Government offensive 'needed to defuse crisis'

JAKARTA (JP): Noted economist Rizal Ramli has criticized the government for being too defensive in handling the financial crisis.

Rizal, a director of the Econit consulting agency, said a more offensive strategy was needed.

He said Wednesday the government's approach had forced it to become defensive, such as by denying various rumors and calming down fears, and it lost the ability to take initiatives.

Rizal cited two factors which caused government officials to become defensive.

First, "intellectual bankruptcy". Due to this weakness, technocrats had intellectually failed to solve the financial crisis, which had hit the country since July, he said. Instead, they sought for an easy way out, including by asking for foreign assistance and selling state assets at bargain prices.

The second factor was a "leaving mentality". With such a mentality, he said, many outgoing members of the House of Representatives only saw the weakness of the government's policy without giving any concrete solution.

Rizal cited several strategies to deal with the country's deepening financial troubles.

The government, for example, had to be based in reality by clearly stating the problems publicly. The political and economic elite must also be willing to sacrifice.

Rizal said the current cabinet must be reshuffled, even before the completion of its five-year term in March to wipe out the "leaving mentality".

"In the run up to March, many things can be done, as has been shown by South Korea, which could rebuild confidence in two months," he said. "If the government fails to come out with an offensive strategy in the next three months, economic problems could become sociopolitical problems with extensive implications."

He said priorities, therefore, must be given to monetary and foreign exchange stability.

According to Rizal, there were four components of the offensive strategy to salvage the country's economy.

First, monetary and foreign exchange stability. He said Indonesia must leave the floating exchange rate system and return to a fixed exchange rate by pegging the rupiah to the U.S. dollar.

The uncertainty and economic costs of a floating system, which had been implemented since August last year, was considered too large.

The system opened ways for external forces to contribute to setting the exchange rate for the rupiah. Financial centers in Singapore, London and New York had become places that dealt in the fate of the rupiah, despite the small transactional volume of the currency in international markets.

Second, synchronization of the monetary and fiscal policies. The willingness to sacrifice and concrete measures must be shown in the State Budget.

Third, improving the health of national banks. The 1988 banking deregulation had boosted the growth of the domestic banking industry, Rizal said, but failed to provide a prudent management system.

To revive domestic banking conditions, a merger policy is not sufficient. It must be based on a thorough financial restructuring of the domestic banking system, including the conversion of debt into equity and injection of fresh capital.

Fourth, the restructuring of the overseas debt of private companies. A conservative estimate showed that the equity-to-debt ratio of Indonesian conglomerates stood at one-to-eight assuming an exchange rate of Rp 6,000 to the dollar, he said.

If the rupiah weakened from that level, many private business groups would technically be bankrupt.

Under such a critical condition, Rizal said, the government should come up with a restructuring of the country's business landscape. This might include a leverage buyout of troubled businesses by the government. (08)