Prospects for RI's recovery
Prospects for RI's recovery
The following article is taken from a presentation at the
Indonesia Next: Politics, Business and The Impact of Change
Conference in Bali on Friday.
By Mar'ie Muhammad
JAKARTA (JP): After a long political struggle, the People's
Consultative Assembly succeeded in electing Abdurrahman Wahid as
the fourth president of the Republic of Indonesia, the third
largest democratic country.
A milestone has been laid for a long, arduous journey. Now
society is in waiting, generally with mixed feelings and
opinions. The core of the issue, a formidable task to resolve, is
restoring confidence. For this we need urgently to build a
credible government, fully committed to the reform program,
including to rebuild good governance.
It is obvious that the government, in collaboration with civil
society, has to reunite Indonesia's highly fragmented society.
Furthermore, it is the duty of the nation to restore trust in
society as a main social element that has continued to
deteriorate.
Restoration of peace and order should become the first
priority of the new government, with active support from all
citizens. The government should secure strong support from
political parties, professionals, civil society and the regions,
and should be welcomed by the international community.
To achieve this objective, the new Cabinet should be a sort of
grand coalition which is able to accommodate various interest
groups, including the minorities.
While other regional economies have begun to recover from the
economic crisis, Indonesia's recovery has occurred at a slower
pace. Thailand, for example, is expected to attain a real gross
domestic product growth rate of 3 percent to 4 percent, and the
Korean economy is expected to grow by more than 5 percent.
Indonesia, in contrast, is unlikely to achieve a 1.5 percent
to 2 percent increase in real GDP.
However, it should not be forgotten that the greater severity
of the economic crisis in Indonesia compared to other regional
economies is at its root a reflection of political instability, a
devastated and dysfunctional banking sector, a deeply indebted
corporate sector and pervasive corruption.
Some signals of economic recovery are quite encouraging. One
is inflation with an annual rate falling to less than 6 percent
in August. The one-month interest rate has dropped below 13
percent per annum. The rupiah has strengthened to about 7,000 to
the U.S. dollar although it is still highly volatile.
Share prices on the Jakarta Stock Exchange rose by 120 percent
between October 1998 and June 1999 and are still more than 80
percent above their level of a year ago.
This said, I still do not mean to belittle the magnitude of
the economic difficulties that we face. The bank restructuring
program, for example, has made enormous progress, with insolvent
banks having been closed, most remaining banks recapitalized and
much of the bad debt moved to an asset management agency.
Nonetheless, our banking system remains dysfunctional.
Although banks continue to perform one of their two critical
functions -- absorbing savings from households and businesses --
they are not performing the other function, which is to channel
these savings into productive investments in the real economy.
Bank lending is still at a standstill and is unlikely to
recover anytime soon. Similarly, some progress has been made in
corporate debt restructuring. More than 280 companies with over
US$23 billion in outstanding foreign debts have begun
negotiations under a program supported by the World Bank, and 27
of these debtors have reached agreements in principal involving
more than $3 billion.
However, most corporate debt is still uncertain and the
Indonesian bankruptcy law and its enforcement are still weak. The
bank restructuring agency has taken about Rp 230 trillion of bad
debt but very little of this has been successfully restructured.
In this regard, it is critical to strengthen the Indonesian Bank
Restructuring Agency (IBRA) and its operations, and for this IBRA
needs strong political support. Until the banking and corporate
debt problems are resolved, Indonesia's economic recovery will
remain anemic.
Another obstacle that Indonesia will face over the next few
years will be the fiscal burden created by the crisis. Before the
economic crisis, Indonesia did not have a significant fiscal
problem. In fact, the government had been running surpluses for
several years. The crisis created enormous new spending
obligations for social safety nets, food and energy subsidies,
and most importantly the enormous cost of financial sector
restructuring. At the same time, with the slowdown in economic
activity, domestic revenue as a share of GDP declined.
Consequently, Indonesia is expected to experience a deficit of
4 percent to 5 percent of GDP during the current fiscal year. For
the time being these fiscal deficits are being financed by
foreign borrowing but this is obviously not a viable long-run
solution. The government's foreign debt has already risen by more
than $15 billion during the crisis, creating a larger burden on
future generations, and the willingness of the international
community to provide official assistance to Indonesia will
diminish with time.
While the soundness of future economic policy cannot be
guaranteed simply on the basis of past performance, there are
several reasons to believe that the fiscal difficulties can be
overcome. First, there is considerable scope for raising tax
revenue. In recent years Indonesia's non-oil tax receipts have
amounted to only 10 percent to 12 percent of GDP.
This is far less than the share of GDP collected in other
economies. Thailand and the Philippines, for example, collect
more than 15 percent of GDP in tax revenue. Second, there is some
scope for reducing spending, particularly with respect to fuel
and energy subsidies, although removing these subsidies will be
painful.
Third, the government has acquired a great number of valuable
assets as a consequence of the financial sector restructuring
program. These assets, including some of the largest private
banks and industrial companies, will be sold back to the public
over the next few years, creating an income stream to offset the
cost of bank restructuring. Government banks and state-owned
enterprises will also be privatized over the next few years.
Of course, the government's political will to divest these
assets in a fair and transparent manner must remain firm.
Maintaining firm political support for this process is highly
essential, particularly if the participation of foreign investors
is needed.
In sum, where do we go from here?
* Equitable development through pro-poor policy and
empowerment of the small scale business.
* Export-led growth, push for foreign investment and
continuous deregulation.
* Sale of banks and other IBRA assets and the privatization of
state-owned enterprises.
* Monetary policy that focuses on attaining and keeping low
inflation and interest rates.
* A neutral and more effective tax collection system.
We can only realize the above agenda with the support of the
international community, including international financial
institutions. We firmly believe that democracy is an essential
foundation for the establishment of a more favorable nation that
is capable of carrying out fair and transparent activities in all
aspects of society. Maintaining international support for
Indonesia is highly critical, based on mutual interest and
respect.
The author is a former finance minister and a founder of the
private Indonesian Transparency Society.