The slowing inflation in December, allowing Bank Indonesia to further lower its benchmark (BI) interest rate Wednesday by 50 basis points to 8.75 percent, will support the massive pump priming the government is doing to fuel the domestic market demand of 240 million people amid the depressed international market.
The consumer price index increased 11.1 percent in December from a year earlier after rising 11.7 percent in November due largely to the government-mandated decrease in fuel prices. There was even deflation of around 0.04 percent on a month-to-month basis, which was unusual because in December the monthly inflation is usually higher due to the Christmas and New Year festivities.
The Rp 50 trillion (US$4.5 billion) fiscal stimulus package the government will inject into the economy will be more effective for pumping up domestic demand if businesses can have easier access to bank loans for working capital.
It should be noted the stimulus will be on top of the Rp 1,037 trillion in operating and investment budget already approved by the House of Representatives for this fiscal year.
Bank lending is expected to expand as the central bank steadily, yet incrementally, eases its money stance amid the weakening inflationary pressures caused by the downward trend in fuel and food prices.
Companies need more working capital loans to implement government projects as the government accelerates the disbursement of its investment budget for basic infrastructure such as roads, ports, airports, power stations, market facilities and various rural infrastructure.
It is encouraging to learn that even though our economic expansion could slow to 4.5-5 percent this year from an estimated 6 percent last year -- which is still quite respectable compared to the contraction in most developed countries -- the government has geared up to cushion the domestic economy against the sharp global downturn.
The government also made the right decision by focusing the allocation of the Rp 50 trillion additional stimulus in the form of import duty and tax cuts for businesses in the sectors able to generate the strongest boost in domestic demand: labor-intensive industries, agribusinesses, import-substitution industries, export-oriented manufacturers and businesses that support infrastructure construction.
We hope the government can soon develop an efficient and effective verification mechanism to ensure the fiscal incentives are granted to the targeted businesses. The rationale is that tax cuts can be put to work immediately.
But bureaucratic inertia in screening the businesses qualified for the stimulus would nullify the benefits of the additional stimulus.
The biggest challenge though is the government's capacity to realize its capital expenditures that have so far been notoriously low, resulting in a big budget surplus. The 2008 state budget, for instance, wound up with more than Rp 51 trillion in unspent budget allocations.
In the past, more than 70 percent of the government capital expenditures budget was spent in the second half of the fiscal year due to arduous procedures for the procurements of goods and services.
This time, however, government spending is quite imperative, if not the key, to preventing a sharp downturn in the economy, and analysts predict the worst impact of the global downturn will hit our economy during the first half of this year.
Hence the timing of the spending is quite crucial, in fact as crucial as the targeted beneficiaries of the pump priming.
The problem is that private consumption, thus far the main locomotive of growth, will significantly weaken due to the crash in prices for most primary commodities and possible massive worker layoffs in several sectors. Neither will exports recover from the deep slump that began last August due to the depressed demand in the international market. Private investment will be quite sluggish due to the global credit crunch and the increasingly high-risk averse stance taken by most investors.
As the bulk of government capital spending goes to basic infrastructure, the procurement process for both goods and services should be expedited.
The government therefore should see to it that all investment spending warrants are issued to the relevant ministries and regional administrations before the end of this week so that the procurement process can begin early.
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