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.