Mon, 10 Oct 1994

Indicators call for caution

The key indicators of the Indonesian economy so far this year, although not a cause for alarm, call for extra caution. The balance of payments seems to have undergone stronger pressures caused by a decrease in oil export revenues and smaller gains in non-oil exports. Although non-oil exports in the first semester of this year increased, their growth rate declined to 6.5 percent from 26 percent in the same period last year, while oil exports fell by 8.6 percent. But since non-oil imports expanded by 12.6 percent, compared to an increase of only 3.6 percent in the same period last year, the current account deficit rose sharply to US$2 billion from $932 million.

Inflation, as announced after the limited monthly cabinet meeting on Saturday, was 0.53 percent last month. Though that was down from 0.89 percent in August, the inflation was still relatively high as the cumulative rise in the consumer price index for the first nine months has already reached 7.38 percent. That means that even though the monthly inflation rate for the next three months could be checked at 0.50 percent, the inflation for the whole calendar year would still be on the high side of a single-digit level.

The fact that the foreign reserves held by the central bank remained large at $12.5 billion, or equivalent to more than four months of imports, might be taken as a sufficiently strong buffer against further pressures on the balance of payments. We may also console ourselves with the upward trend in the oil prices since April. The oil prices have increased from an average of $14.7/barrel in the first quarter to $16.36, slightly higher than the average of $16 used for oil revenue estimates for the current fiscal year (1994/1995), between April and August.

These positive indicators, we think, should not make us complacent. Extra caution is required instead, to guard against further pressures on our external balance. The margin of safety is already very thin. We are especially worried about the 12.6 percent increase in imports during the first semester. The import expansion could, to a certain extent, be seen as normal for an expanding economy because new investment projects need capital goods and a growing manufacturing industry requires imported inputs.

But since the high import increase took place at a time when the growth rate of exports fell sharply, that should be a strong reason to be extra cautious, especially in view of the relatively high inflation rate. This development, in our opinion, makes it even more imperative than ever for the private sector to refrain from implementing capital- intensive projects which require large imports but which have a long gestation period.

The Governor of Bank Indonesia (central bank) Soedradjad Djiwandono did not exaggerate the magnitude of the problems when he recently stressed the need for restraints on large projects to prevent the economy from overheating. For Indonesia, which pursues an open capital account (free foreign exchange regime), high inflation and strong pressures on the balance of payments could cause far-reaching implications, notably on the stability of the rupiah exchange rate. Extra safeguards against such undesirable developments are especially needed during the last quarter of the calendar year when the government is finalizing its budget proposal for 1995/1996 which will be submitted to the House of Representatives in the first week of January. During this period, wild rumors could easily spread among the people who like to speculate about the next state budget and any supplementary fiscal and monetary measures that might be taken.