Political gestures vital to calm the market

The Central Bureau of Statistics (BPS) revised downwards on Monday its projection regarding Indonesia's economic growth this year, from about 4 percent to 1.5 percent, due to continuing political instability. Secretary of the National Economic Council (DEN) Sri Mulyani Indrawati disagrees with the BPS projection.

Question: What do you think about the BPS downward projection?

Mulyani: It is unwise for BPS to make such projections because statements like this might make the economic situation worse. It must have a sense of responsibility for the macro-economic development in the country. Actually, a statistical institution should not make any projections at all. A projection, if it fails to materialize due to change of circumstances, might be damaging to BPS's own reputation as people will question the quality of the statistics it produces.

But do you foresee the economy growing less than 4 percent this year?

We could create a bad scenario if we made linear projections based on data from the first quarter's economic growth. Data produced by the BPS shows that the economy during the first quarter of this year did not grow as highly as expected. (The economy, according to BPS, grew by 1.98 percent during the first quarter of 2000, as compared to the fourth quarter of 1999). Furthermore, lending activities of commercial banks (on which about 70 percent to 80 percent of Indonesia's economic growth depends) continued to grow negatively until the first quarter of this year.

However, I believe that the economic growth will pick up during the fourth quarter and even, perhaps, in the third quarter as well, due to seasonally higher consumer demand and improvement in the conditions of the banking industry. Consumer demand will surely increase in the forth quarter because of several sectors, such as the observance of Idul Fitri Muslim holiday. In the second half of the year, major commercial banks will also finalize their recapitalization programs, after which they can increase their lending activities. Increased lending activities, in turn, will help reinvigorate economic activities.

The state-owned Bank Mandiri, for example, has now finalized its recapitalization program, while the state-owned Bank BNI will follow suit in July and other major banks, like Bank Danamon and Bank Niaga, will do so in the following months.

Because the expected high economic growth in the third and fourth quarters will compensate the lower growth in the previous two quarters, I do not see any reason for a pessimistic projection of growth -- of less than 2 percent -- for the entireyear of 2000.

Could we expect such high growth even if we saw political instability in the coming months?

If political instability occurred in the coming months and the government could not control the situation, of course, we would not be able to expect positive growth in the economy because the rupiah's conversion rate would weaken drastically and banking interest rates would soar. High interest rates would raise the government's obligations to pay interest on its bonds and, therefore, reduce its funds to be allocated for the stimulation of economic activities. High interest rates would also reduce the lending activities of banks, which would become more conservative in evaluating the feasibility of its customers' businesses.

But the rupiah's value has now depreciated to about Rp 8,500 against the U.S. dollar. Can we expect the rupiah to reappreciate to last month's level of about Rp 7,500 a dollar?

Not in the coming one or two months because the government has thus far failed to create market confidence.

But we can expect the rupiah to stabilize at about Rp 8,500 a dollar or even at Rp 8,000 if the government is firm and consistent with the terms mentioned in the Letter of Intent (LoI) it signed today (Wednesday) with the International Monetary Fund (IMF), as well as systematically disseminating information on concrete programs that it will implement in the coming months.

If the government can make economic achievements within two months and the achievements can encourage the IMF to give a rating of A plus in its review on the government's compliance to the LoI, the rupiah's value is expected to appreciate.

President Abdurrahman (Gus Dur) Wahid has instructed Finance Minister Bambang Sudibyo to ask state banks to buy rupiah in a bid to shore up the currency. Will it help?

State banks have no such capacity because their participation in the recapitalization program indicates that they are too weak to function as instruments for monetary stabilization. I think the finance minister has informed Gus Dur about the banks' obligations to comply with the rules related to the recapitalization program. Moreover, such a measure is under the authority of the central bank, which is now independent from the government.

What measures should the President take to calm down the market?

Because the market jitters have been caused by political uncertainty, the President should try to calm down the market by introducing political policies, not political statements, that will create certainty and stability in the country. (riz)