BI predicts lower growth this year

JAKARTA (JP): Bank Indonesia announced on Wednesday that economic growth this year might be lower than its initial projection of between 4.5 percent and 5.5 percent due to economic slowdown in the U.S. and Japan and continuing domestic political and security problems.

Bank Indonesia deputy governor Achjar Iljas said that growth in the first quarter was already lower than expected.

"Economic growth in the second quarter of 2001 is expected to be even slower (again). This is due to various problems and risk factors encountered during the previous quarter which are expected to prevail with greater magnitude...," Achjar said at a media conference, which featured the public unveiling of Bank Indonesia's first quarter report.

"Given this trend, economic growth (this year) is expected to be lower than the 4.5 percent to 5.5 percent projection made earlier this year," he added.

He did not provide the first quarter gross domestic product (GDP) figure, nor the full year revised projection.

Some analysts warned earlier that this year's GDP growth might be lower than the central bank's January projection.

The economy was badly hit by the financial crisis that started in the middle of 1997 with GDP contracting by nearly 14 percent in 1998. The economy started to recover in 1999 with relatively flat growth, but GDP last year expanded by 4.8 percent, well above most projections, driven by strong export performance and private consumption.

In the 2001 state budget, the government forecast economic growth at 5 percent, fueled mainly by investment and exports.

But Bank Indonesia said in its latest report that exports and investment performance might be weaker than anticipated.

The central bank said that the economic slowdown in the U.S. and Japan, Indonesia's largest markets, would affect exports, while political and security problems at home would hinder growth in investment as well as consumption.

"From the supply side, slower production will be reflected in the declining performance in the manufacturing sector," Bank Indonesia said.

The central bank said that this year's economic development will also depend on the ability of the government to resolve major issues, including ensuring social, political and security stability, and improving relations with the International Monetary Fund (IMF).

It added that the halt in gas production by U.S. giant ExxonMobil in Aceh due to security concerns would cause a serious impact on the state budget if the shutdown continued until the end of this year.

Some fear that the state budget will suffer a greater-than- expected deficit due to the weakening of the rupiah and a rising interest rate.

"However, there is still a chance for economic activities to blossom if the government can resolve the social, political and security instability ... Another critical factor is linked to reaching agreements with the IMF and other donors...," Bank Indonesia said.

An IMF team arrived late on Tuesday to commence talks with the government over the key economic reform program. Relations with the IMF turned sour after the fund canceled the disbursement of its next US$400 million loan tranche late last year due to signs of the government wavering in the implementation of the IMF- sponsored reform program.

The delay in the IMF loan tranche had contributed to the fall of the rupiah to a 30-month low of around Rp 11,500 per U.S. dollar last month.

Bank Indonesia said in the report that the drop in the rupiah had subsequently created inflationary pressure.

In a bid to achieve its 2001 core inflation target of between 4 percent and 6 percent, Bank Indonesia said it would maintain a tight monetary policy this year.

Bank Indonesia has allowed the benchmark interest rate of its one-month SBI promissory notes to increase over the past several weeks to help defend the rupiah and curb inflationary pressure.

The SBI rate increased again to 15.82 percent on Wednesday from 15.79 percent the previous week.

The rupiah ended higher at Rp 10,600 per dollar late on Wednesday from Rp 10,690 on Tuesday amid expected positive results from the talks between the government and the IMF.

The IMF mission will stay here for two weeks to review the implementation of the economic reform program. The mission will then report to the IMF board in Washington before the fund decides on the disbursement of the third loan tranche from its $5 billion bailout fund.(rei)