BI's prognosis

Indonesia's economic outlook for this year, as charted out by Bank Indonesia's board of governors in its report on Tuesday, fundamentally is not much different from that of 2001.

Inflation will likely remain at a double-digit level due largely to the increases in fuel prices and electricity and telecommunications rates and the persistently weak rupiah. Export and private consumption growth may slacken or will at best hover at last year's level. Private-sector investment will continue to be sluggish, inadequate to provide pump priming in the absence of fiscal stimulus.

No wonder the economic growth in terms of gross domestic product this year is predicted to remain flat at last year's estimated 3.4 percent, or at best expand by 4 percent. This growth rate is certainly far from sufficient to generate employment even just for first-time job seekers entering the market every year, let alone the tens of millions already in the unemployment ranks.

The question, though, is why this year's economic prospects should be necessarily as grim as last year's. True, the economy has been deprived of its external locomotive due to the global economic recession, and even if the American economy begins to pick up in the second half there will be a time lag of a few months before it affects the Indonesian economy.

But the political climate is now much more stable, unlike last year when then president Abdurrahman Wahid virtually stopped leading the nation and the government during the first half when he became preoccupied with his fight against the House of Representatives.

We think political stability will more than offset the negative impact of the depressed global economic condition on our economic recovery process.

First of all, President Megawati Soekarnoputri's government is supposed to be able to focus its attention and resources on the reform programs to fuel a stronger economic recovery.

The rupiah, which depreciated by more than 17.5 percent last year due mainly to the political turbulence, is expected to be much more stable this year, thereby cutting inflationary pressures from imports and providing businesspeople with a more predictable monetary condition to make reasonable cost and risk calculations.

A condition that allows for more reasonable risk calculation is quite conducive for banks to expand lending. This is contrastingly different from last year when the political fiasco made business risk so high that banks only disbursed Rp 47.7 trillion, or a mere 39 percent, of the Rp 122 trillion in new loans they had approved.

A higher pace of lending will generate a virtuous circle in that banks, which now depend on the interests of government bonds for over 45 percent of their revenues, will be able to raise more income. Further down the line, economic activities will increase as more fuel flows from the banking system.

Credit expansion can further be accelerated if the restructuring of corporate debts by the Indonesian Bank Restructuring Agency (IBRA) can be sped up. This will create another virtuous circle because owners of restructured debts will regain access to working capital loans and will consequently be able to raise their production or operating rates.

Another economic accelerator will be fired up if asset sales and privatization can be sped up. It is worth remembering that the disposal of depressed assets at IBRA and the sale of good- performing state companies is imperative not so much to raise revenues for the state budget but more to woo capital inflows.

It is extremely difficult now to attract investments to greenfield projects as most manufacturers still suffer from large excess capacity. Hence, capital inflows would be most promising through asset acquisition. Asset sales would not only prevent the asset quality from deteriorating. Certainly, new investors would improve the management of the companies and plow in additional investment to increase their competitive edge.

There are, of course, the risks of social unrest and even political turbulence related to the dispute over the new minimum wages and the painful measures to raise fuel prices and telecommunications and electricity rates as part of the ongoing reforms to put the economy on a stronger footing. Poor management of these policies would not only worsen the economic prospects this year, but also might undo some of the achievements already made through past reform measures.