Introduction

The success or failure of the Megawati government will depend heavily on whether her “dream team” economic Cabinet can deliver a sustained economic recovery through to 2004. Accomplishing this will require success on a wide range of policy reforms. However, an issue that could derail the entire process is fiscal sustainability, that is, the ability of the Indonesian Government to finance its expenditures within a specified timeframe. For much of the past thirty years, few observers questioned the sustainability of the Indonesian Government's finances. But the economic crisis changed everything. Honouring the deposit guarantee that was issued in early 1998 and covering the liquidity support given to the banking system by Bank Indonesia have created over Rp650 trillion in domestic debt (well over 40 per cent of GDP) that must be serviced each year. The depreciation of the rupiah has substantially increased the value of the government's foreign debt, putting further stress on the government budget.

The implementation of fiscal decentralization in response to demands for greater regional autonomy has also created significant new demands for expenditures. The Megawati government must decide how to balance these demands for new and expanded spending with the limited fiscal resources that it has at its disposal.

This is a significant challenge for the new administration. But fortunately, President Megawati Sukarnoputri has already shown that she can make the tough decisions that are necessary to ensure fiscal sustainability. Even before assuming the presidency, the then Vice-President was able to break the bureaucratic logjam that placed the 2001 budget in jeopardy. When the 2001 budget was passed in late 2000, it was believed that the budget deficit could be kept within the limits of available financing. However, as the 2001 calendar year progressed, concerns arose that the budget might be spiralling out of control. One early problem was the cancellation of certain programme loans that deprived the budget of some of its financing.