Pump priming

Pump priming

The government's decision to pump prime the economy in the
first semester of next year to bolster growth by ordering the
finance ministry to accelerate the disbursement of Rp 10 million
to Rp 15 trillion (US$1 million to $1.5 billion) in development
appropriations carried over from the 2005 state budget is very
appropriate. This stimulus is indeed badly needed to offset the
decline in private consumption and investment growth caused by
the current high inflation and the central bank's tight monetary
policy.

We cannot expect much in the way of private consumption and
investment during the current tight monetary environment because
punitively high short-term rates (12.75 percent) are affecting
the economy through a number of different mechanisms: consumers
tend to spend less, and businesses are discouraged from
investing. However, private investment is predicted to begin
picking up in the second semester.

Boediono, the new chief economics minister, expects that
investment and private consumption will recover in the second
semester of next year. The rationale is that as market confidence
in the government's economic policies becomes stronger,
macroeconomic stability will get stronger as well. This in turn
will help the rupiah appreciate, thereby curbing inflationary
pressures from imports.

Moreover, judging from the priority action agenda drawn up by
the new economics team -- to reinvigorate the investment climate
through reform measures and quick resolution of government
disputes with foreign investors -- domestic and foreign
investment will increase as businesspeople become more assured of
the economic outlook.

However, the government's expansionary budget will have to be
coordinated with the monetary authorities in view of the strong
inflationary pressures that will persist at least until the end
of the first semester of next year. This means the pump priming
should be offset by the central bank continuing to apply tight
monetary policies.

The market, however, can be rest assured of good coordination
between the fiscal and monetary authorities in the years ahead.

Finance Minister Sri Mulyani Indrawati and Bank Indonesia
Governor Burhanuddin Abdullah held a joint press conference with
Boediono on Dec. 8, one day after the installation of the
Cabinet's new economics team, and this was a strong signal of
better coordination of fiscal and monetary policies over the next
four years.

The joint press meeting, though rather symbolic in nature, was
the right signal to send in order to correct the previous market
perception of an acute lack of synchronization between fiscal and
monetary policies when the Cabinet's economics team was still led
by businessman Aburizal Bakrie. The old economics team was simply
in disarray, with the then finance minister Jusuf Anwar often
absent from coordinating conferences convened by Aburizal.

Good coordination between the fiscal and monetary authorities
is indeed the key to maintaining macroeconomic stability,
especially in this high inflationary environment, which is
projected to prevail until the first semester of next year. The
credibility of fiscal policy has a large influence on the conduit
and effectiveness of monetary policy.

Put another way, monetary policy is more effective when
the private sector or the market in general believes that the
central bank will not succumb to the financing requirements of
the government.

Boediono's and Burhanuddin's policy statements at their first
joint press conference further strengthened our confidence that
Boediono will exert very effective leadership over economic
policy making and implementation. And a credible policy making
system and the right sequencing of reform measures to be taken by
the new economics team will accelerate the virtuous circle within
the economy.