Prospects for RI's recovery<\/p>\n
The following article is taken from a presentation at the
\nIndonesia Next: Politics, Business and The Impact of Change
\nConference in Bali on Friday.<\/p>\n
By Mar'ie Muhammad<\/p>\n
JAKARTA (JP): After a long political struggle, the People's
\nConsultative Assembly succeeded in electing Abdurrahman Wahid as
\nthe fourth president of the Republic of Indonesia, the third
\nlargest democratic country.<\/p>\n
A milestone has been laid for a long, arduous journey. Now
\nsociety is in waiting, generally with mixed feelings and
\nopinions. The core of the issue, a formidable task to resolve, is
\nrestoring confidence. For this we need urgently to build a
\ncredible government, fully committed to the reform program,
\nincluding to rebuild good governance.<\/p>\n
It is obvious that the government, in collaboration with civil
\nsociety, has to reunite Indonesia's highly fragmented society.
\nFurthermore, it is the duty of the nation to restore trust in
\nsociety as a main social element that has continued to
\ndeteriorate.<\/p>\n
Restoration of peace and order should become the first
\npriority of the new government, with active support from all
\ncitizens. The government should secure strong support from
\npolitical parties, professionals, civil society and the regions,
\nand should be welcomed by the international community.<\/p>\n
To achieve this objective, the new Cabinet should be a sort of
\ngrand coalition which is able to accommodate various interest
\ngroups, including the minorities.<\/p>\n
While other regional economies have begun to recover from the
\neconomic crisis, Indonesia's recovery has occurred at a slower
\npace. Thailand, for example, is expected to attain a real gross
\ndomestic product growth rate of 3 percent to 4 percent, and the
\nKorean economy is expected to grow by more than 5 percent.<\/p>\n
Indonesia, in contrast, is unlikely to achieve a 1.5 percent
\nto 2 percent increase in real GDP.<\/p>\n
However, it should not be forgotten that the greater severity
\nof the economic crisis in Indonesia compared to other regional
\neconomies is at its root a reflection of political instability, a
\ndevastated and dysfunctional banking sector, a deeply indebted
\ncorporate sector and pervasive corruption.<\/p>\n
Some signals of economic recovery are quite encouraging. One
\nis inflation with an annual rate falling to less than 6 percent
\nin August. The one-month interest rate has dropped below 13
\npercent per annum. The rupiah has strengthened to about 7,000 to
\nthe U.S. dollar although it is still highly volatile.<\/p>\n
Share prices on the Jakarta Stock Exchange rose by 120 percent
\nbetween October 1998 and June 1999 and are still more than 80
\npercent above their level of a year ago.<\/p>\n
This said, I still do not mean to belittle the magnitude of
\nthe economic difficulties that we face. The bank restructuring
\nprogram, for example, has made enormous progress, with insolvent
\nbanks having been closed, most remaining banks recapitalized and
\nmuch of the bad debt moved to an asset management agency.<\/p>\n
Nonetheless, our banking system remains dysfunctional.
\nAlthough banks continue to perform one of their two critical
\nfunctions -- absorbing savings from households and businesses --
\nthey are not performing the other function, which is to channel
\nthese savings into productive investments in the real economy.<\/p>\n
Bank lending is still at a standstill and is unlikely to
\nrecover anytime soon. Similarly, some progress has been made in
\ncorporate debt restructuring. More than 280 companies with over
\nUS$23 billion in outstanding foreign debts have begun
\nnegotiations under a program supported by the World Bank, and 27
\nof these debtors have reached agreements in principal involving
\nmore than $3 billion.<\/p>\n
However, most corporate debt is still uncertain and the
\nIndonesian bankruptcy law and its enforcement are still weak. The
\nbank restructuring agency has taken about Rp 230 trillion of bad
\ndebt but very little of this has been successfully restructured.
\nIn this regard, it is critical to strengthen the Indonesian Bank
\nRestructuring Agency (IBRA) and its operations, and for this IBRA
\nneeds strong political support. Until the banking and corporate
\ndebt problems are resolved, Indonesia's economic recovery will
\nremain anemic.<\/p>\n
Another obstacle that Indonesia will face over the next few
\nyears will be the fiscal burden created by the crisis. Before the
\neconomic crisis, Indonesia did not have a significant fiscal
\nproblem. In fact, the government had been running surpluses for
\nseveral years. The crisis created enormous new spending
\nobligations for social safety nets, food and energy subsidies,
\nand most importantly the enormous cost of financial sector
\nrestructuring. At the same time, with the slowdown in economic
\nactivity, domestic revenue as a share of GDP declined.<\/p>\n
Consequently, Indonesia is expected to experience a deficit of
\n4 percent to 5 percent of GDP during the current fiscal year. For
\nthe time being these fiscal deficits are being financed by
\nforeign borrowing but this is obviously not a viable long-run
\nsolution. The government's foreign debt has already risen by more
\nthan $15 billion during the crisis, creating a larger burden on
\nfuture generations, and the willingness of the international
\ncommunity to provide official assistance to Indonesia will
\ndiminish with time.<\/p>\n
While the soundness of future economic policy cannot be
\nguaranteed simply on the basis of past performance, there are
\nseveral reasons to believe that the fiscal difficulties can be
\novercome. First, there is considerable scope for raising tax
\nrevenue. In recent years Indonesia's non-oil tax receipts have
\namounted to only 10 percent to 12 percent of GDP.<\/p>\n
This is far less than the share of GDP collected in other
\neconomies. Thailand and the Philippines, for example, collect
\nmore than 15 percent of GDP in tax revenue. Second, there is some
\nscope for reducing spending, particularly with respect to fuel
\nand energy subsidies, although removing these subsidies will be
\npainful.<\/p>\n
Third, the government has acquired a great number of valuable
\nassets as a consequence of the financial sector restructuring
\nprogram. These assets, including some of the largest private
\nbanks and industrial companies, will be sold back to the public
\nover the next few years, creating an income stream to offset the
\ncost of bank restructuring. Government banks and state-owned
\nenterprises will also be privatized over the next few years.<\/p>\n
Of course, the government's political will to divest these
\nassets in a fair and transparent manner must remain firm.
\nMaintaining firm political support for this process is highly
\nessential, particularly if the participation of foreign investors
\nis needed.<\/p>\n
In sum, where do we go from here?<\/p>\n
* Equitable development through pro-poor policy and
\nempowerment of the small scale business.<\/p>\n
* Export-led growth, push for foreign investment and
\ncontinuous deregulation.<\/p>\n
* Sale of banks and other IBRA assets and the privatization of
\nstate-owned enterprises.<\/p>\n
* Monetary policy that focuses on attaining and keeping low
\ninflation and interest rates.<\/p>\n
* A neutral and more effective tax collection system.<\/p>\n
We can only realize the above agenda with the support of the
\ninternational community, including international financial
\ninstitutions. We firmly believe that democracy is an essential
\nfoundation for the establishment of a more favorable nation that
\nis capable of carrying out fair and transparent activities in all
\naspects of society. Maintaining international support for
\nIndonesia is highly critical, based on mutual interest and
\nrespect.<\/p>\n
The author is a former finance minister and a founder of the
\nprivate Indonesian Transparency Society.<\/p>",
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"sponsor": "Okusi Associates",
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