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

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)