BI warns of deepening deficit

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono yesterday expressed concern over the deepening current account deficit and high inflation.

"The increases in investment and consumption have propelled imports that increase our account deficits," Soedradjad said in Manado, North Sulawesi, yesterday.

The government projected that the country's current account deficit would reach US$6.9 billion for the current fiscal year, as compared to $7.9 billion last fiscal year which ended on March 31.

Some analysts forecasted that such high current account deficits would continue to plague the country for years to come.

He noted that the increase in imports was driven by the increasing demand for imported raw materials and capital goods, as a result of high foreign investment.

The government last year approved $39.9 billion in foreign investment, up from $23.7 billion in 1994. It said the implementation rate for commitments made by foreign investors so far reaches over 50 percent.

State Minister of Investment Sanyoto Sastrowardoyo said recently he was confident that this year's foreign investment approvals would reach last year's level.

Soedradjad said such a high level of foreign investment had eased the government's burden in managing the country's deepening current account deficits.

Besides, the government's management of current account deficits has been eased by other capital inflow in the forms of portfolio investment, offshore loans and others.

When there are continuously high current account deficits, it is imperative for the country to maintain its macroeconomic stability, the governor said.

"Macroeconomic stability is not something given, but something to strive for. Therefore, we must continuously maintain it," Soedradjad was quoted by Antara as saying.

The governor called on other state institutions to take care of the country's macroeconomic conditions because efforts by the monetary authority alone will not be enough. He added that the central bank's main duty is nurturing and monitoring the development of the banking industry.

He said the banking sector is still dominant in mobilizing and channeling funds to the public to finance the country's economic activities.

He revealed that banking loans to the public had increased by 160 percent during the last five years to Rp 253 trillion (US$108.3 billion) as of last year from Rp 97 trillion as of 1990.

Meanwhile, the mobilization of public funds through the country's banking industry rose by 159 percent to Rp 215 trillion as of last year from Rp 83 trillion as of 1990.

"These figures show that the performance of the banking sector in providing financing facilities to support the country's development is quite successful," Soedradjad said when officially inaugurating the building of the central bank's Manado branch.

In a related development, the Manila-based Asian Development Bank (ADB) projected yesterday sustained economic growth in Indonesia, despite the threat of inflation and a growing current account deficit.

The multilateral financial institution said in a new report that the Indonesian economy is already operating at a very high level of capacity, and the government should address the macroeconomic concerns in a timely manner.

"Growth of the Indonesian economy in 1996 and 1997 is projected to be almost as strong as in 1995. Continued robust consumer demand and a high level of investment spending ... will help to sustain high growth," the bank said in its Asian Development Outlook for 1996 and 1997.

"(However) the challenge faced by the government to manage stable growth remains," it added.

Gross domestic product was forecast to grow by 7.8 percent in 1996 and 7.7 percent in 1997. GDP was 7.6 percent in 1995, while inflation, which was at 9.4 percent last year, was expected to cool down to 7.5 percent this year and 8.0 percent next year due to better harvest prospects.

The current account deficit was projected to widen to $9.2 billion in 1996 and to $7.9 billion for 1997. It jumped to $8.0 billion in 1995 from $2.8 billion in 1994.

"(Further) In 1997, there will be continued pressures from strong private sector demand and because of the election in that year, from a more expansionary fiscal stance by the government," it added.

The study said fiscal prudence is required since the government is not likely to enact contractionary policies in times of election.

"The main medium and long-term challenge facing the Indonesian economy in the context of an increasingly competitive and open world economy is how to ensure efficient and productive investment," it concluded.

"Other than providing a consistent and transparent investment climate, a fair competitive environment also needs to be created, crucial physical infrastructure bottlenecks need to be alleviated, and human resource development to increase productivity needs to be emphasized." (rid)