Spending to be key to economic recovery

Rendi A. Witular, The Jakarta Post, Jakarta

The government plans to boost spending to help stimulate the economy so as to overcome the downturn caused by soaring inflation, newly installed Coordinating Minister for the Economy Boediono said.

"We expect to start unloading government spending for projects in the first quarter next year to help stimulate the economy, since the private sector is still feeling the pinch of the dip," Boediono told a press conference on Thursday, after the first limited Cabinet meeting since the minor reshuffle.

The meeting was also attended by Vice President Jusuf Kalla, Bank Indonesia Governor Burhanuddin Abdullah, Minister of Finance Sri Mulyani Indrawati, Minister of Industry Fahmi Idris, Minister of Trade Mari Pangestu and Minister of Energy and Mineral Resources Purnomo Yusgiantoro.

To put the plan into effect, the government will spend between Rp 10 trillion (US$103 million) and Rp 15 trillion of undisbursed state funds from fiscal 2005 during next year's first quarter to reactivate the real sector, Mulyani said.

Besides being used for projects related to reconstruction efforts in tsunami-hit Nanggroe Aceh Darussalam and part of North Sumatra, the money will also be allocated for the cash assistance program instituted after fuel prices were increased.

The carry-over funds will also be used to cover the expenditures of all ministries that had already sealed contracts with the private sector in October.

"The slowdown in the economy needs to be treated seriously. We will see whether government spending can help stimulate higher economic growth," said Mulyani.

Based on the 2006 state budget, the government's routine and development spending will stand at around Rp 480 trillion.

With the economy in first half of next year likely to depend on the extra spending, Boediono is optimistic that the private sector will revive investment in the second semester after the central bank starts to gradually lower its lending rates.

Burhanuddin said inflationary pressure was also likely to gradually abate starting in the second quarter of next year, allowing the central bank to lower its rates in the second half of next year.

"Inflation is expected to be single digit next year. We are optimistic about that although we have factored in possible rises in electricity prices, wages, higher interest rates on the global market and higher government spending," he said.

During the meeting, Burhanuddin reported to President Susilo Bambang Yudhoyono that inflation would range between 7 percent and 8 percent next year and economic growth would be between 5 percent and 5.7 percent -- lower than the government's forecast of 6.2 percent.

Inflation accelerated to 18.4 percent between January and November, the highest in six years, after the government more than doubled fuel prices on Oct. 1 due to rising global oil prices and a plunge in the value of the rupiah against the U.S. dollar.

BI has aggressively raised its benchmark interest rate six times in the last six months. The central bank raised its lending rate on Tuesday by another 50 basis points to 12.75 percent.

Higher inflation and interest rates have contributed to a slowdown in economic growth and put a brake on the country's consumption-driven economy as both consumer loans and credit for business expansion become more expensive.

Highlights of the meeting:

1. Fiscal and monetary policies will be synchronized with continuous coordination between the government and the central bank to ease inflation.
2. BI says that economic growth this year is projected to stand at between 5.3 percent and 5.6 percent, with the economic slowdown resulting from declining consumption to continue until the second quarter of 2006.
3. Macroeconomic policies for the first half of next year will remain tight until the third quarter.
4. Government spending is expected to be robust in the first half of next year, sufficient to cushion declining purchasing power.
5. Investment and consumption to recover in the second semester of next year, with the central bank gradually lowering interest rates.
6. Government spending would be closely monitored to avoid unexpected higher demand for goods that could drive up inflation.
7. The deliberation of tax, labor, customs, and investment legislation with the House of Representatives would be accelerated.
8. A plan of action for reinvigorating the real sector would be drawn up, complete with time-bound targets and the allocation of clear job responsibilities.
9. Liquidity management in the fiscal sector would be improved.
10. Solutions would be sought to pending issues -- including the Cepu oil block debacle, the dispute between the government and Mexican cement giant Cemex SA over its investment in PT Semen Gresik, and negotiations over liquefied natural gas (LNG) exports to Japan and South Korea.