World Bank optimistic on RI economy

Dadan Wijaksana, The Jakarta Post, Jakarta

The World Bank praised the government's economic reform package laid out in a special White Paper as a program of impressive targets that promises to improve the investment climate and generate higher economic growth.

"The package lays out an impressive time-bound program of economic reforms that, if implemented, would ensure continued macroeconomic stability, lower interest rates and risk premiums, and higher investment and growth," the bank said in its latest report on East Asia's economies published on Thursday.

Progress of the reform programs laid out in the package, coupled with an absence of problems during the impending elections, should gradually improve the country's investment climate, which would in turn lead to more investment in the medium term.

"We expect (economic) growth to accelerate from 3.5 percent this year to 5 percent by 2006," the bank added.

To support its decision not to renew the International Monetary Program (IMF) bailout program, Jakarta last month issued a White Paper, which specifies the economic policies and targets to be met by the government over the next 18 months.

The IMF has been assisting the government in formulating its economic reform programs since 1999, to help it stand on its own feet after being crippled by the severe financial crisis. In return, Indonesia will have received some US$4.8 billion in loans to strengthen its external reserves. The program is slated to end later this year.

While acknowledging that the government's decision had found acceptance inside and outside the country, the report reiterated the bank's support for the decision.

"The general perception is that Indonesia's macroeconomic conditions have improved enough to warrant the decision," it said.

The report also praised the government for pursuing a tight fiscal policy as part of its continued fiscal consolidation, although as a result, "the persistent under-spending of development expenditure is of concern."

Although the fiscal consolidation has helped restore financial stability -- as shown by the external public debt which had fallen to 69 percent of gross domestic product (GDP) as of June this year from 158 percent in 1998 -- it limits the ability to create enough jobs through increased spending.

Despite continued macroeconomic stability, the unemployment rate reached 8.5 percent in February 2003 -- excluding conflict- affected areas such as Aceh, Maluku and Papua -- up from 8.1 percent in May 2002, the bank said.

"It suggests that the current moderate growth is not enough to improve an employment condition."

Analysis by many economists have predicted that for the economy to be able to absorb some 2.5 million new job-seekers annually, it has to grow by at least 6 percent.

The World Bank is one of the country's traditional lenders with annual loans of around $400 million to help finance various development projects in the country.

World Bank's Medium-Term Macroeconomic Projections ---------------------------------------------------------------

2002 2003 2004 2005 2006 2007 --------------------------------------------------------------- Real GDP growth (%) 3.7 3.5 4.0 4.5 5.0 5.0 Inflation (%) 11.7 6.5 6.0 5.0 5.0 5.0 BI 3-mo int. rate (%) 15.2 9.5 9.0 8.0 8.0 8.0 --------------------------------------------------------------- Source: World Bank