Wednesday, February 27, 2008
Government Urged not to Set High Growth Target
Source: Antara News
Suharto

Jakarta - The House of Representatives (DPR) is set to call on the government during deliberations on the revised 2008 state budget this week not to set its economic growth rate target at the high figure of 6.4 percent for this year on the ground it will put a further strain on the state's debts.

The high economic growth rate target which requires additional budget spending without an adequate increase in state receipts will raise the budget deficit from the projected 1.7 percent to 2 percent of gross domestic product this year, a member of the House's Budget Committee, Hafiz Zawawi of the Golkar Party faction, said.

"Don't push through the higher economic growth rate target because it will only increase the state budget deficit," he said.

The government had initially set its economic growth rate target for this year at 6.8 percent compared to 6.32 percent the year before.

But President Susilo Bambang Yudhoyono said the government was not likely to achieve the target amid a global economic slowdown. Therefore, he proposed that the target be lowered to 6.4 percent.

"We are not likely to achieve the economic growth rate assumption of 6.8 percent. All countries in the world have lowered their economic growth targets. We hope our economy will expand by 6.4 percent," the president said.

Some economists have earlier warned of unfavorable prospects for the Indonesian economy this year. The Economic Research Advisory Group in fact likened the 2008 economic outlook to pre-crisis economic conditions ten years ago.

"The Indonesian economy is facing 'a cloud of smoke' in 2008," Econit Advisory economist Rizal Ramli said when announcing the group's 2008 economic outlook in mid January.

Should internal and external upheavals occur, the smoke cloud might grow and lead to economic and social instability in the country, he said.

"If we compare the pre-crisis economic and political conditions in 1997/1998 with today's conditions, it will be difficult not to arrive at the conclusion that numerous factors that could trigger crisis have emerged albeit with different pressuring intensity," he said.

Bank Indonesia (the central bank/BI) predicted the economic growth rate will slightly decrease this year, approaching the lowest limit of its previous growth forecast of 6.2-6.8 percent.

During a working meeting with the House of Representatives Commission XI early this month, Bank Indonesia Governor Burhanuddin Abdullah said macro economic indicators had deteriorated due to a number of factors.

The first was that the US subprime mortgage crisis and economic slowdown would still continue. The US economic slowdown was expected to lower the global economic growth rate this year to 4.1 percent from 4.4 percent as originally planned. The world economic slowdown would reduce Indonesia's export performance and growth.

The second was that as a consequence of increased subsidy the government would slash its goods and capital spending to prevent the budget deficit from further soaring.

The third was that the prices of commodities, particularly of foodstuffs and oil, had soared, sending the on-month inflation rate to 1.77 percent in January. The monthly inflation figure brought the year-on-year inflation rate to 7.36 percent, well above the previous target of 5, plus or minus, 1 percent.

Head of the Fiscal Policies Board at the Finance Ministry Anggito Abimanyu said the global economic slowdown would have an impact on developing countries, including Indonesia, but it would not be as bad as that on the developed nations.

"It will not be as bad as the affect it will have on developed nations because our dependence on financial markets is low," he said.

At the end of 2007 many circles predicted the Indonesian economy would expand by a range of 6 to 6.8 percent this year but they revised it downward to 5.5-6.8 percent in January, he said.

Citing an example, he said Goldman Sachs Asia had lowered the country's economic growth rate for this year to 5.5 percent from 6.0 percent, Standard Chartered to 6.1 percent from 6.3 percent, Econ Intelligence Unit to 6.1 percent from 6.2 percent, HSBC Economics to 6.4 percent from 6.5 percent, Consensus Mean to 6 percent from 6.4 percent, and Bank Indonesia to 6.2-6.8 percent from 6.5-6.8 percent.

The institutions predicted the looming global economic recession will affect the most developed nations. For instance, the US economic growth rate which had originally been projected at 2.9 percent for 2008 was revised downward to 2.8 percent in April 2007, 1.9 percent in October 2007 and 1.5 percent in January 2008.

The same would also apply to Japan which was expected to see an economic growth rate of 1.5 percent this year instead of 1.8 percent as originally projected.

The looming US recession was also predicted to have an impact on the Indonesian economy as the US was the main market for Indonesian exports.

Observers said the government should diversify the overseas markets for Indonesian exports so they would include countries like n India and China, and benefit from the huge domestic market.

The domestic market can actually absorb a wide range of national products, Martin Panggabean, chief of state-owned Bank Mandiri's economic team, was quoted by Kompas daily as saying.

"That is what we have to take advantage of to make the real sector work rather than to stagnate merely because of a global economic slowdown."

To boost the real sector, Bank Indonesia no longer needs to maintain its high interest rate policy, the more so because the difference between the Federal Reserves' interest rate and the interest on Bank Indonesia short-term promissory notes (SBI) is quite high, reaching 4.75 percent, he said.

"The decline in interest rates will not have a great impact on the inflation rate," he said.

But Country Director of Economist Citi Anton Gunawan at a recent discussion on the looming US recession said Bank Indonesia should focus on maintaining the rupiah's stability rather than following the Fed's example in lowering its interest rates.

A decline in interest rates would only trigger inflation . However, if the rupiah remained stable, the real sector would continue to work and the inflation rate could be kept in check, Anton said.

Anggito said the government was preparing a number of steps to anticipate the worst impact of global economic slowdown due to the US subprime mortgage meltdown and the global oil price spiral.

"The change in the 2008 economic outlook will be reflected in the revised 2008 state budget to be submitted to the DPR. The government also has adopted nine steps to keep the momentum of economic growth," he said without elaborating.