Domestic debt 'constraint to economic growth'

JAKARTA (JP): The government's mounting domestic debt will constrain its ability in 2000 and the years to come to stimulate economic growth, according to the University of Indonesia's noted economist Sri Mulyani Indrawati.

Speaking at a business luncheon hosted by the Indonesia- Australia Business Council, Sri said the huge domestic debt would also complicate macroeconomic management.

Because of such complications, Sri called on the government, in this case the Ministry of Finance, and Bank Indonesia to work together very closely to manage the macroeconomy and, especially, to contain inflation rates.

"Unfortunately, I see no mutual trust between these two important institutions," Sri said. "I don't see any efforts from Bank Indonesia or the government to reduce inflation to below 5 percent."

Because of the huge debt, she said, the 2000 budget would be susceptible to inflation. Any increase in inflation would inflate the government's spending for interest payments on its multibillion dollar bonds.

If inflation exceeded the government's target of 4.8 percent this year, interest rates would also increase and, therefore, the government would have to pay extra for the interest payments on its floating rate bonds.

Based on calculations made together with her colleagues at the University of Indonesia, Sri said her optimistic inflation prediction this year would be slightly over 5 percent and below 7 percent. But her pessimistic prediction would be around 9 percent.

The government has been compelled to accrue a huge domestic debt of around Rp 500 trillion (US$70 billion) to finance the recapitalization of the country's shattered commercial banks.

The interest payments on the debt are financed by the state budget.

Sri, who is also secretary general of the National Economic Council, said the government's decision to inject such a huge sum to mend the destroyed banking industry was questionable because of the "fairness issue". In addition, the restructuring itself had been moving at a snails pace.

"This is very disappointing," she said. "People are very skeptical on the progress of bank restructuring."

Sadder still, Sri said, the government's huge domestic debt would continue to burden the state budget in the years to come. She predicted the domestic debt burden on the budget would reach its peak in year 2003, when some of the bonds mature.

The government expects to finance the interest payments on its debt partly from the sales of assets under the management of the Indonesian Bank Restructuring Agency and the privatization of state firms.

According to the government's nine-month 2000 draft budget, IBRA is expected to contribute Rp 16.25 trillion from asset sales to the government's coffers.

But Sri questioned IBRA's ability to sell assets under its supervision, arguing the agency had not yet proved capable of selling big assets to foreign investors. Sri even questioned the agency's target of raising Rp 17 trillion for this fiscal year, ending March 31.

Nevertheless, Sri saluted the government's decision to set a crude oil price of US$18 a barrel, far below the current market price of around $24.

The International Monetary Fund and the World Bank, she said, had demanded the government's assumptive oil price in the 2000 budget be set at $20 a barrel, but the government insisted on using $18.

That conservative assumption, she said, would result in a huge "unexpected" income for the government, which could be used to cover inflated spending.

Sri was also confident that the government would be able to reach its tax revenue target of Rp 97.78 trillion. She noted that income tax from the interest payments on the government's bonds alone would contribute Rp 7 trillion to the 2000 budget.

She even called on the government to increase its tax revenue targets. The government, she said, could actually raise more money from taxes if it broadened the tax base and intensified tax collections. (rid)