Economy's bleeding worsens

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.