RI growth target difficult to meet: ADB

RI growth target difficult to meet: ADB

MANILA (Agencies): The Asian Development Bank has warned 1999/2000 fiscal year targets in Indonesia of zero growth and 17 percent inflation would be hard to achieve.

It also warned in its 1999 Asian Development Outlook report that there was a risk of renewed unrest this year and said the country's June election could have an impact on monetary targets.

"The government should continue to maintain an expansionary stance, but achieving its stated aim to zero growth and 17 percent inflation may be difficult," the Manila-based ADB said in the report.

The report forecast 2.0 percent gross domestic product growth in fiscal year 2000 after zero growth in 1999, compared to a contraction of 13.7 percent in 1998. It put inflation (CPI) at 17 percent in 1999 and 9.5 percent in 2000, versus 58.2 percent in fiscal 1998.

"Because investment growth will depend critically on restoring investor confidence, the level of investment may take more than a year to show any substantial increase. Monetary targets may be exceeded in an election year. If this happens some significant price increases may be apparent in 1999."

The government needed to keep prices of essential commodities stable to avoid unrest, it said.

"Failure to address the social impact of the crisis in 1999 could easily spark another turbulent year," the report said.

The ABD also highlighted what it said were a number of weaknesses in the government's budget for the fiscal year to March 31, 2000, noting that more than half of revenue was forecast to come from income tax.

"This will be difficult to achieve given that the large increase in income tax revenues realized in 1998 was due to tax on interest incomes in a year of extremely high interest rates. The 1999 budget also forecasts large privatization proceeds, but the government's privatization program is well behind schedule."

"Agriculture still contributes nearly 20 percent of GDP and can play a major role in the recovery process and act as a safety net sector," the report added.

Interest rates

Separately, ADB noted in its latest Indonesia Country Economic Review, which was issued also on Monday, that high interest rates have hurt banks and helped strangle the real economy.

"While tight money and the high interest rate regime helped to stabilize the value of the rupiah, they had severe effects on the finance sector," the bank said.

"The stock market collapse brought about mainly by capital flight, was accentuated by the tight monetary stance," ADB said in the review, which was published every six months.

While ADB doesn't actually come out and blame the International Monetary Fund for the tight monetary policy, the report's implications are clear.

The IMF policy of prescribing high interest rates and tight monetary policy in the early stages of the crisis, while maintaining open capital accounts, has been criticized by many for placing too great a stress on the region's economies.

Interest rates for one-month central bank paper are currently at around 35 percent - far below levels of around 70 percent seen in September, but still lofty.

The high rates have resulted in banks offering higher deposit rates than lending rates, leading to a substantial negative spread.

The ADB said the forecast cost of bank recapitalization - Rp 300 trillion (US$34.5 billion) or one third of the country's gross domestic product- may be off by a large margin due to the lingering negative intermediation spread.

Asia -- Page 4