Wed, 07 Jun 2006

ADB urges for boost in infrastructure spending

Urip Hudiono, The Jakarta Post, Jakarta

With both fiscal and macroeconomic stability in hand, the government should now turn its attention to achieving better economic growth, by increasing its development spending on basic infrastructure, the Asian Development Bank (ADB) said.

Speaking to members of the media Tuesday, ADB Director General for Southeast Asia Rajat M. Nag said the Indonesian government actually had the "fiscal space" now to start expanding investments in infrastructure, be they physical or social infrastructure related to the health and education sectors -- all of which would help improve growth and reduce poverty.

Nag pointed out that the government had the opportunity to do so, given the fact that all of Indonesia's economic indicators have now gone back to the favorable pre-1997 Asian financial crisis levels.

The budget deficit, for example, is currently at a minimum of 0.5 percent of gross domestic product (GDP), while the country's current account has recently been in surplus as well.

Similarly, Indonesia's public debt ratio, which was well over 100 percent of the GDP in 1999 is now just under 50 percent, with the government continuing efforts to better manage the debts.

"So you had a situation where macroeconomic management was good, fiscal management was prudent, fiscal deficit was low. But this has also meant investment in social and physical infrastructure was also low," Nag said. "I believe it is now time to increase these investments."

Data from ADB indeed shows a recent decline in the government's development spending, having been allocated $4.8 billion in 2004, but then only $3 billion last year. The government has only provided $1 billion annually for new infrastructure investments, from its 20 percent financing capacity of a total of $150 billion needed until 2009.

Explaining how the cash-strapped government could up its infrastructure development spending, Nag said it would not automatically translate into a widening budget deficit, if the government managed to mobilize more state revenue.

"And the important thing is what the deficit is for -- it should be for productive investments, and not for consumption," he said.

Currently high interest rates, meanwhile, should not be perceived as the sole factor hampering investments, if the government can provide a favorable investment climate of adequate return rates and legal certainty for investors, said Naga.

Meanwhile, on the politically sensitive issue of using foreign debts -- including from the ADB -- for additional development spending, Nag explained that ADB's policy is to support the government's own development needs in the energy, transportation and financial sectors, health and education, water supply and sanitation, and environmental protection.

ADB plans to provide between $800 and $900 million in loans to Indonesia this year, looking at a range of between $1 to $1.1 billion for the next. The Manila-based lender has extended loans since 1969 of up to $20.7 billion for 227 projects in the country.