Economic pump priming<\/p>\n
As with the government's budget this year, its budget proposal
\nfor 2003, currently under deliberation by the House of
\nRepresentatives, is facing sudden and radical changes in the
\nexternal and internal environments.<\/p>\n
Four days after the 2002 budget proposal was submitted to the
\nHouse, the external factor, on which Indonesia's ailing economy
\ndepends a great deal for its recovery, was abruptly damaged by
\nthe September 11, 2001, terrorist attacks on the U.S., the
\nworld's largest economy.<\/p>\n
However, the impact of the October 12 bomb blast in Bali is
\nmuch more devastating for the country's economy because the
\ntragedy adversely affected both the external and internal
\nfactors, which are more influential on economic growth.<\/p>\n
First of all, the increased security risks and negative
\nrepercussions of the bomb attack on the domestic political
\nsituation will further delay the restoration of foreign investor
\nconfidence. Even existing investors are highly likely to be
\nmoving into a holding pattern until basic questions around the
\nterror bomb are resolved.<\/p>\n
All of this is certainly increasing business risks at the
\nexpense of business confidence and banking operations, cutting
\ntax revenues and consequently forcing the government to review
\nthe key assumptions used for its budget aggregates.<\/p>\n
The assumption for economic growth, for example, may have to
\nbe revised down from 5 percent to at least 4 percent and this
\nchange will obviously lower tax revenues, making the target
\nincrease of 18.8 percent in tax receipts next year extremely
\ndoubtful.<\/p>\n
The rupiah exchange rate may have to fall from the original
\nestimate of Rp 8,700 to the U.S. dollar to a range of Rp 9,000 to
\nRp 9,200, and this, in turn, may increase inflationary pressures
\nand consequently raise interest rates, with all the
\nconsequences on the burden of domestic debt servicing.<\/p>\n
It is not clear yet as to how the government will cope with
\nthese worsening external and internal conditions but these issues
\nare surely the main agenda of the informal meeting of Indonesia's
\ninternational donor community, the Consultative Group on
\nIndonesia (CGI), opening in Jakarta on Friday (today).<\/p>\n
Finance Minister Boediono's pronouncement, that the government
\nwould pick up the slack caused by a weakening private sector by
\nincreasing its development (investment) spending on job-
\ngenerating activities to provide a stronger stimulus to the
\neconomy, is theoretically appropriate.<\/p>\n
However, the policy statement does not have any credibility
\nwithout explanations as to how the government will go about pump
\npriming in view of the anticipated lower-than-estimated tax
\nrevenues. Boediono simply said the government would increase its
\ndeficit spending from the original target of 1.3 percent of gross
\ndomestic product.<\/p>\n
As the government is unlikely to be so misguided as to cover
\ndeficit spending by printing money, the only alternative is
\nlarger loans from CGI. Given the severely limited budget capacity
\nto provide counterpart funds, the government may have to ask for
\nlarger amounts of quickly disbursed program loans, instead of
\nproject aid.<\/p>\n
BUT CGI creditors will not readily fulfill Indonesia's
\nrequest, however sympathetic they are to our plight. Their
\npledges will still depend on the government's policy performance
\nor its determination to execute reform measures already agreed
\nwith the International Monetary Fund. Last year, for example,
\n$1.3 billion of their $3.1 billion loan pledge was tied to policy
\nperformance.<\/p>\n
Just witness how the World Bank and Asian Development Bank,
\nwhich both usually provide more than one-third of CGI's total aid
\npledge, recently stopped disbursements of their loans to urban
\ndevelopment projects in Sulawesi and North Sumatra due to
\nsuspected bidding fraud in the tendering for procurements.<\/p>\n
It is therefore most imperative for the government to speed up
\nthe implementation of its structural reform measures. Simply
\nsustaining policy performance achieved so far is no longer enough
\nas the Bali bomb blast has damaged many of the macroeconomic
\ngains that were hard won over the past year. Moreover, pump
\npriming alone is not adequate to offset the setback caused by the
\ntragedy. Private sector activities should be stimulated as well
\nto fuel recovery.<\/p>\n
Accelerated reforms, such as those in the banking system, the
\njudiciary, public sector governance, corporate debt
\nrestructuring, asset recovery and privatization, are vital to
\nimprove overall economic efficiency and business confidence.<\/p>\n
Perceived greater security and business risks have increased
\nthe cost of doing business in the country, in terms of
\ntransactions with foreign parties and impaired export
\ncompetitiveness. These additional costs should be offset by
\nhigher efficiency through trade-facilitation measures in
\nexpediting regulatory and licensing procedures, transportation,
\nport handling and customs services.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/economic-pump-priming-1447893297",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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