th month salary and significantly increased allocations for all institutions responsible for improved governance and law enforcement (Supreme Audit Agency, Supreme Court, Ministry of Law and Human Rights and the Attorney-General s Office. The substantial budget increase for law enforcement 3
agencies in 2007 is expected to provide added momentum to efforts aimed at eradicating corruption in Indonesia. Working towards ideal levels in the Defence and Security budget. Allocations in the Draft 2007 State also emphasise the creation of a peaceful society in Indonesia. Reflecting this is the increased defence and security budget to be managed by the Indonesian Defence Forces and the National Police. While some resources will be used to upgrade defence capabilities, a major part of the budgeted increase for defence and police will go to increasing the food allowance from Rp 25 thousand to Rp 30 thousand and the rehabilitation of police and military barracks throughout Indonesia. Equipment procurement will prioritise the use of products from domestic industrial enterprises such as IPTN, PAL and PINDAD. Increased expenditures for the Regions The most important budget increases are proposed for regional government expenditures. Regional expenditures are to be raised from 7.0% of GDP (Revised 2006 ) to 7.1% of GDP in the Draft 2007. Measured in proportion to total state spending, regional expenditures are up from 32% to 33.6%, with expenditure levels increased from Rp 219.4 trillion (Draft 2006 Revised ) to Rp 250.5 trillion. This increase reflects the desire for the decentralisation and regional autonomy processes to reach a fully-fledged state of implementation. Another expectation from the increased budget allocation to the regions is for Provincial, Regency and Municipal Governments to cut back the various local levies that burden the business community and the public and are responsible for business uncertainty and high costs. financing to rely more on domestic revenues, most importantly taxation Financing for the Draft will be raised through domestic tax revenues and non-tax revenues. In the Draft 2007, the tax ratio is raised from 13.6% of GDP (Revised 2006 ) to 14.3% of GDP. Within this, the non-oil and gas tax ratio will be increased from 11.9% of GDP (Revised 2006 ) to 12.5% of GDP (Draft 2007 ). Based on this tax ratio, total receipts are projected to reach Rp 713.4 trillion, up 9.3% from the estimated realised receipts in the Revised 2006. The additional revenues will enable the fiscal deficit in the Draft 2007 to be cut back to only 0.9% of GDP compared to 1.2% of GDP in the Draft 2006 Revised. Through the gradual reduction in the deficit accompanied by higher economic growth and accelerated repayment of government debt, the debt ratio will be reduced to 37% of GDP at the end of 2007, compared to the estimated 41.3% of GDP for 2006. The planned level of net domestic financing in the Draft 2007 is Rp 51.3 trillion. This domestic financing will be raised from (i) issue of Government Securities, after taking account of the combined needs of fiscal and monetary policy; (ii) funds released under the debt moratorium for financing of reconstruction and rehabilitation in Aceh and Nias; (iii) strategically managed asset sales under the bank restructuring programme; (iv) use of government funds on deposit at Bank Indonesia; and (v) privatisation. Only a low level of financing is envisaged from privatisation. In the government view, the 4
privatisation programme should not have the financing of the budget deficit as its sole objective. More importantly, privatisation should be aimed at restructuring and building the performance of SOEs under the mandate of Act No. 19 of 2003 concerning State Owned Enterprises. Net budget financing from foreign borrowings is projected at minus Rp 18.2 trillion. The net figure is derived from Rp 35.9 trillion to be received in programme and project loans, subtracted by Rp 54.1 trillion in repayment of foreign debt principal. represents only part of the Economic Reform Programme for economic growth and job creation In addition to the fiscal stimulus described above, policy actions aimed at job creation through increased investment and exports are focused more on microeconomic reforms. The microeconomic reforms are built around two pillars, (i) improvement of the investment and business climate, and (ii) accelerated construction of infrastructure throughout Indonesia. The agenda for improvement in the investment climate essentially focuses on measures to reduce the high costs of doing business and the introduction of a tax incentive package alongside promotion of the tax reform agenda. These objectives can only be achieved on a foundation of macroeconomic stability. The inflationary surge of 2005 is to be stabilised through coordinated fiscal and monetary policy and control of prices for staple goods. If needed, this will include the reintroduction of rice imports. Through these actions, inflation is expected to stabilise at about 6.5% in 2007, consistent with the assumed level in the Draft 2007. Macro Assumptions: Draft 2007 2006 2007 Agreement with Revised Parliamentary Committee Draft Growth (%) 6.2 5.8 6.0-6.5 6.3 Exchange Rate (Rp/US$) 9,900 9,300 9,000-9,500 9,300 Inflation (%) 8.0 8.0 6.0-8.0 6.5 3-month SBI Rate (%) 9.5 12.0 8.5-9.5 8.5 Oil Prices (US$/barrel) 57 64 57-65 65 Lifting (mbcd) 1.050 1.000 1.000 1.000 Deficit (% of GDP) 0.7 1.2 0.7-0.9 0.9 5