RI's growth to fall 5 percent next year: Indef

JAKARTA (JP): The country's economy will contract by a further 5 percent next year barring any major political upheaval, independent research agency Institute for Development and Finance (Indef) predicts.

Indef's Gross Domestic Growth (GDP) forecast for 1999 is worse than the government's economic outlook in which the economy -- which is estimated to shrink 13.5 percent this year -- would grow at least 1 percent.

Indef director Faisal Basri said on Monday there would be a slight recovery next year but GDP growth would remain in negative territory.

"Next year's growth will be better than this year as long as there are no more shocking episodes," Faisal said on the sidelines of a discussion organized by the agency.

Controversial political issues such as a delay in the general election, which is scheduled in May, would have fatal consequences for the country's economic prospects and would make it gloomier than it already is, warned Faisal, who is also the secretary-general of the newly established National Mandate Party.

The Asian Development Bank lowered last week its forecast on Indonesia's growth to minus 16 percent this year and minus 3 percent next year, from respectively minus 3 percent and 1 percent.

Faisal said fundamental indicators, such as high inflation and interest rates, and the high money supply indicated that there had not been a significant recovery in the economy.

The real sector is still sluggish because investors are taking a wait-and-see stance, and lack of confidence had halted the flow of foreign capital to the economy, he said.

Inflation

Faisal also estimated that inflation would be below 20 percent but higher than 10 percent next year, a drop from the expected 80 percent inflation for this year.

The government had earlier projected that inflation would fall to about 10 percent for next year.

Inflation would be caused by the increase in the money supply because of the increase in the subsidies given by the government, Faisal said.

Faisal said he was concerned that the government would likely churn out more subsidies on food-related commodities which were not economically sound in order to contain political and social conflicts, which are getting more intense.

"Rising prices of commodities and services will pressure the government to subsidize it," he said, citing electricity, whose rate rise had recently been delayed.

"In the future, the potential for political instability will get bigger while raising the prices of essentials would be too risky."

In addition to increasing the subsidies, the government will extend its budget to finance social safety net programs to cater to millions of Indonesians who have lost their jobs in the prolonged economic crisis.

Subsidies and social safety net programs could total some Rp 100 trillion (US$13.33 billion) in the budget, he said.

The government will also allocate at least Rp 80 trillion in sovereign loans and interest repayment, and about Rp 50 trillion for banking restructuring in next year's state budget.

"We therefore expect a significant rise in expenditure in the next fiscal year's State Budget," he said.

At the same time, the lower international price of crude oil and the strengthening of the rupiah against the dollar will cause a potential drop in the state income from foreign exchange earnings.

Lower foreign exchange receipts would therefore widen the deficit in the State Budget for the 1999 to 2000 fiscal year of at least 10 percent, from the estimated 6 percent for the current fiscal year.

He conceded that subsidies were important to create a conducive condition and eliminate sharp social tension and conflicts within society, but cautioned that measures must be economically sound.

Faisal also predicted that the banking sector would begin showing signs of recovery in the middle of next year.

"They can start working toward normalcy, but it doesn't mean they are already normal."

Recovery in the banking sector would take longer than three years, but it could start in 2000 if restructuring was expedited, he said.

Faisal said the exchange rate of the rupiah against the U.S. dollar would likely stay at its current level of 7,000 to 7,500 next year. The precrisis level in August last year was about 2,500 to the dollar. (das)