ADB: “The Indonesian Economy All Set to Grow”

Jakarta, Indonesia | August 11, 2007 by D-8 Secretariat

Indonesia's economic expansion is expected to accelerate to 6% in 2007, and 6.3% in 2008, rates of growth not seen since 1990s, according to a major Asian Development Bank (ADB) report released.

The Asian Development Outlook 2007 (ADO), an annual publication that forecast economic trends in the region, says a gradual decline in interest rates, the recent strong export performance, as well as a gradual revival of manufacturing in 2007-2008 will likely contribute to the improved consumption and investment, and acceleration in growth.

According to the ADO , inflation is projected around 6% this year and next, as price stability is not likely to pose a threat during 2007-2008, as it did in 2006. Significant challenges for the country remain, says the ADO. The forecasts assume the Government will push harder to implement major structural reforms, and the local governments do a better job in spending transfers from Jakarta by providing additional resources for local infrastructure and social sector needs.

The ADO says that Indonesia has done much to articulate its reform agenda over the period 2003-2006, however, effective implementation has lagged. It prevents Indonesia from achieving growth at a level that can create enough jobs and reduce poverty. Attention to some vital issues would boost the economic outlook, the report says.

"Finalization and adoption of the proposed investment and tax reforms package is vital. A long delay and lack of clarity on institutional arrangements for investment and coordination within the government have undermined credibility. A significant increase in private investment requires greater legal and regulatory certainty," the report says. "The recent successful conclusion of Parliamentary discussions on the Investment Law is an encouraging sign" says Edgar A. Cua, Country Director of ADB.

On labor, the government needs to create more flexibility in the labor market, particularly with outsourcing and rationalizing the severance pay system.

According to the ADO , these challenges require improvement in the capacity of civil service across the bureaucracy. In addition, given Indonesia 's vulnerability to natural disaster, another challenge is to enhance disaster management capabilities and risk mitigation to reduce the impact on the population and the economy. Failure to address these challenges will mean that Indonesia will not be able to achieve growth rates of over 6% needed to create jobs and reduce poverty.
There is room for optimism, as there is growing recognition of the urgency to implement the much-needed reforms and that the country should take advantage of this window of opportunity to ensure that the recent policy packages are implemented over the next year and a half.

D-8 Secretary General, Dr. Dipo Alam, expects that good performance of Indonesian economy will also contribute to economic cooperation for D-8 countries, in fact all D-8 countries economic growth are expected above five percent this year, he said last week in Istanbul.

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