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IMF warns Indonesia of 'downside risks'

Publication Date : 11-07-2012


Despite its stellar economic performance, Indonesia, Southeast Asia's largest economy, should be aware of certain "downside risks" resulting from the evolving global economic situation and should take necessary measures to minimise the impacts, according to the International Monetary Fund (IMF).

Due to the interconnected nature of the international arena, no country was immune to the impact of the global crisis and therefore, Indonesia should maintain a prudent monetary policy and a flexible exchange rate to help counter external risks, IMF managing director Christine Lagarde said yesterday during her visit to Indonesia.

In addition to these measures, the country should attract more investment, particularly in infrastructure projects, to accelerate the pace of its economic growth, she added.

In this extremely interconnected world, Lagarde said, no country was immune to crisis in one part of the world.

The downside risks remained, as recovery in most advanced economies had been complex, and the overall economic situation was "worrisome", she said, citing the United States and the European Union as sources of the contagion.

In the US, the downside risks could result from the so-called "fiscal cliff", Lagarde said on the second day of the Association of Southeast Asian Nations (Asean)-Latin Business Forum in Jakarta yesterday.

The "fiscal cliff" is a combination of high spending cuts and tax hikes at the end of year, prepared by the US government.

Across the pond from the US, uncertainty persisted despite the efforts of EU leaders to tackle the debt problem, she added.

Lagarde cautioned that amid uncertainty in the global economy, there was a trend of rising protectionism as noted by a recent World Trade Organisation report.

In the report, released in April, the global trade governing body highlighted rising protectionism in G20 economies since mid-October last year, as 124 new restrictive measures were put in place, impacting around 1 per cent of world imports.

Argentina, for example, tweaked import rules on bottle caps and water balloons, while India banned cotton exports. Following the report, the US also recently criticised Argentina and Indonesia for putting up new import restrictions.

"This is the sort of temptation that I strongly encourage you to resist as much as you can," Lagarde said.

In coincidence with Lagarde's visit, Coordinating Economic Minister Hatta Rajasa said that Indonesia would contribute US$1 billion to the IMF.

Central bank Governor Darmin Nasution said that the contribution would be in the form of purchasing IMF bonds. The manner of purchasing would follow the international consensus, where the bond value would be considered as the buyer’s foreign exchange reserves.

To tackle the downside risks of the current crisis and increase its preparedness to respond to the needs of its members, the IMF is expanding its new resources to tackle the fallout from Europe's debt crisis.

So far, it has obtained commitments of up to $456 billion, with the latest coming from a number of emerging economies including Brazil, Russia, China, India and South Africa and G20 countries during its recent summit in Los Cabos, Mexico.

Mexican President Felipe Calderon said during the summit that it was the first time the fund had been capitalised without the US, which reflected the importance of the emerging markets.


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