Economy to keep slowing until mid 2006, analysts say

Urip Hudiono, The Jakarta Post, Jakarta

The nation's economy is likely to continue slowing until the first half of next year as a consequence of the ongoing impact of high inflation and interest rates, analysts say, but will pick up should the government successfully deliver policies to increase exports and development expenditures.

Economist Faisal Basri of the University of Indonesia said on Tuesday at a Bank Danamon-sponsored economic seminar that the most crucial issue for the government was to manage interest rates to balance inflation and economic growth.

"The recent rise in inflation and interest rates have indeed made the economy fail to gain on last year's momentum of growth," he said. "Fortunately, it was not caused by a weakening in our macroeconomic fundamentals, but more to recent poor management."

As Indonesia's core inflation was estimated to be only between 9 and 10 percent, Faisal said a 12 percent interest rate would actually be sufficient to contain inflation, as well as support the rupiah.

The central bank continued raising its benchmark BI Rate to 12.75 percent on Dec. 6, as on-year inflation surged to 18.38 percent in November after the Oct. 1 fuel price hike. The rate hike had been lower than expected, signifying Bank Indonesia's better coordination with the government in an effort to avoid further hurting economic growth.

The country's gross domestic product (GDP) growth has recently been on a downward trend due to high inflation and interest rates, from an on-year 6.6 percent during last year's final quarter to only 5.3 percent in this year's third quarter.

Besides pursuing proper fiscal and monetary policies to stabilize the macroeconomy as a basis for sustainable growth, Faisal also urged the government to spur further growth through breakthrough policies in the real sector, emphasizing particularly on how to encourage labor-intensive, export-oriented manufacturing sectors, by reining in the high-cost economy and an obstructive bureaucracy.

"The government must scrap taxes, duties and illegal fees that only hamper export activities," he said. "It should also reconsider pursuing a stronger rupiah, which may benefit us (in terms of) cheaper imports, but will hurt exports of our agricultural, fisheries, mining and manufactured goods."

Faisal further warned the government to pay attention as well to possible financial imbalances between emerging Asia and the U.S., which could lead to trade disputes affecting Indonesia's export activities.

With all these factors, Faisal expects the economy to grow by 5.6 percent this year and to rise to 5.9 percent next year as inflation mellows down to 8.8 percent and the business climate improves. The government is targeting a growth rate of 6 percent this year and 6.2 percent next year from last year's 5.13 percent.

Speaking at the same occasion, International Monetary Fund (IMF) senior resident representative, Stephen B. Schwartz, said that Indonesia's GDP growth will likely experience a "softening" -- perhaps expanding by only 5.3 percent in 2005 and 2006 -- as consumption and investments slow down on higher inflation, which is expected to decline to 8 percent by the end of next year.

However, he was upbeat that Indonesia's economy may expand by between 6 and 7 percent within the next three to five years.

"In the short run, the government needs to increase spending in a timely manner, prioritizing such sectors as health, education and those which stimulate work opportunities," he said.

"It should also continue financial reforms to strengthen the banking sector, and improve the country's investment climate."