WORLD TRADE
WT/TPR/S/184/Rev.1
6 November 2007
ORGANIZATION
(07-4828)
Trade Policy Review Body
TRADE POLICY REVIEW
Report by the Secretariat
INDONESIA
Revision
This report, prepared for the fifth Trade Policy Review of Indonesia, has been
drawn up by the WTO Secretariat on its own responsibility. The Secretariat has,
as required by the Agreement establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), sought clarification from Indonesia on its trade policies and
practices.
Any technical questions arising from this report may be addressed to
Mr. Mario Kakabadse (tel: 022 739 5172).
Document WT/TPR/G/184/Rev.1 contains the policy statement submitted by
Indonesia.
Note:
This report is subject to restricted circulation and press embargo until the end of the first
session of the meeting of the Trade Policy Review Body on Indonesia.
Indonesia
WT/TPR/S/184/Rev.1
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS
I.
II.
vii
(1)
ECONOMIC ENVIRONMENT
vii
(2)
TRADE POLICY FRAMEWORK AND DEVELOPMENTS
viii
(3)
SECTORAL POLICY DEVELOPMENTS
(4)
PROSPECTS
x
xii
ECONOMIC ENVIRONMENT
1
(1)
INTRODUCTION
1
(2)
RECENT ECONOMIC DEVELOPMENTS
(i)
Growth, employment, and poverty
(ii)
Fiscal developments
(iii)
Monetary and exchange rate developments
(iv)
Balance of payments
(v)
Structural reforms
1
2
5
6
7
7
(3)
DEVELOPMENTS IN TRADE
(i)
Trade in goods
(ii)
Trade in services
10
10
13
(4)
FOREIGN INVESTMENT PATTERNS
13
(5)
OUTLOOK
16
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
17
(1)
OVERVIEW
17
(2)
GENERAL CONSTITUTIONAL AND INSTITUTIONAL FRAMEWORK
(i)
Decentralization
(ii)
Governance
17
18
19
(3)
STRUCTURE OF TRADE POLICY FORMULATION
20
(4)
TRADE LAWS AND REGULATIONS
20
(5)
TRADE POLICY OBJECTIVES
22
(6)
TRADE AGREEMENTS AND ARRANGEMENTS
(i)
Multilateral agreements
(ii)
Regional arrangements
(iii)
Bilateral arrangements
(iv)
Trade preferences
22
22
25
28
28
(7)
TRADE DISPUTES AND CONSULTATIONS
28
(8)
FOREIGN INVESTMENT REGIME
29
(9)
AID FOR TRADE
34
WT/TPR/S/184/Rev.1
Page iv
Trade Policy Review
Page
III.
IV.
TRADE POLICIES AND PRACTICES BY MEASURE
35
(1)
INTRODUCTION
35
(2)
MEASURES DIRECTLY AFFECTING IMPORTS
(i)
Customs procedures
(ii)
Customs valuation and rules of origin
(iii)
Tariffs
(iv)
Other charges affecting imports
(v)
Import prohibitions, restrictions, and licensing
(vi)
State trading
(vii)
Government procurement
(viii)
Contingency measures
(ix)
Standards and other technical requirements
36
36
39
39
46
46
47
49
50
52
(3)
MEASURES DIRECTLY AFFECTING EXPORTS
(i)
Export prohibitions, restrictions, and licensing
(ii)
Export taxes
(iii)
Export assistance
56
56
56
57
(4)
MEASURES AFFECTING PRODUCTION AND TRADE
(i)
Taxation
(ii)
Production assistance
(iii)
Competition and consumer policy
(iv)
Intellectual property rights
59
59
60
62
64
TRADE POLICIES BY SECTOR
67
(1)
INTRODUCTION
67
(2)
AGRICULTURE AND FORESTRY
(i)
Features
(ii)
Main developments
(iii)
Selected items
(iv)
Forestry
69
69
71
73
75
(3)
MINING AND ENERGY
(i)
Mining
(ii)
Energy
78
78
78
(4)
MANUFACTURING
(i)
Textiles and clothing
(ii)
Automotive
80
80
82
(5)
SERVICES
(i)
Financial services
(ii)
Telecommunications
(iii)
Transportation
(iv)
Tourism
84
84
90
93
96
REFERENCES
97
APPENDIX TABLES
99
Indonesia
WT/TPR/S/184/Rev.1
Page v
CHARTS
Page
I.
ECONOMIC ENVIRONMENT
I.1
I.2
Product composition of merchandise trade, 2002 and 2006
Direction of merchandise trade, 2002 and 2006
III.
TRADE POLICIES AND PRACTICES BY MEASURE
III.1
III.2
III.3
III.4
Distribution of MFN tariff rates, 2002 and 2006
Average applied MFN and bound tariff rates, by HS section, 2002 and 2006
Tariff escalation by 2-digit ISIC industry, 2002 and 2006
Composition of Indonesian National Standards
11
12
42
43
44
53
TABLES
I.
ECONOMIC ENVIRONMENT
I.1
I.2
I.3
I.4
I.5
Main economic and social indicators
Selected macroeconomic indicators, 2002-06
Summary of central government operations, 2002-06
Approved foreign direct investment by sector, 2002-06
Approved foreign direct investment by origin, 2002-06
II.
TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1
II.2
II.3
II.4
Trade-related legislation, 2007
Main notifications under WTO Agreement, April 2003-March 2007
Indonesia's recent involvement in the WTO dispute settlement mechanism
Investment negative list, 2006
III.
TRADE POLICIES AND PRACTICES BY MEASURE
III.1
III.2
III.3
III.4
III.5
III.6
III.7
Planned improvements to Indonesian Customs to be carried out in 2006/07
Structure of the MFN tariff, 2002-06
Summary analysis of the Indonesian MFN and CEPT preferential tariff, 2003-06
Major state-owned enterprises, 2006
Summary of anti-dumping actions, 2002-06
Taxation revenues, 2004-05
Budget for science and technology institutions, 2004-07
2
3
6
14
15
21
23
29
31
37
41
45
48
51
59
61
WT/TPR/S/184/Rev.1
Page vi
Trade Policy Review
Page
IV.
TRADE POLICIES BY SECTOR
IV.1
IV.2
IV.3
IV.4
IV.5
IV.6
IV.7
IV.8
IV.9
IV.10
IV.11
IV.12
IV.13
IV.14
IV.15
Sectoral GDP and employment, 2002-06
Production of major agricultural commodities, 2003-06
Exports and imports of major agricultural commodities, 2003-06
Applicable agricultural bound and applied tariff rates, 2007
Price gap between domestic and imported rice, 2003-06
Natural (HPH) and plantation (HTI) forest concessions, 1993 and 2002-06
U.S. imports of clothing from major Asian suppliers, 2004-06
Import duties and luxury taxes, 2007
Structure of the financial sector, 2006
Regional comparison of financial sectors, 2006
Leading banks, ranked by assets, December 2005
Share of bank ownership, December 2005
Telecom sector, 2004-08
Telecommunications market shares in 2006
Visitor arrivals, 2003-06
68
70
70
72
74
76
81
83
85
86
88
89
90
92
96
APPENDIX TABLES
I.
ECONOMIC ENVIRONMENT
AI.1
AI.2
AI.3
AI.4
Merchandise exports by product group, 2002-06
Merchandise imports by product group, 2002-06
Merchandise exports by destination, 2002-06
Merchandise imports by origin, 2002-06
101
102
103
104
Indonesia
SUMMARY OBSERVATIONS
1.
Since its previous review in
June 2003, Indonesia has made steady
economic progress with an average annual
GDP growth rate of 5.2% despite major
exogenous shocks and natural disasters.
Growth, however, has not been high enough to
create sufficient job opportunities to reduce
unemployment and cut poverty levels. In order
to achieve growth rates of over 6% annually to
create the jobs needed to mitigate
unemployment, which was in the order of 10%
in 2006, the Government has started a
comprehensive reform programme aimed,
inter alia, at improving the investment climate,
the financial sector, and infrastructure,
supported by Indonesia's vast natural
resources.
(1)
ECONOMIC ENVIRONMENT
2.
Indonesia's real GDP growth rose
steadily from 4.7% in 2003 to 5.5% in 2006,
while macroeconomic vulnerabilities have
been declining.
3.
Fiscal consolidation has been the
hallmark of economic policy as the overall
budget deficit narrowed from 2.4% in 2001 to
0.5% in 2005, helped by cuts in fuel subsidies
and delays in spending caused by changes to
budgetary and procurement procedures, and
to 1.1% in 2006. Under the medium-term
fiscal framework, public debt declined to 39%
of GDP in 2006, down nearly 20 percentage
points over three years, and is targeted to
continue to fall to about 30% by 2010, which
implies keeping the overall budget deficit
under 1% of GDP in the medium term.
However, the tax to GDP ratio of 12%
appears insufficient to meet Indonesia's
developmental needs.
4.
Inflation in 2006 was down to 6.6%,
apparently within the inflation target,
compared with 17.1% in 2005, reflecting the
deep cuts in fuel subsidies. Inflation is
forecast to be around 6% in 2007 although
this forecast might need to be raised if the
Government decides to reduce electricity
WT/TPR/S/184/Rev.1
Page vii
subsidies. The overriding objective of the
independent Bank Indonesia in the conduct of
monetary policy continues to be to contain
inflation.
5.
Strong domestic demand, particularly
consumption, has driven growth since the
1997-98 Asian financial crisis. The steady
recovery in growth in recent years, however,
has not been accompanied by an increase in
employment levels. Registered unemployment
(at 4.8% in 1997) has been over 9% since
2002, edging up to 11.2% in 2005 and then
down to 10.3% in 2006. Labour market
rigidities have been cited as one of the main
causes of rising unemployment, with Indonesia
ranking unfavourably in the region, and
planned revisions to labour laws appearing to
be stalled.
6.
Despite increased spending on poverty
programmes, the number of people living in
poverty (defined as an income of less than
US$17 per month) rose for the first time in six
years from 16% to 17.8% of the population
between 2005 and 2006. In addition to the end
of fuel subsidies, the ban on rice imports
contributed to a 30% rise in domestic rice
prices by the time of the poverty survey in
2006 and, as the poor spend nearly a quarter
of their income on rice, poverty inevitably
increased.
In response, the Government
relaxed the ban, thereby helping to stabilize
domestic rice prices.
7.
Merchandise exports accounted for
about 30% of GDP during the period under
review, whereas imports as a share of GDP in
the same period increased from 18% to 23%.
Foreign trade patterns have not changed
substantially although Indonesia has become
more dependent on petroleum exports and
imports. Most merchandise trade continues to
be with East Asian countries with China
increasing its share of both exports and
imports. Singapore remains Indonesia's main
ASEAN trading partner.
8.
After a strong recovery in 2000-01,
following a sharp decline after the Asian
financial crisis, gross domestic investment has
WT/TPR/S/184/Rev.1
Page viii
remained relatively flat.
The share of
investment in GDP has averaged around 23%
since 2002, down from a peak of over 30%
prior to the crisis, and below the average
national savings rate of 24%. Similarly,
inflows of foreign direct investment (FDI)
collapsed after the crisis and there have only
recently been signs of recovery. In order to
address Indonesia's poor investment climate,
the Government announced an investment
policy package in early 2006, which enjoys
considerable political commitment through its
issuance as a Presidential instruction. It
included submission of an investment law
(passed by Parliament in March 2007),
creation of a new investment negative list,
drastically cutting the time to start a business,
accelerating the review process of nonbusiness-friendly local regulations, as well as
streamlining
customs
procedures
and
improving customs regulations. These recent
measures do not yet appear to have had a real
impact on inbound FDI, which has historically
played a catalytic role in Indonesia's external
competitiveness.
9.
Improvement of Indonesia's investment
climate includes stimulating investment in
infrastructure. While infrastructure received
high levels of private and public investment in
the decades before the crisis, investment has
fallen since. Indonesia's 2006 Infrastructure
Reform Package is wide-ranging and covers
power generation, telecoms, water and
sanitation, roads and
port and airport
modernization.
10.
The Government has also been laying
the groundwork for judicial and civil service
reform and undertaking an effective anticorruption campaign focused on strengthening
the institutional framework against corruption.
New institutions such as the Anti-Corruption
Commission (KPK), Anti-Corruption Court,
the Interagency Corruption Eradication Team,
the Judicial Commission, the Police
Commission,
and
the
Prosecutorial
Commission have been given considerable
authority, and existing institutions like the
Supreme Audit Commission and the Attorney
General's office have become more active in
Trade Policy Review
combating
corruption.
Corruption
investigations have been launched at all levels
of government, and among state-owned
enterprises, leading to a number of successful
prosecutions. In consequence, corruption and
governance indicators appear to have
improved since Indonesia's previous review.
(2)
TRADE POLICY FRAMEWORK AND
DEVELOPMENTS
11.
Indonesia has continued its transition
to a democratic and decentralized State. The
decentralization process, under way since
1999, has transferred control of large amounts
of public expenditure and service delivery
from the central Government to 440 local
governments. Trade policy, however, remains
the responsibility of the Ministry of Trade and
has not changed significantly since the
previous Review. Indonesia provides at least
MFN treatment to all WTO Members. In an
effort to improve transparency and public
scrutiny of trade policies, the Government has
carried out a review of trade rules and
regulations in order to identify and, where
necessary, rectify onerous bureaucracy and
poorly conceived trade and investment
policies.
12.
During the period under review,
Indonesia has begun to follow a triple track
strategy of international trade negotiations:
multilateral, under WTO auspices; regional,
centred on ASEAN and ASEAN+ agreements;
and, for the first time, Indonesia is also
pursuing a bilateral trade agreement with
Japan, with other possible bilateral
agreements under study. Indonesia considers
that a multi-track strategy has become a
necessity although it considers that the
multilateral trading system is ultimately the
best option. To further its objectives, the
Government has established a National Trade
Negotiation Team responsible for overall
negotiating strategy.
13.
Since its previous Trade Policy
Review in 2003, Indonesia has continued to
undertake systematic efforts to increase the
pace of its economic development, including
Indonesia
by reducing constraints to trade, investment,
and production and streamlining procedures
at the border. Customs reform is high on the
Government's agenda and Parliament has
considered important changes that are
expected to enter into effect in 2007. The goal
of customs reform is to reduce the time and
cost of clearing customs and to limit
smuggling and customs fraud. Indonesia has
been active in the APEC trade facilitation
framework with the aim of reducing
transaction
costs.
Computerized
documentation requirements and customs
clearance have facilitated both imports and
exports;
registration of importers has
remained a requirement.
14.
The tariff has remained Indonesia's
main trade policy instrument, albeit a
relatively small
source of tax revenue,
accounting for a little over 4% of total tax
revenue. The average applied MFN tariff is
9.5% (2006), down from 9.9% in 2004 when
Indonesia adopted a new tariff classification
for MFN (non-ASEAN) tariffs. The average
applied MFN tariff is 9.2% for industrial
products and 11.4% for agricultural imports.
More than 75% of tariff rates are currently in
the range of zero to 10%. In line with longstanding sectoral support, the highest tariffs
apply mainly to motor vehicles. As was the
case at the time of the previous Review, over
93% of tariff lines are bound but at 37.5% the
average bound rate largely exceeds the
average applied rate, imparting a degree of
unpredictability to the tariff. The difference
between average applied and bound rates
remains much higher for agricultural products
(at 11.4% and 47.3% respectively). Over 99%
of applied tariff rates are ad valorem, a
feature that contributes to the transparency of
the tariff. Nonetheless, the structure of the
tariff has remained complex, involving
16 ad valorem rates and three specific rates.
The tariff also embodies a degree of
escalation, which has become more
pronounced
for
semi-processed
food,
beverages and tobacco products as well as for
paper, printing, and publishing. By 2006, the
ASEAN Common Effective Preferential Tariff
(CEPT) rate had come down to an average of
WT/TPR/S/184/Rev.1
Page ix
2.7% (from 3.4% in 2004), and as
intra-ASEAN trade develops it is predicted
that Indonesia's CEPT rate will drop further,
thus widening the gap with its MFN tariff rate.
15.
During the period under review,
Indonesia has continued to reduce the number
of tariff lines subject to import restrictions,
currently 141. Bans for sanitary and other
reasons have affected imports of chicken parts,
rice, and salt. No origin-related restrictions
have been maintained, except those affecting
trade with Israel. It is unclear how restrictive
remaining non-tariff barriers are;
they
include the producer-importer licences (for
sugar imports, for example) and the importer
registration licensing scheme.
16.
Government procurement remains an
important instrument of industrial policy.
Indonesia is not a signatory of the WTO
Agreement on Government Procurement
(GPA).
It has revised its government
procurement regime to, inter alia, increase
domestic sourcing, reduce corruption, and
bring its procurement framework more into
line with international public procurement
practice. Countertrade transactions, in which
foreign firms tender for certain types of
government procurement contracts and
construction projects, have fallen off
considerably.
17.
Indonesia has remained a relatively
active user of anti-dumping measures, mainly
on base metals and chemicals from the region,
initiating 26 anti-dumping investigations
between 2002 and 2006; in 2003 a Safeguards
Committee was established, following the
enactment of safeguards legislation in 2002.
18.
National standards are formulated in
accordance with international standards,
where feasible; as at the time of the previous
Review, mandatory standards account for
about 3% of all standards. Involvement in
mutual
recognition
arrangements
has
increased. Regarding SPS regulations, animal
and plant quarantine measures are strictly
enforced.
WT/TPR/S/184/Rev.1
Page x
19.
Indonesia has export licensing,
prohibitions and restrictions to ensure
protection of natural resources and
endangered species, provide an adequate
domestic supply of essential products, promote
higher-value-added downstream industries,
and upgrade the quality of export products.
Exports of products subject to restrictive
measures, including coffee, textiles, rubber
and certain types of wood, have been allowed
only through registered and approved
exporters. During the period under review, a
ban on log exports was in force, and in 2005,
export taxes were introduced on raw skins,
white tanned hides and coal. In 2004 the
Government ended several credit programmes
that offered subsidized loans to support
exports. Export finance is provided by the
state-owned Bank Eksport Indonesia.
20.
Support for production and trade has
been provided through financial assistance for
R&D as well as through industry- and/or
region-specific tax incentives. In 2006, the
Government proposed tax reforms, inter alia,
to simplify the tax incentive regime. Indirect
taxes, such as VAT and sales tax on luxury
goods, are levied, in principle, in a nondiscriminatory manner. Rising global oil
prices obliged the Government to reduce
subsidies for fuel in 2005 and bring prices
closer in line with world prices; it is estimated
that savings from fuel subsidies could free up
US$6-8 billion annually for developmental
spending.
Measures to assist domestic
production and/or control/restrain trade in
several sectors remain in place; they include
exclusive import rights to domestic producers
of certain sensitive items such as rice,
alcoholic beverages, sugar, hot- and
cold-rolled coil iron, and steel products.
State-owned enterprises continue to play a
central role in the economy and are estimated
to account for up to 40% of Indonesia's GDP.
A handful of commodities and services,
including petrol, electricity, cement and
transport, remain subject to "administered
prices".
21.
Indonesia's
competition
policy
framework has not undergone any significant
Trade Policy Review
change in the period under review. The
independent Commission for the Supervision
of Business Competition (KPPU) has
continued to implement Indonesia's antimonopoly legislation. Most of the cases dealt
with up to 2006 relate to collusion on tenders
and bid-rigging in government procurement by
state-owned enterprises or government
agencies. The emergence of the KPPU as a
body with the authority to handle bid-rigging
cases is significant in improving competition
in the economy, in particular for government
contracts. Government action on consumer
protection has continued in terms of preparing
and introducing implementing regulations of
the consumer protection law.
22.
Indonesia has sought to strengthen
protection of intellectual property rights
(IPRs) by expanding its international
commitments and improving its legal
framework to combat IPR violations.
Although institutional constraints have
continued to impede effective implementation
of the laws, the Government appears to have
made some progress in controlling piracy,
with the periodic seizure of sizable amounts of
pirated optical disc products.
A 2006
Presidential Decree established a National
Task Force for IPR Violation Prevention,
which is tasked with coordinating law
enforcement efforts of the customs authorities
and police, and increasing the number of
qualified judges, prosecutors, and IP lawyers.
(3)
SECTORAL POLICY DEVELOPMENTS
23.
Indonesia is the world's largest
archipelago with an ethnically diverse
population of 223 million and abundant
natural resources, including timber, fish,
minerals, petroleum, natural gas, and
considerable biodiversity.
Agriculture
(including animal husbandry, fishing and
forestry) accounted for almost 13% of GDP in
2006 and is home to the largest segment of the
Indonesian population and of the poor; it has
a primary role in achieving the objective of
poverty alleviation. It remains the most
important sector in terms of employment,
providing livelihoods for over 44% of the
Indonesia
workforce, which indicates that labour
productivity in agriculture is less than one fifth
of the level in the rest of the economy.
24.
Indonesia's vast range of mineral
resources has been exploited intensively,
enabling the mining sector to make an
important contribution to exports, in the order
of 8% in 2005. Since 1980, the share of
manufacturing in GDP has increased from
some 13% to about 28% and manufacturing's
share of exports has increased five fold to
64%. The services sector has also expanded,
boosted by the travel and tourism industry,
and in 2006 it accounted for 40% of GDP and
employed nearly 38% of the working
population.
25.
As was the case at the time of the
previous Review, agriculture continues to
receive special government assistance, which
reflects concern over food security and the
view that this can best be met by achieving
self-sufficiency in food staples, in particular
rice. Central to this policy is the stabilization
of the price of rice through intervention in the
market, to maintain a ceiling price for
consumers and a floor price for producers,
and by controlling trade. Due to shortages as
a result of the 2004 ban on rice imports, the
price of rice rose about 30% above
international prices and, given that two thirds
of farming households in Indonesia are net
consumers of rice, was widely considered to be
the main factor in the increase in poverty in
2006; the ban has been partially removed to
allow imports to help stabilize prices. By the
time the Uruguay Round Agreements were
implemented, Indonesia had removed a
number of licensing restrictions affecting
agriculture. Sanitary and phytosanitary and
food quality regulations have led to import
restrictions, particularly on animals and
animal products and on food items requiring a
halal certificate.
26.
In the forestry sector, regulatory
controls, including export restrictions, seem to
have had very limited success in dealing with
the problem of over-exploitation of forests and
particularly illegal logging, which is thought
WT/TPR/S/184/Rev.1
Page xi
to account for over 50% of timber production.
The ban on log exports, reinstated for the
duration of the review period, has done little
to stem losses from the smuggling of illegally
felled logs or to address environmental
problems, such as damage caused by illegal
logging, and instead may have depressed
domestic log prices, thereby encouraging
processing of wood-based products. The
Government, both central and regional, has
stepped up efforts to combat illegal logging,
but the foreign demand for cheap timber
appears to be overwhelming Indonesia's
enforcement capacity.
27.
The 2001 liberalization of the oil and
gas sector has allowed foreign firms to enter
the oil market, particularly in exploration and
production;
private companies are now
allowed to open retail outlets for fuel.
Pertamina's monopoly on importing and
distributing fuel has been lifted, and refining,
storage, and transport have been liberalized.
An electricity law passed in September 2002
envisaged an end to the state electric
company's monopoly on electricity distribution
and the possibility for private companies, both
local and foreign, to sell power directly to
consumers within five years. In January 2005,
however, the Constitutional Court announced
that the law was unconstitutional and it was
annulled.
28.
With respect to manufacturing,
Indonesia's average applied MFN tariff has
been reduced, from 9.6% in 2004 to 9.2% in
2006, but certain sectors (e.g. chemicals,
fabricated metal products, motor vehicles,
alcohol products, motor cycles, bicycles)
continue to be subject to high rates, ranging
up to 150%. In the textiles and clothing
sector, average MFN tariff protection has
remained constant at 10.8%. 2002 saw the
introduction of a decree concerning textile
import arrangements, whereby only companies
that have production facilities using imported
fabrics as inputs for finished products may
obtain import licences. There are no limits on
foreign ownership in the automotive sector
and no local-content requirements or
incentives. Tariff barriers have also been
WT/TPR/S/184/Rev.1
Page xii
lowered, although, at an average MFN rate of
26.5%, they remain relatively high by
international standards.
29.
The financial sector has gone through
major restructuring and reform since the
financial crisis in 1997-98. The Indonesian
Bank Restructuring Agency (IBRA) oversaw
substantial consolidation during its six years
of operation, but a large portion of the
banking system remains in government
control. During the period under review,
Indonesia has continued to make progress
towards establishing a strong and competitive
private banking sector, although the two
biggest state banks still have weak governance
and large non-performing loans (NPLs).
According to Bank Indonesia, total banking
sector NPLs as a percentage of total loans
rose to 9.3% in 2006 compared to 8.2% in
2003. Banks still dominate the financial
system, accounting for 80% of financial assets,
but the strengthening of non-bank financial
institutions (NBFIs), such as insurance
companies, finance companies and pension
funds, while small for a country of Indonesia's
size, has become a key policy imperative, as
articulated in the 2006 financial sector policy
reform package. The development of NBFIs
promises to increase access to low-cost
financial services and mobilize domestic
savings and channel them into profitable
investments.
30.
Indonesia has been undertaking
significant reform of its policy in the
telecommunications sector.
Reform has
brought about increased private sector and
foreign participation. Indonesia's two main
carriers - PT Telkom and PT Indosat, which
are 65% and 16% state-owned, respectively have been partially sold to private investors.
Competitive licences have been awarded for
the provision of GSM mobile services, Internet
services, and other value added services.
31.
Given its size and island structure,
Indonesia faces considerable challenges in
establishing
the
extensive
transport
infrastructure essential for its economic and
social development. Road development policy
Trade Policy Review
is focused on increasing road capacity and
quality by strengthening main national road
corridors and providing better access to less
developed and remote areas.
Ports are
generally inefficient, imposing additional time
and costs on domestic cargoes and exports.
While the main airports function well,
increased transport demand due to
deregulation and the proliferation of low-cost
airlines is putting pressure on capacity at
medium-sized and small airports.
(4)
PROSPECTS
32.
The Government's Medium-Term
Development Plan 2004-2009 envisages
annual average GDP growth of 6.6% and aims
to cut the poverty rate to 8.2% and the
unemployment rate to 5.1% by 2009. The Plan
recognizes that the main challenge is to
increase growth to a level that can create
sufficient jobs to hold back rising
unemployment (and underemployment) and
reduce poverty.
33.
The Government is implementing a
comprehensive reform agenda to strengthen
public institutions, improve the business and
investment climate, and boost infrastructure
development. If implementation continues in a
timely manner, these reforms will remove
some of the main obstacles to private
investment and contribute to a more flexible
labour market and more efficient public
administration, thus contributing to an
acceleration in growth and helping to reverse
the rising trend in unemployment. On the other
hand, delays in implementation of the
Government's key structural measures,
including approval of tax and labour laws,
could undermine investor confidence, and
growth could remain in the sub-6% range
(similar to that seen in the last few years) with
unemployment continuing to trend upwards.
34.
The Government has shown clear
resolve to carry out major reforms. Indonesia
could also take advantage of the multilateral
system to further lock-in any
unilateral
reforms, thereby boosting investor confidence
and facilitating foreign investment, which will
be key to Indonesia's future prospects.