Govt urged to reduce current account deficit
JAKARTA (JP): Pressure on the government to take immediate steps to cut the burgeoning current account deficit is growing with more business leaders and academics joining the chorus.
Chase Manhattan's senior country officer for Indonesia, Morgan T. McGrath, said Wednesday the government should continue to diversify the country's export mix and prepay its high interest external debt.
Mari E. Pangestu, head of the economic department at the Centre for Strategic and International Studies, suggested yesterday that the government produce more budget surpluses, guide investment to productive sectors and improve public savings.
She projected that the current account deficit would start to shrink to US$8.9 billion next year from her $9.6 billion deficit projection for this year.
They agreed that the current account deficit, equivalent to 4 percent of gross domestic product, was high for the country considering it had foreign debts of $110 billion.
The government announced earlier this month that the current account deficit would grow to $8.8 billion this fiscal year from $7 billion last fiscal year. The deficit is projected to blow out to $9.8 billion next fiscal year.
"It's something to watch. At 4 percent of gross domestic product, it becomes a large number because Indonesia also has a large level of foreign debt," McGrath said.
McGrath, nevertheless, praised the government's efforts to reduce the current account deficit by diversifying the export mix and using the proceeds from privatizing state companies to reduce its foreign debt.
The government said earlier this month that it had repaid $2.6 billion of its high-interest debt early in the last three fiscal years, and was in the process of repaying another $750 million early. These debt prepayments are expected to save the government $1.45 billion in cumulative interest payments.
Mari suggested the government continue to privatize state enterprises, not only to get more cash to prepay its debts but also to reduce its spending on government enterprises.
"By reducing its spending on government enterprises, the government can produce more budget surpluses, which will be important for financing productive investment to create export revenue," Mari said.
She suggested the government privatize more state enterprises, especially public utilities.
Besides reducing spending, the government should also find ways to raise its domestic revenue to reduce its dependence on foreign funds for development projects.
"I think the government can still increase its revenue from taxes by intensifying tax collection and expanding tax coverage," Mari said.
She noted that the government could increase its revenue from land taxes. She argued that most land in Indonesia was under- valued and under-taxed.
She suggested the government impose a progressive tax on land to stop people investing in property instead of productive sectors which would generate exports.
"If the government can now direct investment to productive sectors and invest more on the sectors as well as improve public saving, it will be able to reduce current account deficits in the future," Mari said.
Both McGrath and Mari commended the government's success in attracting foreign capital, especially from direct investment, to finance the current account deficit.
The government projects that the balance of payments will remain in surplus, with a more than $2 billion surplus this year and $1.45 billion surplus next fiscal year.
McGrath said the country's successful financial management was reflected by the performance of its top companies.
"When you look at major Indonesian borrowers like Indofood, Sampoerna and Astra International, you see that these companies -- because they have strong businesses and good management -- reflect the same economic trends taking place in the country as a whole," he said. (pwn/rid)