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By Elizabeth Pisani
665 words
16 May 1991
Reuters News
(c) 1991 Reuters Limited

JAKARTA, Reuter - Indonesia's imports are growing much faster than exports, threatening to knock economic growth off track unless subsidies that encourage inefficient industries are abolished, the World Bank said in a confidential report.

The World Bank's annual report on Indonesia's economy said the government must keep an iron grip on money to kill the country's apparently insatiable appetite for imports, which shot up by 25.9 per cent in the fiscal year to March 30 1991.

In that time non-oil exports, intended to be the jewel in Jakarta's economic crown, grew by a paltry 6.7 per cent after 23 per cent growth in 1989/90.

The gap between imports and exports of goods and services, the current account deficit, doubled to four billion dollars or 4.1 per cent of national output in fiscal 1990/91.

"The emergence of inflationary pressures and a deteriorating non-oil trade balance during 1990/91...require that decisive actions be taken in the near term to return the economy to a sustainable growth path," said the report, a copy of which was obtained by Reuters.

"Without these strong stabilization measures, macroeconomic stability could be undermined in the near term."

The bank recommended the government get rid of favouritism and subsidies that protect a few large firms, encourage inefficiency and ultimately come to roost in lower export growth.

Under fire particularly were fuel subsidies and cheap electricity which eat into government budgets and allow factories to be sloppy in their use of energy. Energy prices should be raised across the board, the report said.

There were some improvements in 1990, but the report said Jakarta still has much to do before open competition and efficiency become the order of the day.

It criticised bans and massive taxes in the forestry sector which it said have cost export earnings dearly.

Officially, the measures were intended to boost domestic furniture production but in fact, the bank said, they enriched a few well-connected companies in the developed island of Java and deprived poor peasants in remote areas of a living.

The bank favoured roping the private sector in to develop crucial sectors like telecommunications where open tenders and competition would mean better prices and service.

But it urged the government, strapped as it is for cash, to reconsider vast infrastructural projects that may not instantly smash open bottlenecks such as energy supply and transport that are threatening industrial growth in some areas.

Economists in Indonesia doubt the wisdom of some of the expensive projects now on the drawing board, such as a nuclear power programme and a mass transit system for Jakarta.

Private sector borrowing from overseas went through the roof in 1990/91, bringing in six billion dollars, 40 per cent more than the previous year.

Indonesia is almost unique among developing nations in not restricting capital or foreign exchange flows and Jakarta at first did little but stand back in shock and watch the incoming money compete to send prices up.

But as borrowers from overseas scrambled to import equipment that would eventually produce manufactured exports, Bank Indonesia saw a hole being dug in its reserves and begun to rein in money, a move aplauded by the World Bank.

The World Bank, itself a major lender to Indonesia, recommended Jakarta maintain the squeeze begun in earnest earlier this year to put a damper on consupmtion, especially of imports.

It made projections for the country on the assumption that Indonesia, considered a model debtor, would do what was needed to reduce the current account deficit, something it judged "a high probability".

The report recommended international donors come up with $4.6 billion in cheap loans for Indonesia in the current fiscal year, around the same level as 1990/91, but that they be prepared to help out with more if a drop in oil prices cut the OPEC member's income.




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