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.