Aloysius Unditu

OECD Argues Against More Spending as Indonesia's Economy Recovers

The Indonesian government should not be considering increasing spending, the Organization for Economic Cooperation and Development said a day after Morgan Stanley urged a boost in outlays to spur growth.

“Given that the recovery appears to have begun in earnest, additional fiscal easing would not be advisable,” the Paris-based OECD said in a report on Thursday, saying likely inflation and unspent money from government projects were the main threats. “Growth picked up significantly in the second and third quarters.”

The OECD’s call for fiscal restraint contrasts with the views of Morgan Stanley economist Deyi Tan, who said on Wednesday that the government “has room” to raise spending by about 3 percent of gross domestic product. The government expects the budget deficit to narrow to 1.6 percent of GDP in 2010 from around 2.5 percent this year.

Both the OECD and Morgan Stanley acknowledged that some of the pro-growth policies adopted by President Susilo Bambang Yudhoyono’s government are being hampered by infrastructure constraints.

“Implementation bottlenecks continue to delay execution of investment projects,” it said. “The 2009 budget deficit target of 2.5 percent of GDP may therefore be undershot.”

Yudhoyono’s efforts to jump-start development spending during his first term were slowed by a number of “structural impediments,” Morgan Stanley said.

Tan noted that none of the 91 projects worth an estimated $22.5 billion which the government put out to tender during the 2005 Infrastructure Summit have materialized.

“Land-acquisition issues, the lack of consistency in regulation at the central and regional government levels, the lack of separation in functions such as policy making, regulating, contracting and operating,” are some of the impediments, she said.

Despite these hurdles, “Activity is picking up in earnest,” the OECD said about the economy.

Economic growth, targeted at 5 percent next year by the national budget, “is set to gather some further impetus, buoyed by rising investment and easing credit conditions.”

Therefore, “Monetary policy may need to begin to be tightened in the first half of 2010 to ensure attainment of the end-year inflation target,” the OECD report said.



Bloomberg