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)