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Editorial: Budget geared for crisis
Tue, 11/04/2008 10:40 AM | Opinion
In an economic or financial crisis, the government must be decisive. Whatever action it takes, it should not dither, or the market will lose confidence in its policy-making capability.
Herein lies the strategic importance of the special clause in the 2009 budget law that authorizes the government, under certain conditions, to allocate new spending not included in the budget, or shift spending between programs or government agencies to protect the economy.
The government is also authorized to hold off on spending while maintaining priority programs such as education and, if necessary in the case of an emergency or a severe liquidity crisis, to withdraw standby loans from bilateral or multilateral creditors and issue bonds of a higher value than stipulated in the budget.
The special clause gives the government broad political leeway to take immediate action without having to go through protracted political deliberations in the House of Representatives.
The cascading impact of the weakening global economy, the international credit crunch and the falling prices of commodities, especially crude oil, palm oil, rubber, coffee and cacao, has not only forced major amendments to the 2009 state budget plan.
Unfavorable external factors make it most imperative and urgent for the government to gear up its budget plan for coping with a crisis.
The final budget proposal for 2009, which was approved by the House last Friday, is designed to protect our economy from the fallout from the economic recession in developed countries.
The House and government agreed to increase subsidies by almost 33.50 percent -- to Rp 63.13 trillion (US$6.3 billion) -- to cushion the impact of the U.S. recession on consumers and businesses. Subsidies for food, fertilizer and rice seeds were budgeted at Rp 32 trillion and credit subsidies for businesses 21 trillion. Another Rp 10 trillion is reserved as emergency assistance for businesses to weather the economic and financial turbulence ahead.
These non-energy subsidies could be increased so significantly because spending on fuel and electricity subsidies will decrease sharply to Rp 126.82 trillion next year from an estimated Rp 187 trillion this year thanks to the fall in crude oil prices from an average $95 per barrel this year to an average $80 per barrel.
The Jakarta stock market crash early last month, which shaved more than 50 percent off its market capitalization, and the rupiah's depreciation of almost 20 percent just in the past week have clearly demonstrated how vulnerable our economy is to the fallout from the economic and financial crises in the developed economies, notably the world's economic powerhouse (United States).
The government should therefore constantly be ready to act swiftly and decisively to cope with any unexpected developments that adversely affect market confidence in our economy.
Most analysts foresee that the global economic condition will remain gloomy at least for the next year and the recession in the United States will most likely last at least two years. The more pessimistic pundits even warn that as far as economic hardship in the United States goes, the worst is yet to come.
The House again deserves commendation for its wise decision to provide the government with a broader political mandate to take whatever contingency measures are needed to cope with a dire economic condition.
But the political mandate is not a blank check. The 2009 budget law stipulates clear-cut definitions of the conditions in which the government may exercise its special authority to take emergency measures.
The government is allowed to exercise its emergency budget authority if the economy next year grows one percentage point below the 6 percent target or macroeconomic indicators fall 10 percent short of the assumptions used for the budget or if there are massive runs on a bank or some banks and the yield on government bonds rises by 300 basis points within one month.
The risk of the economy growing less than 6 percent is indeed very real, as evidenced by the steep falls in the prices of natural-resource commodities over the past two months and the sharp depreciation of the rupiah.
It is therefore most urgent and imperative for the central bank to lower its benchmark interest rate by at least 50 basis points this week to reinvigorate business activities and for the government to expedite its budget disbursement for pump priming.
Rod from sydney (not verified) — Tue, 11/04/2008 - 1:25pm
Omg....
You actually think that Indonesian Banks are going to be Ok when the financial crisis starts to bite do you. Expansion ? hahaha..that is hilarious.
Let me ask you this, Do you actually think that if banks that have a AAA credit rating in first world countries are having problems getting any loans, do you actually seriously think any bank would lend to an Indonesian Bank that at best would not get an A rating ?
Think about what you are writing before you comment on a subject that obviously you have written with hope that Indonesia is not going to be severly effected by this crisis. It will hit Indonesia just as hard as the rest of the world, you will have to just wait for the Overseas Banks to start calling in the loans they have outstanding there, thats when it will hit the hardest.
Good luck.
Rod rom sydney.