Alarm bells ringing
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.