Economic recovery will begin in 2000: World Bank

Economic recovery will begin in 2000: World Bank

JAKARTA (JP): The Indonesian economy, currently at its most
critical juncture in over 30 years, will likely make a slight
recovery of 2 percent to 4 percent growth in the year 2000 after
an estimated contraction of 10 percent to 15 percent in 1998 and
2 percent in 1999, the World Bank predicts.

The World Bank's 1998 Annual Report on Indonesia, which will
be discussed at the meeting of Indonesia's creditor consortium in
Paris later next week, puts the country's economic growth in
terms of real gross domestic product at 1 percent last year and
7.8 percent in 1996.

The report projects new investment in the economy to decline
by 55 percent this year and to grow by 4 percent in 1999 and 6
percent in 2000.

"Domestic demand has plunged due to a sharp decline in
investment, the collapse of banks and corporates and dwindling
real incomes," the bank points out.

It says even export growth appears to be slowing as trade
finance becomes increasingly scarce. Exporters cannot maintain
delivery deadlines and export orders are plunging.

The following is more excerpts from the World Bank's report on
Indonesia's macroeconomic outlook which will be tabled at the
annual meeting of the Consultative Group on Indonesia in Paris
later next week:

The destiny of the nation hangs in the balance and direction
it takes will depend on chance as well as choice. Chance, because
Indonesia's economic future will be shaped by many factors over
which it has no control-- the pattern and intensity of rainfall,
trends in international oil prices, developments in Japan.

Choice, because Indonesia has control over many of its own
policies, decisions and actions which together can spell the
difference between success and failure.

To the virtually limitless potential combination of chance and
choice should be added the stresses and strains being applied to
Indonesia's fragile social and political fabric.

The balance of payments is projected to record a current
account surplus of about 1.8 percent of GDP for fiscal year
1998/1999 and 2.3 percent for 1999/2000.

Unlike other economies which have experienced a large real
depreciation in their currency, Indonesia, which has suffered an
80 percent fall in the value of its rupiah, is not expected to
see an immediate boom in non-oil exports.

Exports

In fact, exports are likely to grow relatively slowly owing to
limited access to trade finance, the depletion of input stocks,
lack of buyer confidence and prolonged uncertainty and social
unrest.

Imports are expected to shrink considerably, suppressed by the
severe contraction in domestic demand and a major increase in
import costs. Imports are likely to fall by about 15 percent in
FY 1998/1999 before beginning to expand in 1999/2000.

Despite the gloomy near-term outlook, there remain some
potential bright spots in the economy that, in combination with
firm, consistent implementation of the reform program, could
rekindle growth.

Agriculture is expected to recover gradually with the fading
of El Nino, adding to local incomes and demand and re-energizing
off-farm activities.

This would complement the expansionary fiscal stance which
will inject new purchasing power into the economy reversing a
vicious circle of decreased demand and production.

Export earnings from tree crops could rise significantly and
mineral production (copper, coal, gold, tin and nickel) also
shows encouraging strength.

But continued political uncertainty at home could delay the
return of confidence and flight capital.

It is therefore most imperative that the government implements
speedily and consistently four major reform agendas:
Restructuring the corporate debt overhang, reforming and
restructuring the banking system,improving governance and
maintaining macroeconomic stability through the transition with
appropriate and compatible fiscal and monetary policies.

Over the longer term, attention will also have to be given to
addressing other fundamental weaknesses-- the legal system,
competition policy, corruption, unsustainable patterns of natural
resource use and development of social and political
institutions.

True, the recovery period could shorten, depending upon the
speed with which political and economic stability returns and the
vigor and integrity with which reforms are implemented.

But the factors impeding a quick recovery are equally strong:
a mountain of external debt which will still have to be lowered,
the loss of many ethnic Chinese entrepreneurs who left the
country which will still be felt keenly in the economy.

Indonesia will need about $13 billion - $14 billion of
official foreign financing in 1998/1999 and the financing needs
for 1999/2000 will need to equal the budget deficit for that year
which may not be as high as the 8.5 percent estimated for
1998/1999 but will nevertheless be much higher than the past
years.

Even with additional foreign financing, however, there is no
guarantee that the economy will be able to engineer a recovery
with moderating inflation and appreciating exchange rate.

Continued political uncertainty could precipitate further
social unrest and impede any incipient return of confidence among
domestic and international investors.

The fragile social fabric could be torn asunder, making any
subsequent economic recovery a protracted process. (vin)