BI projects higher growth of 6% by 2006

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.