ECONOMIC OUTLOOK FOR JULY 1998
> Kadin Indonesia Bulletin <
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ECONOMIC OUTLOOK FOR JULY 1998 |
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> Kadin Indonesia Bulletin < |
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July 1998 The passing month has only brought more hardship to the economy. The basic proposition is that the Indonesian economy can only recover after flows of foreign aid and private capital are in place. That did not happen in the month of June. Aid and other official flows, expected in the order of several billions of dollars from the multilateral institutions and bilateral donors, were not forthcoming because the IMF had not switched on the green light after the last tranche of $1 billion was not disbursed on June 4, because of the change in national leadership on May 20. Hubert Neiss, the IMF chief for East Asia, scuttled to Jakarta two times to take the political temperature and to asses the economic damage after the riots accompanying the step down of President Suharto. At the time of this writing (end of June) a new letter of intent between the Indonesian government and the IMF has been signed, with new financial figures as estimates of a gaping hole in the government budget and requirements for plugging it. Verdict: the economy is in a worse shape than a month ago, and the problem is how to mobilize enough EXTRA (i.e., on top of the original $43 billion IMF package) aid, to the tune of $4-6 billion, to finance the swollen deficit to avert a galloping inflation and a breakdown of civil society in these sensitive times. The reason given by the IMF, in Washington DC, why this institution was so late in giving the go-ahead, was that it realized that aid to Indonesia under the circumstances had to be much bigger because of the much larger government budget deficit, which is now estimated at around 8% of national income, biggest in the past thirty years. The estimate for economic contraction for 1998 is higher; it is now 10 to 15% of GDP. The rate of inflation may reach 80% this year, and for consolation, coming down to 50% for the fiscal year ending March 1999. IMF estimates (or guestimates), however, have lost their credibility as these can change from month to month. There is also an inclination to paint a rosier picture, perhaps to bolster confidence. The new guestimates are already challenged, e.g., by Prof. Anwar Nasution, dean of the faculty of economics, University of Indonesia. The rate of exchange has weakened significantly during June, from Rp 11,000 to Rp 15,000 per US dollar. Was the root cause, still, in the political field, i.e., the continuing lack of broad support for the Habibie government and the lingering doubts of the Chinese about safety of their body and property after the riots of 13-14 May? So far there has been neither outright condemnation nor compensation from the government. Hence there may still be a capital flight from this section of society rather than repatriation. One cause in the economic field may be a consequence of the framework formulae for restructuring private debts agreed upon in Frankfurt. It required the debtors to settle their arrears in June, producing an additional demand for foreign currency. The very weak rupiah rate, however, has been accompanied by thin trading. But we know that Bank Indonesia's policy is not to intervene in a bearish market and going against market sentiments. We have also heard, recently, that bank credits to facilitate exports of manufactures, i.e., to import raw materials and components, are not yet available freely or sufficiently. Such exports are making progress indeed, but could be more forceful. The month of July may be an important month. GOLKAR will have a new leadership and that can be an important factor for further political developments during this year. In the longer run, Golkar may go down in importance, but not in the immediate future. The IMF may give the green light for its monthly disbursement. The question of mobilizing the extra $4-6 billion aid, however, is still an uncertain proposition. Bilateral aid will be more important since the multilateral institutions have serious resource constraints. Japan and Australia are likely contributors, but the signals from Washington DC are not encouraging. The US stance is that it endorses multilateral aid to the present Indonesian government but do not expect extra bilateral aid. Are the sentiments at Capital Hill hamstringing the Administration? Should the Habibie government meet in some way these political sentiments. i.e., with respect to the legitimacy of its government, the credibility of the promised political reforms and its policy towards East Timor, and how? (June 29 1998, SADLI) |
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