Waiting for stimulus

Businesspeople may be skeptical about Minister of Finance Boediono's announcement of a new stimulus package the government will soon provide to reinvigorate business and spur investment in a bid to offset the impact of the bombing at the JW Marriott Hotel in Jakarta.

Given the fragile economic situation and the large idle capacity in manufacturing industries, the most appropriate fiscal stimulus should be designed to increase domestic and external (export) demand.

But there is not much leeway for the cash-strapped government to launch new pump-priming measures to stimulate domestic market demand, because its revenues from several sectors may fall short of their targets.

For example, it is likely that only a small portion of the Rp 8.5 trillion (US$1 billion) in receipts the government expects from the privatization of state companies this year will be collected.

In fact, judging from actual spending during the first half of this year, the government may not be able to spend all of what it has budgeted. Only Rp 14.2 trillion, or 22 percent, of the 2003 developmental (investment) budget has so far been spent, due partly to a lack of matching funds to implement foreign-aided projects.

Providing another package of tax relief for certain categories of goods, like the ones given in January and May, could fuel stronger domestic demand. But this option seems unfeasible in view of the poor prospects for several revenue sources.

Instead of providing additional tax breaks, the government may even have to increase tax receipt targets next year to meet bigger spending, due in part to the steep increase ($3 billion) in foreign debt servicing burdens. This is because of the government's decision to end the International Monetary Fund program later this year, which will deprive the government of access to new debt rescheduling facilities from the Paris Club of sovereign creditors. Moreover, about Rp 25 trillion in government bonds will mature next year.

Stimulating the economy by pushing external demand through exports is also an uphill task, given the increased security concerns after the Marriott bombing and the persistently high risks encountered by businesspeople.

Hence, the only feasible alternative is stimulating business operations by removing barriers and consequently reducing risks. But this course requires a much faster pace of structural reform in customs and tax services, labor regulations and other sectors of public governance, as well as better legal and physical infrastructure.

Unfortunately, structural reform has long been the biggest negative point in the government's record, because of what analysts call an acute lack of effective government leadership and sense of urgency on the part of the government and politicians.

However, the problem should not be blamed totally on the government. Structural reform is basically a long-term process because it involves the building of institutional capacity, meaning civil service reform. This task alone is already a tall order, especially in the early stages of decentralization.

The government nevertheless can still do a great deal to reduce business risks and the cost of doing business by giving top priority to public sectors that greatly influence business operations.

Judging from the complaints being raised by businesspeople, the government should zero in on stepping up trade-facilitation measures such as those having to do with transportation, port handling and customs service, and providing legal certainty in taxation, notably tax audits and tax refunds.

The government is fully aware of what are the most urgent problems in these areas. What is needed now is an effective leadership to instill a sense of urgency among officials.