Indonesia's economic progress fragile, IMF rep says

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.