Govt economic policies
The Jakarta Post's comment about our country's problems and the government's economic team's performance in an editorial titled Bitter medicine on May 17, contains a number of factual errors.
This economic team shares the deep concern of the Post about the consequences of a weakening currency. Since the current Cabinet took office, the economic team has been working hard to implement policies to strengthen the economy and the rupiah. We have been successful in a number of areas, as acknowledged by our partners.
In an important sense, the depreciation of the rupiah is at least in part a "monetary problem". Bank Indonesia, not the government, was given the responsibility by the current Central Bank Law to maintain the value of the rupiah. If monetary growth is too rapid, one will see the type of depreciation that we have seen over the past 18 months. As Ross McLeod of the Indonesia Project at the Australian University in Canberra pointed out on your editorial page "if inflation and depreciation of the currency get out of hand, the Central Bank must bear the blame". And the fact is the Central Bank Law provides one single objective for Bank Indonesia, i.e. maintaining the value of the rupiah.
The economic team supports the central bank's efforts to tighten the monetary policy, lower inflation and strengthen the rupiah. Wherever blame lies for our current predicament, there are a number of tough decisions that must be made. For instance the weak rupiah and high interest rates that are needed to address them have completely undermined the 2001 budget as passed by the House of Representatives. Thus we now project that without dramatic adjustments to our policies, the budget deficit will balloon from 3.7 percent to 6 percent of Gross Domestic Product.
Since such a high deficit cannot be readily financed without fueling further inflation or forcing interest rates even higher, difficult times demand that hard choices be made. It is for this reason that the government is proposing a series of tough measures to the House. These will include reducing the burden of subsidies on the budget, an increase in the value-added tax and a reduction in development expenditures.
The House will have to make sure that it too can make hard choices. The nation cannot afford to ignore the budgetary problems in the hopes that it will somehow go away. Failing to act now will only further weaken the rupiah and cause further suffering for all Indonesians.
I would like to take exception to the short shrift your editorial gives to the accomplishments of the people of Indonesia last year. We should all be proud that despite the problems in the country last year, the economy grew at 4.8 percent and continued to grow at 4 percent into the first quarter of this year, driven by high levels of non-oil and gas exports, higher than precrisis levels. As stated by Coordinating Minister for the Economy Rizal Ramli when he took office in August 2000, his priority is first of all to push exports. That we now have the beginnings of a recovery, as indicated by the increased use of electricity and cement and increases in car production and sales of motorbikes, is in part due to the diligence of a well- coordinated economic team.
The economic team is now working to implement a comprehensive set of economic policies that will improve the productivity of Indonesian capital and labor so that our products are competitive in world markets irrespective of the value of the rupiah.
But economic policies do not work in a vacuum. It will take more than good economic policy to strengthen the rupiah. Without some sort of solution to our political problems, there is not much that an economic policy can accomplish.
KOMARA DJAJA
Deputy Macroeconomics and Finance
The Office of the Coordinating Minister for
Economic Affairs