Our economy shines
The explosion of the US$450 million loan scandal at the state- owned Bank Bapindo which jolted the financial sector early this year turned out to have only a little impact on the performance of the Indonesian economy as a whole this year. The speed and the way in which the monetary authority coped with the credit fiasco not only prevented a run on Bapindo but also succeeded in maintaining the public's trust in the banking system. The amount of private savings raised by banks during the first 10 months of 1994 increased by 10 percent.
The additional packages of reform measures launched in the middle of the year further strengthened investor confidence in the long-term prospects of the economy. Indonesia's leading role in hosting the Nov. 15 meeting of APEC economic leaders and motivating them to agree to adopt free and open trade and investment in the Asia-Pacific region by the year 2020 served to reassure domestic and foreign businessmen of the future direction of the country's economy.
All these developments got immediate, positive responses from businessmen. Foreign investment commitments licensed this year increased by 195 percent to $23.7 billion and domestic investment plans by 35 percent to Rp 53.3 trillion ($24.2 billion). More foreign banks and major securities houses have become increasingly active. Total bank lending expanded by more than 18 percent. The Jakarta stock exchange got about 230 new share listings, thereby raising the market capitalization to Rp 105.2 trillion or 30 percent of the gross domestic product. Around $4.7 billion was raised through share and bond flotation during the first eleven months of this year.
The 30 percent rise in minimum wages this year and another 10 percent increase next year will hopefully strengthen good industrial relations and minimize the incidence of labor strikes, which, given the high unemployment rate and widening gap between the very rich and the poor, could easily turn into acts of vandalism and have far-reaching repercussions in relation to political stability.
The remarkable progress achieved in the privatization of such basic infrastructure as power generation and telecommunications this year is expected to further reduce the high-cost components of the economy.
The lower income tax rates to be introduced by the new tax laws next year have been praised as greatly conducive not only for stimulating new investments, but also for broadening the tax base. This is good news for the state budget because tax receipts now account for around 65 percent of total internal revenues for the government. Given this favorable condition, the average annual increase of 20 percent in tax receipts over the past few years may well be within reach for the coming 1995/1996 fiscal year beginning in April. As the international prices of oil, which together with natural gas contribute about 25 percent of the government revenues, are projected minimally at a range of $16 to $18 per barrel next year, the 1995/1996 state budget can most likely be increased at least by 20 percent.
Noting all those positive factors, no wonder most economists estimate the economic growth at at least 6.7 percent this year and predict another robust expansion of seven percent next year. The only caveat is inflationary pressure.
That looks simple to deal with. But the success in curbing inflation will determine bank interest rates, which in turn will influence investment activities, and will determine the rate of rupiah depreciation against major international currencies. And in so far as Indonesia is concerned, the challenge is not small at all because anti-inflation measures require not only careful monetary management, but also further deregulation measures to improve the overall efficiency of the economy. Further down the line, that calls for further reduction of bureaucratic hurdles and high tariff protection and improvement of the mechanism of market competition.