RI economy strong, yet risks loom

RI economy strong, yet risks loom

JAKARTA (JP): Significant risks loom over Indonesia's economy,
despite its strong fundamentals, because the current account
deficit may worsen, deregulation has lost momentum and core
inflation is still high, the World Bank warns.

The World Bank said in its latest annual report on Indonesia
that the country's economy performed very well last year with 7.8
percent growth, its inflation dropping to 6.6 percent and
domestic and foreign investments remaining buoyant.

"Despite this strong performance, significant risks remain,"
warns the report, Indonesia sustaining high growth with equity,
which was issued here yesterday.

The report praises Indonesia's fiscal policy as responsible
even in the run-up to the election and its prudent foreign
borrowings as well debt management.

But, the higher oil earnings were not fully sterilized by an
increased fiscal surplus and off-budget spending looks less
contractionary, it warns.

It noted that the deregulation drive has slowed and even
reversed in some areas. There has been slippage in scheduled
tariff cuts and domestic regulations continue to hurt efficiency
and inter-island equity.

"About 800 of the announced tariff cuts were not implemented
on schedule," the report said.

The World Bank praised the lifting of the ban on imports of
used fishing ships but said the measure was immediately followed
by costly local content regulations.

It said a lack of transparency and competition had hurt
performance in sectors such as infrastructure and natural
resource development.

"Ad hoc interventions (which are on the rise) and other common
local practices are coming under increasing global scrutiny," the
report cautions.

The World Bank, the coordinator of Indonesia's creditor
consortium -- the Consultative Group on Indonesia (CGI) -- warned
that unless momentum was restored to deregulation, Indonesia
risks slower growth and deteriorating equity.

The report also addressed the issues of invisible business
costs and good governance.

"Only modest improvements have been made in the complex web of
domestic restrictions, fees and levies," the report said.

The World Bank warned there was a widely-held perception that
the invisible costs of doing business in Indonesia were very
high.

It quoted a survey by Japan's External Trade Organization in
1995 which concluded that 50 percent of Japanese firms operating
in the county cited complexity of administrative procedures as
the most difficult problem faced by their businesses.

"Without effective institutions and good governance,
businesses can have their competitive position adversely affected
by the selective imposition of regulations, taxes and laws," it
said.

The World Bank said that credibility of public policy and the
consistency with which rules were enforced and property rights
protected had an important effect on the level and pattern of
investment.

It quoted the findings of surveys of businessmen which gave
Indonesia high marks for criteria such as little risk of
expropriation with no compensation but low marks for bureaucratic
delays and contract enforceability.

"Such factors increase uncertainty and risk. They favor the
well connected over the efficient and they inflate costs. They
engender cynicism and the perception of unfairness," it said.

The report said that these perceptions had not impeded growth
or foreign investment in recent years. Nonetheless, to keep pace
with other successful countries, Indonesia will need to address
this issue sooner or later.

Ports

The World Bank called for serious attention to seaport delays
and the problems caused by new regulations and bureaucratic
obstructionism in sea transport.

It also suggested that the customs performance be subject to
independent evaluation to ensure that import flows remain as
smooth as before April when the country used a pre-shipment
inspection system to clear imports.

"If there is a deterioration (in customs service), it is
essential that action is taken quickly to restore quality
service, otherwise opportunities for growth and employment
expansion will be forfeited by increased costs of imported
inputs," it warned.

The World Bank reminded CGI that despite the increased role of
private-sector financing, official foreign assistance would
continue to be important for Indonesia.

Therefore, " a level of commitments from the CGI roughly
similar to last year (US$5.26 billion) would be very supportive,"
the World Bank suggested. (vin)

Editorial -- Page 4