Statement to Parliament on the Macroeconomic Framework and Key Points of Fiscal Policy
Under Act Num ber 17 of 2003, t he Cent r al Gover nm ent is r equir ed t o pr esent infor m at ion on t he m acr oeconom ic fr am ew or k and key point s of fiscal policy for t he upcom ing budget year no lat er t han m id- May dur ing t he cur r ent year . For t his pur pose, t he Minist er of Finance, r epr esent ing t he Cent r al Gover nm ent , deliver ed a st at em ent t o Par liam ent on t he m acr oeconom ic fr am ew or k and key point s of fiscal policy on 22 May 2007. This infor m at ion w ill be discussed by t he Cent r al Gover nm ent and Par liam ent dur ing consult at ions on gener al policy and budget pr ior it ies t o be used as a guide for m inist r ies and st at ut or y agencies in pr epar ing t heir indiv idual budget proposals.
The infor m at ion cover ed by t he m acr oeconom ic fr am ew or k and key fiscal policies includes the following:
1) Review of the Latest Economic Developments and Challenges in 2007 2) National Economic Development Targets, Macroeconomic and Sectoral
Targets
3) Fiscal and Monetary Policy Support
4) Fiscal Policy and the Draft 2008 Budget, including macro assumptions for 2008.
Description of the Latest Economic Developments and Challenges in 2007
Ongoing developm ent s in indicat or s show t hat t he I ndonesian econom y is gaining st r engt h and m om ent um . Econom ic gr ow t h and act ivit y ar e in t he r ise w hile t he nat ion has r obust , w ell- m anaged econom ic fundam ent als and stability. This pr ogr ess is indicat ed by such dev elopm ent s as t he m ount ing t r end in econom ic gr ow t h, subdued inflat ion, st able ex change r at e and steadily rising international reserves.
1. Econom ic gr ow t h in Q1/ 2007 r eached 6% . The im pr oved gr ow t h per for m ance w as dr iven by st r onger per for m ance in invest m ent , expor t s of goods and ser v ices and pr iv at e consum pt ion. I n t he indust r ial sect or , gr ow t h m om ent um cam e fr om m or e v igor ous per for m ance in ser vice sect or s and par t icular ly t r anspor t and com m unicat ions, follow ed by t he trade, hotels and restaurants sector and construction.
2. The im pr oved condit ion of t he econom y also pr ov ided added im pet us t o public purchasing power and economic activity, indicated among others by t axat ion ( VAT) , elect r icit y consum pt ion, gr ow t h in aut om ot iv e sales and expansion in consumption credit within the banking system.
st r onger ear nings per for m ance by st at e- ow ned and pr ivat e sect or companies that will support higher levels of retained earnings available for reinvestment. I n t he banking sy st em , t he im pr ovem ent in t he LDR since t he end of 2006 alongside gr ow t h in deposit or funds and cr edit r eflect s m or e v igor ous disbur sem ent of banking funds t o t he business com m unit y. I nvest m ent cr edit and w or king capit al cr edit cont inued t o expand dur ing Q1/2007. The posit ive t r end in invest m ent indicat or s w as also suppor t ed by ex panded capit al expendit ur es by t he Cent r al Gover nm ent and Regional Gover nm ents. These posit ive developm ent s ar e pr edict ed t o continue throughout 2007.
4. In international trade, the improvement in export performance is reflected in st r onger expor t gr ow t h, par t icular ly in t he non- oil and gas sect or . This upw ar d t r end w ill be sust ained in line w it h st r onger inv est m ent , r ising global m ar ket pr ices m ainly for pr im ar y com m odit ies and expanded t r ade volum e w it h I ndonesia s t r ading par t ner s. On the other hand, imports will also m ount in r esponse t o incr eased public pur chasing pow er . The t w in t r ends in expor t s and im por t s w ill have a posit ive im pact on I ndonesia's trade balance.
5. Var ious gover nm ent policies put int o place t o ensur e unim peded supply and dist r ibut ion of foodst uff com m odit ies and especially r ice hav e deliver ed t he int ended r esult s. I nflat ionar y pr essur e in t he foodst uffs cat egor y dim inished fur t her in Apr il 2007. That m ont h r ecor ded - 0.16% deflation, bringing cumulative CPI inflation for January- April 2007 down to 1.74% from the previous month's level of 1.91%.
6 I n t he m onet ar y sect or , policy shift ed t o a caut ious easing in int er est r at es follow ing t he achievem ent of m acr oeconom ic st abilit y. The BI r at e, already at 9.0% in April 2007, was lowered further by 25 bps in May 2007 t o 8.75% . The r educt ion in t he BI r at e pr oduced a fur t her nar r ow ing in t he spr ead against t he Fed Funds r at e t o 350 bps. Since m id- 2006, t he Fed Funds rate has held steady at 5.25%.
7. Anot her indicat or point ing t o upbeat econom ic condit ions w as t he r upiah, w hich t r aded at about Rp 9,096 t o t he US dollar w it h an appr eciat ing trend. I nt er nat ional r eser ves cont inued t o m ount , r eaching US$49.3 billion in April 2007, having climbed US$2.1 billion from March 2007.
8. St r engt hening econom ic condit ions and r ising m ar ket confidence in domestic economic performance was reflected in the upward movement in t he Jakar t a Com posit e Shar e Pr ice ( JSX) I ndex. I n Apr il 2007, t he JSX index pushed past t he 2000 bar r ier w it h m ar ket capit alisat ion at Rp 1,394.7 t r illion, up 11.7% over 2006. For eign net buying in Apr il 2007 r eached Rp 5.6 t r illion, w ell above t he Mar ch 2007 level of Rp 2.3 t r illion. Fact or s dr iving t his posit iv e t r end include favour able sent im ent am ong m ar ket player s over t he condit ion of t he dom est ic econom y, r esult s reported in quarterly financial statements and low rate of inflation.
yield curve, indicating improved performance and rising market interest in governm ent bonds. Net buying by for eigner s in Apr il 2007 clim bed t o Rp 7.7 t r illion, w ell above Rp 4.5 t r illion in Mar ch 2007. The global econom y cont inues t o offer favour able condit ions for dom est ic econom ic gr ow t h in 2007, despite some challenges that call for vigilance.
10. Econom ic gr ow t h r em ained st r ong despit e som e decline br ought on by slow ing gr ow t h in t he Unit ed St at es econom y in 2007. The r ise in Japanese int er est r at es m ay affect capit al flow s t o t he r egion, but t his is seen as having very little impact on the Indonesian economy.
11. Ot her challenges include inst abilit y in pr im ar y com m odit y pr ices and t he global money market, which if not monitored carefully could bear down on the national economy.
12. Global monetary liquidity remains at fairly high levels, fuelling competition in w or ld int er est r at es and capit al flow s. This m ay have undesir able consequences for international financial stability.
13. Challenges on t he dom est ic fr ont include t he need t o pr oceed ur gent ly w it h infr ast r uct ur e developm ent pr ogr am m es and der egulat ion for creation of an attractive investment climate.
National Economic Development Targets, Macroeconomic and Sectoral Targets
14. The nat ional econom ic developm ent t ar get s for 2008 w er e developed for achievem ent of t he obj ect iv es in t he long- t er m developm ent plan. The developm ent t hem e adopt ed for 2008 is acceler at ion of econom ic gr ow t h in pur suit of r educt ions in pover t y and unem ploym ent . To t his end, t he gover nm ent has est ablished cer t ain t ar get s w it h m easur able indicat or s: econom ic gr ow t h at 6.6% - 7.0% , unem ploym ent r educed t o 8% - 9% and per cent age of t he populat ion liv ing below t he pover t y line at 15.0% -16.8%.
15. These m easur ables w ill be achieved t hr ough eight developm ent pr ior it ies: ( i) incr eased inv est m ent , ex por t s and em ploym ent oppor t unit ies, ( ii) r evit alisat ion of agr icult ur e, for est r y and fisher ies and act ivit ies in r ur al development, ( iii) acceler at ed infr ast r uct ur e developm ent and im pr oved ener gy m anagem ent , ( iv) im pr oved access and qualit y in t he educat ion and healt h sect or s, ( v) height ened effect iveness in pover t y r educt ion, ( v i) er adicat ion of cor r upt ion and fast er im plem ent at ion of bur eaucr at ic reforms, ( vii) st r engt hened defence capabilit ies and enhanced dom est ic secur it y, and ( viii) disast er r elief, r educt ion in disast er r isk s and im pr ov ed eradication of contagious diseases.
14.5% 18. 2% and expor t s and im por t s at 12.0% 13.6% and 17.3% -19.1%. Alongside t his, t he t ar get ed indust r y gr ow t h w ill be suppor t ed by gr ow t h in agr icult ur e of 3.5% - 3.7% , m anufact ur ing at 7.7% - 8.1%, const r uct ion at 10.0% - 10.5% and t r anspor t and com m unicat ions at 13.6%- 14.4%.
17. The t ar get ed gr ow t h in consum pt ion w ill be pur sued t hr ough act ions t o boost r eal incom es and public pur chasing pow er . This w ill include a subdued level of inflat ion and cont inued pr ice st abilit y, decline in int er est r at es, launching of a Nat ional Pr ogr am m e for Com m unit y Em pow er m ent and disbur sem ent of condit ional Dir ect Cash Tr ansfer s and appr opr iat e subsidies.
18. Act ions for achievem ent of t he inv est m ent gr ow t h t ar get s w ill involv e per for m ance im pr ov em ent s in sour ces of invest m ent , including low er interest rates and improvement in the bank intermediary function, policies t o pr om ot e higher levels of appr oval and r ealisat ion in for eign and dom est ic invest m ent pr oj ect s, im pr oved disbur sem ent of st at e capit al expendit ur es, appr oval and m onit or ing of r egional budget capit al expendit ur es, gover nm ent suppor t for pr oj ect s under t he public- private par t ner ship, super vision of capit al expendit ur es by st at e ent er pr ises and more vigorous activity in IPOs and investment on the capital market.
19. Policies and act ions for expor t gr ow t h w ill include t he est ablishm ent and expansion of t he Nat ional Single Window ( NSW) and ASEAN Single Window ( ASW) , m apping and analysis of m ainst ay and pot ent ial commodities and the implementation of FTA and EPA.
Fiscal and Monetary Policy Support
The Gover nm ent and Bank I ndonesia w ill coor dinat e act ions and policies in suppor t of achiev em ent of nat ional developm ent t ar get s for 2008, including the following:
20. Macr oeconom ic st abilit y w ill be m aint ained by keeping inflat ion low in or der t o allow r oom for easing in loan int er est r at es. To t his end, t he r upiah w ill m anaged t o ensur e an opt im um lev el of st abilit y in suppor t of growth and purchasing power.
21. The monetary and fiscal policy direction will be coordinated through firmer m easur es t o safeguar d j oint t ar get s and har m onisat ion of m onet ar y and fiscal policies in or der t o pr om ot e opt im um gr ow t h and cont r ol of economic liquidity.
Support from Fiscal Policy and the Draft 2008 Budget
23. The or ient at ion of fiscal policy and dr aft ing of t he st at e budget ar e t w o pr ocesses t hat have under gone change. Up t o 2006, policy w as or ient ed t ow ar d fiscal consolidat ion, but since t hen has been st eer ed t ow ar ds deliver ing an econom ic st im ulus. Dur ing 2008, t he gover nm ent w ill again use t he St at e Budget as a st im ulus for econom ic gr ow t h, as indicat ed by the projected budget deficit at 1.6%- 1.8%.
24. Var ious policies and im pr ovem ent s w ill be put in place t o achieve t he incr eased r evenue t ar get s for 2008, in w hich t he r at io of t ax r evenues t o GDP w ill be r aised t o 13.5% - 14%. To t his end, t he gover nm ent w ill t ak e further actions in reform of tax administration, broadening of the tax base and intensified tax collection.
25. I ncr eased cent r al gover nm ent expendit ur es w ill be com plem ent ed by im pr oved qualit y of expendit ur es t hr ough pr ecise planning, fast er and m or e effect ive deliber at ion of budget it em s w it h Par liam ent , ex ecut ion of expendit ur es in k eeping w it h pr udent ial pr inciples, r est r ict ion of r evisions t o r egional gov er nm ent budget s t o changes in budget assum pt ions and cases of emergency and a tidy, disciplined reporting system.
26. Concer ning t he policy dir ect ion for r egional expendit ur es, t he gover nm ent w ill consolidat e t he nat ional budget and r egional budget deficit s and st r engt hen fiscal decent r alisat ion in suppor t of r egional aut onom y. I n t his r egar d, t he gov er nm ent w ill w or k t ow ar ds r educt ion in fiscal dispar it ies bet w een t he cent r al and r egional levels and am ong t he r egions t hem selves, r egional gover nm ent capacit y building for m ax im ising t he pot ent ial for r egional gov er nm ent r evenues, phased t r ansfer of deconcent r at ion and assist ance funds designat ed for funding act ivit ies for w hich r egions ar e alr eady r esponsible w it h t he use of Special Allocat ion Funds and t he r escinding of hold har m less w it h no allocat ion of adjustments funds to be made during 2008.
27. On t he financing side, t he Gov er nm ent w ill focus on dom est ic sour ces of budget financing and other low- cost, low risk sources.
28. I n 2008, t he developm ent of t he Dr aft Budget w ill t ake place alongside a fiscal r isk analysis of fact or s likely t o affect achievem ent of t he Dr aft Budget t ar get s. Fiscal r isk s t hat m ay ar ise include t he r isk of changes in assumptions (sensitivity), risk of increased expenditures related to natural disast er s and ot her event s, r isk s fr om gov er nm ent com m it m ent s and suppor t for infr ast r uct ur e pr oj ect s and debt r isk influenced by m ovem ent s in interest rates, the exchange rate and other factors.
29. I n developing t he Dr aft 2008 Budget , t he gover nm ent has t ak en exist ing econom ic condit ions int o account and adopt ed t he follow ing under lying assumptions:
Rupiah in the range of Rp 9,100- 9,400 to the US dollar. 3- month SBI rate at 7.5%- 8.0%
International oil prices at US$57- 60 per barrel
Lifting of Indonesian crude (MBCD) from 1.034 to 1.040 million barrels per day.
Chief Public Relations Officer
Samsuar Said
