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.