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Jakarta Post

ADB paints brighter picture of RI economy

Satria Sambijantoro
Jakarta   ●   Wed, March 25, 2015

Unlike other global financial agencies, the Asian Development Bank (ADB) has painted a more positive picture of the Indonesian economy this year, arguing that the government'€™s policy reforms will have an impact on economic growth sooner than expected.

The ADB forecast Indonesia to grow by 5.5 percent this year and 6 percent in 2016, far more optimistic than estimates from the World Bank and the International Monetary Fund (IMF), which said the economy would grow by 5.2 percent this year.

The World Bank cut its projection for this year'€™s economic growth to 5.2 percent from 5.6 percent due to the weak outlook for fixed investment and trade as well as the slowing pace of loan expansions.

'€œThe fiscal position could, if required during this year, accommodate a more expansionary stance,'€ the ADB Indonesia resident mission wrote in a report released on Tuesday.

The projections are based on the assumption that the new government'€™s rapid reform momentum is maintained, especially the acceleration in infrastructure building and budget disbursement.

ADB Indonesia chief economist Edimon Ginting said he expected the country'€™s economic expansion to be more inclusive and to absorb more jobs, given the current administration'€™s focus on boosting the manufacturing sector.

Currently, every 1 percent of economic growth in Indonesia can absorb approximately 200,000 jobs, according to estimates from the National Development Planning Board (Bappenas).

This is a decline in economic efficiency compared to three years ago, when the 2012 state budget stipulated that the economy could generate up to 400,000 jobs with the same level of growth.

'€œIn the past, we focused too much on the commodity sector, which is actually a capital-intensive industry absorbing relatively little labor,'€ Edimon told a press briefing on the report'€™s release.

'€œIn the future, Indonesia should focus on developing its manufacturing industry, which is labor-intensive, with growth in the manufacturing sector closely related to formal employment in the economy,'€ he added.

In recent years, Indonesia has struggled to maintain its 6-plus percent growth as exports plunged due to weak commodity prices, while investments became moderate due to tight domestic liquidity and infrastructure bottlenecks.

For example, the World Bank estimated that Indonesia'€™s potential long-term growth had declined from 6 to 5.5 percent.

The bank cited various domestic and external risks, notably an economic slowdown in China.

President Joko '€œJokowi'€ Widodo'€™s administration has generated fresh optimism.

So far, Jokowi has prioritized economic issues, with reforms, such as the reallocation of fuel subsidies to infrastructure, the acceleration of state tender projects and the streamlining of business permits, in a bid to push growth to 7 percent within five years.

Nevertheless, concerns have arisen of the possibility the economy could overheat if pushed beyond capacity.

Amid prevailing uncertainties in the global economy, economists have suggested that policymakers focus on stability oriented policies, warning that Jokowi'€™s ambitious infrastructure development plan may invite strong imports, thus enlarging the current-account deficit.

However, the ADB argued that the maritime-based development plan would be beneficial to economic stability, with the archipelagic country slated to benefit from lower logistical costs at ports that would make the economy more efficient and drive up potential growth.

'€œThe government'€™s efforts to boost investment in infrastructure with a focus on ports and connectivity should show significant results in the medium-term,'€ the ADB stated.

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