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reincarnation of the government's old policy of an import substitution strategy, which turned out to be ineffective and out of date," Rizal said.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)