DONORS SUPPORT INDONESIA’S EFFORT

TO ACCELERATE RECOVERY

Tokyo, October 18, 2000— The tenth meeting of the Consultative Group on Indonesia (CGI) concluded two days of discussions on the Indonesian economy in Tokyo today. “Three issues were of paramount interest at the meeting – the continuation of structural reform as outlined in the letter of intent to the IMF, the clear articulation of a poverty reduction strategy, and implementation of a comprehensive governance program that covered legal and judicial reforms, decentralization, and forest management”,    Jemal-ud-din Kassum, World Bank Vice President for East Asia and Pacific Region and Chairman of the CGI said today. He added, “I was struck by the very open and substantive exchange of views. This created a positive atmosphere and reinforced the strong partnership between the government and donor community.”

The Indonesian delegation, led by the Coordinating Minister for Economic Affairs, Dr. Rizal Ramli, briefed the international donor community on the state of the Indonesian economy, and on the status of policy reforms in a broad range of areas including the Ten Point Program on Accelerating Economic Recovery.  He also explained the latest situation in West Timor and government actions to disarm the militia, and reported that individuals had been arrested in connection with the murder of three UNHCR workers and seven Indonesian civilians in Attambua last September.  “We remain committed to resolving the security challenges in the border areas of West Timor, and many steps to address this matter have already been taken,” he said.  The donor community welcomed the Indonesian Government’s invitation to a Security Council mission to observe progress in West Timor next month and noted the importance of continued progress in this difficult area. They offered assistance and support to the refugee humanitarian and resettlement program once security conditions permit.

On the current state of the Indonesian economy, donors were encouraged by some recent positive trends.  They noted that economic growth has taken hold – and its base has expanded beyond consumption. Inflation is contained, and the numbers of those living below the poverty line are declining. The Minister of Finance, Ir. Prijadi Praptosuhardjo said, “the key objectives of the macro-economic framework for 2000 are within reach and we expect that GDP growth for this year will exceed our original target of 3.8 percent.  In our budget for 2001, we are targeting a growth rate of 4.5 percent, which is evidence of our confidence in the sustainability of our economic recovery.” Nevertheless, donors urged the government to deal with domestic political and security issues (including regional unrest in Maluku, Aceh and West Irian).  Failure to take appropriate action could weaken market sentiment and slow, or even stall, recovery.

On the program of structural reforms, “one message that emerged strongly was the critical importance of keeping the reform program – as described in the government’s Letter of Intent to the IMF – on track,” said Mr. Jemal-ud-din Kassum of the World Bank.  A structural reform issue that attracted particular attention was the pace and quality of corporate restructuring.  Donors noted that the quality of IBRA’s restructuring agreements depended on adherence to a set of principles aimed at maximizing recovery for the state, transparency of the process, and procedures for oversight for all large cases.  The government has agreed to work with the IMF and World Bank on these principles that would guide all corporate restructuring cases led by IBRA.

In the session on poverty reduction, the clear, strong content of the government’s statement was welcomed by many donors.  This was reflected in the proposed organizational arrangements put forward by the Chairman of BAPPENAS, Dr. Djunaedi Hadisumarto, who said, “Coordination for poverty strategy will now be the responsibility of the Vice President who will be supported by a task force made up of government and non-government members.  At the same time, we will be creating stakeholder forums consisting of non-government and government representatives at central and regional levels.”  There was broad recognition that poverty concerns should permeate all government policies and programs, and recognize the special needs of the vulnerable, in particular women and children.  The overarching strategy bringing together these different initiatives would rest on the three cornerstones of economic opportunity, empowerment, and security.

On the governance agenda, the government presented progress on the Partnership for Governance Reform. Strong emphasis was placed on legal and judicial reform, decentralization and forestry management. “Governance reform is not only an objective in it’s own right, but it is also a means to achieve economic recovery, eradicate poverty, protect the environment, advance democracy, and strengthen Indonesia’s nation building efforts”, stated Minister Erna Witoelar, in her capacity as co-chairperson of the Partnership for Governance Reform. The donors recognized the government inherited weak institutions and governance systems, and has initiated reforms on many fronts.  But progress has been slow – certainly in relation to the expectations of the people and the international community.  Donors understood the huge constraints confronting the government and the difficulty of tackling such deep-rooted problems.  At the same time, the international community wanted to help accelerate momentum – especially in key areas such as legal and judicial reforms, decentralization, and forest management.

On the forestry sector in particular, the government committed itself to further strengthen its inter-agency coordination and to increase the participation of all stakeholders in preparing a new forest management system.  The government also promised to elaborate a detailed action plan on urgent forestry issues within one month and to jointly review progress on its implementation in April 2001.  The donors welcomed these intentions and offered continuing support.

On development priorities, aid effectiveness, government debt and financing requirements, a more participatory approach to aid utilization and management was recommended, one that involves civil society groups. The government presented the key features of the draft budget and highlighted its development priorities. It also presented proposals for strengthening financial management and procurement systems that will ensure government resources reach intended beneficiaries and improve the effectiveness of aid. The government requested donors to adopt flexibility in the design and implementation of projects in a decentralized system. Donors were also requested to extend financial support in the form of grants or on concessional terms to the extent possible. Donors, on their part, welcomed the government’s proposal to improve financial management and offered technical assistance to support this effort.  They also noted the critical importance of allocating scarce government resources to highest priority needs, especially for poverty reduction and environmental sustainability.

Donors announced their pledges at the close of the two-day meeting after reviewing the Government’s priorities, policy initiatives, and strategies for implementing key economic, social and institutional reforms central to accelerating Indonesia’s recovery.   In all, the donors pledged US$ 4.8 billion to support the government budget. “These pledged resources will be adequate to finance the budget and our development programs, but we recognize they are mostly loans and will add to our government’s already onerous debt situation.  Therefore, we will only draw upon these funds if absolutely necessary and only after exhausting every alternative to meet our development needs from domestic sources,” said Coordinating Minister for Economic Affairs, Dr. Rizal Ramli. A further US$ 530 million was pledged for technical assistance grants and support for Indonesian non-government organizations.

This year’s CGI meeting included five representatives of civil society groups, which presented a joint statement on their development priorities and concerns. This participation was welcomed by the donor delegates and the Government of Indonesia. Donors have agreed to hold a mid-year interim CGI meeting in Jakarta six month from now, while the next CGI is tentatively planned to be held at the same time next year – also in Jakarta.