Curbing import growth

Curbing import growth

The 1995/1996 current account deficit of nearly US$8 billion,
twice as large as the original estimate made early last year, is
regarded by most analysts and the government as the biggest
obstacle to sustaining high economic growth. Because a steep rise
in imports accounted for 32.4 percent of the deficit, from
January to September 1995, the government considers it most
imperative to cut import growth down to 11 percent this year.

Most analysts, however, doubt the government will be able to
reduce import growth so sharply and still reach the 7.1 percent
economic growth target for the coming fiscal year.

Furthermore, we think the almost 100-percent increase in the
imports of consumer goods last year is causing an inordinate
amount of concern.

First of all, consumer items still account for less than 10
percent of our total imports. There was also an aberration in the
composition of imported consumer goods last year in that we
imported about US$550 million worth of rice and sugar (January-
September, 1995). Food imports in that period shot up 313 percent
from the same period in 1994, when rice and sugar imports were
only $44.1 million. For this year we believe rice imports will
fall sharply based on a 4-percent increase in rice production
last year, compared to a decline of 3.6 percent in 1994.

Of all the current account components (trade in goods and
services -- including profit repatriation -- foreign debt
interest payments, shipping, insurance and tourism), the
government's influence is greatest over the trade in goods
(imports and exports).

Thus the government has taken a series of measures to tighten
the monetary policy to reduce the amount of credit available for
import financing. But we need to keep in mind that import growth
is directly related to economic expansion in a developing country
like Indonesia, where almost 90 percent of total imports consist
of capital goods as well as intermediate and raw materials.

Theoretically, imports will have to increase at an even higher
rate this year in view of foreign investment commitments of
nearly $40 billion, almost double the amount licensed last year.
The higher export growth target (19 percent) set for this year
also will result in more imports, on which the manufacturing
industry still depends for raw materials, intermediate goods,
components and parts.

Lowering import growth without adversely affecting economic
expansion will only be possible if those imported goods can be
replaced by local products. But we cannot cut down sharply on the
importation of capital goods. For even though we have been
capable of manufacturing airplanes, our machinery and machine
tool industries are still in the early stages of development; the
most developed machinery industry we have is in the textile
industry. However, for various raw materials and intermediate
goods our production capability and capacity are fairly
developed, especially for those based on local resources.

The problem lies with industrial users, many of whom prefer
imported materials to local products because of favorable tax
treatment and softer payment terms. Export-oriented companies are
entitled to get back the duties and value added tax they pay on
imported materials, but the rebate facility is not granted to the
procurement of local materials, even if they are used for export
products. In addition, international market competition enables
importers to get soft payment terms from their suppliers
overseas.

Therefore, if the government is serious about promoting the
use of local products to slow import growth, the discriminative
tax treatment should be removed. The government must also devise
ways of enabling local suppliers of raw materials and
intermediate goods to sell their goods on credit terms. Without
special programs, local suppliers will never get loans as cheap
as their competitors overseas. In the end, even though the prices
of local products are slightly higher than imports, industrial
users will find it cheaper and more convenient to procure locally
because of speedier deliveries (reducing inventory costs) and
less hassle at seaports.