Pump priming<\/p>\n
The government's decision to pump prime the economy in the
\nfirst semester of next year to bolster growth by ordering the
\nfinance ministry to accelerate the disbursement of Rp 10 million
\nto Rp 15 trillion (US$1 million to $1.5 billion) in development
\nappropriations carried over from the 2005 state budget is very
\nappropriate. This stimulus is indeed badly needed to offset the
\ndecline in private consumption and investment growth caused by
\nthe current high inflation and the central bank's tight monetary
\npolicy.<\/p>\n
We cannot expect much in the way of private consumption and
\ninvestment during the current tight monetary environment because
\npunitively high short-term rates (12.75 percent) are affecting
\nthe economy through a number of different mechanisms: consumers
\ntend to spend less, and businesses are discouraged from
\ninvesting. However, private investment is predicted to begin
\npicking up in the second semester.<\/p>\n
Boediono, the new chief economics minister, expects that
\ninvestment and private consumption will recover in the second
\nsemester of next year. The rationale is that as market confidence
\nin the government's economic policies becomes stronger,
\nmacroeconomic stability will get stronger as well. This in turn
\nwill help the rupiah appreciate, thereby curbing inflationary
\npressures from imports.<\/p>\n
Moreover, judging from the priority action agenda drawn up by
\nthe new economics team -- to reinvigorate the investment climate
\nthrough reform measures and quick resolution of government
\ndisputes with foreign investors -- domestic and foreign
\ninvestment will increase as businesspeople become more assured of
\nthe economic outlook.<\/p>\n
However, the government's expansionary budget will have to be
\ncoordinated with the monetary authorities in view of the strong
\ninflationary pressures that will persist at least until the end
\nof the first semester of next year. This means the pump priming
\nshould be offset by the central bank continuing to apply tight
\nmonetary policies.<\/p>\n
The market, however, can be rest assured of good coordination
\nbetween the fiscal and monetary authorities in the years ahead.<\/p>\n
Finance Minister Sri Mulyani Indrawati and Bank Indonesia
\nGovernor Burhanuddin Abdullah held a joint press conference with
\nBoediono on Dec. 8, one day after the installation of the
\nCabinet's new economics team, and this was a strong signal of
\nbetter coordination of fiscal and monetary policies over the next
\nfour years.<\/p>\n
The joint press meeting, though rather symbolic in nature, was
\nthe right signal to send in order to correct the previous market
\nperception of an acute lack of synchronization between fiscal and
\nmonetary policies when the Cabinet's economics team was still led
\nby businessman Aburizal Bakrie. The old economics team was simply
\nin disarray, with the then finance minister Jusuf Anwar often
\nabsent from coordinating conferences convened by Aburizal.<\/p>\n
Good coordination between the fiscal and monetary authorities
\nis indeed the key to maintaining macroeconomic stability,
\nespecially in this high inflationary environment, which is
\nprojected to prevail until the first semester of next year. The
\ncredibility of fiscal policy has a large influence on the conduit
\nand effectiveness of monetary policy.<\/p>\n
Put another way, monetary policy is more effective when
\nthe private sector or the market in general believes that the
\ncentral bank will not succumb to the financing requirements of
\nthe government.<\/p>\n
Boediono's and Burhanuddin's policy statements at their first
\njoint press conference further strengthened our confidence that
\nBoediono will exert very effective leadership over economic
\npolicy making and implementation. And a credible policy making
\nsystem and the right sequencing of reform measures to be taken by
\nthe new economics team will accelerate the virtuous circle within
\nthe economy.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/pump-priming-1447899208",
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"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
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