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.