Interview with Faisal Basri: Soeharto ‘s Capabilities Can No Longer Be Relied Upon

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Edition 45/02 – 10/Jan/1998

In midst of an acute monetary crisis, the 1998/1999 draft state budget (RAPBN) increased to Rp. 133 trillion, or a 32% increase from the previous one. The government seemed to be optimistic about achieving the targets. Indeed, the present rupiah exchange rate of around Rp. 8,000 -Rp. 9,000 to the dollar is programmed to return to Rp. 4,000.

According to Faisal H. Basri, the Head of Development Studies at the University of Indonesia, the rupiah’s fall after the announcement of the RAPBN was the result of government inconsistency towards IMF requirements. “The IMF’s requirement of a 1% surplus for the budget is not reflected in the RAPBN, so foreign investors and foreign fund managers considered that Indonesia is not serious about following the IMF’s prescription,” said Faisal.

About the budget increase, Faisal thought it was unrealistic with the economic condition. “Other countries whose crisis is not as bad as Indonesia’s have cut their budgets, but Indonesian government increased theirs,” he said.

Here are the excerpts of TEMPO Interaktif’s interview with observer Faisal H Basri, who is also a researcher in the Institute of Social and Economic Studies (LPEM) of the University of Indonesia, on Thursday, 8th January 1998.

Is it true that 1998/1999 RAPBN is unrealistic in light of the real situation?

Pak Harto said the increase is the result of strengthening US dollar rates. RAPBN’s revenues which are in US $ are oil, gas, foreign aid, port fees and export taxes. The total value of these four components is Rp. 44 trillion or 44.2%.

Those four components contributed 13.5% of the increase of 32%. If the budget becomes bigger as the result of a rise in the exchange rate, the increase for the RAPBN should be 13.5%. But the increase not caused by a rise in the exchange rate is 18.6%. this means an increase compared to last year’s APBN, which only increased by 11%. Malaysia, whose crisis is not as bad as Indonesia’s and has not sought IMF aid, cut its budget by 18%. Indonesia, on the other hand, has enlarged its by 32%.

The increase is not realistic. The government said we had to tighten our belts but the budget has got bigger. All expenditures in the budget have been increased. Only the budget for law and supervision has experienced a reduction. It’s strange that law is considered the least important in this country.

In the revenue section, value added tax (PPN) has increased to 13%. This means ordinary people must pay the same tax as Liem Sioe Liong. It is not fair. Whereas, taxes on the rich, through income tax (PPh), have decreased. This doesn’t mean that PPh should be increased but the increase should be proportional and reflect fairness.

The silly thing is that domestic capital expenditure has increased to 18%. It doesn’t reflect a retrenchment at all. I am suspicious that increase is being used to buy Timor cars.

Moreover, the determination of the exchange rate at Rp. 4,000 is irrational. Nothing that the government offers will make it return to Rp. 4,000. It may be possible if government had offered something that would improve conditions. But Soeharto offered nothing.

In your opinion, will the government undertake economic reform and restructure the economy as stated by Pak Harto in his speech?

He has said that many times, but where is the implementation? We all want proof in black and white.

Laksamana Sukardi stated that if Indonesia can achieve zero percent growth, this is good enough. Many predict that our growth will be negative. The government, meanwhile, has set growth at 4%. Do you think that can be achieved?

The target of 4% growth is the government’s wish or hope. It is the minimum figure to avoid a social crisis. If the growth is zero %, it means new unemployment of 2.4 million people. That is apart from those new graduates and the already existing unemployment. So that means 10 million people unemployed. It was socio-political considerations that aimed growth at not more than 4%. Even with this target, there will be new unemployment of 1.2 million people.

So, 4% is actually an impossible target?

It can be achieved as long as the steps for reform are clear, transparent and consistent. But under conditions where nothing is offered by the government and Pak Harto, those targets are impossible to achieve. However, if some clear steps are taken next week and Pak Harto declines to be reelected, I think the target of 4% can be achieved.

How about the fuel subsidies?

We know IMF has stipulated a budget surplus of 1% ,or equal to Rp. 6 trillion. This is not reflected in the budget. I guess the surplus is hidden in the petrol subsidy of Rp. 10 trillion or other subsidies of Rp. 5 trillion. It is almost certain, after the plenary session, that petrol prices will increase. With such an increase, subsidies will less and there will be a surplus. But, if petrol prices increase, it is not fair on the people. Therefore, the present RAPBN is very tricky and political. It reflects unhealthy governance.

If government increases petrol prices, won’t it cause inflation, whereas in the 98/99 budget the government has set the rate of inflation at 9%?

Subsidies are not allowed by the IMF. It seems the government is asking them to wait until the plenary session. If Indonesia wants the IMF package, it has to have a surplus in its budget. But, once again I say it is not fair as the government still hides the figures.

If electricity and fuel prices increase, won’t people’s burdens be even heavier?

Indeed the price of petrol has to increase. Those who have enjoyed the electricity tariffs up to now are the rich. Just look at ordinary people, they perhaps only get 200-400 watts. The rest is for the rich. Of course increased petrol and electricity prices will have a psychological impact but there are ways to ensure that transportation fees don’t go up. Give subsidies by exemptions from income tax and value added tax.

How about the target for the oil selling price of US$17 per barrel. Could this price change if the UN allows Iraq to sell oil which then will influence international oil prices?

I think that US$ 17 per barrel is safe for there are no fundamental factors which will influence the rise or fall of oil prices. If there is a negotiation between Iraq and the UN, the oil price will be about US$ 16.5 – 17.5 per barrel. Therefore US$17 per barrel is a realistic figure.

Can the 13% targeted increase from value added tax be achieved in midst of a crisis where many companies are going bankrupt?

I think the income tax should go down 15% and value added tax should also be decreased. Can we achieve a 13% increase from value added tax? The answer is, yes we can. But with an iron hand. There are still many gaps where taxes could be imposed.

What are they?

For example, the 200 richest people could donate 50% of their income tax. That’s easy. Then, there are people like me who have no NPWP (the tax payer number). The tax collectors are afraid to chase us for if we pay taxes we will demand our rights of democratization. In an economic crisis like now, the target of increasing PPN is not appropriate. How can you increase tax collection in the middle of an economic crisis?

How about the burden of Indonesian debts which amount to Rp. 30 trillion in the budget?

The government should reschedule them, because it’s easier to reschedule government debts than private debts. All donor countries, the World Bank, IDB and others would understand. At least half of the government’s debts should be rescheduled. If this is done, the funds can be allocated to regional development which could then stimulate small-scale regional economies. However, this is not reflected in the 1998/1999 draft state budget. I think it is the worst draft state budget in the history of the New Order. Indonesia now is a bad boy instead of a good boy.

You once said that the 1998/1999 draft state budget would go down to Rp. 90 trillion, but in fact it showed an increase of 32%, and the government is still optimistic. How do you see Pak Harto’s leadership capabilities with such a draft in mid-crisis?

It is a reflection of the lack of clarity of the government’s vision and statements. It is also not consistent with the facts. The government said that we have to tighten our belts but the expenditure allocations have got bigger. And the post for the legal sector has declined. Perhaps this is deliberate, so that our legal institutions will be even more of a mess. Actually with a budget of Rp. 90 trillion, we could make savings from value added tax and income tax. In other countries which are facing crisis, taxes are cut. They did this in Japan, to start up economic growth again.

How about the government’s consistency in carrying out retrenchment, when Mbak Tutut’s Tanjung Jati electricity project and Bambang Trihatmodjo’s APRI oil refinery can go ahead?

It is a reflection of the government’s unclear vision of it wants to take this country. In this bring together all the existing potential and lead this country out of the crisis. Soeharto has failed. He made enemies of observers, didn’t pay attention to Petition 50, and anyone who disagreed was kept well away.

Is Pak Harto’s leadership incapable of being improved?


Is there any guarantee that if Pak Harto is replaced it will lead to an improvement in the economy?

At least, there would be a chance for Indonesia to rearrange the political power structure to produce a new spirit. It is impossible for this to happen in the Soeharto era. Soeharto is old and his capability is limited. Moreover his relatives’ interests are becoming ever bigger. It is obvious that the family has gotten privileges in the present attempts to improvement the economy.

Will Pak Harto reform the economy according to what he stated before the House, such as eliminating monopolies or protection?

No. It means he will not undertake any reform or deregulation that will get us out of this crisis. Marginal reformations are possible, though he will still maintain the status quo which is the political basis for the legitimacy of his power. According to Harold Crouch, legitimacy is achieved by money rather than by his charisma as a leader.

Is it possible that to maintain his power, Pak Harto will ban monopolies?

It will be marginal. He will ban some monopolies and politicize them as if there was elimination. If he is reelected again, his ministers will be even worse than now because now he is getting fragile and needs more support as well as compensation. The danger is that he will choose ministers based not on competency but on compensation.

After the RAPBN announcement, the rupiah fell further. In your opinion, what do foreign fund managers and investors want?

They want to see that the IMF requirements are implemented. They think Indonesia will not abide by the IMF’s conditions. However, if the 1% surplus is included in the RAPBN, it will be wrong too as the budget should be balanced. So, this RAPBN will do nothing to help the rupiah improve.

Is there a possibility for the House to make any corrections of the draft?

Of course. Even though it’s only a dream, we would like to see the House squeeze the budget and demand the government to announce explicitly when the price of petrol will increase. Then, if we want a surplus, how many percent will it be and where will it come from? It must be transparent. Then, the House should ask the government to reschedule its debts.


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