Stability, growth, reform: WB

Stability, growth, reform: WB

World Bank, Jakarta

Structural reforms under the Megawati administration have by
and large remained on track. Reforms accelerated markedly after
the Bali attack. Recognizing the importance of sending positive
signals after Bali, the government renewed reform efforts on a
wide front. Key steps taken in recent months include the passage
of the Law on the Anti-Corruption Commission, the sale of an IBRA
bank, and announcements of more sales. IBRA recovery targets were
met, and even privatization receipts, although the original aim
to sell stakes in 25 enterprises was not met by a long shot,
amidst growing political opposition against privatization. The
agreement on past liquidity credits reached between the
government and the central bank, the restructuring of
recapitalization bonds, and the start of treasury bonds auctions
all underpin fiscal sustainability, and will contribute to a
reduction in Indonesia's risk premium. Less encouraging were
developments in trade policy, where a succession of tariff and
non-tariff measures, from sugar, cloves to textile, signal a more
protectionist stance. Particularly worrying are plans to further
increase the tariff on rice, a measure that would hurt the poor,
even the poor farmer, while achieving little for Indonesia's food
security or term productivity.

Five years after the onset of the crisis, macroeconomic
stability has gained much ground, thanks to the government's
macroeconomic policies and supporting reforms. Now, aside from
maintaining stability. the government needs to tackle those
issues that hold back growth, employment, and poverty reduction.
In many ways, these are the harder issues, and they must be
addressed in a year before the elections. Improving the
investment climate and restoring the rule of law in Indonesia
will therefore require the same resolve and determination as the
government has shown after the Bali bombing.

Maintaining Indonesia's hard-won macroeconomic stability
requires the government to continue its prudent macroeconomic
policies, maintain fiscal sustainability, and keep the pace of
structural reforms.

Maintaining fiscal sustainability over the next few years will
be particularly challenging. The Bali fiscal stimulus, while
appropriate, will cause a slowdown n in fiscal consolidation,
requiring a redoubling of efforts in the years beyond 2003. The
government's plan for a 'second fiscal stimulus' by means of tax
relief for businesses would add to budget pressures. And the
government's desire not to seek further rescheduling under the
Paris Club, together with the still large amount of
recapitalization bonds due in 2004 and 2005 would require careful
management of government debt and financing. The government
should therefore:

* Continue to raise revenues by accelerating the reforms
initiated in tax and customs administration.

* Cut waste and corruption by improving government procurement
and financial management.

* Develop savings options by evaluating the effectiveness of
existing programs and projects.

* Devolve more expenditure responsibilities by finalizing
arrangements for offending to the regions, and expanding the DAK.

* Minimize debt financing of the budget through continued IBRA
asset sales and privatization.

* Maximize the use of concessional aid funds by improving the
disbursement on current existing commitments.

On structural reforms, the government should use the year
ahead to speed up corporate restructuring, and tackle remaining
reforms in the financial sector, by:

* Continuing IBRA's asset sales, and complete the
sale of banks already selected.

* Improving the governance of state banks, and pursuing their
announced sales.

* Further building a solid financial safety net through
improvement in supervision, an orderly phase-out of IBRA, and a
gradual transition to the new financial sector regulatory
authority.

To accelerate growth and investment, the government must
improve the country's investment climate. The formation of the
National Investment Team announced in the aftermath of Bali is
promising. It will need to be a focused, cabinet level team
sufficiently empowered to address all of the key issues affecting
the investment climate. The team will have its plate full, as
government must:

* Reduce bureaucracy and red tape. From investment approval to
tax and customs administration, regulations that are needlessly
cumbersome and give rise to discretion and corruption should be
cut.

* Ensure that labor regulations balance the interests of
employers and employees, while maintaining labor market
flexibility. The government should also consider how it could
give more guidance to the regions in their decisions on minimum
wages.

* Contain the downside of decentralization by clarifying the
functions of levels of government, and by granting the regions a
proper tax base, while limiting the type of taxes they can levy.

* Avoid a power crisis by investing in transmission, and
restoring the financial viability of the sector.

Continue to hand over state assets to the private sector.
Beyond revenues, privatizing enterprises in competitive or well-
regulated sectors still has much scope to improve the country's
productivity.

Perhaps the most effective way to improve the investment
climate is to send a strong signal that the government means
business in reforming the justice sector. There are no easy or
quick solutions to the sector's deeply rooted problems, and all
of its key institutions need major repairs, which cannot be
expected overnight. Five years after the end of the New Order
regime, many of the elements of a reform program have been
identified, including the need for a national framework for legal
reforms. The current "National Law Summit" process is a step in
the right direction, but government must ensure that the outcome
of the process leads to a clearly articulated long-term strategy
for justice sector reform, and measurable progress towards the
goals outlined in that strategy. This requires:

* Leadership at the highest levels off government on the issue
of justice sector reforms.

* Preparation by the Attorney General's Office and the
judiciary of comprehensive governance reform action programs for
their respective institutions.

* A needs assessment for existing And new institutions in the
justice sector to determine adequate funding and resources for
them.

Making growth work for the poor requires a broad-based
strategy comprising all elements of government policy. The
government should be commended for embarking on a process to
develop such a strategy. It is expected that at the time of the
CGI the government will have published a roadmap for drafting
such a strategy. As Indonesia moves forward to develop its full
poverty reduction strategy, it will be important to focus on:

* Defining priority areas of policy and public action for
equitable growth and poverty reduction, and create the analytical
basis in these areas to come to the right policy decisions.

* Identifying national poverty reduction objectives,
indicators, and targets. The Millennium Development Goals can
serve as useful, guides in this respect, but the government
should translate these to Indonesia's own circumstances.

* Mainstreaming the poverty reduction strategy in the
government's core planning, policy and budgeting processes, and
Propenas and Repeta.

If the government manages to maintain stability, and deepen
reforms as spelled out in this report, it will be in a position
to deliver a healthier economy with more growth and less poverty
in 2004.

The above article is taken from the executive summary of World
Bank Brief of the Consultative Group on Indonesia (CGI) titled
Maintaining Stability, Deepening Reforms. The group will meet in
Bali next week.