JAKARTA - Despite current unfavorable
economic indicators, optimistic 2006 budget
parameters set by the Indonesian government assume
the country's US$280 billion economy will grow by
6.2% to $304 billion, and that inflation will be
pegged at about 8%, as will interest rates be
pegged.
The central bank, meanwhile,
predicts the economy will grow 5-5.7%, similar to
last year. Inflation slowed to 17.1% last month
from a six-year high of 18.4% a month earlier, and
analysts expect it to drop further. The bank's
benchmark interest rate is
12.75%, and observers expect
it to remain at that level or go up marginally,
possibly a quarter point.
High
unemployment and poverty levels carry a
social-political economic risk and could even
threaten stability. At least 17% of the country's
220 million people are unemployed or
underemployed, and 40 million live on $2 a day or
less.
"The year 2005 was not an easy year
... We must examine what we did in 2005 and admit
the shortcomings and weaknesses," President Susilo
Bambang Yudhoyono said in his New Year's address.
"Only by doing so can we move forward."
His administration had been stretched to
the limit in handling a series of unforeseeable
calamities, such as natural disasters and
contagious diseases, he said.
In a
December cabinet reshuffle, Yudhoyono made
significant changes in his economic team, which
had been criticized for bureaucratic inertia and
failing to sufficiently improve the investment
climate, as well declining growth and soaring
inflation.
His appointment of former
International Monetary Fund regional director Sri
Mulyani as minister of finance and respected
technocrat Boediono as coordinating minister for
economic affairs won praise from investors and the
markets.
The team's focus in 2006 will be
on containing the inflation rate, maintaining
macroeconomic stability and taking steps to
address the remaining impediments in the
investment climate. Continued efforts to
strengthen the financial sector can be expected,
including sound banking supervision and
improvements in the asset quality of state-owned
banks. This would enhance the ability of the
banking sector to support private economic
activity.
"Since economic stability and
inflation is one of our focuses in 2006, we will
do anything to ensure inflation will not go up so
that by the end of 2006 we can reach our target of
single-digit inflation," Boediono, who like many
Indonesians uses only one name, said last week.
The government plans to focus on curbing
price pressures to improve consumers' purchasing
power and restore economic stability.
The
central bank will need to cut interest rates to
boost investment and consumer spending, but
conversely any further pressure on inflation and
the exchange rate could see it increasing rates.
"We will accelerate spending and improve
the investment climate, and will cooperate with
Bank Indonesia [the central bank] to help reduce
interest rates and boost investment," Boediono
said.
Approved domestic and foreign
investment plans last year reached Rp110.86
trillion ($11.66 billion), an increase of 88.02 %
- more than Rp58.96 trillion ($6.2 billion) in
2004.
Although Rp18 trillion will be spent
this year on building roads, bridges, irrigation
facilities and other infrastructure to boost
investment and reduce unemployment, servicing
sovereign debt will account for a massive 21% of
government expenditure.
The payments of
Rp73.47 trillion in interest and Rp60.38 trillion
in principal due this year are much higher than
the mere 2.7% of the budget allocated for capital
spending - badly needed to help stimulate the
economy.
Inflation hit 17.1% year-on-year
in December following massive fuel price rises
forced on the government by soaring global oil
costs and a slump in the rupiah. Expensive fuel
has driven up transport costs by more than 40% and
food prices have increased by 18%, says Badan
Pusat Statistik (BPS-Statistics Indonesia), a
government institution directly responsible to the
president.
October fuel increases had
pleased investors and the market but the ensuing
hike in the cost of living has been a major blow
to the poor. The price of kerosene, the main
cooking fuel of the masses, soared by 185.71 %,
while petrol increased by 87.5 % and diesel by
104.76%. Inflation also hit hardest at the lower
end of the consumer sector as wealthier consumers
are better placed to protect themselves against
inflation.
Though inflation fell in
December for the first time in seven months, the
rise in inflation, along with rising interest
rates, has slowed economic growth overall and put
the brakes on consumer spending, with both
consumer loans and credits for business expansion
becoming more expensive.
This limits
working capital options, economic expansion, job
creation and puts the brakes on public
consumption, which for several years has been the
main driver of growth in the economy.
Labor-intensive industries have slashed more than
1 million jobs in the past three months.
Though consumer prices fell by 0.04% in
December, the first time in seven months, the fuel
price increases have led to a decline in real
disposable income for consumers and raised input
costs for the business sector.
Unfinished business On the
business side, several other pending issues have
to be addressed, such as the excessive regulatory
burden, investment and labor law amendments and
tax reforms. The government will push through a
number of policies this year to promote robust
economic activity for the private sector and help
spur growth, geared to providing certainty and
stability for the business community.
A
draft revision of the labor law is due to be
delivered to legislators for deliberation in
February or March. Several articles in the law,
which forces companies to pay compensation for
workers who opt to resign, are reported to be
under amendment to encourage companies to hire
more workers.
Business leaders warn that
the tax system is already causing domestic and
foreign investors to withdraw or minimize their
investment. Crucial tax reforms in the pipeline
may not be implemented until early 2007 after an
expected drawn-out debate in the legislature, and
a planned corporate tax cut would not take effect
until 2010.
"Businesses are already going
to China and Vietnam, and one of the main problems
is our tax policy," said Sofyan Wanandi, chairman
of the National Economic Recovery Committee. "Even
Indonesian businesses are investing elsewhere.
The 35% company tax rate made it
uncompetitive for businesses, Wanandi added.
The Indonesian Chamber of Commerce and
Industry said the proposed amendments "place too
much power in the hands of tax officials and
excessively heavy sanctions on taxpayers".
Peter Fanning, chairman of the
International Business Chamber, warned, "If the
bills are not revised, we believe that it will
scare away potential investors and make existing
investors consider leaving."
Tax receipts
account for more than 75% of government revenue,
and the budget sets tax revenue at Rp416.3
trillion, or 13.7% of gross domestic product this
year.
Boediono has warned the business
community not to expect to enjoy tax cuts or
write-offs. "The government needs the income from
taxes to fund development of the educational and
health sectors," he told a news conference.
The economy has grown in the face of a
formidable series of challenges over the past
year, including the tsunami, high world oil
prices, avian influenza and polio outbreaks.
The president's election promises and
goals of economic growth of 7% by 2009, job
creation and poverty reduction remain in place.
This year is likely to be much the the same as
last year, in terms of intent and commitment,
darkened by anxieties about external factors and
sustainability of growth.
Bill
Guerin, a Jakarta correspondent for Asia Times
Online since 2000, has been in Indonesia for 20
years, mostly in journalism and editorial
positions. He has been published by the BBC on
East Timor and specializes in business/economic
and political analysis related to Indonesia. He
can be reached atsoftsell@prima.net.id.
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