Stronger market trust

It is now almost seven weeks since the government has managed the economy without the direct supervision and balance-of- payments support from the International Monetary Fund; and market trust in both fiscal and monetary management has increased steadily.

This positive development can be seen in the steady appreciation of the rupiah and the reduced volatility of its exchange rate. The stronger rupiah has, in turn, lifted inflationary pressures from imports, thereby enabling the central bank to keep inflation within target and to continue lowering its benchmark interest rate.

Inflation declined to a mere 0.57 percent in January, from 0.80 percent a year earlier and 0.94 percent in December. The benchmark interest rate also continued its downward trend to as low as 7.66 percent last week, from as high as 8.3 percent in early January. The Jakarta bourse also continued its rally, raising its composite price index to over 767, the highest in the past seven years.

These developments reflect market expectations and perceptions on economic prospects this election year. Positive perception was also generated by market trust in the government's policy-making capability and determination to push ahead with its reform agenda, as put forth in the White Paper of September 2003.

The government seems to have been able to remove any earlier doubts the market had over its ability and discipline to continue the reform agenda after the end of the IMF-funded program in December. The market has been deeply impressed by the government's high fiscal discipline, despite the great temptation to introduce populist programs with a short-term aim of gaining voter support.

President Megawati Soekarnoputri and her Cabinet pledged early last month that this year, the government would focus on bolstering economic growth, maintaining the pace of reform, attacking poverty, facilitating smoother distribution of goods and preparing the draft 2005 state budget for the new government to be installed in October. These are, by and large, the policies it has followed thus far.

The market also seems to have more confidence in the monetary management of the central bank, with a full trust in its anti- inflation measures and in the consistency of its policy to lower interest rates to stimulate economic activities. The central bank's monetary policies have thus gained market credibility.

This virtuous circle will continue -- provided the government maintains high fiscal discipline and pushes ahead with the reform agenda. Likewise, the central bank should nurture the current market trust in its management and policies. These are the only ways of maintaining market trust in the government and its economic policies this year, with elections looming.

The government should therefore not be swayed in any way by the pressures from narrow-minded and short-sighted lobbyists and analysts who are firing up inordinate nationalist sentiments and xenophobia, demanding that the privatization program be stopped, pending the installation of a new administration in October.

The privatization and divestment of the banks that were nationalized at the height of the banking crisis from 1998 to 1999 are not only central to achieving fiscal consolidation and cutting the budget deficit, but are vital to reform and establishing good corporate governance. Any signs of backtracking on these measures would erode the credibility of the government's commitment to reform.

Privatization will bring in additional revenues to the cash- strapped government to help it cut down debt burdens, thereby making it possible to release more resources toward public welfare. Privatization is also greatly effective in improving macroeconomic efficiency through the creation of a more competitive market. On top of all this, its microeconomic benefits are manifold, including more efficient and thus, more profitable, enterprises, higher tax revenues and a significant increase in investment to spur job creation.

State companies, even after privatization, will be subject to Indonesian laws and regulations and must follow the policies of each economic sector.

What is needed, though, is for the government to set out and implement a credible strategy for privatization and clear-cut directives, standard operational procedures and a step-by-step divestment process to ensure that transactions are highly accountable and transparent.

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