Sustained criticism of corruption in Indonesia’s public bodies, most recently by World Bank president Paul Wolfowitz, has prompted the government to embark on an anti-corruption drive only to find its efforts have backfired by constraining vital government spending.
Wolfowitz said last month that the biggest obstacle to improving investment climate and lifting growth in the south-east Asian country is the legacy of corruption left by the regime of ex-president Suharto. However, the short-term effects of a drive to eliminate graft have been to deter public finance officials from the making spending decisions needed to compensate for a slowdown in economic growth.
“People are becoming too careful even to try to make any decisions or participate in any activities” for fear of subjecting themselves to criminal investigation, finance minister Sri Mulyani Indrawati said at a presentation yesterday, stressing that there can be no let-up in the pursuit of bribe givers and takers.
President Susilo Bambang Yudhoyono’s government is desperate to reinvigorate the economy with a rapid injection of public cash amid signs growth is slowing. Elimination of a key fuel subsidy towards the end of last year is already squeezing household spending and high oil prices mean the drag will continue. The central bank is also worried about the side-effects of the corruption remedy.
The attempts to eliminate growth are a problem “from the fiscal side,” Indonesian central bank deputy governor Hartadi Sarwono told Emerging Markets. “The government expenditure right now is below our expectation, that causes a problem, that’s why our prediction of economic growth is lower than” the government’s.
The central bank sees the pace of expansion nearly 0.3 percentage points below the official government estimate of about 6%. Indonesia consistently ranks towards the bottom of global corruption indices, taking the 137th spot in Transparency International’s 2005 Corruption Perceptions Index, on a par with countries like Iraq, Liberia and Uzbekistan.
In addition to the drag on government spending, Indonesia’s state banks are unable to sell off bad loans below their value without risking prosecution for corruption, according to Sarwono. “We need to have an adjustment to the situation,” he urged.
As yet, Indrawati’s promise not to let short-term glitches overturn the government’s tough stance looks credible. The head of the state electricity company Eddy Widiono was yesterday arrested on corruption allegations.
Despite the slowdown in growth, investors are bullish on the Indonesian economy, rating it above peers in the region of a comparable size.
“It doesn’t suffer from as much political risk as somewhere like Thailand and it benefits from the global commodities boom,” noted Wilfred Sit, head of Asian equities at Standard Bank.
A further boost for the economy is likely to come as borrowing costs decline. Sarwono hinted the central bank will cut interest rates at its next meeting on May 9.
“If the current robust developments continue I believe there is a possibility we will cut interest rates by around 25 basis points,” Sit told Emerging Markets.