Economy's bleeding worsens

Amid the hurly-burly of the political battle between President Abdurrahman Wahid and the House of Representatives on the one hand and between Abdurrahman and his vice president, Megawati Soekarnoputri, on the other, the ailing economy seems to have been neglected, left unattended.

There appears to be a vacuum of decision-making authority for the implementation of reform measures sorely needed to prevent the economy's bleeding from worsening. A new accord with the International Monetary Fund (IMF), already delayed since December, seems even farther away.

The overall condition for business is so inimical that the banking industry, still reeling under mountains of bad credits, is encountering big risks of more loans turning sour.

As the political uncertainty escalates and a special session of the nation's top legislative body, the People's Consultative Assembly (MPR), is almost certain within the next few weeks, the new basic assumptions for the proposed budget amendments may no longer be relevant by the time they are approved by the House early next month.

Particularly vulnerable to high volatility is the new assumption of the rupiah exchange rate at Rp 9,600 to the dollar, as against the average of Rp 7,800 set earlier. The dollar has been higher than Rp 9,500 since January, exceeding Rp 10,000 since March and more than Rp 11,400 since April.

This steady depreciation of the local unit has been increasing fuel subsidies, the burden of foreign debt servicing and the cost of imports, forcing the central bank to maintain its tight money policy to curb expectations of inflation. The central bank's interest rate is now hovering at slightly over 16 percent, compared to 11.5 percent originally assumed for the budget and 15 percent set in the budget amendments.

The government has estimated that every Rp 1,000 decline in the value of the rupiah against the dollar will result in an extra Rp 8-9 trillion in budget expenditure. Every one percentage point increase in the central bank's benchmark interest rate will add Rp 2.3 trillion to the budget deficit.

Pressure on the rupiah will most likely strengthen in the next few weeks. The likelihood of an MPR special session could prompt the IMF to further delay its commitment to enter into a new accord with the present government, preferring instead to wait for a new administration that could emerge from the current political contest.

Should this occur, the government's agreement with the Paris Club sovereign creditors for the rescheduling of US$2.8 billion in debt repayments falling this year could fall apart, threatening the potential of a payment default by the government. This dilemma exists because the $2.8 billion debt servicing has been discounted from the 2001 state budget and there is simply no alternative financing source to meet the unexpected expenditure.

Further delays in the reduction of subsidies through a 30 percent hike in fuel prices and 20 percent increase in electricity charges -- which is highly probable in view of the fragile political condition leading up to the MPR session -- would cause the state budget deficit to explode to an unmanageable level.

But larger-than-estimated spending as a result of the much weaker rupiah and possible delays in cutting fuel and electricity subsidies are not the only major threat to the state budget.

The apparent vacuum in decision-making authority for reform measures, notably in relation to asset sales and corporate debt restructuring, has been jeopardizing revenue targets in several sectors.

Minister of Finance Prijadi Praptosuhardjo has hinted that the Rp 10.5 trillion revenue target set for dividend payments from state companies would have to be lowered to Rp 8 trillion at the most, or even as low as Rp 7.5 trillion, due to their weaker performance caused by depreciation of the rupiah and high interest rates.

Worse still, the Rp 6.5 trillion revenue target from the sale of state companies now seems to be a mission impossible due to the legal uncertainty experienced in past privatization deals and the depressed condition of the Jakarta Stock Exchange. As of this month, only one state company, PT Indofarma, has been sold through an initial public offering, which brought in a mere Rp 150 billion.

Even more daunting is the task of achieving the Rp 27 trillion revenue target from asset sales undertaken by the Indonesian Bank Restructuring Agency. Already six months into the 2001 fiscal year, not even one third of the target has been collected.

Both the government and the House should realize that the result of their political fight will be inconsequential if the bleeding economy collapses into a second, more devastating crisis.

It is, therefore, imperative that the government and House, in spite of their political differences, remain united in the management of the economic crisis and in continuing the economic reform agenda. The economy is now like a time bomb that could explode any time soon into social, security and political chaos.