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p. 7 of 27 BACK | NEXT Executive Summary I. Background II. The Government's Development Priorities and Outlook A. Public Finance and Investment B. Medium-Term Plan C. ADB’s Assessment of the Government’s Development Agenda III. Strategies and Programs of Other International Funding Agencies IV. ADB's Development Experience V. ADB's Strategy VI. Risks, Performance, and Monitoring

Country Operational Strategy Studies - Indonesia : II. The Government's Development Priorities and Outlook

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A. Public Finance and Investment

72. By the mid-1990s the Government was generating substantial public savings. These savings, the current budget surplus,²⁰ were used to finance part of the development budget. The remainder, about 40 percent, was funded by external assistance. The crisis dramatically altered this picture. Public savings since FY1998/99²¹ have been negative, i.e., external assistance was needed to finance current expenditures in addition to development. At first the changes resulted from the loss in revenue due to the economic crisis. The need to increase expenditures soon followed as the public sector undertook the costs of bank restructuring. The constrained revenues heighten the need to increase the efficacy of public expenditures. In the 2001 budget, for example, petroleum subsidies represent 2.6 percent of GDP. This program is widely regarded as providing comparatively little real assistance to the poor segments of society.

73. The crisis-induced increase in public debt has introduced structural elements that will constrain development spending. Indonesia’s public sector debt has nearly tripled, from $53 billion at the end of FY1996/97 to an estimated $152 billion at the end of 2000. As discussed, the macroeconomic framework of PROPENAS projects a declining fiscal deficit trajectory from a negative -4.8 percent of GDP in 2000 to a near balanced budget in 2004, based on relatively optimistic assumptions. In the best of circumstances there will be relatively restricted public resources, and increasing services for human resources development (HRD) such as health and education will be made more difficult. Maintaining the public infrastructure will also be that much harder. These problems underscore the importance of a Government development strategy that uses limited resources efficiently.

74. Other aspects of the budget are also important for development support. As a result of decentralization, transfers to local governments will determine much of the budget structure. In the 2001 budget, transfers to other levels of government will represent 25.4 percent of total outlays by the central Government. Although comparisons are difficult because of structural changes, this represents roughly a two-thirds increase from 2000. There is also a commitment to redress past regional inequities. The budget for the Ministry of Settlements and Regional Infrastructure, for example, has programmed a sharp decrease in expenditures to Java and Bali and a sharp increase for the eastern islands.

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