[Kabar-indonesia] 2 of 3: Text: President's State of the Nation Address 2006

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State of the Nation Address 
continues...

The economic growth of 2005 reached the figure of 5.6
percent, even though we expected it could reach 6
percent. The tendency of the weakening of the economy
was still apparent at the first trimester of this
year, even though we started to see a positive
downturn direction at the second trimester. The
Government wil continue to tackle this weakening of
the economy through a measured fiscal expansion,
monetary slackening from the Bank of Indonesia, and
the implementation of other structural policies, such
as the packages for the improvement of the investment
climate, acceleration of infrastructure development,
and reform of the financial sector.

The economic growth in the first trimester of 2006 was
recorded at 4.7 percent. In the second trimester, the
economic growth showed signs of increase and was
recorded at 5.2 percent, a figure higher than anyone
projected. As a whole, the economic growth in the
first semester of 2006 reached almost 5 percent. The
improvement of economic growth in the second trimester
is expected to augur the early signs of consolidation
and strengthening of economic activities that will be
more stable in the second semester of 2006, thereby
building a more robust fundamental for higher economic
growth in the following years.

As I have mentioned earlier, poverty alleviation
constitutes an inseparable package with the effort to
create employment opportunities, which has become the
main focus of the economic policy of the Government.
The Government has and will continue to perfect and
synergise the programme for the creation of employment
opportunities with various strategic programmes in the
fields of the diversification of energy, development
of rural infrastructures, and programmes of housing
development.

 The figure for unemployment has started to decrease
from 11.2 percent in November 2005 to 10.4 percent at
the start of 2006. This decrease of the level of
unemployment occurs for the very first time, after in
these last few years experiencing an increase.
Nonetheless, that level of unemployment is still high
and impacted negatively, be it from the economic as
well as social aspects. The reduction of unemployment
has indeed become our common commitment in the context
of fulfilling the mandate of the Constitution. Our
ability to reduce the level of unemployment will be
determined by whether we are able to formulate and
adopt policies that are appropriate and of quality,
and implement them consistently and timely, by taking
advantage of all the momentum that we have. I am of
the fervent hope that the House of Representatives and
the Government can build more synergistic and
constructive cooperation to enable the formulation of
policies that are vital to the improvement of the
investment climate. Therefore, investment will grow,
and employment opportunities will become more open as
well. The various Bills that will be and are currently
being deliberated with the DPR in the areas of
investment, taxation, customs, excise, and others, are
crucial to the improvement of our economic
performance. I hope the House could give priority to
the deliberation of all of these bills, so that we can
adopt them together.

Honourable Leadership and Members of the House,
My Fellow Countrymen,

The time has now come for me to convey the salient
elements related to the formulation of the 2007 Draft
State Budget. By taking into consideration the
developments in the domestic and international
economic environment, and the national objectives that
we wish to achieve, I wish to propose to the House the
2007 Draft State Budget (RAPBN), based on the
following basic assumptions: economic growth at 6.3
percent, inflation at 6.5 percent, the 3-month SBI
interest rate at 8.5 percent, an exchange rate of Rp
9,300 to the US Dollar, an oil price of US$65 per
barrel, and an oil lifting of 1million barrel per day.

The programmes and budgeting of the 2007 Draft State
Budget is drafted based on the 2007 Government Work
Plan (RKP) that is focused on Increasing Employment
Opportunities and Alleviating Poverty in the Framework
of Improving the People’s Welfare. The 2007 Government
Work Plan designates nine work programme priorities,
namely: first, alleviating poverty. Second, increasing
employment opportunities, investments, and exports.
Third, revitalizing agriculture, fisheries, forestry,
and the rural sectors. Fourth, increasing the
accessibility to and quality of the education and
health. Fifth, upholding the law and human rights,
eradicating corruption, and reforming the bureaucracy.
Sixth, strengthening the defence capability,
solidifying security and order, and settling
conflicts. Seventh, rehabilitating and reconstructing
Nanggroe Aceh Darussalam (NAD), Nias, the Yogyakarta
Special Region and Central Java, and mitigating
disasters. Eighth, accelerating the building of
infrastructures, and ninth, developing border regions
and isolated areas.

As I have mentioned earlier, in order to reduce the
poverty level, in accordance with the middle-term
target until the end of 2009, we not only need quite a
high economic growth but we also have to make sure
that the economic growth will veritably give direct
benefits to the poor people. We aspire for growth
coupled with equitable distribution. This endeavour is
elaborated in the form of special programmes that is
expanding and integrating poverty alleviation
programmes of community participation-based in the
rural and urban areas. Until 2006, this programme has
covered 39,282 villages/subdistricts out of 69,929
villages/subdistricts, which covered 2,600
subdistricts, or 46 percent of the 5,623 subdistricts
present all over the homeland. This expansion will be
carried out gradually, it is, therefore, expected that
by 2009 all subdistricts would have been reached by
this programme. The benefit of this programme, in
addition to increasing employment opportunities and
increasing the income of poor families, it also
improves infrastructures and public utilities at the
village and subdistrict levels. Should all of these
programmes proceed according to plan, then, the
acceleration of economic growth and the effort to
improve the distribution of the people’s revenue could
be achieved. Furthermore, this programme also
cultivates a social capital, such as the participation
and mutual cooperation of the community in the process
of development. This social capital is vitally
important in sustaining the feeling of togetherness,
and is expected to be able to prevent the potential of
tensions and conflicts between community groups.

The government will continue to perfect the system of
protection for poor families. As I have previously
explained, since 2005, as a result of economizing from
the Oil-Based Fuel (BBM) subsidy, we have succeeded in
introducing programmes that directly touch the poor
people, for instance, the health insurance system for
poor households and the Cash Direct Subsidy (SLT), the
School Operational Assistance or BOS, and the rural
infrastructure development. These programmes are going
to be continued in 2007 with some improvement, such as
the Conditional Cash Direct Assistance to support the
improvement of access to education and health for poor
families, and labour-intensive programmes at the
village level that can create employment
opportunities.

The improvement of the people’s welfare cannot be
separated from the performance of the agriculture and
rural economy sectors and the food resilience. In
consequence, the Government has launched the
Agriculture, Fisheries, and Forestry Revitalization
Programme (RPPK). The suggestion of the DPR to
integrate agricultural subsidies will be immediately
initiated in the 2007 fiscal year. The programme to
improve the integrated agricultural subsidy system,
seen from the aspects of its effectiveness and
efficiency, we realize, is quite a complicated
programme. The impact of this integration will only be
felt in the following years.

Honourable Leadership and Members of the House,
Ladies and Gentlemen,

Presently, Honourable Speaker, I would like to shift
to speak about the energy matter, and various issues
in our national economic development. The energy
subject has become a vital and strategic issue, either
at the national or international level. Since last
year, the government has launched a comprehensive
national energy policy, be it in relation to the
increase of the production side, the diversification
of the demand side, as well as the increasingly
realistic price policy. The development of alternative
energies has become an important option, not only to
reduce dependence on BBM, which price keeps on
soaring, but at the same time also to solve the
problems of poverty and unemployment, and improve the
environment. The dependence on BBM as the main source
of energy also puts at risk the state finances, in no
small measure, with the swelling subsidy.

Our country possesses various sources of alternative
energy in quite a large amount, such as gas, coal,
hydropower, geothermal, solar power, and the like. The
investment in this field still needs to be developed.
The Government could not possibly, by itself, make
investment in this field, considering its quite high
cost. That is the reason why the Government encourages
the private sector, domestic and foreign, to actively
invest in this field of alternative energy. The
Government is also drawing up measures for the
development of alternative energy that is
vegetable-based or biofuel. This National Programme
has been set in motion this year with the development
of energy with the basic materials of palm oil,
sugarcane, cassava, and castor oil plant. For certain
regions, especially those that are remote and
underdeveloped, we will carry out a program of
energy-independent villages, based on castor oil
plant. Therefore, those villages are expected to be
able to meet their energy needs, without having to
depend on diesel fuel and kerosene. In the medium
term, this energy policy is anticipated to be able to
create new employment opportunities for around 3 to 5
million persons. In this manner, this measure will
also reduce the figure of unemployment and poverty, as
well as reducing BBM subsidy in a significant way.

In order to accelerate economic growth and open
employment opportunities, the Government deems it
necessary to bring about an improvement of the
investment climate. We should not be left behind other
countries, especially other Asian countries, in
attracting investment. The improvement of the
investment climate has been initiated by issuing the
investment policy package in February 2006. The
package is intended to reduce business costs and
improve business certainty through improvement of the
regulation, services, and simplification of procedures
and bureaucracy. The taxation reform plays a key role
in the improvement of the investment climate. The
effort to perfect the system of taxation
administration, among others, are the improvement of
the services functions, including improvement of the
management at tax offices, simplification of the
Annual Notification Letter, intensification of
compliance and supervision, and also the modernization
of the supporting function. In order to carry out a
more comprehensive taxation reform, I hope that we can
immediately conclude deliberations over three Bills on
Taxation, namely the General Rules for Taxation and
Procedures for Taxation, Income Tax, and Value Added
Tax for Goods and Services, and Sales Tax on Luxury
Items. Within these three Bills are stipulated
provisions on reducing tax burden, improving
compliance and more equitable treatment between
taxpayers and tax officers.

With respect to the granting of incentives, the
government will soon issue a Government Regulation to
boost investment, by providing tax facilities to
certain sectors and regions. The government is also
finalizing the VAT exemption facility for primary
agricultural products, so that they will have stronger
competitiveness. In the framework of improving the
competitiveness of domestic leading industrial
products, the Government has carried out the effort to
simplify the procedures and facilities for exports and
imports, and harmonizing import duty tariffs, so that
they will have a tariff structure and procedures that
are simple, harmonious, low, and uniform by 2010.

A special programme designed to boost investment,
which was launched at the beginning of 2006, is the
effort to develop the Special Economic Zones (KEK).
This zone, other than intended to promote area growth,
is also expected to be able to attract investment to
those areas. With the existence of the Special
Economic Zones, it is expected that they will open new
employment opportunities for the surrounding
community. The commitment of the regions to cut their
bureaucracies down, eliminate retributions that burden
business activities, provide and secure land that is
appropriate and the full support of the Regional
Administrations form the key to the success of the
Special Economic Zones.

The acceleration in the development of infrastructures
constitutes a prerequisite for high and sustained
economic growth. Through Presidential Regulation
Number 67 of 2005, the Government is preparing
measures to accelerate the development of
infrastructures, especially power plants, highways,
airports, railways, harbours, and telecommunication.
The lack of electricity supply, the limited
telecommunication network, and the deteriorating
quality of the street and traffic congestion have
hampered the progress of business, and decreased the
competitiveness of our economy. Mindful of the limited
government resources in financing the development, it
is then necessary to heighten private participation
through partnership, mainly in financing the
infrastructure supply. The support of the Government
in infrastructure financing and risk sharing is
evidenced in the supply of risk sharing fund and the
initial capital in investment fund for the
infrastructure sector, as allocated in the Revised
2006 State Budget (APBN-P) and the 2007 Bill on the
State Budget (RAPBN). Cooperation projects between the
public and private sectors have started to be put in
operation, be it at the construction stage as well as
in the preparation for tender. The Government expects
the intensity of transaction implementation for the
public-private cooperation projects will start to
increase from 2007.

In relation to the improvement of simple and healthy
housings, the government has also carried out an
improvement of the regulation and has established the
Housing Financing or Secondary Mortgage Facility,
which capital participation has been included in the
past 2005 State Budget. With the said facility, it is
expected that the housing financing availability will
continue to increase.

Honourable Speaker, Members of the House, and Ladies
and Gentlemen,

The fiscal policy for 2007 is formulated in conformity
with the aforementioned various programmes and
priorities. The fiscal policy strategy is still
conducted within the context of two principal
corridors, namely: first, fiscal consolidation through
budget deficit control at the right level to maintain
an equilibrium between creating the space for the need
for economic development and creating employment
opportunities, yet, still within the boundaries of
financing sources that are safe and sustainable.
Second, formulating a budget financing strategy, so as
to result in a decrease of the burden and as minimal a
risk of government debt as possible. In that
connection, the planned expenditures support in the
2007 Draft State Budget is as follows:

First, in order to improve the people’s welfare,
expenditures for the health sector will be increased
from Rp. 13.5 trillion in 2006 to Rp. 15.1 trillion.
An increase in the health budget is highly required to
improve the quality of health, the services, and to
equitably provide health services. In the context of
overcoming the increase in the spread of contagious
diseases, especially avian influenza, active
surveillance efforts have been carried out. In
addition, the government has also strengthened the
capability of regional laboratories, the supply of
anti-virus medicines, and the supply of protection
equipment.

The budget allocation for education also experiences a
significant increase. At the present time, the
expenditure of the government for education ---by
using a large definition--- has reached 4.1 percent of
the GDP, which is still below the international
average of 5 percent. I am convinced that, through
determined efforts, the said target will be achieved
within the next 2-3 years. In the 2007 Draft State
Budget, the government proposes an education budget
based on the functional approach amounting to Rp. 51.3
trillion, or an increase of 18.5 percent compared to
the 2006 State Budget 2006, which amounted to 43.3
trillion. The said expenditure does not include
expenditure for the salary of teachers, which is part
of the General Allocation Fund (DAU) and the Special
Allocation Fund (DAK) for the education sector and the
service budget. The Government continues to seriously
endeavour to increase the budget for education, be it
nominally but also in its ratio to expenditure of the
central government, with a view to meeting the mandate
of the Law on National Education System.

The Cash Direct Assistance programme or BLT will be
modified into the Conditional BLT. This Conditional
BLT programme is to be linked to the education and
health programmes that are expected to be launched at
the beginning of 2007, and tried-out in several
provinces. This programme will utilize a budget of Rp.
4 trillion in the 2007 Draft State Budget. The 2007
Draft State Budget also plans to give and channel
inexpensive rice for around 15.8 million poor
families, amounting to Rp 6.5 trillion. The subsidy
for the price of fertilizers amounts to Rp 5.8
trillion, and the Public Services Subsidy (PSO) for
State-Owned Enterprises (BUMN) that performs the
duties of the government in the field of public
services for the community so that they are
affordable.

Second, improvement of the investment climate. The
support of the State Budget to improve the investment
climate is distributed through several programmes of
policy reform and public service. The reforms in the
sectors of taxation and customs receive increased
budget support. The service to the business world will
be improved through bureaucratic reform with quite a
sufficient budget. The fund allocation to the regions
is also increasing; consequently, it is expected that
all sorts of fees collected in the regions by the
regional administrations will diminish.

Third, the Government allocates quite a significant
budget to improve the physical equipment and
infrastructure that support investment. The
development of the physical equipment and
infrastructure is realised in the form of increasing
the capital expenditures, which will be used for
investment activities in the equipment and
infrastructure for the development. The said increase,
among others, take the form of land, equipment and
machines, buildings and constructions, networks, and
other physical capital that is projected at around Rp.
66,1 trillion or an increase of 4.9 percent from the
budget cap of last year. In the framework of
infrastructure financing through partnership
programmes, as I have touched upon earlier, in 2006,
it was submitted to the House regarding the
establishment of the Infrastructure Development Fund,
which, together with the participation of
international institutions and the private sector,
will become an initial fund or a catalyst for the
acceleration of infrastructure development. This fund,
aside from being allocated for investment, especially
for infrastructure projects, will also be utilized for
risk sharing with private investors. In the 2007 Draft
State Budget, the Government proposes a funding
allocation amounting to Rp 2 trillion as an additional
fund for risk sharing and as capital for investment
expenditure by the Government.

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