Linda Yulisman, Jakarta – The government's inability to set realistic economic targets for this year has resulted in the failure to seek solutions that adequately address the current economic situation, says an economic think tank.
Hendri Saparini, executive director of the Center of Reform on Economics (CORE), said on Wednesday that the government was in constant denial throughout this year over its inability to achieve its ambitious targets amid a persistently gloomy external outlook, thereby its policy responses were not able to sufficiently solve its real problems.
In the 2013 state budget, the government set 6.8 percent economic growth and 4.9 percent inflation, which were then corrected to 6.3 percent and 7.2 percent respectively, due to various factors, including the ongoing global downturn and fuel-price increases.
However, despite the changes, the economy grew below expectations in the first three quarters at 5.8 percent, the lowest level in almost three years, on weak investment and exports, while inflation shot to 8.4 percent on a yearly basis in November.
The country's economic fundamentals were not as strong as expected, but the government still focused on high growth and investment, putting the economy at risk of overheating, marked by high inflation and a huge trade deficit, said Hendri.
"Such an economic structure should have driven the government to correct its policies, but it still aims for growth amid a widening trade deficit because it doesn't worry about our economic fundamentals," she said during a discussion on the 2013 economic review.
The government's claim that a dependence on the sizeable import of raw materials and intermediary goods was necessary to support investment and exports was false, she said, because the inflows of investment were mostly channeled to production serving the domestic market.
Spurring growth through consumer spending and investment thus posed a serious threat to the trade balance, she added.
In its review, CORE also points out policy mishaps by the government in dealing with the current situation, including raising taxes on luxury goods and opening access for food imports as wide as possible.
It says that the luxury goods tax increase will be inefficient in its attempt to overcome the trade gap through curbing the purchase of consumer goods, which only contribute to less than 10 percent of overall imports.
In addition, while easing raw food imports can serve as a short-term solution to pacify inflation, the government failed to address the root of the problem – insufficient agricultural production. "So far, there is no domestic economic reform to end the trade deficit," Hendri said.
Dwi Andreas Santosa, an agricultural expert from the Bogor Agriculture Institute, said that the government should help local farmers with much-needed subsidies to boost production.
"The subsidies on fertilizers and seeds may have proven ineffective, so maybe the government can try other forms of subsidies. For now, farmers may want subsidies dealing with price," he said.
The subsidies could be provided to enable prices to stay at appropriate levels, allowing farmers to earn profits from production. This would be an incentive for them to grow, Andreas added.
Under the recent deal agreed to during the World Trade Organization (WTO) meeting in Bali, developing countries, including Indonesia, are allowed to breach the subsidy limit of 10 percent of national output for public stockholding for the purpose of national food security programs, without being sued by other members.