Stimulus helpful but not a booster to growth: Economists

The Jakarta Post, Jakarta

Economists welcomed the additional Rp 10.5 trillion (about US$1.1 billion) in development spending next year to soften the impact of the Bali bombing, but added the government should lend a hand to the economy's real booster: the ailing private sector.

The state budget is not the main contributor to the economy to begin with, said Bank Mandiri chief economist Martin Panggabean on Tuesday.

"We can't expect too much from the budget to grow the economy, it'd be like a becak (pedicab) towing a car," he said.

State expenditures, both for routine and development spending, accounts for 19 percent of gross domestic product (GDP), which is the value of the country's annual output of goods and services.

With an estimated GDP of Rp 1,950 trillion next year, he said, a one percentage point GDP growth required Rp 19.5 trillion in additional spending.

The House of Representatives' budget committee had sought a stimulus package of up to Rp 20 trillion. The government proposed Rp 5.9 trillion, before both sides agreed on Rp 10.5 trillion on Monday.

That amount would come on top of Rp 65.13 trillion earmarked for development spending in the 2003 draft budget, which is hoped to spur the economy into growing by 4 percent next year.

Finance Minister Boediono on Tuesday said the stimulus package would consist of Rp 6.1 trillion in infrastructure projects, Rp 2.6 trillion in human resources development projects, and Rp 1.3 trillion in defense and security spending. The remaining Rp 700 billion is to be split over other sectors.

With the bulk of the money going into infrastructure projects, the government hopes to boost the labor intensive construction sector and thereby ease pressure on unemployment.

"However the point here isn't how much the government spends," Martin said, "but rather how sound policies can stimulate the private sector."

Standard Chartered Bank economist Fauzi Ichsan agreed, adding that security threats were adding to investors concerns next to political instability and a poor legal system.

"For immediate effect the stimulus package is preferable but over the longer term government policies should do the job," he said, adding Standard Chartered maintained its 2003 growth target at 3.5 percent despite the stimulus package.

He said the government could not rely on its state budget to push the economy. Not only as budget revenue was tight, but also because the private sector should be the one leading investment spending.

"One quarter of the budget is reserved to paying off debts, it doesn't lend much of a stimulus," Fauzi said.

But private investment is unlikely to pick up anytime soon given the lingering adverse business climate. Five years after the economic crisis struck the country, capital outflow still exceeds inflow, and analysts said to reverse the trend Indonesia must push ahead with its economic reforms program.

Sponsored by the International Monetary Fund (IMF), the program calls for, among other things, structural reforms to improve the banking sector and the judiciary, and measures against rampant corruption.