Thu, 11 Mar 1999

RI economic recovery shaky: WB

JAKARTA (JP): The World Bank predicted on Wednesday that Indonesia's economy would shrink a minor 1 percent in the 1999/2000 fiscal year before returning to modest growth of 3 percent in the following year, but only if the government sticks to its reform program.

If the government slows down on pushing through reform and the global situation also worsens, Indonesia's gross domestic product would dip by 3 percent next fiscal year, beginning in April, and remain stagnant in the following year.

"Indonesia's prospects are subject to a wider-than-usual band of uncertainty," the bank said in its country assistance strategy progress report.

"The point at which the economy will bottom out and start growing again is hard to predict."

Part of the uncertainty, the bank said, lay in Indonesia's main markets in East Asia and also in continued political uncertainty at home.

A reversal in the world equity market and a deepening recession in Japan -- Indonesia's main trading partner and source of investment -- would seriously affect the country's economic recovery, it added.

The report warned the country's recession would be prolonged and recovery postponed if domestic political events took a turn for the worse.

"Nevertheless, if political events go smoothly and the government implements the reform program speedily and consistently, the economy will bottom out in the 2000/2001 fiscal year."

The turnaround in growth is expected to come from agriculture -- partly a rebound from last year's drought -- mining and exports of labor intensive manufacturing.

The bank predicted inflation should moderate to 20 percent next fiscal year and 10 percent the following year, from almost 80 percent in the 1998 calendar year.

The government should continue with its tight monetary policy to reduce inflation and stabilize the rupiah, the bank said.

It forecast Indonesia would continue enjoying a trade surplus of 3.2 percent of the GDP next fiscal year and 2.4 percent the following year. The surplus is projected to stand at 4.6 percent this fiscal year.

Domestic demand contraction and the rupiah's real depreciation helped swing the current account into surplus, the bank said.

In the fiscal sector, the bank said, Indonesia should continue with its expansionary fiscal policy to stimulate demand.

Consequently, the budget deficit will remain high, at 4.8 percent of GDP in 1999/2000 and 3.5 percent the following year, compared to 4.7 percent in the current year.

This will result in increasing external financing needs for the country.

Indonesia, the bank said, would need about $15 billion in the 1998/1999 fiscal year and in each of the next four years for amortization payments of both public and private external debt.

The bank has committed to providing $4.9 billion in the three- year period 1998 through 2000, including $3.2 billion in adjustment lending to help finance government budget needs and $1.7 billion in investment lending.

With the new loans, Indonesia is projected to near the bank's concentration limit of $13.5 billion for a single large borrower for the 2000/2002 fiscal years. It would limit the scope for additional lending in the future to about $1.2 to $1.3 billion a year.

The bank noted the government of President B.J. Habibie continued to show its commitment to reform. The government has attained "important achievements" in import-export policy reforms, domestic market deregulation and investment policies changes and improved forest management regulations.

It noted the government has also initiated several other measures, including anticorruption actions, civil service reforms, fiscal decentralization and judicial reforms.

However, it warned the government could become increasingly focused on short-term measures before the June 7 general election.

"There is a danger, of course, that these initiatives may be motivated by short-term political considerations to the detriment of longer-term development objectives, and they will require close monitoring and intensive, constructive involvement by the bank and others," it said.

The election is touted as the first free and fair election in three decades.

The poll and presidential election in November could fuel uncertainty and stall government decision-making, the bank said. (rei/rid)