OECD suggests Indonesia shift spending from subsidies to pro-growth programs

The club of developed economies, the OECD, suggested in a new report on Monday that Indonesia shift government spending away from inefficient subsidies toward programs that will help the country meet its ambitious medium-term growth and poverty reduction targets

According to its Economic Survey of Indonesia 2010, the Organization of Economic Cooperation and Development (OECD) said the Indonesian economy had shown strong resilience during the global economic crisis, but it needed to cut energy subsidies to maintain sustainable economic growth.

Indonesia's real GDP grew by 4.6% in 2009 - the third highest level in the G20, after China and India - and is on track for a 6% growth rate this year and next.

“Indonesia’s recent growth performance has been impressive, but there is no room for complacency,” OECD Secretary-General Angel Gurría said during the launch of the report with Finance Minister Agus Martowardojo in Jakarta.

But to seize this opportunity, Gurría said the government had to pursue its reform agenda, including better tax collection and more effective government spending would free up funding for infrastructure, education and health care initiatives.”

Topping the list of proposed spending reforms is the rapid elimination of consumer energy subsidies, which are expected to cost IDR 144 trillion (USD 15.7 billion) in 2010, or about 2.3% of GDP.

These subsidies keep energy prices artificially low, distort consumption and investment decisions and principally benefit wealthier households. The OECD welcomes the government’s pledge to eliminate fuel subsidies by 2014. “Significant budgetary resources can be saved by phasing out these inefficient energy subsidies,” Gurría said.

Ending energy subsidies would allow Indonesia to dedicate greater fiscal resources to its massive long-term infrastructure challenges, which are key to meeting future growth objectives, according to the report.

Indonesia’s Medium-Term Development Plan calls for IDR 1 429 trillion (USD 157 billion) in new infrastructure investments over the 2010-14 period, representing just under a quarter of the current GDP.

Authorities expect public-private partnerships (PPPs) to fund nearly 65% of the projects, in sectors that range from road and sea transport to power and water supply, telecommunications and sanitation.

The OECD report says that the Indonesia’s PPP goals would be difficult to achieve, unless existing regulatory uncertainty and barriers to foreign investment are reduced.

To boost chances of attracting much-needed private sector investment, a new OECD Investment Policy Review of Indonesia, also released on Monday, suggests Indonesia should lift restrictions on foreign investment, improve access to land, better enforce competition rules, further strengthen protection of investor assets and continue cutting red tape.

The report recommends that Indonesia pay greater attention to how regulations are designed, implemented and reviewed, so policy objectives are achieved with the least possible disruption to the business climate.