2006 Year in Review

Indonesia

Economic News

22 Jul 2010
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Ever since the government of Susilo Bambang Yudhoyono, or 'SBY' as he is popularly referred to, took office, he has been focusing on attracting foreign direct investment (FDI) to Indonesia. Observers see this as essential as the country relies on fresh foreign capital to accelerate GDP growth in the country, which is estimated at 5.6% for 2006.

It is estimated that Indonesia needs a minimum of 7% growth per year to be able to absorb new entrants into the labour force and to reduce the high numbers of unemployed. The World Bank evaluated unemployment at 10.4% in 2006, but hidden employment is estimated to double this figure.

The government expects economic growth in 2007 to reach 6.3% and inflation to drop to 6.5%, with an average interest rate of 8.5% and a rupiah rate of 9300 against the dollar.

Much of the growth in 2006 can be attributed to strong global commodity prices and Indonesia's high level of resources. Most notably, the agriculture and mining sectors experienced high growth rates due to increasing export revenues. At the end of the second quarter in 2006, agriculture was reported to have grown by 5% compared to the same period in 2005, while the mining sector grew by 5.43%. Total exports expanded by 15.14% to $46.9bn in the same period.

Increased government spending also propelled growth as budget and procurement procedures were simplified. As a result, overall government spending grew by 31.38% in the second quarter compared to the same period in 2005.

Several reforms aimed at boosting investment have been initiated. A new investment law levelling the playing field among foreign and domestic investors is currently being discussed in parliament, and is expected to be passed in the first half of 2007, while new tax legislation is due to be discussed early this year. The government is also working on amending the relatively restrictive existing labour legislation.

In an effort to boost foreign investment into Indonesia, a deal was signed this summer with neighbouring Singapore. Jakarta signed a memorandum of understanding (MoU) with the island nation on the joint development of three Special Economic Zones (SEZs).
So far, the existing SEZs in Riau have attracted around $580m in investment since their inception. This success prompted the government to expand the programme and to look at opening up SEZs in other regions, such as South Sulawesi, North Sumatra and Bojonegara. Several incentives will be put in place in the SEZs to attract new investments, mainly in shipyards and oil-related industries, but later also in garments, electronics and tourism.

The endeavours are seen as a shortcut to quick success, badly needed by the Indonesian government, which has been plagued by several natural and human disasters in the past two years.
The government also launched a series of initiatives aimed at reviving the country's agricultural sector. Around 15% of Indonesia's GDP comes from agriculture and more than 45% of the Indonesian labour force - or more than 42m people - work in this sector.

Meanwhile, authorities have revealed their will to intensify the use of biofuels and have offered incentives to investors operating in green energy, providing subsidies to palm oil producers and establishing a joint-research project with Malaysia on the production of palm-oil-based biodiesel.

The drive to replace fossil-based fuels follows global trends. However, for Indonesia, which is the only south-east Asian country member of OPEC and which has been a net oil-importer since late 2004, biofuels offer a promising future. The country is soon expected to emerge as the world's largest producer of crude palm oil (CPO), one of the commodities that can be used to make bio-diesel.

In addition to subsidies for the palm oil sector, farmers engaged in cacao, rubber and corn production will receive similar support in order to increase their production. Agriculture Minister Anton Apriyantono declared that the government will allocate IR1.7 trillion ($182m) from the state budget this year, and committed to provide subsidies until 2009. According to Apriyantono, these steps will boost the country's plantation output and create jobs in the country's agricultural sector, which has lagged behind in comparison to other countries in Asia. It will also help the government to meet its target of expanding plantations by 500,000 ha annually.


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