BI predicts lower growth this year

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)