World Bank sees growth but new investment unlikely

Dadan Wijaksana, The Jakarta Post, Jakarta

The World Bank said Indonesia's economy could grow faster this year thanks to a better global trade picture, but warned of poor performance in the investment sector.

The Bank, in its biannual assessment report on the region's economies, predicted the Indonesian economy to grow by 4.5 percent in 2004, 0.5 percent higher than its initial prediction last year.

The economy grew by 4.1 percent in 2003, the Bank noted, slightly outpacing the government's target of 4 percent.

The report also urged the government to accelerate efforts to boost exports and investment, as "growth remains consumption- driven, with exports and investment underperforming compared to other Asian countries".

"For Indonesia, the key challenge remains accelerating growth. Turning this around requires improving the investment climate and improving Indonesia's competitiveness," said Bert Hofman, the Bank's lead economist in Indonesia.

On investment, the Bank said the country was still struggling to recover to the pre-crisis level in terms of luring investors to the country. The current contribution of investment to the gross domestic product (GDP) is 10 percent under the pre-crisis level.

"Fixed capital formation grew by a meager 1.4 percent in 2003, and the share of investment in GDP declined from 20.3 percent in 2002 to 19.7 percent in 2003," said the report, and that the condition had dragged down efforts to reduce unemployment and poverty.

Citing official data, the Bank said between May 2002 and February 2003 alone, 400,000 Indonesians became unemployed due to the meager economic growth. Unemployment was on the rise and reached 8.5 percent in August last year.

The number of jobs in the formal sector is also declining, which means that more people have been absorbed by the informal sector.

"The share of the informal sector employment increased from 54 percent in 1997 to 64 percent in 2002," said the Bank.

Numerous analyses have shown that the country's investment climate will not improve unless integrated efforts in various areas are made. Included in this must-do list of actions are: ensuring stability, fixing the corrupt judiciary, easing worker- employer disputes and resolving post-autonomy confusion.

Adding to its concerns is the general election, as "uncertainty on an incoming government will not be resolved until the end of the year. A recovery in investment this year, therefore, remains unlikely".

The country held its legislative election on April 5, which will be followed by its first direct presidential election on July 5, with a strong possibility of a runoff in September.

Despite the gloomy outlook in investment, the country has regained some ground in its macroeconomic performance.

Public debt fell in the past five years to around 69 percent of the GDP, with external debt estimated at US$135 billion, or 70 percent of the GDP compared, with 80 percent in 2002.

Having graduated from a special lending program under the International Monetary Fund (IMF) in December 2003, the nation successfully launched $1 billion in sovereign bonds, in what analysts said was a reflection of an increasing investors' confidence.