Our external balance

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.