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.