RI economic growth to be robust next year
RI economic growth to be robust next year
What is the economic outlook for the new year? Economist Mari
Pangestu ponders with this question.
JAKARTA (JP): Growth for this year is expected to be at 7.5
percent, with the main source of growth on the expenditure side
being strong consumer demand and to a lesser extent investment
demand. Whereas the main source of growth on the production side
has come from a recovery in agriculture and continued strong
growth in the manufacturing and service sectors. Despite the
slowdown in the property sector, the construction sector
continues to grow robustly on the back of massive infrastructure
building.
Given the current trend, what is the prospect for next year's
growth? Our prediction is that Indonesia is on the upside of a
business cycle which should peak in 1997. Therefore, growth
should continue to be robust next year and can even be expected
to be higher at 7.7 percent. The main sources of growth will be
continued consumer demand growth coupled with stronger investment
growth. On the production side, manufacturing sector growth is
expected to continue; services and especially trade, will also
continue to expand along with overall growth. Once again
infrastructure related sub-sectors such as construction and the
manufacture of cement, cables, pipes and so on will continue to
experience strong growth.
While inflationary pressures have abated somewhat with
inflation expected to be around 8.5 percent by year end,
continued concern about overheating prevails. Continued strong
consumer demand growth and the possibility of some increases in
prices of basic goods and services, will put continued pressure
on prices next year. Thus, even though inflation can be expected
to remain at a single-digit level next year it will still persist
in the 7-8 percent range.
The other major concern with overheating is the balance of
payments. The current account deficit for 1995 is expected to be
around US$7-8 billion or more than double the deficit in 1994 of
$3.3 billion. The main reason for the jump in the deficit is the
decline in the trade surplus due to slower-than-expected growth
of non-oil exports and the jump in import growth.
Non oil exports growth has been declining in the 1993-1994
period reaching a 12 percent low in 1994, and in 1995 is expected
to reach 16-17 percent. However, at the same time import growth
has jumped dramatically from an average of nine percent per year
in 1993-1994 to 32 percent in the year ending September 1995.
High import growth has been fueled by a sharp increase in the
imports of intermediate goods and raw materials which make up the
bulk of imports.
However, it should be noted that imports of consumer goods
(which account for six percent of total imports) almost doubled.
Growth of capital goods imports from new investments is just
beginning to pick up, reaching 14 percent by September and
expected to increase further in 1996.
The net deficit in the services account also continues to
increase due to higher debt servicing caused by larger foreign
debts. However, the expected increase from the 20 percent
appreciation of the yen earlier in the year, did not come about
and the yen is now back to the same level as that at the end of
last year.
Despite the dramatic jump in the deficit the situation is
considered to be manageable in the short run, since the deficit
amounts to only around four percent of the gross domestic product
(GDP) and reserves are considered to be adequate at $14 billion
or four months of imports. Furthermore, capital flows are also
expected to increase dramatically with direct foreign investment
inflows expected to double compared with previous years.
Of course, the rising deficit should be of concern. Any
decline in the current account deficit in the medium term will
depend on whether the high import growth that is generating the
deficit will result in productive investment which will reduce
imports and increase exports in the future.
Furthermore, the government needs to ensure that the business
environment will foster productive investment to enable the
investors to repay their debts.
Continued concerns about inflation and overheating will mean
that the central bank will continue its policy of managing
liquidity with its monetary instruments.
However, given the open capital account, the monetary
authorities face the familiar dilemma in liquidity management:
tightening liquidity will lead to an increase in the interest
rate which in turn leads to rapid capital inflows that need to be
neutralized. Interest rates are not expected to rise further, but
are expected to stay constant until the middle of next year.
There have been recent recommendations to allow the rupiah to
float more in line with capital flows to assist monetary policy
in dealing with capital inflows. However, given the level of the
deficit, concerns about non-oil exports, and the need to ensure a
reasonable flow of capital inflows, it is unlikely that the
central bank will deviate from its present predictable continuous
exchange rate depreciation policy of around four percent per
year.
The limitations of monetary policy will also mean that
fiscal policy will have to play a greater role in managing
overheating. This essentially means that the government will have
to run a budget surplus by ensuring limited expenditure increases
and at the same time increase revenue collection.
Despite the rosy macroeconomic picture, problems and issues
remain at the micro level. Some of the key issues include the
problem of bad debts in the banking sector; the perceived over
expansion in the property sector (which is related to the first
issue); how to increase Indonesia's competitiveness in the face
of liberalization and increased competition for investments and
markets: preventing a high cost economy, structural and systemic
issues of building up supporting industries, human resources and
technological capability and overcoming infrastructure
bottlenecks in a timely and efficient way.
The writer is head of the economics department of the Centre
for Strategic and International Studies.