Private funds still needed 'to lead recovery process'
Private funds still needed 'to lead recovery process'
JAKARTA (JP): Official loans would have only a short-term
effect on Indonesia's economic recovery program and, therefore,
the government should woo private funds to lead the recovery
process, a noted economist has suggested.
Mari E. Pangestu, executive director of the Center for
Strategic and International Studies, said that private funds
would reenter Indonesia only if the government could guarantee
security and order as well as macroeconomic stability.
"If we want to speed up the economic recovery process, private
funds must return. Official funds alone would never be enough,"
Mari told The Jakarta Post.
"If we expect private funds, we must ensure safety and
security. In addition, the direction of the government's policy
must be clear and consistent."
She said investors still viewed Indonesia as an insecure place
for investment because lawlessness still prevailed in many parts
of the country.
Political uncertainties also clouded Indonesia's investment
climate. Investors are still reluctant to invest or expand
businesses here until a new, elected government was in place.
"It means that our economic situation will not improve until
the general election in next May," she said.
Even after the general election, investors would still wait
until the People's Consultative Assembly convenes at the end of
next year to elect a new president and vice president.
Besides security and political certainty, consistency in the
government's economic policies was badly needed to lure private
capital back into the country, Mari said.
She said the government's policies thus far were still far
from consistent, especially on the macroeconomic front, which
kept investors waiting.
Both fiscal and monetary policies were often contradictory.
For example when the central bank wanted to tighten money supply
the government expanded its spending to finance subsidized
programs.
The government seemed to be to absorbed with miltibillion-
dollar official funds committed by its donors in the Consultative
Group on Indonesia (CGI) and those arranged by the International
Monetary Fund.
The government has said that it expected to get more than $5.3
billion from CGI members, who are currently meeting in Paris. In
addition, the IMF has arranged a bailout fund totaling US$46
billion for Indonesia.
"Funds from the CGI and the IMF would have short-term positive
effects but they will not be able to stimulate sustainable growth
because next year, we cannot be so sure we will get that much
again."
Donor countries would monitor Indonesia to ensure their
taxpayers' money was used wisely to stimulate positive economic
growth.
Mari warned that official funds from CGI donor countries and
multilateral lending agencies would only give Indonesia a
"breathing space".
"Okay, we have been given a breathing space with loans. Now,
we can finance our fiscal deficits of minus 8.5 percent of gross
domestic product.
"But we must stick to our fiscal discipline. We cannot just
spend those funds on any popular policy because this could have
disastrous effects on inflation."
She noted that the impact of the huge fiscal deficit would be
on spiraling inflation. Therefore, monetary policy should be
tight. If not, inflation could shoot over 100 percent this year.
To ensure tight monetary policy, the central bank should
continue to absorb excess liquidity in the market through open
market operations.
She welcomed the central bank's move to hold a weekly auction
of its one-month promissory notes because it would let the market
decide interest rates.
The government should not be tempted to influence the central
bank to lower interest rates without the consent of market
players because it could result in higher inflation and the
weakening of the rupiah.
"High inflation and a volatile rupiah-dollar exchange rate
would derail everything, including the restructuring of our
banking industry and our corporate debt." (rid)