Economists doubt stimulus plan will work

The Jakarta Post, Jakarta

Economists raised doubts about a government plan for an economic stimulus package aimed at revitalizing the private sector, but welcomed the setting up of a crisis center, which, they said, should enable the government to respond to economic problems more quickly.

Senior economist at the Danareksa Research Institute Raden Pardede said he was surprised at hearing the government planned an economic stimulus package.

Kompas daily reported Vice President Hamzah Haz as saying on Wednesday that an economic stimulus package was being drafted, and might be presented by next March.

Hamzah said it was impossible to expect an economic recovery without a stimulus package to spur growth in the real sector.

"But if we're talking about a stimulus, that can only come from either the fiscal side or the monetary side," Raden said.

"And right now the government cannot afford a stimulus on either side."

He said the state budget was running too tight to allow it spare funds for a stimulus package.

A major and also growing constraint to the state budget has been the expenditure to service domestic debt.

This year alone spending on domestic debt payment is greater than development spending, which is where a stimulus could have come from.

A source at the Ministry of Finance confirmed that if a stimulus package was being drafted, it was unlikely to be a fiscal one.

On the monetary side, Raden continued, a stimulus was doubtful as well because the monetary outlook remained fragile.

"Bank Indonesia cannot afford to ease its monetary policy," he said.

Bank Indonesia's benchmark rates have been dropping since early this year, but analysts said they could rise again due to inflationary pressure and a huge foreign debt overhang weighing against the rupiah.

Instead of a stimulus package, Raden said, the government would do better improving the investment climate, which has spooked capital away.

"Legal certainty, security and political stability would do the job," he said.

Economist at the Centre for Strategic and International Studies (CSIS) Hadi Soesastro said the only stimulus the economy could hope for should come from the private sector.

"The government can't do it and shouldn't do it," he said.

Economist at Standard Chartered Bank Fauzi Ichsan agreed. He said the state budget had already been drawn up, and what was left could do little to stimulate the economy.

On plans for a crisis center, Raden said that it was a better move, designed to cope with economic problems while anticipating others.

"What it should do is monitor progress of each single item of the LoI (letter of intent)," he said, in reference to the reform program outlined in a lending agreement with the International Monetary Fund.

But he warned that the crisis center should not become a new bureaucratic organ under Vice President Hamzah's control.

According to a source, President Megawati Soekarnoputri has aired concern over Hamzah's initiative to round up economic ministers and establish the crisis center.