Rural Revelations

Indonesia

Economic News

22 Jul 2010
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After concentrating on boosting investment during its first years of office, the government has recently been turning to rural Indonesia, with a series of initiatives aimed at reviving the country's agricultural sector.



Around 15% of Indonesia's GDP comes from agriculture, yet more than 45% of the Indonesian labour force - or more than 42m people - work in this sector. Average rural income is, as a result, relatively low.



The past month has been welcome to many farmers then, as a number of initiatives by the government to improve the conditions of conducting a business in agriculture have got underway.



The highest profile effort was undoubtedly the announcement earlier this month that President Yudhoyono had ordered the intensified use of biofuels.



This is being backed up by a number of measures, including offering incentives for investors in green energy resources, providing subsidies to palm oil producers and establishing a joint-research project with Malaysia on the production of palm-oil-based biodiesel. The latter initiative was agreed during bilateral talks between President Yudhoyono and Malaysian Prime Minister Abdullah Ahmad Badawi on June 20.



This drive to replace fossil-based fuels follows global trends. For Indonesia, biofuels hold specific potential as while the country is the only south-east Asian member of OPEC, the country has been a net oil-importer since late 2004.



The country is furthermore soon expected to become the world's largest producer of crude palm oil (CPO), one of the commodities that can be used to make bio-diesel.



Next to subsidies for the palm oil sector, farmers engaged in cacao, rubber and corn production will receive similar assistance in order to increase their production.



Agriculture Minister Anton Apriyantono declared last week to leading English-language newspaper The Jakarta Post that the government will allocate IR1.7 trillion ($182m) from the state budget this year, while committing itself to provide the subsidies until 2009.



"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," Apriyantono said. "It will also help the government to meet its target of expanding plantations by 500,000 ha annually."



Meanwhile, his ministry is also involved in the promotion of horticultural exports. Last Monday, the director for promotion and market development, Gayatri K. Raya, announced the establishment of a quality and standardisation directorate for the horticultural sub-sector.



The new directorate will monitor the quality of local produce, and will set up certification and upgrading programmes aimed at increasing producers' knowledge and capabilities. Together with a number of promotional activities, the measure is expected to double Indonesia's horticultural export to $12bn in 2009.



In addition, Minister of Maritime Affairs and Fisheries Freddy Numberi has decided to step up efforts to accelerate the development of local sectors.



During a visit to Lampung in southern Sumatra last Friday, he told Antara news agency that Indonesia had ended a co-operation agreement with the Philippines. This agreement allowed fishing boats from the neighbouring country to catch fish in Indonesian waters.



Similar agreements with Thailand and China will also be ended, in September this year and next year, respectively. If and when foreign fishing companies open up their processing facilities in the country, the government would be willing to actively support these companies operating in Indonesian territorial waters, Numberi said.



Indonesia suffered IR3 trillion (around $319.9m) in losses to state revenue in 2005 due to illegal fishing - mostly by foreign vessels. Next to bringing value-added industry and new jobs into Indonesia, the move could simplify the monitoring and supervision of foreign fishing in Indonesian waters.



Numberi hoped Indonesia would be free of illegal fishing as soon as 2008, and called upon local administrations to provide foreign fishing companies with tax incentives if they established processing plants in their provinces.



While each of these initiatives will undoubtedly stimulate growth in the agricultural sector, the measure that potentially has the biggest impact for the sector is the Warehouse Receipt Bill, passed by parliament last week.



This new law, which will become effective in one year, establishes a system of designated warehouses providing official, centrally registered receipts for commodities stored by farmers or growers.



This means for small- and medium-sized farmers that they will not have to sell their produce immediately after harvesting, when prices are usually low due to excess supply. They now can keep their harvest in a warehouse while waiting for better prices.



After the bill passed parliament, Trade Minister Mari Elka Pangestu, who will be responsible for the implementation of the law, explained that "The law will thus also help stabilise commodities prices".



The certificates will furthermore be tradable as derivatives, or can be used to settle maturing futures contracts on a commodities exchange.



But maybe more important is the stipulation that these certificates can also be used as collateral. Small- and medium-sized enterprises (SMEs) in Indonesia often have difficulties getting competitive loans from banks. They lack the necessary equity that could serve as collateral if the loan cannot be repaid. As a result, expanding business has been very hard for many Indonesian SMEs, which are often considered the main drivers behind economic growth.



The Trade Ministry must now design and implement the technical procedures and infrastructure of this warehouse receipt system. This is to ensure that, together with all these other efforts, enough SMEs will be empowered to give the sector, and then the economy, the boost it deserves.


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