Ary Hermawan, Jakarta – The government's expectation that the banking industry will be able to increase lending by 33 percent by 2008 in order to meet its economic growth target of 7 percent is too ambitious, Bank Indonesia Governor Burhanuddin Abdullah said.
"The highest lending growth ever achieved by the country's banking industry was only 24 percent. I think the government needs to readjust its target," he said on the sidelines of a hearing Tuesday with the House of Representatives' finance commission.
He was commenting on the government's 2008 economic goals unveiled by Finance Minister Sri Mulyani to the same House commission earlier in the day.
Sri Mulyani said a total of Rp 1,296 trillion (about US$147 billion) in investment would be needed to meet the GDP growth target of between 6.6 percent and 7 percent in 2008.
The finance minister said that the government was hoping the country's commercial banks would contribute Rp 210 trillion of this, which according to BI would represent a 33 percent increase in lending compared to the current figure.
The lending-to-deposit ratio, Mulyani said, would hopefully rise to 75 percent from the current level of 60 percent.
While expressing the hope that the country's banks would begin to improve their intermediation function so as to propel the real sector on the back of a relaxation in lending rules and a reduction in BI's key interest rate, Burhanuddin said he was rather pessimistic about the government's target. "It's just that it has never happened in history," he said.
According to Bank Indonesia, bank lending grew by Rp 97 trillion, or about 14 percent, from Rp 690 trillion as of the end of December 2005, a substantial drop from the average 20 percent growth recorded in the preceding years. As of the end of March, lending had risen to Rp 800 trillion from Rp 787 trillion at the end of December last year. The central bank has targeted an increase in lending of 18 percent this year.
"Even if lending growth reaches 24 percent, the highest level ever, the government will still have to look for other alternative investment financing sources," Burhanuddin said.
The government, which will allocate about Rp 170 billion for infrastructure development under the 2008 budget, hopes that the private sector will contribute Rp 460 trillion to the investment target.
With the enactment of the new Investment Law, Mulyani said, 70 percent of 2006's approved domestic and foreign investments, worth about Rp 314 trillion, should be realized next year.
State enterprises are expected to be able to spend Rp 151 trillion on capital investment in 2008, she added.
Mulyani said that in order for the economy to grow by 7 percent, the contribution of personal private consumption to GDP would have to be in a range of between 5.7 and 6.2 percent, compared to this year's target of 5.1 percent.
To make this possible, she said the government hoped the central bank would keep inflation at a level of 6 percent and lower its key rate to between 7.5 and 8 percent. "We will also optimize the poverty alleviation program to increase the real incomes of the public," she said.
She said that the government also expected an increase in the number of villages participating in the National People's Empowerment Program (PNPM) from 2,800 at present to 3,800 in 2008.
The government was targeting a reduction in the poverty rate from 17 percent to between 15 and 16.8 percent, and the unemployment rate from 10 percent to between 8 and 9 percent.