STATE ADDRESS
OF THE PRESIDENT OF THE REPUBLIC OF INDONESIA

Jakarta, 16 August 2006

Bismillahirrahmanirrahim,
Assalamu’alaikum Warahmatullahi Wabarakatuh,

May we all be bestowed with prosperity,

Honourable Speaker, Deputy Speakers, and Members of the House of Representatives,
Esteemed Chairpersons, Deputy Chairpersons, and Members of State Institutions,
Excellencies, the Ambassadors and Representatives of International Agencies and Organizations,

Ladies and Gentlemen,
My Fellow Countrymen,

Let us offer our praise and gratitude to Allah SWT for it is with His mercy and grace that we are able to attend the Plenary Session of the House of Representatives of the Republic of Indonesia today. I wish to thank the House, which has provided me with the opportunity to deliver this state address and the Government Statement on the Bill on the State Budget for 2007, and its Financial Note.

Tomorrow, God Willing, we shall commemorate the historic moments of the sixty-first anniversary of the Proclamation of Independence of our country. Let us take a moment to bow our heads to offer our most profound praise and gratitude to God the Almighty for the blessing of independence that has been bestowed upon us. It is also with His blessing, mercy, and grace that, for the last sixty-one years, our nation and state remain standing robustly. All of the trials and tribulations that have come alternatingly during the last sixty-one years have forged our fortitude and resilience as a nation to continur striving to reach high and noble ideals.

As a reflection of history on this auspicious day, we should all express our highest gratitude and respect to all of the patriots and heroes of the nation, who have dedicated their lives, even their body and soul, to achieve, maintain, and develop the independence. I also wish to extend my profound expression of respect to the Presidents who have preceded me, whose leadership I now perpetuate, namely Dr. Ir. Soekarno, Grand General Soeharto, Prof. Dr. B.J. Habibie, KH Abdurrahman Wahid and Ibu Megawati Soekarnoputri, for their dedication and contribution, in leading the nation and state, so that we have reached the current state of progress. A similar expression is also extended to the Prime Ministers of Indonesia — from PM Sutan Sjahris to PM Djuanda — who have led the government of our country, while we adopted the parliamentary system of governance in the past.

The commemoration of the historic moments of the proclamation of independence this year is conducted with a mixed feeling of happiness and concern. It is still vivid in our memories, the earthquake and tsunami disaster that devastated Aceh and the Nias Islands at the end of December 2004. A similar disaster, albeit on a smaller scale, once again hit the southern coast of the Island of Java. Previously, an earthquake disaster also ravaged Yogyakarta and Central Java. Meanwhile, earthquakes of smaller magnitudes also occurred in various regions of the homeland. Our country is indeed located on a region vulnerable to disasters. However, this condition should make our nation tougher, resilient and always ready to face any challenge and problem. Those toughness and resilience will become critical capital in our struggle to develop the nation and state towards a better condition.

My Fellow Countrymen,

No one nation grows into a great nation without trial. Attempts to break up the unity of the nation have, on several instances, occurred; however, they have all been successfully overcome. Crisis after crisis have come and gone in the course of our history, however, we were able to surmount all of them. We are convinced that the structure and form of the Unitary State of the Republic of Indonesia, based on Pancasila (the Five Principles of National Ideology), is an accurate and final choice. For that determination and choice, we must continue to develop the state, towards a situation that is safe and peaceful, just and democratic, and prosperous, which have become the ideals and purpose of the independence of our nation. Conflicts and quarrels must be brought to an end. Justice and prosperity must continue to be increased. A sense of safety and peacefulness and a prosperous condition must be solidified. We should be grateful that, in the past year, threats and security disturbances in various regions have abated. The people who live in areas that were afflicted by conflicts such as in Poso, the Moluccas, and North Moluccas have now enjoyed a life that is much safer and more peaceful. Such is the case in other regions.

In the state address of last year, I have specifically conveyed the measures that were undertaken by the Government to settle the conflicts in Aceh and Papua. Praise be to God, in the past year, we have made much progress that is full of hope. A situation of security and peace in Aceh has been realized. Not long ago, I have adopted the Law on the Governance in Aceh, in order to meet the hopes of the entire people of that region. I wish to convey a message to all the parties, do welcome this law, as foundation to develop the future of Aceh that is more prosperous. Through a deliberation process that was democratic and transparent, the Government and the DPR-RI have worked hard to produce the said law.

We have also recorded much progress in bringing about a better atmosphere in Papua. The Government has always favoured dialogue and persuasive approach in handling the various issues in that region. We are grateful that the regional administrative institutions in Papua have been able to function in implementing the special autonomy, as we expected. Not long ago, the process of electing the regional heads (Pilkada) in Papua —and also in West Irian Jaya— has been successfully conducted in a democratic, safe, and peaceful manner. This conducive atmosphere is expected to boost the acceleration of development in that region, so that the people in Papua can veritably reap the benefits of independence, such as enjoyed by their brothers and sisters in other regions. The Government earnestly considers and takes more concrete measures to advance the welfare of the people in Papua, particularly in the areas of health, education, basic infrastructures, public housing, and food resilience. The Government undertakes with high seriousness to provide opportunities and equalities to the original sons of Papua to develop forward to catch up with the sons of other regions.

Honourable Members of the House,
My Fellow Countrymen,

In close relation to our mutual effort to safeguard the sovereignty of our state from any disturbance and threat, we have no other choice but to develop our defense. We are grateful that throughout the history of our state, the Indonesian Military (TNI) has always been ready and is always at the forefront in defending the sovereignty of the state. The TNI is currently carrying out efforts to strengthen and simultaneously enhance its capability, be it in its organisation, professionalism of its personnel, as well as its armaments. The efforts to reactivate various armaments, which have previously been inoperable due to the lack of spare parts, have made much progress. We have also taken measures to procure new weaponries on a gradual basis, proportional to the capacity of the budget. Defense cooperation with friendly countries continues to be increased, including cooperation in the development of the defense industry. It is our wish that in the future we shall be able to meet our own needs in the procurement of various main equipment of the weapons system.

We indeed do not intend to enlarge our current forces. What we wish to build is an essential force that we deem strong enough and able to secure the entire sovereign territory of our state. The focus of our defense attention is directed to guard the sea and land boundaries areas, particularly the outermost and farther out islands, including setting up security posts of the TNI. In addition to providing education and military training, we pay serious attention to the welfare of the soldiers, so that they are ready at any time and able to perform their duties to defend the nation and state. We continuously try to increase the salary, food allowance, old-age pension, and the provision and repair of the housing for our soldiers. Safeguarding and maintaining a secure and peaceful condition in the country is certainly not the exclusive duty of the defense and security apparatus, but it is also the duty of the entire citizenry. Without the support of the entire people, a secure, orderly, and peaceful atmosphere would be impossible to realize.

We should be grateful that the capability of the POLRI in deterring and takcling threats to the security and order of the public has now far increased. Stage by stage, the image of the POLRI as officers of law enforcement and public security and order guardian is increasingly ameliorating. Nevertheless, the POLRI will continue to face challenges that are not light in tackling the various forms and types of crimes. The crimes that must be eradicated are not only transnational in nature, such as narcotics, terrorism, money laundering, and the trafficking in persons, but also various conventional crimes that disturb the public sense of peace and quiet, such as murders, gambling, armed robbery, thefts, and robberies. For that reason, the government has adopted a programme on the enhancement of the professionalism capability of POLRI in tackling any form of crime, so that the public can enjoy a sense of safety and tranquility.

We also record much progress in tackling acts of terror. These are made possible due to the alertness of the security apparatus, the support of the society, and enhancement of the international cooperation. I would like to express my deepest gratitude and appreciation to all the citizens, who have supported the tackling of any threat of terror acts, which have threatened the safety of humans and properties. During the course of 2006, we are grateful since our country did not experience terror attack. However, this growing conducive situation should not make us become complacent and less vigilant. The police apparatus have succeeded in dismantling the network and disabled the terror activities of Dr. Azhary. Nonetheless, the terrorist group headed by Nurdin Mohammad Top —- who until now has not been arrested — still continues to carry out his activities. The security apparatus continue to work hard to eradicate terrorism in the homeland. However, I would like to reaffirm the stance of the Government that the efforts to combat terrorism still adhere to the principles of law and respect for human rights. The eradication of terrorism has no relation with any particular religion or identity, since in reality, in this world, crime and terrorism are committed by groups with varying religions and identities.

Honourable Speaker, Deputy Speakers, and Members of the House of Representatives,
My Fellow Countrymen,

The development of our nation and state cannot possibly be separated from the effort to create a just and democratic society. It is within that context that we are determined to develop and uphold law, eradicate corruption, and solidify the consolidation of democracy. The priority of the Government in eradicating the criminal act of corruption has at the very least bore fruit. By accelerating their eradication, it has now step by step started to emerge a culture of fear of committing corruption. This momentum is very crucial to be maintained and nurtured, in order to prevent the emergence of new cases of criminal acts of corruption. In addition to maintaining that momentum, the Government also continues to enhance the capability of the legal enforcement apparatus to solve cases of criminal acts of corruption that have occurred. The Government has succeeded in realizing a synergy with the Corruption Eradication Commission (KPK) —-as an independent entity outside of the Government—- in tackling corruption. With regard to the cracking down of perpetrators of the criminal acts of corruption, we can, at the present, follow together the legal process of various cases of corruption that have and are being tried by Courts for the Criminal Acts of Corruption, as well as by the general judiciary.

The Coordinating Team for the Eradication of the Criminal Acts of Corruption (Tim Tas Tipikor), which was established in early 2005, has also taken firm measures in solving cases of corruption. In tackling various cases of corruption, the Government remains steadfast in its stance of no compromise. There shall never be the term “pick and choose” in cracking down the perpetrators of corruption, especially corruption on a large scale that has clearly inflicted losses to the state finances and brought misery to the people. I realize that, in consequence of that resolute attitude, there has emerged a sense of worry, and even excessive fear some quarters of the decision makers and the executing apparatus on the ground. I wish to reaffirm that such worry and fear need not exist, in so far as one acts in compliance to the prevailing procedures and regulations. On the other hand, the legal enforcement apparatus must act cautiously in receiving and assessing every report, so as not to take the wrong action. We must prevent the emergence of slander and the tarnishing of the good name of others, which could degrade the dignity of someone who may not be necessarily guilty. I have also instructed so that the coordination of legal enforcement is truly conducted well, so as to avoid examination of the same case over and over again by various institutions, which disturb the work and business effectiveness. In order to strengthen our commitment in eradicating corruption, and in the context of improving the image of our nation and state in the eyes of the international community, we have ratified the United Nations Convention Against Corruption. We also continue to increase regional and international cooperation in tackling the criminal act of corruption.

The effort to eradicate corruption will not succeed without preventive measures, especially reorganizing the bureaucracy, and improvement of the salary of our bureaucratic apparatus. This measure has been and will continue to be undertaken. The improvement of our bureaucratic system is conducted by giving more orientation to the achievement and performance. This reform is in parallel with the reform of the system of state financial management, as provided for in Law Number 17 of 2004. The reform of the bureaucracy will be conducted comprehensively, be it from the aspects of its institution, organization, management, as well as its human resource. Steps toward that direction have been initiated by formulating three Bills, namely: (1) Bill on Public Service; (2) Bill on State Administration; and (4) Bill on the Ethics of State Officials. Those three Bills have been incorporated into the National Legislation Programme (Prolegnas) and will be immediately submitted to the DPR-RI for deliberations in the forthcoming 2007 year.

Another problem in law enforcement that continues to preoccupy the attention of the Government is the trafficking and abuse of narcotics and dangerous substances (narkoba) or narcotics crimes. Narcotics crimes continue to pose threats to the survival of future generations of the nation. Notwithstanding that the combat against narcotics have been waged incessantly, acts of narcotics crimes continue to develop. This year the police have succeeded in uncovering a number of factories that produce narcotics and other dangerous substances in huge quantities.

My Fellow Countrymen,

The development in the legal field is closely related to our mutual commitment to uphold human rights. We should be grateful that, due to our common endeavour, legal norms that are related to human rights, have become more complete. We have completed the ratification of the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights. We have endeavoured with resolute determination to promote, protect, and respect human rights. Praise be to God, within the time frame of the last two years, in our country, no cases that could be categorized as constituting gross violations of human rights occurred. This favourable condition shall continue to be maintained and preserved.

We shall also continue with the establishment of the Commission on Truth and Reconciliation, so that it can become a vehicle to settle the various alleged cases of gross violations of human rights, aside from the existence of the available human rights Tribunals. Meanwhile the resolution on the alleged cases of gross violations of human rights, prior to and after the popular consultation in East Timor in 1999 has been mutually agreed by the Government of Indonesia and Timor Leste to be settled through the Commission on Truth and Friendship. It is expected that in the time frame that has been determined, the commission will report on the results it has achieved. The improving human rights condition in the homeland is reflected in the election of Indonesia as Chair of the Commission on Human Rights of the United Nations (U.N.) last year. Indonesia has also been elected as a member of the newly established U.N. Human Rights Council.

I am gratified to witness the development of our society that develops more democratic. The right of every individual to express his or her opion has been guaranteed by law, and in reality, has been exercised. It is equally true for the right of every individual or group of people to convey their aspirations through a peaceful rally. Our press has developed into one that is free to cover stories, store and broadcast news. However, we all realize that press freedom is not without borders. Press freedom must still be exercised by respecting human rights and by complying with the prevailing legal provisions.

The government welcomes the functioning of state institutions as regulated in our Constitution. Relations between the Government and other state institutions proceed healthily and constructively. The Government is grateful to the House of Representatives that have succeeded in building appropriate and responsible relations, in accordance with the mandate of the law. Let us hope this type of relations could continue to be maintained, so that the duties to meet the interests of the people can be performed well. One of the state institutions stipulated in the Constitution, which until now has not been established, is the Presidential Advisory Board. I am of the hope that, in the not too distant future, the House and the Government can formulate the Bill to establish that board, as agreed to in the national legislation programme.

The democratisation process in the body of the government is now increasingly reflected in the election of every Regional Head. In line with provisions of Law Number 32 of 2004, the Elections of the Regional Heads (Pilkada) are conducted in a direct manner by those who are eligible to vote. From June 2005 until June 2006, 257 Pilkadas have been conducted all over the homeland. Those elections have in general been conducted safely, peacefully, and democratically. The Central Government has truly taken a neutral stance with regard to the process of each election. Those parties who are dissatisfied with the results of the elections have taken the legal recourse through the judicial process. The people have grown more aware that undemocratic means and extrajudicial avenues are unacceptable means.

The conduct of the Pilkadas, which in general proceeded smoothly, demonstrates the strengthening of the domestic political stability. Such an atmosphere further encourages the consolidation of the implementation of regional autonomy as mandated by the Constitution and Law Number 32 of 2004. In conformity with the mandate of the Reform, we no longer want our government to be centralistic. For that reason, the autonomous regions can now at their own discretion manage their resources in the regions under their authority. The regions have also conducted governance and provide public services in a better manner, compared to the previous times.

With regard to the foreign policy, I would like to expound that the Government remain consistent in implementing the foreign policy orientation that is free and active. Every step in our foreign policy is undertaken by advancing — and we dedicate it to — the national interests. The strengthening domestic political, social, and economic situation has encouraged us to further activate our role in the regional and global political arena. We continue to play an active role in the process of regional integration towards the achievement of the ASEAN Community in 2020, and a closer cooperation between countries in East Asia. Our success in convening the Asia Africa Summit in the past 2005 has elevated the stature of our nation and state to a global level. For that reason, we are beginning to play a more active role in the establishment of world peace, as mandated by the Preamble to the Constitution, such as in handling the Iranian nuclear case, the effort to reduce the tension on the Korean Peninsula, and our proactive measures to support the establishment of peace in the Middle East.

We remain consistent in supporting the struggle of the Palestinian people to realize a Palestinian State that is independent and sovereign. In the face of the deteriorating situation in the Middle East lately, we have taken proactive measures to end the Israeli aggression on Lebanon. We, together with Malaysia, have proposed the convening of the Emergency Summit of the OIC in Kuala Lumpur, which has produced a declaration urging the UN to immediately end the conflict in Lebanon. For that reason, we welcome the adoption of resolution of the Security Council number 1701 on the past 12 August, which intends to cease hostilities, and reactivate the peace process in the region. As a form of our commitment, we have stated our readiness to join with the U.N. Peacekeeping force, in order to protect the Palestinian and Lebanese peoples from Israeli attacks. In the face of the situation in Iraq, we support the process of transition in Iraq, so that the Iraki people can regain their rights and sovereignty to manage and build their country. The Government will also continue to enhance international cooperation, be it at the regional as well as global levels, be it through the ASEAN forum, as well as other fora, such as the APEC, the Non-Aligned Movement, and the Organization of the Islamic Conference.

Honourable Speaker, Deputy Speakers, and Members of the House of Representatives,
My Fellow Countrymen,

In the context of social welfare development, we are on the path toward achieving the objectives of the Millennium Development Goals (MDGs) in 2015. We have succeeded in reducing the level of poverty from 23,4 percent in 1999 to 16 percent in 2005. Be that as it may, that achievement of 16 percent is still far from the objective that we wish to achieve. The alleviation of poverty does not merely require high economic growth, but it also necessitates a quality of growth that reaches directly to the betterment of the plight of the poor people. We must ascertain that the economic growth we are stiving for will guarantee the realization of the reduction of poverty. Our development will be in vain if we are not able to lift our people from the abyss of poverty and backwardness. For that reason, the Government accords high priority, and provide for a substantially large budget for the poor people so that they have the opportunity to enjoy education, improve their health, and improve the quality of the environment.

We have carried out the Programme of Cash Assistance Subsidy during one year to to 19.2 million poor households. The programme that we conducted in such a short time, as a measure to overcome the increase in the price of Oil-Based Fuel (BBM), has succeeded in reducing the living cost burden of our poorest group. In 2006, the Government has also provided the School Operational Assistance (BOS) for the nine-year basic education to 29.4 million students equivalent to SD, and to 10.5 million students equivalent to the junior high school SMP, who are categorized as poor. At the senior high school level or equivalent to the SMA, scholarships were made available to more than 698 thousand poor students. The number of SD students and its equivalent reaches 41 million. Meanwhile, for the secondary level now total 6.4 million students. This amount has surpassed the intended target for the 2005/2006 school year. Therefore, the neglect of the opportunity to have an education, especially for the poor people, step by step has been overcome. The Government has seriously encouraged and opened education opportunities for every child in our country. Meanwhile, the number of subdistricts/municipalities that have succeeded in completing the 9-year compulsory education programme at the end of 2004/2005 has reached 142 subdistricts/municipalities. This figure has increased from 77subdistricts/municipalities at the end of 2003/2004.

In parallel to the strong will and seriousness of the Government to increase the budget for education, in line with the mandate of the Constitution and the Law on National Education System, the revitalization of education continue to be conducted to further increase the quality of education. In this context, we must be grateful that in August of this year, our best students succeeded in winning 28 gold medals in various international competitions in the fields of science, mathematics, arts and sports. Among them, there is a student by the name of Jonathan Pradana Mailoa, who earned the accolade as The Absolute Winner in the 2006 International Physics Olympiad in Singapore. This success has broken the dominance of Chinese students, and defeated his competitors from the United States, Germany, and Australia. Meanwhile, Rudolf Surya Bonay, a student from Papua, succeeded in winning The First Step to Nobel Prize in the field of Chemistry. The successes should strengthen the conviction on the capacity of our young generation, and compel all of us to work harder in improving the quality of education in Indonesia.

In the meantime, basic health services for the poor people and close to poor until 2005 have reached 60 million people. The equitable distribution of health services is carried out by setting up Community Health Centres (Puskesmas) at every subdistrict. In the supply of medicines and health equipment, the availability of essential generic medicines at the facilities for basic health services reaches 80-100 percent. In order to help the poor people, the Government has reduced the price of generic medicines between 30 to 50 percent last May. In this month of August, the Government, once again, reduces the price of 1418 types of generic medicines between 60 to 80 percent. Starting on this 17 August, the Government will stick the labels of generic medicines as well as their prices for sale on the market. With the inexpensive price of medicines, we hope that our people will be more able to afford them. The price sticking is also an effort to guarantee that the prices of medicines are not under the mercy of speculators. The Government will continue to increase health services to reach all layers of the society. Health counseling activities, including the integrated services posts (Posyandu), have started to be reactivated. The number of Posyandu that have been reactivated has now reached 42.221 units all across the homeland.

Honourable Leadership and Members of the DPR and ladies and gentlemen,

Allow me, Honourable Speaker, to shift the subject and speak about matters related to the economic development. During the last two years, we have witnessed the dynamics of global economic development that provide challenges that are not light to the management of our economy. The tendency of the high price of oil and the imposition of relatively tight monetary policies in several developed countries, particularly in the United States and the European Union, have impacted on the national economy. The coordination between the Bank of Indonesia and the Government in the management of the macro economic policies has further ameliorated. This is demonstrated by the success in maintaining economic stability, which is a prerequisite for sustained economic growth. Sustained economic stability has increased the trust of the businesspeople, as reflected in the entry of portfolio investments that has stimulated the improvement of our balance of payment and strengthened our foreign exchange reserves. In spite of that, short-term capital flows must be managed prudently and wisely, for they are vulnerable to sentiments that may cause economic fluctuations.

The Government and the Bank of Indonesia will continue to endeavour to perfect the policies, mechanisms, regulations, instruments, and the quality of the economic institutions and the financial industry, such as, among others, stipulated in the package of policy reform in the financial sector. This measure is necessary so that our economy has a growing elasticity and resistance to fluctuations and uncertainties. This measure is also in line with the medium- and long-term efforts to increase direct investment, which is crucial to creating employment opportunities and reduce poverty, and strengthening our capital account and foreign exchange reserves. After accelerating the debt servicing to the IMF in June of this year amounting to US$3.8 billion, the position of our foreign exchange reserves is estimated to reach around US$43 billion at the end of 2006, an increase of 24 percent from US$34.7 billion in 2005.

The improving performance of the balance of payments, be it from the goods flow as well as capital flow, and the strengthening position of our foreign exchange reserves in 2006, have strengthened the exchange rate of the rupiah to the United States dollar, with a relatively under control fluctuation. Be that as it may, we still need to be on the alert to the possibility of the occurrence of a dynamic shift in the exchange rate of global currencies, as a result of the adjustment to the global imbalances. The stability of the Rupiah exchange rate has supported our effort to decrease the inflation to a lower level. Up to July 2006, the inflation rate amounted to 3.3 percent, far lower compared to the same period in the previous year that recorded 5.9 percent. As a whole, the inflation target of 8.0 percent in 2006 is projected to be achievable. In line with the decrease of the inflation rate, and while still observing the development of international interest rates, the Bank of Indonesia is starting to decrease its interest rate in a prudent manner. That decrease is expected to spur the growth of investment through the improvement of banking intermediation, restoring market trust, and decreasing loan costs. The inflation and interest rate decrease will also lower the burden for bonds interests within the State Budget. Even though the macro economic performance demonstrates quite a meaningful improvement, the Government is fully conscious that the effort to ameliorate the welfare of the people has yet to reach a level that is expected. The dimension of the problem that is being faced is indeed highly complex.

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.

Fourth, in the energy policy sector, it will be directed to utilize oil substitute energy sources that are generated from coal, water, gas, as well as renewable energy, particularly biofuel that is cheaper so it is more affordable to the public. This policy will take time, therefore the 2007 Draft State Budget still makes available Oil-Based Fuel (BBM) and electricity subsidies. The fuel subsidy is allocated in the amount of Rp 68.6 trillion and the electricity subsidy amounts to Rp 25.8 trillion. This subsidy allocation that is quite substantial is undertaken because the Government is fully cognizant of the burden that the people had to endure due to the reduction of the fuel subsidy last year. The proportion of fuel utilisation in 2007 as electricity generating energy shall be decreasing and substituted by coal and gas. In 2008, it is expected that the subsidy allocation for fuel and electricity in the State Budget will decrease drastically owing to the utilization of gas at gas-powered electric generator plants (PLTGs). Meanwhile in 2009, all power plants in the Island of Java would have been populated by non-fuel electric generators. For the purpose of developing biofuel energy, the Government will utilize the asset expenditures allocation from various ministries and related institutions to support that program. In addition, it will also be made available credit interest subsidy for biofuel industry amounting to Rp1 trillion.

Fifth, as part of the State Budget support to the bureaucracy reform programme, it will be allocated an increase of 23.3 percent in personnel expenditure budget in 2007. In the calculation for the personnel expenditure, it is incorporated, among others: (i) the increase in the base salary for state apparatus and retirees; (ii) the payment for the thirteenth month salary and pension; (iii) the improvement of structural allowances and some functional allowances; (iv) the increase in profession allowance for teachers and lecturers; (v) the salary budget for new central public servants numbering around 50,000 persons, the majority of whom originate from non-permanent employees; (vi) the increase of official per diem and extra money for members of the TNI and POLRI amounting to 20 percent; and (vii) the increase in the Government contributions to assist in the improvement of health services for the staff and retirees.

The Government will try to increase the efficiency of the budget to purchase goods and services through a tender and procurement system that is more transparent and competitive. Therefore, the public can participate in supervising the conduct of the procurement of Government projects. The increase in goods expenditures is projected not to surpass 31.3 percent. This budget for goods and services expenditures shall be used to: (i) increase the public service function of each Government institution; (ii) increase the efficiency and effectiveness of goods and services procurement, service trips, and state assets maintenance; and (iii) support the smooth flow of Government operational activities, be it domestically as well as in Indonesian diplomatic missions abroad. The increase of the budget for domestic goods expenditures is, among others, used to accommodate the planned increase of the service trip cost index at all departments or non-departmental government institutions.

Sixth, in order to mitigate natural disasters, starting from the Revised 2006 State Budget (APBN-P) and in the 2007 Draft State Budget, the Government proposes an increased allocation for expenditures to build a disaster early warning system, the additions respectively amount to Rp 60 billion for 2006 and Rp 150 billion for 2007. The post-disaster allocation fund provided through the general reserves amounts to Rp 2 trillion in 2007. At the present time, it is being deliberated an additional expenditure in disaster mitigation for the rehabilitation and reconstruction of the Special Region of Yogyakarta and Central Java as well as regions affected by other disasters. The post-tsunami rehabilitation and reconstruction programme in Aceh and Nias will continue to be monitored according to the schedule.

Aside from the six previous types of expenditures, in the 2007 Draft State Budget, expenditures are allocated for the Central Government to pay debt interests, both domestic and foreign debts, amounting to Rp 85.1 trillion. Therefore, the total expenditures of the Central Government for 2007 amount to Rp 496 trillion or experiencing an increase of 16 percent compared to that of the 2006 State Budget.

Honourable Leadership and Members of the House of Representatives,

The 2007 Draft State Budget allocates expenditures to the Regional Administrations for the development and improvement of services for the regional communities amounting to Rp 250.5 trillion or experiencing an increase of 13.8 percent compared to that of 2006. The General Allocation Fund (DAU), which constitutes an instrument to overcome the financial imbalance between the regions, is allocated at 26 percent of the net domestic revenue. In parallel to the increase of the domestic revenue, the allocation of the DAU in 2007 is then projected to reach Rp. 163.7 trillion or increasing by to 12.4 percent from the DAU allocation of the previous year.

In consonance with the increase of the DAU allocation, the allocation of the Special Allocation Fund (DAK) is also being increased. For that purpose, the DAK allocation for 2007 is projected to reach Rp. 14.4 trillion. This amount indicates an increase of 24.1 percent from the DAK allocation of the previous year. Furthermore, the special autonomy and adjustment fund in 2007 is projected to amount to Rp. 6.7 trillion. From the aforementioned special autonomy fund, the special autonomy fund specific for the Province of Papua is planned to amount to Rp. 3.3 trillion or equal to 2 (two) percent of the DAU allocation, which usage will be directed in particular to finance the education and health sectors. In addition, in order to carry out the mandate of Article 34 paragraph (3) point f of Law Number 21 of 2001, the Province of Papua is also provided with an additional fund in the framework of infrastructure development amounting to Rp. 800 billion, which usage will be allocated for the development of road infrastructure and transportation.

In order to meet the expenditure needs, both at the central as well as at the regional levels, sources of revenue are needed that originate from tax and non-tax revenues and grants. State revenue and grants in the 2007 Draft State Budget is projected to reach the amount of Rp. 713.4 trillion or increasing by 14.1 percent from the 2006 State Budget. The sources for the state revenue in 2007 is planned to consist of tax revenue amounting to Rp. 505.9 trillion, non-tax revenue amounting to Rp. 204.9 trillion, and grants amounting to Rp. 2.7 trillion. The estimation of the state revenue and grants indicate that around 71.2 percent are supported by the tax revenue, and around 28.8 percent originate from non-tax revenue. The tax ratio is increasing from 13.7 percent in 2006 to 14.3 percent in 2007. The contribution of the tax revenue that is increasingly growing demonstrates that the Government remains consistent in continuing to explore domestic funding sources, in order to realise the level and quality of State Budget independence.

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

In accordance with the direction of the fiscal policy, and the planned state revenue and grants, and the state budget as I have previously elaborated, the 2007 Draft State Budget will then experience a budget deficit of around Rp. 33.1 trillion or 0.9 percent of the GDP. In order to finance the budget deficit, the government plans to use funding sources, from both domestic and foreign, while still being oriented towards financing efforts that are stable and sustainable, with as minimal a burden and risk as possible. In addition to close the budget deficit, the budget funding is also needed to meet the payment obligations for the main instalments of domestic and foreign debts that will reach their maturity dates in 2007, and the government capital participation for the revitalization of several State-Owned Enterprises that are still in trouble.

In the 2007 Draft State Budget, the budget financing that originates domestically is planned to reach a net amount of Rp. 51.3 trillion. This financing from domestic sources is planned to originate from: (i) The issuance of Government Bonds or SUN by taking into account the fiscal and monetary policies in an integrated manner; (ii) ex-moratorium funds to finance the reconstruction and rehabilitation programmes in NAD-Nias; (iii) the sale of assets from the banking restructuring programmes in an optimal manner; (iv) utilizing the reserve fund of the government in the Bank of Indonesia; and (v) privatization. I would like to convey that the source of privatization financing is designed to be at quite a low level, since the government realizes that the privatization programme should not be aimed at merely meeting the financing of the State Budget deficit, however, what is more important is that the effort to revitalize and the improvement of the performance of State-Owned Enterprises as mandated by Law Number 19 of 2003 on State-Owned Enterprises.

In the meantime, budget financing that originates from foreign loan sources amounts to a net figure of Rp. 18.2 trillion. That amount consists of program loans and project loans amounting to Rp. 35.9 trillion, and subtracted by payments for the main instalments of foreign debts amounting to Rp. 54.1 trillion.

With the structure of the draft State Budget that I am presenting, and with a targeted economic growth of 6.3 percent, the debt ratio of the government at the end of 2007 is estimated to decrease from around 41.3 percent in 2006 to around 36.9 percent in 2007. The decrease of the debt ratio of the government will increasingly strengthen the structure of the fiscal resilience, in parallel with the objective of achieving sustained fiscal self-reliance.

In the end, implementing the State Budget and the development objectives in general would unlikely reach the target without the participation of all the people and the businesspeople. The programmes of the State Budget are carried out by increasing the improvement of the public accountability, which is reflected in the improvement of the quality and orderliness of the state finances report. The policy orientation of the State Budget and the focus of the Indonesian development will also be more directed at the betterment of the quality of the Indonesian being, which is covered in the improvement of the quality of life, and the achievement of the Millennium Development Index. The importance of the development of the Indonesian being is also translated in the enlargement of the budget portion destined for the development of the Indonesian being in the State Budget and the Regional Budget all over Indonesia. Henceforth, we long for inexpensive education and health costs and basic infrastructure that is appropriately available, so that all of the Indonesias people will be able to gain access to health and education, two matters that constitute crucial elements in the development of the Indonesian people.

Honourable Speaker, Deputy Speakers, and Members of the House of Representatives,
My fellow countrymen,

In concluding my State Address, and the Government Statement on the Bill on the State Budget for the 2007 Fiscal Year and Its Financial Note, I would like to invite the entire components of the nation to look forward, together in concert build a brighter future. Long was the road that we thread, much that we have achieved, yet, there remains much more endeavours that we must undertake, towards the ideals and purpose of our independence. The years that we are navigating these days are by no means easy, and replete with challenges. Be that as it may, with the assent of Allah SWT, I am confident, all of us, the Indonesian nation that is grand, shall be able to transform our fate and future towards a better direction.

Let us remain resolved, confident, and evermore hardworking in reaching our ideals. The time has come, for us to be more united, rise up, and step forward. Ahead of us, there lie a wealth of opportunities and chances that we must approach and seize. To all of the leaders in our homeland, I invite you, let us dedicate our thoughts, time, and energy to improve the welfare and progress of the entire Indonesian people, the people we hold dear in our hearts.

May the Almighty God bestow His blessing upon all of us.
Long live the Republic of Indonesia!
Thank you.

Wassalamu’alaikum warahmatullahi wabarakatuh.

Jakarta, 16 August 2006
PRESIDENT OF THE REPUBLIC OF INDONESIA,

Sgd.

DR. H. SUSILO BAMBANG YUDHOYONO