Feeding banks only deters real-sector industries

Feeding banks only deters real-sector industries

Pitan Daslani, Journalist, Jakarta

In defending her policy to increase fuel prices and utility
rates, little did President Megawati Soekarnoputri realize --
unless she really meant it -- that she was well on track to
crippling Indonesia's real-sector industries.

According to economic theory, the President did the right
thing -- that is, she has attempted to pull the nation away from
over-dependence on foreign aid and setting the tone for an
economic self-reliance yet to be born.

If Megawati deserves the nation's admiration, it is only in
that she will not reap the results of the unpopular price rises
during her term in office. What she has done, if her actions were
faithfully implemented with consistency and support from every
sector forming the Indonesian economy, would only bear fruit in
about two decades' time when she is no longer President.

Megawati should deserve admiration because only a leader with
a particular level of statesmanship would make this daring
decision, gambling with the probability of angry reactions from
the public.

The subsidy removal could compel economic and business actors
to realign strategies by standing on their own feet, rather than
by expecting privileges. This would force businesses to promote
efficiency in their survival strategies and thereby promote
business competitiveness in the international market.

Such would be the assumption of someone innocent, like a
foreign observer who arrived in Jakarta only yesterday. Such
innocent people are unaware of the prevalence of illegal fees and
collusion which are part of Indonesia's politico-business
tradition, a lethal virus that kills Indonesia's competitiveness
in the world market.

The trouble with this high-profile leap is that Megawati is
neither an economist nor a market-friendly politician, who would
otherwise refuse to create unnecessary jolts in the economy. And
this she did, successfully.

Political and economic observers alike are now wondering
whether the President was sufficiently advised before approving
the move to hike electricity and phone rates and raise domestic
fuel prices at the wrong time, a move that could only be greeted
by demonstrations all over Indonesia.

In order to understand precisely what is happening, one needs
to trace the domain from which the price hike decision
originated. The bottom line is that the government does not have
enough in its treasury to feed the bureaucracy and run the state
administration. Foreign aid has, for years, constituted a
significant portion of the State Budget while the real-sector
economy has had difficulty moving forward due to the collapse of
the banking sector in 1998.

Banks have now regained confidence following the injection of
trillions of rupiah in government bonds but, alas, those
alternative investment instruments now comprise a majority of the
banking industry's assets instead of performing credits.

At a time when political risk is still high and uncertainty
over the continuity of the national leadership looms large, banks
prefer to invest in such alternatives rather than channel their
loans to the real sector.

One recent example of a tragic policy causing this kind of
unfortunate trend was evident at the end of December 2002 and the
beginning of January 2003.

Bank Indonesia (BI), the central bank, had announced
significant reductions in interest rates by the end of 2002.
Bank Indonesia sliced the interest rates on its SBI bonds to 11
to 12 percent and envisaged its M1 to stand at only Rp 138.2
trillion by the end of 2003.

This would have been a very good signal, actually, for
business actors to get fresh loans from banks to finance new or
expansion projects, if the Cabinet had refrained from killing the
optimism.

Only a day after Bank Indonesia had announced its interest
rate reductions, however, the government dropped its bombshell on
the economy. It hiked public utility rates and the domestic
selling prices of fuel, thereby destroying the little spark of
optimism that Bank Indonesia had painfully initiated for the
revival of the business sector.

How? The frustrated government issued at least Rp 2 trillion
worth of T-bonds -- not for the general public and business
sector in general -- but for the banking sector again. The fact
is that 68 percent of the T-bonds went into the banking
industry's portfolios. In addition, the government plans to issue
a further Rp 7 trillion worth of such bonds in the near future to
generate funds for its treasury. Again, banks would feast on the
godsend opportunity to collect more revenue, forgetting their
intermediary role in the process.

Worse, the price hike decision vindicates the banking
industry's assumption that it is useless to channel credit to the
real sector, because industries are now having difficulty
surviving and are therefore unable to come up with feasible
project proposals.

The biggest irony in Indonesia is that President Megawati's
Cabinet is going against the direction that Bank Indonesia is
taking. Never before has there been such a tragic collision
between fiscal and monetary policies in this country.

Why should banks force themselves to give out loans at a time
when there are better and more convincing sources of easy
revenue, i.e., government bonds? Why would they perform an
intermediary role to feed real-sector industries at a time when
the industries themselves are crippled by the extra burden
created by increased utility rates and fuel prices? Who could
guarantee that the real-sector actors would even be able to
complete their own projects, if they should obtain bank loans at
a time when political uncertainty continues to grip the nation?

The blunder created by the widely protested decision to raise
fuel prices and utility rates is that the government is actually
attacking itself. It wants the banking sector to fuel real-sector
industries, and to achieve that goal, it has only shown the banks
a direction opposite from that in which the banks had been
traveling.

It wants real-sector industries to create new employment
opportunities to accommodate over 40 million jobless citizens,
and to achieve that goal it has only crippled the industries by
causing unnecessary increases in their production costs, to the
extent that many of them may have to dismiss their workers.

One clear example of the government's lack of sensitivity
towards public frustrations is its strange policy to reduce
excises on non-clove cigarettes produced by foreign companies,
which contribute only 10 percent of total government receipts
from the cigarette industry, while producers of clove-blended
cigarettes who employ millions of people on their production
lines are denied the privilege.

With all these unfortunate developments gripping the nation,
are there sufficient reasons for President Megawati to build
hopes of occupying the Palace beyond 2004?