Failure to restore political crisis will worsen economy

JAKARTA (JP): The success of the government's attempts to resolve the country's political difficulties will become a determining factor in leading the crisis-hit country out of its dire economic situation, according to three leading economists.

The University of Indonesia's Sri Mulyani Indrawati, government adviser Arsjad Anwar, and Rizal Ramli from the Econit research institute said here on Friday that failure to end the political crisis would lead to further deterioration in the country's economy.

"The recovery of our economy will become a dream if the political and social crises are not resolved," Sri Mulyani told a seminar organized by Bisnis Indonesia on Friday.

Investors are concerned by the country's political instability, which is partly due to the inability of the President B.J. Habibie's administration to introduce a clear-cut agenda for political reform.

Habibie became President in May after his mentor, former president Soeharto, was forced to resign amid growing social unrest and crumbling support for his autocratic rule.

Since then, Habibie's new administration has been dogged by persistent antigovernment protests and demands for sincere political reform.

A general election is planned for June 7 next year. The People's Consultative Assembly (MPR) will then convene in a general session on Nov. 30 to elect a new president and vice president.

The economists said that most foreign investors would wait to see what happened during the general election before contemplating a return to Indonesia.

"If the general election passes satisfactorily, it will mean that Indonesia still has as future. But if not, Indonesia will sink," Rizal said.

Sri Mulyani said the economy would begin to improve if the current political problems could be resolved.

If this happened, she argued, gross domestic product (GDP) would decline by only two percent next year, compared to more than 15 percent in the current financial year.

"Under the most optimistic scenario, our economy is expected to contract by only two percent, inflation is forecast at 20 percent and deposit rates would fall to 30 percent," she said.

The government has forecast economic growth of between negative one percent and plus one percent next year along with an inflation rate of between 15 percent and 20 percent and a rupiah- dollar exchange rate of between 7,000 and 8,000.

However, she said that if political and social reform agendas were not adhered to, economic growth would be negative 6 percent, inflation would be 35 percent and interest rates would hover at around 45 percent.

Rizal presented an even gloomier set of forecasts. He predicted a 5 percent contraction in the economy next year, even if the general election passed off successfully.

"That is the most positive scenario, while the worst is that our economy will contract by 15 percent," he said.

Sri Mulyani said the government's failure to resolve its political difficulties would result in economic growth of negative 8 percent and an inflation rate of 45 percent.

"This will keep interest rates up at around 55 percent and the rupiah-dollar exchange rate at the 12,500 level," she said.

The rupiah, which fell to Rp 16,800 against the dollar in May this year, is now hovering at around Rp 7,500, with currency dealers confident it will remain at this level for the rest of the year.

Rizal said the stability in the rupiah exchange rate was the result of government intervention and bullishness in the regional markets.

"A stable rupiah does not reflect an improvement in our economy. There is still a long way to go," he said. (aly)