RI growth will remain strong in 1995: Econit

JAKARTA (JP): The high inflation rate over the past few months, the appreciation of the yen and the government's slow response to new economic developments may affect Indonesia's economy in the short term, an economic think-tank said yesterday.

However, the Econit Advisory Group in Economics, Industry and Trade, said in its mid-year review that in the long term, Indonesia's economy, bar any unexpected social or political instability, will not face serious problems in reaching an annual growth rate of six or seven percent per annum because the current fundamental factors in the economy are healthy and well managed.

Laksamana Sukardi, an associate director of Econit, said that the economy might grow more than seven percent if the government manages the macro-economy better.

He said that Econit has downgraded its assessment on Indonesia's short-term economy, as compared to its assessment last November, after the announcement of the high inflation rate in the first few months of this year, the appreciation of the yen and the slow response of the government towards economic developments.

Econit's economic outlook for 1995, published last November, said that the Indonesian economy should be very healthy this year.

Poor coordination

Laksamana said the government's slow response towards economic developments indicates poor coordination among its institutions, particularly those related to the management of economic sectors, such as trade and industry.

He said such a slow response has caused Indonesia to lose export opportunities offered by very favorable international factors early this year.

"The May 23 deregulation package was introduced too late to respond to the opportunities," he added.

Moreover, the deregulation did not touch sectors vital to the public and will not contribute much to support economic development, he added.

He said the inflation rate in the last few months was too high.

According to the Central Bureau of Statistics, the inflation rate during the first four months of this year alone reached 4.73 percent, only slightly below the five percent targeted by the government for the whole year.

Laksamana said that the high inflation rate was mainly caused by substantial increases in the prices of commodities of which the domestic trade is regulated by the government, such as cement, wheat flour, sugar, cooking oil and paper, due to their oligopolistic trading.

"It's ironical that the prices of the regulated commodities on the domestic market are far higher than international price levels," he said.

The domestic retail price of sugar, for instance, was recorded last month at US$733 (Rp 1.63 million) per ton, 145 percent higher than the international price of only $299, while the domestic retail price of wheat flour was $378 per ton, 47 percent higher than the international price of $256, he said.

Laksamana said the recent increase in banking deposit rates to about 14.5 percent per annum has raised lending rates to a range of between 21 percent and 23 percent per annum.

"If the lending rates increase further to 25 percent, many companies will face cash-flow difficulties and many debts may go sour," he said.

Econit estimates interest rates will most likely further grow by between one and two percent by the end of this year due to the high inflation rate, the funding gap in the banking sector and the expectation of steep rupiah depreciation. (32)