Friday, February 17, 2006 Vincent Lingga, The Jakarta Post, Jakarta
The country's economic growth rose to 5.60 percent last year from 5.13 percent in 2004. While this may seem like good news, there is reason to worry, because expansion in 2005 was lower than the official target of 6 percent.
Quarterly growth rates have steadily declined since the second quarter of last year, meaning grimmer job prospects for the country's estimated 11 million unemployed and the more than 2.5 million new job seekers who enter the labor market annually.
Yet more worrisome in terms of poverty alleviation efforts is the discouraging development of the agricultural sector, which employs more than 50 percent of the total workforce.
The Central Statistics Agency announced Wednesday that growth in terms of gross domestic product contracted 2.18 percent in the last quarter of 2005 from the third quarter, mainly due to negative growth of almost 20 percent in the agricultural sector.
The economy actually performed robustly during the first six months (October 2004 to March 2005) of President Susilo Bambang Yudhoyono's administration, with GDP expanding by 6.65 percent on a yearly basis in the fourth quarter of 2004 and 6.25 percent in the first quarter of 2005.
The quality of growth also increased significantly, with a much stronger foundation as the prime economic movers shifted more to investment and exports. Investment grew by 15 percent during the first quarter, as shown by a robust 40 percent increase in capital goods imports, while exports expanded by 13 percent.
However, the quarterly growth pace slackened to around 5.64 percent in the second and third quarters.
The lower-than-estimated growth last year had been widely predicted since last July, after steep increases in global oil prices pressured the rupiah and threatened fiscal sustainability as the government dragged its feet over the exploding fuel subsidy.
Strong inflationary pressure from imports dampened consumer confidence, and when the government finally decided to contain the fuel subsidy by increasing fuel prices by an average of 125 percent last October, the damage already had been done.
Growth prospects this year are no rosier, with personal consumption, which accounted for 65 percent of last year's growth, likely to continue declining, while private investment is expected to begin picking up only in the second semester.
Finance Minister Sri Mulyani Indrawati predicted late last year that GDP growth this year would most likely hover between 5.3 and 5.7 percent, lower than the official target of 6.2 percent, because new investment is expected to pick up only in the second semester.
Since most companies are still struggling with the cost-push inflation caused by the October fuel price increases and their multiplier effect, including the tremendous pressure for higher labor wages, many businesses will likely book smaller taxable income. Many others may even operate in the red.
Despite the tight fiscal condition, the public sector and private consumption are still expected to be the prime movers of growth, at least during the first semester.
The 2006 state budget provides a 20 percent expansion in spending to a total of Rp 645 trillion (US$64.5 billion). On top of that, another Rp 10-15 trillion in public sector investment, carried over from the 2005 budget, will be pumped into the economy.
However, the pump priming should be accompanied by a more concerted anti-inflation drive, otherwise the expansive public sector spending could increase inflation expectations, especially since higher electricity rates are looming.
A persistently high-inflationary environment is certainly inimical to consumer confidence and will make it much more difficult for the central bank to begin easing the credit crunch.
Hence, the urgency in the demand from businesses for the government to accelerate reform measures in such important areas as customs, taxation and basic infrastructure, to cut the costs of doing business and reinvigorate the pace of private investment.
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