JAKARTA, Jan 4, Reuter - Indonesia's policy makers are walking an economic tightrope, pulled by pre-election populism on one side and hard-headed pragmatism on the other

Beneath them inflation is snapping its jaws.

A draft budget due on Monday for the 1991/92 fiscal year which begins on April 1 will look to spend the country's surging oil revenues without sending prices rocketing, economists say.

But they believe the government will yield to temptation to make people happy before elections due in early 1992 by raising spending in the villages and improving infrastructure.

"Expanding the rural economy is okay if you also improve rural infrastructure. With a better flow of goods the danger of inflation is not so bad," one economist said.

Indonesian inflation was officially 9.53 per cent in 1990 against 5.97 per cent in 1989, and the highest rate since 11.46 per cent in 1983.

"The government will continue efforts to curb the growth rate of inflation at not more than one digit," Finance Minister Johannes Sumarlin said on Thursday.

Fuelling inflation has been a booming economy, imports and soaring investment. The economy grew 7.3 per cent in 1989/90 and a 7.0 per cent expansion is estimated for the current 1990/91 year.

Added to this were windfall gains from oil exports after prices recovered at mid-year and then soared above 30 dollars a barrel following Iraq's invasion of Kuwait. Jakarta has used an average price of 16.50 dollars in the current 1990/91 budget.

"A high oil price brings two problems for Indonesia," one economist said. "One, it contributes to economic growth and fuels inflation. Two, it contributes to income the government faces political pressure to spend, and fuels inflation."

As the economy boomed, banks bursting with funds lent money furiously. Demand for goods and services outpaced availability, "which equals high inflation and lots of imports," a banker said.

In August 1990, the most recent figures available, Indonesia's trade surplus had fallen to 86.3 million dollars from 491.6 million a year earlier. While non-oil exports rose just 5.8 per cent over the period, total imports jumped by 45 per cent.

"Import growth is inevitable to help with inflationary supply bottlenecks, and because we need capital goods," a private economist said.

With the windfall from oil revenues, Indonesian politicians have talked of paying off part of Jakarta's foreign debt, which at over 50 billion dollars is the Third World's fifth largest.

"They've certainly been playing up the issue that a large part of the budget is eaten up by debt payments. But if imports are high you eat up your dollar windfall, so you're still short of foreign exchange to pay off debt," a foreign economist said.

The 1990/91 budget was 42,873 billion rupiah (24 billion dollars), up 17 per cent on the previous year. Of that, foreign aid was budgeted at contributing 11,289 billion rupiah (6.3 billion dollars).

Japan led the lenders in 1990/91 with 2.31 billion dollars.

Jakarta's drive to diversify exports from oil and gas is coming up against a wall of physical constraints -- there is not enough power, too few phone lines, ports are overcrowded.

"There are certainly a lot of big ticket items the government needs to spend money on," a development adviser said.

So far the weapons Jakarta has used against inflation have revolved around a squeeze on money through credit policies.

The budget will increase the arsenal, economists predict. "There is only so much you can do before you turn a liquidity squeeze into a blunt instrument that brings down the whole banking system," one said. "It's time for fiscal measures."

Principal among these should be taxation, one economic adviser to the government said. "Corporate and especially land tax are not used as effectively as they might be," he said.