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)