Long-term reform a must for RI

By Omar Halim

JAKARTA (JP): Amid the nosedive of the rupiah value against the dollar by more than 50 percent between July and October, President Soeharto decided last week to ask the International Monetary Fund (IMF), World Bank and other international financial institutions to assist in shoring up Indonesia's currency.

He also asked Dr. Wijojo Nitisastro, the New Order economic guru, to take the necessary action and coordinate with the relevant governmental institutions to deal with the problem.

These steps have no doubt increased confidence in the government's intentions and seriousness in facing the present monetary crisis. The rupiah exchange rate had, as of yesterday, rebounded to Rp 3,400 to the dollar.

In the past several weeks, the monetary measures announced were meant to drastically reduce the money in circulation through compulsory deposits of public corporations deposited into Bank Indonesia, the central bank, accompanied by the payment of exorbitant interest rates for these deposits.

These prompted an intense time-deposit rate war among banks to attract deposits from the public. Gradually, these rates have been reduced. The government had subsequently complemented these measures with a series of fiscal measures which were meant to redress the excessive balance of current account deficit in the longer term.

The continuing liquidity squeeze has affected the financial viability of firms which could, sooner or later, result in bankruptcies and unemployment. A decrease in the rate of economic growth has been widely forecast for 1997 and 1998.

The involvement of the IMF and World Bank, and the return of credibility and confidence, might stabilize the exchange rate of the rupiah for now, but the government should take this opportunity to undertake fundamental reforms aimed at laying the basis of long-term confidence in the Indonesian economy.

This should include revitalization of the capacity and performance of the economy at the micro level, the level which will basically determine the viability of the Indonesian economy in the face of the process of globalization.

In accordance with the ASEAN Free Trade Area timetable, Indonesia will be exposed to almost full competition from other ASEAN countries by 2003. Members of the Asia Pacific Economic Cooperation, including Indonesia, have agreed to have free trade among themselves by 2020. Indonesia should be, if it does not want to be the backyard of other countries, at that time, fully competitive in world trade.

For this purpose, the government should have a long-term perspective of the comparative advantage of the Indonesian economy vis-a-vis its major trading partners in ASEAN and the Asia Pacific region.

It should orient the education and training system to enable Indonesia to be fully able to face the challenges of the future. This is a long-term project, which should have been started.

The government could also use this opportunity when the international community (IMF, World Bank, ADB and major bilateral donors) is prepared to support its efforts to put the Indonesian economy back on the high-growth track.

This means undertaking fundamental reforms in the banking sector, as has been suggested by numerous commentators, to weed out inefficient and incompetent financial institutions in order to make the banking sector fully capable in efficiently channeling financial resources into the appropriate sectors.

At the same time, the banks should also be protected from having to fork out funds for projects that have not been thoroughly evaluated and approved. The government should also use this opportunity, in general, to eliminate demands for resources that are not consistent with national economic priorities, or nonviable megaprojects which would only increase the overall cost structure of the economy.

Monopolies, oligopolies and other activities that distort prices, and the efficient allocation of economic resources, should also be phased out within a short period of time. These entities, if they are serious in contributing to the Indonesian economy, would benefit from the required rationalization process that would make them competitive with foreign competition.

It is difficult to take firm decisions on these, and other, reform measures because there are numerous influential interest groups. Some of those measures would also take some years to bear fruit.

But it is imperative that the fundamental reform of the Indonesian economy must be undertaken now. It will immeasurably increase confidence in the Indonesian economy and the government much more than the confidence which is being shown now to restore the value of the rupiah.

The IMF/World Bank mission in its stay here this week should take a long-term perspective in its recommendations to the Indonesian government.

Better still, as Dr. Mohammad Sadli said in a recent Business News editorial, if the "government, on its own initiative, (would) adopt most urgent measures without consulting vested interests, and before any demand is made by the IMF".

Failure to undertake the necessary reform now would make the Indonesian economy continue to be vulnerable. And if such crisis should recur in the future, international goodwill will be much more difficult to come by, since it will be clear to foreign and national capital that Indonesia is not where their capital would receive the maximum return.

The writer is a research fellow at the Center for Strategic and International Studies who worked for the United Nations for almost 30 years.