~Drawing up the balance sheet of Indonesian economic performance

~Drawing up the balance sheet of Indonesian economic performance is a discouraging job. How can it be otherwise when we hear incessant complaints and cynical comments on the sorry state affairs. For five years we have been mired in economic crisis, our fortunes rising or falling in concert with the rupiah. Although the rupiah has strengthened to around Rp 8,800 to the U.S. dollar, the debt/GDP ratio has declined from 90 percent in 2001 to 72 percent in 2002 and consumption growth is still robust, the economy has not recovered yet. Problems lie ahead of us, and we are haunted by the continuing question: When will we begin to emerge from this crisis? We have been muddling through with the economy since 1998. It is true that in 2000 we reached 4.8 percent economic growth, but since then the economy only grew by 3-4 percent. This rate of economic growth is far from adequate to sufficiently open up employment opportunities. The employment elasticity estimate shows that to recruit 2.5 million new employees in the formal sector, economic growth between 5 percent to 6 percent is required. While there are continuing indications that a global recovery is well underway, the details show that the economic recovery is likely to be weaker than anticipated due to the U.S. war in Iraq and, in particular, repercussions from the outbreak of Severe Acute Respiratory Syndrome (SARS). The pace of recovery in the United States is now expected to be slower than earlier forecast. In Europe, projections have also been curtailed, with domestic demand likely to take longer to increase than expected. In Japan, domestic demand remains weak. The direct effects of a slow world economic recovery will obviously impact Indonesia through trade. In these circumstances, growth will be highly dependent on two major components: private consumption and the government budget. In a situation in which the government budget is dominated by repayment of domestic and foreign debts, it is difficult to expect a budget expansion that can stimulate the domestic economy and alleviate poverty. As a result, a fiscal adjustment program will be needed. In trying to deal effectively with all of these problems, it's useful to examine several related issues. First, the legislature has already asked the government not to extend the International Monetary Fund (IMF) program after the end of 2003. There is lingering concern about how the exit strategy will proceed and how far the fiscal consolidation program has been prepared to anticipate such a decision. The exit strategy should take into account two major issues: policy credibility and financing gap. The main prerequisite for economic recovery is to resolutely implement government policies and fiscal discipline. Like it or not, amid competing political interests and wildly diversified economic interests, external pressure is needed to remind the government of its target of economic recovery. Unfortunately, much to many people's chagrin, so far the debate on the IMF program has focused entirely issue on whether we need the IMF, not on an action plan to convince of future fiscal sustainability. Debt rescheduling through the Paris Club is unlikely to happen without the extension of the IMF program. It means we have to anticipate the possibility of a $3 billion fiscal shortfall and an attendant balance of payments problem. It is true that we can increase revenue from taxation and optimize our potential revenue, but the question is whether it can be done in such a short period, with just eight months left before the end of the IMF program. Thus, the nature of the exit program is crucial, and we have to embark on it immediately. Without a solid and comprehensive program, the market will react badly, engendering even more troubles for the economy. Unfortunately, the government has been silent on the matter. Second, as mentioned earlier, it is difficult to expect there will be budget expansion that can stimulate the domestic economy. As a result, we have no other resort than to increase investment, a complex issue in itself. In the context of the cost of doing business in Indonesia, for example, a study by the Institute for Economic and Social Research at the University of Indonesia (LPEM-FEUI) shows that bribery alone is no longer an efficient means to cut transaction costs in connection with the bureaucracy. At present, in line with the distribution of power, corruption has also become more evenly distributed. It's hard to imagine that foreign investors will flock to these shores amid the prevailing business uncertainty, rampant smuggling and widespread labor problems. The LPEM-FEUI study indicates that political instability, labor issues and the imposition of new local taxes could increase the cost of doing business in Indonesia. Thus it is imperative for the government to resolve political stability problems and settle labor and local tax matters. If one looks at government performance and the obstacles faced in implementing good governance, it certainly is difficult to expect that the cost of doing business will decline in the near future. The implication is that foreign investment will not return unless significant reforms are made in law and order. Perhaps we must prepare ourselves to live without foreign investment for the next two to three years.