Clouded by high inflation rate, economy grows over 7%
Clouded by high inflation rate, economy grows over 7%
By Rikza Addullah
JAKARTA (JP): Indonesia's economy, spurred by increasing
investment and demand, has grown at a rate of over seven percent
this year.
However, economic growth has been overshadowed by a high
inflation rate and a swelling current account deficit.
Domestic demand for goods and services was pushed upwards at
the beginning of this year, when the National Logistics Agency
(Bulog) increased by 11 percent its rice price paid to village
cooperatives, the institutions assigned by the government to
collect rice from farmers.
The boosted purchasing power of farmers was strengthened in
April by the 29.7-percent increase in the ceiling price of sugar.
The government policy requiring employers to raise minimum
wages by between 5 percent and 34 percent in the same month also
increased the domestic demand for goods and services.
Stronger demand was also fueled by increased spending by the
government and private sector.
The government's net domestic spending rose by 15.4 percent to
Rp 60.12 trillion (US$26.1 billion) this fiscal year from Rp
52.09 trillion in 1994-1995.
Private sector spending, partly indicated in the domestic and
foreign investment commitments approved by the government, also
show an upward trend.
According to the Investment Coordinating Board (BKPM), the
amount of domestic investment commitments approved by the
government, which increased from Rp 39.5 trillion in 1993 to Rp
53.3 trillion in 1994, reached Rp 66.51 trillion during the first
11 months of this year.
Foreign investment commitments surged from $8.14 billion in
1993 to $23.72 billion in 1994 and reached $39.35 billion for the
January-November period of this year.
BKPM reported that the realization of investment commitments
was 43.2 percent for domestic investment projects and at 48.4
percent for foreign projects.
BKPM's figures recorded the development of non-oil and non-
financial projects, which were comprised of both equities and
loans.
Besides the direct investments reported by the BKPM, Indonesia
also recorded additional capitalization of Rp 5.5 trillion this
year from the issuance of shares by 22 companies through the
capital market and another Rp 3.1 trillion from the rights issues
of 17 firms already listed on the market.
This year's increasing demand can also be seen in the growth
of the country's money supply -- comprised of currencies, demand
deposits and quasi-money -- which grew 15.79 percent from Rp
174.51 trillion as of the end of 1994 to Rp 202.08 trillion as of
August, according to Bank Indonesia, the central bank.
Strong demand contributed substantially to the high growth of
the country's economy this year.
Chairman of the Central Bureau of Statistics (BPS), Soegito,
says that the economy, in terms of goods and services produced
domestically, is likely to grow at a rate of more than 7 percent
this year.
Last year, Indonesia recorded an economic growth rate of 7.34
percent.
Senior economist Sumitro Djojohadikusumo has estimated that
the economy, calculated on the basis of the constant 1993 prices,
grew by 7.3 percent this year.
In August, the government revised its way of calculating the
country's gross domestic product (GDP) by using the constant 1993
prices as a basis, instead of the 1983 prices used in the past.
The revision resulted an average economic growth rate of 8.3
percent per annum during the fifth Five Year Development Plan
period Repelita V (1989-1994), compared to an average of 6.9
percent, if based on 1983 prices.
According to Soegito, the BPS started using 1993 prices
because of the contribution of the manufacturing sector to the
country's economy, which has grown significantly since 1983,
unlike the contribution of agriculture, which has been on the
decline.
The contribution of the manufacturing sector to the economy
increased from 12.7 percent in 1983 to 22.3 percent in 1993,
while the contribution of agriculture decreased from 22.9 percent
to 17.9 percent.
Merrill Lynch, a U.S. securities company, predicts that
Indonesia's economy will grow by 7.7 percent this year, far
higher than the government's revised growth projection of 7.1
percent per annum for the current Repelita VI period, which began
in April 1994.
President Soeharto announced in his state address in August
that the government was revising its economic growth target from
the original annual rate of 6.2 percent to 7.1 percent for the
Repelita VI period.
In line with the revision, Indonesia's per capita income is
also expected to reach $1,280 by 1999, compared to the original
target of $1,020. Indonesia's 1994 per capita income of $919
ranks it among lower to middle-income countries.
The Econit Advisory Group, based on the revised calculation
methods, reported that the country's economy is growing at a rate
of 7.5 percent this year due to strong support from the
construction, infrastructure and manufacturing industries.
The construction industry is estimated to expand by 14.2
percent this year, the infrastructure industry -- comprised of
electricity, gas and water -- by 13 percent and the manufacturing
industry by 11 percent.
The finance, trade and hotel sectors are growing at a rate of
more than 9 percent this year, the transportation sector 6.5
percent, the mining industry more than 5 percent and the service
sector 3 percent, while the agriculture sector is growing by 0.2
percent only.
However, this year's high economic growth has been
overshadowed by an inflation rate of close to 10 percent.
The inflation rate reached 4.73 percent during the first four
months of this year due to increases in the government-set prices
for rice, sugar and cement; heavy rains and floods, which damaged
roods and bridges in various provinces; and the increasing
seasonal demand for goods prior to the Idul Fitri holiday.
The inflation rate was recorded at 1.16 percent in January and
1.31 percent in February before falling to 0.57 percent in March.
It rose to this year's highest level of 1.69 percent in April,
when the government raised the reference prices of cement by an
average of 40 percent and the producer price of sugar by 29
percent.
The inflation rate was recorded at less than 1 percent in each
of the following months -- 0.49 percent in May, 0.16 percent in
June, 0.71 percent in July, 0.32 percent in August, 0.38 percent
in September, 0.64 percent in October and 0.42 percent in
November -- after the government took several steps, including
the importation of more rice and crude palm oil to allow Bulog to
cushion price fluctuations.
This year's high inflation rate, combined with a heavy load of
bad debts, forced banks to raise their deposit rates from around
13 percent per annum last year to about 16 percent this year. The
lending rates were about four points to five points higher than
the deposit rates.
According to Bank Indonesia, the level of bad debts in the
country's commercial banks rose to 3.97 percent of their
outstanding credits of Rp 188.94 trillion as of January from 3.88
percent as of September 1994.
The level of bad debts increased further to 4.24 percent of
the banks' outstanding credits as of April.
From the total bad loans of Rp 9.78 trillion as of April, Rp 7
trillion was incurred by seven state-owned banks. The state-owned
Bank Pembangunan Indonesia (Bapindo) alone held Rp 3 trillion in
bad credits as of April.
High interest rates have also driven companies, particularly
big and publicly listed ones, to look for loans from overseas
banks and other financial institutions offering lower interest
rates.
In turn, the increasing inflow of overseas funds prompted the
government, in an attempt to slow down the growth of the money
supply and to cool down the overheating economy, to issue a
policy earlier this month requiring banks to increase their
minimum reserves from the current level of 2 percent of total
assets to 3 percent by February 1996.
The high economic growth rate also has been overshadowed by
the surging current account deficit.
Sumitro predicts that the country's current account deficit,
which rose from $2 billion in 1993 to $3.4 billion in 1994, may
soar to $6 billion this year and during the next few years.
Econit even estimates that the current account deficit will
likely increase to $6.4 billion this year and to $7 billion in
1996.
Both the projections of Sumitro and Econit exceed the
government's target of limiting the current account deficit to $4
billion this 1995/1996 fiscal year.
The main reason for the deficit increase was the amount of
imports, which grew faster than the country's exports.
Export growth, according to BPS, increased by only 8.7 percent
to $40.05 billion in 1994 from $36.82 billion in 1993, while
imports rose 12.9 percent to $31.98 billion from $28.32 billion.
During the first eight months of this year, exports increased by
only 13.5 percent to $18.97 billion from $25.51 billion in the
corresponding period of 1994, while imports rose 31.7 percent to
$26.53 billion from $20.15 billion.
The gap between the growth rates of imports and exports
widened in May, when a deregulatory package lowered tariffs on
thousands of trade items and reduced some non-tariff barriers.
In August, for example, exports grew by only 10.05 percent to
$3.95 billion from $3.59 billion in the same month of 1994, while
imports increased by 38.16 percent to $3.8 billion from $2.75
billion.
The deregulatory measures covered five main sectors -- import
duties and surcharges, import restrictions, investment, business
licensing procedures and the trading of goods in export
processing zones.
Besides lowering tariffs on 6,030 items, or 64.16 percent of
the 9,398 commodities on the government's tariff list, the
measure also introduced schedules on tariff reductions between
1995 and 2003, the deadline for trade liberalization among
members of the Association of Southeast Asian Nations (ASEAN).
ASEAN groups Brunei, Indonesia, Malaysia, the Philippines,
Singapore, Thailand and Vietnam.
The deregulatory package also removed restrictions on the
importation of 81 products which previously could be imported
only by registered importers, producer importers and Bulog.
The measure also significantly relaxed investment
requirements, as illustrated by the opening up of 10 industries
previously classified on the government's Negative Investment
List.
Analysts have also been concerned with the deepening current
account deficit, which could endanger the balance of payments if
the net inflow of investments into the country is not able to
compensate.
Econit estimates that the net inflow of investments will
likely reach only $4.7 billion in 1995.
According to the government's budget plan, which is based on
an assumption that exports will rise 11.5 percent to $45.45
billion in 1995/1996 from $40.76 billion in 1994/1995, Indonesia
is projected to gain a surplus of $1.8 billion in its balance of
payments in 1995/1996, in spite of its current account deficit of
$4.09 billion.
Analysts say that the faster growth of imports than exports
has been caused by the sharp increase of capital-good imports by
new investors, while Indonesian products are becoming less
competitive on the world market due to excessive levies on
businesses and an overvalued rupiah.
The rupiah, calculated on the basis of purchasing power
parity, is now overvalued by 16 percent, according to Econit.
However, the government's partial sale of its shares in its
domestic telecommunications company PT Telkom and tin mining firm
PT Tambang Timah on overseas stock exchanges will help ease the
country's balance of payments.
Minister of Finance Mar'ie Muhammad said in the middle of this
month that Telkom's overseas offering resulted in $605.95 million
in revenues for the government, and that Tambang Timah's offering
abroad raised another $154.72 million.
Besides the foreign exchange revenues for the government, the
domestic sale of shares gave Telkom a revenue of Rp 1.85 trillion
and Tambang Timah Rp 140.5 billion. The government also earned Rp
437.32 billion from the domestic sales of Telkom shares.
Mar'ie said the government's total net revenues of $760.67
million from the two firms' overseas offerings will be used to
repay its high-interest debts to the World Bank and the Asian
Development Bank.
The government's total outstanding foreign debt declined
significantly to $61.3 billion as of September, from $64 billion
as of May.
Based on the fact that the government, which has required
banks to raise minimum reserve levels by February, is trying to
limit money supply expansion, the country's economic growth will
likely slow down in 1996.
Econit sees the economy growing by 7.3 percent in 1996,
compared to 7.5 percent estimated for this year.
The government policies to allow rice prices to rise by about
10 percent, to raise minimum wages by up to 50 percent next April
and to raise transportation fares and electricity tariffs will
likely force the country's inflation rate to reach a level of
close to 10 percent in 1996.
Window A: High interest rates have also driven companies,
particularly big and publicly listed ones, to look for loans from
overseas banks and other financial institutions offering lower
interest rates.
Window B: The country's current account deficit, which rose from
$2 billion in 1993 to $3.4 billion in 1994, may soar to $6 billion
this year.