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Saturday March 31, 2007

For 2008 next year, Indonesia assumes an economic growth target of 6.8% and a Budget deficit of 1.7% of GDP said Finance Minister, Sri Mulyani, announcing the Government’s Work plan for 2008 at a recent press conference. The target, which had been decided by President SBY at an enlarged plenary cabinet meeting, is above the earlier predicted growth of 6.5% maximum, said Minister Mulyani.  To achieve the accelerated target, household consumption must increase by 5.9%, government spending by 6.2%, investments by 15.5%, exports by 12.7%, and imports by 17.8%, Minister Mulyani continued.

Three factors that are estimated to impact on growth are: firstly, the expected positive global economic trend that will affect development sectors such as infrastructure, import-exports, and in particular mining and agricultural production. Secondly, domestically, national disasters may adversely impact on government capacity to realize the accelerated development of infrastructure. And thirdly, there is the issue of oil prices and the price of other commodities. The price of oil is estimated at between US$ 55 to US$ 60 per barrel.

In 2007, however, the government’s budget deficit is expected to expand from 1.1% of GDP (or Rp. 40.5 trillion) to between 1.2% to 2% (or an estimated Rp. 60 trillion to Rp. 65 trillion), whereas government’s revenue is expected to reach Rp. 723.1 trillion, and government spending  Rp. 763.6 trillion.

This increase was caused by added government spending to assist and recover from the many natural disasters, as well as the increased payments on subsidies carried over from last year. Over the past three years, spending by government agencies has continuously increased, and it is hoped that with increased government spending this will accelerate economic growth, reported Bisnis Indonesia. 

Unequal growth between Java and other islands; Growth Quality must be improved

Meanwhile, Bank Indonesia Economic Report for 2006 showed that economic activities on Java, Bali and Nusa Tenggara are far surpassing those of other islands including Sumatra, Kalimantan, Sulawesi, Maluku and Papua, wrote Kompas daily.

The 6.42% growth of the provinces of Jakarta and Banten, for example, exceeds the average 5.5% national growth. In contrast, growth in Sumatra was 4.57%, which is below the national average. This accentuates the fact that there is an ever widening gap between rich and poor provinces, said Mudrajad Kuncoro, economist at the University of Gajah Mada inYogyakarta. Indonesia’s economic growth remains unequal and tends to be dominated by the richer provinces. Regional autonomy which came into force in 2001 has apparently not contributed much to equalizing development in regions, he said. 

The poor quality of economic growth can also be seen when comparing unemployment among regions, which confirms that macro economic growth today still has little impact on employment opportunities. The unemployment rate on Java, Bali and Nusa Tenggara, increased from 9.6% in 2005 to 9.7% in 2006. Similarly, unemployment rate on Sulawesi, Maluku and Papua went up from 9.4% in 2005 to 9.7% in 2006.

There is also a widening gap between modern and traditional industries. While capital intensive industries grew faster than labour-intensive industries, which is one of the reasons for the poor absorption of unemployment.

Gorontalo Governor, Fadel Muhammad, on his part added that there is still a lack of synchronization between national policies vis-à-vis provincial policies, where often local policies conflict with national bureaucratic rules.

Fadel Muhammad, therefore, suggests that provinces take three innovative steps. These are firstly, innovate structure and organizational behaviour. Secondly reduce bureaucratic red tape, and thirdly innovate the decision making process.

On the other hand, Bank Indonesia Governor, Burhanuddin Abdullah, was of the opinion that in order to create quality in economic growth, there needs to be quality in investment, meaning the accelerated investments that result from wider access that are open to all economic stakeholders in order to support capital formation in the productive sectors.

To reach such quality is required a conducive investment climate which is open and based on a market system that promotes competitiveness.  This also requires systematic policies which push national transformation in the economic structure, in asset ownership and production tools that are more widely spread out. To attract quality investments, conducive industrial relations are also required that are not anti-labour, but are instead focused on production and distribution activities to meet domestic market demand.

Consumer Spending drives growth; Investments in Infrastructure top priority

Separately, further explaining the targets for 2008, Anggito Abimanyu, Head of Fiscal Policies, explained that Indonesia’s GDP in 2008 is expected to reach the level of Rp. 4,200 trillion. In efforts to reach this level, the government must solve two critical problems, which are consumer demand and increased investments. Consumer spending which is expected to reach 60% will be the strongest driver, helped by fiscal policies. And in line with consumer spending, the government has prepared a number of programs to improve the real income of the people while at the same time reduce poverty levels.

While, from the monetary side, the government will reduce interest rates and curb inflation. This is important, since with controlled prices and improved real income, consumers will spend more, while government earnings will also increase with increased economic activity. 

On the side of investments, the government has increased spending on infrastructure, in particular through the Department of Public Works and the Department of Communications.
Investments are also pushed through public-private partnerships in infrastructure projects, such as in the construction of power plants, roads, airports and seaports.
With increased investments, there will be accelerated activity which opens up employment opportunities. For this reason, the government has allocated a significant budget for infrastructure development, said Anggito, as reported by Media Indonesia on Line. 
To accelerate economic growth to 6.8% in 2008, Anggito continued, the government needs investments of more than Rp. 1,000 trillion, which is more than the requirement set for this year. Recently, Finance Minister, Sri Mulyani mentioned that in order to reach 6.3% growth in 2007, investments must increase by 12.3% through gross investments valued at Rp. 989 trillion. Such growth is necessary since investments in 2006 grew by 2.9% only.
Therefore, the programs that are made through the government Departments are aimed to push industrial development, while the government also shares risks with the private sector.
In addition, exports will increase quite reasonably this year, despite the fact the price of natural commodities that are Indonesia’s chief export commodities, will not continue to increase in world markets.
On the other hand, when prices are pressed down, then volumes will increase. This will include commodities such as CPO (crude palm oil), textile and textile products, electronic goods. Prospects of textiles and textile products should remain good, as a result many restructuring programs, while the market is still wide open.
This, and improved competitiveness of Indonesia’s products should push Indonesia’s economy on a continued upward path, considering also that Parliament has recently passed the Law on Investments, while the Bill on Taxes should be passed soon. There is also government’s focus on particular industries, and the continued slide in prices of basic commodities should support above growth expectations.
Export value of Indonesia’s commodities should therefore also be better than today.
These measures, together with improved bank loans, direct investments or through the stock market, will become sources of investments for projects that are already in the pipeline, which should, therefore, be able to boost economic growth to 6.8% in 2008, Anggito said.
Media Indonesia further noted that Indonesia’s GDP in 2006 was Rp. 3,338.2 trillion, while in the 2007 Budget, Indonesia’s GDP was said to reach Rp. 3,531.1 trillion.
(Sources: Bisnis Indonesia, Kompas, Media Indonesia)     (Tuti Sunario)-