Geared up for 1996

Geared up for 1996

We have just ended 1995 with an impressive economic growth
rate, which was estimated to be 7.1 percent by President
Soeharto. After three consecutive years of such a respectable
performance, we enter the new year confident of more robust
growth.

The turbulence we encountered in the second week of last
January, when the central bank was forced to draw on US$500
million of its foreign reserves holdings to defend the rupiah
from speculative attacks, is not likely to recur this year. In
the event of another financial debacle like the Mexican peso
crisis in late 1994, which set off attacks on our rupiah,
Indonesia has taken the necessary precautions.

Bank Indonesia (the central bank) has cemented an interlocking
set of bilateral repurchase agreements with Australia, Hong Kong,
Malaysia, Thailand and Singapore to cope with speculative
assaults on the rupiah. Last week, the central bank widened its
intervention band for the buying and selling rates of the rupiah
against the American dollar to cope with the impact of short-term
capital flows. Moreover, our inflation rate last year was kept
below 8.5 percent. Though the level is still a high single-digit
figure, it has come down significantly from 9.24 percent in 1994.

Our national rice stocks, buffered by 1.3 million tons of
imported rice and a four percent production increase last year,
are now well above the safety level. Barring disastrously bad
weather conditions, we can expect an even better harvest this
year.

The monetary authority has taken a series of measures to cool
down our overheating economy. These moves will hopefully be
strengthened by a conservative fiscal policy through the
1996/1997 state budget, which will be proposed to the House of
Representatives on Thursday. The government is so strong that,
despite in the face of general elections next year, it won't need
to provide political goodies, which usually run counter to sound
fiscal management. Hence, we expect a moderate state budget
expansion, which, in real terms (adjusted for inflation), will be
only slightly higher than the current one.

So sound are the fundamentals of our economy and so rosy are
most of the key indicators that the biggest threat to maintaining
economic stability and growth might come from complacency and
overconfidence.

Complacency could divert our attention from the real problems,
which are still regarded as perceived rather than real dangers,
and eventually hurt our economy. Among the most pressing problems
are the eroding international competitiveness of our economy
caused by inefficiency, market distortions (monopoly, oligopoly)
costly red tape, corruption, inadequate infrastructures and low-
quality human resources.

Three successive years of healthy economic growth may seduce
policy makers into quiet satisfaction and a feeling that massive
economic and bureaucratic reforms are not necessary since we have
been doing so well so far.

Such complacency could cause officials to underestimate
President Soeharto's year-end instructions (repeated in almost
every year-end address of the past ten years) regarding:
budgetary discipline, the reduction of wasteful spending, the
fight against corruption, more efficient and better public
services as well as effective supervision within government
offices and state companies.

Furthermore, the continuous wave of business complaints about
red tape, illegal levies and other forms of malfeasance reveal
the smug attitude of a bureaucracy slow to reform its ways of
doing things.

Government leaders therefore need to work harder to convince
the rank and file of President Soeharto's urgent message. Our
economy is so inextricably linked to the world economy now that
any mistake or policy inconsistency at home will undoubtedly be
punished by the international market.