Legal certainty very important for further investment, ADB says
Urip Hudiono, The Jakarta Post, Jakarta
Indonesia needs to improve legal certainties if it wants to invite more investment and drive upward its modest economic growth, the Asian Development Bank (ADB) said.
In its annual report on the region's economic development, the ADB projected that Indonesia's economy would grow by only 4.5 percent in 2004 and 2005, lagging behind the region's forecast average of 6.8 percent.
Although this estimated gross domestic product (GDP) growth would be better than last year's 4.1 percent, the report said, it would still not be enough to help reduce the country's unemployment rate, which currently stood at some 10 percent of the population.
Moreover, as the ADB also predicted export growth of only 3.5 percent during the next two years, as compared with 7.1 percent in 2003, Indonesia would therefore need to increase foreign direct investment (FDI) to boost its economic growth, besides relying on the current increase in consumption and improving macroeconomic performance.
"There has, however, been no actual increase in FDI due to poor governance in ensuring legal certainty in the country," ADB senior economist Ramesh Subramaniam said on Wednesday, during a media briefing on the report.
Citing data from the Investment Coordinating Board (BKPM), the report noted that only 38 percent of the US$13.2 billion of FDI approved in 2003 was realized. In the first two months of 2004, FDI approvals fell by 66 percent to $805.4 million, from $2.4 billion in the corresponding period last year.
The report explained that the lack of legal certainty arose from the current tendency of the government to propose simple legislation in order to expedite its approval, leaving critical issues to be addressed by subordinate regulations. These regulations, however, mostly lacked clarity and predictability in their implementation.
Apart from a lack of clarity in its law and regulations, the ADB said that Indonesia also lacked adequate law enforcement, including that for investment project contracts, which further worsened the country's investment climate.
"The government should ensure that the contracts are respected and enforced," Ramesh suggested. "It should also prepare a clear arbitration scheme should any disputes arise concerning the contracts."
The report further explained that Indonesia was in much need of FDI to improve its infrastructure, particularly in the transportation, energy and telecommunications sectors.
According to data from the National Development Planning Board (Bappenas) quoted by the report, Indonesia needs some $72 billion for the next five years to improve its infrastructure and achieve an average annual economic growth of 6 percent.
While the government is estimated to be able to generate some $40 billion of the needed funds, there would still be an urgent need to attract investment for the remaining $30 billion or more.
"An improvement in infrastructure would invite more investment," Ramesh said. "Infrastructure projects would also create many jobs and contribute to economic growth."