We believe Finance Minister Sri Mulyani Indrawati’s preliminary estimate that Indonesia’s economy could have expanded by 4.6 percent in the first quarter was by no means dressed up to make the Susilo Bambang Yudhoyono government look good in the July presidential election.
The final figure on the first quarter gross domestic product will be announced by the Central Statistics Agency (BPS) only next month. But the provisional figure, which was quite impressive compared to miserable economic contractions in most other countries, including in Malaysia, Thailand and Singapore, seem realistic, based on actual developments.
Domestic consumption has indeed become the main locomotive of the economy because exports, according to BPS, contracted by almost 35 percent in January and February down to US$ 14.23 billion.
Private consumption, which now accounts for more than 70 percent of GDP, has received a significant boost from several factors.
The 15 percent increase in the pay of an estimated 5.5 million state employees, the fuel price cut in December and the $1 billion in waived payroll taxes, value added tax and import duties - as part of the $6.1 billion fiscal stimulus designed for pump priming this year - has already contributed greatly to strengthening consumer purchasing power.
On top of that, the enforcement of the new income tax law starting in January also helped to increase the disposable income of taxpayers because the law increased tax allowances for low-income people and lowered the highest rate on personal income tax from 35 to 30 percent.
The law also simplified the structure of corporate income tax from three bands with the highest rate at 30 percent, down to a simpler single flat rate of 28 percent.
Yet more significant was the big spending on political campaigns by the estimated 1.5 million candidates and 38 national political parties contesting in the April 9 legislative elections for the 18,440 seats in the national and regional legislatures and the regional representative council.
Many producers of packaged meals, processed foods and various other consumer goods, as well as transportation and advertising companies reported unusually high increases in sales turnovers, especially over the past two months.
We believe domestic consumption will remain vigorous in the second quarter due to more massive spending on nation-wide political campaigning in June as political parties will again go all out to reach the 171 million voters to gain support for their candidates in the July presidential election.
Another $1 billion is being injected into the rural economy for infrastructure development as part of the $6.1 billion stimulus.
In yet another boost to the purchasing power of millions of consumers, the international price of crude palm oil has recovered strongly to $700/ton, from as low as $350/ton early this year. This increase represents a quite significant bonus for domestic consumption, given the country’s position as the world’s largest palm oil producer with an estimated output of 18 million tons this year, especially since many producers are small farmers.
On the monetary side, Bank Indonesia has steadily lowered its benchmark interest rate to as low as 7.50 percent at present.
So all in all, barring major election violence that could set off speculative attacks on the rupiah, our economy will probably be able to expand by at least 4 percent during the first semester, - even though this is when we expect the most adverse impacts of the global financial crisis and downturn to hit us.
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