As a result of prudent macroeconomic policies, the Indonesian government now has sufficient resources to finance the country's infrastructure development and reduce poverty, according to a World Bank report.
The reduction in fuel-subsidy spending in 2005, declining debt-service costs and increasing revenues have all resulted in a total of US$15 billion in additional financial resources -- the largest amount since the 1973 oil-boom windfall-- being available to the government to finance the development effort, the World Bank said in a review of public spending.
Indonesia should now build upon this "fiscal space" and previous efforts to expand basic services by increasing and improving the quality of its public spending, particularly in the fields of infrastructure, education and health services, so as to keep the country's economy competitive in the long run.
"The challenge now is to move to the next generation of reforms in public services and infrastructure so Indonesia can achieve the kind of growth rates seen in many neighboring countries today," World Bank country director Andrew Steer said during the launching of the report Monday.
The document suggested that Indonesia increase its infrastructure spending by at least two percent of gross domestic product (GDP) to 5.4 percent -- or $6 billion a year -- with the power and water sectors being the most crucial areas requiring investment.
For the power sector, the government should consider reallocating existing electricity subsidies so as to encourage expansion of the grid, which a third of the country's 220 million people still lack access.
The government should also provide incentives to the regions to encourage them to maintain local roads and improve water services.
Further reform of public spending at the local level could be achieved by giving local administrations more flexibility in using their general fund (DAU) transfers from the central government to support priority sectors, rather than just paying civil service salaries. This, however, would imply a greater effort to improve governance in the local administrations.
Fighting corruption of public funds -- both at the national and local levels -- remained an important issue as it would determine whether public spending and investment produced lasting benefits for the Indonesian people, the report said.
Meanwhile, on education and health-service spending, Steer acknowledged Indonesia's progress in the two sectors, but said things could still be improved.
The report suggested that the 20 percent of budget spending on education mandated by the Constitution cover teachers' salaries, local-government spending, efforts to improve the student-teacher ratio, and the proper decentralization of the country's education system.
Steer said he expected that higher spending on education and health services would support two of the government's existing programs -- the rural development project and conditional cash transfers to the poor related to education targets.
The World Bank's latest report on poverty in Indonesia notes that nearly 50 percent of the country's population still live on less than $2 a day.
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