Economy may not last 3 months: Econit

JAKARTA (JP): Indonesia's economy may not survive for more than three months unless the country elects a new credible government, according to an independent think tank.

Plunging foreign exchange reserves, the ballooning budget deficit and the severe lack of capital inflow are all serious threats to the economy's ability to survive the economic crisis, the Econit Advisory Group said yesterday in a discussion.

"We must have a government which is credible both domestically and internationally," said the group's senior economist Rizal Ramli.

He explained that President B.J. Habibie, and his economic ministerial team were not a solution but still part of the problem because they had served during the Soeharto era.

"It is therefore difficult to expect them to change their conventional ways of thinking in dealing with the economic crisis," Rizal noted.

Former president Soeharto ended his 32-year rule last month after pressure from the House of Representatives, students and most mass organizations. He handed over the reins of power to his protege Habibie, at the time the vice president.

However, Habibie himself is still facing strong pressure to quickly arrange a general election based on a new political system to elect a credible leader who is trusted by the people.

Econit dubbed the current government as "a new brand of old stock."

Rizal explained that because the solution to the current economic crisis depended largely on a solution to the political uncertainty, a credible government must be elected quickly.

"Time is running against us because of the economic paralysis," said Arif Arryman, another Econit economist.

Habibie, who has promised a general election sometime next year and presidential elections before the end of next year, seems to have started gaining international confidence.

The World Bank said yesterday that it had resumed a US$225 million loan to reduce poverty in Indonesia.

IMF Asia-Pacific Director Hubert Neiss has also said that Habibie had shown positive steps toward the implementation of human rights, and that the country had an impressive economic team led by Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita.

The IMF is expected to soon disburse another $1 billion in bailout money to Indonesia.

Indonesia is currently being administered to by the IMF through its multibillion dollar sweeping economic reform programs designed to lift the economy from its worst crisis in three decades.

Econit, however, said that unless the country had a legitimate and credible government the economy would soon collapse.

It cited several indicators.

Despite the punitively high interest rates, the rupiah has failed to stabilize against the U.S. dollar.

The local currency plunged to its lowest level of Rp 17,000 to the dollar in January, against Rp 2,450 in July before the crisis. The currency was hovering at around Rp 12,000 yesterday.

Rizal said the sharp depreciation of the rupiah had failed to boost exports as businesses had been hurt by the high interest rates and the international community's refusal to accept letters of credit from most Indonesian banks.

"This is a very sad situation because exports are the best and most effective way out of the crisis," he said.

He also said that the country's alarmingly low level of foreign reserves, of only around $14.5 billion compared to the short-term overseas debt obligation of $14.2 billion and import needs of $4 billion per month, was exacerbated by the virtual halt of capital inflow.

The economic hardships are being worsened by the high inflation rate which Econit estimates will reach more than 80 percent this year due to the severe shortage of essential food items.

Econit expects the economy to contract 10 percent this year against an average growth rate of 7 percent before the crisis.

"This would cause additional unemployment of around 20 million," Rizal said

Arif said that even with the rupiah standing at Rp 8,000, the government would not be able to finance its budget.

He pointed out that with that exchange rate and the price of oil at $14 per barrel, government revenue would only be Rp 114 trillion compared to expenditure of Rp 125 trillion, excluding subsidies on essential foods.

"Actually, with an exchange rate of above Rp 6,000, we're already bankrupt," he said, adding that the government may soon run out of money even to pay its personnel and the military.

Given the limited foreign exchange reserves and exploding budget deficit, the government's blanket guarantee on the claims on banks, massive liquidity injection to problem banks and subsidies on staple goods and medicines are only hastening the government's descent into bankruptcy, Arif explained.

"The personal credibility of the country's leader is key to the recovery," Rizal said, pointing out that other crisis-hit countries, Thailand and South Korea, were able to recover because of their new, credible, governments. (rei)