Govt vows to cool down economy

Govt vows to cool down economy

By Riyadi

JAKARTA (JP): Indonesia's economy was estimated to grow by
over 7 percent this year and is projected to remain buoyant next
year despite the general election in May.

The bright macroeconomic outlook, however, is overshadowed by
the swelling current account deficit, which according to most
analysts has reached an alarming level -- almost 4 percent of the
gross domestic product.

However, it is likely that inflation declined to below 7
percent this year (compared to 8.64 percent last year and 9.24
percent in 1994) despite the increases in transportation fares
and minimum wages earlier this year.

Lower inflation this year will decrease inflationary
expectations in 1997.

Although inflation was relatively low, the monetary authority
has ruled out a substantial easing of the tight monetary policy
next year.

Though the national agenda will be heavily political in view
of the general election in May, most economists agree that
Indonesia will still see robust economic growth of over 7 percent
next year, quite similar to this year's level.

The Econit research group, for instance, has predicted 7.5
percent growth in 1997 provided that political uncertainty does
not become political volatility and unrest.

The main engine of next year's growth will be the sectors of
electricity, gas and water, construction as well as manufacturing
-- each with a growth exceeding 10 percent. This indicates growth
will still be driven by domestic demand.

Econit expects growth to reach 7.3 percent this year, lower
than the 8.1 percent recorded last year, as the impact of the
government's efforts to cool down the economy.

The Institute for Development of Economics and Finance
projects an economy expansion of 7.8 percent this year and 7.4
percent next year.

Domestic demand, especially household consumption and
investment, will continue to be the locomotive of growth, the
institute says.

Mari E. Pangestu of the Centre for Strategic and International
Studies forecasts a growth of 7.6 percent next year, up from an
estimated 7.5 percent this year.

Most of the growth will be generated by the construction
sector, financial services and the trade, hotel and restaurant
industries, Mari said.

This year's growth, however, was very much spurred by the
increasing domestic demand, as can be seen from the 26 percent
expansion of the money supply -- composed of currencies, demand
deposits and quasi-money.

The 26 percent year-on-year growth is much higher than the
government's target growth of only 17 percent for this year.

According to the Investment Coordinating Board, the
amount of domestic investment commitments approved by the
government surged from Rp 39.5 trillion in 1993 to Rp 53.3
trillion in 1994, Rp 69.8 trillion in 1995 and Rp 100.7 trillion
this year (as of Dec. 15).

Foreign investment commitments increased from US$8.14 billion
in 1993 to $23.72 billion in 1994, $39.9 billion in 1995 and
dropped to $29.9 billion this year (as of Dec. 15).

Realization of investment commitments usually take place two
to three years after a project is approved by the government.
Therefore, 1993 and 1994 investment commitments will very likely
be realized this year.

The investment board reported last week that the realization
was 46.4 percent for domestic investment projects and 48.1
percent for foreign projects.

The current account deficit increased from $2.96 billion in
1994 (about 2 percent of gross domestic product) to $6.76 billion
in 1995 (3.8 percent of gross domestic product).

Minister of Finance Mar'ie Muhammad told the House Budgetary
Commission earlier this month the current account deficit was
$4.5 billion for the first semester (April to September) of the
1996/1997 fiscal year.

Coordinating Minister for Economy and Finance Saleh Afiff
forecast earlier the current account deficit would increase to
$8.7 billion in 1996/1997, up from the $6.8 billion envisaged in
the state budget.

Most analysts have predicted the current account deficit would
increase to up to 4 percent of gross domestic product this year.

Senior economist Sumitro Djojohadikusumo warned early this
month that the current account deficit had reached an alarming
level.

Mar'ie revealed last month that the government's foreign debt
had fallen to $57.22 billion at the end of September from $59.59
billion at the end of last year.

The government's debts constitute 60 percent of the country's
outstanding offshore borrowings.

To reduce its burdening debts, the government has repaid its
high-interest loans using proceeds from the sale of government
shares in state-owned companies and from budget surpluses.

The government last October paid US$540.46 million of its
high-interest debt ahead of schedule to multilateral agencies --
the World Bank and the Asian Development Bank -- and will soon
amortize another $50.58 million.

If these debt prepayments can be concluded, the government
will have prepaid a total $2.82 billion in foreign debts by the
end of the current 1996/1997 fiscal year.

Analysts have expressed great concern over the deficit's sharp
increase because it happened in the first semester when oil and
natural gas exports greatly exceeded the budget's expectations.

The 1996/1997 state budget, the period of which ends in March,
estimates an average oil price of $16.50 a barrel for the current
fiscal year. Actual prices in the first semester averaged $19.15
a barrel.

The government said every $1 increase in the price of crude
oil per barrel contributes Rp 630.7 billion to its revenue from
oil taxes.

The main reason for the increase in the current account
deficit was the decline in trade surplus and the widening deficit
in services.

The only way to reduce the current account deficit is through
bolstering exports while curbing import growth and reducing the
deficit in services.

In a bid to boost exports, the government introduced a major
economic reform package last June. The package covers the
timetable for further reductions of import tariffs on 1,497
items, simplifying import and export procedures, offering more
incentives to export-oriented companies and more flexibility for
foreign manufacturers operating in the country.

Under the new package, the government promises to give special
tax, customs and banking breaks to exporters of textiles and
textile-related products, shoes, electronics, wood and rattan
products and leather goods.

Bank Indonesia (the central bank) Governor J. Soedradjad
Djiwandono said earlier this month the cooling-down efforts by
the monetary authority since late last year had produced some
results.

The money supply in narrow definition (M1) had slowed down
since June this year, reaching 27.5 percent in September, the
economic liquidity (M2) growth also slowed down to 26.1 percent,
while credit growth stood at 19.8 percent.

The government's targets for M1, M2 and bank credit growth for
this year were 15 percent, 17 percent and 16 percent,
respectively.

Imports increased by merely 6.68 percent to US$28.28 billion
during the first eight months of this year from $26.5 billion
during the same period of last year.

The slow growth in imports, however, was not followed by a
higher rate of growth in exports. Exports increased by only 10
percent to $31.87 billion, compared to $28.97 billion.

Last year, imports soared by 25.6 percent to $40 billion from
$31.9 billion in 1994, while exports grew by 16 percent to $45.4
billion from $40 billion.

Soedradjad said the widening current account deficit, to a
level of 3.8 percent of gross domestic product, was still
manageable.

He contended that the surplus from the capital account was
enough to finance the deficit in the current account. He foresaw
a surplus in the overall balance of payments next year.

Although the government failed to reduce the current account
deficit from swelling, it managed to slow down inflation this
year, despite the 10.6 percent increase in daily minimum wages
and the 9.2 percent to 66.7 percent rise in transportation fares
earlier last April.

This year, inflation is likely to be checked below 7 percent,
down from 8.64 percent last year and 9.24 percent in 1994.

The cumulative inflation for the first 11 months of this year
reached only 5.92 percent, compared with 7.85 percent for the
same period of last year.

Indonesia, hampered by high inflation rates for years,
recorded monthly deflations three times this year. The month-on-
month deflation rate of minus 0.61 percent was reported in March,
minus 0.07 percent in July and minus 0.04 percent in September.

This year's inflation rate, however, is still higher than the
government's target of 5 percent per annum.

Considering the widening current account deficit and
relatively high inflation rate, the government is expected to
maintain its tight monetary policy.

Soedradjad said the central bank would continue to tighten
public liquidity through a number of instruments to pursue a
"soft landing" for the country's overheating economy.

"Monetary stabilization efforts will continue until 1997 to
curb inflation and current account deficit so that our economy
will grow in a sustainable manner," Soedradjad said.

In its efforts to cool down the economy, finance minister
Mar'ie pledged the government would continue to produce a surplus
in its budget.

The government has projected to secure a surplus of Rp 900
billion (US$378 million) for the current 1996/1997 fiscal year,
ending in March next year.

Tight monetary policy, however, kept domestic interest rates
high in 1996 although there has been persistent calls from a
senior minister as well as the private sector for lower interest
rates.

Deposit rates stay at some 17 percent, while lending rates
stand at some 22 percent.

Economist Sjahrir predicted that the tight monetary policy --
which is to become even more stringent as a result of the
increase in commercial banks' reserve requirement to 5 percent
next April from the current 3 percent -- will force banks to
increase or at least maintain their current interest rates.

The possibility of an increase in interest rates in the United
States will put additional upward pressures on Indonesian
interest rates.

A rise in domestic interest rates would attract more capital
inflows because of widening differentials between domestic and
foreign interest rates.

Such inflows would complicate macroeconomic management and
undermine the monetary authority's efforts to cool down the
economy.

The inflows, however, would additionally support the economy
to grow high next year.

Window A: The main locomotive of economic growth remains the domestic
market demand.

Window B: The economy will still be able to post 7.5 percent growth in
1997 provided the political uncertainty does not turn into
political volatility and unrest.