Minister of Finance Sri Mulyani Indrawati said Wednesday that the government would accelerate its investment spending within the next few weeks, injecting up to Rp 100 trillion (US$8.3 billion) in pump priming amid the steep global economic downturn and international credit crunch.
But then -- what makes this commitment really serious and more credible this time? After all, we have often heard of such pledges before but they have mostly gotten bogged down in bureaucratic inertia, causing the annual state budget to end up with 15 to 20 percent of its investment budget unrealized.
The prognosis for the economy is really worrisome as our economy begins to feel the devastating impact of the recession hitting the United States, Europe and Japan.
The crash of the Jakarta stock market in early October which shaved off more than 60 percent of its market capitalization and an almost 20 percent depreciation of the rupiah in the past three weeks alone has shown how vulnerable our economy is to the fallout from the economic and financial crises in the developed economies.
We therefore believe the government does really mean business this time. In fact, it is not exaggerating to say that our economic growth could fall to as low as 4 percent -- some analysts even forecast it at 2.5 percent next year -- and unemployment could explode to more than 20 percent from around 11 percent now if the government does not offset the expected steep decline in private consumption with fiscal pump priming.
The problem is that private consumption, thus far responsible for 65 percent of the growth, will significantly weaken next year due to declining prices of most primary commodities and possible massive employee layoffs in several sectors.
Exports will not shine either as they did in the first eight months of this year due to the falling prices of commodities and depressed demand in the international market.
Yet more worrisome is that private investment -- both portfolio and direct investment -- will also be debilitated due to a credit crunch, massive withdrawal of funds from such emerging economies as Indonesia and the increasingly high-risk averse stance on the part of most investors.
Bank lending is not promising either because major banks will probably see larger nonperforming loans due to the impact of the steep fall in commodity prices. Several banks have even begun slowing down the disbursement of pledged credits in anticipation of needing larger provisions for bad loans.
Hence, government spending should become the main locomotive, the savior.
Most analysts, including those of such conservative institutions as the International Monetary Fund, have suggested that the government increase its deficit spending from 1 percent of gross domestic product by borrowing more from the domestic market and overseas. The government does have a broader space for increasing its deficit spending through debts because the ratio of government debt to GDP has declined to below 30 percent from a high of up to 100 percent several years ago.
Of most importance is that the additional spending be made on such labor-intensive projects as infrastructure construction such as roads, irrigation systems and ports which do not require a lot of foreign exchange financing.
Bigger government spending will generate a virtuous circle within the economy. Suppliers and contractors will use part of the payments from the government to pay workers and will deposit some of their revenues in banks, which will in turn transfer these deposits into loans, thereby injecting liquidity into the financial system.
Fortunately, the 2009 state budget has been designed to cope with a sharp economic downturn in that the government has broad political leeway for amending its budget in case of an emergency condition.
A special article in the 2009 budget law authorizes the government, under an emergency condition, to allocate new spending not stated in the budget, or to shift spending appropriations between programs or government agencies to protect the economy.
The government is also authorized to withdraw standby loans from bilateral or multilateral creditors and issue bonds of a higher amount than stipulated in the budget.
Since fuel subsidies budgeted for next year will be much lower as international oil prices will most likely hover between US$40-50/barrel -- far lower than the $80 assumed for the budget -- the government will be able to allocate a much larger budget for poverty alleviation, rural infrastructure development and subsidies for food, fertilizer, rice seeds and loans for top priority sectors.
