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)