From International Herald Tribune

Indonesia counting on biofuel
Bloomberg News, Reuters

Published: August 16, 2006
JAKARTA Indonesia is seeking more investment in industries producing energy from palm oil, sugar cane and jatropha to help create five million new jobs and cut government fuel subsidies, President Susilo Bambang Yudhoyono said Wednesday.

The government will set aside 1 trillion rupiah, or $110 million, to help farmers pay interest on loans they take to plant more crops that can be used to produce biofuels, Yudhoyono said. Villagers will be encouraged to grow jatropha, a plant that thrives in poor soil whose seed can be crushed to yield oil for biofuel.

Indonesia is one of the leading producers of palm oil.

Since coming to power in 2004 as Indonesia's first directly elected president, Yudhoyono has struggled to meet his pledge to cut poverty by half, keep prices in check and create more jobs. Rising interest in biofuels, prompted by high prices for oil and gasoline, gives Indonesia an opportunity to develop the industry and bolster employment.

"The government alone cannot invest in this, considering the huge cost, which is why the government is asking domestic and overseas investors to actively invest in this sector," Yudhoyono said in a speech to Parliament. "It will help cut the unemployment rate and fuel subsidies."

Yudhoyono also said the government was aware of the need to improve Indonesia's investment climate, so as to draw foreign investment amid stiff competition from other countries in the region.

He said the government estimated the country's budget deficit next year would be 33.1 trillion rupiah, or 0.9 percent of gross domestic product. That would exceed a deficit of 0.7 percent of GDP in the 2006 budget.

"We hope an improvement in economic growth during the second quarter will be an early sign of consolidation and a strengthening of economic activity in the second half," Yudhoyono said.

"That could create better fundamentals for stronger growth in the coming years," Yudhoyono said, repeating a previous forecast of 6.3 percent growth next year. He said he expected economic growth to accelerate in the second half of 2006.

The palm oil industry in Indonesia currently employs about 1.5 million people. Yudhoyono said the jobs expected to come from increased investment in the sector would be created in the medium-term. He provided no other details.

Export prices for crude palm oil have been increasing on demand for its use in biofuels, Last week, they rose 26 percent to $474 a ton, the highest since 2004, from this year's low of $375.5 a ton on Jan. 19, according to the Malaysian Palm Oil Board.

The government, which expects to spend 104.3 trillion rupiah on capping fuel and electricity prices in 2006, will be able to reduce its subsidy costs next year as power plants start using biofuels, Yudhoyono said. By 2009, all power plants on the island of Java will be using "nonfossil fuel," he said.

Fuel subsidies may decline to 94.4 trillion rupiah next year as the government increases the use of biofuels, he said.

Samsung of South Korea plans to spend $1 billion to develop biofuel projects in Indonesia, said Al Hilal Hamdi, the head of a government-appointed panel on biofuel development.

Indonesia needs investment to shore up economic growth, which the International Monetary Fund says may slow this year for the first time since 2001. The IMF expects Indonesian gross domestic product to expand 5.2 percent in 2006 after growing 5.6 percent in 2005.

Gross fixed capital formation, a measure of investment, contracted in Indonesia by 1 percent in the second quarter from same period last year , the Central Statistics Bureau reported Monday.$@
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