Economy better, investment needs fixing

Urip Hudiono, The Jakarta Post, Jakarta

The World Bank acknowledged that Indonesia's economy has continued to improve, but urged the new government to act quickly in fixing the still weak investment climate to push economic growth.

In an update on Tuesday of its East Asia and the Pacific economic outlook, the World Bank revised its forecast for Indonesia's gross domestic product (GDP) growth in 2004 to 4.9 percent from the previous 4.5 percent, and to 5.4 percent from 5 percent for 2005.

The Bank said the economy grew by 4.7 percent during this year's first semester, while the unemployment rate in May was down to 7.4 percent from 8.5 percent in August 2003.

The government had set an economic growth target of 4.8 percent for this year. Newly elected President Susilo Bambang Yudhoyono, however, is expecting to be able to reach a GDP growth of between 5 percent and 7 percent, and an unemployment rate of 6 percent for the country's 212 million people, in the next year.

Investment in the country rose by 8.3 percent during the first semester, much higher than the 0.4 percent during last year's second semester.

The World Bank, however, warned that Indonesia's investment climate remains uncompetitive in comparison with international conditions.

Exports, though increasing in value, are also actually declining in volume and losing the market share as its growth lags behind that of global export growth.

"The next few months are crucial to Indonesia's medium-term economic picture," the Bank said. "A new economic policy package and early implementation steps by the new government would draw further attention from investors and markets."

Concerning the investment climate, the World Bank pointed to its recent Doing Business Survey 2005 report, which shows that it takes 151 days for investors to start a business in Indonesia -- five times longer than in Malaysia or Thailand.

"Despite signs of investment recovery, Indonesia's investment climate remains weak as compared to regional competitors," the Bank said.

The government should therefore pass a new investment law to provide legal certainty for investors, the bank said, and act carefully with the Social Security Law so as not to raise uncertainty over labor and fiscal costs.

While praising the recent Bankruptcy Law and President Susilo's commitment to the business community by tackling corruption and government red tape within 100 days, the Bank also advised the government to reduce the fuel subsidy and improve the country's security conditions particularly in the wake of the terrorist bombing attack in front of the Australian Embassy here.

"The bombing had little impact on (financial) markets, but it has renewed concerns about the security situation and negatively affects the investment climate," the Bank said.

Meanwhile, speaking on how Indonesia could improve its exports, World Bank lead economist for Asia and the Pacific, Milan Brahmbhatt, said that Indonesia could focus on many of the region's potential markets.

"China, for example, has become the region's hub for the assembling industry, and Indonesia's machinery and spare parts industry should take the opportunity to become its supplier," he said.