Interest rate for 2009 set at 7.5 percent to help growth

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Wed, 10/15/2008 10:43 AM  |  Business

The government and lawmakers agreed Tuesday to set the country's benchmark interest rate and inflation in the 2009 state budget at 7.5 percent and 6.2 percent, respectively.

The decision was made as part of a revision of the 2009 state budget assumptions to allow for the impact of the current financial crisis.

The revision, which the government submitted to the House of Representatives' budget committee on Monday, put economic growth at between 5.5 percent and 6.1 percent, inflation at 7 percent and the interest rate at 8.5 percent.

The proposed revision was made to better reflect the current economic state, with U.S. financial woes sending stock markets around the world tumbling and raising the prospect of a global economic downturn.

On Tuesday the budget committee decided to lower the interest rate to 7.5 percent, saying a lower rate was in line with moves by central banks worldwide as countries seek to facilitate access to credit and stimulate growth.

Bank Indonesia earlier this month raised its rate by 25 basis points in six straight months to 9.5 percent.

A lower interest rate means a low cost of borrowing, which could boost demand for bank lending among companies and individuals. Robust bank lending will eventually stimulate economic growth.

Inflation has been set at 6.2 percent, lower than the proposed 7 percent, "so that the government will have to work hard to boost the real sector", said House budget committee vice chairman Harry Azhar Aziz.

On-year inflation in October rose 12.14 percent from a year earlier, according to the Central Statistics Agency (BPS).

The revision to the economic growth assumption is still under deliberation. The proposed growth is lower than the initial assumption of 6.1 percent.

Harry said the lawmakers basically understood the reason behind the downgrade, "which required the government to work harder and build a better investment climate".

The economy probably expanded 6.3 percent in the third quarter of this year on higher domestic demand, the central bank said in its quarterly report Tuesday. The official figures on growth will be issued by the BPS later this month.

An agreement has also been reached on the oil price assumption.

The Indonesian Crude Price -- the country's benchmark oil price -- has been set at US$80 per barrel, lower than the government's proposal of $85. ICP is usually about $5 lower than global oil prices.

Another vice chairman, Suharso Monoarfa, said the U.S. demand for oil would fall because of the U.S. economic slowdown, easing pressure on global oil prices.

"The U.S. is the world's biggest consumer of oil," he said.

The budget deficit was set at Rp 71.3 trillion, or 1.3 percent of GDP.

To finance the deficit, the government has Rp 21 trillion in standby loans from the World Bank, although Suharso said the lawmakers preferred "to reduce spending by government offices and ministries".

"It is better to reduce spending than to borrow money (for deficit financing). However, we will keep signaling the market that government spending is needed (to stimulate the economy)," he said.

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