Inflation from robust growth under control

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)