Economy faces triple-whammy next year

Economy faces triple-whammy next year

A. Asohan, Asia News Network/Bangkok

The Indonesian economy faces a trio of challenges next year -- the high price of crude oil, decelerating economic growth and one of the highest inflation rates in Asia-Pacific.

Ongoing concern about terrorist attacks, boosted by the second Bali bomb blasts on Oct. 1, is not going to help matters either, the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) said in its first-ever report on Key Developments and Prospects in the Asia-Pacific Region.

Still, the single biggest concern has to be the rising price of oil. In October, President Susilo Bambang Yudhoyono's administration finally swallowed the bitter pill and raised fuel prices by an average of 126 percent.

Indonesia's fuel subsidies remain one of the two highest in Asia-Pacific however, at Rp 89.2 trillion (US$9.12 billion) for the 2004-2005 fiscal year.

The country's gross domestic product (GDP) growth will slow down to 5 percent next year from 5.3 percent in 2005; while inflation will decrease slightly from 8 percent to 7.6 percent.

Both rates do not compare favorably with the regional average. Real GDP growth in Asia-Pacific is expected to be 6.2 percent in 2006, a fraction off the 6.3 percent recorded this year. Inflation will rise, but at a more muted level of 4.4 percent next year from 4.8 percent in 2005.

"We expect the same range of economic growth next year across the region," UNESCAP Executive Secretary Kim Hak-su said at a media conference here on Wednesday where the report was released.

The report complements the annual Economic and Social Survey of Asia and the Pacific also published by UNESCAP.

However the above projections depend on oil prices staying at the $50 per barrel range.

An increase of $10 over a sustained period of perhaps six months would throw the projections off slightly -- regional GDP growth will be 0.5 percentage points lower and inflation 0.5 percentage points higher, said Kim, also the UN Under-Secretary- General.

Any increase in the price of oil would adversely affect oil- importing countries, slowing economic growth and creating inflationary pressure.

UNESCAP recommends a gradual phasing out of oil subsidies, which many countries are finding difficult to sustain anyway. Tighter monetary policies would also have to be formulated to stave off the inflation that will be caused by higher oil prices.

Many governments, including Indonesia's, are reluctant to phase out oil subsidies, especially those with volatile political environments, arguing that removing such subsidies would impact the region's poor the most.

"But you have to ask whether these subsidies are really reaching the poor," said Ravi Ratnayake, director of UNESCAP's Property and Development Division.

"If they really want to help the poor, governments should instead look at subsidizing the alternative energy sources that the poor use, such as kerosene," he added.

The establishment of regional oil reserves might help, but UNESCAP also recommends that governments -- including those of oil-exporting countries -- develop longer-term policies to reduce oil dependency, looking more seriously into alternative energy, as well as energy efficiency and conservation.

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