Indonesia on the road of economic reforms

Indonesia has entered a new era of democratisation and political stability with the completion of the general election of its multi-level Parliaments in April 5th.
It was the world's largest one-day democratic exercise by any standard. There were 147 million registered voters with over 80 percent turnout, electing 550 members of National Parliament (DPR), 132 regional representatives (DPD), and more than 14,000 members of 33 provincial and about 440 districts Parliaments (DPRD) from 448,705 candidates.
Not only has Indonesia advanced on the political front, but just as important, it has advanced on the road of economic reform with three major watersheds being reached.
First, Indonesia has successfully graduated from the IMF programme and has been following its own reform blueprint as laid out in the Government's White Paper on Economic Policy Programme.
In addition, two of the three main institutional legacies of the crisis have now been closed down with their missions broadly accomplished. Namely, the Jakarta Initiative Task Force (JITF), which oversaw the working out of debt agreements between private creditors and debtors, and the Indonesia Bank Restructuring Agency (IBRA) which oversaw the recovery of bank assets and the sale of banks that had been taken over by the government.
The remaining legacy of the crisis-the Blanket Guarantee-will be replaced in near future with an Indonesian Deposit Insurance System (LPS).
MACROECONOMIC STABILITY: Indonesian economic performance and resilience continued to improve steadily in 2003 and into 2004. Despite a number of shocks, including the lingering impact of the terrorist's bombing in Bali and other places in the world, the impact of Sars, the war in Iraq and more uncertain global political and security conditions, the country's macroeconomic fundamentals improved.
The strengthening and competitive exchange rate, subdued inflation, falling interest rates, and growing foreign exchange reserves all contributed to an environment conducive to faster growth.
With these developments, GDP growth exceeded the governments and most analysts' expectations at 4.1% in 2003 on strong private consumption demand. Inflation fell dramatically from over 10% in 2002 to 5.1% by year end 2003 and was still at this level in March 2004.
Falling inflation and improving confidence led to an equivalent decline in key interest rates. A sustained current account surplus and improved capital flows increased external reserves to a record high, and reduced external vulnerability.
The Rupiah-dollar exchange rate appreciated and stabilised in the middle and upper 8,000 range and the stock market reached historical new highs in terms of indices level and market of capitalisation value.
By April 2004, the main stock market index was up over 80% since end-2002, or over 100% in US Dollar terms.
These positive outcomes improved international sentiment toward Indonesia, evident in the highly over-subscribed and successful $1 billion sovereign bond issue in March 2004.
These improvements in the macroeconomy have been underpinned by steady and consistent economic policy. The Central Bank focused monetary policy on bringing down inflation in the context of controlled growth in monetary aggregates and a stabilised exchange rate, which will be detailed later by the Governor of Bank Indonesia.
Fiscal policy continued to feature reduced deficits aimed at lowering the central government debt burden. There has now been remarkable progress on government debt reduction, down from over 100% of GDP in 2000 to less than 70% by the end of 2003 and expected to be below 60% by the end of 2004.
Indonesia's economic performance should strengthen further in 2004. The GDP is now expected to grow 4.8% or higher sustained by robust private consumption. Inflation should be subdued in the 5-6% range.
The trade surplus is expected to narrow slightly with some recovery in imports of capital goods and raw materials, but the current account will remain in substantial surplus.
This current account surplus and the improvement in the capital account will enable Indonesia to compensate the loss of exceptional financing from the IMF and Paris Club creditors, while maintaining a comfortable external reserve position. Indonesia's economic developments in 2004 will also be influenced by the electoral cycle.
In the medium term, sustaining growth depends critically on a revival of investment and exports. Thus Indonesia's medium-term objectives remain returning GDP growth to 6% or more, restarting infrastructure investment and continuing the reform process.
One manifestation of the success Indonesia has enjoyed in macroeconomic management is the upgrading of Indonesia's credit rating-a trend we expect to continue. Indeed, Standard & Poor's announced on May 12, 2004 a revision in Indonesia's long-term sovereign credit rating to positive from stable.
S&P affirmed the B/B rating on foreign currency bonds and of B+/B on domestic currency bonds, the best rating Indonesia has acquired since the monetary crisis in 1997/98.
PERFORMANCE OF THE ECONOMIC POLICY: Indonesia has come a long way since Indonesia announced the plans to 'graduate' from the program with the IMF last year. To prepare for this 'graduation', Indonesia laid down the commitment to reform through a series of time bound measures that will maintain the reform momentum.
The 'stamp' of confidence in Indonesia's efforts was demonstrated in Indonesia's continued macroeconomic stability and growth. The international financial community welcomed issuance of Indonesia's first sovereign bond since the crisis by oversubscribing to this issue and priced it attractively given prevailing country considerations relative to other similar issues.
Indeed, Indonesia had to increase the size of this issue to meet unexpected huge demand for its bonds, a clear sign of the return of international confidence.
The latest IMF Executive Board endorsement of Indonesia effort in the implementation of the White Paper strengthens Indonesia resolve to carry on with this reform program.
Indonesia is operating in a very dynamic domestic and international environment. Whilst Indonesia has completed about 75 percent of the 133 measures detailed in the program from September 2003 to April 2004, Indonesia do have several crucial areas that will need immediate attention to cope with the fast changing environment. Besides the challenge to sustain its macroeconomic stabilit6y and growth path, Indonesia is working towards improving the investment climate and bolstering export performance.
The National Team for Investment and Exports, chaired directly by the President and comprising senior ministers meet regularly to deal with specific investment and export related issues.
CGI FORUM: Indonesia has a regular meeting with the World Bank, and Consultative Group on Indonesia (CGI) whether in Jakarta or other cities. Indonesia had a very successful CGI meeting last December 2003.
The World Bank led the donor community in pledging substantial financial support for Indonesia's reform program.
The mid term meeting with CHI gives Indonesia the opportunity to report the progress and seek further guidance from the donor community on the program.
In brief, Indonesia will focus in the next few months on three key areas: improving Indonesia's fiscal and treasury management, financial safety net program and investment and industrial competitiveness measures. Indonesia will be working closely with the World Bank.
This is what it would term as the "White Paper Plus" - a follow up of Indonesia's successful program but this time, Indonesia will concentrate on the efforts to implementation measures.
FUTURE REFORMS: The path to higher sustainable growth will require more effort to address problem areas and to implement sound policies in support of the reform program.
Expansion of capacities for electric power generation and distribution and improved efficiency of ports, roads, railways and airports are crucial issues in this regard.
In acceleration of export growth, Batam Island will play an important role. Hence, legislation that provides the free trade zone status of Batam enhances the competitive advantages in attracting investors. It is essential not only for investment climate in Batam, but also act as a benchmark for many more free trade zones in Indonesia.
LEGAL AND JUDICIARY REFORMS: It is important to understand that Indonesia does not face a simple problem in the legal and judicial sector, or that this problem arose only yesterday.
The current government has inherited a legal system and legal institutions that were seriously neglected under the previous regime. This neglect extended over many decades. It has degraded the legal infrastructure of the country, on the broadest possible range. It includes the institutional structure as a whole, physical infrastructure, personnel management, financial management, professional capacities, and performance assessment.
Just to give a simple example, routinely operational budgets for each court only covers 8 months of the year, after that courts must switch off their electricity and telephones. It is an unacceptable situation, and its need to address it. But it is part of broader issues on budgeting that Indonesia is working hard to improve.
FINANCIAL SECTOR REFORM: Financial Sector Reform and the strengthening of the Financial Safety Net System are crucial to improving the performance of the banking system. Further consolidation and merger of banks will take place and foreign banks will play a key role in the process. Introduction of competitive banking services and increased lending to bankable firms under a credit culture are essential to improvement of investment in this regard.
The framework for gradual lifting of the blanket guarantee and implementation of the LPS and other aspects of the safety net system is being put in place and should help spur the banks to increase lending.
Other options for the financing of long-term investments are already gaining in importance as the domestic and foreign bond issues advance.
Invitation of increased foreign direct investment and the facilitation of foreign investor's economic activities is another component of the Government which is actively engaged in.
The Indonesian government has addressed economic and political reform and managed the process rather well. Indonesia has restored macroeconomic stability and has in place a sound reform program that will allow higher growth to be sustained once it is achieved.
The progress and prospect in the banking, consumer's goods, energy, minerals, infrastructure and other sectors have a better prospect.
The past three years have seen steady progress on debt reduction and this together with improved stability have led to upgrading of Indonesia's international credit ratings. Without steady and consistent macroeconomic policies there could be no real hope for the recovery of investments and exports that are needed for poverty alleviation and employment growth.
The purchasing power of lower income groups is bolstered by the taming of inflation and the stability in the foreign exchanges. Despite a rising figure of unemployment to over 10 per cent, Indonesia has been successful to bring down poverty to the pre-crisis level.
Indonesia will need to enhance institutional capacities to address the issues of poverty, as well as environment, trade, labour and related issues of governance. Indonesia's immediate task is to take practical steps to address lingering problems inhibiting capital investment.
The following is the message of Anwar Santoso, Ambassador of the Republic of Indonesia on the occasion of the 59th anniversary of independence day of his country:
This is a special occasion for the whole of the Indonesian nation both at home and abroad as we celebrate with solemnity the most memorable day in our history. I would also like to extend my heartiest felicitations upon the 57th anniversary of the independence of the Islamic Republic of Pakistan celebrated recently on August 14, 2004.
Fifty-nine years ago, on 17 August 1945, the Indonesian independence was proclaimed by Soekarno-Hatta on behalf of the Indonesian nation, breaking the shackles of colonialism and freeing the Indonesian people. Soekarno became the first President and Chief Executive, and Dr Mohammed Hatta, the first Vice-President of the Republic of Indonesia.
That was the dawn of a new era towards the attainment of the universal ideals of peace, justice, independence and economic prosperity.
On this auspicious occasion, let me pay my sincere tribute to the exemplary co-operative relations and excellent friendship between the government and the people of our two countries.
Both the countries are gifted with great natural resources, skilled manpower and developing infrastructure.
However, I believe that the existing trade and economic relations between the two countries are not representing their true potential and tremendous resources.
Keeping in view the importance of economic prosperity for our people, there is need to accelerate the efforts to explore the new opportunities by sharing the experiences, information and expertise in all sectors.
In this connection, the successful visit of Madam Megawati Soekarnoputri, President of Indonesia on 14-16 December 2003, has opened new ways of collaboration between the two countries.
The visit not only strengthened the traditional ties but also led to greater co-operation in areas that have long been neglected in the past. During the visit, the two countries agreed to initiate consultations on preferential trade agreement as a first step to arriving at a free trade agreement.
Another important development was that the two countries signed an MoU to combat international terrorism. President Megawati also promised that Indonesia would support Pakistan for ARF Membership.
The July 2, 2004 was a day of great significance since Pakistan was formally accepted as the 24th member of Asean Regional Forum (ARF) at the foreign ministers meeting held in Jakarta.
Indonesia strongly supported Pakistan's inclusion in ARF since it believes that it would add to the effectiveness of the war against terrorism in the Asia-Pacific region.
On this occasion, Pakistan also signed a Treaty of Amity and Co-operation (TAC). The Pakistan's inclusion in ARF would certainly promote good neighbourliness, regional peace and stability in South Asia.
It will also be very beneficial for the ongoing process of dialogue between Pakistan and India and promote better understanding since both the countries are the members of ARF. I hope that it will bring stability and economic prosperity in the region.
Indonesia has over 220 million people and is the fourth most populous nation in the world next to China, and United States and is the world's largest Muslim population. It is the largest Muslim population in the world and believes in the principles of religious freedom, tolerance and universal ideals of peace and justice.
Indonesia is also the world's largest Archipelago State and has the largest maritime territorial jurisdiction in the region.
Indonesia is now on the way towards achieving the political stability and the recent peaceful general elections show that democratic values and culture is prospering and strengthening.
The first phase of Presidential elections held on 5 July 2004 was completed in a peaceful manner and Indonesian people participated in it with great enthusiasm. The second phase of the Presidential elections will be held on 20 September, 2004 and we are quite optimistic that our people will show the same mature response and peaceful attitude.
We hope that democracy will soon be established on solid foundations and political stability will accelerate the economic development for the benefit of the people.
In terms of its international outlook Indonesia adheres to an independent and active foreign policy, is a founding member of the Association of South East Asian Nations (ASEAN) and has promoted policies of international co-operation, good neighborliness, regionalism and conflict settlements.
Despite the economic crisis, Indonesia remains a country with enormous economic potential. We have a big market with a thriving middle class and open society, a large labour force, immense natural resources and sound infrastructure.
The various economic indicators show that Indonesia's economic growth and macroeconomic stability are now on solid footing. In 2003, Indonesia's exports continued to increase over its 2003's target of $60 billion.
The inflation rate has been reduced from 20.7 in 1999 to 6.6 in 2003. Indonesia is one of the most attractive destinations for foreign investment due to its liberal investment policies and regulatory frameworks. I hope that the corporate sector of Pakistan will utilise the opportunities of investment in Indonesia. It is believed by many international analysts that with emerging political stability, the growth of Indonesian economy could be higher than what is estimated in other Asian countries.
Moreover, this indicates that the international market has still confidence in Indonesian economy and its on going process of recovery.
Indonesia has long been a difficult country to govern and transforming our huge country into a stable strong democracy is indeed a momentous challenge. But there is no turning back. Democracy, judicial reforms, good governance, economic development and human rights are here to stay.
Since the establishment of the diplomatic relations, the Indonesia-Pakistan friendship has remained exemplary. Our task is to maintain and develop the potential of this partnership for the good of the two nations, for the sake of international security and economic growth.
I am confident that our good and harmonious relations will continue to strengthen and gain new heights in future. I also hope that people-to-people links will continue to expand Indonesia-Pakistan relations far faster than the expectations.
To conclude my message, I pray to Allah to shower His blessings on us in our efforts for the establishment of a progressive and prosperous society for the people of our two brother countries, Indonesia and Pakistan.