Economic progress during Megawati's first year

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.