Inflation from robust growth under control

JAKARTA (JP) An advisor to the minister of finance, Dahlan Sutalaksana, said here yesterday that any inflation arising from the rapid growth expected in the country's economy will be kept under control.

Dahlan said that the relatively low-growth target of the money in circulation and the more favorable situation in the industrial sector will be able to curb the inflationary pressure.

"As a result, there will only be a slight chance of economic overheating," he told a year-end press briefing.

The demand and the supply sides of the economy will be much more favorable than those in 1990, when the country's economy was overheating, he said of the economic indicators next year.

In 1990, economic growth reached 7.2 percent with the inflation rate reached 9.9 percent and the money in circulation (M2) expanded by 44.2 percent.

Dahlan, a former executive of Bank Indonesia (the central bank), said the rapid growth expected in industrial activities, resulting from the sharp increase in investment approvals this year will, therefore, cause less inflationary pressure than in 1990.

He estimates that inflation will finish at around 10 percent this year and remain at the same level in 1995.

Economic overheating may take place if demand growth exceeds supply, he said, adding that this difference is what eventually leads to increased inflationary pressure.

"Such was the case when the Indonesian economy suffered an overheating in 1990," he added.

Ideal growth

Asked about the ideal growth of the Indonesian economy next year, Dahlan said that between seven and 7.5 percent would be considered safe for the Indonesian economy.

"At such growth levels, the inflation rate could be still checked at below 10 percent," he said.

Dahlan acknowledged that the economic overheating indicator is different from one country to the next. "The economy in the United States, for example, is considered overheated when the inflation rate reaches three percent," he added.

The other indicator of a healthy Indonesian economy is the more favorable monetary system, he said in reference to Bank Indonesia's commitment to limit the growth of the money supply at around 20 percent.

"Limiting the growth of the money in circulation at around 20 percent will help to curb inflationary pressures," he said.

About the country's balance of payments, Dahlan said that the current account deficit will remain at a safe level even though there will most likely be a sharp increase in imports.

He said an increase in export earnings will offset any sharp increase in imports, adding that the current account deficit will hover around the same level of this year's US$3.3 billion.

Dahlan forecasted that the sharp demand for lending next year will not cause a sharp increase in interest rates, given the fact that most of state banks, which control over 50 percent of the lending market, will still be in the consolidation process.

In means that interest rates will remain around this year's levels of between 13 and 15 percent per annum as state banks, often called the "market leader", will have no pressure to increase their interest rates, he said.

He said that the central bank's commitment to maintain the money in circulation at around 20 percent will alleviate pressure on the banking industry to increase interest rates.

"The rise in interest rates will occur only as an adjustment to the rise in the interest rates in the United States," he said. "But it will be small."(hen)