More bankruptcies feared over price hike

JAKARTA (JP): Indonesia's business sector is anticipating a new round of belt-tightening ahead if the government realizes its plan to raise fuel prices, electricity charges and value added tax (VAT) next month.

Businessman Sofyan Wanandi, who is also a senior member of the National Economic Recovery Committee (KPEN), said on Friday that the new plan would impose new burdens on a business sector already decimated by the country's more than three years of economic turmoil, which has included rocketing interest rates, a plunging rupiah, and ballooning wage increases.

"As businessmen, we'll try our best to survive, to be able to pay our workers and pay the interest on our loans ... We no longer think of profit. But I don't know how long we can sustain (such conditions) before some start to go bankrupt and create more unemployment," Sofyan told The Jakarta Post.

He said that it was unfair to continue to force businesses to shoulder the cost of the higher-than-expected budget deficit which had resulted from economic and political uncertainties.

Separately, chairman of the Indonesian Textile Association (API) Lili Asdjudiredja also expressed fears that more textile companies would go to the wall if the government proceeded with its plans.

Lili said that last year's 80 percent power price hike, the recent 50 percent increase in fuel prices for industry, and the current plunge in the rupiah left little room for further increases in production costs.

"The government is very insensitive ... Just because it wants to maintain a budget deficit of 3.7 percent of GDP (gross domestic product), everyone is made to suffer," he said.

The textile industry is one of the main contributors to the country's economy and is a major employer.

Chairman of the Association of Indonesian Automotive Industries (Gaikindo) Bambang Trisulo also warned of a gloomy outlook for the automotive industry.

"The accumulated effects of the increase in fuel prices, taxes, and power charges will place an undue burden on us," he claimed.

Bambang said the industry had lowered this year's automobile sales forecast to 250,000 units, as against 300,000 units last year.

Finance minister Prijadi Praptosuhardjo said on Thursday that the government had finally decided to raise fuel prices by an average of 30 percent and power charges by 20 percent on June 15, and raise VAT to 12.5 percent from the current level of 10 percent on July 1.

Prijadi said that the move was needed to help maintain the 2001 state budget deficit at a safer level of around 3.7 percent of GDP.

The sharp drop in the rupiah and rising domestic interest rates have resulted in the possibility of this year's budget deficit widening to a dangerous level of around 6 percent of GDP, compared to the initial projection of 3.7 percent of GDP.

The government plans to submit the new plan and the budget revisions to the House of Representatives on Monday to seek approval.

The International Monetary Fund hailed the government's new plan, saying that it would help open the way for the Fund to disburse its next loan tranche to the country after being stalled since late last year.

Senior economist Sri Mulyani said that although the new measures could help improve relations with the IMF and plug the budgetary hole, she warned that without a proper "response policy", the measures could be detrimental to the overall economy.

"This (the new plan) may be seen as positive in the sense that the government seems to be determined to take the difficult policy steps that are necessary to rescue the state budget," she said.

Sri, however, warned that there would be certain consequences.

"The increase in fuel prices, power charges and taxes will raise production costs which in turn will trigger cost-push inflation," she said.

She said that based on the trend over the past six months, cost-push inflation and imported inflation resulting from the weaker rupiah were contributing 50 percent and 60 percent respectively to the country's inflation figure.

Inflation is seen as the number one threat to the recovery and stability of the country's ailing economy.

"The government must come up with a proper policy response and work closely with Bank Indonesia to curb inflation," Sri said.

"Secondly, the government must create a better business environment to help the business sector boost efficiency," she added.

She said that the increases in fuel prices, power charges and VAT would make Indonesian products less competitive, and that it would be necessary for businesses to improve efficiency to compete with foreign products.

"The government must address the various complaints which have been expressed by businessmen, including the problem of kickbacks (collected by corrupt officials)," she said. (rei/bkm)