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Monday, 2 October, 2000, 13:48 GMT 14:48 UK
Indonesia budget boost for regions
After the riots n Mataram, Lombok
Indonesia has been scarred by riots and protests in recent years
The Indonesian government has unveiled a draft budget for the next year, promising to pour money into local and regional government.

For the first time, the 2001 budget separates central government spending from regional government spending.

The goverment hopes that by directing money into the regions, it will go some way to alleviating the social and separatist conflicts which have scarred Indonesia in recent years.

But news that fuel subsidies are to be cut - boosting the price of oil by up to 20% - have already prompted rioting around Indonesia.

Regional split

About $8.5bn (74.90 trillion rupiah) will be poured into the provinces - a quarter of total spending.

It is the biggest single spending item and is aimed at giving local governments more economic power and responsibility.

"This is to prevent Indonesia from disintegrating," chief economics minister Rizal Ramli said.

However, the government also unveiled plans to cut fuel subsidies, something it has been under pressure to do from the International Monetary Fund (IMF).

Fuel prices are set to rise 20% under the new budget as subsidies are cut, a move expected to save the government an estimated 4.7 trillion rupiah.

This move is likely to provoke the sharpest public response, as it will boost the price of kerosene used by millions of Indonesians for cooking and lighting.

Indonesia is Southeast Asia's largest oil producer and has enjoyed low fuel prices for some years, largely thanks to subsidies introduced by President Soeharto.

IMF welcome

So far the budget has been cautiously welcomed by the IMF, which called it a "sensible" budget.

"[It is] the first step in the medium term programme of fiscal consolidation... It does move towards cutting subsidies and deals with decentralisation in a balanced way," IMF representative John Dodsworth said.

"The difficulty will come in the implementation, to make sure what's written in the budget is implemented in practice," Mr Dodsworth said.

In September, Indonesia signed a revised letter of intent with the IMF, preparing the way for the release of new funds. The new commitments were made as part of a $5bn, three-year loan agreement with the IMF, under which Indonesia receives regular loans for implementing tough economic reforms.

The government forecast a 52.12 trillion rupiah ($5.9bn) deficit compared to 44.13 trillion in 2000. But as a percentage of GDP, the deficit is to narrow to 3.7% from 4.8%.

The government also hopes to boost its coffers and fund the deficit through selling off some state-owned firms.

On top of that it hopes to raise 27 trillion rupiah through selling assets under the control of the powerful Indonesian Bank Restructuring Agency (IBRA).

Inflation in Indonesia is set to hit 7% next year, it said, compared with 4.8% this year, while growth should reach 4.5%, compared with 3.8% this year.

Unrealistic

But Kwik Kian Gie, a former co-ordinating minister for economy, finance and industry, said the assumptions were "unrealistic".

"We don't see that the political conditions in 2001 can instantly become good," Kwik said.

Some analysts also questioned the government's forecasts.

"I think the budget will do little to stimulate growth," Danareksa Sekuritas head of fixed income research Kahlil Rowt said.

Indonesian stock markets and the rupiah were barely changed on news of the budget.

"There is nothing new, it is as was expected," Raden Parede, an analyst at Danareksa, said.

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See also:

30 Aug 00 | Business
Indonesia in IMF talks
28 Oct 99 | The Economy
Rebuilding Indonesia's economy
07 Sep 00 | Business
Indonesia signs new IMF deal
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