Linda Yulisman, Jakarta – The package of economic measures announced by the government on Friday to overcome the growing current account deficit and avert further economic slowdown would be ineffective, as it would not address the root of the country's economic problems, economists said.
The analysts said that the government had failed to prescribe the right medicine to cure the nation's recent economic woes.
In a much-anticipated move, the government rolled out a set of measures that it said would reduce deficits caused by external trade, sustain growth and brace the system against external headwinds, particularly the US Federal Reserve's tapering of its economic stimulus.
On the same day, Bank Indonesia (BI) launched its new monetary policy to boost US dollar liquidity by extending tenors of its foreign exchange to between one day to 12 months from the current seven, 14 and 30 days. The central bank also eased restrictions on exporters buying US dollars.
Hendri Saparini, from the economics, trade and industry research institute Econit, said the newly launched economic stimulus package did not introduce short-term breakthroughs to address structural problems in the economy, citing the scrapping of export quotas for unprocessed ores.
"The deficit in the trade balance, which puts pressure on the current account, should be overcome by boosting exports of manufactured goods, instead of pushing up commodities, which now make up 70 percent of the country's total exports. To reach that end, the government must prepare a comprehensive matrix with specific strategies," she told The Jakarta Post.
Hendri also expressed her pessimism that the program to promote the use of biodiesel as an additive for automotive fuel would be ineffective, as the previous program, which aimed to promote natural gas to replace fossil fuels, had not run as smoothly as planned.
Institute for Development of Economics and Finance (Indef) economist Enny Sri Hartati echoed Hendri's concerns, saying that the new economic measures were "less comprehensive than expected" and would not instill positive sentiment in business players.
"Overall it seems like a remedy that doesn't match the disease it seeks to cure," she said, citing the scrapping of the import quota.
By supporting imports to manage inflation, the government did not address the real problem – shortage of supply – which could be solved in the short-term by enhancing the productivity of crops, for example, Enny said.
Apart from that, she added, the root cause of the inflationary pressures from the raw food basket was a distorted domestic market due mainly to oligopoly; therefore, any instrument the government promoted would not work and could be hijacked by several players to control prices.
"The critical point is an unhealthy market structure, and this must be improved if the government really wants to curb prices," Enny said.
Ho Woei Chen, an economist at United Overseas Bank (UOB), said the short-term effectiveness of the fiscal package in reducing the current account deficit and bolstering the weak rupiah would be limited, although in the medium-term it could bring a positive effect on economic growth.
"In the short-term, the current account weakness and the expected start of quantitative easing tapering in the United States will continue to favor a higher US dollar against the rupiah, which could head up to 11,300 in the coming months," he said in a note.
Despite criticisms voiced by analysts, Indonesian Employers' Association (Apindo) chairman Sofjan Wanandi lauded the government's move in issuing the economic package, which he regarded as having come at a critical time for business players, particularly labor-intensive firms that had threatened to execute further layoffs after a significant annual wage increase this year.
In the package, the government offers a tax dispensation to labor-intensive firms, which can account 125 percent of their labor costs in their tax counts. Apart from that, similar firms with at least 30 percent export oriented products may put 150 percent of their labor costs into their tax counts. These measures are intended to avert massive worker layoffs caused by reduced profit margins amid crimped demand.
"In my opinion, all of the policies will help our companies, especially those which are labor-intensive and export oriented," he said.
Economic stimulus package
To reduce current account deficit: Provide tax incentives to export-oriented companies; reduce oil and gas imports; increase tax sales on luxury goods and imported cars from an average of 75 percent to between 125 percent and 150 percent, and allow more shipments of unprocessed ores until 2014
To spur growth: Provide tax breaks to labor-intensive industries and ensure the state budget deficit will not exceed 2.38 percent
To stabilize prices: Cooperate with BI to curb surging inflation and change from quota-based import mechanism for horticulture and meat to price-based system
To boost investment: Improve one-roof licensing system in all business sectors including oil and gas industry, revise negative investment list, speed up renegotiation of existing contracts of works in mining sector
Bank Indonesia's measures: Extension of the tenors of commercial banks' foreign-denominated time deposits kept at BI; extending banks' counterparty coverage for derivative transactions; extending exporters' underlying assets to obtain foreign currencies; and extending the exclusion scope of banks' non-foreign loans
[Bagus BT Saragih and Tassia Sipahutar contributed to the story.]