Aditya Suharmoko, Jakarta – The economy will remain stable throughout the year with strong investment and exports set to compensate for a slight dip in private consumption despite increases in fuel prices, the International Monetary Fund says.
IMF's senior resident representative in Indonesia, Stephen Schwartz, told a discussion Thursday the economy this year would grow 6.1 percent, as "the stronger-than-expected momentum from the first quarter offsets the expected near-term impact of the recent fuel prices increase".
The forecast, made after a meeting with the government and the central bank, Bank Indonesia, is higher than the government's target of 6 percent growth, and the BI's target of less than 6.1 percent, but is unchanged from IMF's previous forecast dated October 2007.
"The outlook is positive, but it is uncertain because of the uncertain global economic outlook," Schwartz said.
Milan Zavadjil, IMF's assistant director in its Asia and Pacific department, said, "We expect (economic) growth to sort of pick up gradually, but it depends on the world's economy."
The world's economy may face a prolonged slowdown due in part to consistent rises in global oil and commodity prices, in addition to a slowing US economy hit hard by subprime credit woes.
The government last week raised subsidized fuel prices – Premium gasoline, diesel and kerosene – by an average of 28.7 percent on fears global oil prices would continue to increase fuel subsidy costs and stretch the state budget.
Zavadjil and Schwartz said the fuel price increase might slightly slow private consumption over the coming months due to a decrease in people's purchasing power, but that the economy would continue to grow as expected on consistently strong investment and exports.
Private consumption accounts for 60 percent of the economy, while investment and exports each contribute 20 percent.
In the first quarter of 2008, the economy grew 6.3 percent on robust growth in private consumption, investment and exports, as reported by the Central Statistics Agency. Investment grew 2.9 percent from in the same period last year, private consumption by 3.2 percent and exports by 7.1 percent.
However, the IMF said the government and BI must control inflationary pressures, which they cited as the year's most pressing challenge, even more so than fuel price increases. The government predicted full-year inflation would reach 11.2 percent, while BI estimated it to hit almost 12 percent.
To control inflation, Zavadjil said BI would likely raise its interest rate. "BI has signaled its intention to tighten (its rate) further as needed to bring inflation back from a declining trend."
The IMF said the financial sector had stood firm amid turmoil in the global credit market.
"Financial soundness indicators have improved, with profitability across the banking industry increasing and non-performing loans continuing to decline amid strong private sector credit growth. BI needs to look closely at how banks are managing their risks, and banks need to ensure their lending quality," Zavadjil said.
BI has said it will monitor lending growth, which is currently growing at a rate of 29 percent, higher than BI's prediction of between 22 and 24 percent for this year.
Should the government and BI manage to address the problems, the IMF predicted the economy would grow 6.3 percent in 2009, with inflation slowing to 7.5 percent.