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Jakarta Post

Editorial: Regaining economic stride

  • The Jakarta Post

    The Jakarta Post

  /   Tue, July 22, 2014   /  10:27 am

The World Bank'€™s (WB) second quarter (Q2) report on the Indonesian economy, released on the eve of the General Elections Commission'€™s (KPU) announcement of the official results of the presidential election, again focuses on the challenges of economic management for the new government.

The report warns that Indonesia will never regain its economic stride of annual growth of more than 6 percent if it does not accelerate genuine economic reforms, largely stalled as policymakers focused on short-term survival. Complacency set in when the short-term measures worked, reducing the urgency surrounding structural reforms.

There was not much new policy advice proposed in the latest report. It mostly reiterated the importance for the new government to expedite the implementation of structural reforms; otherwise growth would stall at less than 6 percent, much lower than its potential of 8 to 9 percent. The report revised growth this year to 5.2 percent, significantly lower than the 5.8 percent last year.

The steps will be '€œpainful'€, such as reducing wasteful spending on fuel subsidies and the politically difficult regulatory and bureaucratic reforms needed to woo new private investment. The title of the report '€œHard policy choices'€ candidly reflects the challenges ahead.

As China'€™s economic expansion has also slowed, Indonesian exports of minerals and other natural resources will not be able to finance big imports of capital goods and industrial inputs, which are needed to fuel high growth. Given the persistent pressures on the current account and fiscal management, Bank Indonesia (BI) will have to continue with its tight monetary policy, thereby, constraining growth.

But, as many analysts also have pointed out, Indonesia will not be able to regain growth above 6 percent and reduce inequality in income distribution, unless the pace of structural reforms is raised. Without significant progress in infrastructure development, growth of even 6 percent would cause the economy to overheat.

But enhancing productivity growth through structural changes or within sectors requires improvement in the functioning of product, labor, capital and land markets. A consistent industrial strategy is needed, elaborated in partnership with the private sector.

The incoming government, which will take over in October, therefore, will not have any fiscal space for populist measures, which were the popular topics of election campaign rhetoric.

The central bank will continue to pursue its macro stabilizing policy measures to ensure a more sustainable current-account footing and enhance investor confidence as rising current-account deficit will strengthen the downward pressure on the rupiah, with all its inimical ramifications on macroeconomic stability.

Given the hard policy choices ahead, the new government needs full support from the House of Representatives because painful reform measures without strong national political consensus could fail.

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