IMF urges Indonesia to target inflation

Indonesia needs to bring inflation under tighter control and scrap policies that restrict spending in order to consolidate its nascent economic recovery, the International Monetary Fund has advised after its annual review of south-east Asia's largest economy. But the IMF praised the Indonesian government and central bank for their response to the global financial crisis and raised its estimate for economic growth this year to 3-4 per cent from 2.5 per cent.

Thomas Rumbaugh, the IMF mission leader, told the Financial Times that sound policies and a stable political environment had helped Indonesia attract comparatively more foreign capital as the global risk appetite had picked up.However, he cautioned that the fortunate timing of April's five-yearly legislative elections also played a role in the country achieving 4.4 per cent growth, year on year, in the first quarter of 2009. He said the 1.6m candidates and 38 parties injected enormous sums into the economy at a time when the government's stimulus package and central bank's rate cutting had yet to have an impact.The government has launched a Rp 73,300 bn ($7.3bn, ?5.3bn, £4.6bn) stimulus package, while the central bank allowed the rupiah to weaken from 9,500 to the US dollar to almost 13,000 in October and then gradually cut interest rates as the economy improved.Last Friday the rupiah strengthened to above 10,000 to the US dollar for the first time since last October.

Bank Indonesia cut its benchmark rate 25 basis points last week to 7 per cent, down 250 basis points from December.Mr Rumbaugh said he thought easing was now at or near an end, particularly considering the inflation forward indicators, such as rising commodity prices.Inflation is currently 6.04 per cent, year on year. The IMF expects it to fall to 5 per cent for 2009, low by Indonesian standards but higher than the regional average.

Mr Rumbaugh said: "I think the [economic and monetary authorities] would strengthen the credibility of their macroeconomic policy if they could get inflation down and reduce its volatility." He added that they also needed to create more fiscal space to spend more money on infrastructure and social protection."The revenue ratios are still very low. The number of registered taxpayers is very low."They've made some good progress in the last couple of years in that area but they've got a long way to go."

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