(Source: Esther Samboh Asia News Network (MCT) — The World Bank says that several recent Indonesian government decisions may send “mixed signals” at a time when coordination, investment and trade are needed to tackle the global economic slowdown.
In its latest quarterly report on Indonesia released yesterday, the World Bank cut its annual economic growth forecast for Indonesia to 6 per cent this year and to 6.4 per cent for 2013, assuming the current global economic slowdown would continue.
However, the growth rate might drop to as low as 3.8 per cent in a worst-case scenario of a severe global downturn, the World Bank said.
The report said that the government should immediately redirect its spending to capital and social expenditures, instead of “unproductive” fuel subsidies, to support the economy and protect the poor in the event of a crisis.
Clear and consistent policies for trade and investment were also needed to boost investor confidence, it added.
Recently enacted government policies, such as horticulture import restrictions, divestment regulations and domestic processing requirements in the mining sector, might weaken investor confidence at a time when the bank claimed it was needed the most.
“While the aims of these policies may originate in the development objectives of promoting domestic productivity, jobs and growth, their presentation, which has often been changing, highlights coordination and communication issues,” the report said.
“There is no room for complacency in the current fragile market environment,” the Bank’s lead economist for Indonesia, Shubham Chaudhuri, said after the release of the report.
State Investment Coordinating Board (BKPM) chairman Chatib Basri said that the government had some homework to do to entice long-term direct investment to the nation, instead of short-term portfolio investors.
Indonesia’s economy, the largest in Southeast Asia, has proven resilient to the global crisis and ensuing slowdown.
Its economy has grown more than 6 per cent for the last several years, something that former finance minister and current World Bank managing director Sri Mulyani Indrawati considered a “luxury level”.
While Indonesia’s economy will likely remain solid amid weakening global growth and market turbulence, it was not immune to spillover from international developments in trade and finance, according to the World Bank.
Indrawati said that policy makers in Indonesia and abroad must avoid sending conflicting policy signals, given the prevailing fragility and sensitivity in the global economy.
“This is a time when coordination among policy makers is becoming even more important, because you don’t have the luxury of making conflicting signals,” Indrawati said.
“On a normal day, that might be excusable. Now you have to prepare a ‘good umbrella’. Confidence needs to be built on perceptions.”
Indrawati had several prescriptions for Bank Indonesia officials: “The central bank needs to give the right signals to provide coherence. Investment policy, trade policy and local government policy need to be coordinated,” Indrawati said.
“The coordination is very much needed to strengthen and unify the message,” she added.
Separately, Coordinating Economic Minister Hatta Rajasa said that he had proposed a new infrastructure financing scheme to Indrawati when they met at his office on Thursday.
“For example, if a private sector firm is interested in a project, then the World Bank can finance at least 20 per cent of the total spending. The financing would then be leveraged by private banks. After the financing is leveraged, it will then be packaged and a guarantee on it will be attached before the project is started,” Rajasa said.
Rajasa said that the current sub-loan agreement scheme used to finance large infrastructure projects was no longer feasible amid the government’s effort to accelerate development.
Hans David Tampubolon contributed reporting
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