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)