Geared up for high growth

Geared up for high growth

The central bank's benchmark interest rate fell to as low as
13.06 percent last week, from almost 17 percent in January and
15.11 percent in June. Yet more encouraging is the chance for
this trend to continue, as inflationary pressures decrease and
the rupiah's exchange rate stabilizes at a considerably
appreciated level at or below Rp 9,000 to the American dollar.

Cumulative inflation during the first nine months of this year
was checked at 6.17 percent, making it highly probable that
inflation for the entire year will be contained at a single-digit
level.

All this is surely sweet music to enterprises, which have long
suffered a credit crunch, as they can now expect cheaper loans
from banks. Lending will expand at a faster rate because the
lower interest rates are eating into banks' revenues from
government bonds.

This is a virtuous cycle that is being generated by the
strengthening macroeconomic picture. Even the World Bank
acknowledged in the latest assessment of its country-assistance
strategy for Indonesia that there are now good prospects for a
high-growth scenario, meaning an annual economic expansion of 5
percent to 6 percent.

However, these prospects will not be realized if there is not
stronger leadership to accelerate the implementation of reform
measures, notably those related to better government financial
management, a faster rate of asset recovery and corporate debt
and bank restructuring, more vigorous tax collection and
privatization of state companies.

These measures are imperative to free more enterprises from
their bad debts, allowing them to become more productive
operations and enabling the government to reduce its debt stocks
and to allocate more resources for investment spending.

Yet more important is that the reduction of public sector
debt, now estimated at about 90 percent of gross domestic
product, will decrease the country's sovereign risk.

In the absence of speedier and firmer reform measures,
however, the economy will likely continue to muddle through,
remaining highly vulnerable to periodical shocks and instability
caused by the painful process of political liberalization and the
massive decentralization of power to the provinces and districts.

In this scenario, economic growth would continue to languish
below 4 percent, barely enough to absorb the 2.5 million new job
seekers annually entering the labor market, let alone to generate
larger tax revenues for the government to service its huge
foreign and domestic debts.

Consequently, the government, tied up by its fiscal
restraints, would be unable increase spending on public services
and basic infrastructure, while private consumption, the main
engine of the economy over the last three years, would lose
steam.

Only investment spending, especially foreign capital, and
external demand (export) can provide much of the additional fuel
needed for generating higher growth. But these two engines will
only run with improved policy consistency and continued
structural measures to make the overall situation conducive for
business operations.

There are at least two main reasons as to why it is now
imperative for the government to seize the momentum of the
current macroeconomic stability to speed up the reform movement
to attain higher growth next year.

First of all, higher economic growth is urgently needed to
reduce poverty. With more than half the people still living on
the brink of poverty, even the slightest worsening of the
economic situation could plunge these unfortunate people into
absolute poverty.

Next year is a crucial moment for attaining stronger
macroeconomic stability and a more vigorous private investment
climate, in anticipation of the rather politically turbulent
period during the 2004 elections.

Even though political stability is now much stronger than
early last year, there are still risks of political upheaval as
the competition between political parties -- there are now more
than 100 parties registered to take part in the elections --
heats up.

However, a robust economy with improved macroeconomic
stability would be better able to weather this turbulent period.
People relatively better off economically could be expected to be
more capable of rationally responding to political campaigners,
who might resort to emotional, narrow-minded themes to gain
popular support even at the long-term cost to the economy.