Government predicts positive growth in 1999/2000

JAKARTA (JP): Senior government officials and the International Monetary Fund are unanimous in predicting Indonesia's battered economy will recover earlier than previously estimated following recent positive developments in the country's macroeconomic condition.

Coordinating Minister for Economy, Finance and Industry Ginandjar Kartasasmita said on Thursday the government was revising upward its economic growth forecast for the 1999/2000 fiscal year. The new forecast calls for between zero percent and 2 percent growth, revising the earlier estimate of between a contraction of 1 percent and 1 percent growth.

He also predicted inflation would be around 10 percent, lower than the earlier predicted 17 percent.

"But we can achieve these results only if we have a nonviolent and credible general election," he said on the sidelines of a seminar.

The June 7 general election will be the country's first free and fair elections after more than 30 years under the authoritarian rule of former president Soeharto.

Ginandjar said predictions of an earlier than expected economic recovery were not being made only by the government, but were also being voiced by the IMF.

IMF Asia Pacific director Hubert Neiss agreed positive economic growth this fiscal year was possible, but he declined to give an exact figure. He said the new economic assumptions would be detailed in the letter of intent from the government to the IMF which is expected to be finalized on Monday.

Neiss arrived in Jakarta earlier this week to review the country's economic reform programs being financed by a multibillion dollar overseas funding package arranged by the IMF.

The results of the review will be given to the fund's board of directors, who will convene at the end of May to decide on the next disbursement of the IMF's loan commitment to Indonesia.

Neiss said the next disbursement would be around US$500 million. He added that Japan also would provide a similar amount of aid through the Miyazawa Plan.

Neiss also was optimistic inflation would drop. "There is now the possibility that by the end of the fiscal year inflation will be below two digits. That's a good target; that's a realistic target," Neiss said after a breakfast meeting on Thursday with opposition leader Megawati Soekarnoputri of the Indonesian Democratic Party of Struggle (PDI Perjuangan).

Over the past several days, Indonesia has announced several positive macroeconomic developments. The economy grew by 1.34 percent in the first quarter of 1999 from the fourth quarter of last year, although on a year-to-year basis the economy still contracted by more than 10 percent.

Inflation was minus 0.68 percent in April, following .18 percent deflation in March. The benchmark interest rate on the central bank's one-month SBI promissory note declined to 31.47 percent on Wednesday from 33.21 percent the previous week.

Ginandjar is optimistic the interest rate on the SBI will decline to below 30 percent within two weeks due to diminishing inflationary pressure.

Bank Indonesia director Subarjo Joyosumarto also said on Wednesday the interest rate on the SBI could drop to between 25 percent and 30 percent by the end of this month.

"With the declining interest rate we expect domestic banks will no longer suffer negative (interest rate) spread," Subarjo said on the sidelines of a seminar.

The problem of negative spread emerged because banks' time deposit interest rates were higher than their lending rates.

The government plans to recapitalize the country's major commercial banks to lift their capital adequacy ratios to a minimum of 4 percent.

However, high interest rates pose a danger to the recapitalization program because negative spread would continue to erode the banks' capital.

The cost of the bank recapitalization program is expected to rise to Rp 500 trillion from the earlier estimated Rp 300 trillion due to the deteriorating capital of the banks in the program.

Subarjo stressed the central bank would only allow a gradual decrease in interest rates, saying such a slow decline would not affect the exchange rate of the rupiah if inflation remained under control.

The rupiah was at Rp 8,075 against the U.S. dollar on Thursday. The local currency has stabilized at around Rp 8,500 against the dollar over the past few weeks despite declining interest rates. The rupiah was at Rp 9,500 in March.

The local stock market also has rallied in the past couple of weeks on the back of an influx of foreign funds as investor confidence in crisis-hit Asian countries begins to rise.

Neiss warned, however, that the renewed confidence would only be sustainable if the country remained committed to the much- needed economic reform programs.

Neiss has held marathon meetings with senior economic ministers over the past few days in an effort to hammer out an agreement on how to recover state banks' bad assets owed by well- connected businessmen.

There has been concern early signs of economic recovery would tempt some officials to delay the painful economic reforms, particularly the effort to recover the huge debts owed to state banks. (rei)