Indonesia's economic progress fragile, IMF rep says

The Jakarta Post, Jakarta

While Indonesia's economy has been making significant improvement in a number of key areas, progress remains relatively fragile, the chief representative of the International Monetary Fund (IMF) office in Jakarta says.

David Nellor told journalists on Tuesday Jakarta still needed to work on sustaining progress it has made in the past 12 months.

He cited in particular the need for Indonesia to continue working in gaining investors' confidence.

"We see some momentum, but will this be sustained?" Nellor asked rhetorically, adding that a lot would depend not only on the global economic condition, but also on domestic reforms.

Pointing to the stronger rupiah, which has now moved to the region of Rp 8,500 to Rp 9,000 to the dollar, Nellor said Indonesia should not squander the opportunity presented.

"This is a point of opportunity, and we have yet to transform it into growth," he said.

He recalled that Indonesia had been at this point before, at the start of the Abdurrahman Wahid's presidency in October 1999 when the rupiah was in the range of Rp 7,000 to Rp 8,000.

"That was a lost opportunity," he said.

An IMF delegation is due in Jakarta later this month to make the next quarterly review of the economy, a prelude to the release of the next tranche of the IMF loan to Indonesia.

An IMF endorsement would send positive signals to the market, but lack of progress in several reform areas, particularly in the legal sector, could undermine investors' confidence.

The latest case to shake their confidence was the bankruptcy ruling against the local unit of the Canadian insurance giant Manulife even when the company was financially sound.

The Supreme Court last week overturned the ruling by the Jakarta Commercial Court, but the Manulife episode, along with several other controversial court rulings, has damaged Indonesia's reputation.

Nellor said gaining investors' confidence was crucial for Indonesia to maintain the progress it had made so far.

"They need legal certainty," Nellor said.

Thomas Dawson, the IMF director of external relations who was in Jakarta yesterday, said Indonesia needed to improve the investment climate not only for foreign investors, but also more importantly, for the local investors.

Nellor listed Indonesia's macroeconomic stability, resulting from prudent fiscal and monetary policies, as a sign of progress.

Interest rates have fallen, the rupiah's exchange rate have strengthened, investment funds have started coming back, and inflation has been kept low, he said.

Nellor said the rupiah had been gaining ground before the U.S. dollar began to weaken globally in March. "There was an Indonesian dimension to this," he said.

Other economic indicators however point at the other direction, underpinning investors' lack of confidence.

Foreign direct investment as well as domestic investment both fell in the first six months of the year with officials laying much of the blame on controversial court rulings that discouraged investors.

Export revenues also dropped during the period, and Minister of Industry and Trade Rini Soewandi has attributed this to falling orders for manufacturing products because of labor conflicts besetting the industrial sector.

Nellor said the government has made a number of improvements in several key reform areas, particularly in the administrative sector.

He listed the establishment of the oversight committee of the Indonesian Bank Restructuring Agency (IBRA), the completion of the audit of state enterprises, and tax reforms among progress that have rarely been highlighted.

On administrative reforms, the government had completed between 90 and 95 percent of the programs listed in the letter of intent (LOI) it signed with the IMF in September, he noted.

On high profile reforms, the results have been mixed, he said.

While the sales of the Bank Central Asia, Indonesia's largest private commercial bank, by IBRA has sent positive signals to investors, delays in the government's planned privatization has the potential of harming confidence, he said, citing the example of the government's failure to privatize cement producer Semen Gresik.

The next IMF review would particularly look at the government's bank divestment program, privatization, a number of macroeconomic policies and IBRA's loan sales, Nellor said.

Progress on some of these areas could help build investors' confidence, he added.