Source: The Jakarta Post, January 27, 2009
SBY’s administration has been very aggressive lately in stimulating the economy as a response to the impact of the global economic crisis that coincides with the upcoming legislative and presidential elections.
The government plans to increase the budget deficit from 1 percent to 2.5 percent GDP financed by the budget surplus last year and by foreign loans from multilateral and bilateral parties. The budget deficit would increase from Rp 51.3 trillion (US$4.5 billion) to Rp 132 trillion.
This move is welcome as other countries are also aggressively stimulating their economies with large amounts of funding. At the same time Bank Indonesia (independently) cut the interest rate more aggressively by 50 basis points in January and likely another 50 basis points in February as inflation is no longer the issue.
The question is whether the stimulus will be effective and whether the political environment will support the move.
In the post-1998 crisis era, the main problem of economic development in Indonesia is actually not so much to do with financing, but its execution and getting things done.
The large budget surplus in 2008 shows the government has been able to increase revenue significantly both from tax and non-tax revenues.
However, this also shows that budget management is not that sound. Goods expenditure was only about 83 percent.
Despite the report of capital expenditure reaching more than 90 percent, there is doubt whether this is really spending with tangible results, or whether it is simply still at the bidding process level.
Not to mention a huge amount of unspent budget at the local government level that reached around Rp 45 trillion. Judging from this, the effectiveness of the stimulation is in doubt if the priority is for the government’s large infrastructure projects.
Certainly, infrastructure development is very important, but the focus should be on selected projects where the bidding process is manageable, the implementation reaches its target and it is also accountable. Otherwise, this would create another long process of corruption investigations later on.
The government also would like to stimulate the private sector through tax incentives, especially VAT and duty free waivers.
This would synergize with the implementation of the reduction of tariffs for income tax based on the new tax law.
This policy could directly benefit companies, so that they could maintain capacity and keep their workers from being laid off by using funds that are supposed to be paid for VAT and duty fee.
The problem is how to select which sectors and companies get the facility.
The other area for additional expenditure is the program related to reducing unemployment and poverty. As the economy slows down, probably in the range of 4-5 percent growth, the problem of unemployment will worsen as companies lay off their workers.
Poverty might also be getting worse, but the decrease in the price of basic necessities triggered by cutting the price of fuel would play an important role as a cushion for the poor.
Nevertheless, the poor need support from the government to deal with the worsening economic conditions. Increasing subsidies for SMEs under the Kredit Usaha Rakyat (KUR or the People’s Entrepreneurship Credit) program is a good idea, but this mainly reaches SMEs that are already bankable.
In fact the rolling fund to community groups is an appropriate program. However, there should be some improvement in accountability, as the Minister of Finance postponed the program based on the Supreme Audit Agency’s (BPK) report.
Cash transfer is considered to be an effective program that can reach the poor directly. In order for the poor to be able to use the cash wisely however, the conditionality program is more appropriate, where the fund can only be used for education, health, and basic necessities.
It is a good idea to extend these programs at the sub-district level (kecamatan) under the PNPM program.
However this does cause resentment from local government leaders who have political backgrounds other than the ruling parties Golkar and Partai Demokrat.
In principle, the more direct the stimulus into companies and households, the more effective it becomes. Relying too much on the government, both central and local, to undertake large-scale projects would have little chance of success. There should be a selective approach in this area.
This has a lot to do with the low capacity of the bureaucrats, including their difficulties in handling audit processes and corruption investigations.
In prioritizing the direct program, the issue is how to identify the target groups, so that it would not end up in the wrong hands.
Political resistance is a serious parallel issue here, as politicians are very sensitive to government programs that benefit certain political parties and candidates.
Members of parliament, especially from the opposition party the PDI-P, rejected the idea of implementing the economic stimulus immediately using the additional budget under an emergency agreement, without having to wait for the formal revision that could only be implemented in June.
The opposition also criticizes the ruling party’s (the Partai Demokrat) campaign highlighting the SBY government’s success in cutting fuel prices three times, while actually it is simply the consequence of the decline in the world’s oil price.
Considering this political issue, it is wise for the government to facilitate a wider participation, including the opposition, to take part in the effort to handle the impact of the global economic crisis.
Since the opposition party is also strongly represented in local governments, it is politically wise to let them contribute to planning the economic stimulus and in implementing it.
The PNPM program, or others similar to it, should not just be claimed as the current government’s program, but part of a common, integrated effort.
Similarly the argument for allowing the immediate use of the additional budget should also be considered a common effort.
At this difficult time, a common effort is really needed. Each political party and candidate can claim their contribution and the results that have certainly benefited the people.
The writer is Chairman of CIDES (Center for Information and Development Studies), Senior Fellow, the Habibie Center.
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