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Economic turbulence ahead for Indonesia

Publication Date : 12-07-2012

 

International Monetary Fund chief Christine Lagarde, who was on a three-day visit here ending on Tuesday, has been generous with her praise for Indonesia, calling the country's economy solid and encouraging and saying that she was deeply impressed by the reforms that have been implemented over the past decade.

The compliments should serve as a confidence-building tile in the nation's roof as we seek to reduce damage from the storms buffeting the global economy. However, it would be totally misguided for the government to let this praise go to its collective head. In the same breath, Lagarde also warned us of even more dark clouds ahead due to the global uncertainties.

Instead of being lulled by Largarde's approbation, it would be much wiser for the government to look deeper into the IMF chief's observations that Indonesia should speed its infrastructure development to attract more foreign direct investment, instead of relying on risky, skittish portfolio capital inflows.

It was no coincidence that Lagarde also quoted a recent report of the Geneva-based World Trade Organisation that revealed an alarming increase in protectionist measures in major economies.

This remark should prompt the government to take a more critical examination of the series of trade and policy measures it has taken in the wake of the European debt crisis and weakening recovery in the United States.

The behaviour of the government, however, has thus far shown a propensity to complacency, especially given that commodity markets have remained fairly bullish.

It is true in the short term, things look rosy and the nation looks to be on track to book an annual growth rate of 6 per cent this year with little difficulty.

However, such economic growth will not be sustainable in the medium term without significant progress in infrastructure development.

Just look at the crumbling condition of most basic infrastructure across the country, such as seaports, airports and roads, not to mention an acute shortage of electricity, which make the economy grossly inefficient and much less competitive compared to other major economies in the Association of Southeast Asia Nations (Asean) region. Given these challenges, Lagarde's recommendation for the government to speed the development of infrastructure is quite strategic.

Unfortunately, though, the government still fails to realise the urgency of the problem. The government spent more than US$13 billion on fuel and electricity subsidies during the first half of 2012, or almost 63 per cent of the budgeted allocation for the whole year, while investment in infrastructure was only $3.2 billion, or less than one-fourth of the subsidies for energy use.

Even more discouraging, the government has tended to sit back and relax after international oil prices started to decline due to the weaker global economy - even though the Finance Ministry has warned that total spending on energy subsidies in 2012 might top a staggering 28 per cent of the annual state budget. Fast-track reforms are obviously most imperative: Critical development constraints - poor infrastructure, corruption and inadequate institutional capacity - cannot be removed within one or two years, as they require firm and consistent measures.

If we cannot make fast and significant progress in removing these development barriers, we will not be able to take great benefits from the Asean economic community in 2015, which will make the region more attractive to international investors due to the integration of its market of almost 600 million people.

 

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