Revitalizing real sector the main challenge: Indef

Andi Haswidi, The Jakarta Post, Jakarta

While the economy is expanding at a descent clip, the growth achieved to date has done little to help mitigate poverty as most of it has taken place in non-labor intensive sectors, an economic think tank says.

"Macroeconomic stability has yet to be followed by improvements in the real sector, especially given that the indicators show increasing unemployment and poverty," said Iman Sugema of the Institute for Development of Economics and Finance (Indef) during a seminar Monday on the economic outlook for 2007.

Central Statistics Agency figures show that the economy grew by 5.2 percent year-on-year in the second quarter of 2006, and by 5.5 percent in the third quarter. On-year growth in the first quarter stood at 4.7 percent.

Meanwhile, the BPS's latest poverty statistics show that as of the end of March, some 17.75 percent of the population -- or 39.05 million people -- were living below the poverty line, an increase of around four million from a year earlier.

Explaining the contradiction, Iman said recent growth had mainly been in non-manufacturing sectors that provided relatively few job opportunities, whereas manufacturing industry was still struggling following the last fuel price hikes and the resulting high inflation and interest rates.

"The fact that most banks are still hesitating to increase their lending to the real sector despite the decline in the central bank's benchmark interest rate is as a sign that the banking sector continues to consider investing in real sector as being too risky," said Iman.

Looking forward, Indef predicts 5.85 percent growth next year, far lower than the government's 6.3 percent forecast.

"Net investment has been in negative territory all year. It's hard for investment to suddenly pick up significantly as it takes time for any investment plan to come to fruition," he said.

"Economic growth of more than 6 percent (in 2007) is almost impossible," he said.

However, other economists speaking at the seminar did not share Iman's pessimism.

Anton Gunawan, Citigroup's chief market analyst, predicted that economic growth would reach 6 percent next year.

"Growth could be higher if the government is able to deliver on its promises of overhauling the investment, tax and labor legislation."

However, he admitted that the 6.3 percent growth scenario painted by the government looked a little on the optimistic side, though it could still be achieved if there was a significant improvements in the monitoring of spending.

Against a backdrop of softening commodity prices, including crude oil prices, and the government's stated intention of continuing to subsidize domestic fuel prices, Anton forecast that inflation would come down to 6 percent and stay at this level for the next two years.
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