Economic progress during Megawati's first year

Anggito Abimanyu, Expert Staff, Ministry of Finance, Jakarta

A year has passed since the People's Consultative Assembly (MPR) appointed Megawati Soekarnoputri as Indonesia's fifth President. The transition took place during a turbulent period characterized by the growing specter of social unrest, the threat of national disintegration and deteriorating economic fundamentals.

Following more than two years of political stalemate and amid continued declines in investor sentiment and disagreement with the International Monetary Fund (IMF), many believed that Indonesia would be unable to overcome the problems that followed the Asian financial crisis or to carry out the reforms necessary to ensure sustained economic growth.

Much has happened during these last 12 months. The media has been focusing on the many problems that continue to afflict the country. Many seem to forget, however, that less than a year ago investors had all but written off Indonesia's prospects. The appointment of Megawati led to improved political stability while a new economic team, after quickly reaching an agreement with the IMF, started working to inject new life into an economic program, which had been stagnating for months.

Addressing each of these issues will require time and careful planning. The present administration is a coalition reflecting a delicate balance between various constituencies. Furthermore, these reform efforts must be implemented at a time when the world economic environment continues to weaken and excessive global equity market volatility threatens further financial turmoil.

In the case of Indonesia, the two main pillars of the government's program for macroeconomic stability are fiscal sustainability and monetary prudence. Albeit slowly, improvements in domestic security and political stability have markedly improved Indonesia's risk profile. These changes have led to a gradual appreciation of the rupiah and allowed Bank Indonesia to begin lowering interest rates.

Despite pressure from administrated price increases over the last few months, inflation has been on a downward trend since March. The decline in asset volatility has been vital to the improvement in domestic confidence while creating an environment conducive to better business practices.

Similarly, successful debt restructuring agreements with our official and commercial creditors, grouped through the Paris Club and London Club, have further helped the efforts to rein in the growing fiscal deficit pursued through the acceleration of asset sales and the reduction of energy subsidies. This process of fiscal consolidation has continued further with the drafting and passage of the budget for 2002, which targets a lowering of the deficit to 2.5 percent of gross domestic product.

One of the major efforts over the medium term involves an extensive and comprehensive overhaul of our tax and customs administration systems. These reforms are under way, but will take time to complete. Although these achievements are encouraging, the challenges that lie ahead remain formidable and we cannot, therefore, risk complacency.

First, further weakness in the global economy and equity markets means that we shall continue to be heavily dependent on domestic demand to fuel growth. Fortunately, consumer demand has responded positively and is continuing to strengthen, while there is an acceleration of private investment in the country, a tendency likely to be further supported by the decline in domestic interest rates.

A second major challenge is the need to speed up the pace of corporate debt restructuring. While this may be an area in which the government has limited power to effect change, we are accelerating the pace of asset sales from the Indonesian Bank Restructuring Agency (IBRA) and that of the privatization program in an effort to return these assets to the private sector. This may help the private sector's efforts by providing an incentive to push ahead with their own restructuring.

Third, we must continue to formulate plans to increase much- needed government spending on infrastructure, education and poverty alleviation initiatives. These have been severely impacted by our need to bring the budget deficit under control and rehabilitate the country's debt position following the recapitalization of the banking sector in 1998. The government has begun to work with multilateral development agencies, donors and the private sector to formulate innovative plans aimed at meeting the country's infrastructure and development needs.

Finally, the government is also striving to improve the country's investment climate as we continue to implement the decentralization program. These efforts to give greater power and independence to our regions and municipalities through revenue sharing have gone more smoothly than many expected.

The goal is to progressively transfer authority to local governments in a fiscally responsible way while preserving the territorial integrity of the republic, its economic stability and the quality of public services. The government is also working with the regions to address both financial and regulatory matters that could potentially create problems for investors.

At the same time we are beginning to push harder on the legal reform agenda. This has proven to be a difficult area as the weaknesses in legal and judicial systems are deeply embedded in institutions. Improvements will need time and political will, but an improving economy should help.

While we cannot and should not prejudge the outcomes of the trials, the indictments represent a substantial change. Another important achievement is the recent passage of a money-laundering bill, a bill with provisions at Organization for Economic Cooperation and Development (OECD) standards. Drugs, crime and terrorism are all growing problems and we hope that this law and the center for financial transactions and reporting that it establishes can assist us in dealing with them.

We recognize that to consolidate what has been achieved to date and to strengthen the economic recovery, we must accelerate our structural reforms in an effort to improve the business climate and reduce risks and uncertainties further. The country's current growth rate remains below the economy's potential and is not yet sufficient to generate the level of employment needed for our population or to reduce the overall poverty level.

A lot remains to be done. However, while we may be taking slow steps, we have every intention of reaching the finish line. The future of our country and our people depend on it.