by Piyaporn Hawiset
The Asian Development Bank warned in an April 1999 report that the 1999-2000 fiscal year targets in Indonesia of zero growth and 17 percent inflation would be hard to achieve. It also warned in its 1999 Asian Development Outlook that there was a risk of renewed unrest this year and said the country's June 1999 election could have an impact on monetary targets.
"The government should continue to maintain an expansionary stance, but achieving its stated aim to zero growth and 17 percent inflation may be difficult," the ADB said in the report. The report forecast 2.0 percent gross domestic product growth in fiscal year 2000 after zero growth in 1999, compared to a contraction of 13.7 percent in 1998. It put inflation (CPI) at 17 percent in 1999 and 9.5 pct in 2000, versus 58.2 percent in fiscal 1998.
"Because investment growth will depend critically on restoring investor confidence, the level of investment may take more than a year to show any substantial increase. Monetary targets may be exceeded in an election year. If this happens some significant price increases may be apparent in 1999."
The government needed to keep prices of essential commodities stable to avoid unrest, it said.
"Keeping the prices of essential commodities stable in the short run remains the government's main priority if social unrest is to remain under control."
Levels of poverty had risen sharply since Indonesia's financial crisis erupted in 1997, the ADB said, citing preliminary estimates of 16 to 20 percent incidence of poverty in 1998 compared with a 1996 level of 11 percent. The east of the archipelago was particularly affected, it said.
"Failure to address the social impact of the crisis in 1999 could easily spark another turbulent year," the report said, adding that it was imperative that future development efforts be aimed at social, infrastructure, and essential resources development in the eastern islands, particularly water resources and agricultural development, if a disenchantment with Jakarta and breakdown of social order in that region were to be prevented..
The ABD also highlighted what it said were a number of weaknesses in the government's budget for the fiscal year to March 31, 2000, noting that more than half of revenue was forecast to come from income tax.
"This will be difficult to achieve given that the large increase in income tax revenues realised in 1998 was due to tax on interest incomes in a year of extremely high interest rates. The 1999 budget also forecasts large privatisation proceeds, but the government's privatisation programme is well behind schedule."
It said 25 percent of government expenditure in the budget was going on servicing debts. Estimates indicated that total oustanding debt in Indonesia's corporate sector in 1998 was about $138 billion, it said. The government needed to ensure exporters have access to financing and the ADB called for the agricultural sector to function as a safety net. Layoffs were mainly occurring in the cities, it said.
"Agriculture still contributes nearly 20 percent of GDP and can play a major role in the recovery process and act as a safety net sector particularly if it is improved in the eastern islands were traditionally the government has in effect ignored significant development in favour of Java, Sulawesi and Sumatera."
The report said the government needed to address imbalances between regions.
"The worst phase of the financial crisis may have passed, but the future shape of Indonesia's political and economic landscape will depend on its success in confronting the imbalances between regions.