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JAKARTA. Fiscal reforms can help attract foreign inflows, while raising the nation’s benchmark interest rate may be counterproductive, a well-respected academic has said ahead of next year’s expected US interest-rate hike, which could result in funds flowing out of emerging markets and back to the world’s top economy.
At the moment, too many government funds were earmarked for mandatory and subsidy spending, consequently limiting fiscal authorities’ ability to post higher growth that could help to attract inflows, said Ari Kuncoro, the dean of the University of Indonesia’s (UI) economics school, many of whose alumni are now senior fiscal and monetary authorities.
“Our fiscal side is not really working,” Ari said recently in an interview at UI’s campus in Depok, West Java. “At times, when global interest rates are on the rise, it would be very helpful for BI [Bank Indonesia] if the fiscal side could play a role.”
Executives with Indonesia’s central bank have repeatedly signaled that they will need to hike the benchmark BI rate further, in response to the upward trajectory of US interest rates next year.
However, raising BI’s benchmark rate from its current level of 7.5 percent may add further pressure on the Indonesian economy at a time when its gross domestic product (GDP) growth already slumped to 5.2 percent, its lowest level in almost five years, in the first half this year.
“Monetary policy may be ineffective because its impact is too stretched in the real sector, causing a slowdown not only in consumption but also in investments, which are needed for sustainable growth in the long run,” Ari explained.
BI Governor Agus Martowardojo has lamented the absence of fiscal pro-activity to resolve the imbalances in the domestic economy.
He has threatened to carry out “more painful measures” if no decision is made or action taken on the fuel subsidy, which accounts for a huge spending allocation that is seen as the key factor limiting fiscal ability to spur growth.
The current administration of President Susilo Bambang Yudhoyono has rejected calls to raise the price of subsidized fuel but his decision, according to the President’s special aide for economic affairs, Firmanzah, was not so much a political one, as it was based on economic rationale.
He argued that an adjustment in the price of subsidized fuel would need careful planning and preparation, adding that it was a policy that could not be adopted hastily.
Next year’s expected US rate hike may trigger outflows from RI
More govt funds needed to spur growth, attract inflows: UI dean
BI interest-rate hike may be counterproductive
Fuel subsidy limits fiscal ability to spur growth
“I disagree with statements saying that the President is leaving behind a fiscal time bomb,” Firmanzah said in a recent interview. “This year, we have already increased the price of electricity, while performing fiscal tightening that has affected the budget spending of our ministries.”
However, economists argue that the spending structure of the 2015 state budget, approved by the House of Representatives last week, is still dominated by unproductive spending that contributes only marginally to economic growth.
“Indonesia is unusual in that its composition of spending matters more for financial markets than the size of its deficit,” said Tim Condon, the head of Asian research with the Dutch-based ING Group.
“We remain of the view that eliminating fuel subsidies would be very investor-friendly, almost irrespective of what the government did with the freed-up revenue,” he explained via an email. (Satria Sambijantoro)
