Economic management

Economic management

We can't avoid reading a great deal into the suggestion by the
World Bank's Vice President for Asia and the Pacific Region,
Russell Cheetham, that Indonesia should maintain great prudence
in its economic management. Therefore, we are reassured by
President Soeharto's immediate reaffirmation to Cheetham of the
government's strong determination to continue its sound
macroeconomic management and to be persistently prudent in
managing its foreign debts.

For the World Bank delegation, which was led by Cheetham, to
make such a suggestion directly to the President at their meeting
last week required moral courage in view of the robust condition
of the economy. At this point in time, when the economy is
bullish with a growth rate exceeding seven percent last year and
foreign investment approvals hitting all-time records, such a
message of caution might be seen as strange.

The pressures on Indonesia's economy due to the impact of the
12 percent appreciation of the Japanese yen since early last
month have not been as strong and damaging as the jolt caused by
the 50 percent fall in the oil prices and the steep surge of the
yen in 1986. The double blow in 1986 forced the government to
devalue the rupiah against the American dollar by 45 percent and
to ask its major creditors for special assistance (fast
disbursing aid) for local financing.

Nevertheless, the President's reaffirmation of the strong
commitment to sound macroeconomic management serves as a timely
reminder to both the policy makers and other officials, as well
as the private sector that great prudence remains the order of
the day despite the rosy overall picture of the economy.

We think, Cheetham, who was the World Bank resident director
in Jakarta for several years in the 1980s, had strong reasons
that compelled him to call for greater prudence in economic
management. After all, the World Bank -- the largest multilateral
creditor for Indonesia and the chair of the country's creditor
group (the Consultative Group on Indonesia)-- has always been
well apprised of Indonesia's economic condition through its large
staff in Jakarta.

True, the structure of the country's economy is now much
stronger and has a much broader base. Oil and natural gas account
for only around 25 percent of the government's revenues and total
export earnings, compared to 65 percent in 1986. But the robust
economy actually does not allow any room for complacency,
especially in the wake of the steady appreciation of the yen.

Instead, Indonesia's large debt burdens, which have reached
US$88 billion with a debt service ratio of 32 percent against
export earnings, should force the government to be more careful
in managing the external balance. The central bank itself has
acknowledged that each one percent rise in the yen value against
the dollar adds $300 million to Indonesia's outstanding debts.
Since early March alone, the yen has appreciated by around 12
percent against the greenback.

Officials and the private sector should realize that despite
the sound fundamentals and stronger structure of the economy, our
safety valve is already overworked. We cannot afford to make more
mistakes without adversely affecting the capability of our
economy to weather unexpected turbulences such as the fallout of
the recent financial crisis in Mexico. Even a small mistake could
result in extensive economic instability.

In fact as recently as January, several foreign fund managers
were jittery about Indonesia and dumped their rupiah holdings on
the basis of the fear that the financial crisis in Mexico might
repeat itself in Indonesia. A short wave of unsettling events
occurred again in the Jakarta foreign currency market immediately
after the yen's steep appreciation two weeks ago. Though this
nervousness was actually an overreaction, those jitters indicated
the vulnerability of foreign investors' confidence in Indonesia's
economy.

All this makes it even more imperative then ever for the
government to be consistent with its prudent economic management,
especially now when the robust economic condition seems to tempt
several segments within the bureaucracy into complacency.
Inconsistency, even in microeconomic policy instruments, and
laxity in the enforcement of the ceiling on the private sector's
external borrowings would send off the wrong signals.