Feeding banks only deters real-sector industries<\/p>\n
Pitan Daslani, Journalist, Jakarta<\/p>\n
In defending her policy to increase fuel prices and utility
\nrates, little did President Megawati Soekarnoputri realize --
\nunless she really meant it -- that she was well on track to
\ncrippling Indonesia's real-sector industries.<\/p>\n
According to economic theory, the President did the right
\nthing -- that is, she has attempted to pull the nation away from
\nover-dependence on foreign aid and setting the tone for an
\neconomic self-reliance yet to be born.<\/p>\n
If Megawati deserves the nation's admiration, it is only in
\nthat she will not reap the results of the unpopular price rises
\nduring her term in office. What she has done, if her actions were
\nfaithfully implemented with consistency and support from every
\nsector forming the Indonesian economy, would only bear fruit in
\nabout two decades' time when she is no longer President.<\/p>\n
Megawati should deserve admiration because only a leader with
\na particular level of statesmanship would make this daring
\ndecision, gambling with the probability of angry reactions from
\nthe public.<\/p>\n
The subsidy removal could compel economic and business actors
\nto realign strategies by standing on their own feet, rather than
\nby expecting privileges. This would force businesses to promote
\nefficiency in their survival strategies and thereby promote
\nbusiness competitiveness in the international market.<\/p>\n
Such would be the assumption of someone innocent, like a
\nforeign observer who arrived in Jakarta only yesterday. Such
\ninnocent people are unaware of the prevalence of illegal fees and
\ncollusion which are part of Indonesia's politico-business
\ntradition, a lethal virus that kills Indonesia's competitiveness
\nin the world market.<\/p>\n
The trouble with this high-profile leap is that Megawati is
\nneither an economist nor a market-friendly politician, who would
\notherwise refuse to create unnecessary jolts in the economy. And
\nthis she did, successfully.<\/p>\n
Political and economic observers alike are now wondering
\nwhether the President was sufficiently advised before approving
\nthe move to hike electricity and phone rates and raise domestic
\nfuel prices at the wrong time, a move that could only be greeted
\nby demonstrations all over Indonesia.<\/p>\n
In order to understand precisely what is happening, one needs
\nto trace the domain from which the price hike decision
\noriginated. The bottom line is that the government does not have
\nenough in its treasury to feed the bureaucracy and run the state
\nadministration. Foreign aid has, for years, constituted a
\nsignificant portion of the State Budget while the real-sector
\neconomy has had difficulty moving forward due to the collapse of
\nthe banking sector in 1998.<\/p>\n
Banks have now regained confidence following the injection of
\ntrillions of rupiah in government bonds but, alas, those
\nalternative investment instruments now comprise a majority of the
\nbanking industry's assets instead of performing credits.<\/p>\n
At a time when political risk is still high and uncertainty
\nover the continuity of the national leadership looms large, banks
\nprefer to invest in such alternatives rather than channel their
\nloans to the real sector.<\/p>\n
One recent example of a tragic policy causing this kind of
\nunfortunate trend was evident at the end of December 2002 and the
\nbeginning of January 2003.<\/p>\n
Bank Indonesia (BI), the central bank, had announced
\nsignificant reductions in interest rates by the end of 2002.
\nBank Indonesia sliced the interest rates on its SBI bonds to 11
\nto 12 percent and envisaged its M1 to stand at only Rp 138.2
\ntrillion by the end of 2003.<\/p>\n
This would have been a very good signal, actually, for
\nbusiness actors to get fresh loans from banks to finance new or
\nexpansion projects, if the Cabinet had refrained from killing the
\noptimism.<\/p>\n
Only a day after Bank Indonesia had announced its interest
\nrate reductions, however, the government dropped its bombshell on
\nthe economy. It hiked public utility rates and the domestic
\nselling prices of fuel, thereby destroying the little spark of
\noptimism that Bank Indonesia had painfully initiated for the
\nrevival of the business sector.<\/p>\n
How? The frustrated government issued at least Rp 2 trillion
\nworth of T-bonds -- not for the general public and business
\nsector in general -- but for the banking sector again. The fact
\nis that 68 percent of the T-bonds went into the banking
\nindustry's portfolios. In addition, the government plans to issue
\na further Rp 7 trillion worth of such bonds in the near future to
\ngenerate funds for its treasury. Again, banks would feast on the
\ngodsend opportunity to collect more revenue, forgetting their
\nintermediary role in the process.<\/p>\n
Worse, the price hike decision vindicates the banking
\nindustry's assumption that it is useless to channel credit to the
\nreal sector, because industries are now having difficulty
\nsurviving and are therefore unable to come up with feasible
\nproject proposals.<\/p>\n
The biggest irony in Indonesia is that President Megawati's
\nCabinet is going against the direction that Bank Indonesia is
\ntaking. Never before has there been such a tragic collision
\nbetween fiscal and monetary policies in this country.<\/p>\n
Why should banks force themselves to give out loans at a time
\nwhen there are better and more convincing sources of easy
\nrevenue, i.e., government bonds? Why would they perform an
\nintermediary role to feed real-sector industries at a time when
\nthe industries themselves are crippled by the extra burden
\ncreated by increased utility rates and fuel prices? Who could
\nguarantee that the real-sector actors would even be able to
\ncomplete their own projects, if they should obtain bank loans at
\na time when political uncertainty continues to grip the nation?<\/p>\n
The blunder created by the widely protested decision to raise
\nfuel prices and utility rates is that the government is actually
\nattacking itself. It wants the banking sector to fuel real-sector
\nindustries, and to achieve that goal, it has only shown the banks
\na direction opposite from that in which the banks had been
\ntraveling.<\/p>\n
It wants real-sector industries to create new employment
\nopportunities to accommodate over 40 million jobless citizens,
\nand to achieve that goal it has only crippled the industries by
\ncausing unnecessary increases in their production costs, to the
\nextent that many of them may have to dismiss their workers.<\/p>\n
One clear example of the government's lack of sensitivity
\ntowards public frustrations is its strange policy to reduce
\nexcises on non-clove cigarettes produced by foreign companies,
\nwhich contribute only 10 percent of total government receipts
\nfrom the cigarette industry, while producers of clove-blended
\ncigarettes who employ millions of people on their production
\nlines are denied the privilege.<\/p>\n
With all these unfortunate developments gripping the nation,
\nare there sufficient reasons for President Megawati to build
\nhopes of occupying the Palace beyond 2004?<\/p>",
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