Govt told to safeguard domestic economy

Berni K. Moestafa, The Jakarta Post, Jakarta

Experts have urged the government to ensure legal certainty and restore security in order to attract new investment to help cushion the country from the looming global economic slump.

Former finance minister Bambang Sudibyo said that the administration of President Megawati Soekarnoputri must give a signal to the market that it was serious in resolving the present legal imbroglio and ongoing security problems.

"The key is to attract new investment, but we need legal certainty and security guarantees. This is what has been lacking," Bambang told The Jakarta Post on Sunday.

He explained that there was strong evidence now that the world economy was heading toward a recession, but there was nothing the government could do to prevent it from happening except to moderate the impact on the country by taking concerted measures to prop up domestic investment.

Centre for Strategic and International Studies (CSIS) economist Hadi Soesastro concurred.

Hadi said that the government must resolve "the domestic mess", including security and legal problems, to entice new investment so as to help the economy to grow and create more jobs.

"An economic package alone will not be sufficient," he said.

Some businessmen had earlier called on the government to provide an economic stimulus package, as have been prepared by other governments in the region, to help the country brace itself for the economic repercussions of last month's terrorist attacks in the U.S.

The attacks have left the world teetering on the brink of a recession, pushed by a sharp plunge in U.S. consumer and business confidence.

Economist Umar Juoro of the Association of Indonesian Muslim Intellectuals (ICMI) predicted the global economic slowdown would extend well into next year.

"It's going to be tough without a stimulus package from the government," he told the Post over the weekend.

But Umar said Indonesia could hardly afford a spending binge to spur economic growth given its gaping budget deficit.

Instead, he suggested redirecting bank credit portfolios away from Bank Indonesia promissory notes to the productive sector.

Since the 1997 financial crisis crippled the country's banking sector, many banks have come to rely on government bonds and Bank Indonesia certificates, known as SBIs, for their earnings.

This situation places huge fiscal constraints on the budget, as the government must pay interest on the bonds.

Umar said that if the banks were to skim off 10 percent of their bond interest earnings and allocate it to fresh lending, then economic growth should be stimulated.

"It's public money, and most banks are now state-owned anyway," he said.

Banking analyst Mirza Adityaswara at PT Indosuez W.I. Carr Securities said Bank Indonesia should ease its monetary policy.

"A one percent cut in SBI rates amounts to a saving of Rp 2.5 trillion, which the government can spend on development," he said.

Thus far, Bank Indonesia has persisted in keeping rates high in order to lower the base money supply to Rp 110 trillion.

Meeting that target is one of the promises the government has made to the International Monetary Fund (IMF).

Mirza said the government should persuade the IMF to ease its base money target to allow the central bank to lower SBI rates.

Senior economist Raden Pardede at PT Danareksa Securities concurred, but cited security, political and legal certainty as preconditions.

"Uncertainty makes people run for cash which raises the base money supply, hence we have high SBI rates," he said.

Raden said a fiscal stimulus under this and next years' tight budgets was unlikely unless the government aimed for higher revenue targets.

Tax collection, privatization, asset sales, and raising new foreign loans were among the best options for achieving that goal.

But he warned that the rising nationalism of legislators would likely hamper the achievement of privatization and asset sales targets.

"If we want a stimulus there is a price to pay, like paying interest on new loans or losing ownership of assets," he said.