Q4 economy grows on local consumption: BI

Berni K. Moestafa, The Jakarta Post, Jakarta

Bank Indonesia said on Wednesday that it expected the country's economy to grow by between 3.3 and 3.6 percent in the fourth quarter of this year, because of a surge in domestic consumption ahead of the year-end festive season.

It expected economic growth this year to reach up to 4 percent, which analysts said was too optimistic given dwindling export performance.

"Economic growth in 2001 is estimated to reach between 3.5 percent to 4 percent," Bank Indonesia said in a report issued after a meeting of the central bank's board of governors.

The central bank however warned of the subsequent inflationary pressures, as prices have kept rising in line with economic growth.

"The economy in the fourth quarter, up to Nov. 2001, has been marked by a surge in various activities linked to the Ramadhan month and year end activities," Bank Indonesia said.

The government is targeting the country's gross domestic product (GDP) to grow by 3.5 percent this year.

In the third quarter, the economy recorded growth of 3.47 percent, compared to 3.32 percent in the same period last year.

Third quarter growth was also driven by high domestic consumption, which had helped boost production levels in the manufacturing sector.

The government said earlier it was hoping local industries could take advantage of the bullish domestic market.

Indonesia's export sales have been declining steadily as a result of the fallout from a slowing global economy.

But its strong domestic market enabled the economy to grow, as other Southeast Asian countries recorded contractions.

Exports and consumer spending are the country's main economic growth engines, which last year helped the economy grow by 4.8 percent.

With one engine down, it remains to be seen how long strong consumer spending will persist and help keep the economy afloat.

Creeping inflationary pressures are likely to eat into domestic consumption once the festive season comes to an end next month.

"Prices during November have gone up, with inflation reaching 1.71 percent compared to 0.68 percent the month before," Bank Indonesia said.

The central bank is in charge of keeping inflationary pressures in check, which in the 11 months to November hit 10.76 percent, compared to the full-year target of 9-11 percent.

To this end, it is keeping its interest rates tight to reduce the supply of money in circulation, thereby also relieving pressure on the rupiah.

On Wednesday, the weighted average interest rate on one-month Bank Indonesia SBI promissory notes was unchanged at the weekly auction.

The one-month SBI notes stood at 17.61 percent, unchanged from last week's auction.

Bank Indonesia predicted that demand for liquidity would continue to rise throughout the rest of the year, on the back of higher consumer and government spending.

"Without an adequate supply and distribution of goods, the pressure on prices will increase," the central bank said.

It suggested that the government provide an adequate supply of goods and ensure their distribution as a matter of priority in order to lower inflationary pressures.

For its part, Bank Indonesia said it would focus on reducing the supply of money in circulation, meaning that it planned to keep interest rates high.