Endy M. Bayuni, Jakarta – The International Monetary Fund has revised upwards its forecast for Indonesia's gross domestic product (GDP) growth to 5.2 percent for 2006 in another sign of growing international confidence about the direction of the government's policies.

The endorsement comes as Indonesia grapples with volatility in the financial markets that has seen the rupiah and stock prices seesawing in the past week.

The latest forecast was announced at the conclusion of a two-week IMF mission in Indonesia, led by Milan Zavadjil, to conduct its annual consultations with Indonesian officials. A report from the mission is expected to be published in August.

The IMF predicts an economic recovery in the second half of the year as interest rates fall and the economy fully adjusts to higher domestic fuel prices, which were raised at the end of 2005, according to a statement attributed to IMF senior resident representative Stephen Schwartz.

GDP growth slowed to 4.6 percent on-year in the first quarter of 2006 because of the impact of the fuel price hikes.

Previously, the IMF had predicted growth "in the 5 percent range" for all of 2006.

This is the third upward revision of the 2006 GDP growth forecast made in light of improvements in some of the economic fundamentals, Zavadjil told a media briefing.

He pointed to the slowdown in inflation, which, while still in double digits, is heading towards the 7-9 percent targeted by the government by the end of the year.

The IMF also endorsed the government's efforts to sustain growth momentum through increased budgetary spending, and raising its deficit targets.

It also referred to the recent decision by Bank Indonesia to ease interest rates. The IMF fully supported the central bank's cautious approach in setting interest rates, bearing in mind that its priority should continue to be reducing the inflation rate.

On the volatile rupiah and stock prices, Zavadjil said this was more a reflection of external forces rather than changes in the fundamentals of the Indonesian economy, but this was all the more reason why the central bank must move with caution.

Indonesia's $43 billion international reserves could help to cushion exchange-rate volatility, he said.

"The anticipated recovery is dependent on a continuation of a favorable external environment," according to the statement by Schwartz. "Nevertheless, there are important risks to the outlook stemming from further increases in international oil prices, a tightening of global financial conditions, and slower than projected government spending." The IMF supported the government's economic reform programs which it said would allow Indonesia to realize its potential growth rate of between 6 and 7 percent in the coming years.