WB calls for faster reforms

Aditya Suharmoko ,  The Jakarta Post ,  Jakarta   |  Thu, 06/25/2009 11:23 AM  |  Business

There could be a longer global economic crisis, but Indonesia can recover faster by spending on infrastructure, plus rapid institutional reforms: World Bank.

"Invest more in infrastructure, health, social protection and agriculture; but for spending to be effective, institutional reforms have to be accelerated," World Bank's country director for Indonesia Joachim von Amsberg said in a forum at the Financial Club in Jakarta on Wednesday.

Amsberg said that recovery from the global financial crisis would get under way in the second half of this year, but economic activity could remain below full potential for several years, indicating possibly more prolonged economic distress.

"This crisis has been different as the financial crisis has led to a real sector recession. Clearly Indonesia is affected ... but is still pretty robust," he said.

The World Bank estimated Indonesia's economy would have only 3.5 percent growth in 2009, before recovering to 5 percent in 2010 and 6 percent in 2011.

The International Monetary Fund (IMF) has upgraded its more gloomy growth projection for Indonesia from 2.5 percent to between 3 percent and 4 percent.

Despite these pessimistic economic forecasts from others the government confidently expects the economy to expand at between 4 and 4.5 percent this year, and to bounce back in robustly to between 5 and 6 percent in 2010.

One of the government's main weakness is lengthy and slow bureaucratic procedures, causing a slowdown in government expenditure, compared to state plans. As of May, government spending only reached 27 percent of the targeted 2009 state budget figure for expenditure, despite the fact that the country needs a boost from government spending to back up private consumption, the economy's main driver, predicted to slow somewhat.

Continued reform of the public procurement system will "allow the government to spend better", said Joachim, suggesting the development of a reliable and efficient independent complaint handling mechanism for firms participating in public procurement bids.

He also said that Indonesia could accelerate the construction of, for example, the Trans-Java highway and help build world-class cities by investing in urban infrastructure in Jakarta and Surabaya, the country's two largest cities, also revitalizing water and sanitation facilities.

Standard Chartered Bank senior economist Fauzi Ichsan said Indonesia's economy could expand 4 percent this year, if helped by more infrastructure development and election-related spending.

Inflation should slow to 4.5 percent soon, also helping private consumption. A weakening rate for the US dollar in the second half of 2009 may help reduce imported inflation.

While the macroeconomic figures seem OK, the biggest challenges to the economy are poor infrastructure, legal uncertainties, labor rigidities, problems related to implementation of regional autonomy and tax and customs issues, said Fauzi.

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