Econit predicts economic recovery to take a year

JAKARTA (JP): The Econit Advisory Group estimates that Indonesia's crisis-plagued economy will take at least a year to recover despite the IMF-led bailout package.

Econit's director Rizal Ramli said here yesterday that new reforms initiated by the government as part of the aid package would cause a "monetary and fiscal contraction".

Economic reform would, in the short run, repress economic growth, trigger inflation, cause unemployment and widen the socioeconomic gap, he said.

However, Rizal said measures by the government to provide more incentives to boost export-oriented companies would boost the country's foreign exchange receipts.

The rise in export growth would, in the long term, stimulate the domestic economy, which would then improve the unemployment rate and people's purchasing power.

Rizal said Econit was optimistic that the Indonesian economy would begin to recover by the end of next year if the reform measures ran as expected.

Indonesia's sound economic fundamentals would help speed up the recovery process, he said.

He said the sound fundamentals were indicated by the country's current account deficit of 4 percent, relatively low inflation rate and high import and export growth.

"Most importantly, Indonesia also has natural collateral in its abundant oil and gas reserves, which are the world's largest amount of resources," he said.

The natural resources would be a guarantee for investors to place their trust in the country again, he said.

He said all economic indicators in the country were much better than those of Thailand, whose financial crisis sparked turmoil in other Southeast Asian currencies.

The Indonesian rupiah, Malaysian ringgit and Philippine peso have dropped by between 20 percent and 40 percent against the U.S. dollar due to speculation attacks sparked by the Thai crisis.

The Indonesian government has either delayed or rescheduled state-related projects worth US$38 billion to cope with the currency crisis, with the rupiah's value plummeting by more than 30 percent against the dollar since July.

The government also announced last week financial and fiscal measures to support the $23 billion in financial aid arranged by the International Monetary Fund.

Econit estimates that the retrenchment program, in addition to the government's credit crunch policy, will cause economic growth to decline to 6.1 percent this year from the initially predicted 7.5 percent.

The rate would further sink to 5 percent next year, assuming that all IMF conditions and structural adjustments proceeded smoothly, the consulting group predicted.

Other economists have predicted that economic growth could slump to below 2 percent next year.

Rizal said the slowdown in economic growth would be caused by lower private consumption growth, which had been the catalyst of economic growth in the past.

Private consumption was estimated to plunge to 5.8 percent this year from 12.2 percent last year. Next year, it was estimated to drop to 3 percent, he said.

A decline in foreign and local investment as an impact of the credit crunch policy would also cause lower economic growth.

Rizal said construction, financial and manufacturing sectors would be among those hardest hit.

He said inflation this year would be about 11 percent, because of the inflation of imports and interest costs, and the long drought.

Rizal said the economic policy adopted by the government in fighting the financial crisis was similar to that introduced by Japan in dealing with its economic crisis from 1974 to 1981.

The move strengthened Japan's economy and currency, he said. (das)