Economic reform package

The government's package of measures that includes steps to boost the stock market, cut budget spending, raise luxury tax and cleanse the banking industry of unsound banks is welcome. This could prevent the country from plunging into a worse financial crisis. Probably, the worst affected in the present crisis are expatriates who bought stocks in the Jakarta Stock Exchange from hard-earned salary income. Compared to friends who had U.S. dollar deposits, those who bought stocks had a double jeopardy as the loss is both on account of drop in stock prices and the depreciation of the Indonesian rupiah.

You felt that the lifting of the limit on foreign purchases of shares at initial public offerings (IPO) will help reinvigorate the capital market (Preventing a crisis, The Jakarta Post, Sept. 5, 1997). I feel that an increased reliance on foreign investors may not be healthy for any stock market. Both the government and industry should make serious attempts to tap the vast number of potential domestic investors.

One way of doing this is the abolition of withholding tax on dividend payments to individual investors, after all, the dividends are disbursement of funds from after-tax profits. Though the withholding taxes can be adjusted in the tax returns, probably, individual investors may find it troublesome. This will make the dividend income comparable to interest income from bank deposits and will definitely attract cautious domestic investors to the stock market who would be content with the dividend income and even with a small appreciation of stock prices.

This can also curtail the volatility in the stock market to some extent, as this class of investors tend to keep the stocks. The exchequer may not lose in the long run, as the industry will have more equity, which can either replace loans from banks or be used for the growth of the companies. When the equity replaces the loans, the interest payment by the companies reduces and profit before tax improves; interest being tax deductible. Thus, increased equity benefits the industry as well as the exchequer.

D. PRABHAKAR

Jakarta