A double-barreled economic solution and its hair trigger

A double-barreled economic solution and its hair trigger

Things are so bad that it seems they couldn't get worse.
Economist Mohamad Chatib Basri asks, can the government seize on
the remaining opportunities? The following are excerpts of an
interview with The Jakarta Post's contributor Dewi Anggraeni in
Canberra, Australia.

Question: How do you view the options of increasing taxes and
reducing subsidies as a way of gaining revenue?

Answer: The deficit in our budget is now projected at Rp 80
trillion, about 6 percent of our gross domestic product, up
sharply from the initial estimate of Rp 53 trillion.

There are two options. First, increase taxes. There are two
ways of doing this; the first being intensification of tax
collection, which is rather difficult given the inadequate
administrative capacity. The second way is broadening the tax
base by registering more taxpayers. I'm not sure this could be
completed in the timeframe either. An easier option would be to
increase the value added tax. However, in an economic recession,
any tax increase would only contract the economy further.

Now, with the second option we may have to reduce spending. We
could do this by cutting fuel subsidies.

Wouldn't that hurt those who couldn't afford it?

The last national survey statistics showed only 66 percent of
people categorized as poor using petrol and kerosene as their
fuel and power sources. These people, according to the
statistics, use firewood. Who uses petrol and kerosene for fuel?
Mostly urbanites -- well-off middle and upper middle classes.

Also, manufacturing costs would increase. Yet I don't believe
they would be so big that industry would have to cut labor.

What about price increases for daily necessities caused by
rising transportation costs?

Yes, unfortunately that would happen. But I don't see any more
than a 2 percent increase in inflation (resulting from a
reduction of the fuel subsidy). The more worrisome impact is in
the economic and political sectors. We regard the fuel subsidy as
a sort of sacred cow -- if we upset it something terrible will
happen. (People say), "Look at what happened to Soeharto in May
1998 immediately after he did that."

In reality Soeharto didn't fall because of his lifting of the
fuel subsidy. It was only a trigger which unleashed the momentum
of accumulating public sentiment against Soeharto. Admittedly, it
appears that President Abdurrahman Wahid is in a precarious
position and could do without anything that might serve as a
trigger. The question is whether the government is prepared to
bite the bullet.

So the policy is not as big a monster as people have made it
out to be?

Exactly. We have a small section of middle and upper
classes ... saying aloud that they speak for the poor. We have
always heard that rice imports have a detrimental effect on poor
farmers because they could depress the price of local rice. Well,
the bulk of tenant farmers' income doesn't come from the sale of
rice. It is the income of landowners that is negatively affected.
Those poor farmers actually benefit from the lower price of rice.

If the government wanted to soften the effect of fuel subsidy
reductions across the economy, what would their options be?

They could introduce a cross-subsidization policy. They could
cut the subsidy, then allocate funds to subsidize the types of
fuel used by poorer sectors of the community, such as for
kerosene and fuel for public transportation.

Didn't the central bank try to resolve this economic
stalemate?

With the continually weakening rupiah, the central bank has
been forced to defend it, increasing the interest rates to
encourage people to deposit their money in rupiah. Yet with the
hike of interest rates, the cost of servicing government's
domestic debt shoots up. The government is faced with risky
choices.

What are they?

There are two possibilities. To gain revenues, we need to have
the courage to sell assets (under the Indonesian Bank
Restructuring Agency - IBRA) at low prices, with the hope that
investors will come in. When they have gained control over the
assets and get them operating, the prices will naturally rise.
Assets will gain value when they are no longer idle.

The second possibility is to cut the fuel subsidy.

Action is now crucial. We cannot please everyone. The
International Monetary Fund (IMF) has expressed readiness to talk
only when they have seen revisions in the budget so that the
figures make sense. Abdurrahman's government should have shown
more concern.

Yet, there are more political skirmishes among the political
elite than concrete steps. There must now be fine coordination
between fiscal and monetary policies, but instead, the government
created a confrontation with the central bank because the
President doesn't like (Governor) Sjahril Sabirin.

Were the paradigms set by the IMF unrealistic?

I agree that IMF programs are not all workable. The IMF is not
a savior from heaven ... neither are they infallible. Their
suggestion to raise interest rates is not workable. However, so
far, only the IMF has come up with a detailed program. The debate
that arose tended to be rhetorical rather than practical. If one
aspect of the IMF program is wrong, then what is the alternative,
where are the figures, and so forth.

So we have no choice but to negotiate with the IMF?

I believe so. We need to negotiate with the IMF to implement
the agreed Letter of Intent. If we had any misgivings, we should
have expressed them then.

Isn't it possible to crawl out of this mess?

Professor Eric Ramstetter at the Indonesia Update conference
(in Canberra last October) said that, in reality, foreign
investors still show interest in Indonesia. Indeed, there are
indications to that effect. Furthermore ... we cannot blame the
exchange rate on the President's policies alone. When our rupiah
fell, most regional currencies also fell.

If we are determined to see the bright side of life, we are in
a situation so bad it couldn't get worse. In fact, an adjustment
process has begun. Businesses are already thinking of their lower
costs. Investors who have invested a lot of money cannot easily
withdraw without incurring more costs, so they will go with the
flow, whoever is in government.

This is visible in production continuity, recording 5 percent
growth last year, as if there were a decoupling between political
stability, or lack thereof, and economic growth.

It is up to the government to harness this momentum.

What about new investors?

We have to show them political stability ... not
authoritarianism, but a government that provides legal certainty
for commerce. A government that does not change regulations
arbitrarily.