Econit criticizes government over new car policy

Econit criticizes government over new car policy

JAKARTA (JP): The government's national car policy is likely
to exacerbate the country's current account deficit, the Econit
economic research group said yesterday.

In its public policy review, the research group said that the
government's drive to develop a national car is positive but that
its policy is misguided.

"The instruments used to achieve (a national car) are
inappropriate," said Rizal Ramli, a senior researcher at the
group.

The group faulted the government's latest car policy, which
puts more emphasis on local content than export performance.

"A local content-oriented, not export-oriented, policy is only
a reincarnation of the government's old policy of an import
substitution strategy, which turned out to be ineffective and out
of date," Rizal said.

The government decided last February to grant tariff and tax
breaks for the next three years to PT Timor Putra Nasional, the
only company to receive the privileges. The company, controlled
by President Soeharto's youngest son Hutomo Mandala Putra, will
develop the "Timor" car with a local content requirement of 60
percent by the end of the third year of production.

"If such a reincarnation is only designed for the interest of
one company, it will lead...to the substitution of beneficiaries,
from old rent seekers to new rent seeker," Econit's report said.

The group also criticized the government's national car
program for being non-transparent, inconsistent and
discriminatory. "Such a policy could reduce investor confidence
in the country's business climate."

Econit called the program a pseudo-nationalistic policy which
could result in industry inefficiencies and pose an eventual
burden to the country's economy.

The Indonesian Automotive Industry Association forecasted
recently that the government will lose at least Rp 2.1 trillion
(US$900 million) in revenues over the next three years from the
tax and tariff breaks, assuming that Timor Putra sells 150,000
sedans during that period.

Econit said that the national car policy will also worsen the
country's current account deficit, which is expected to remain
high for the next four to five years.

The government has said that the country's current account
deficit in 1995/1996 will reach $7.9 billion, far higher than the
government's earlier estimate of $3.1 billion. This fiscal year,
the deficit is expected to drop slightly to $6.9 billion.

Some analysts, however, projected that during the next four to
five years, Indonesia will continue to suffer from a high current
account deficit of $10 billion due to the government's pursuit of
high economic growth.

To support the national car program, Econit said, the
government will have to provide $800 million to import capital
goods for the construction of Timor Putra's production
facilities.

On top of that, the automotive industry association has
predicted that the country will have to earmark at least $750
million to import the required components from South Korea,
provided that the components for one car cost Timor Putra $5,000.

In addition, the policy allows the newly-established Timor
Putra to import up to 100 percent of its components tariff-free
during the first year of operation.

"When Indonesia is suffering from a high current account
deficit, the government should avoid such a problem... It could
eventually put the country's macroeconomic performance at risk,"
the review said. (rid)