INDONESIA DIGEST Indonesia's complex Issues in a Nutshell By: Ms. Wuryastuti Sunario Published by: TBSC-Strategic Communication No.: 21.06 - Dated: 26 June 2006 In this issue:
MAIN FEATURE: TOP TEN COMMODITIES AND SPECIAL ECONOMIC ZONES TO BOOST ECONOMY NEWS AND BACKGROUND: 1. Health, Culture and the Environment 200 Swept by South Sulawesi Flash Floods and Landslides Mahakam River Porpoises Threatened with only 70 existing 5 Orang Utans returned to the Wild 2. The Economy, Trade and Industry Indonesia's borrowing Falls to Pre-Crisis Levels --------------------------------------------------------------- In this issue: MAIN FEATURE: TOP TEN COMMODITIES AND SPECIAL ECONOMIC ZONES TO BOOST ECONOMY The government has identified Indonesia's top ten national export commodities, said Mari E. Pangestu, Minister for Trade, at the 6th. Congress of Indonesian Economists (ISEI) held recently in Manado. These are:(1) Textiles and textile products; (2) electronics; (3) automotive components; (4) cocoa; (5) coffee; (6) prawns (7) palm oil; (8) furniture; (9) handicrafts; (10) shoes and footwear. Priority setting is important since no national consensus has yet been reached to identify a clear national trade vision and strategy. Whereas, through officially recognizing Indonesia's 10 ten commodities, this will increase their production and competitiveness worldwide, besides facilitate in international negotiations to determine tariffs. For example, Indonesia aims to become the number one producer of palm oil in the world, said Minister Pangestu. This steps will be followed by a Plan of Action, which will be used to assess market trends, and determine which of Indonesia's best commodities have highest local content. Whatever the case, Indonesia must still rely heavily on natural resources. Moreover, in the area domestic distribution, one key program is aimed to cut the chain of distribution, which must be done without causing upsets. The program is aimed to increase regional participation and boost small and medium scale enterprises. In infrastructure development, the program boosts improvements in ports and roads, as well as seeks the active participation of local governments. Banks also need assist to in order to cut the role of the middlemen. Another strategy is the use of storage godowns, so that producers are not forced to sell their produce to unscrupulous middlemen, since they can now store their goods awaiting more profitable times. In the field of investments, improvements in the investment climate are key to development that include transparency, legal assurance, and ease in obtaining permits. For this purpose one-stop service offices are needed at regional level, as well as the formation of Special Economic Zones, said Minister Mari Pangestu. Problems in bureaucracy, coordination, infrastructure and electric power supply At the close of its Congress, ISEI formulated its assessments on the challenges faced by the Indonesian economy. ISEI Chairman, Burhanuddin Abdullah, who is also Governor of Bank Indonesia, said that essentially, the Congress assessed that Indonesia's main challenge is in the implementation of the economic program, which is hampered by a problematic bureaucracy and poor coordination among government agencies. For example, Burhanuddin continued, fiscal deficit that could have become an economic stimulus, has instead become a budget surplus (because of slow implementation by government agencies). In his closing speech to the Congress, on his part, Vice President Jusuf Kalla, who was formerly Chairman of ISEI, explained that there are three main issues that face the economy, these are: firstly, the existing high interest rate of over 15%, which is among the highest in the world, that has caused money to circulate in the financial sector only (and has not penetrated into the real sector). For instance, when the national government transfers funds to local governments, these are deposited at the Regional Development Banks, while in turn, these Banks again place these into the SBI. The reason for this situation is that with Regional Autonomy and Indonesia's decentralization policy, actions and the speed of development are determined by regions at regional level. This speed now needs to be accelerated, said VP Jusuf Kalla. Secondly, power is expensive. Within the short span of two years, power plants must be built that can supply over 10,000 megawatts of electricity to the regions. Thirdly, the distribution of goods is hampered by insufficient infrastructure, bad road systems and bridges. While, building infrastructure needs substantial budgets. Indonesia-Singapore develop Batam-Bintan-Karimun Special Economic Zone Whereas, to solve problems of poor bureaucracy and poor coordination, the government has therefore, created the Special Economic Zones, which will become breakthrough projects, added VP Kalla. Batam and Bintan islands are to be the first such zone, with an agreement to be signed on Sunday 25 June by the governments of Indonesia and Singapore in Batam. This agreement is aimed to create synergy between economic strengths available to both Indonesia and Singapore, said Kalla. However, the authority over the SEZ will remain with Indonesia, while Singapore will assist in the formulation of policies, especially fiscal policies. Indonesia offers land and location as well as infrastructure and manpower, whereas Singapore offers excellent marketing network. There are more than 17,000 multi-national corporations operating in Singapore and these possess good networks. Indonesia may also adopt Singapore's trading system. Meanwhile, to support development of Special Economic Zones, a revised Bill on Taxation will be submitted to Parliament on Monday, detailing special specifications pertaining to all such zones, not just applicable to the Batam-Bintan zone. And indeed, on Sunday, 25 June, President Susilo Bambang Yudhoyono of Indonesia and Singapore Prime Minister Lee Hsien Loong on Sunday witnessed the signing of a Framework Agreement on Economic Cooperation, that has been expanded to cover the Islands of Batam, Bintan and Karimun, reports Indonesia's Trade & Investment News issued by the Office of the Coordinating Minister for the Economy. The Agreement, signed by Coordinating Minister for Economic Affairs Boediono of Indonesia and Minister for Trade and Industry Lim Hng Kiang of Singapore, is aimed at cooperation between both countries to develop the Special Economic Zones (SEZs) in the region mentioned, as well as in locations elsewhere in Indonesia. At a joint press conference with Indonesian President Susilo Bambang Yudhoyono on Batam, Singapore Prime Minister Lee Hsien Loong commented that, "Success in the SEZs will create win-win outcomes for both sides", reports Forex News. "It combines the complementary strengths of Indonesia and Singapore into a package that is competitive and attractive to investors," he said. Under the agreement, Singapore will provide support using its past experience in setting up similar SEZs and leverage on its status as a regional commerce hub to promote the three Indonesian islands. While President Yudhoyono said that :"This framework agreement emphasises the cooperation in the areas of investment, finance and banking, taxation... in order to establish an investor-friendly environment in the special economic zones". "I hope that investors will take advantage of the opportunities that we are going to have ranging from shipyard, manufacturing sectors such as electronics... and even light industries such as garment, tourism, agriculture, aquaculture and education," he said. Both leaders believe that the successful implementation of the Framework Agreement is important to guarantee the development of internationally competitive special economic zones in the region, and to serve as a model for the development of additional special economic zones in other parts of Indonesia. It is a clear sign of the political commitment from both sides to develop this area into a viable and dynamic center of growth with clear mutual benefits for both countries. Details of the Agreement on Batam-Bintan-Karimun Islands Continues Indonesia Trade& Investment News further: the SEZs development will be based on the principles of clear institutional structures, consistent policy framework, streamlining of investment procedures, development of efficient infrastructure, and effective zone administration and management. The scope of cooperation that will be included in the zones will be investment, finance and banking, tax, customs, immigration, manpower, capacity building and other possible areas of cooperation. Other than cooperation to develop the special economic zones, cooperation will also include in the tourism, agriculture, aquaculture, small and medium sized enterprises, training and human resource development, and educational services. A National Team chaired by Minister Boediono is currently finalizing the policy framework for special economic zones. The framework will include identifying a set of criteria required for areas to be determined as zones, and a set of policies that will be provided in the zone; and most importantly providing international best practices in terms of investment servicing and institutions. Such policies would include amongst others, duty and VAT free inputs for re- export purposes with simplified procedures for the movement of goods, work permit and visa facilitation, and most importantly an integrated investment service authority where an investor can process all the necessary licenses and documentation, as well as take up any issues and problems. It is envisaged that economic cooperation will enhance the consistency in implementation of the special economic zone concept. While the policy framework in developing SEZs in Batam, Bintan and Karimun remains under the Indonesian policy framework, Singapore's experience in developing similar zones in other countries will certainly support a successful and effective implementation. The cooperation does not preclude Indonesia from cooperating with other countries to develop special economic zones in the islands and elsewhere. The establishment of SEZs in Batam, Bintan and Karimun will bring benefits in terms of investment, growth, job creation and foreign exchange earnings to Indonesia. The most immediate evident opportunities are in shipyards and oil related equipment and services. Already 80 percent of oil supporting business in Indonesia are located on Batam such as casing and tubing, engineering, procurement and construction and drilling rig construction. There is also the potential to further develop oil related industries in this area, whether it be storage or refinery facilities, and petrochemicals. Given high oil prices there will be increased demand from Indonesia, as well as elsewhere. There are also already a number of shipyards such as which have plans to expand. In both shipyards and oil supporting industries, there are also an increasing number of interested investors from other countries. In the manufacturing sector, strategic priorities will be to develop and upgrade existing sub-sectors which are already strongly represented in Batam and Bintan like electronics, chemicals and precision equipment, as well as light manufacturing such as garments. Other areas of mutual benefits would be in the tourism and wellness industry such as resorts and the potential synergies with the Singapore convention and exhibition business; agriculture and aquaculture; and various service industries. There is also potential in training and education activities to service the needs of the special economic zones, as well as wider. The Batam Polytechnic inaugurated by the President today, is already a concrete example of Singapore and Indonesian cooperation in such capacity building. The development of the zones in Batam, Bintan and Karimun will make it a center of growth with multiplier and spillover effects for the Riau Islands as well as the surrounding areas. The successful implementation of special economic zones in these islands will become a model to be quickly replicated in other strategic regions in the rest of Indonesia. The Government's decision to have Batam, Bintan and Karimun as the first SEZ is because they have good infrastructure, large existing number of foreign and domestic investors, and located strategically, so most ready to take off and develop in a short time. Implementing the Agreement a Joint Steering Committee (JSC) will be established with co-chairs Minister Boediono and Minister Lim Hng Kiang. The JSC will meet within three months time to agree on the action plan for implementing the cooperation and adopting market oriented proposals. The action plan will be implemented by the Joint Working Committee (JWC) which comprises co-chairs Mari Pangestu, Minister of Trade from the Indonesian side and Mr. Lim Siong Guan Chairman of Economic Development Board, from the Singapore side. The action plan will include the short term priority of resolving immediate issues and problems faced by investors in the area, and ensuring the substantive improvement of implementation of existing policies. At the same time the action plan will outline the needed actions by a specified timetable, identifying policy framework of the special economic zone, and building up the needed integrated investment service unit, the management and monitoring systems, and the human resource support. (Sources: Kompas, Bisnis Indonesia, Indonesia's Trade & Investment News) (Tuti Sunario) ---------------------------------------------------------------------------------------------------------------------- NEWS AND BACKGROUND: 1. The Environment, Health, and Culture 200 Swept by South Sulawesi Flash Floods and Landslides While Indonesia had hardly recovered from the earthquake in Yogyakarta and Central Java, and the eruption of Mt. Merapi, more bad news comes from South Sulawesi where tropical rains poured for three days, swelling rivers, causing huge landslides and floods. By Friday 23 June, the number of victims found dead had risen to 198 and 73 missing, while rescue work continued trawling through mud and scouring nearby islands for more bodies and survivors. In hardest-hit Sinjai district, 183 people were killed and 67 others remained missing, said officials. The floods here killed 89 while landslides killed 94. Air Force personnel have dropped food to remote villages from helicopters, while total damage is being assessed. Vice President Jusuf Kalla who hails from South Sulawesi inspected the area Saturday, assuring evacuees that the government will provide emergency assistance as well as restore damages to homes. The unusual and continuous downpour of rain, besides illegal logging activities on the hills above Sinjai are blamed for the flash floods, as well as the large-scale conversion of forest areas to cocoa and tea plantations. Meanwhile, Prof. Emil Salim, Indonesia's environment expert, believes that drastic changes in the weather are also caused by global warming and the greenhouse effect. Mahakam River Porpoises Threatened with only 70 in existence The grand Mahakam river porpoise (orcaella brevirostris) of East Kalimantan is in danger of extinction, said Budiono, Director of the Institute for the Conservation of Rare Aquatic Species of Indonesia, as their habitat is becoming overcrowded with human activities. At present there are only an estimated 70 in existence, with a death rate of four per year. Porpoises are often caught in fishermen's nets, are hit by motor boats, while the roar of engines especially from barges hauling coal from inland, cause porpoises to become stressed and can, therefore, rarely multiply. To locals, porpoises indicate the best locations for fish, or their absence a sign of oncoming floods. At present, the two best locations where porpoises (or" pesut" as they are known locally) are found in the Mahakam are at Muara Pahu in the district of West Kutai and at Muara Kaman, in the district of Kutai Kartanegara. The Conservation Institute, therefore recommends that a conservation area be designated at Muara Pahu, to a radius of 2.5 kilometers, while further socialization of communities on the need to protect these endangered species must be conducted. In principle the local government has agreed to the proposal, awaiting detailed scientific studies. The government also sees the need for local communities, especially children, to be aware of their existence and protect the Mahakam river porpoise. Five Orang Utans returned to the Wild Five Sumatran Orang Utans (pongo abelii) were recently sent to the reintroduction center at Bukit Tiga Puluh National Park in Jambi, to prepare for their final return to the wild. The five were returned from Malaysia and were earlier quarantined at Sembahe in North Sumatra. Director for Sumatran Orangutan Program Conservation, Dame Sianipar, said that another one has remained at Sembahe for treatment since it had contracted hepatitis B from humans. The total population of Sumatran apes left in the wild is estimated at 7 thousand. 2. The Economy, Trade and Industry Indonesia's borrowing Falls to Pre-Crisis Levels The annual Consultative Group on Indonesia (CGI) meeting Wednesday 14 June saw "growing confidence" on the part of the government in managing a reduced borrowing program, which a statement noted was down to pre-crisis levels, reports Indonesia's Trade & Investment News issued by the Office of the Coordinating Minister for the Economy. World Bank Country Director, Andrew Steer, noted that a "spirit of collaboration for Indonesia's growth and recovery", was evident as in the joint effort between donors and government in preparing a comprehensive damage and loss assessment for the Yogyakarta earthquake and the ongoing reconstruction program in Aceh. The World Bank further stated that falling interest rates and faster government spending should lead to a recovery in the growth rate by year's end. "Indonesia is on track for annual growth of around 5.5% this year that could reach up to 7% in the medium term if recently announced policy packages on infrastructure and the investment climate are effectively implemented," a statement on the bank's web site said. "Last year one million Indonesians moved out of poverty," said Steer. "But this has been a tough year with devastating natural disasters and sharp price increases. The government has put in place a series of innovative pro-poor policies - including the world's largest cash transfer program - to offset these challenges. "If the government maintains its momentum on reforms in governance, the investment climate and infrastructure, millions more could also be lifted from poverty in the years ahead." In his report, Coordinating Minister for Economic Affairs Boediono said that the government wishes to move to higher economic growth in the medium term in order to create jobs and reduce poverty. But, he noted, that this would require changing investment sentiments and further reform. He promised a new package of financial sector reforms by the end of June and additional measures designed to improve the performance of SMEs. The CGI meeting ended with commitments of $3.9 billion in loans and grant to the Government, which include $500 million carried over from unused commitments in 2005. The total commitments compare with $3.5 billion in 2005. Minister Boediono added that the latest loan and grant offers from the CGI would not worsen Indonesia's debt situation. "Our indebtedness level in terms of the amount we borrow and our repayment needs will show no net increase," he said. "Neither will we suffer a widening gap between our debt stock and foreign exchange reserves, which have recently been increasing." In a further development, State Minister for National Development Planning, Paskah Suzetta said on 15 June that the government may not take up all loan offers pledged by foreign donors, given the high level of unspent funding allocations in the current state budget, Suzetta said the exact amount of the loan offers that would be acted upon by the government would depend on the upcoming mid-year budget revision, reported The Jakarta Post. Suzetta said that for the first time in the country's history, the House of Representatives will be involved in determining the exact amount of the loan offers that will be taken up. "We don't have to pay commitment fees on those loan offers that we don't take up. The government and the legislature will first look to see to what extent the unspent money can help plug the deficit," Finance Minister Sri Mulyani Indrawati said Thursday. 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