Indonesian economy to grow 5.5%, ADB says

Urip Hudiono, The Jakarta Post, Jakarta

Indonesia's economy is set to grow moderately by 5.5 percent this year and later pick up to over 6.0 percent in the next two years on the back of buoyant consumption and improving investment, the Asian Development Bank (ADB) says.

In its latest assessment report on the region's economies, the bank also forecasts that Indonesia will be able to increase its gross domestic investment (GDI) to as much as 26 percent of its gross domestic product (GDP), while maintaining an inflation rate at slightly less than 6 percent.

Everything, however, would be dependent on the government's success at improving the country's investment climate through corruption eradication, ensuring legal certainty, and addressing the potential risks associated with decentralization.

"Good governance will be a key issue to achieving this," ADB economist Amanah Abdulkadir said on Wednesday when presenting the report during a live linkup with the ADB's headquarters in Manila.

"Indonesia's economy will only grow faster in the future if there are improvements in governance, accountability and legal certainty."

The ADB is forecasting the region's economies to grow by between 6.5 percent and 6.9 percent this year on the back of strong domestic demand and stronger intraregional trade.

Indonesia's economy grew by 5.13 percent last year, up from 4.5 percent in 2003, while the nation's on-year inflation rate in 2004 stood at 6.2 percent.

Concerning legal certainty, Amanah cited a recent decision by the Constitutional Court to annul the Electricity Law as having created more uncertainty on the future direction of Indonesia's reforms.

Meanwhile, on decentralization, Amanah said that there should be better coordination to avoid the issuance of conflicting regulations by local administrations, which would only result in a high-cost economy.

"The decentralization policy should in fact produce benefits, not problems for the country's economy," she said, adding that continued confusion over decentralization would do no good for the government's efforts to lure investment.

"Investment in infrastructure, for instance, would result in a more efficient economy," she said.

"A low-cost economy would bring the prices of goods, and thus inflation, down," she said.

Last but not least, the government must increase its efforts to create jobs for the more than 2 million people entering the nation's workforce every year, and increase development spending on poverty reduction schemes.

Indonesia's Economic Outlook

2004 2005 2006 2007
GDP 5.1 5.5 6.0 6.5
GDI/GDP 21.3 22.3 24.2 26.1
Inflation rate 6.2 5.9 5.5 5.5
Export growth 9.4 6.0 7.0 8.0
Budget deficit 1.3 0.8 1.0 0.5

Source: Asian Development Bank