WB proposes 3 measures to maintain recovery

WB proposes 3 measures to maintain recovery

JAKARTA (JP): The World Bank has outlined three immediate
actions the Indonesian government must implement to maintain the
momentum of economic recovery in 2001, given the current
political instability.

World Bank country director Mark Baird said here on Wednesday
that the three measures included restoring budgetary discipline
as soon as possible, implementing the decentralization program in
a fair and transparent manner, and pressing ahead with the
restructuring and sales of assets under the Indonesian Bank
Restructuring Agency (IBRA).

"What is needed to maintain the recovery in 2001? Well, I
could say the obvious is that all you need is political
stability, law and order, and a functioning court system... But
while that's all very important to investors, I think we also
recognize that's not part of the short-term outlook," Baird told
a business luncheon organized by the Mercantile Club Jakarta.

"So the real question is what can you do, given there's
political uncertainty and given we won't have a smoothly
functioning judicial system for quite sometime ... There's a lot
that can be done to improve the current situation ... I would
like to focus on three key short-term issues," he added.

While the economy expanded with a higher-than-expected growth
of 4.8 percent in 2000, there have been signs that growth in 2001
will be much slower than initially expected due to domestic
uncertainties and the prospect of an economic slowdown in the
USA.

Baird said that the fiscal adjustment package unveiled by the
government last week in a bid to limit the 2001 state budget
deficit to a reasonable level of around 3.7 percent of gross
domestic product (GDP) was a sensible and sound proposal.

"The package proposed by the Cabinet last week makes a lot of
sense, although it remains to be seen whether the legislature
will be able to approve it quickly so that the government can
move ahead with its implementation," he said.

The 2001 budget deficit could widen to a dangerous level of
around 6 percent of GDP, primarily due to the sharp plunge in the
value of the rupiah and rising domestic interest rate.

To avoid the risk of a fiscal catastrophe, the government
proposed a fiscal adjustment package focusing on three bold
measures: a further reduction in subsidies on fuel and
electricity through raising fuel prices by an average 30 percent
and power rates by 20 percent, raising value added tax to 12.5
percent from the current 10 percent level, and a more efficient
transfer of central government funds to provincial and district
administrations.

Baird said the government could no longer borrow any more to
contain the budget deficit, as public indebtedness had already
soared to 100 percent of GDP, while at the same time a further
spending cut on basic infrastructure and social services could
lead Indonesia into a major crisis over these items in the
future.

"To solve this (deficit) problem you cannot borrow more.
That's my proposition. Nor can you afford to really cap
development spending further more," he said, pointing out that
the spending cut had already been significant in recent years.

He also said that with one-third of central government revenue
being transferred to local government as a consequence of the new
fiscal decentralization program, "this leaves very little room
for the government to adjust to adverse macroeconomic
development."

"So the government is focusing on other options: higher taxes,
lower fuel subsidies, and more efficient transfer to the
regions," he said.

"All of these are politically difficult and all of them of
course have their own impact on the economy. So I think we have
great sympathy for the task ahead for the government on how to
bring the deficit down to a more reasonable level," he added.

Baird said that on the fiscal decentralization program, the
concern was over its implementation.

"But we have to acknowledge that it has not been as bad as
many had feared a year ago," he said, pointing out that the
government had taken steps to bar regional government from
borrowing this year.

But he said that there were still some issues, including
concern over regional government aggressively reimposing local
tax regulations that had been simplified in recent years, and
over the impact of uncoordinated decisions at the local level
that affected the environment.

On the issue of IBRA, Baird said that it was important for
IBRA to be able to realize its cash target of Rp 27 trillion to
help finance the 2001 deficit.

He also gave a warning about the importance of the quality of
the corporate restructuring work carried out by IBRA in a bid to
revive investor confidence and limit the government's burden.

"We are very pleased with the new corporate debt restructuring
principles that have been adopted by (the government). They lay
out a transparent process of independent review for the largest
debtors," he said.

"We recognized that debt restructuring is an inherently
political process and the principles will not always be followed
in practice, but at least there will be a clear set of principles
against which decisions will have to be explained and justified
and hopefully this will allow the process to move ahead more
rapidly and in a less controversial manner because it is
essential that IBRA achieve its cash recovery target in 2001," he
added. (rei)