IMF: RI needs more reform for higher growth

IMF: RI needs more reform for higher growth

Dow Jones, Washington

The International Monetary Fund lauded Indonesia's progress in economic reforms but also said that, for a sustained higher growth, the country needs further efforts, such as banking reforms.

In its annual economic report on the country, released here on Sunday, the IMF executive directors welcomed continued progress in Indonesia's economic reform efforts to overcome hardships that originated in the 1997-1998 Asian financial crisis.

"Indonesia has made significant progress in strengthening macroeconomic policies and implementing key areas of the structural reform agenda," the directors noted in the report.

But they also cautioned that the nation's still incomplete reforms have left it unable to "fully share in Asia's (ongoing) recovery" and lagging "behind other countries in the region" in the economic growth rate.

Though the IMF has kept its 4.8 percent growth forecast for the country for 2004 (in line with the government's forecast), unchanged from the latest projection in April, Indonesia's growth "continues to be below potential, and investment and exports remain weak," the report said.

In order to rise above the below-potential growth, Indonesia needs to continue reform efforts, above all, those in the banking sector, the IMF directors said.

They thus urged the Indonesian government "to maintain close oversight of state-owned banks to strengthen their financial position and ensure that their lending practices are in line with sound banking standards," the report said, which was issued as state-owned banks struggle to deal with lending scandals unveiled recently.

Such efforts, combined with sound macroeconomic policies, will help improve the environment for foreigners' investment, which is "crucial" for the country to achieve higher growth, the report said.

Indonesia's economy needs to grow by between 6-7 percent per year in order to be able to provide enough jobs for the millions of unemployed people and new job seekers.

Indonesia graduated late last year from the IMF's rescue program that was launched during the Asian crisis, but still owes US$10 billion to the international lender.

The IMF report did not make any reference to the recent spike in the country's consumer price index and has left unchanged its inflation forecast for 2004 at 5.0 percent.

The directors, however, urged the central bank "to maintain a cautious monetary stance, particularly in light of the potential for shifts in market sentiment" and the prospect of higher interest rates abroad, the report said.

In April, the country's inflation rate jumped to 5.92 percent from 5.11 percent a month earlier.

A stable inflation is key to the current stability in other macroeconomic indicators as the relatively benign inflation environment has allowed the central bank to keep cutting down interest rate to allow the corporate sector obtain cheaper loans and help ease the government's domestic debt burden.