Indonesia makes steady economic recovery

Indonesia makes steady economic recovery

Boediono, Jeju Island, South Korea

Among countries in this region, Indonesia has been hit by the
1997 crisis hardest and longest. In the past three years or so,
however, the country has been slowly but steadily pulling itself
out of the crisis.

The year 2003 represented another step on the road to
recovery. Prudent fiscal and monetary policy had contributed a
continued deceleration in inflation and interest rates while the
exchange rate strengthened and stabilized. This pattern continued
into the first quarter of 2004.

These strengthening fundamentals generated some acceleration
in growth in 2003, which was 4.1 percent compared to 3.7 percent
in 2002 and 3.3 percent in 2001.

The sources of growth had been consumption and, more recently,
exports, while investment continued to be weak. There are a
number of reasons for the poor investment performance, but the
most serious may be the uncertainty around the outcome of the
election.

The legislative election was concluded successfully in April.
Now a very competitive presidential race is getting under way. A
first-round election is set for July 5 and the runoff on Sept. 20
if one of the candidates does not receive more than 50 percent of
the votes.

Indications so far are giving us confidence that the process
will go well and that the improvements to the electoral system
will yield a stronger accountable government and parliament.

However, our reform agenda is too pressing to wait for the
results of the election. Last year the government issued a White
Paper that provides a detailed macroeconomic and structural
reform strategy for 2003 and 2004.

Key recent reform accomplishments include the establishment of
a National Export and Investment Team chaired by the President
and tasked with addressing critical obstacles.

In April a one-roof licensing service was created to speed up
investment approvals. With the assistance of the donor community,
tax and customs reform, which was begun last year, continues to
progress, and a reorganization of the Ministry of Finance to
enhance budgeting and treasury operations is getting under way.

We will shortly submit new tax legislation to the House of
Representatives with provisions we believe will spur investment
and job creation.

On the critical governance agenda, the Anti-Corruption
Committee should be operational shortly and Anti-Money Laundering
Agency is now actively investigating cases.

The outlook is positive. An improving global economy should
increase exports and investment later this year and 2005. We now
expect growth in 2004 to reach close to 5 percent, and inflation
will be below 6 percent. This will set the stage for a pick-up in
growth and continued stability in 2005.

Next year, we project growth will be 5 to 5.5 percent,
inflation in the 5 percent range and short-term interest rates
around 7 percent.

With our recovery back on track, Indonesia is now at or close
to pre-crisis poverty levels. We will use this momentum to not
only meet but exceed the Millennium Development Goals and we look
to ADB to support our effort.

For our part we intend to implement a Poverty Strategy that
provides a comprehensive framework and focus for anti-poverty
actions.

We would like to commend ADB in its efforts to develop new
financial and developing instruments that can assist governments
and private sectors to find a longerterm local currency financing
for infrastructure and other projects.

This effort dovetails with our macroeconomic strategy to bring
down long-term interest rates to spur private investment while
building more active and efficient capital markets.

We look forward to working with ADB on this and hope this
effort will result in an attractive product for long term local
currency financing.

We are very pleased to learn that the Asian Development Fund
(ADF) negotiation has come to a successful conclusion. This will
enable ADB to enhance its efforts to combat poverty.

The writer is Indonesia's minister of finance. This article
was condensed from a speech he delivered at the annual meeting of
the Asian Development Bank in South Korea last week.