Waiting for stimulus

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.