Indonesia's major donors see slow progress in poverty reduction
Dadan Wijaksana, The Jakarta Post, Jakarta
Indonesia's major donors from the Consultative Group on Indonesia (CGI) have emphasized that the country's progress in certain structural reform programs has been slow, resulting in reduced economic activity and investment, thus creating a slower rate of poverty reduction.
The assessment was made on Wednesday during a mid-year review by the CGI on the progress of the country's reform program.
Failure to address this problem could risk the government being unable to fully utilize loans pledged by the CGI late last year.
The grouping pledged some US$3.14 billion in loan in November to help finance the 2002 state budget. However, some $1.3 billion was tied to progress on policy performance concerning poverty reduction and good governance.
"The theme of the June 12 CGI mid-year review is progress on reducing poverty," the donor consortium said in a report.
While indicators for economic stability are improving, as evident in a significant strengthening of the rupiah and stock market, falling interest rates, relatively stable political and social conditions, growth is still sluggish.
"Poverty reduction in Indonesia is dependent on fiscal sustainability and economic growth, as higher growth would contribute to a diminishing debt burden, employment growth and declining rates of poverty," CGI said in a media statement.
About half of Indonesia's more-than-210 million population is believed to be living in poverty, earning only around $2 a day.
The donor grouping said it would not turn a blind eye to Indonesia's reform efforts, saying that since November the country had moved on several reforms.
Those included a review of the tax system, a reduction in fuel subsidies and the acceleration of asset sales.
The CGI groups together the country's 32 major creditors, including 21 countries and 11 multilateral lenders, such as the World Bank and the Asian Development Bank (ADB).
CGI has warned, following the pledges, that weak reform efforts would carry "their own severe cost".
Such assessment should serve as a preliminary warning for the government that it could face "obstacles" in its bid to secure another loan commitment.
According to one estimate, only 40 percent of some $23.2 billion in loan pledged by CGI between 1998 and 2001 was disbursed due to the government's slow progress in reform performance.
Aside from exports, CGI said, an improvement in investment should be the government's priority in order to reach higher growth.
However, improvement in investment, especially foreign direct investment (FDI) has, so far, been hard to come by, constrained by weaknesses in the legal system, the banking sector and labor unrest.
According to the Investment Coordinating Board (BKPM), FDI approvals dropped by 88 percent, to $291.5 million, in the first quarter of this year, compared with $2.44 billion in the same period in 2001.
World Bank country director in Indonesia Mark Baird acknowledged that some high-profile commercial disputes involving foreign firms would hurt investment sentiment in the country.
"It was noted of course that these cases, which gained wide exposure in the international press, did not help Indonesia's image before foreign investors....," Baird told reporters.
Therefore, legal and banking reform, corporate restructuring, reliable public administration and sound industry and investment policies overall are needed to remove barriers to economic growth and promote development spending for the poor.
"Cutting back on development spending in the state budget may achieve a short-term objective of lowering the deficit, but it reduces the country's growth potential," the statement said.
The state budget has been reducing its allocation for development spending, mostly due to the huge burden resulting from debt repayments.