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)

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