Medium-term challenges affect growth sustainability
Vincent Lingga, The Jakarta Post, Jakarta | Fri, 12/23/2011 9:47 AM
A consensus has emerged among economic forecasts for next year: Indonesia should gear up to cope with bigger risks of financial market turbulence next year in case the eurozone debt crisis worsens and the US economy falls into recession.
Most analysts also agree that Indonesia — with domestic consumption as its main driver of growth, a strong fiscal position and low government debt ratio, international reserves worth more than seven months of imports and a strong financial sector — already has a strong defense against external shocks.
It is comforting to know the government has not been complacent with all these advantages. The government has put in place a set of contingency fiscal and monetary measures in maintaining stability in the domestic financial market and the rupiah exchange rate through joint market operations by the central bank, the Finance Ministry and state companies to buy government rupiah bonds should jittery portfolio investors decide to dump their rupiah assets.
Preemptive and proactive policies could help break a potentially vicious loop between financial weakness and the real economy.
Indeed, extreme exchange rate volatility and financial panic warrant foreign exchange intervention, but only so long as support for the exchange rate and the resulting foreign reserve drawdown is not so excessive as to undermine macroeconomic fundamentals.
The 2012 State Budget Law stipulates several articles specially designed to empower the finance minister to quickly and firmly take fiscal measures, including providing additional fiscal stimulus, whenever necessary, to cope with any adverse fallout from the global economic uncertainty or downturn.
Putting it briefly, the government and Bank Indonesia are already fully prepared to respond quickly and firmly to external shocks by deploying fiscal and monetary measures to restore confidence and ensure financial stability.
The only vital component still missing from all these anticipatory measures is a crisis management framework, held up by delays in the House of Representatives for over a year as discussions have stalled over the financial safety net bill.
However, a narrow focus on anticipatory measures for near-term risks without adequate efforts to accelerate structural reforms to sustain medium-term growth could damage both portfolio and direct investors’ confidence in the longer-term economic prospects.
Several key reforms are required to strengthen investor confidence in the medium and long-term economic prospects, including concerted efforts to accelerate the implementation of government investment (the capital expenditure component of the state budget), significant reduction in fuel subsidies and infrastructure development.
Without significant progress in these areas, Indonesia’s economy will continue to be plagued by factors of uncertainty, and fall short of its potential growth of 7 to 8 percent.
Next year may well be our last chance under the current administration to launch bold reforms, because starting in 2013, most parties will embark on preparations for the 2014 legislative and presidential elections.
Turning first to capital expenditures, investment spending by the central government and regional administrations has remained very slow with the bulk of expenditures occurring in the last two to three months of the year, thus causing inefficiencies and losses through corruption.
“As of early this month, only about 50 percent of the government investment budget had been spent,” said Chairul Tanjung, chairman of President Susilo Bambang Yudhoyono’s economic think tank — the National Economic Council — which groups senior economists and business leaders.
Unfortunately, there seems to be no bold programs on the way to increase this public sector investment.
The council’s 2012 Economic Outlook report cites bureaucratic reform and infrastructure development as the most pressing problems in the medium term.
The delay in government capital expenditures inflicts especially severe damage on the long-term foundation of the economy because most investments have been allocated for crucial infrastructure development.
Yet more discouraging is the acute absence of political courage to significantly reduce wasteful spending on fuel and electricity subsidies, which tops US$25 billion annually (this year it could exceed $27 billion). The bulk of these subsidies supported middle and high-income consumers.
More than simply wasting taxpayer money, fuel subsidies blur price signals, distort consumption and investment decisions on alternative renewable energy, and increase the vulnerability of the state budget to oil-price volatility.
This misguided policy certainly abolishes any incentive for energy conservation and diversification programs to reduce the economy’s addiction to fossil fuels by developing new sources of renewable energy. With artificially cheap energy costs, businesses feel no urgency to replace their plant equipment/machinery with more energy-efficient ones.
If the government does not start gradually phasing out fuel subsidies next year with a clearly set time-bound schedule, we can simply forget about investment in renewable energy such as biofuel.
The effectiveness of the recent government policy to offer a 10-year tax holiday to investors in renewable energy development remains questionable at best as long as domestic fuel prices remain way below international levels.
The acute lack of basic infrastructure and the crumbling condition of most existing infrastructure has become the main obstacle to robust growth. Unusually high logistics costs reduce the competitiveness of Indonesian products and hinder connectivity between the various major islands.
In fact, the absence of connectivity between islands, and even between neighboring districts in the outer islands, leads to conditions in which several areas may suffer from a severe shortage of fish or agricultural produce and have to depend on imports while farmers in their neighboring districts have to dump their produce at throw-away prices due to a lack of local demand.
The recent controversy over the import of fruits, vegetables, salt, sugar and fish is closely related to inadequate infrastructure which hinders connectivity between markets in various districts and islands.
The enactment of the land acquisition bill last week could be a breakthrough in infrastructure development providing a remedy to the complexity, weak legal framework and arduous procedures for land clearance which have become the biggest barriers to project implementation.
The government also has made regulatory and institutional improvements for the public-private partnerships (PPP) scheme for infrastructure development. This scheme stipulates contractual arrangements between public and private parties under which rights and responsibilities are shared for the duration of the contract.
Institutional support for PPP includes the state-owned Indonesia Infrastructure Fund to provide long-term financing, the Infrastructure Guarantee Fund and the Land Acquisition Revolving Fund (LARF) to help accelerate the selection, preparation and execution of PPP projects. An inter-ministerial coordinating committee (KKPPI) was set up to speed up the implementation of PPP infrastructure projects.
However, only a few of the 80 infrastructure projects offered under the PPP scheme this year have entered implementation stages because most of the projects turned out to be either inadequately prepared or poorly selected.
A recent study by the World Bank showed how the lack of coordination among involved agencies during the selection process has resulted in multiple lists of projects which create confusion for potential investors.
Coordination on PPP projects at the central government level has been complicated, with the KKPPI being chaired by both the coordinating economic minister and the national development planning minister.
This institutional arrangement may be a fatal flaw. Good coordination and strong governmental leadership is key to PPP project implementation. India, for example, received $40 billion in investment commitments to its PPP infrastructure projects last year, thanks in part to its coordination structures.
“In India, the Cabinet committee on infrastructure, headed by the Prime Minister, decides on infrastructure sector projects and monitors their performance,” the World Bank report says.
The author is a staff writer at The Jakarta Post
Most analysts also agree that Indonesia — with domestic consumption as its main driver of growth, a strong fiscal position and low government debt ratio, international reserves worth more than seven months of imports and a strong financial sector — already has a strong defense against external shocks.
It is comforting to know the government has not been complacent with all these advantages. The government has put in place a set of contingency fiscal and monetary measures in maintaining stability in the domestic financial market and the rupiah exchange rate through joint market operations by the central bank, the Finance Ministry and state companies to buy government rupiah bonds should jittery portfolio investors decide to dump their rupiah assets.
Preemptive and proactive policies could help break a potentially vicious loop between financial weakness and the real economy.
Indeed, extreme exchange rate volatility and financial panic warrant foreign exchange intervention, but only so long as support for the exchange rate and the resulting foreign reserve drawdown is not so excessive as to undermine macroeconomic fundamentals.
The 2012 State Budget Law stipulates several articles specially designed to empower the finance minister to quickly and firmly take fiscal measures, including providing additional fiscal stimulus, whenever necessary, to cope with any adverse fallout from the global economic uncertainty or downturn.
Putting it briefly, the government and Bank Indonesia are already fully prepared to respond quickly and firmly to external shocks by deploying fiscal and monetary measures to restore confidence and ensure financial stability.
The only vital component still missing from all these anticipatory measures is a crisis management framework, held up by delays in the House of Representatives for over a year as discussions have stalled over the financial safety net bill.
However, a narrow focus on anticipatory measures for near-term risks without adequate efforts to accelerate structural reforms to sustain medium-term growth could damage both portfolio and direct investors’ confidence in the longer-term economic prospects.
Several key reforms are required to strengthen investor confidence in the medium and long-term economic prospects, including concerted efforts to accelerate the implementation of government investment (the capital expenditure component of the state budget), significant reduction in fuel subsidies and infrastructure development.
Without significant progress in these areas, Indonesia’s economy will continue to be plagued by factors of uncertainty, and fall short of its potential growth of 7 to 8 percent.
Next year may well be our last chance under the current administration to launch bold reforms, because starting in 2013, most parties will embark on preparations for the 2014 legislative and presidential elections.
Turning first to capital expenditures, investment spending by the central government and regional administrations has remained very slow with the bulk of expenditures occurring in the last two to three months of the year, thus causing inefficiencies and losses through corruption.
“As of early this month, only about 50 percent of the government investment budget had been spent,” said Chairul Tanjung, chairman of President Susilo Bambang Yudhoyono’s economic think tank — the National Economic Council — which groups senior economists and business leaders.
Unfortunately, there seems to be no bold programs on the way to increase this public sector investment.
The council’s 2012 Economic Outlook report cites bureaucratic reform and infrastructure development as the most pressing problems in the medium term.
The delay in government capital expenditures inflicts especially severe damage on the long-term foundation of the economy because most investments have been allocated for crucial infrastructure development.
Yet more discouraging is the acute absence of political courage to significantly reduce wasteful spending on fuel and electricity subsidies, which tops US$25 billion annually (this year it could exceed $27 billion). The bulk of these subsidies supported middle and high-income consumers.
More than simply wasting taxpayer money, fuel subsidies blur price signals, distort consumption and investment decisions on alternative renewable energy, and increase the vulnerability of the state budget to oil-price volatility.
This misguided policy certainly abolishes any incentive for energy conservation and diversification programs to reduce the economy’s addiction to fossil fuels by developing new sources of renewable energy. With artificially cheap energy costs, businesses feel no urgency to replace their plant equipment/machinery with more energy-efficient ones.
If the government does not start gradually phasing out fuel subsidies next year with a clearly set time-bound schedule, we can simply forget about investment in renewable energy such as biofuel.
The effectiveness of the recent government policy to offer a 10-year tax holiday to investors in renewable energy development remains questionable at best as long as domestic fuel prices remain way below international levels.
The acute lack of basic infrastructure and the crumbling condition of most existing infrastructure has become the main obstacle to robust growth. Unusually high logistics costs reduce the competitiveness of Indonesian products and hinder connectivity between the various major islands.
In fact, the absence of connectivity between islands, and even between neighboring districts in the outer islands, leads to conditions in which several areas may suffer from a severe shortage of fish or agricultural produce and have to depend on imports while farmers in their neighboring districts have to dump their produce at throw-away prices due to a lack of local demand.
The recent controversy over the import of fruits, vegetables, salt, sugar and fish is closely related to inadequate infrastructure which hinders connectivity between markets in various districts and islands.
The enactment of the land acquisition bill last week could be a breakthrough in infrastructure development providing a remedy to the complexity, weak legal framework and arduous procedures for land clearance which have become the biggest barriers to project implementation.
The government also has made regulatory and institutional improvements for the public-private partnerships (PPP) scheme for infrastructure development. This scheme stipulates contractual arrangements between public and private parties under which rights and responsibilities are shared for the duration of the contract.
Institutional support for PPP includes the state-owned Indonesia Infrastructure Fund to provide long-term financing, the Infrastructure Guarantee Fund and the Land Acquisition Revolving Fund (LARF) to help accelerate the selection, preparation and execution of PPP projects. An inter-ministerial coordinating committee (KKPPI) was set up to speed up the implementation of PPP infrastructure projects.
However, only a few of the 80 infrastructure projects offered under the PPP scheme this year have entered implementation stages because most of the projects turned out to be either inadequately prepared or poorly selected.
A recent study by the World Bank showed how the lack of coordination among involved agencies during the selection process has resulted in multiple lists of projects which create confusion for potential investors.
Coordination on PPP projects at the central government level has been complicated, with the KKPPI being chaired by both the coordinating economic minister and the national development planning minister.
This institutional arrangement may be a fatal flaw. Good coordination and strong governmental leadership is key to PPP project implementation. India, for example, received $40 billion in investment commitments to its PPP infrastructure projects last year, thanks in part to its coordination structures.
“In India, the Cabinet committee on infrastructure, headed by the Prime Minister, decides on infrastructure sector projects and monitors their performance,” the World Bank report says.
The author is a staff writer at The Jakarta Post
