BoP deficit projected at $0.7b in 1997

JAKARTA (JP): Indonesia is expected to suffer a US$700 million balance of payments (BoP) deficit next year, after enjoying a projected $200 million surplus this year, a domestic report says.

The Institute for Development of Economics and Finance's report, Indonesian Economic Prospects 1997, projects that net capital inflows, including official loans, are likely to reach $9.2 billion next year, up from $8.8 billion this year.

But the capital inflows will be too small to cover the country's current account deficit, which is projected to reach $9.9 billion next year, up from a $8.6 billion projection this year.

"Next year could be a critical year for us, and the government will do anything to cover the deficit. It may seek new loans, issue bonds or use its stand-by loans," institute researcher Faisal H. Basri said here yesterday.

He said capital outflows next year would be greater than inflows because of increased political tension in the run up to the general election.

Faisal would not predict the value of capital outflows next year.

"It is a general phenomena here. When we had our general elections in 1992, we saw s net capital flight of some $1.7 billion," he said.

The realization of foreign direct investment commitments is expected to be weaker with many investors putting off their projects until after the election.

But the institute's managing director, Didik J. Rachbini, believes the government and the military will not tolerate disturbances which could disrupt foreign investor confidence in the country's economic and political stability.

The government, he said, had learnt from the July riots in the city, which almost paralyzed the country's financial and capital markets.

He predicted in the short-term that the government will control economics, politics and other matters, and that it will continue to try to cool the economy with its tight fiscal and monetary policies.

But he criticized the government's fiscal and monetary policies in cooling the overheating economy for not addressing structural problems.

"Rather than just introducing a tight monetary policy, the government should address fundamental problems in real life, such as eliminating barriers in supply and strengthening our industrial structure," Didik said.

Nonetheless, Didik commended the government's efforts to reduce inflation even though they failed to reduce the country's current account deficit.

The government has projected the inflation rate will be around 7 percent this year, down from 8.64 percent last year. The institute, however, believes the actual inflation rate will be much higher.

Economic growth

The institute projected that Indonesia will enjoy 7.8 percent economic growth this year and 7.4 percent next year.

If the government loosens its monetary and fiscal policies, next year's economic growth may be closer to this year's level or just under last year's level of 8.1 percent.

Domestic demand, especially household consumption and investment, is expected to drive the high growth rates, the report said.

The institute forecasts that growth will slow in all sectors except manufacturing, which is expected to grow some 11 percent this year and in coming years.

The agricultural sector is projected to have the slowest growth: 3 percent this year and 2.8 percent next year, down from 4.2 percent last year.

The construction sector's growth is to slow to 10.9 percent this year and 10 percent next year, compared with 12.9 percent in 1995.

Growth in the services sector is also expected to slow, especially in transportation and telecommunications services. But the growth of financial and tourist services, including hotels and restaurants, is expected to remain buoyant. (rid)

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