Jakarta, June 2, 2003 – At its mid-year meeting, the Consultative Group on Indonesia (CGI) welcomed the increasing signs of renewed confidence in Indonesia’s economy. But recognizing the remaining risks, delegates agreed that it is imperative to build on this momentum through deeper reforms to improve the investment climate and lay the foundation for vigorous growth and poverty reduction.

Representatives of 30 bilateral donors and multilateral agencies met with senior officials from 17 government agencies to engage in an informal dialogue on Indonesia’s development challenges. Also participating were representatives of civil society organizations and the private sector.

Though recognizing the recent gains reflected in modest inflation, lower interest rates, and a stronger rupiah, the participants concluded that growth continues to be held back by corruption, lack of progress in re-establishing the rule of law, declining infrastructure, and regulatory and tax uncertainty exacerbated by decentralization. The CGI welcomed the Government’s progress on the policy agenda in these areas, but stressed the urgent need for more concerted actions to ensure the effective implementation of recent reform efforts.

In his opening remarks, Coordinating Minister for the Economy H.E. Dr. Dorodjatun Kuntjoro-Jakti noted a broad improvement in Indonesia’s key economic indicators, despite the challenges in the aftermath of the SARS epidemic, the Iraq war and the Bali bombing. “I think I speak for all of us when I say that we are cautiously optimistic about the situation for the remainder of the year and we believe that this will create an increasingly positive environment for next year,” he said. “However, we have been hit too often by unanticipated shocks to be sanguine. Our core objectives are to maintain macroeconomic stability, complete the reform of the financial sector and improve the investment climate.”

H.E. Dr. Boediono, Minister of Finance, outlined the Government’s ongoing efforts to evaluate its options regarding Indonesia’s future arrangements with the IMF and its plans to draft a strategic “white paper” that will set out its commitment to a broad reform program before the Indonesian people. “We are working to address the ‘credibility gap’ that might result from a change in our existing program,” he said, “by preparing a comprehensive action plan for reform, a convincing implementation mechanism and by enlisting strong international support.” The white paper will cover macroeconomic policies, financial sector development, and policies to promote investment, trade and employment. CGI members stressed that this action plan should set out clear and monitorable reforms that sustain the momentum of recent successes and go further to demonstrate the Government’s capacity to implement policy and institutional changes that will address the remaining obstacles to investment and growth. Donors expressed their willingness to continue to support such a Government program in the coming year.

Andrew Steer, World Bank Country Director for Indonesia, summarized the engaging discussions at the half-day event: “The message from this CGI meeting is simple,” he said, “if Indonesia could make genuine progress on the investment climate, governance and legal reform – as it has on macroeconomic policy – it could again become one of the brightest performers in East Asia. The international community deeply hopes that this will happen and stands ready to do whatever it can to help.”

Recent Economic Performance and the Investment Climate

The participants reviewed recent economic trends that show signs of an improvement in market sentiment towards Indonesia. Buoyed by an upgrade of Indonesia’s credit rating and continued progress within the framework of the IMF program, the rupiah exchange rate has reached its highest level since August 2000 and the Jakarta stock exchange has climbed more than 20 per cent. Last year, private capital flows turned positive for the first time since the onset of the crisis. “These favorable developments provide a strong foundation for meeting the government’s growth and employment targets,” said David Nellor, Senior Resident Representative of the International Monetary Fund. “There are, of course, risks to the outlook and the Government will need to do all in its power—through good policy performance and consistent communications—to retain market confidence.”

Japan’s Ambassador, H.E. Yutaka Iimura, reflected a widely held view at the meeting, saying, “Now that economic stability has been achieved, the important task ahead is to push economic growth to a higher level by facilitating private investment.” Despite the recent upturn, the outlook for foreign investment remains unclear. Representatives of the private sector identified continued uncertainty as a major obstacle in the current investment climate. CGI members welcomed the Government’s initiative in declaring 2003 the Year of Investment and look forward to decisive action from the planned cabinet-level investment promotion team to lay out a comprehensive roadmap to improve the investment climate in close consultation with the domestic and foreign business communities. CGI participants agreed to establish a working group to discuss ways to improve the investment climate.

CGI members stressed the critical link between progress in legal and judicial reform and improving the investment climate. Investors increasingly regard the lack of credibility of justice sector institutions as one of the main obstacles they face in Indonesia.. The donors expressed particular concern about the slow pace of progress since the last CGI meeting in this area. Key laws on the Judicial Commission and the Constitutional Court are still under discussion. The establishment of the Anti-Corruption Commission is not moving forward decisively. There has been no response by the Attorney General’s Office (AGO) to a recent audit of its activities, though increasing concerns have been raised about AGO performance. To counter these concerns, the Government needs to take decisive action to demonstrate its continued commitment to legal and judicial reform. H.E. Laksamana Sukardi, State Minister for State-Owned Enterprises, recognized the challenge, but expressed optimism about future developments in this area, saying, “The basic foundation for fighting corruption and enhancing the rule of law rests on the strengthening of civil society and democracy and in this area, Indonesia has made great strides.”

Several participants noted that the business community also places high priority on the need to strengthen the development of Indonesia’s infrastructure – the power plants, roads, bridges and ports that constitute the very foundation of an efficient and vigorous market economy. They stressed the importance of developing a prioritized Government plan for infrastructure projects that could become the basis for further donor and private sector support.

Poverty Reduction

Throughout the meeting, the reduction of poverty was re-emphasized as the foremost goal of the CGI. Economic growth and investment were identified as the most important means towards that end.

CGI members welcomed the finalization of the participatory Interim Poverty Reduction Strategy Paper (IPRSP) and the Government’s “Yogyakarta Declaration” in March 2003 confirming its commitment to poverty reduction as a top national priority. In reviewing recent developments, H.E. Jusuf Kalla, Coordinating Minister for People’s Welfare, said, “We are now establishing a new foundation for combating poverty based on a regional approach, recognizing the greater diversity of economic and social life through our decentralization policy and providing greater autonomy to the district level.” The Government committed to developing a comprehensive poverty reduction strategy based on genuine and open consultation among a wide range of stakeholders to reflect the aspirations of the Indonesian people. Donors appreciated this commitment and urged the Government to continue to support this process through decisive leadership and financial support.

Regional and Environmental Issues

The Government recognized that its ambitious decentralization program has faced difficulties in the implementation stage. CGI participants expressed concerns about the proliferation of local taxes and regulations, which are not closely monitored by the central government. The Government is currently evaluating the implementation of the main decentralization laws suggesting corrections where necessary, while donors stressed the importance of consistency across decentralization and sector laws.

CGI participants raised serious concerns in the forestry sector, in particular the problems of illegal logging and excessive industrial consumption of timber. The Government acknowledged that these problems could not be tackled without the combined efforts of all concerned agencies. The Government and donors agreed on the need for more intensive communications and dialogue involving all stakeholders in this sector.

Despite initial signs of a rebound in tourist arrivals in the aftermath of the Bali tragedy, the subsequent SARS outbreak and Iraq war forced a further delay to the island’s long-term recovery. Additional concerns have been expressed over the impact of the Aceh crisis and the withdrawal of the free visa facility in October 2003 for many key overseas tourist markets. Pockets of vulnerability have started to emerge and donors encouraged the Government to be prepared to implement flexible, targeted interventions to alleviate the resulting hardships. Though the CGI members praised the Government for its decisive response to security concerns, more concerted efforts will be necessary to offset the social and economic risks. Enhanced coordination among central, provincial, and local governments, and in turn donors, will be essential to meet the challenge.

The donors expressed their deep regret that a peaceful solution could not be found to preserve the December 9, 2002 Cessation of Hostilities Agreement that allowed the people of Aceh a period of peace after years of struggle. With the resumption of military action, the CGI members emphasized the need for all combatants to show full respect for human rights and to make all efforts to protect the well-being and livelihood of the Acehnese people upon which any lasting peace will ultimately be based. In addition, some donors raised concerns about access of donors and non-governmental organizations to Aceh and the ability of donors to monitor program activities. The Government noted that security concerns prevented full access.

The donors indicated that their commitments of assistance to Indonesia will be formally provided at the full meeting of the CGI expected to be held in November 2003 in Jakarta.