Strongest signal of intentions will be new Cabinet lineup

Strongest signal of intentions will be new Cabinet lineup

Although the final result of the presidential election runoff
has yet to be announced, it seems certain that Gen. (ret) Susilo
Bambang Yudhyono will be the next president. The Jakarta Post's
Kornelius Purba talked with the World Bank's Country Director for
Indonesia, Andrew Steer, on Wednesday about international
expectations regarding the new government. The following are
excerpts from their conversation.

Question : What do you think should be the top priority of the
new government, which will very likely be led by General Susilo,
so as to maintain and even increase market confidence in the
Indonesian economy?

Answer : The elections themselves have been a major
achievement for Indonesia. Whoever is to win, they have rightly
promoted pride among Indonesia's citizens, and built confidence
in Indonesia's stability and maturing democracy. This in itself
is very helpful to market sentiment. Today Indonesia faces
greater opportunities than at any time in the past seven years
since the crisis.

However, as was noted clearly during the campaign, investment,
at 20 percent of GDP, remains much too low. It should be 30
percent, and growth is still insufficient to create enough good
paying jobs. The government will be well positioned to act to
address impediments, thus improving investor confidence. Some
actions can be done quickly. For example it takes 150 days to get
permission to start a company in Jakarta, compared with 33 days
in Thailand, 41 days in China and 56 days in Vietnam.

Cutting this sort of red tape can be done quickly. So too,
blockages that are preventing specific major investments can
often be removed quickly. Other vital actions -- improving the
legal system, reforming the civil service, curbing corruption,
etc. -- will, of course, take years to achieve. But even here the
announcement of time-bound, monitorable road-maps can demonstrate
decisiveness and action, which is vital to changing investors'
perceptions.

Other key ingredients required to create improved market
confidence include a continuation of the excellent macroeconomic
management of recent years, and a campaign to restore the eroded
physical and social infrastructure that is the consequence of the
crisis. In all of these issues, as in every new administration in
every country, the strongest signal of intent will be the
appointment of the members of the Cabinet. These must be men and
women of technical excellence, integrity and courage. This will
bode very well for the future.

How do you see the short and medium-term outlook for
Indonesia's fiscal sustainability in the absence of any debt-
rescheduling facility?

Indonesia has done an excellent job in managing its fiscal
accounts in the last few years. The government's debt as a share
of GDP has fallen from over 100 percent to 59 percent in just
four years. Indonesia still has a big debt burden but is no
longer in crisis. And each year Indonesia has more flexibility.
It is now internationally creditworthy, as demonstrated by the
bond issuance early this year. So Indonesia deserves strong marks
on fiscal management, and indeed now is the time to focus on
expanding prudently, expenditure for infrastructure and social
services.

Do you mean that it is impossible for Indonesia to ask for
debt rescheduling outside of the Paris Club mechanism?

Indonesia no longer needs wholesale rescheduling, but there
are certainly financial options looking forward. This year
Indonesia successfully graduated from the IMF program and fully
normalized its relations with its creditors, and has also managed
to significantly improve its credit ratings. Opportunities for
formal debt rescheduling outside of the Paris Club mechanism are
now very limited. There are still opportunities to undertake
small debt swaps, and also to manage the debt structure by
borrowing at low interest rates to pre-pay higher interest rate
debt, which is like debt rescheduling but with a different name.

Fuel subsidies here have ballooned to more than Rp 63 trillion
as the government has decided not to raise fuel prices this year.
How do you assess this huge subsidy burden set against fiscal
consolidation in the coming fiscal year?

If there is any good news about having such a large subsidy it
is that it provides a lot of potential resources for the
government should it choose to reduce or eliminate it. These
resources could then be used to invest in schools, clinics,
poverty programs and the like. There is a lot of analysis showing
that the bulk of the benefits of these subsidies go to the rich
and not the poor, and that the subsidies don't help the economy.

Raising prices does cause pain, however, and is often
difficult politically. One idea would be to remove them according
to a clear, announced path and specifically allocate the funds
saved for pro-poor programs that would more than compensate those
who are least able to afford price increases

Do you foresee any changes in Indonesian relations with the
CGI creditor consortium under the new government?

The CGI has served a very useful purpose, but needs to change
as Indonesia is changing. The needs of a newly confident, post-
crisis Indonesia are different to those of the crisis period. We
strongly support a transition towards full government leadership
of the CGI (Consultative Group on Indonesia), and believe that
there are exciting options for turning it into a genuine
development forum where decision-makers on both the international
and Indonesian sides can help solve real problems.