Economic reform package

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