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.