Donors urge RI to push reform

Dadan Wijaksana, Jakarta

A grouping of major foreign lenders to Indonesia has renewed calls for further reform here to promote investment and boost exports -- the main factors holding back the nation's economic growth.

In its mid-term report on Indonesia released on Wednesday, the Consultative Group on Indonesia (CGI) said weak investment was hampering exports, "as in the past, foreign companies were a key driver of export growth."

According to Dow Jones, joint ventures between foreign and local companies currently made up around one-third of the country's manufacturing exports.

Indonesia's economy expanded by 4.5 percent in the first quarter of the year but the growth would have been higher had the country managed to exploit its export potential, the report said.

The grouping -- which includes the World Bank, the Asian Development Bank and Japan -- said the country was lagging behind many of its regional peers in export growth. The report said Indonesia's exports grew by only 10 percent from 1996 to 2003, as compared to Thailand's 70 percent and South Korea's 50 percent growth.

The three countries were among the hardest hit by the regional financial crisis in the late 1990s.

It said the country was also less aggressive in taking a larger share of China's huge import market.

"While Indonesia's exports to China grew 30 percent in 2003, they are not growing as rapidly as those of regional competitors, so Indonesia is losing market share," it said.

The report was issued ahead of the CGI's annual meeting to determine its loan pledge to the country to help cover next year's state budget deficit.

For the 2004 state budget, the lenders set aside US$2.8 billion in loans and grants. The meeting usually takes place near the end of the year.

The report says the worse is yet to come should plans by China for a "soft-landing" in a bid to prevent its economy from overheating, fail to materialize.

"If the China economy is in for an unexpected hard-landing as a result of the authorities' attempt to slow the economy, (Indonesia's) exports to China would be affected," the report said.

With exports failing to live up to expectations, the country had become too dependent on domestic consumption.

"Medium-term growth will depend on the progress of reforms, and improvements in the investment climate."

Until these factors were dealt with, Indonesia's economy would continue to grow at a "fair" level of about 4.5 percent, the report said.

Indonesia needs the return of foreign investment to generate growth of at least 6 percent -- the minimum rate required to address unemployment and poverty in the country.