BI projects higher growth of 6% by 2006
Tony Hotland, The Jakarta Post/Jakarta
The country's economic growth is projected to reach about 6 percent by 2006, encouraged by the implementation of prudent fiscal and monetary policies as well as the determination by the incoming government to create a more favorable business climate, a senior official at Bank Indonesia (BI) says.
Speaking during an economic seminar held by the Indonesian Economists Association on Wednesday, BI senior deputy governor Miranda S. Goeltom said domestic consumption would remain the main driver of growth.
"Public consumption will still play a dominant role, although it would be a declining influence. The impact of exports will start to show in 2005, while new investments would play a big role in 2006 as the new government's policies in the corporate sectors begin to take effect," she said.
Miranda also projected the industrial, trade, and agriculture sectors would be the major contributors to growth during the next two years.
She said growing public consumption would be supported by an increase in purchasing power as reflected in a higher real disposable income.
"The public's real disposable income is projected to grow higher as economic activity increases and the global economy improves. Improved purchasing power would encourage companies to revise their sales targets upward and these would include automotive, telecommunications, and pharmaceutical firms," she said.
The country's economy grew by 4.1 percent in 2003 and is expected to reach 4.8 percent this year. The government has set an ambitious target of 5.5 percent for 2005. The economy needs to grow by at least 6 percent to create enough jobs for the 2.5 million new jobs seekers each year.
Miranda said inflation during the next couple of years would be influenced by fundamental factors, such as supply and demand, administered prices, and expectations about currency rates and inflation.
"For 2005, inflation is expected to be lower than in 2004 from 7 percent to 5.6 percent due to the stronger rupiah, lower prices of oil (US$25 in 2005 and $22 in 2006) and imported manufactured goods. In 2006, there won't be too much pressure on prices given assumptions that these factors display little changes.
Miranda's predictions seem to ignore the impact of high oil prices, the record levels of over $40 per barrel that show no sign of declining in the immediate future.
Her growth projection does also not take into account an incoming government having to lower a costly fuel subsidy, a move that would push up inflation and eat into consumers purchasing power.
"(Upward inflationary) pressure would likely come from the domestic market as the effect of growth. For administered prices, the government would probably lower subsidies, which would increase the prices of goods," Miranda said.
On the rupiah, Miranda said: "Entering 2005, the rupiah would appreciate again and be stable throughout 2006, supported by the euphoria of a new government that induces positive sentiments from domestic and international communities. We call it the honey moon effect."
However, she said the projections were naturally subject to changes due to global, regional, and domestic risk factors.
"For example, there are uncertainties about how developed countries will tighten their monetary policies and over possible increases in U.S. benchmark rate.
"Besides that, we have to also take into account the increasing dependence among Asian countries, such as China, and the phenomenon of stronger foreign exchange reserves dominated by short-term investments," Miranda said.