The central bank has urged that the proposed increase in government spending next year be used primarily for infrastructural development so as to spur faster growth in the real sector.
For its part, Bank Indonesia will continue to encourage more bank lending, and help keep inflation under control through its interest and exchange rate policies.
BI governor Burhanuddin Abdullah said during a hearing Monday with the House of Representatives' economics and finance commission that the country's real sector had already benefited to some degree from the current stable inflation, interest rates and rupiah, pointing to the recent rise in exports and consumer spending.
He admitted, however, that the real sector had yet to move out of "the slow lane".
"Macroeconomic stability is always the most important thing to achieve. The problem now is that the real sector is not yet moving as fast as we would like it to so as to reduce unemployment and poverty," Burhanuddin said.
"Only one sector can be still be described as stagnant, and that is (fixed) investment -- something that is hampering the other sectors from growing even faster."
The economy saw first-quarter growth of 6 percent on the back of higher consumer spending and exports, while on-year inflation had eased to 6.29 percent by the end of April. Meanwhile, the central bank has reduced its key BI rate to 8.75 percent, thereby increasing people's purchasing power and lowering the cost of business expansion.
BI senior deputy governor Miranda S. Goeltom said the real sector could be shifted into faster growth mode if the government's planned higher spending next year was effectively directed at developing the country's infrastructure.
"The local authorities also need to better prepare for and manage investments in their regions, particularly their local human resources and businesses so that they can benefit from the projects," she said.
Manufacturers and exporters have long been complaining of Indonesia's woefully inadequate infrastructure -- particularly road, port and power infrastructure -- which is hampering them in getting their goods to market.
The government is planning to expand 2008's budget deficit to 1.7 percent of gross domestic product (GDP), given a total budget of Rp 73.1 trillion (US$8.1 billion), as part of its efforts to push economic growth higher to 6.8 percent from this year's 6.3 percent.
Miranda warned, however, that higher growth could also spur inflation, but said that this could be contained as long as increases on the demand side resulting from more government spending were balanced by more output on the supply side.
"That's why the additional spending should be focused on encouraging more production, such as through the development of infrastructure," she said.
Meanwhile, Burhanuddin said that BI would also continue to encourage more bank lending to the real sector, despite the fact that some Rp 170 trillion in approved credits had yet to be drawn down by businesses. The country's banks, awash in excess liquidity, have pumped some Rp 200 trillion into central bank bills, while Rp 90 trillion in transfers from the central government to the regions has been placed in bank deposits.
"The banks cannot be blamed for investing their excess funds in central bank bills, or that approved loans have not been fully drawn down by businesses," he said. "The problem arises when too many banks decide to do this rather than extend more loans."
Find Article by Date