• State of the Nation Address 2007
• Tsunami Declaration
• RI-GAM MOU

STATE ADDRESS,
BY
THE PRESIDENT OF THE REPUBLIC OF INDONESIA
AND
THE GOVERNMENT STATEMENT
ON
THE BILL ON THE STATE BUDGET FOR THE 2005 FISCAL YEAR
AND
ITS FINANCIAL NOTE

BEFORE THE ASSEMBLY OF
THE HOUSE OF REPRESENTATIVES OF
THE REPUBLIC OF INDONESIA
IN THE YEAR 2004

Jakarta, August 16, 2004

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

Assalamu'alaikum Warahmatullahi Wabarakatuh,
May prosperity be bestowed upon all of us,

Prior to presenting my explanation on the conduct of my constitutional duties in the 2001-2004 period to this august General Assembly of the House of Representatives, permit me to invite all of us to offer our sincere praise to God the Most Compassionate and Merciful for the blessings and bounty that He has so generously bestowed upon our nation and state.

These praise and grace are truly imperative, for it is only through His will that our nation and state have overcome formidable challenges and successfully reached this present stage. We all fully comprehend these arduous and complex challenges. Only through our sheer energy and effort, have we finally overcome the various difficulties wrought by monetary turmoil, and their wide-ranging impact that have nearly paralyzed the joints of our socio-economic life. In parallel with this, we also shoulder the duty of continuing the reform aspirations in all aspects of our nationhood and statehood.

In conjunction with their various excesses, which resolutions are neither easy, they constitute reasonably difficult homework. We have all become witnesses to the utter difficulty in resolving conflicts and threats of disintegration in our nationhood and statehood. Only through our utmost endeavors that we were finally able to end that crisis and cope with its attending consequences. Our existence as a nation could be kept intact. Our Unitary State could also be preserved. The stability of our government, particularly with regard to the relationship between the central and regional governments, was able to be maintained and is proceeding further toward a firmer direction. Although still incomplete, we have progressed through the most difficult part of a transitional situation that is commonly encountered in every motion of a change. We should not hesitate in admitting that together we have completed the greater part of the work of the reform.

No faction may and is entitled to claim that all the progress that we have achieved is the result of the performance of its own. Not even the Government. The progress that we have attained, however big or small, is without exception the performance of all the elements and layers of the society, be it the layer of the leadership as well as that of our own people.

We need to particularly emphasize this role of the people. In the recent two elections, we were presented with a totally unheard of new political phenomenon. Out of the more than 148 million registered voters, more than 124 million voters, or accounting more than 83 percent, have exercised their right to vote in the General Elections to elect members of the House of Representatives (DPR), the Regional Representatives Council (DPD), and of the Provincial Legislative Councils (DPRD). A high turnout percentage was also recorded in the 5 July Elections, which for the very first time held direct presidential and vice-presidential elections. Out of the 155 million registered voters, more than 121 million people, or constituting 78 percent, have casted their vote in the first round of elections. These high turnout figures or percentages demonstrate that our people have acquired a mature political awareness and will. They are able to express their political decision independently, which could differ from that directed or expected by their leaders. Moreover, not even one act of violence occurred between followers or cadres of parties participating in the past General Elections, much less one that led to the loss of human lives. This is truly remarkable! Hence, it is our common hope that, in the second round of the presidential and vice-presidential elections later on in September, such a similar condition or perhaps even a better one could reoccur.

The leaders of our society, nation, and state need to welcome this development wholeheartedly and respectfully, for the highest sovereignty of this State constitutionally lies within the hands of the Indonesian people themselves. At the same time, it is also clear that from that moment onward all of the leaders must be more dedicated, sincere, and diligent in listening to the voice of their people, be it one expressed vociferously, as well as one that may be conveyed softly and quite often indirectly. In other words, this is high time for the leaders of Indonesia --- myself included --- to be more self-critical. This self-criticism of the leaders is totally natural and human, for only God Almighty is free from negligence.

Consequently, while requesting the indulgence of the invitees, including the esteemed members of the Diplomatic Corps, it is highly appropriate if this State Address - other than being delivered to the Members of the DPR who, together with the Members of the DPD later on, formally represent the entire people of Indonesia - is also directly intended for my beloved brothers and sisters, the whole people of Indonesia, who through the mass media can follow this programme from their respective abodes.

My fellow countrymen,
Honourable Assembly,

Apart from being in the context of commemorating the 59th Anniversary of the Proclamation of Independence and in introducing the Bill on the 2005 State Budget, the State Address on this occasion takes place simultaneously with the impending conclusion of the tenures of the honorable Members of the Assembly, as well as that of the government I am currently presiding over. To my understanding, it is both an exceptional duty and honor if we are able to successfully complete the tasks we are entrusted with, so that whoever shall successively be entrusted by the people with their mandate could begin their work at a better and more advanced stage than the condition that we had to face and address jointly at the start of the National Reform six years ago.

In the report of the conduct of the tasks entrusted to the President that I have delivered on 1 August 2003, I have called upon the attention on the extent and complexity of the changes that have been, are being, and will be experienced by our country. That change is by no means a partial change, instead it is one that is comprehensive. What we are preserving intact in this changing structure is only the Preamble to the 1945 Constitution, which, aside from being a historic document on the state vision that underlies the establishment of the Unitary State of the Republic of Indonesia (NKRI), also actually constitutes a political contract that must be followed-up by our entire nation with its pluralistic society. In other words, the spirit of the Preamble to the 1945 Constitution must continue to live in our everyday lives, not only in the big cities, but reaching out to the outer remote villages.

We indeed need to turn the spirit in the Preamble to the 1945 Constitution as a dynamic basic reference for the daily life of our nation and state. In consequence, each layer and group of our nation with its pluralistic society need to conscientiously and sustainably internalize, socialize, and actualize the norms of the Preamble to the 1945 Constitution within their own circles, not only to their adult constituents, but also to their young generation. In any event, the process of the development of the nation - the nation building - has indeed not been completed, and may never be completed in this most dynamically changing world.

Its reason is quite simple. That Preamble to the 1945 Constitution constitutes the sole framework of reference for our national ideology that enables our nation with its highly pluralistic society to coexist and co-operate as a Nation and within an integrated State. In order to convince our respective selves, we ought to occasionally ask ourselves: would a united Indonesia have ever existed lest there be our consensus and loyalty in implementing and realizing the core value enshrined in that Preamble to the 1945 Constitution? I am inclined to think that the answer would be: it never would have existed.

Our negligence in comprehending, socializing, and actualizing the norms of the Preamble to the 1945 Constitution into our respective circles may have dire consequences, for each layer and group would clearly have its own dynamics. Without being connected to the context of the nation, this dynamics of the internal life within groups may find itself trapped in a narrow circle of aspirations, interests, and even obsessions, and cause the corresponding layer and group to lose the orientation of the nation, with the attendant impact that may even endanger our overall nationhood and statehood.

Honourable Speaker, Deputy Speakers, and Members of the House of Representatives,

With afore-mentioned introduction, I would now like to deliver my exposition on the conduct of governance, from the moment I took the oath of office as President of the Republic of Indonesia in July 2001 up to August 2004.

It is obvious that in this limited time frame, I would only bring to the fore certain substance of policy and strategic value. Meanwhile, those items of technical and specific nature may be verified and perused in the Annex to this State Address.

The substance of this explanation would still refer to the six programmes of the Gotong Royong Cabinet that I preside over, which are the elaboration and implementation of various Decrees of the People's Consultative Assembly (MPR). The six programmes of the Gotong Royong Cabinet consist of: 1) Preserving the unity and integrity of the nation within the framework of the NKRI; 2) Continuing the reform and democratization process in all aspects of the national life through a more definite framework, direction and agenda, while continuing to promote the respect for human rights; 3) Normalizing the economic and societal lives in order to strengthen the basis for the economic life of the people; 4) Upholding the law consistently, bringing about a sense of safety and peace within the society, and continuing the eradication of Corruption, Collusion and Nepotism (KKN); 5) Conducting the free and active foreign policy, restoring the dignity of the nation and state as well as the foreign trust, including that of the lending institutions and the investment circles towards the government; and 6) Preparing the holding of the 2004 General Elections that is safe, orderly, free, confidential, and direct.

Similar to the explanation that I delivered consecutively two years ago, I have classified those six programmes into three sectors, namely Politics and Security, Economy and Finance, and the People's Welfare. However, in line with our areas of priority, I shall alter the order on this occasion by giving precedence to the sectors of the Economy and Finance, and the People's Welfare, to be subsequently followed by elaborating on the Politics and Security sector.

In the sector of the Economy and Finance, the recovery activities intended to dampen the difficulties brought about by the monetary fluctuations in the three-year period of the tenure of the current government have truly been the most arduous task and challenge. This is owing to the fact that those recovery activities are not only related to short-term economic and financial issues, but are also closely related to the other sectors in the wider framework of the national reform movement. This means that the efforts for the recovery of the economy and finance that are undertaken annually by the government must seriously take into account and adjust with the dynamics of the direction of the national political and economic developments that are incorporated into a great number of MPR Decrees and governmental laws.

Merely laying the blame for those complications on the past is indeed not a constructive attitude, and will not be of much help in resolving the problems that we are facing. Nevertheless, we must on this opportunity examine the reasons for our being in such a prolonged state of collapse, while other countries having equally been struck by the crisis seven years ago have started to recover or have nearly recovered.

Both the World Bank and the International Monetary Fund (IMF) have provided us with much assistance, and for this reason we express our deep gratitude. However, we also need to pay attention to the acknowledgement of the IMF that has honestly and openly admitted the existence of errors in their recommendation to our government in 1997. The problem lies in that it was also those errors that became the precursors to the policy of liquidity assistance that nearly bankrupted our monetary system. In reality, a mere admission of mistake may not be enough, for up to the present time we still have to bear the brunt of the impact from the mistake of those recommendations.

It is true that part of that responsibility rests upon our very shoulders, since the implementation of those recommendations is indeed dependent on our approval. However, it is similarly natural --- even highly proper --- that the IMF professionally and proactively takes remedial actions, by among others taking steps that could help alleviate the burden of our national debt that emanated as a result of the mistake of those recommendations. At the very least, the IMF should be willing to initiate the reschedulling of the servicing of our debts so that a greater amount of fund is available for the development of the welfare of our people.

I am conveying these precisions, for Indonesia is a good member of the IMF that, other than loyally servicing its national debt and its interest timely, is also complying with every agreement that we have reached after concluding the co-operation with the IMF. We have, all this time, listened to their suggestions and recommendations, and it is now high time for them to also listen to our normal and legitimate complaints, and make amends to maintain and restore their reputation in our eyes. For this reason, in order not to prolong the difficulties arising as result of the 1997 monetary crisis, in 2003, in compliance with the mandate stipulated in Decree Number VI/MPR/2002 or in Decision Number 5/MPR/2003, I have decided to put an end to the co-operation with the IMF. In a broader scale, that measure is also intended as an effort to gradually decrease our dependence on foreign lending while simultaneously increase the effort for our self-reliance.

For that purpose, the Government has implemented the Package of Economic Policy prior to and after the conclusion of co-operation with the IMF, which is affirmed through the Presidential Instruction Number 5 of 2003. Up to the present time, around 80 percent of the Plan of Action contained in that Package of Policy have been completely implemented, and the government is determined to thoroughly complete the remaining Plan of Action before the term of office of this Gotong Royong Cabinet expires. The successful implementation by the Government of that Package of Economic Policy has helped maintain the macro economic stability in that transition period of the post-co-operation with the IMF.

Such decrease of dependence on foreign assistance and increase of self-reliance are also important due to some considerations. From time to time, at the international level, an idea is also arising that the sources of the development fund must be mobilised domestically. This problem need to be carefully assessed, particularly so in the framework of the implementation of the sustainable development. As the follow up to the Summit on Sustainable Development in Johannesburg in 2003, the Government is currently designing a plan of action. In accordance with the objectives of the Summit, the plan of action to be immediately formulated in the National Development Programme should cover among others the efforts in poverty alleviation, the expansion in the access to clean water and sanitation, the decrease in mortality rate of infant under five years old, the environmental conservation, the creation of a favourable investment climate, and stimulating the increase in international trade.

These programmes clearly require funding, and it must begin to be explored domestically. It is within the framework of exploring and mobilizing the sources for the development fund at the domestic level that the Government has started to develop the Government Bonds market, both domestically and internationally. It is heartening to note that the Government Bonds amounting to US $ 1 billion with a 6,75 percent interest rate for a 10-year period, that were issued last march, have received encouraging response especially in the international market. In any case, such a condition demonstrates that the international trust towards the prospect of the Indonesian economy remains high. For the first time, in the period of 2001 - 2004, we were also able to show a high result of tax collection amounting Rp. 778.1 trillion, which in total exceeded the tax revenue during the last thirty-two years that reached Rp. 670.2 trillion.

In relation to the exploration of domestic sources of development funding, I follow with great attention the prevailing controversy in our society with regard to the privatisation of State-Owned Enterprises (BUMN). As a policy, this privatisation is implemented in accordance with the budgetary mandate and functions, and conducted in line with the rules of procedure as guided in the Law on State-Owned Enterprises as well as in the Law on the State Finance. The fact that then emerged problems in the implementation of several privatisation programmes indicates the need for giving attention for their perfecting.

Hand in hand with the various realities that are often heart wrenching, we continue working. Step by step we are progressing forward. We have resolved the complication that engulfed the banking sector due to the 1997 monetary crisis. One by one, we are solving problems, while continuing to strengthen the foundation and capacity of the national economy. Little by little, we are mending the damages to our economic infrastructure.

In the last three years, the Government has prioritized the policy on macro economic stabilisation in the framework of preventing the further decrease of economic activities due to crisis occurring since 1997. That measure, at the same time, is intended to lay down the basis for the growth of the real sector in the future.

With that policy, the economic stability has improved since 2002, and this is characterized by the stability of the exchange rate of the Rupiah currency, the decrease of the inflation rate and the interest rate, the increase of fiscal resilience, and the increase of the foreign exchange reserves.

In 2003, the average exchange rate of the Rupiah reached Rp. 8,572 per 1 US Dollar or strengthened by 16,4 percent as compared to the figure in 2001. Meanwhile, the inflation rate decreased to 5,1 percent or lower than the last two years. The average mean interest rate of the 3-month Bank Indonesia promissory notes (SBI) also decreased to 8,3 percent, far lower compared to the figure in 2001, which reached 17,6 percent. The State Budget deficit has also decreased to 2,1 percent of the Gross Domestic Production (GDP), much lower compared to the figure in 2001, that was around 2,8 percent of the GDP. The government debt stock also decreased to 69 percent of the GDP, far lower compared to the figure in 2001 at 87 percent of the GDP. The foreign exchange reserves increased to US $ 36,3 billion or around 8 billion larger compared to the figure at the end of 2001. That increase of the macro economic stability and performance has provided an impetus for the trust of the stock exchange. The Composite Stock Price Index (IHSG) at the Jakarta Stock Exchange increased to 691,9 points or 76.5 percent higher compared to the figure posted in 2001.

The improving monetary stability is also supported by a healthier banking sector. In the period of 2001 to 2003, the capital adequacy ratio was stable at around 20 percent, far higher than the minimum limit of the capital adequacy ratio at 8 percent. During the same period, the number of bad credits also sharply decreased from 12,1 percent to 8,2 percent. At the end of 2003, the amount of fund channeled to the society increased by 15,4 percent annually compared to the figure at the end of 2001, included therein is the channeling of small enterprise credits, which increased by 32,9 percent annually in the same period. With the increase of the fund channeled to the society, the ratio between the lending to the deposit therefore increased from 33 percent at the end of 2001 to 43,2 percent at the end of 2003.

The improved performance of the Indonesian economy is also marked by an increase of the economic growth rate from 3,5 percent in 2001 to 4,1 percent in 2003. This economic growth rate is relatively lower than expected, this is, among others, due to the decelerating world economic growth rate, and the increasing competition in the regions in attracting investment funds. Let us not forget that amidst the practically low activities in foreign investment, we are still able to create such economic growth.

The Government is aware that numerous problems remain unresolved in the effort to increase investment and exports. Those problems are influenced by various factors, among others: the labour, legal certainty, implementation of the regional autonomy and the readiness of the infrastructure. However, the Government has undertaken a number of measures in improving the investment climate in order to reach the expected target.

In connection with the labour issue, the problem rests mainly with the fact that harmonious industrial relations have yet to materialize. The increasing number of demonstrations, ranging from the demands for wage increase and welfare improvement up to the rejection of legislative regulations in the labour sector, demonstrates that the related legislative regulations have not exhibited as yet a sense of justice to all the parties concerned.

With a view to improving the investment climate, the Government has endeavoured to complete the Bill on Capital Investment that is intended to increase the legal certainty in investment, including in providing equal treatment to both domestic and foreign capital investors. The legal certainty is also increased through the harmonisation of Regional Regulations (PERDAs) that contradict with the public interest. Until July 2004, evaluations have been conducted to around 3,600 PERDAs. As a result, 267 PERDAs have been annulled and 44 others have been annulled by the related regional governments themselves. The enactment of the Government Regulation in Lieu of Law (PERPU) Number 1 of 2004 on the Amendment of Law Number 41 of 1999 on Forestry, is also intended to provide legal certainty in investment activities in the mining sector.

In order to simplify the procedures for the issuance of investment permits, the Government has enacted the Presidential Decree Number 29 of 2004 on the Conduct of Capital Investment in the framework of Foreign Investments (PMAs) and Domestic Investments (PMDNs) through the One Roof Services system. This measure is intended to clarify the authorities of the Central Government and those of the Regional Governments in investment services. The Government has also made efforts to enhance the capacity in institutional services in handling the various hindrances faced by the investors, including problems of inter-sectoral and inter-regional nature such as security, employment and infrastructure.

Through those various policy measures, the interest of investors could gradually be increased. During the period of 2001 to June 2004, the figure for the domestic investment agreements (PMDNs) reached 720 projects with an investment plan value amounting to Rp 149,9 trillion. Meanwhile, the figure for the foreign investment agreements (PMAs) reached 4,085 projects with an investment plan value amounting to US $ 41.5 billion. Furthermore, in the same period, the PMDN permanent business permits reached 409 projects with a realization value of Rp 41.4 trillion and the PMA permanent business permits reached 1,650 projects with a realization value of US $ 13,9 billion. The above figures on the investment agreements and realizations do not include investment in the oil and gas, banking, non-banking financial institutions, insurance, mining, portfolio investment and household investment sectors.

In the electric energy sector, the Government has carried out restructurization and reform measures through Law Number 20 of 2004 on Electric Energy, which supplanted the previous law. Another measure is the conclusion of the renegotiation on 26 private electric projects. A measure of the result of the improvement programmes on the accessibility of the society toward electric energy infrastructure is indicated by the ratio of electrically installed villages, which reached 78.5 percent in 2003.

In the road infrastructure, mindful of the prevailing limitations, the Government has succeeded in decreasing the national road damage from 15 percent in 2001 to 12 percent at the end of 2003, thereby providing quite a significant operational cost saving for vehicles. Besides, in order to support the centres of national production and the outlets for their manufactured products, the Government has carried out road structure and bridge improvements among others along the Northern Java Coast road, the Trans-East Sumatera, the Trans-Kalimantan, and the Trans-Sulawesi. Meanwhile, in the framework of opening up isolated regions and in order to support the border regions, the constructions of new roads have been carried out among others on the Jayapura-Wamena road, the Trans-Flores and Seram as well as roads on the borders of Kalimantan, Papua, East Nusa Tenggara (NTT) and on small islands. Road constructions have been carried out in order to support the regional development in the Southern Java Coast road, the Trans-West Sumatera, and the construction of the Suramadu Bridge. Included in the development of the Trans-West Sumatera is the construction of the Ladia Galaska road in Nanggroe Aceh Darussalam, which in fact is requested by the people living in the southern part of that province, in order to open up the isolation of their area. It is for this reason that the road crossing the island from the eastern to the western coast is being built.

In the agricultural sector, the one that absorbs the highest number of the labour force, we have also achieved progress. In the 2000 to 2003 period, the Gross Domestic Product in the agricultural sector grew on average by 2 percent annually, a figure that is higher compared to that of the previous three years that only recorded an average growth rate of 0.6 percent annually.

However, behind the achievements as shown in those figures in the agricultural sector, it is important for us to examine the condition surrounding the land issue, which practically becomes the meeting point of various interests in the agricultural sector. In this sector, we can witness the prevailing vast potential for land conflicts, on the relations between land and farmers, on the traditional law societies and their rights to the land, and finally on the land reform as well as the natural resources management, which policy direction and resolution strategy have been mandated in the Decree of the People's Consultative Assembly Number IX/MPR/2001. Fully cognizant of the complexity of the problems surrounding the land, especially in relation to the completion of the land management and the various activities in the exploitation of the natural resources, the Government has started to formulate the conception of land reform. At the present time, the main ideas of that conception have begun to take shape, though their elaboration would still require further evaluations.

In relation to the agricultural reform, the Government welcomes the initiative of the Human Rights Commission, which in co-operation with several non-governmental organisations and government institutions have endeavoured to take fundamental measures in the handling of this land issue that is clearly related to the protection of the economic, social and cultural rights of our people.

Still in the context of the agricultural and land issues, a growing attention also need to be given to the threat that will confront our future generations due to the exploitation of natural resources and the degradation of the quality of the environment.

Against illegal exploitation of natural resources at the sea, I have approved the enforcement of sterner measures against offenders in the form of the shooting and sinking of ships by the Indonesian Navy. For the sake of upholding the law and conserving the natural resources of our country for future generations, I am of the hope that our judges would have the wisdom and courage to mete out harsh sentences in order to deter fish stealers, including by sentencing the confiscation of their ships and punishing the captains and their crews with the harshest sentence.

Honorable Assembly,

Against the backdrop of the progress, however big or small, that we have begun to achieve in recent years, we still have to face quite a difficult issue of unemployment, be it of the open or disguised types. Even though it may sound classical, however it would indeed not be easy to solve this problem without the existence of an economic growth that would be able to absorb the accumulative increase in labor force, and at the same time generate the creation of a large number of new employments.

The problem of unemployment is certainly not merely an economic problem, but it is also a socio-cultural, and even also a political and security problem. Unemployment is closely related to poverty, a condition of being incapable of meeting many of the very basic needs in life, such as providing for clothes and food, education, and health. Unemployment and poverty are akin to a vicious circle that causes a major part of our society to not only live in want, but also to be unable to take advantage of the many opportunities provided by the world surrounding us. A major part of our labor force must go through stiff competition only to obtain crude jobs with meager pays, both domestically or overseas.

Of no less serious importance is the cruel and inhuman treatment experienced by our migrant workers and inflicted by their employers, even though they entered those countries legally. In one or two countries, they have received attention and protection from the governments concerned, however not rarely do they experience dreadful fates nor do they gain any protection whatsoever. Through the diplomatic channels, the Government has made communication with the governments of the states concerned with a view to providing a proper protection in compliance with the International Convention on the Protection of Migrant Workers.

The return of our illegal workers, who earn their living in the neighbouring country of Malaysia and which number is approximately 700 thousand people, is an additional problem that certainly needs the attention of all of us, especially from the local governments where the workers originate from. This is due, for the greater part, to their illegal nature being only related to the issue of completing the necessary immigration documents, which in reality could have been handled better by the local governments.

In order to prevent this significant issue from getting protracted, the Government has signed a Memorandum of Understanding with the Kingdom of Malaysia, which on the one side respects the sovereignty of our neighbouring country, and on the other side it allows sufficient opportunities to our workers to legally make a livelihood in that country.

Honourable Assembly,

In commencing the explanation on the sector of the People's Welfare, I would like to begin by presenting the problems that are principally connected with the life and basic needs of our people.

In the area of sustainably maintaining the health of the people, I would like to convey that we have decreased the Baby Mortality Rate (AKB) from 46 per 1000 living births in 1997 to 35 per 1000 living births in 2003. Whereas, the Infant Mortality Rate (AKBa) have also been decreased from 79 per 1000 per living births in 1997 to 46 per 1000 in 2003. Meanwhile, the Maternal Mortality Rate (AKI) has decreased from 334 to 100.000 living births in 1997 to 307 per 100.000 living births. In line with the decrease of the Infant Mortality Rate, the Life Expectancy Rate (UHH) continues to increase, and it has currently reached 66 years.

Despite still facing limitations in resources, in the recent three years, the Government also still pays great attention to the education of our youth, even though it has yet to meet in its entirety the directives of the 1945 Constitution and of Law Number 20 of 2003 on the National Education System.

In 2003, the implementation of the 9-year compulsory education showed a significant increase, both in the number as well as the quality. This is equally true for the Gross Enrolment Ratio (APK) from the level of the elementary school and the Madrasah Ibtidaiyah to the higher education.

Apart from this, in the recent three years, we have also decreased the number of inhabitants living under the poverty line, although that effort only constitutes a short term one if it is viewed from the angle of the Human Development Index (HDI). Until 2003, this figure has dropped to 37,3 million from 47,9 in 1999.

In the medium to the long term, our nation and state would require a fundamental policy and strategy to empower these poor people in such a way that, apart from being able to free themselves from the clutches of poverty that have impeded the development of their human potentials, they would also be able to give positive contribution for the progress of our nation and state.

In accordance with the state order and the current governmental order, which hinge upon the concept of the wide-ranging decentralization particularly in autonomous regions at the regencial and municipal levels, the responsibility and primary honour to develop and implement the policy and strategy needed for the development of the Indonesian person, who is healthier, more educated, more secure, and able to empower the potentials of their own people, both male and female, repose in the regency and municipal governments together with all the leadership of the society living in that region. The central government has the responsibility in creating a conducive condition for the execution of the responsibility of the local governments.

In relation to the effort of materializing and enhancing the welfare, I can also convey the endeavour of the government in carrying out the mandate of the People's Consultative Assembly of the Republic of Indonesia to build a National Social Security System. The bill that is intended to serve as the legal foundation for its implementation is currently under deliberation at the House of Representatives, and God willing could be immediately concluded and adopted. Through that scheme of security, it is hoped that at the very least social securities could soon start to be distributed to groups of the society excluding the civil servants, army, police, and workers. Whatever the category and amount of benefit that could provisionally be materialized at the initial stage, but the basic idea is that we could progress one step forward in providing welfare to all of the people of Indonesia.

Honourable Assembly,

Allow me now to describe the various activities that were completed in the political and security sector. One of the heaviest challenges in this sector is the maintenance of the integrity of the national territory as a receptacle and one of the main components of our state in implementing the overall national tasks with a view to prospering the societal, national, and stately lives.

I believe that we are all aware that the integrity of our territory is not only threatened by the acts of separatist movements existing in several regions, but also by the increasingly widening acts of forest and marine resource plundering perpetrated by criminal elements who abuse the weaknesses of our legal enforcement apparatus and our army. It is clear that in order to protect the integrity of our state territory and to ensure a sense of safety of the entire population, our country is in need of a legal enforcement apparatus --- including a defense and security apparatus --- that possesses high, strong, effective and efficient professional capacities.

In order to achieve this target, we have conducted and is currently completing the reform programme for the TNI and POLRI, which in past history have frequently been entrusted with tasks that are beyond the area of their main duties. The repositioning process of those two institutions continue to progress. We have enacted two Laws, namely Law Number 2 of 2002 on the National Police of the Republic of Indonesia (POLRI) and Law Number 3 of 2002 on the State Defense. These two Laws constitute the implementation of article 20 and article 30 of the 1945 Constitution as well as the Decree of the People's Consultative Assembly Number VI/MPR/2000 on the Separation of the TNI and POLRI and the Decree of the People's Consultative Assembly Number VII/MPR/2000 on the Role of the TNI and the Role of POLRI. The bill on the TNI has also been submitted to the Honourable House of Representatives for deliberations.

In the framework of finalizing that repositioning, it is important to note that the year 2004 constitutes as the last year for the presence of the faction of the TNI/POLRI in representative institutions of the people. The TNI and POLRI would today and in the future concentrate more in their respective areas, including in maintaining a distance with activities in political practices.

The POLRI apparatus also continuously tries to improve their professional competency. As answer to the anxiety of the society towards the increasing frequency of terror threats, POLRI have co-operated with other security officers, at home and abroad, and have succeeded in dismantling, apprehending, and investigating, and bringing to Courts the suspected perpetrators of criminal acts that endanger our society, nation and state. Particularly, in regions facing the threats of armed separatist movements, the TNI units together with POLRI units conducted the security restoration operation. This securizing task is quite successful, hence, up to the present the integrity of our territory continue to be maintained, particularly in confronting separatist movements in several regions.

In particular reference to the threat of separatism in Nanggroe Aceh Darussalam, the integrated operation conducted by the Government that covers the security restoration operation to deal with the Freedom Aceh Movement (GAM) armed separatist movement, the law enforcement operation, the government establishment operation, as well as humanitarian and economic recovery operations, was able to limit that threat of separatism up to its minimum stage. Hence, even though it has not completely achieved its target, today, the responsibility for regional security in Nanggroe Aceh Darussalam has been shifted from the Military Emergency Authority to the Civilian Emergency Authority.

The task of the Government to protect the integrity of the Unitary State of the Republic of Indonesia is not light. A huge fund is required to recruit, train, arrange, equip, and assign TNI and POLRI units so that they can properly accomplish their main tasks. We are all aware of the limitations of the capacity for that purpose. It was only due to urgent needs, merely to replace the ageing fighter planes, that in the recent years the Government has procured 4 units of Sukhoi fighters and 2 units of MI-35 fighter helicopters. We hope that in the not too distant future, and in line with the increasing capability, we shall complement that air power so that they will respectively compose a squadron. However great the fund that must be allocated to build and deploy a defense and security force, it must be realized that that is one of the consequences of statehood. Security and order are pre-conditions that are absolutely required for the functioning of the sectors in the nationhood and statehood.

With regard to the settlement of cases of grave violations of human rights, I can state that, in the case of the 1999 East Timor, several cases have been investigated and decided by the court, some of those cases have acquired legal permanency. Excepting for the case of Trisakti and Semanggi that up to this moment is still awaiting for the supplementaries from the National Commission on Human Rights (Komnas HAM), the settlement of the Tanjung Priok and Abepura cases have also now been sent to the Court.

I am following closely and listening attentively to the discourses or opinions on these human rights trial processes. I am aware that, here and there, statements or even unsatisfied sentiments have been expressed with respect to the process and decision of those legal entities. Through this occasion, I would like to state that up to a certain point, we indeed must respect whatever decisions are taken by the legal agencies investigating and deciding those human rights cases. In line with the spirit of reform, the government takes a consistent stance and does not intervene in the functions and authorities of legal entities. Hence, one of the essences of reform, when we all have to keep the three supporting pillars of the state power in the executive, legislative, and judicative branches standing and functioning in equality.

As a nation, we realize how strenuous the settlement of such human rights cases can be. Different from the impact of criminal acts in general, cases left behind by human rights violations tend to leave a deep scar. For this reason, in order to settle our historical burden in handling issues of human rights violations, specifically prior to the enactment of Law Number 26 of 2000, the Government has submitted a Bill on the Truth and Reconciliation Commission for deliberations and approval by the House of Representatives in the near future.

Another national issue that continues to be handled is legal enforcement, especially in eradicating corruption. We do not lack in legislative regulations to eradicate corruption and other reprehensible acts. We neither lack in institutions and personnel having the responsibility in preventing and eradicating them. However, it is a fact that our performance in eradicating corruption is still far from being sufficient. Nevertheless, this does not mean that the Government is not taking any action. During 2001 - 2004, the Office of the Attorney General has submitted to court 52 cases that are connected with the Liquidity Assistance of Bank of Indonesia (BLBI) and 54 non-BLBI cases. In the context of eradicating the criminal act of corruption, the Office of the Attorney General has also submitted cases in an ever-increasing number. While in 2001, 208 cases were submitted; in 2002 it was 434; and from 2003 up to April 2004, 778 cases were submitted. Even up to now, not all of those cases have been decided by the court.

Similarly to the human rights cases, I also believe that not one among us is satisfied with the sluggishness of the settlement of those legal cases. However, as I have previously elaborated, the final decision of the series of legal process rests in the hands of the court that is clearly outside of the reach the authority of the government.

Another achievement in this sector is the increasingly materialization of stability in the conduct of governance, mainly in stabilizing the relations between the central and regional governments. The decentralization of various authorities of the government continues to take place, and from time to time the implementation of autonomy is also taking shape. It is must be admitted that, here and there, shortcomings are still felt, and for that reason the Government has proposed a Bill for perfecting Law Number 22 of 1999 and Law Number 25 of 1999. Departing from previous experiences, the perfecting of those two Laws, other than being intended to improve several weaknesses or deficiencies, is particularly also directed at straightening out matters with respect to the aspects of the conception of our nation and state. The aim is evident, so that the implementation of the autonomy conception, which is basically sound and appropriate, does not then give rise to threats against our unity and integrity as a nation, and against the very integrity of the Unitary State of the Republic of Indonesia (NKRI).

Honourable Members of the House,
Ladies and Gentlemen,

With regard to foreign relations, I wish to convey that in accordance with one of programmes of work of the Government that I am presiding, the conduct of the free and active foreign policy from the beginning is aimed at the efforts to restore the dignity of the nation and state as well as the foreign confidence. We all still remember how the monetary difficulties that brought about the emergence of multi-dimensional problems have precipitated the emergence of a most disheartening social turmoil. Nearly every day our lives were filled with concern, when other nations expressed views that gave the impression of ridiculing and downgrading, as a result of that action. Many of our citizens, out of fear, evacuated themselves and their families overseas. A significant number of investors relocated their businesses and capital to other countries. Scores of foreign nations and governments assessed their relations with a hesitant stance, while others were sceptical. Thus was a description of the prevailing condition at that time.

Through seriousness, hard work, and perseverance in convincing the leaders of governments, business sectors, or numerous groups within societies during each visit overseas, praise be to God, we were able to improve and restore that foreign confidence. Their perception towards the nation and the good name of Indonesia has now gradually been restored. No longer does a feeling of reluctance or uneasiness accompany us when, each one of us, now travels abroad.

The actualization of the principle of free and active was also applied through the equilibrating of relations with countries of the world. We do not solely maintain and improve our bilateral relations with countries formerly known as the Western block, but also with other countries. We wove once again and improve our ties with Russia and many countries previously regarded as members of the Eastern block, with the People's Republic of China, with the Democratic People's Republic of Korea, and even with Mongolia. Our relations were not restricted to inter-governmental ones, we even encouraged, particularly our business community, to come forward and take more initiative in substantiating them with trade co-operation.

Relations with countries of the Asia-Pacific region, South Asia, the Middle East, are proceeding well both at the bilateral framework as well as through co-operation of inter-regional organisations and through other multilateral co-operation. With particular reference to the Middle East region, we still reaffirm the consistent position of Indonesia that supports the struggle of the Palestinian people against Israel. In the Iraq case, from the very initial stages we have also strongly condemned the unilateral act ignoring the multilateral process through the United Nations. We also support the decision of the United Nations Security Council that adopted resolution 1546 (2004), which serves as the basis the process of transition toward ending foreign occupation and fully restoring the sovereignity of Iraq as a country.

We have established diplomatic relations with 40 out of 53 countries of the African continent, and we have opened 16 missions. With those countries, we have implemented programmes in the context of the Technical Cooperation among Developing Countries (KTNB).

Similar to our bilateral relations with the United States of America, our relations with West European countries during the period of 2001-2004 proceeded well and were beneficial, among others, in the form of the support provided to the territorial integrity of the Unitary State of the Republic of Indonesia. With these countries, we also co-operate in eradicating terrorism, supporting legal, police, and court reforms, and other assistance in the framework of the national reform movement.

Our role in various bilateral as well as multilateral fora, continue to improve and is increasingly and widely accepted again. In ASEAN, which constitutes a priority in the conduct of our foreign policy, Indonesia was once again able to show its leadership. The success of Indonesia, during the 9th Summit, in proposing the Bali Concord II has strengthened the role, commitment, and the leadership of Indonesia within ASEAN. As the principal pillar of its foreign politic, Indonesia has played an active role in: 1) Establishing an ASEAN society in 2020, consisting of three pillars, namely: the ASEAN Economic Community (AEC); the ASEAN Security Community (ASC); and the ASEAN Social Cultural Community (ASCC); 2) enhancing bilateral relations with and among ASEAN countries as well as with East Asia countries, particularly Japan, South Korea, and the People's Republic of China; 3) increasing closer bilateral relations with Australia, New Zealand, Timor Leste, and other Pacific countries, grouped in the Pacific Islands Forum (PIF) and Southeast Pacific Dialogue (SwPD).

Our role, together with ASEAN member countries, in the dialogue with the partners, has also continued to increase. This is also the case in various multilateral fora such as the Non-Aligned Movement and the Organization of the Islamic Conference. Our ideas to give substance to inter-state relations, especially through co-operation of the inter-subregional organizatons, with more substantive and concrete activities, particularly in the field of economy and culture, is receiving wider acceptance. In the framework of commemorating the 50th anniversary of the Asia Africa Conference that will be held next year, Indonesia together with South Africa is also initiating the convening of the Asia Africa Conference II. The target is simple, among others and particularly in order to build bridges for the realization of that concrete co-operation.

Ladies and Gentlemen,
Honourable Members of the House,

Permit me, now, to turn to the second part of this State Address, namely introducing the 2005 Bill on the State Budget.

Fulfilling the mandate of Law Number 17 of 2003 on the State Finance, today the Government is presenting the Bill on the State Budget (RAPBN) for 2005 along with its Financial Note Document. This Bill on the State Budget is compiled based on the 2005 Governmental Work Plan (RKP) 2005, which has been deliberated with the Budget Committee of the House of Representatives, as the first year plan for the implementation of development, after the National Development Programme (PROPENAS) for 2004-2005 concludes.

Compared to the formulation of the previous Bill on the State Budget, the preparation for the 2005 Bill on the State Budget has special characteristics, since: first, it must comply with the new deliberation mechanism and format as mandated by Law Number 17 of 2003 on State Finance. Secondly, more fundamentally, at the time of drawing up the 2005 Bill on the State Budget, we are in the transitional period from the incumbent Government and House of Representatives to the Government and House of Representatives as a result of the 2004 General Elections. The series of activities of the 2004 General Elections have not been completed yet, meanwhile, Law Number 17 of 2003 on the State Finance has mandated that the formulation of the 2005 Bill on the State Budget and its Financial Note must be submitted to the House of Representatives in August 2004.

In these particular circumstances, through the hard work of the members of the House with the Government, various preliminary agreements have been reached that eventually became the basis for calculating the 2005 Bill on the State Budget. Therefore, it was formulated not only to guarantee fiscal continuity, but also to give sufficient space for the Government and House of Representatives as result of the 2004 General Elections to set the policy priorities for the 2005 State Budget. We are fully aware that the right to effect adjustments in the 2005 State Budget in line with the priorities on fiscal policy is fully in the hands of the Government and House of Representatives as result of the 2004 General Elections. And for us, who until today are still on duty up to the conclusion of our terms of office in a short while, with a feeling of deep gratitude will retire leaving behind a more stable foundation for the upcoming new Government.

With this background on the formulation of the 2005 Bill on the State Budget, I will now present the broad outlines of the 2005 Bill on the State Budget and the Financial Note document.

As in previous years, the formulation of this 2005 Bill on the State Budget is also formulated by paying due consideration to several assumptions. The performance of the Indonesian economy in 2004 is projected to remain stable, as could be witnessed from the maintenance of the market trust during the general elections. The economic growth target of 4, 8 percent is estimated to be achievable; this is supported by consumption and a conducive external environment. With a well-kept economic and political stability, the inflation in 2004 is estimated to remain at around 7 percent. From an external perspective, the surplus in trade balance is estimated to decrease slightly in parallel with the start of the increase in imports, meanwhile the balance of payment is estimated to post a surplus of 2,3 percent against the GDP. The foreign exchange reserves is estimated to reach around US$ 33.2 billion at the year end position or equal to more than 5.7 months of the import needs and the servicing of government foreign debt.

In the meantime, the world economy will in 2004 experience a high growth rate in the last four years. This is supported by the improvement of the labour market in the United States of America, the still high economic growth rate of China, and the economic recovery of Japan that is higher than previously estimated. Conversely, 2005 is estimated to be coloured by the increasing trend of global interest rate and the effort to decelerate the economic growth of China. All these are estimated to cause the world economic growth in 2005 not to grow as strong as in 2004.

In 2005, the expansive fiscal policies of industrialized countries are estimated to still support high global production levels. The economy of developed countries, mainly the United States and European countries is estimated to remain quite strong. The economy of industrialized countries is estimated to grow around 3.1 percent, with the economy of the United States as the primary engine is projected to grow at 3.9 percent. Meanwhile, the economy of the developing countries in 2005 is estimated to grow around 5.9 percent, with the Asian economy and especially China as the prime mover.

On the domestic front, the realization of macro economic stability and the improvement of the socio, political and security conditions are expected to increase investor confidence toward the prospect of the Indonesia economy. This is reflected, among others, in the decrease of risk-premiums and the improvement of debt level. The world oil price, which is currently extremely high, is estimated to decrease to a more normal level in conjunction with the easing of several tensions in the world. The assumption of the Indonesian oil price will be set on the basis of cautious principle, and Indonesian oil production in 2005 is estimated to reach around 1,125 million barrel per day.

In 2005, the Indonesian economic growth is estimated to fare better than in 2004, and projected to reach 5.4 percent. This growth is estimated to remain supported by the increase in domestic consumption, in addition to the increase in exports, and the improving of investment interest. That growth target is still below the potential of the Indonesian economy, and may not be sufficient to significantly lessen unemployment and poverty. Nevertheless, that economic growth is expected to continue higher after 2005 in conjunction with the resolution of the prevailing impediments.

Furthermore, through domestically co-ordinated policies on fiscal, monetary, and the real sector, and by paying attention to the development of international finance, including the development of the US dollar, the rupiah exchange rate during 2005 is expected to remain stable at around Rp. 8.600 per US dollar.

Through the assessment of those tendencies, the Government and the Budget Committee have also agreed with the target of inflation in 2005 is projected under control at the level of 5,5 percent. This inflation estimation is lower when compared to the estimation in the 2004 State Budget reaching 6.5 percent. In line with that inflation estimation, and taking into consideration the remaining uncertainty risks, the interest rate of the 3-month Bank Indonesia promissory notes (SBI) is estimated at around 6.5 percent in 2005. Meanwhile, the realization of the interest rate of the 3-month SBI in 2004 is estimated to be lower than that previously assumed at 7,6 percent.

Honourable Speaker and Members of the House,

In general, the policy of the macro economy in 2005 remains directed toward three sectors. First, macro economic stability through prudent fiscal and monetary policies; secondly, continuing to strengthening of the financial sector by prioritising the improvement of the performance and bank resilience, non-banking monetary institutions such as insurance companies, financing institutions and others, as well as the stock exchange; and thirdly accelerating the effort to improve the business and investment climate.

In the financial sector, the effort to perfect the provisions on the principle of prudence, to improve the controlling system, to implement good corporate governance, and to consolidate the financial sectors that was done in 2004, will be increased in 2005. Included in the policy of this financial sector is the gradual and prudent implementation of the implementation of transition from the blanket guarantee system to the savings guarantor institution.

This policy on the financial sector has been better implemented along with the completion of the amendment to the Bank Indonesia Law, which is expected to enhance the policy accountability of Bank Indonesia.

In 2005, the Government shall continue the measures that have been taken in 2004 to reinforce the foundation for a business climate to attract investment. This effort consists of the stabilization of the security and order situation, the follow-ups to the Legal reform, the improvement of the labour climate, the improvement of the tax and customs system, the improvement of the economic infrastructures, the revocation of the regulation made by central or regional governments which impede investment and trade, and so on.

With these assumptions, I will now submit the main contents 2005 Bill on the State Budget in the fields of Income, Expenditure and Budget Financing.

The role of the tax revenue is growing more significantly in the state revenue, and for that reason, the effort that has been begun in this field need to be increased. The ratio of tax income against the GDP is also increasing from 11.9 percent in 2001 to 13.6 percent in the 2004 State Budget. At the moment, the Government is preparing the amendment to the Law on Taxation for deliberation with the House of Representatives and is expected to be effective in 2005. The draft amendment to the Law on Income Tax (PPh), the Value Added Tax (PPN), and the General Provisions on Taxation (KUP), are basically intended to continue the reform in the field of taxation and taxation administration.

In the meantime, the perfecting measures in customs administration include: 1) the continuation of the initiative in trade facilitation, and 2) the initiative to eradicate smuggling and undervaluation. In the cigarette duties sector, the Government will continue the prevailing policy and maintain its administrative efforts in the forms of eradicating counterfeit cigarettes as well as their counterfeit duties. In line with this policy, the Government will also apply systematic measures to eradicate illegal logging, mining, and fishing.

The efforts to increase the non-tax state revenues (PNBP) are estimated to decrease due to: First, the revenues of natural resources originating from oil and general mining are currently developing new investments; Second, the revenues of natural resources from the forestry remain under the programme of logging moratorium with the purpose of preserving the forest and environment; and Third, the limited revenues of devident from the State-Owned Enterprises (BUMN). Other PNBP sectors that still have the potentials to be increased, among others, originate from the natural gas sector and telecommunication services, such as revenues from the rights and licensing of telecommunications operation.

In general, the state revenues and grants are predicted to reach Rp 377.9 trillion or increase by Rp 28 trillion (8 percent) compared to the year 2004. The sources of the state revenues consist of tax revenues amounting to Rp 297.5 trillion and non-tax revenues amounting to Rp 79.6 trillion. This amount constitutes approximately 78.7 percent of the total state revenues and grants in the year 2005. The increasingly higher revenue contribution of the tax sector shows that the Government remains consistent in exploring domestic sources of funding in the framework of realizing the independence of the State Budget (APBN).

From that amount, revenues of income tax (PPh) is projected to reach Rp 141.9 trillion or rising by 5.9 percent compared to the State Budget of 2004. Meanwhile, revenues of Value Added Tax (PPN) and of Value Added Tax for Luxury Goods (PPnBM) is projected to reach Rp 98.8 trillion or increasing by 14.6 percent compared to the year 2004. Subsequently, duty revenues are predicted to amount to Rp 28.9 trillion.

With regard to state expenditure, in accordance with the mandate of Law Number 17 of 2003, an integrated budgetary system merging routine and development expenditures in one expenditure format starts to apply. The combination of routine expenditure (specifically salary and goods expenditures) with development expenditures is intended to reduce overlapping allocations. Even though its results may only be enjoyed in a few years time, I am of the belief that this effort will save as well as help reduce the practices of corruption, collusion, and nepotism (KKN) in the state financial sector. For this purpose, the Government and the House of Representatives (DPR) resulting out of the 2004 General Elections are later expected to continue that consolidation process.

Should there be a need to adjust strategic policies such as in the sectors of expenditure for employees, subsidy of refined furl oil (BBM) and regional expenditures, as well as other sectoral priorities, this task would fall to the next Government to implement in the form of a revised State Budget. In line with that perspective and point of view, in the 2005 Bill on the State Budget (RAPBN), the allocation for expenditures of employees is set at Rp 62.2 trillion or increasing to 8.7 percent compared to that of year 2004, and goods expenditures is Rp 31.0 trillion or decreased to 12.9 percent from year 2004. The increase in employees expenditures is intended to improve the benefit of Incentive in Retirement (THT) of civil servants when they enter retirement period, payment of the burden of pension levy, and allocation of budget for the recruitment of new employees, particularly in the fields of education, health, and religion.

Still in the state expenditures is the budget to pay debt interest of Rp 64.0 trillion, comprising domestic debt interest of Rp 38.8 trillion and foreign debt interest of Rp 25.1 trillion. Compared to year 2004, the total of debt interest indicates the decrease of 2.6 percent.

Subsequently, in order to support national development, capital expenditures are allocated at Rp 43 trillion, an increase to 8 percent from the same budget of year 2004. The capital expenditures will be used for investment activities in the development of structures and infrastructures, namely in the forms of land, equipments and machines, buildings, as well as other physical capital expenditures.

In year 2005, subsidies are allocated at Rp 33.6 trillion, or 26.3 percent higher than that of the year 2004. The provision of subsidies is intended to help the poor people as well as small and medium enterprises, to assist the State-Owned Enterprises entrusted with providing public service, and to maintain price stability of certain commodities. Most parts of subsidies are channelled through certain State-Owned Enterprises (BUMN), which provides cheaper price for subsidized goods and services, such as PT Pertamina amounting to Rp 21.0 trillion with kerosene for households consumptions as priority; Perum Bulog amounting to Rp 5.9 trillion for food subsidies for approximately 8.3 million of poor families and for the task of managing national rice stock; PT PLN amounting Rp 3.4 trillion for electricity subsidies for consumers with a maximum power of 450 VA and electricity consumption below 60 kwh/month; some State-Owned Enterprises in the field of fertilizer amounting Rp 1.3 trillion for fertilizer subsidies; and some other SOEs amounting Rp 0.8 trillion to conduct government obligation in public services. In addition, subsidies are also allocated at Rp 1.2 trillion to be channelled through state-owned companies in the form of financial institutions tasked to manage subsidies of credit interest program.

As to the amount and policy of subsidies, I wish to note an aggrement with the distinguished House regarding the price subsidy system, that it would indeed be better to be gradually directed to a more properly-targeted subsidy.

Honourable Speaker and Distinguished Members of the House,

The details of the ceiling of the Central Government budget in financial note and the Bill on the State Budget (RAPBN) 2005 are classified by the types of spending, organizations, and function. Subsequently, I will concisely present the Central Government Budget based on organization classification. The details of other classifications of the Central Government Budget could be verified in the Financial Note as attached to the address.

The total of Central Government Expenditures of Rp 264.9 trillion is slightly decreased compared to that of year 2004. The expenditures are allocated to just about 66 ministries and institutions. Some of them will have a relatively bigger budget ceiling to finance operational and non-operational activities particularly related to the conduct of the services of primary needs namely the services of order and security, education, settlement, and health.

First, the Ministry of Defence will receive the ceiling of approximately Rp 22.0 trillion or 2.8 percent, higher than year 2004 which, among others, is allocated to run an integrated defence development program, defence supporting potential development program, as well as development program of the dimensions of land, sea, and air. The budget is essential to maintain territorial integrity as well as the sovereignity of the Unitary State of the Republic of Indonesia, besides to provide compensation for families of those soldiers fall or suffer from permanent disable in the line of duty.

Second, the Ministry of National Education will approximately receive Rp 21.5 trillion, an increase to 12 percent compared to year 2004, to be utilised among others, for the implementation of the nine-year compulsory program, higher education program, the progam of impproving the quality of education and that of educational personnel, as well as the program on the conduct of state and government for high ranking officials. On this occasion, I would like to state that the budget allocated for education as mandated in Law Number 20 of 2003 on National Education System is gradually accomodated in the Bill on the State Budget (RAPBN) 2005.

Third, the Ministry of Settlements and Regional Infrastructures will approximately receive Rp 12.4 trillion, or an increase to 3.3 percent compared to that of the year 2004 to be used among others to carry out the program of improving the development of roads and bridges, the program of developing dan managing irrigation canals, swamp, as well as other canals, and the program of flood control and coast security.

Fourth, the National Police will approximately receive Rp 11.2 trillion, or an increase to 5.7 percent compared to year 2004, among others, will be used to implement the program of public security and social order, the program of improving structures and infrastructures of the Police, to provide compensation for those who fall or suffer from permanent disable in the line of duty, and to carry out the human resources development program.

Fifth, the Ministry of Health will receive the allocation of approximately Rp 7.4 trillion, or an increase to 10.4 percent compared to year 2004, among others, will be used to enhance the people's health, to prevent and eradicate diseases, and improve people's nutrition.

Apart from the afore-mentioned five ministries, details of ceiling of the Central Government Budget for the other ministries or institutions could be more precisely observed in the document of Financial Note and the Bill on State Budget Year 2005.

With regard to regional expenditures, the policy measures proposed in 2005, among others on the basis of the Law Number 25 of 1999, the Public-Allocated Fund (DAU) and the Income-Sharing Fund (DBH) are directed to strike the financial imbalance between central and local governments, as well as among regions while maintaining the fiscal neutrality. In the Bill on the State Budget of 2005, regional spending is allocated at Rp 129.9 trillion, comprising the balanced fund of Rp 123.4 trillion, and the special autonomy and adaptation fund of Rp 6.5 trillion. The allocation for DAU is agreed at 25.5percent of the net domestic revenues, or amounting to Rp 88.1 trillion. The formula of current DAU remains as a basis for calculation while keeping the efforts to improve the accuracy of the data. The allocation for the Income-Sharing Fund is amounting to Rp 31.2 trillion, and the Special Allocated Fund (DAK) is Rp 4.1 trillion.

In the Bill on the State Budget of 2005, the role and allocation of the DAK have been increased in selective and gradual way, while paying due considerations to the national priority. The Government and the Budget Committee of the DPR have also agreed to gradually divert the deconcentration fund to the DAK, namely to the programs and activities, which authority falls on the regional administrations. I call on the regions receiving the DAK to take benefit from it and to devote it to the best interest of the people's welfare.

Against the afore-mentioned plans, the 2005 Bill on the State Budget (RAPBN) will therefore experience a deficit of around Rp 16.9 trillion or 0.8 percent of the GDP. The figure is lower than targeted defisit in the 2004 State Budget, amounting to Rp 24.4 trilliun or 1.2 percent of the GDP. The decrease of defisit and its ratio against the 2005 GDP reflects the seriousness and commitment of the Government in keeping with the program and measures of fiscal consolidation with the objective of stabilizing a sustainable fiscal endurance.

Although the budget deficit in the 2005 Bill on the State Budget is lower than that of the 2004 State Budget, the challenges to expenditures are not necessarily lighter. Necessary financing is not only needed to cover the State Budget deficit, but also to meet the obligation to pay the installment of primary debt, both domestic and foreign lending that will reach its maturity date in 2005, which is in a bigger amount. The need to such financing will be sought from domestic and foreign sources.

In the 2005 Bill on the State Budget, budget financing originated from domestic sources is projected to reach Rp 66.7 trillion. Such domestic financing is planned to come from the Government's remaining account balance in the Bank of Indonesia, among others, Investment Funding Account (RDI), and the non-RDI. Meanwhile, other financing originated from other domestic sources is projected to reach Rp 57.7 trillion. The amount derives from: First, privatization of State-Owned Enterprises (BUMN) and assets selling program of banking restructuring by former Indonesian Banking Restructuring Agency (BPPN), and Second, publication of Government Bonds (SUN). The privatization of State Owned Enterprises in 2005 is basically as the extension of divesting program or releasing of state stock in the SOEs in the previous years. Meanwhile, the assets selling by ex-IBRA, currently managed by PT (Persero) the Company for Managing Assets (PPA), will be optimally sought to gain the best result and price, in accordance with market conditionIn. As to the SUN publication, in line with the agreements between the Government and the DPR, the Government is accorded with flexibility to determine both the timeframe and denomination of its currency by paying due considerations to factors of market condition, budget, risk management, and financing needs.

Budget financing originated from foreign sources (bruto) in 2005 is estimated to reach Rp 26.6 trillion or equivalent to US$ 3.1 billion. The plan to withdraw foreign loan in 2005 consists of program and project loans. The withdrawal is primarily expected from the loans agreed upon with the donors that is planned to release in 2005.

Agaisnt such developments, and without any more plan to reschedule the Government's lending in 2004 and 2005, along with the target of economic growth at 5.4 percent, then the Government's foreign debt ratio of 2005 is estimated to decrease in comparision to that of 2004. Similarly, the domestic debt ratio is also projected to decrease. Over all, the Government debt stock ratio against the nominal GDP is estimated to decrease from 60.1 percent in 2004 to 55 percent in 2005.

The Distinguished Members of the House,

Those are general outline of the 2005 Bill on the State Budget and brief explanation about macro-economic projections as well as various policies, which serve as basis for its formulation. I am of the hope that deliberations over the 2005 Bill on State Budget will proceed smoothly so as to allow the process of formulating and determining the Regional Budget (APBD) to also progress in line with its schedule.

While praying to God the Almighty, let us ask for His guidance and blessing so that we will always be given the ability and strength to shoulder the aspirations of the people in performing our duties and serving our nation and state. I thank you.

Wassalamu'alaikum Warahmatullahi Wabarakatuh,

Jakarta, August 16, 2004
PRESIDENT OF THE REPUBLIC OF INDONESIA,

MEGAWATI SOEKARNOPUTRI

• State of the Nation Address 2007
• State of the Nation Address 2006
• State of the Nation Address 2005
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