Iraq war would 'hurt' RI economy

Dadan Wijaksana, The Jakarta Post, Jakarta

A war in Iraq would hit the country's economy hard, making it impossible for the government to reach its economic growth target of 4 percent this year, the National Institute of Sciences (LIPI) said on Monday.

Wijaya Adi, a senior economist at LIPI, said that even if the war failed to materialize, the growth target was unlikely to be met, as domestic consumption would be eroded by high inflation, while improvements in exports and investment are predicted to remain slow.

"Based on our calculation, the economy would grow slower than expected, around 3.8 percent at best," Wijaya told a media gathering on Monday while delivering LIPI's latest economic report.

He added that the planned hikes in utility charges throughout the year would pose constant inflationary pressure on the economy, cramping people's purchasing power and thereby weakening consumption.

He predicted inflation to reach 10.4 percent this year.

Over the past three years, the country's economic growth has been relying heavily on robust public consumption amid declining exports and investment, the other main engines of economic growth.

Currently, net exports make up less than 10 percent of the country's gross domestic product (GDP), while investment contributes around 15 percent.

In 2002, exports inched up a mere 1.21 percent, compared to the previous year. The country's full-year exports stood at $57.0 billion as against $56.32 billion in 2001.

Investment has also been in a constant decline, with approvals for foreign direct investment (FDI) and domestic investment plummeting by 35 percent and 57 percent respectively last year.

Wijaya said, with the absence of real actions by the government to improve the business climate, the situation would remain the same this year.

"It's going to be worse if the U.S.-Iraq war breaks out, as the war would delay any possible rebound of the global economy and even hurt the already fragile global economy," he said.

He argued that not only would the war further hit the country's exports, but would also hurt investment sentiments in the country, taking into account the radical anti-U.S. movement which is projected to escalate due to the war.

Following the U.S.-led multinational military strikes on Afghanistan in late 2001, anti-U.S. rallies flourished across the country. Some groups even staged sweeping operations against U.S. citizens, prompting several foreign-based firms to temporarily close their business operations.

If the U.S. decides to attack Iraq, the nation will most likely see similar actions, which would certainly scare investors away from the country.

Without new investments, it would be difficult for the country to reach its growth target, he said.

"According to our calculation, we need around Rp 300 trillion in new investments this year to allow the economy to grow by 4 percent."