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)