Indonesia's future economic challenges
Indonesia's future economic challenges
This is the first of two articles by Dr. Emil Salim,
professor of economics at the University of Indonesia and
chairman of the former National Economic Council. The article is
based on a presentation at an international conference on
Indonesia held last month in Tokyo. The event was hosted by the
Ministry of Finance.
TOKYO: Indonesia's development performance in 2000 had an
economic growth of close to 5 percent and an inflation rate below
10 percent per annum. This performance was received with pleasant
surprise, given the numerous demonstrations, conflicts in the
provinces, frequent replacements of Cabinet members, and the tug
of war between the President and the legislature.
The first quarter of 2001, however, has raised concern because
of the following indicators:
* a sharp depreciation of the rupiah from Rp 7,800 as assumed
in the 2001 budget, to Rp 10,250 to the US dollar in March;
* a fall in the composite share index in the capital market;
* the drop of Moody's rating from positive to stable and Standard
& Poor's long-term rating from stable to negative;
* the slowdown in major export markets, such as in the United
States and Japan and reduced oil prices in the world market;
* increased interest rates, as revealed in one month promissory
notes, from 11.5 percent in June 2000 to 15.58 percent in March
2001.
The declining trends shown by these indicators were influenced
by economic, social and political factors.
First, the market has sensed strained ties between the
International Monetary Fund (IMF) and the government. The review
of the implementation of the Letter of Intent scheduled last year
has been frequently delayed. It should be possible for agreement
to be reached rather soon, however, on the remaining issues:
1. Amendment of the Central Bank Law, specifically on the
notion of independence and accountability. There is also the
concern that the legislature wants more political control on
monetary policy. A panel of four eminent persons has been
assigned to assess and review these issues;
2. Fiscal decentralization, which allows local governments to
borrow from external as well as domestic sources. With the
current huge debt burden, it is irresponsible to allow further
borrowing by local governments. A government decree postponing
the implementation of foreign borrowing has been issued;
3. The divestment of Bank Central Asia and Bank Niaga, which
has been agreed by the government and the House of
Representatives. Privatization of state enterprises is also
forthcoming;
4. Principles for corporate debt restructuring under the
Indonesian Bank Restructuring Agency (IBRA), to create
transparency that maximizes recoveries for the government and is
applied in a non-discriminatory manner to all large debtors.
These are in the process of fine tuning.
With these issues satisfactorily solved, negotiations may
resume this April.
A second major issue is the 2001 budget. With the sharp rupiah
depreciation and increased interest rate, the budget requirement
for debt servicing has increased; likewise spending of activities
with foreign exchange components.
Furthermore, the delay until October 2001 in cutting the fuel
subsidy requires more spending for subsidies. Also, funds for
autonomous districts are apparently insufficient.
Fewer economic activities have dampened initial optimistic
estimates of revenue, while the percentage of Indonesian
taxpayers is the lowest among countries of the Association of
Southeast Asian Nations. In brief, the estimated budget deficit
for 2001 of fewer than 3.8 percent of gross domestic product
needs further adjustment.
Third, Indonesia is still struggling with weak institutional
arrangements, such as good governance, law enforcement,
implementation of competitive policies, elimination of
corruption, collusion, nepotism, etc. Quite a number of the
bankruptcy cases submitted by foreign firms to the commercial
courts have failed to receive fair and honest hearings. The
Minister of Justice and Human Rights is aware about this
situation and has replaced several judges.
Fourth, the issue of security becomes increasingly important
as seriously demonstrated by the temporary closure of
ExxonMobil's production facilities in Aceh. A number of other
foreign mining companies are also complaining about lax security
in the field.
Wildcat strikes, more demands for land compensation that were
settled years ago, and thefts of mining equipment in the open are
disturbing mining operations. There is the impression that
responsibility for security has been shifted by the central to
local governments -- while local administrations still expect the
central government to take responsibility.
Fifth, decentralization of economic decision-making to the
regions is politically desirable but economically difficult. The
rules on fiscal responsibilities need to be intensively
introduced. Most local governments complain about the lack of
funds and are therefore eager to introduce local income sources.
The risk of fragmenting the provinces into individual economic
compartments are high and real.
In the past, too much emphasis was placed on taxation by
central government, to be distributed later to the regions as
subsidies, which the regions considered unfair. The central
government is now suffering a backlash, as local administrations
are shifting many budgeted spending items to the center while
claiming more revenues for themselves.
Centralized management by a strong central government was
initially justified for creating and assuring unity in a country
that stretches the equivalent distance as from London to Egypt.
However when unity is stressed too long at the expense of
diversity, the reaction of the regions becomes stronger and
stronger, until it bursts into the open and releases the energy
for demanding freedom.
Decentralization then becomes important. This brings us to the
social factors behind declining economic performance.