Fri, 18 Aug 2006

Govt upbeat on the economy

Urip Hudiono, The Jakarta Post, Jakarta

The government clearly believes that 2007 will be the year when the economy finally begins to shine again, with the President unveiling an outline draft budget promising better growth on higher development spending and improving economic conditions.

Growth is expected to reach 6.3 percent next year, higher than this year's 5.8 percent revised-down estimate, President Susilo Bambang Yudhoyono said Wednesday in his state-of-the-nation address to the House of Representatives, in which he also outlined the key points of the draft 2007 budget.

With this level of economic growth, the country's gross domestic product (GDP) would reach Rp 3,531 trillion (US$379.7 billion).

The growth estimate was based on the assumption that inflation would continue to ease to 6.5 percent, and the central bank's key rate fall to 8.5 percent. Meanwhile, the rupiah's exchange rate against the dollar is assumed at Rp 9,300.

Encouraged by this year's higher-than-expected 5.2 percent second-quarter growth, the government would nevertheless remain cautious, in the expectation of higher quality growth ahead.

"Higher growth alone, which does not help the poor, will not be enough to reduce poverty," Susilo said in the address, which is delivered annually on the eve of Independence Day on Aug. 17.

"What we want is equitable growth."

By the end of the first quarter of the year, the economy had been slowing down for five successive quarters following last year's fuel price hikes, which pushed up inflation and interest rates, thus hurting consumption. Growth only managed to pick up in the second quarter, buoyed by higher government spending and exports, but was still not enough to create jobs for the unemployed.

The President said the government would increase spending next year by 8 percent to Rp 746.5 trillion, with most of the extra money going on infrastructure, and rural welfare programs in the education and health sectors.

The government would also spend Rp 66.1 trillion -- or nearly 5 percent more than this year -- to pay for infrastructure development. In addition, it would also set aside Rp 2 trillion to provide risk guarantees for investors -- deemed vital to encouraging more investment in the infrastructure sector.

The President revealed that government would increase spending on education by 18 percent to Rp 51.3 trillion, and on health by 11 percent to Rp 15.1 trillion.

Meanwhile, it would also expand its district-level, community-based development programs in order to achieve more bottom-up growth. Regions would be provided with Rp 250.5 trillion for their development needs, up 14 percent from this year.

Yudhoyono said that subsidy allocations for the fuel and power sectors would be Rp 68.6 trillion and 25.8 trillion, respectively, both lower than this year as the government seeks to develop alternative energy resources. The size of the allocations, he said, were based on an oil-price assumption of $65 a barrel and an oil-production assumption of 1 million barrels per day (mbpd).

On the revenue side, the government expected to take in Rp 713.4 trillion, mostly in taxes. The country's tax to GDP ratio was expected to rise to 14.3 percent from this year's 13.7 percent.

Overall, the President said that next year's budget deficit was expected to come in at Rp 33.1 trillion, or 0.9 percent of GDP.

The 2007 draft budget will be the second to have been presented by the Susilo administration, and still must be passed by the House.

The 2005 budget, which had been drafted by the previous administration, almost derailed the economy before it was twice revised to take into account soaring oil prices that rendered most of its basic assumptions -- particularly the crude-oil price and rupiah-exchange rate -- completely unrealistic.