Our external balance

Pressures on the balance of payments remain a major challenge to sustainable economic growth in Indonesia. According to official projections for fiscal 1997/1998 year, the balance of non-oil trade will, for the third consecutive time, end up with a deficit. Even if the overall trade balance -- including oil and natural gas -- will produce a surplus of US$5.4 billion, it will not give the government any more leeway to manage the balance of payments.

The problem is that the position of the balance of payments directly influences monetary stability. President Soeharto did not exaggerate when he warned in his budgetary speech on Monday that the widening deficit in the current account (balance of trade in goods and services) should be curbed to preserve economic stability. The government expects the current account deficit to increase to $9.8 billion in the coming fiscal 1997/1998 year from an estimated $8.8 billion in the current fiscal year ending in March.

As a percentage of the gross domestic product, the current account deficit will remain at 4 percent. This is quite worrisome, even if other ASEAN countries such as Thailand and Malaysia are suffering from worse ratios of between 7 to 8 percent. The most important difference, and one which makes Indonesia's position much more vulnerable, is its huge foreign debts of more than $100 billion.

Soeharto reaffirmed the urgent need to boost exports and curb import growth to check the current account deficit at a manageable level. But given internal constraints, such as a lack of economic efficiency, and external ones, notably fierce international competition, Indonesia can only set an export growth target of about 14 percent this year. The target is already much higher than the estimated export expansion rate of 10 percent in 1996.

The dilemma is that import growth can no longer be kept to as low as 7 percent as it was last year. Imports this year are expected to expand by at least 13.5 percent. Such import growth is apparently the minimum level needed to support the export growth target because the manufacturing sector relies heavily on imported basic and intermediate materials.

Holding import growth to below 10 percent this year would reduce export capacity at a time when new investment projects should be implemented at a pace that will expand export capacity. Past experiences have shown that large investments can have an expansive impact on export capacity within one to two years after the implementation of investment projects.

The central bank introduced last week new incentives to bolster exports in the form of rediscount facilities to suppliers of export-related goods, specific producer-exporters and exporting companies. It also lowered the discount rate on usance export drafts.

These incentives will improve the competitiveness of exports because they reduce pre-shipment finance costs. But the effectiveness of the incentives will depend on how efficiently and transparently they are provided. Businesses tend to be apprehensive about such incentives due to their past experiences with the wide gap between what has been decreed and actually implemented.

Whatever the impact of the new export incentive, Indonesia will be forced to rely largely on capital flows to cover its widening current account deficit, at least in the next two to three years. But because a portion of capital flows usually consists of short-term, speculative capital -- in addition to foreign direct investment -- monetary management will be made even more difficult and complex.