Indonesian minister says world may not need the IMF or World Bank

Indonesia's Minister of Trade, Mari Pangestu, talks to FinanceAsia about how Indonesia has changed since the Asian financial crisis and discusses the role of the IMF and World Bank.
How has Indonesia changed in the past decade - ie since the Asian financial crisis?

After the last financial crisis, Indonesia has learnt its lessons well and the government and the people will not repeat those mistakes again. During the past decade, Indonesia has undergone economic, political and social reform. President Susilo Bambang Yudhoyonois is committed to job creation, economic growth and transparency within the country. We are also simplifying the administrative and bureaucracy processes to reduce high economic costs and therefore attract investors.

Economic developments in recent years include modest economic growth (real GDP growth of 4.7%, 5.1% and 5.6% in 2003, 2004 and 2005, respectively); a relatively stable exchange rate (averaging Rp8,572 ($0.93), Rp8,985 and Rp9,751 to the US dollar in 2003, 2004 and 2005, respectively); consistent current account surpluses (3.4% in 2003 and 1.2% in 2004); and moderate levels of inflation (increases in the CPI of 5.1% in 2003 and 6.4% in 2004), with the exception of 2005 when inflation accelerated to 17.1%, primarily as a result of a substantial increase in fuel prices due to a reduction in fuel subsidies.

Prior to the Asian financial crisis that began in mid-1997, Indonesia had historically relied on foreign lending to finance its fiscal deficit, including official development aid from foreign governments and loans from multilateral lending organisations, such as the World Bank and the Asian Development Bank, and from the Paris Club, an informal group of official-sector foreign government lenders. IndonesiaÆs budget policy at that time required that the budget deficit be financed by external aid and foreign loans from official sources.

With the onset of the Asian financial crisis, the government of Indonesia received foreign loans from the IMF intended to support the RepublicÆs balance of payments as official foreign reserves declined and the rupiah weakened. Since the crisis, Indonesia has successfully completed three rounds of rescheduling of its Paris Club debt, extending its maturity and reducing its amount.

What happened with your external loans following the December 2004 tsunami that struck Indonesia?

The Paris Club offered a temporary suspension of debt service payments through the end of 2005 to Indonesia (as well as other countries affected by the tsunami). Through a series of bilateral agreements with the Paris Club members, Indonesia reduced its debt service payments by $2.6 billion in 2005. Indonesia no longer relies exclusively on external borrowings. Beginning in 1998, the government has issued domestic debt as part of its programme to recapitalise IndonesiaÆs banks, and, in 2002, the government began a programme of regularly issuing rupiah-denominated bonds in the domestic market. With the development of a regulatory framework and support from the government, a secondary market for the governmentÆs domestic debt securities has developed.

As part of the governmentÆs financial management reforms, the minister of finance issued a ministerial decree on September 15, 2005 that set forth the governmentÆs debt management strategy through 2009. This comprehensive strategy covers policies on management of the central governmentÆs public debts, both external loans and government securities, to assure transparency and accountability. The strategy also addresses coordination between the Ministry of Finance, Bank Indonesia and the National Development Planning Agency (Bappenas) in debt management.

How can you help to increase trade in and out of Indonesia?

Indonesia is setting up Special Economic Zones at Batam, Bintan and Karimun to increase export productivity by providing special treatment in customs, labour and permits to investors. Batam, Bintan and Karimun will be the pilot projects and other areas will follow. The Special Economic Zones will improve the trade in and out of Indonesia to other countries.

Looking forward, what are the key sectors that will fuel Indonesia's growth?

The sectors that will fuel IndonesiaÆs growth are: manufacturing, agriculture and services. These sectors represent the highest contributing growth to IndonesiaÆs economy. And the government is providing tax incentives to pioneer industry and the regulation is in the process of being passed.

The Indonesia government is currently preparing the Draft Investment Law, Draft Customs Law and Draft Tax law. These laws, if passed, will improve the investment climate of the country and will therefore attract investment to Indonesia. Indonesia is also offering 10 infrastructure projects (toll roads) to improve the transportation access to many areas in Indonesia. There will be an infrastructure summit in Jakarta in November 2006 that offers infrastructure projects to various locations in Indonesia.

Will the IMF and World Bank continue to act as facilitators to help increase Indonesia's growth?

We welcome the assistance from the World Bank and IMF as we need to discuss which areas that create bottlenecks and issues that hamper economic growth, job creation and transparency. The problem is we need to persuade and convince them that reform will take time. We are committed to reform. The president wants to create better economic conditions and encourage transparency and good governance at the central and regional government level.

Do you think there will come a time when there will be no need for the IMF and/or the World Bank?

I believe that each country will at some stage arrive at a stable and prosperous destination and can sustain that condition for a very long time if supported with strong macro economic conditions, and a stable political and social situation. If those conditions are achieved than there might be no need for the IMF and World Bank.

At this stage though, the existence of the IMF and World Bank is very important to give assistance to developing countries and to accelerate their economic growth and welfare. The roles of these institutions are also necessary to facilitate and harmonise the different interests among countries particularly developed and developing countries.
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