BI chief predicts slowdown

BI chief predicts slowdown

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono
predicted yesterday economic growth would slow down next year but
remain above 7 percent.

Soedradjad said next year's economic growth would be similar
to this year's, but slower than the 8.1 percent expansion in
1995.

The slowdown would result from the tight fiscal and monetary
measures being undertaken now, he said.

"The developments in monetary aggregates clearly illustrate
this slowdown," he said at a seminar on the country's economic
prospects for 1997.

The growth of M1 (narrowly-defined money supply) began slowing
in June, to 27.5 percent for September, while M2 (domestic
liquidity) growth declined to 26.1 percent and bank credit grew
19.8 percent.

"These are favorable developments, but they are still higher
than we want them to be," he said.

The government's target for M1, M2 and bank credit growth for
this year are 15 percent, 17 percent and 16 percent.

Soedradjad said the inflation rate also declined. It was 5.92
percent for the first 11 months of this year compared to 7.85
percent for the corresponding period last year.

"This may indicate that the government has succeeded in
reducing inflationary pressures from domestic demand. But we must
be careful, because this low inflation rate is also the result of
a sharp drop in food prices," he said.

"All these trends show that Indonesia's economy this year will
slow down a little, but will stay above 7 percent," he said.

Soedradjad said economic growth this year would continue to be
driven by strong domestic demand and growth in investment and
private consumption.

"The role of the foreign sector will decline," he said.

Last month, economists predicted slightly higher growth for
next year compared to this year.

Mari Pangestu of the Centre for Strategic and International
Studies predicted 7.6 percent growth for 1997 and 7.5 percent
growth for 1996.

Economist Rizal Ramly estimated growth at 7.5 percent next
year and 7.3 percent this year, while Didik Rachbini foresaw 7.4
percent growth and 7.8 percent growth, respectively.

Soedrajad expected strong domestic market demand to persist
because of the many licensed investment commitments, particularly
from domestic investors, and a strong consumption pattern because
of better welfare.

But he warned strong domestic demand may strain public
liquidity: "If we are not careful, this may lead to higher
monetary indicators and result in high prices."

In response to questions on inflation and economic growth,
Soedradjad said that, in the short run, high growth could not go
hand in hand with low inflation.

"Theoretically, (high growth) has trade-offs, such as high
inflation and high unemployment," he said.

But in the medium term and long run, high growth could
coincide with low inflation.

"Bringing down inflation results in stability, and stability
will be useful for long-term planning," Soedradjad said.

He said lowering inflation would help distribute wealth more
evenly. "Those who are most affected by high inflation are those
with fixed, low incomes," he said.

"I believe we can achieve high growth and low inflation in the
medium and long terms," Soedradjad told reporters after the
seminar.

Economist Sjahrir, who addressed the seminar, shared
Soedrajad's views, predicting growth would slacken this year
because of tight monetary policy and weaker export
competitiveness.

"I think economic growth will slow down to 7.9 percent this
year from 8.21 percent last year, and will further decline to 7.6
percent next year," he said.

He said high deposit rates at domestic banks would sustain a
large inflow of short-term capital which would appreciate the
rupiah.

A stronger rupiah would weaken the competitiveness of
Indonesian exports, he said.

Sjahrir based his economic growth prediction for this year on
the assumptions that the manufacturing industry would grow 12
percent, agriculture by 3.1 percent, construction by 12 percent
and services by 7.20 percent.

He projected growth in agriculture would decline slightly to 3
percent next year, manufacturing to 11 percent, construction to
10.8 percent and services to 6.9 percent. (pwn/vin)