Experts say LoI targets reprieve for businesses

JAKARTA (JP): Businesses can expect a recovery in investment activities following the signing of The International Monetary Fund's (IMF) Letter of Intent (LoI), experts said on Tuesday.

Bustanul Arifin of the Institute for Development of Economics and Finance (Indef) said he expected a jump in investments on the back of economic reform targets under the LoI.

"In the long run we'll see more investment flowing in," Bustanul told The Jakarta Post.

He said several points in the recently signed LoI opened the door for revitalizing the country's dull investment growth.

He said the IMF, in relaxing its base money supply target to Rp 110.5 trillion (about US$12.31 billion) from Rp 108 trillion, eased pressure on Bank Indonesia's interest rates.

Bank Indonesia has been raising interest rates to absorb the money supply, curbing pressure on inflation and the rupiah.

With a current base money supply at over Rp 111 trillion, the central bank has been reluctant to cut interest rates.

Instead, rates have been steadily rising even after the rupiah has firmed. From 14 percent early this year, Bank Indonesia's three month promissory notes could test 18 percent this week.

Given the high rates, it has become difficult for banks to expand their lending portfolio to businesses.

Lowering the central bank's interest rates is essential to allow banks to reduce theirs and thus lower the cost of borrowing for businesses.

"We hope that banks will soon resume its intermediary role in the economy," Bustanul explained.

Without the banking sector pushing investment, analysts remain gloomy over Indonesia's economic growth outlook.

The government has said its economic priority is the creation of more jobs, which is a prerequisite for higher economic growth.

Economist Hadi Soesastro has estimated Indonesia's economy must grow by 7 percent to absorb a 2.5 percent growth of the country's work force.

Under the LoI, the government expects the economy, as measured by its Gross Domestic Product (GDP), to grow between 3 percent and 3.5 percent.

"For every increase of 1 percent in GDP, the government provides 400,000 new jobs," Bustanul continued.

Another boost for the real sector is the LoI's demand for contingency funds worth Rp 3 trillion to help deficit provinces, he added.

The funds are part of the government's fiscal decentralization policy to help the budgets of poorer regions.

"The funds will go to regional administrations for spending, meaning that it will be spent on local economies," Bustanul said.

He said that as the IMF largely dealt with monetary policies, most of the LoI's impact on businesses would only be felt in the long term.

He cited as an example structural reforms, such as promoting good corporate governance and legal certainty, which would take time to bear fruit.

Turning to the informal sector of the economy, Bustanul said, the impact of the LoI there would be even less significant.

"It's not the IMF's job to deal with our informal economy, and the government also focuses more on the formal economy," he said.

Nonetheless, he said, the IMF and the government acknowledged the importance of the informal sector, which had absorbed much of the country's work force when the manufacturing sector, as well as other sectors, went bust during the 1997 economic crisis.

Bustanul said the informal sector would benefit from the impact of which a healthier state budget would have on the economy.

National Economic Recovery Committee (KPEN) executive Anton J. Supit described the LoI as start-up capital for the government to lead the economy into recovery.

He said the signing of the LoI encouraged foreign investors to take interest again in Indonesia.

But Anton warned that most of the problems that had blocked their entrance were related to issues outside the LoI.

"Now that the door has opened to new investment, it will be up to the government to do its homework on cleaning up old problems," he said.

He cited rampant security threats, inconsistency in government policies and legal uncertainty as the real menace behind the disappearance of foreign investors.(bkm)