Economic progress during Megawati's first year<\/p>\n
Anggito Abimanyu, Expert Staff, Ministry of Finance, Jakarta<\/p>\n
A year has passed since the People's Consultative Assembly
\n(MPR) appointed Megawati Soekarnoputri as Indonesia's fifth
\nPresident. The transition took place during a turbulent period
\ncharacterized by the growing specter of social unrest, the threat
\nof national disintegration and deteriorating economic
\nfundamentals.<\/p>\n
Following more than two years of political stalemate and amid
\ncontinued declines in investor sentiment and disagreement with
\nthe International Monetary Fund (IMF), many believed that
\nIndonesia would be unable to overcome the problems that followed
\nthe Asian financial crisis or to carry out the reforms necessary
\nto ensure sustained economic growth.<\/p>\n
Much has happened during these last 12 months. The media has
\nbeen focusing on the many problems that continue to afflict the
\ncountry. Many seem to forget, however, that less than a year ago
\ninvestors had all but written off Indonesia's prospects. The
\nappointment of Megawati led to improved political stability while
\na new economic team, after quickly reaching an agreement with the
\nIMF, started working to inject new life into an economic program,
\nwhich had been stagnating for months.<\/p>\n
Addressing each of these issues will require time and careful
\nplanning. The present administration is a coalition reflecting a
\ndelicate balance between various constituencies. Furthermore,
\nthese reform efforts must be implemented at a time when the world
\neconomic environment continues to weaken and excessive global
\nequity market volatility threatens further financial turmoil.<\/p>\n
In the case of Indonesia, the two main pillars of the
\ngovernment's program for macroeconomic stability are fiscal
\nsustainability and monetary prudence. Albeit slowly, improvements
\nin domestic security and political stability have markedly
\nimproved Indonesia's risk profile. These changes have led to a
\ngradual appreciation of the rupiah and allowed Bank Indonesia to
\nbegin lowering interest rates.<\/p>\n
Despite pressure from administrated price increases over the
\nlast few months, inflation has been on a downward trend since
\nMarch. The decline in asset volatility has been vital to the
\nimprovement in domestic confidence while creating an environment
\nconducive to better business practices.<\/p>\n
Similarly, successful debt restructuring agreements with our
\nofficial and commercial creditors, grouped through the Paris Club
\nand London Club, have further helped the efforts to rein in the
\ngrowing fiscal deficit pursued through the acceleration of asset
\nsales and the reduction of energy subsidies. This process of
\nfiscal consolidation has continued further with the drafting and
\npassage of the budget for 2002, which targets a lowering of the
\ndeficit to 2.5 percent of gross domestic product.<\/p>\n
One of the major efforts over the medium term involves an
\nextensive and comprehensive overhaul of our tax and customs
\nadministration systems. These reforms are under way, but will
\ntake time to complete. Although these achievements are
\nencouraging, the challenges that lie ahead remain formidable and
\nwe cannot, therefore, risk complacency.<\/p>\n
First, further weakness in the global economy and equity
\nmarkets means that we shall continue to be heavily dependent on
\ndomestic demand to fuel growth. Fortunately, consumer demand has
\nresponded positively and is continuing to strengthen, while there
\nis an acceleration of private investment in the country, a
\ntendency likely to be further supported by the decline in
\ndomestic interest rates.<\/p>\n
A second major challenge is the need to speed up the pace of
\ncorporate debt restructuring. While this may be an area in which
\nthe government has limited power to effect change, we are
\naccelerating the pace of asset sales from the Indonesian Bank
\nRestructuring Agency (IBRA) and that of the privatization program
\nin an effort to return these assets to the private sector. This
\nmay help the private sector's efforts by providing an incentive
\nto push ahead with their own restructuring.<\/p>\n
Third, we must continue to formulate plans to increase much-
\nneeded government spending on infrastructure, education and
\npoverty alleviation initiatives. These have been severely
\nimpacted by our need to bring the budget deficit under control
\nand rehabilitate the country's debt position following the
\nrecapitalization of the banking sector in 1998. The government
\nhas begun to work with multilateral development agencies, donors
\nand the private sector to formulate innovative plans aimed at
\nmeeting the country's infrastructure and development needs.<\/p>\n
Finally, the government is also striving to improve the
\ncountry's investment climate as we continue to implement the
\ndecentralization program. These efforts to give greater power and
\nindependence to our regions and municipalities through revenue
\nsharing have gone more smoothly than many expected.<\/p>\n
The goal is to progressively transfer authority to local
\ngovernments in a fiscally responsible way while preserving the
\nterritorial integrity of the republic, its economic stability and
\nthe quality of public services. The government is also working
\nwith the regions to address both financial and regulatory matters
\nthat could potentially create problems for investors.<\/p>\n
At the same time we are beginning to push harder on the legal
\nreform agenda. This has proven to be a difficult area as the
\nweaknesses in legal and judicial systems are deeply embedded in
\ninstitutions. Improvements will need time and political will, but
\nan improving economy should help.<\/p>\n
While we cannot and should not prejudge the outcomes of the
\ntrials, the indictments represent a substantial change. Another
\nimportant achievement is the recent passage of a money-laundering
\nbill, a bill with provisions at Organization for Economic
\nCooperation and Development (OECD) standards. Drugs, crime and
\nterrorism are all growing problems and we hope that this law and
\nthe center for financial transactions and reporting that it
\nestablishes can assist us in dealing with them.<\/p>\n
We recognize that to consolidate what has been achieved to
\ndate and to strengthen the economic recovery, we must accelerate
\nour structural reforms in an effort to improve the business
\nclimate and reduce risks and uncertainties further. The country's
\ncurrent growth rate remains below the economy's potential and is
\nnot yet sufficient to generate the level of employment needed for
\nour population or to reduce the overall poverty level.<\/p>\n
A lot remains to be done. However, while we may be taking slow
\nsteps, we have every intention of reaching the finish line. The
\nfuture of our country and our people depend on it.<\/p>",
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