Indonesia reforms face 2004 deadline


President Megawati's term runs through to 2004

Staff and wires

JAKARTA, Indonesia (CNN) -- Indonesia needs to make progress on its economic and financial reforms before national elections in 2004, according to World Bank official Mark Baird.

Baird, the outgoing country director for the bank in Indonesia, told CNN Tuesday that the reforms undoubtedly would take time.

But the government of President Megawati Sukarnoputri needed to "lock in progress now" to be able to resist populist pressure for pump-priming measures ahead of the 2004 election, and to maintain the support of the International Monetary Fund (IMF).

Baird's comments came as Indonesia looks to be headed for economic growth of 3.5 percent this year. The economy grew about 3.1 percent last year.

Baird said the big challenge for Indonesia was the reform of its judicial system and civil service.

"We need to keep pushing on this," he said.

IMF support

Long-range regional forecaster BIS Shrapnel said last month that the IMF's loan program was underpinning the greater confidence now being seen in Indonesia. But it noted that this support was conditional on the government's reform program moving ahead.

Sydney-based BIS Shrapnel said it expected economic growth to strengthen to 3.9 percent in 2003, "still short of levels needed to contain poverty and ease social tensions".

On Monday, Indonesia posted a higher inflation rate in August, the first increase in six months. The figure prompted speculation further interest rate cuts would be limited, Reuters news agency reported.

But economists were not surprised, repeating earlier doubts about the government's ability to reach this year's budget target of nine percent inflation.

Indonesia said on Monday year-on-year inflation rose to 10.60 percent in August from 10.05 percent a month earlier but still sharply down from a high of 15.13 percent in February.

Last year inflation was at 12.55 percent.

Basic commodities up

"The higher inflation in August is largely due to an increase in the prices of some basic commodities and school fees," Sudarti Surbakti, head of the statistics bureau, told a news conference.

Economists said it would be hard to lower inflation next year, particularly as the cash-strapped government plans to raise prices of basic necessities, although if the rupiah currency continued to strengthen this would help things.

"The sharp downtrend is unlikely to be sustainable particularly from year-end onward because of the seasonal factors but the government would still be able to reach around 10 percent figure by year-end," economist Anton Gunawan of Citibank told Reuters.

Recent falls in Indonesia's inflation, among the highest in Asia and a politically sensitive subject in the world's fourth most populous country, have largely been due to an improved exchange rate, which has helped reduce prices of imported goods.

But several experts have said any further strengthening in the rupiah -- up 17 percent so far this year against the U.S. dollar -- would likely be limited unless the government makes substantial economic reforms to help ease its punitive debt burden.

Latest trade data from Indonesia's statistics bureau on Monday showed exports hitting $5.01 billion in July against $5.07 billion in June while imports stood at $2.60 billion from $2.41 billion in June.

Reuters contributed to this report.