Growth momentum picks up

The Jakarta Post ,  Jakarta   |  Fri, 05/18/2007 7:56 AM  |  Opinion

The momentum of robust economic growth is picking up thanks to real gross domestic product expanding by almost six percent, year-on-year, in the first quarter.

This trend met the expectations of most analysts in the government and private sector.

However, the pace of new investment, which is expected to be the main locomotive of growth this year, remained weak.

Exports, which expanded by almost nine percent on the back of higher priced natural-resource commodities, continued to be the main driver of growth -- accounting for more than 50 percent of first quarter growth.

Private consumption, the main engine of growth over the past five years, contributed 2.6 percent, the Central Statistics Agency announced Tuesday.

Bank Indonesia and the International Monetary Fund mission (in Jakarta this week) welcomed the reports and said they were a positive signal for more robust growth -- despite being below the 6.3 percent 2007 target set by the government.

Consumer confidence appears to have recovered.

A steady decline in the central bank's benchmark interest rate, a strengthening of the rupiah and weakening inflationary pressures will provide more room for Bank Indonesia to further lower its interest rate (BI rate), which is currently at 8.75 percent.

But the government cannot yet celebrate.

Compared with last year's first quarter, private and government consumption and investment (gross fixed capital formation) was higher in the first quarter of this year.

But we should remember the economic condition in the first quarter of 2006 was at its lowest point due to the 126 percent hike in fuel prices in October, 2005.

In the last quarter of 2006, the three components that helped drive growth declined in the first quarter of this year.

Growth dipped to five percent in mid-2006, but recovered to 5.9 percent and 6.1 percent in the third and fourth quarters of 2006.

And government spending continued to run below budget.

Significant achievements have been made in the regulatory framework for infrastructure development.

Other than toll roads, few large projects have commenced.

The challenges for higher growth (6.5 to seven percent is the level considered adequate to reduce poverty and unemployment) remain greatly daunting.

The government should work harder to meet the basic requirements for robust growth.

One of the preconditions is public expenditure should run at a higher rate.

But bureaucratic inertia and inadequate budget management has prompted many local administrations to park their investment (development) funds in bank deposits and Bank Indonesia certificates.

Other prerequisites include accelerating infrastructure development, especially in energy and transport; larger non-oil exports, notably those of manufactured goods; and an increase in production capacity.

These conditions require a high pace of private investment and significant improvement in public sector governance.

And for all this to work, many tax, labor and mining regulations already well behind schedule must be completed soon.

Unfortunately, the House of Representatives does not have any sense of urgency.

Nor does it realize a crisis -- even though most senior politicians have been complaining about the huge number of unemployed people and the high incidence of poverty.

The House is instead wasting energy on issues including Iran -- which are irrelevant to the greater public.

Given the current stage of deliberation at the House, bills on taxation and mining (which have been in the wings for many years) will probably not be implemented this year.

Although these laws could be enacted in the second semester of this year, it will be some time before they are fully enforced or stimulate investment.

The reform of labor regulations has been in limbo and has no clear timetable.

And the significant lack of progress in public sector reform -- especially state companies and civil service (bureaucracy) -- is disappointing.

The problem lies behind the bureaucratic machinery responsible for reform, economic activity and new investment.

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