From World Bank

Indonesia Ten Years after the Crisis

July 16, 2007––Ten years after the Asian economic crisis, things have dramatically changed in Indonesia.

A comprehensive public expenditure review, jointly prepared by the World Bank and the Government of Indonesia with grant support from the Netherlands Government, says the drastic reduction in fuel subsidies, sharply declining debt service payments, and an impressive increase in revenues have left the country with a massive $15 billion windfall to spend on development. The report was launched on Tuesday at the InfoShop.

After almost a decade of successful macroeconomic management by successive governments, the world’s third largest democracy now has enough cash in its coffers.

Indonesia created the additional “fiscal space” of $15 billion –– around 20 percent of the national budget –– in 2006. This is the largest increase in additional fiscal resources since the 1973–74 oil boom, and provides a tremendous window of opportunity for Indonesia to upgrade its public services.

A Caveat to Spend Wisely
The joint report also noted that this success comes with a caveat: more money could only be good news if it is spent more wisely. Indonesia needs to invest more in the quality of its public services –– health, education, and infrastructure. The government realizes that these three key sectors need particular attention.

“The Bank’s financial assistance to Indonesia amounts to $1 billion annually. This is large for the Bank, but small for Indonesia and represents around one percent of the national budget,” said Wolfgang Fengler, lead author of the report. “This joint report is about making that 99 percent of the budget more effective.”

Indonesia now spends 17.2 percent of the budget on education, just 3 percent short of the constitutionally decreed 2009 target and higher than for any other sector. But the report also noted that with 93 percent of the nation's children in primary school, the country must turn its attention to higher quality and more accessible secondary and tertiary education if it is to stay competitive.

The health sector also continues to languish, the report noted. While its nominal share of the budget has increased from 2.6 percent in 2001 to 4.5 percent last year, health still ranks in a lowly eighth position in total government spending.

Need for Water and Electricity
Despite all the improved fundamentals, the World Bank reckons that Indonesia's investment in infrastructure, both public and private, amounts now to only 3 percent of GDP, against 5–6 percent before the Asian crisis.

The lack of infrastructure spending is of major concern, given the way Indonesia has fallen behind most countries in the region. Barely 40 percent of Indonesians have access to piped water, and an estimated one-third of the population lives without electricity.

Public spending on infrastructure is 11.1 percent of the budget, just above its post-crisis low of 9.2 percent. This, according to the report, is not sufficient if Indonesia is to catch up on the "lost decade" of investment in infrastructure since the economic crisis and stay competitive with its regional peers.

Regional Governments Need to Spend

Indonesia’s move to decentralization in 2001 has changed the fiscal fundamentals of the country, and it is particularly regional governments that need to spend money, not save it. Out of the $70 billion national budget in 2006, a record $25 billion was transferred to regional governments. With such large sums now flowing to the regions, the challenge is no longer primarily to ensure that adequate resources reach the poorest regions, but rather to ensure that the poorest regions spend the resources well.

Indonesia is poised to spend its resources in ways that could greatly influence and accelerate the country's development over the next decade. If these resources are spent wisely, Indonesia will be able to make the most of the financial opportunities now available to it after so much recent hardship. With the changes already underway and fiscal opportunities these changes create, there is reason to hope that Indonesia will be under the international spotlight for the right reasons, not the wrong ones.

Contributed by Mohamad Al-Arief, communications officer, EAPVP

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