The Asian Development Bank cut its economic growth forecast for Indonesia this year to reflect slowing export growth.
But the those numbers are expected to bounce back next year, the lender said in Jakarta on Wednesday.
Manila-based ADB, whose mission is to promote growth and alleviate poverty in the region, sliced Indonesia’s economic growth outlook by one-tenth of a percentage point to 6.4 percent. It made the original forecast, 6.5 percent, in November 2011.
The ADB’s growth forecast was slightly lower than the 6.5 percent set by the government in the proposed state budget submitted to the House last month.
Southeast Asia’s largest economy is expected to bounce back to 6.7 percent economic growth next year on the back of an expected recovery in trade and improvements in the investment climate, the ADB said in a statement released in Jakarta.
In its annual report, Asian Development Outlook 2012, the lender also urged Indonesia to increase spending on infrastructure and improve the execution of state capital spending.
“Although there is a weak global environment, Southeast Asia’s growth momentum continues,” Jon Lindborg, the ADB’s country director for Indonesia, said on Wednesday. “Indonesia is generally adjusting toward a more sustained long-term growth.”
The $813 billion economy expanded by 6.5 percent last year, the fastest pace since 1996, driven by growing private consumption, strong investment and exports. Household consumption accounted for 56 percent of economic activity last year.
Indonesia, the ADB said, should invest more in infrastructure by improving state capital spending. In the revised 2012 budget, capital spending for infrastructure was set at $1.9 billion this year, almost a 50 percent increase from what was spent in 2011. “In order to boost economic growth it has to be supported by improved capacity in executing these capital projects. This can be done by simplifying procedures and strengthening capacity in the spending agencies,” said Edimon Ginting, the ADB’s senior country economist for Indonesia.
Lindborg said infrastructure spending in Indonesia was small compared with its peers in the region. Indonesia, he said, only spent around 2.5 percent of its gross domestic product for infrastructure, behind its middle-income peers, which spent on average 5 percent of their GDP.
“Vietnam infrastructure spending is up to 10 percent, and China has been spending around that consistently,” Lindborg said.
He said too much government money was tied up in paying for a fuel subsidy, which, “if you think about it, essentially you are paying for people burning up money in traffic jam.”
“In order to make up for that, the government has to attract private investment as much as possible by providing a good investment climate,” he said.
The House of Representatives on March 31 rejected the government’s proposed plan to cut the fuel subsidy.
Arianto Patunru, an economist at the Economic and Social Research Institute at the University of Indonesia, said investing in infrastructure would reduce income inequality.
The fuel subsidy, Arianto said, is wrong “on so many different levels.”
He said it wasn’t productive, it failed to achieve its stated aims and it was ultimately damaging to the environment.