Consistent policy vital to capital inflows

Consistent policy vital to capital inflows

JAKARTA (JP): Amid concerns over the country's deepening
current account deficit, the government needs to maintain its
credibility abroad to attract more capital inflow to cover the
deficit, an analyst argues.

Hadi Soesastro, executive director of the Centre for Strategic
and International Studies, said in a discussion at The Jakarta
Post yesterday that the government's ability to maintain its
credibility is key to sustaining economic stability.

"The government needs to maintain its credibility to attract
foreign capital because in four to five years our account deficit
will still be high," Hadi said.

He said Indonesia's current account deficit in the last fiscal
year could reach US$9 billion, or 4.5 percent of the country's
gross domestic product (GDP).

"In the past, when an account deficit neared 4 percent of the
GDP, the government resorted to the devaluation of the rupiah
against the U.S. greenback. Now, devaluation is not an option,"
Hadi said.

Hadi's estimate is somewhat higher than the government's
projection of $7.9 billion for last year's current account
deficit. The deficit was $3.49 billion in the 1994/1995 fiscal
year.

The government projected that the current account deficit for
the ongoing fiscal year will likely shrink slightly to $6.9
billion.

Hadi, however, predicted that the current account deficit
could rise to $10 billion this fiscal year, considering that the
government is still pursuing high economic growth.

To cover such a high deficit, he said Indonesia needs
sustainable foreign capital inflows, especially from direct
foreign investment. To attract more direct investment, the
government should be consistent in its economic policies.

Hadi warned that the government's current policies, which
businesspeople and analysts have criticized as inconsistent, may
damage Indonesia's credibility abroad and could eventually
discourage foreign investment.

The unpopular policies include the favoritism shown to the
national car program, the protection of the ethylene industry,
the establishment of a private foundation to manage poverty
alleviation funds, and the formation of PT Dua Satu Tiga Puluh to
fund the development of a locally-designed passenger jet.

"The national car program is often seen as a case that can
disrupt the government's credibility in terms of the consistency
of its economic policies, fair treatment of investors and so
forth," Hadi said.

The government decided last February to grant PT Timor Putra
Nasional, controlled by President Soeharto's youngest son Hutomo
Mandala Putra, tariff and tax breaks to develop Indonesia's
national car.

The government has also ruled that Timor Putra will be the
only firm to get the tariff and tax exemptions for the next three
years.

"That's a blatant policy," Hadi said. "Even if you have it in
mind to give such facilities to one firm, you should not take
such a blatant stand."

Also in February, the government granted 25 percent tariff
protection to PT Chandra Asri's olefin plant. Only a few months
earlier the government stated it would not protect the
petrochemical plant.

The government also told business leaders to help establish
PT Dua Satu Tiga Puluh to raise at least $2 billion to finance
the development of a 130-seat jet by the state aircraft
manufacturer PT IPTN.

Earlier this year, the government called on individuals and
companies making more than Rp 100 million (US$42,800) a year to
donate 2 percent of their incomes or profits to the privately-run
Dana Sejahtera Mandiri Foundation, to fund the government's
poverty alleviation program.

The government has extended for three years the clove trading
monopoly held by the Clove Bufferstocking and Marketing Agency,
also headed by Hutomo, without a transparent assessment of the
agency's performance.

"Such policy changes contain higher risks for investors," Hadi
said, adding that foreign investors will be hesitant to enter the
country because they cannot predict the business climate. (rid)