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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