Crash liquidity injection
Official announcements last week brought in what the Indonesian Chamber of Commerce and Industry (Kadin) saw as winds from heaven to soothe the business community which has been burning in the "hell" of a liquidity crunch since August. If the pledges materialize, no less than Rp 40 trillion in new funds will be injected into the economy within the next few months. That will represent as much as 12 percent of the total money supply (broadly defined) as of September.
Bank Indonesia's (central bank) Director Muchlis Rasyid said Rp 20 trillion in funds from state companies would be disbursed in loans to small and medium-scale enterprises (SMEs) starting next month. That amount will be in addition to the Rp 3 trillion in funds from PT Jamsostek, the state-owned social security company for private-sector employees, which President Soeharto had previously ordered to be lent to SMEs and low-cost housing developers.
The President was quoted by Aburizal Bakrie, Chairman of Kadin, as saying in Cape Town, South Africa, on Friday that US$5 billion (Rp 17 trillion) in funds derived from Singapore's standby loan would also be injected through state banks as credits to medium and big businesses. The battered stock exchange will also get a shot of boon. Soeharto has ordered state companies to use up to 1 percent of their net profits to buy shares on the Jakarta Stock Exchange to reinvigorate the exchange which has lost 47 percent in market capitalization since July.
No technical details were immediately available on how the crash liquidity injection would be implemented, but the government has assured businesspeople that all those funds will be lent at an annual interest of 17 percent, much lower than the current market rate of 27 percent to 30 percent.
Further clarification is especially needed for the disbursement of the Singapore standby loan. Finance Minister Richard Hu assured the Singapore Parliament last week and the Monetary Authority of Singapore reiterated yesterday that the loan would not be used unless the IMF-led $23 billion first-line defense assistance had already been used up. Another puzzling question is why the government chose foreign debts to inject liquidity. In the past, all credit programs which offered below- market rates were funded by liquidity credits (refinancing facility) from the central bank. Drawing down on foreign debts at a time when the rupiah rate is still highly volatile is a dangerous game.
The government should obviously address the plight of the business community as the private sector has been the locomotive to growth since the early 1990s. But notwithstanding the great relief the new funds would bring to the cash-strapped business sector, the crash liquidity pumping program is still raising great concerns. Past experiences show that government-directed mass lending programs often override prudential requirements. The execution of programs based on presidential instruction often ignores economic rationale even though the objective is commercial interest. Since the credits will be extended through state banks the risk is quite big that political influence may weigh more than the commercial viability of the borrowers, as shown by the high rate of bad credits among state banks.
Prudential lending measures are especially crucial now as the government is strengthening the financial sector as part of the painful stabilization program agreed with the International Monetary Fund. It is therefore most imperative that the lending of these huge funds be made strictly on viable credit assessment and fully in a transparent manner and be directed to export and export-related activities. Finance Minister Mar'ie Muhammad assured the House of Representatives last week that the government had no plans to bail out, directly or indirectly, private companies over foreign debts.
If some of the funds were extended to bail private companies out of foreign debts, the private sector would never learn from its mistakes and greed, which are responsible partly for our dire economic condition now. Further down the line, the concerted, costly efforts to regain the market confidence in the economy would suffer a great setback. The stabilization program consequently would take much longer and the pains would get more painful. For the umpteenth time, we must make this point: It is the snail's pace progress in the improvement of bad governance that has been mainly responsible for the nation's inability to regain market confidence despite the IMF backup.