Alarm bells ringing

We sounded the alarm bells in this column last month when official trade figures were released, showing a 33 percent fall in Indonesia's trade surplus in the first five months of this year over the corresponding period of last year. But the alarm was muffled by the euphoria surrounding the celebrations of the nation's 50th anniversary.

The latest trade figures, announced on Wednesday after the limited cabinet session on economic affairs, showed an even more troublesome trend. For the first time in five years, the country posted a trade deficit of US$205 million in June.

We could console ourselves by arguing that the situation has not yet reached dangerous levels since total exports in the first half still reflected a 15 percent increase over the same period last year. The trade surplus, amounting to $1.89 billion in the same period, also was respectable.

Nonetheless, the seemingly rosy figures also reveal cause for concern. The trade surplus in the first half was way below the $3.65 billion surplus posted in the same period last year. And while the 15 percent export growth rate did not fall too short of the 16 percent target, it was much lower than the imports growth rate of 30.70 percent.

If the trend continues the current account deficit could rise above the sustainable level of two percent of the gross domestic product. The debt service ratio against exports, already hovering at a worrisome 30 percent, will increase. Such a situation will force the government to tighten monetary policy, thereby raising the cost of capital to the business sector. Foreign portfolio investors, who play a significant role in the domestic stock exchange, and foreign creditors will demand higher risk premiums for exposure to Indonesian assets, thereby exerting further upward pressure on domestic interest rates. Further down the line, the rupiah will feel stronger downward pressure, causing monetary instability with all its damaging repercussions.

While we could cut back on importing certain goods to deal with the deficit, a sharp reduction would not be advisable. More than 85 percent of our imports are raw and intermediate materials as well as capital goods. A large portion of the materials is imported by export-oriented industrial firms, while capital goods are needed for new investment ventures to expand export capacity and diversify our export goods. We estimate that the import rate of capital goods will continue to grow as a result of the sharp increase in foreign and domestic investments approved by the government over the last two years.

The trade deficit therefore should be addressed by increasing exports. By now the government should realize the importance of making the country's export more competitive. Studies by international and domestic analysts show that Indonesia's total factor productivity is the lowest in Southeast Asia, and only slightly higher only than India's and Pakistan's. With such a low total factor productivity, our cheap labor costs, once considered a competitive advantage, no longer mean much.

President Soeharto has repeatedly ordered all ministries and other related government agencies to support the export drive. The same instruction was issued again at the last monthly cabinet session. We think the current situation has made it most imperative to follow through on the instruction by improving inter-ministerial cooperation to promote exports. Exporting is a cross-sectoral activity involving imports of raw and intermediate materials, port handling, domestic transportation and packaging. Export promotion also requires the removal of distortions within domestic trade.

A new institution in charge of export development is not necessary. We do, however, need an inter-ministerial task force with enough authority to address the problems encountered in any of the chains of activities related to export trade. We should act now before the situation becomes critical.