Government told to sell assets quickly

JAKARTA (JP): International economists urged the Indonesian government to accelerate sales of assets to speed up the pace of recovery and strongly warned against resorting to any form of exchange control as a quick fixer to stabilize the rupiah's exchange rate.

The economists, speaking at a panel discussion here on Tuesday, also strongly suggested that Bank Indonesia (the central bank) ease monetary policy to fuel economic expansion.

"I don't think Indonesia can now afford to introduce exchange controls. Nor is a currency board system appropriate for the country," asserted economist Paul Krugman of Princeton University, U.S.

Krugman argued that even though Malaysia achieved a stronger, quicker recovery under a regime of exchange control, the Indonesian government simply lacks administrative depth and credibility to manage such an exchange system.

Krugman, one of few economists who accurately forewarned of the East Asian economic crisis in late 1997, was a keynote speaker at the meeting on Indonesia's road to recovery that was organized by Strategic Intelligence, an economic research agency.

Other economists participating in the panel discussion that attracted quite a large audience were: Hubert Neiss, former director of the Asia and Pacific Department of the International Monetary Fund and the architect of Indonesia's bailout program in November 1997, IMF senior resident representative in Indonesia John Dodsworth, World Bank Country Director for Indonesia Mark Baird, Bank Indonesia's Deputy Governor Miranda Gultom, Standard Chartered Bank's chief economist for Southeast Asia Wong Yit Fan.

"The monetary policy should not react too much to inflationary pressures and should not be too cautious about lowering interest rates," Krugman added.

Bank Indonesia has steadily raised its benchmark interest rate since early May after the tightening of monetary policy in the U.S. and in reaction to the recent deterioration of the rupiah against the U.S. dollar.

The central bank's benchmark interest rate is now around 13.3 percent, compared to less than 11 percent in April.

Krugman conceded he was out of new ideas on how to speed up Indonesian economic recovery, but cited speedy resolution of the corporate and government debt trap and corporate and bank restructuring as top priorities of current policy measures.

The government's debts are now estimated at more than US$146 billion, of which $74 billion are foreign debts and $72 billion domestic debts in the form of treasury bonds issued to recapitalize banks. Foreign corporate debts are estimated around $65 billion.

Krugman stressed the urgent need for the development of strong, independent institutions to execute reform and a credible system to broaden the tax base, as well as acceleration of the privatizing of state companies.

Neiss, currently Deutsche Bank's Asia chairman, shared Krugman's view that Bank Indonesia should not raise interest rates to cope with the rupiah's depreciation.

He also warned that any form of exchange control would scare away investors.

Miranda noted that the central bank's monetary policy has to deal with challenging situations due to the weakening rupiah and increasing inflationary pressures.

"The banking industry has not yet resumed significant lending and that is very worrisome," Miranda added.

Baird, Dodsworth and Neiss agreed that accelerating sales of the assets currently managed by the Indonesian Bank Restructuring Agency is pivotal for fueling economic recovery.

Dodsworth said he understood the concern over the risk of fire sales but the dilemma is that "without significant asset sales, recovery will never come and the quality of the assets will deteriorate."

The economists referred to the Rp 600 trillion (US$72 billion) in assets taken over by IBRA from closed and nationalized banks.

While Krugman declined to comment on the economic team in the new Cabinet because, "I don't know those people", other panelists opined that the team should immediately set a firm policy direction to gain credibility in the market.

"The new economic team needs to firmly demonstrate up front policy direction to convince the market," Dodsworth said.

The panelists cited policy directions in the 2001 state budget, fuel subsidy cuts through fuel price increases in October, preparations for the decentralization of political and fiscal power to the regions, civil service reform and corporate and bank restructuring as crucial for establishing the Cabinet's market credibility.

"The government should step up interference in the process of corporate debt restructuring," Neiss said.

The economists also agreed that the new Cabinet should be given a fair chance to prove itself. (bkm/vin)