Indonesia gets tough on debt woes

JAKARTA, Indonesia (CNN) -- For the first time since taking office a few weeks ago, Indonesia's president has got down to the difficult business of getting the nation out of its spiraling debt.

Megawati Sukarnoputri's first budget, which shows a 2.3 percent contraction in spending, was closely watched by investors and donors anxious for an end to four years of crisis.

Megawati has focused her draft 2002 budget on clamping down on a debt level that is roughly equal to about one year of the country's GDP, says CNN's Maria Ressa in Jakarta.

VIDEO Don Hanna, Citibank Salomon Smith Barney's economic research head, talks on Indonesia budget. Play video (QuickTime, Real or Windows Media)

The president has announced tough budget reforms in a bid to lighten mounting debt as well as lift the country out of its worst economic crisis in a generation as Jakarta struggles to deal with four governments in as many years.

Extra tough measures are needed in the midst of uncertainty, Megawati said in her speech, adding "there are almost no good options before us."

AUDIO CNN's Maria Ressa from Jakarta on the President's budget speech 1.4 MB / 2 min 20 secs WAV sound

Megawati succeeded Abdurrahman Wahid after the House dumped him in July over charges of incompetence and corruption. One of the toughest tasks facing the daughter of Indonesia's founding president Sukarno is reviving the economy and restoring investor and donor confidence.

Among Megawati's slew of unpopular measures are cuts to state subsidies of fuel and electricity prices, along with asset sales, reports Ressa.

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Foreign interests, including the International Monetary Fund, are certain to welcome her initiatives as they have made economic reforms a key part of handing out loans.

They argue that without a cut in the deficit, Indonesia will not be able to replay massive debt.

Fuel hike

To counter the country's debt burden and budget deficit, fuel prices, long and heavily subsidized by the state, will be hiked by 30 percent as early as January, the new leader said.

Previous hikes in fuel prices have sparked violent protests across the country as Indonesians are accustomed to subsidized prices, which former dictator Suharto used until his downfall in 1998 to boost the government's popularity.

"There is no other choice except to increase the domestic price of fuel," Megawati told the 500-member assembly.

"This decision is clearly a very heavy one, but we are forced to make it to maintain the continuation of our state budget. This is an important prerequisite for economic recovery."

Bright spark

Megawati's budget comes only days before Indonesian officials travel to France to ask the Paris Club -- an informal group of creditor governments from major industrialized countries -- to reschedule $2.8 billion in debt due in March.

Megawati has blamed much of Indonesia's economic woes on the cost of bailing out its banking system, which collapsed amid allegations of corruption and criminality after the 1997 Asian crisis.

Key to their talks will be Indonesia's debt trap. Huge interest costs on government bonds, issued to rescue the financial system, mean its budgets are likely to remain in deficit for years to come.

While that deficit situation continues, Jakarta will struggle to repay debt, which stands at about $160 billion this year, or more than its GDP, The Associated Press reports.

Failure to reduce the deficit quickly will hurt the rupiah currency and dissuade foreigners from investing.

One bright spark in recent weeks has been the strong rupiah, Ressa reports. Indonesia forecasts economic growth for 2002 to rise to five percent, from 3.5 percent.

Don Hanna, head of economic research for Citibank Salomon Smith Barney, told CNN that he thought Indonesia could be one of the best performing economies in Asia this year.

He said it would achieve 3.5 percent in 2001, so 4.5 to 5 percent "is not such a herculean task".