67858 INDONESIA ECONOMIC QUARTERLY Redirecting spending April 2012 INDONESIA ECONOMIC QUARTERLY Redirecting spending April 2012 Preface The Indonesia Economic Quarterly reports on and synthesizes the past three months’ key developments in Indonesia’s economy. It places them in a longer-term and global context, and assesses the implications of these developments and other changes in policy for the outlook for Indonesia’s economic and social welfare. Its coverage ranges from the macroeconomy to financial markets to indicators of human welfare and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Indonesia’s evolving economy. This Indonesia Economic Quarterly was prepared and compiled by the macro and fiscal policy cluster of the World Bank’s Jakarta office, under the guidance of Lead Economist Shubham Chaudhuri and Senior Country Economist Enrique Blanco Armas. The team was led by Ashley Taylor and included Magda Adriani (commodity prices), Andrew Blackman (international environment, external sector and risks), Fitria Fitrani (external sector), Faya Hayati (prices and fuel subsidies), Ahya Ihsan (fiscal and 2011 Budget), David Stephan (real sector and risks) and Gonzalo Varela (external sector). Additional contributions were received from Neni Lestari (banking), The Fei Ming (corporate sector), Sandra Pranoto (Doing Business in Indonesia 2012), Jon Jellema and Rythia Afkar (Social Assistance), Dwi Endah Abriningrum (2011 Budget), Yuliya Makarova, Pedro Cerdan-Infantes and Yus Medina Pakpahan (Education), Anna I. Gueorguieva and Yulia Immajati (Gender). Arsianti, Yus Medina Pakpahan and Ashley Taylor shared the editing and production. Enrique Blanco Armas, Reena Badiani, Dini Sari Djalal, Juan Feng, Andrew Mason, Katherine Patrick, Hari Purnomo, Rubi Sagana and Djauhari Sitorus provided detailed comments and input. Farhana Asnap, Indra Irnawan, Jerry Kurniawan, Nugroho, Marcellinus Winata and Randy Salim organized the dissemination and Titi Ananto, Sylvia Njotomihardjo and Nina Herawati provided valuable administrative support. This report is a product of the staff of the International Bank for Reconstruction and Development / The World Bank, supported by funding from the Australian Government - AusAID under the Support for Enhanced Macroeconomic and Fiscal Policy Analysis (SEMEFPA) program. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent, AusAID or the Australian Government. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. For more World Bank analysis of Indonesia’s economy: For information about the World Bank and its activities in Indonesia, please visit www.worldbank.org/id In order to be included on an email distribution list for this Quarterly series and related publications, please contact madriani@worldbank.org. For questions and comments relating to this publication, please contact ataylor2@worldbank.org. Table of contents Preface iii Executive Summary: Redirecting spending viii A.  ECONOMIC AND FISCAL UPDATE 1  1.  The global economic outlook remains fragile, oil prices have risen sharply 1  2.  Indonesia’s GDP growth remained at 6.5 percent in the fourth quarter of 2011 3  3.  Downside fiscal risks have risen 5  4.  The potential for higher subsidized fuel prices dominates the inflation outlook 9  5.  Further balance of payment outflows were seen in the fourth quarter of 2011 12  6.  Financial markets are likely to remain sensitive to fuel price developments 14  7.  Uncertainty over the future path of fuel prices adds to Indonesia’s near-term risks 15  B.  SOME RECENT DEVELOPMENTS IN INDONESIA’S ECONOMY 17  1.  2011 budget performance – a brief review 17  a.  Revenues came in strong although tax collection was slightly below target… ...................... 19  b.  Rising subsidy spending and weak budget execution continued until year end .................... 20  c.  Looking forward ............................................................................................................................ 22  2.  Doing Business in Indonesia 2012 23  a.  Cities across Indonesia are improving commercial regulations… ........................................... 23  b.  …but there remain significant differences in performance across cities................................. 24  c.  Learning from each other ............................................................................................................. 26  C.  INDONESIA 2014 AND BEYOND: A SELECTIVE LOOK 27  1.  Building Indonesia’s social safety net 27  a.  The building blocks exist, but better construction and engineering are needed .................... 28  b.  Is the appropriate level of resources allocated to household social assistance?................... 29  c.  Do programs provide the right benefits at the right time? ........................................................ 30  d.  Are benefits reaching the right people? ...................................................................................... 31  e.  Are programs implemented in the right way?............................................................................. 32  f.  Are the right programs and system in place?............................................................................. 33  g.  Building a true social safety net in Indonesia ............................................................................. 35  2.  Turning quantity into quality in education 36  a.  Access to education has improved but quality remains an issue ............................................ 36  b.  Inefficient spending, particularly on teachers, may explain why increases in resources have not translated into improved education quality .......................................................................... 37  c.  Improving the quality of the teaching force in Indonesia is critical for improving the quality of education ................................................................................................................................... 39  3.  Gender equality is smart economics 42  a.  Gender equality in endowments has increased, however some disparities remain ............... 43  b.  On economic opportunity, female labor participation rates has risen but lags the region .... 45  c.  Women’s agency – voice and influence – can be strengthened in both the private and public spheres ........................................................................................................................................... 46  d.  Priority areas for action ................................................................................................................ 47  APPENDIX: A SNAPSHOT OF INDONESIAN ECONOMIC INDICATORS 48  LIST OF FIGURES Figure 1: Oil prices have moved well above the original Budget assumption ............................... ix  Figure 2: Energy subsidy spending in recent years has significantly exceeded social and capital expenditures ................................................................................................................... x  Figure 3: One quarter of Indonesians have been poor at least once in the past three years ........ xi  Figure 4: Oil prices moved up sharply at the beginning of 2012 ...................................................... 1  Figure 5: Financing costs for core Euro zone countries have retreated, but remain high for peripheral countries ....................................................................................................... 2  Figure 6: The global economic outlook is mixed but has weakened on average in Indonesia’s trading partners .............................................................................................................. 2  Figure 7: Quarterly GDP growth remained at 6.5 percent in the fourth quarter of 2011… .............. 3  Figure 8: …with quarterly growth moving up, despite a negative contribution from net exports . 3  Figure 9: Commercial users and wealthier households consume the bulk of subsidized gasoline…. 8  Figure 10: …whereas most poor and near-poor households do not consume gasoline ..................... 8  Figure 11: Headline inflation has continued to move down over the past quarter.......................... 9  Figure 12: The gap between Indonesian and international rice prices has moved up.................... 9  Figure 13: A comparison of macro variables around the 2005 and 2008 fuel price increases and potential 2012 increase ................................................................................................ 11  Figure 14: The balance of payments recorded a second consecutive deficit in Q4 2011............. 12  Figure 15: Trade values have softened in recent months ............................................................... 13  Figure 16: Bond yields have recently picked up and the Rupiah has depreciated gradually against the US dollar .................................................................................................... 14  Figure 17: February saw a reduction in non-resident investor holdings of Indonesian government bonds ....................................................................................................... 14  Figure 18: Indonesia’s Budget deficit has remained low ................................................................. 17  Figure 19: Revenue collection in 2011 was relatively strong… ...................................................... 19  Figure 20: Oil lifting has trended downwards, dampening the rise in related revenues from higher oil prices ............................................................................................................ 19  Figure 21: Energy subsidy spending significantly overshoots the revised Budget allocation .... 20  Figure 22: Education, defense, and infrastructure accounted for 62 percent of 2011 line ministry spending ....................................................................................................................... 21  Figure 23: Central government spending on infrastructure increased markedly in 2011 ............ 21  Figure 24: …and capital expenditures continue to be back-loaded towards the end of the year 21  Figure 25: Much of Indonesia’s population live just above the poverty time… ............................. 27  Figure 26: … and approximately 25 percent of Indonesians have been poor at least once in the past three years. ........................................................................................................... 27  Figure 27: Indonesia spends relatively little on social assistance relative to regional and middle income peers ................................................................................................................ 30  Figure 28: In practice the Raskin program delivers fewer benefits to the poor than budgeted for… ............................................................................................................................... 32  Figure 29: …while awareness of Jamkesmas benefits levels is low .............................................. 32  Figure 30: The “ 20 percent rule� triggered a significant increase in education spending starting 2009 ............................................................................................................................... 36  Figure 31: Comparable measures of the quality of educational outcomes are relatively weak in Indonesia… ................................................................................................................... 37  Figure 32: …resulting in a reduction in gross enrollment rates, adjusted for quality .................. 37  Figure 33: Most of the recent rise in education spending went to teachers’ salaries and certification program subsidies .................................................................................. 37  Figure 34: Indonesia already has one of the lowest STR in the world ........................................... 38  Figure 35: The growth in teachers has outstripped that of students across different levels of education ...................................................................................................................... 38  Figure 36: The relationship between the Student Teacher Ratio and spending per student is very strong .................................................................................................................... 38  Figure 37: The STR is not correlated with learning outcomes if the class size is below the regulatory maximum of 32 ........................................................................................... 38  Figure 38: Discretionary budget at the school level is associated with higher student test scores ............................................................................................................................ 40  Figure 39: Students in schools with BOSDA perform better, even controlling for other factors. 40  Figure 40: East Asia and Pacific has experienced historic rates of poverty reduction ................ 42  Figure 41: Enrollment rate gaps for tertiary education have closed and are reversed in some countries ....................................................................................................................... 44  Figure 42: There are no systematic differences between males and females in mathematics and science scores .............................................................................................................. 44  Figure 43: Maternal mortality in Indonesia is high for its income level .......................................... 44  Figure 44: Indonesia’s female labor force participation rate is lower than the regional average of 70 percent ..................................................................................................................... 46  Figure 45: Women still earn less than men across all sectors, but with less divergence in government ................................................................................................................... 46  Figure 46: Strength of women’s voice in personal and household is relatively high…................ 47  Figure 47: …but remains weak in the public domain ....................................................................... 47  LIST OF APPENDIX FIGURES Appendix Figure 1: Quarterly and annual GDP growth ................................................................... 48  Appendix Figure 2: Contributions to GDP expenditures ................................................................. 48  Appendix Figure 3: Contributions to GDP production..................................................................... 48  Appendix Figure 4: Motor cycle and motor vehicle sales ............................................................... 48  Appendix Figure 5: Consumer indicators ......................................................................................... 48  Appendix Figure 6: Industrial production indicators ....................................................................... 48  Appendix Figure 7: Real trade flows ................................................................................................. 49  Appendix Figure 8: Balance of Payments ......................................................................................... 49  Appendix Figure 9: Trade balance ..................................................................................................... 49  Appendix Figure 10: Reserves and capital inflows .......................................................................... 49  Appendix Figure 11: Term of trade and monthly export & import chained Fisher price indices . 49  Appendix Figure 12: Inflation and monetary policy ......................................................................... 49  Appendix Figure 13: Monthly breakdown of CPI .............................................................................. 50  Appendix Figure 14: Inflation among neighboring countries ......................................................... 50  Appendix Figure 15: Domestic and international rice prices .......................................................... 50  Appendix Figure 16: Poverty and unemployment rate .................................................................... 50  Appendix Figure 17: Regional equity indices ................................................................................... 50  Appendix Figure 18: Dollar index and Rupiah exchange rate ......................................................... 50  Appendix Figure 19: 5 year local currency government bond yields ............................................. 51  Appendix Figure 20: Sovereign USD Bond EMBI spreads .............................................................. 51  Appendix Figure 21: International commercial bank lending ......................................................... 51  Appendix Figure 22: Banking sector indicators ............................................................................... 51  Appendix Figure 23: Government debt ............................................................................................. 51  Appendix Figure 24: External debt .................................................................................................... 51  LIST OF TABLES Table 1: Growth of 6.1 percent is projected for 2012 ........................................................................ ix  Table 2: Although risks remain high, baseline 2012 GDP growth is projected at 6.1 percent ....... 4  Table 3: The oil price assumption was revised up in the 2012 proposed revised Budget ............. 5  Table 4: With no fuel subsidy reform the 2012 Budget deficit could reach 3 percent of GDP ....... 7  Table 5: The current account is projected to move into a small deficit in 2012 and financial inflows to come down .................................................................................................. 13  Table 6: Despite high energy subsidy spending the deficit in 2011 came in well below the revised Budget level .................................................................................................... 18  Table 7: The Doing Business methodology allows an objective but limited global comparison. 24  Table 8: Where is it easier to start a business, deal with construction permits or register property?....................................................................................................................... 25  Table 9: Some cities within Indonesia already perform to international best practice ................. 26  Table 10: Indonesia’s social assistance program is concentrated in eight household-centered programs ....................................................................................................................... 29  Table 11: After rising to 2005, spending on household SA has stayed roughly constant in real terms ............................................................................................................................. 30  LIST OF APPENDIX TABLES Appendix Table 1: Budget outcomes and proposed budget ........................................................... 52  Appendix Table 2: Balance of Payments .......................................................................................... 52  LIST OF BOXES Box 1: The proposed fuel price increase ............................................................................................... 6  Box 2: Fuel subsidies are highly regressive with most benefits going to wealthier households ......... 8  Box 3: Looking back to previous fuel price increases......................................................................... 11  Box 4: Key features of Indonesia’s new Land Acquisition Law ...................................................... 22  Box 5: About Doing Business and Doing Business in Indonesia 2012 .......................................... 24  Box 6: Indonesia’s household-based social assistance programs ..................................................... 29  Box 7: BLT and BLSM .......................................................................................................................... 33  Executive summary: Redirecting spending The near-term economic International developments continue to shape Indonesia’s near-term economic outlook, focus has shifted to the but the focus of attention has shifted. In late 2011 the primary concern was the need to address the cost deteriorating and uncertain outlook for the global economy and financial markets. Since of Indonesia’s fuel then there has been further evidence of the slowdown in global economic momentum but subsidies… also some positive signs, such as from the US, and international financial market conditions have improved. The recent sharp rise in global oil prices has added a new dimension to the situation. In particular, it has increased the projected cost of Indonesia’s fuel subsidies. With the benefits of these subsidies mainly going to the wealthier segments of the population, there is a clear need to redirect this spending to more pressing development needs. …and Parliament has Responding to the weakening external environment and higher oil price, the Government approved a revised 2012 brought forward the submission of its draft revised 2012 Budget to Parliament to early Budget allowing for a fuel March. The Government’s proposal to increase the subsidized fuel price from April 2012 price adjustment if the oil was a welcome move away from the quantitative restrictions in the original Budget. After price remains sufficiently high much debate Parliament allowed the option of a fuel price increase of IDR 1,500 per liter to IDR 6,000 per liter subject to the condition that the average, over six months, of the Indonesian crude oil price is 15 percent above the Budget assumption of USD 105 per barrel (i.e. USD 120.8). Without a fuel price The deficit in the proposed and approved revised 2012 Budget was 2.2 percent of GDP, adjustment and assuming up from 1.5 percent in the original Budget as a result primarily of higher energy subsidies. oil prices of USD 120 per However, the World Bank estimates that if oil prices average USD 120 over the year, the barrel, the World Bank deficit could rise to 3.1 percent of GDP if there is no subsidized fuel price adjustment or estimates that the budget deficit could move up to 2.5 percent of GDP if a fuel price rise is implemented in the third quarter of 2012. just above 3 percent of GDP From the perspective of fiscal sustainability a higher deficit is manageable given Indonesia’s strong initial debt position. However, the risk of hitting Indonesia’s three percent of GDP deficit limit may prompt a tightening in spending in key development areas. The greater uncertainty and complexity of the approach to fuel price adjustment also clouds the inflation and macro-policy outlook for investors. Furthermore, while recognizing the progress made on such a politically sensitive topic, the decision not to increase prices now represents a missed, or delayed, opportunity to redirect spending at a time when risks remain in the global environment. A deterioration in global Previous risks persist, but are less prominent. The risk that financial market stresses economic and financial originating from the Euro Zone spill over to Indonesia remains, given the exposure to developments also foreign investors of the government bond and equity markets. Yet, global financial remains a key risk… markets have regained ground on the back of the policy support measures taken in the Euro zone and the Greek restructuring deal. The Government of Indonesia has continued progress in strengthening crisis preparedness and management, potentially mitigating the domestic impact of any such shocks. Despite some buoyancy in the US, the momentum of the global economy has slowed over the past two quarters, and a sustained increase in oil prices poses risks to near-term global economic prospects. …around the baseline But Indonesia’s economic fundamentals are solid; Fitch and Moody’s recently moved scenario of a solid growth Indonesia’s credit rating back to investment grade, for the first time since the 1997/1998 outlook for Indonesia crisis. Domestic growth came in at 6.5 percent in Q4 2011, and moved up on a seasonally-adjusted quarterly basis. The weaker international environment was reflected in the drag on growth from net exports, but domestic investment has held up well. FDI and the manufacturing sector have performed strongly over the past year. However, a number of restrictive changes to regulations regarding trade and foreign investment have been put in place or proposed, for example, relating to horticulture imports or affecting exports and investment in the mining sector. Although the policies may not have an immediate impact on growth and investment, they may have significant longer-term implications. The baseline scenario for 2012 therefore remains for a moderation in export growth. This reflects a downward revision to Indonesia’s major trading partner growth relative to the December 2011 IEQ but there is expected to be a continuation of support from domestic drivers of growth. A fuel price hike later in the year, and the resulting inflation, may take some edge off private consumption growth (and may also pose challenges for monetary policy). However, 2012 growth is forecast to remain robust, at 6.1 percent, and is projected to move back up to 6.4 percent in 2013 (Table 1). Table 1: Growth of 6.1 percent is projected for 2012 2010 2011 2012 2013 Gross domestic product (Annual percent change) 6.1 6.5 6.1 6.4 Consumer price index* (Annual percent change) 6.3 4.1 8.5 5.4 Budget balance** (Percent of GDP) -0.6 -1.2 -2.2 n.a. Major trading partner growth (Annual percent change) 6.8 3.1 3.3 3.9 Note: World Bank projections for GDP and CPI assume an IDR 1,500 rise in the subsidized fuel price from Q3 2012. * Q4 on Q4 inflation rate. ** Government figures for Budget deficit - 2011 is preliminary figure and 2012 is revised Budget Source: Ministry of Finance, BPS via CEIC, Consensus Forecasts Inc., and World Bank staff Concern over the rising Supply disruptions and geo-political Figure 1: Oil prices have moved well above the fiscal burden of energy concerns have led to the sharp rise in original Budget assumption subsidies reflects the international oil prices (Figure 1). The (USD price per barrel of oil) recent sharp upward Budget assumption Indonesian crude oil price averaged USD movement in revised Budget assumption international oil prices, 122 per barrel in the first three months of USD per barrel USD per barrel but also the sustained 2012. The Government’s proposed 175 175 rise in domestic fuel revised Budget assumes a still Brent oil price consumption, in line with conservative price of USD 105 per barrel. 150 (dashed line = 150 Indonesia’s rising Based on the current profile of oil prices Indonesia futures as of 30 domestic incomes crude oil Mar 2012) from futures contracts, and the price 125 125 price adjustment mechanism recently approved by Parliament, the baseline 100 100 scenario of this report considers that the 75 75 price of subsidized fuel is raised in Q3 2012. 50 50 As mentioned, a rising gap between the 25 25 market price and subsidized price of fuel 2006 2008 2010 2012 will inflate the fiscal burden of fuel Source: EIA, ESDM, ICE, Ministry of Finance subsidies. It is also important to note that the increased cost of fuel subsidies is in part driven by Indonesia’s economic success. Fuel consumption has been rising with incomes. GDP per capita in 2010 was USD 3,000; one year later, it is USD 3,500. Vehicle ownership has boomed. In 2011 alone eight million motorbikes were sold in addition to almost 900,000 cars. ix It is not only the fiscal Figure 2: Energy subsidy spending in recent years has As well as reducing fiscal cost of fuel subsidies that significantly exceeded social and capital expenditures risk, reducing fuel subsidies is a concern but also the (central government spending as a share of GDP) also represents a valuable opportunity cost of the Energy subsidies opportunity to redirect spending… Capital expenditures Percent of GDP Percent of GDP government spending over Social expenditures 5 5 the medium-term to more 4 4 pressing development 3 3 needs and to make this 2 2 spending more efficient. For 1 1 example, in 2011 Indonesia 0 0 spent 3.4 percent of GDP on energy subsidies (2.2 percent on fuel and 1.2 percent on electricity subsidies), and only 1.6 percent and 1 percent of Note: 2012 prop. Rev is proposed Revised Budget GDP on capital and social Source: Ministry of Finance, CEIC and World Bank staff expenditures, respectively. …along with the fact that Indonesia’s subsidized fuel price is considerably cheaper than the price in most countries most of the benefits of and disproportionately benefits richer households. A car owner using 50 liters per week fuel subsidies go the receives around IDR 1,115,000 per month in benefits, ten times the IDR 111,000 per wealthier segments of the month received by a motorcycle owner using only 5 liters per week. A poor person without population a motorbike or car would see very little direct benefit, although may benefit indirectly from lower transport costs. Indeed, according to the 2009 household survey, 40 percent of the direct benefits to households from gasoline subsidies go to the richest ten percent, and less than 1 percent to the bottom 10 percent. It is, however, important to give poorer households time to adjust to the higher prices following a hike in subsidized fuel prices, as recognized in the Government’s proposed temporary cash transfer program. Sustained efforts to Redirecting spending by reducing fuel remove other distortions subsidies is only the first step. To enable to economic activity and Indonesia to achieve its potential of improve the allocation sustained 7 percent-plus growth, while and efficiency of government spending ensuring that the benefits of this growth are can help Indonesia reach enjoyed by all, progress in improving the its objectives of inclusive, allocation and efficiency of government and higher, growth… spending is crucial. Improvements in the business climate, and removing other economic distortions, can also help Indonesia reach these higher growth rates. …through ensuring that Education has received a substantial increase in its spending allocation, in line with the the increased resources constitutional rule that the sector should receive a minimum of 20 percent of the total state going towards education expenditure. This spending, and reform efforts, have led to noted successes, such as lead to the desired higher enrollment rates. But there is more work to do. Access remains low for higher improvements in quality… education and for secondary education in remote areas. Quality is a concern, and should be the next priority. Given the very low student-to-teacher ratio in Indonesia already, there is evidence that additional teachers are not associated with improved quality of education. Many reforms that could improve education quality would align spending with more prudent decision- making and more accountability, but would not increase costs. Other areas, such as expanding scholarships, require additional resources which could be freed from elsewhere. The key to this is improved teacher management and addressing the current strong incentives for hiring too many teachers. Important steps are being taken to fix these policies. Success will be essential if Indonesia is to take the next step forward towards a high quality education sector that provides competitive skills. x …through reforming and Policies for inclusive growth involve Figure 3: One quarter of Indonesians have investing in integrated promoting equality of opportunity, such been poor at least once in the past three years social assistance as through improving access and quality (share of individuals by exposure to poverty, programs to ensure that 2008-2010, percent) of education. But also vital are programs they provide a true social safety net to the bottom that help households escape Never poor Poor once 40 percent of the impoverishment and protect the highly Poor twice Poor three times population that is at high vulnerable. Indonesia’s national poverty Percent Percent risk of falling into rate has fallen to 12.5 percent in 2011. 100 4 100 7 10 poverty… This statistic masks a worrying degree of 80 15 13 80 vulnerability: much of the population is clustered just above the poverty line. 19 60 60 Nearly a quarter of Indonesians live below the official “near-poor� line (1.2 40 74 40 times poverty line expenditure); two-fifths 57 live below 1.5 times the poverty line. 20 20 Even relatively small shocks to 0 0 vulnerable households can push them Number of times Number of times into poverty. In recent years, half of all poor 2008-2010 near poor 2008- poor households had moved into poverty 2010 that year, and were not poor the year before, while more than a quarter of all Source: Susenas and World Bank staff Indonesians have been in poverty at calculations least once over 2008 to 2010 (Figure 3). Indonesia has the building blocks in place for a modern social welfare system. However, there is much room for improvement to ensure that these programs function as a true social safety net, so that the right benefits reach the right people at the right time. More effective spending through improving programs will be required, along with optimizing the mix of initiatives, integrating operations and access, and the scaling up of programs to protect more households from health risks, promote continuous education, and protect from adverse shocks. The cost of building the next generation of social safety assistance in Indonesia is manageable, requiring a rise in social assistance spending from 0.5 percent of GDP (2010) to roughly 1 percent of GDP, far less than the projected energy subsidy spending in 2012. Set against these costs, the benefits are sizeable. Not only can the poor be more effectively protected from shocks, but an effective social safety net can contribute to economic strength, to the benefit of the entire population, by promoting pro- poor investments in human capital and a healthy, educated, and productive workforce. …through promoting Policies that contribute to gender quality can also play an gender equality, which is important role in facilitating inclusive growth. There has been both an important considerable progress toward gender equality in Indonesia, objective in its own right particularly in the area of education. However, persistent and could also yield significant labor gender disparities remain elsewhere. Women still earn less productivity gains … than men in all sectors, and are more likely to work in the informal sector. Maternal mortality rates remain relatively high for Indonesia’s income level, and as in other countries, women’s voice in the public domain is weak. Gender equality is an important development objective in its own right; it is also smart economics. For example, a forthcoming East Asia and Pacific companion report to the World Bank’s World Development Report 2012, finds that gender equality could lead to significant productivity growth in the region. It is estimated that if Indonesia were to allocate productive resources on the basis of people’s skills and abilities, rather than by their gender, per worker productivity could increase by as much as 14 percent, with significant implications for growth and poverty reduction. …and through supporting Improving the business climate for the private sector can also play an important role in the development of the raising growth levels, through stimulating investment and entrepreneurship. The recent private sector by Doing Business in Indonesia 2012 survey of 20 cities across Indonesia illustrates the improving the regulatory progress made in reducing red tape for local entrepreneurs. Yet, many challenges remain. environment However, there is scope for cities to learn from the best practices of other cities within Indonesia, some of which are already up to international standards, and internationally so as to help close the gap in performance between Indonesia and global leaders. xi xii A. ECONOMIC AND  FISCAL UPDATE 1. The global economic outlook remains fragile, oil prices have risen sharply The outlook for the global International developments continue to shape the near-term economic outlook for economy and financial Indonesia, but the focus of attention has shifted. At the time of the previous IEQ in markets remains fragile... December 2011, the deteriorating and uncertain outlook for the global economy and financial markets was the primary concern. Since then there has been further evidence of the slowdown in global economic momentum but also some positive signs, such as from the US. Global financial markets have posted gains over the first quarter of 2012 but, also, remain sensitive to Euro zone developments and to macro data releases. The recent sharp rise in global oil prices has added a new dimension to the situation, raising concerns that, if sustained, it could dampen the growth outlook. It has also increased the fiscal risks associated with Indonesia’s fuel subsidies, prompting an early revision of the 2012 Budget which foresees an increase in subsidized fuel prices under certain conditions, discussed further below. …and oil prices have The increase in international oil Figure 4: Oil prices moved up sharply at the beginning of risen sharply since the prices has been due to geo- 2012 start of 2012 political tensions and supply (USD price per barrel of oil) disruptions, such as related to Budget assumption Iran. Indonesia’s crude price revised Budget assumption (ICP) averaged USD 122 per USD per barrel USD per barrel barrel in the first three months 175 175 of 2012, up from USD 111 in Brent oil price (dashed the final quarter of 2011 150 150 Indonesia crude line = futures as of 30 (Figure 4). Currently Brent oil price Mar 2012) 125 125 futures project prices to remain elevated but decline gradually 100 100 over the year. Applying this profile to the ICP would give an 75 75 average price for 2012 of just under USD 125. 50 50 International US dollar non- 25 25 energy commodity prices have Jan-2006 Jan-2008 Jan-2010 Jan-2012 also increased recently, up 2.7 Source: CEIC, ESDM, ICE, Ministry of Finance percent in February alone, although remain down on their levels of mid-2011. Metal and mineral prices showed particularly strong gains, in part due to weather-related supply losses affecting tin output in Indonesia. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 1 Indonesia Economic Quarterly Redirecting spending Policy measures taken in The recently agreed Greek debt restructuring plan and other policy measures in the Euro the Euro zone have zone have provided some support for global financial markets, with core Euro zone supported international economy bond yields narrowing since late 2011 (Figure 5). However, fiscal concerns financial markets… remain for peripheral Euro zone countries, notwithstanding the revised set of fiscal deficit rules, and also for the medium-term growth outlook for the area, particularly given the need for fiscal adjustment and the challenges of implementing needed structural reforms. …and there has been After the heightened volatility from August equity markets closed 2011 on the rise, with some return of risk developed markets (in US dollars) increasing by 7.1 percent over Q4. The market appetite recovery continued into early 2012 with a further rise of 5.6 percent for developed market equities between 1 January and 26 March 2012 (still leaving them 6.0 percent below May 2011 post-crisis highs). Emerging market equities also rose, but less strongly, up 3.6 percent over the corresponding period, remaining over 13 percent below post-crisis highs. The prospect of stronger growth in the US, and its impact on the perceptions of the likely future monetary policy stance, along with the agreement on Greece, contributed to rising yields on US and German government bonds from January lows. Consistent with returning investor risk appetite, emerging market bond spreads have fallen by over 90 basis points since January 1 and developing economy bond issuance also recovered strongly in early 2012. Other market stress indicators – such as US dollar liquidity and interbank lending – have also come down somewhat recently. Figure 5: Financing costs for core Euro zone countries have Figure 6: The global economic outlook is mixed but has retreated, but remain high for peripheral countries weakened on average in Indonesia’s trading partners (10-year government bond yield, percent) (Mean Consensus forecasts for 2012 growth, percent) Yield, percent Yield, percent Consensus forecasts for 2012 growth as of: 16 16 Percent Mar-11 Jun-11 Sep-11 Dec-12 Mar-12 Italy Spain 5 10 France Germany 4 8 12 12 Portugal Ireland 3 6 8 8 2 4 1 2 4 4 0 0 -1 -2 0 0 US Euro area Japan Indonesia's Jun-10 Dec-10 Jun-11 Dec-11 MTP* Source: JP Morgan Note: *MTP is major trading partner growth weighted by export shares (World Bank staff projection for 2012) Source: Consensus Economics Overall, the growth Business confidence and high frequency leading indicators, such as industrial production projection for 2012 in and exports, point to a further weakening in growth in the Euro area, major emerging Indonesia’s major trading market economies such as China, India and Brazil, and within Asia. Growth forecasts partners has been have been downgraded accordingly (Figure 26). The European Central Bank now expects lowered slightly the Euro zone to record a mild recession in the first half of 2012, before a slow recovery. The Chinese economy is experiencing a gradual slowdown and, symbolically, the Chinese government announced a growth target of 7.5 percent for 2012 – following eight successive years of an 8 percent target – although past growth out-turns have, however, regularly exceeded the target. US economic news has surprised on the upside, providing some counterbalance to the weakening global outlook, although the political debate over fiscal consolidation will continue to cloud the outlook. Overall, putting developments across the region and major markets together, forecast growth in Indonesia’s major trading partners (MTP) has moved down gradually as the impact of the global downturn on economic activity has become clearer. Indonesia’s MTP growth in 2012 is now forecast at 3.3 percent, down from 3.5 percent in the December 2011 IEQ. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 2 Indonesia Economic Quarterly Redirecting spending 2. Indonesia’s GDP growth remained at 6.5 percent in the fourth quarter of 2011 The Indonesian economy Indonesian GDP increased by 6.5 percent in Q4 2011, the third consecutive quarter of 6.5 grew by a solid 6.5 percent growth (Q1 was revised down slightly from 6.5 percent to 6.4 percent). On a percent in the fourth seasonally-adjusted basis the economy grew by a robust 2.2 percent, stronger than the quarter and 6.5 percent 1.4 percent recorded in Q3 (Figure 7). Overall, the Indonesian economy grew by 6.5 overall in 2011 percent in 2011, up from 6.1 percent in 2010 and the highest recorded growth rate since 1996. This strong real growth, combined with GDP deflator growth of 8.4 percent and the strength of the Rupiah, moved GDP per capita to USD 3,540 per capita, up from USD 3,010 in 2010. Investment and private The major driver of growth in Q4 2011 was investment (Figure 8), which grew by a consumption supported seasonally adjusted 5.2 percent in the quarter, the strongest growth since mid-2004. activity in the quarter but Private consumption, although slowing slightly, remained supportive. Offsetting these the weakening in global factors was the drag on growth from net exports, which detracted 1.7 percentage points demand was seen in the trade figures from quarterly growth. Reflecting the weakening external environment quarterly seasonally-adjusted real export growth slowed to 0.5 percent in Q4 from 2.2 percent in Q3. This was in line with monthly trade data, discussed further below, which had shown a slowing in export growth from the middle of the year. Imports grew by 5.1 percent in the fourth quarter, recovering from the weak growth in the third quarter. Figure 7: Quarterly GDP growth remained at 6.5 percent in Figure 8: …with quarterly growth moving up, despite a the fourth quarter of 2011… negative contribution from net exports (growth in real GDP, percent) (contribution to quarter-on-quarter seasonally adjusted growth, percent) Private cons. Gov cons. Investment Percent Percent Net Exports Discrepancy GDP 4 8 Year -on-year (RHS) Percent Percent 4 4 3 6 Quarter-on- quarter seasonally 2 2 adjusted (LHS) 2 4 Average (LHS)* 0 0 1 2 0 0 -2 -2 Dec-05 Dec-07 Dec-09 Dec-11 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Note: * Average quarter-on-quarter growth since Q1 2002 Note: Contributions may not sum to overall GDP growth due Source: BPS and World Bank staff seasonal adjustment to seasonal adjustment of each individual series Source: BPS and World Bank staff calculations Growth in production was On the production side, manufacturing and trade, hotels and restaurants were the main driven by manufacturing drivers of growth. Manufacturing growth was 6.2 percent in 2011, the strongest annual and trade, hotels and growth since 2004, driven by the food, beverage and tobacco and transport equipment restaurants and machinery sectors. Construction also performed well, in-line with the strong investment figures. Overall in 2011, both the trade, hotel and restaurant and services sectors recorded their highest growth rates since before 1993. Indonesia’s growth is Looking towards the rest of 2012, in line with recent data releases, the baseline scenario projected to moderate in remains one in which there is a moderation in external demand but domestic drivers of 2012 to 6.1 percent before growth are supportive. The downgrade in forecast growth in Indonesia’s major trading moving up to 6.4 percent partner economies contributes to a slight dampening of the recent strong growth in in 2013 industrial sectors such as manufacturing while net exports are expected to contribute very little to growth in 2012, after a contribution of around 1.5 percentage points in 2011. Indicators of domestic activity, such as concrete sales and industrial production, all remain at elevated levels. Consumer sentiment indicators, while high, have come off slightly. This is most likely related to the potential rise in subsidized fuel prices. As discussed below, T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 3 Indonesia Economic Quarterly Redirecting spending Parliament decided to allow such an adjustment if the average oil price is sufficiently high over six months reaches 15 percent above the USD 105 oil price assumption in the revised Budget. As discussed in the fiscal section below, given the profile of oil prices, the baseline scenario assumes a subsidized fuel price increase in the third quarter of 2012. The direct, and anticipatory, impact of such an increase, and the consequent increase in the level and uncertainty over inflation, could dampen consumption growth slightly, as appears to have been the case in 2005 and 2008, although cash compensation accompanying any increase may have an offsetting effect. From the supply-side perspective, the rise in crude oil prices may also be a drag on growth, to the extent that it is an important intermediate input cost for some firms. The net impact of these factors is a growth forecast for 2012 of 6.1 percent, slightly below the December 2011 IEQ forecast of 6.2 percent. In 2013, growth is projected to move back up to 6.4 percent as external demand will likely recover, although the weakness in the Euro zone economies is set to be protracted. There remains considerable downside, as well as upside, risks around the outlook which are discussed in more detail below. Table 2: Although risks remain high, baseline 2012 GDP growth is projected at 6.1 percent (percentage change, unless otherwise indicated) Revision Annual Year to December quarter to Annual 2011 2012 2013 2011 2012 2013 2012 1. Main economic indicators Total Consumption expenditure 4.5 4.9 5.0 4.6 4.9 5.0 -0.6 Private consumption expenditure 4.7 4.6 4.8 4.9 4.5 4.8 -0.1 Government consumption 3.2 6.8 6.0 2.8 6.9 6.1 -3.3 Gross fixed capital formation 8.8 9.8 10.0 11.5 9.8 9.9 0.2 Exports of goods and services 13.6 7.4 9.5 7.9 7.5 9.5 -0.5 Imports of goods and services 13.3 9.2 9.5 10.1 9.2 9.4 -0.5 Gross Domestic Product 6.5 6.1 6.4 6.5 6.0 6.5 -0.1 Agriculture 3.0 3.4 3.4 4.1 3.3 3.4 -0.3 Industry 5.3 4.9 5.3 5.3 4.8 5.1 0.1 Services 8.5 8.0 8.2 9.0 7.9 7.9 0.0 2. External indicators Balance of payments (USD bn) 11.9 7.9 12.6 n/a n/a n/a -3.9 Current account balance (USD bn) 2.1 -4.1 -1.7 n/a n/a n/a -2.4 Trade balance (USD bn) 23.5 15.4 18.7 n/a n/a n/a -2.5 Financial account balance (USD bn) 14.0 11.9 14.3 n/a n/a n/a -1.6 3. Other economic measures Consumer price index 5.4 6.4 6.8 4.1 8.5 5.4 1.5 Poverty basket Index 8.2 8.8 9.7 6.3 10.2 8.3 2.1 GDP Deflator 8.4 9.7 10.5 7.5 11.3 10.1 1.1 Nominal GDP 15.4 16.4 17.6 14 17.9 17.2 1.1 4. Economic assumptions Exchange rate (IDR/USD) 8773 9000 9000 9024 9000 9000 200 Indonesian crude price (USD/bl) 111.6 120.0 115.0 111.0 120.0 115.0 10.0 Major trading partner growth 3.1 3.3 3.9 2.6 4.4 4.0 -0.2 Note: Projections for 2012 and 2013 assume an IDR 1,500 rise in the price of subsidized fuel in the third quarter of 2012. Economic indicators are in real terms. Projected trade flows relate to the national accounts, which may overstate the true movement in trade volumes and understate the movement in prices due to differences in price series. Source: MoF, BPS, BI, CEIC and World Bank projections T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 4 Indonesia Economic Quarterly Redirecting spending 3. Downside fiscal risks have risen Motivated by rising oil In response to the weakening external environment and sharp rise in global oil price, the prices, the Government Government submitted the draft revised 2012 Budget in early March ahead of the regular submitted its draft budget revision schedule of between July and August. After a month of deliberation revised 2012 Budget to process, the budget was approved by Parliament on April 1, 2012. The revised 2012 Parliament earlier than usual and it was Budget allows an increase in subsidized fuel price if the average oil price over six months approved on 1 April 2012 reaches 15 percent above the USD 105 oil price assumption in the revised Budget. This is slightly different to the Government’s proposal to increase the subsidized fuel price by IDR 1,500 per liter (one-third of the current subsidized price) by early April. A proposal to increase electricity tariffs gradually in 2012 also was not approved. However, although the proposed fuel price hike was postponed, the spending levels and budget deficit in the approved budget are broadly the same as in the proposed revised budget. The overall deficit in the 2012 revised Budget was moved up by IDR 66.1 trillion to IDR 190.1 trillion or 2.2 percent of GDP from 1.5 percent in the original Budget. This is an increase on the deficit of 1.2 percent of GDP seen in 2011 (which is discussed in more detail in Part B). The higher deficit under the revised Budget is expected to be financed mainly from domestic sources, including through increased government bond issuances and the use of an additional IDR 51.1 trillion from the Government’s accumulated unspent balances (saldo anggaran lebih, SAL). The macro assumptions The growth assumption in the in the revised Budget Table 3: The oil price assumption was revised up in the revised Budget was lowered included a slight 2012 proposed revised Budget slightly, by 0.2 percentage downgrade to GDP Macroeconomic Budget Revised Change points, due to the moderation growth and a USD 15 rise assumption budget in the oil price to USD 105 in the global outlook. The Real growth per barrel inflation assumption was (percent) 6.7 6.5 -0.2 moved up to 6.8 percent, Inflation (percent) reflecting the potential year-on-year 5.3 6.8 1.5 increase in the subsidized Interest rates fuel price. The assumed (percent, SPN 3mth) 6.0 5.0 -1.0 interest rate was revised Exchange rates down to reflect strong (IDR/USD) 8,800 9,000 200 Oil price investor demand for (USD/barrel) 90.0 105.0 15.0 government securities, backed by Indonesia’s Oil lifting (000 bpd) 950.0 930.0 -20.0 sovereign rating upgrade to Source: Ministry of Finance investment grade. Higher inflation and uncertainty in the global economic outlook contributed to the slightly weaker exchange rate assumption. Oil lifting was revised down to 930 thousands barrel per day (bpd) from 950 thousands barrel per day. Finally, and most importantly, the assumed oil price was revised up from USD 90 to USD 105 per barrel, although this is still on the optimistic side since the average ICP price in the first three months of 2012 was USD 122 per barrel. Total revenues have been Under the revised 2012 Budget total projected revenues were increased by IDR 47 trillion increased in the revised (3.6 percent) from the original Budget level, primarily due to higher commodity-based Budget due in particular revenues (mainly from oil, gas and CPO). Non-tax revenues were upgraded by IDR 63 to the rising international trillion on the back of the higher oil price assumption, although this is somewhat offset by oil price the lower assumed oil lifting. Revenue from tax collection has been adjusted downward by IDR 16 trillion (1.6 percent) due to the slightly lower domestic GDP growth projection and a change of basis of projection to 2011 revenue outcome from 2011 revised budget. Spending was also Total expenditure was increased by 8 percent or almost IDR 113 trillion in the revised increased due to rising Budget relative to the original Budget. The projected spending on fuel subsidies remains energy subsidies, significant, accounting for 13 percent of central government spending and up by IDR 14 additional spending for trillion compared to the budget. This may be underestimated since it is based on the compensation programs related to subsidized fuel original proposal to increase subsidized fuel price in April (Box 1). As of March 2012, the price adjustment, and effective cost of the subsidy (i.e. the economic price of fuel less the subsidized cost of extra spending for fuel) was at a record high of IDR 5,600 per liter of gasoline. Without increasing subsidized infrastructure fuel price, the Government spending on fuel subsidy is projected to increase by 51 percent relative to the original 2012 budget. Spending on electricity subsidies was T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 5 Indonesia Economic Quarterly Redirecting spending increased by IDR 20 trillion (45 percent higher than the initial Budget), but the allocation was lower than the proposed revised Budget of IDR 93 trillion which included the proposal to gradually increase tariffs by 3 percent in Q2, Q3, and Q4. This has been rejected by Parliament, potentially leading to significant overspending in electricity subsidies as was the case in 2011. Non-energy subsides also received a slightly higher allocation, reflecting an increase in the rice price and the allocation of 1 additional month to the rice for the poor (Raskin) program, to 14 months. Personnel and material expenditures have been revised down by IDR 5 trillion, reflecting cuts for line ministry spending to restrain the deficit. Capital expenditures received an 11 percent increase in their allocation, or IDR 17 trillion, to finance infrastructure development in Eastern Indonesia and domestic connectivity. “Other expenditures� also increased, by almost 50 percent, reflecting the compensation program for the poor proposed as part of the fuel price subsidy reforms. Transfers to the region remained broadly stable, with only a small proposed increase for oil and gas revenue sharing. Box 1: The proposed fuel price increase The Government’s proposed revised Budget included an increase in the subsidized fuel price together with compensation programs. The proposal was to increase the subsidized fuel price from April 2012. Two options were under consideration: an increase of IDR 1,500 and a fix subsidy of IDR 2,000. The government proposed a combination of two schemes of compensation programs to limit the potential impact of the fuel price increase on households. The first BLSM program (Bantuan Langsung Sementara Masyarakat or temporary community direct assistance) was a cash transfer to be distributed to 18.5 million poor households (the poorest 30 percent of households). The proposal was for a transfer of IDR 150,000 per month for 9 months with a total budget of IDR 25.6 trillion. The second compensating program, to assist those indirectly affected by rises in transportation costs, due to the higher fuel price was an increased subsidy for public transport (public service obligation) economy class (passenger and goods) with an estimated cost of IDR 5 trillion for 9 months. As mentioned, Parliament of Indonesia approved the option of a fuel price increase of IDR 1,500 provided the ICP price is on average, over a six month period, 15 percent above the revised Budget assumption of USD 105 per barrel (i.e. USD 120.8). Due to a higher oil price The oil price and the decision on subsidized fuel price adjustment are the main drivers of assumption, the World the overall budget position for 2012. The World Bank ICP assumption for 2012 is USD Bank projects a slightly 120, USD 15 higher than the revised Budget assumption. This reflects the price of ICP in higher deficit than the the first three months in 2012 and the profile of prices going forward from the Brent futures Government in 2012, even assuming a rise in the market. Following Parliament’s support to adjust subsidized fuel price should the ICP price subsidized fuel price later meets the condition, and based on the six-month average of prices under this profile, this in the year report assumes that there is an increase in subsidized fuel prices in Q3 2012. In this baseline “reform� scenario, the 2012 budget deficit is projected at 2.5 percent of GDP, higher than in the revised budget of 2.2 percent of GDP. This reflects fuel subsidy spending which is one-third higher due to the higher oil price assumption. Disbursements of line ministry (K/L) expenditure are assumed to be slightly below the revised Budget allocation. Revenue is projected to be slightly higher than the revised Budget, driven by higher oil price assumption although this is offset somewhat by the lower assumed oil lifting of 920 bpd.1 With no fuel price However, in the absence of subsidized fuel price increase, the World Bank projects that increase and elevated oil the budget deficit would grow to IDR 269 trillion, or 3.1 percent of GDP (Table 4). This is prices, the fiscal deficit driven primarily by spending on energy subsidies which is 60 percent higher (IDR 83 could exceed 3 percent of trillion) than the allocation in the revised Budget. This sensitivity analysis provides a clear GDP indication of the fiscal risks associated with delaying subsidy reform given current levels of oil prices and potential rising opportunity cost of what is a regressive form of spending (Box 2). In addition, the risk of hitting Indonesia’s three percent of GDP deficit limit may prompt a tightening in spending in key development areas.. 1 Press reports from the upstream regulator of oil and gas industry (BP-Migas) indicated that, by mid March, the average realized monthly oil lifting was only 895 bpd. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 6 Indonesia Economic Quarterly Redirecting spending Table 4: With no fuel subsidy reform the 2012 Budget deficit could reach 3 percent of GDP (IDR trillion, unless otherwise indicated) 2011 2012 2012 2012 2012 (p) 2012 (p) Outcome Budget Proposed Revised Budget WB Mar WB Mar (Unaudited) Revised estimates* estimates* Budget Assumption on subsidized fuel No No IDR 1,500 Potential for IDR No IDR 1,500 price Change Change increase in 1,500 increase if Change increase April average oil price in Q3 over certain level** A. State revenue and grants 1,199.5 1,311.4 1,344.5 1,358.2 1,368.5 1,383.3 1. Tax revenue 872.6 1,032.6 1,011.7 1,016.2 1,013.6 1,022.1 2. Non-tax revenue 324.2 278.0 331.9 341.1 354.1 360.4 B. Expenditure 1,289.6 1,435.4 1,534.6 1,548.3 1,637.7 1,600.7 1. Central government 949.2 965.0 1,058.3 1,069.5 1,134.8 1,097.8 K/L Expenditures 483.3 508.4 535.1 547.9 530.6 530.6 Non-K/L Expenditures 465.9 456.6 523.2 521.6 604.2 567.2 o/w Energy subsidies 255.6 168.6 230.4 202.4 285.0 248.0 - Fuel subsidy 165.2 123.6 137.4 137.4 220.0 183.0 o/w Other expenditures 6.5 28.5 42.5 68.5 68.5 68.5 2. Transfers to the regions 411.4 470.4 476.3 478.8 486.6 486.6 C. Primary balance 3.2 -1.8 -72.3 -72.3 -151.4 -99.6 D. SURPLUS / DEFICIT -90.1 -124.0 -190.1 -190.1 -269.2 -217.4 Deficit -percent of GDP -1.2 -1.5 -2.2 -2.2 -3.1 -2.5 Key economic assumptions/outcomes Economic growth (percent) 6.5 6.7 6.5 6.5 6.1 6.1 CPI (percent) 5.4 5.3 7.0 6.8 5.2 8.5 Exchange rate (IDR/USD) 8,742 8,800 9,000 9,000 9,000 9,000 Crude oil price (USD/barrel) 111 90 105 105 120 120 Oil production ('000 barrels/day) 898 950 930 930 920 920 Note: *World Bank revenue estimates are based on a different methodology than the Government to derive projections for nominal GDP (see Part C of the June 2010 IEQ for a full discussion). ** the revised Budget includes the option of a IDR 1,500 fuel price increase provided the ICP price is on average, over a six month period, 15 percent above the revised Budget assumption of USD 105 per barrel Source: MoF and World Bank staff calculations T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 7 Indonesia Economic Quarterly Redirecting spending Box 2: Fuel subsidies are highly regressive with most benefits going to wealthier households Most of the benefits of fuel subsidies in Indonesia go to commercial users and wealthier households. In addition to the fiscal burden and risks of the fuel subsidy system (see Part B and also the discussion in the March 2011 IEQ), there is also a concern that the current fuel subsidies do not assist the poorer segments of the population who are most in need of such support. Estimates based on data from Indonesia’s National Household Socioeconomic Survey (SUSENAS, Survei Sosial Ekonomi Nasional) indicate that households or private users may consume as little as one-third of all subsidized fuel, which includes gasoline and diesel. The residual is potentially attributable a to commercial users such as transport operators, businesses and other users. With respect to individual fuels, estimates indicate that households consumed almost half of all subsidized gasoline in 2008, implying that commercial and other users consumed the remaining half (Figure 9). A breakdown of the household component of gasoline consumption by socio-economic group indicates that the top half of households accounted for 84 percent of gasoline consumption, with the highest consumption decile alone accounting for almost 40 percent (Figure 9). In contrast, the bottom 50 percent of consumers accounted for just 16 percent of total household fuel consumption, with the poorest decile accounting for less than 1 percent. Moreover, a detailed examination of reported fuel consumption in the household survey indicates that around two-thirds of poor and near- poor households do not consume any gasoline whatsoever, and the likelihood of consuming gasoline and the actual quantity consumed rises sharply at higher income levels (Figure 10). With respect to diesel, very few households report any consumption; therefore commercial and other users are estimated to account for virtually all (98 percent) of the consumption of subsidized diesel. The pattern of fuel consumption directly determines the distribution of fuel subsidy benefits. Thus, commercial users may have received up to two-thirds of benefits and wealthier households most of the remainder. The gasoline subsidy is the most regressive, i.e. benefits the rich disproportionately more than the poorest households, as expected given limited motorcycle and virtually no car ownership amongst poor and near-poor households. Figure 9: Commercial users and wealthier households Figure 10: …whereas most poor and near-poor households do consume the bulk of subsidized gasoline… not consume gasoline (share of subsidized gasoline consumption attributed to (share of households who report consuming gasoline and average commercial users and private households in aggregate and by monthly benefit from gasoline subsidy of those who consume fuel, per capita consumption decile, 2008) by per capita consumption ventiles, 2008) IDR ‘000s per household/month Percent 400 100 Proportion of HH that report consuming fuel (RHS) HH benefit from gasoline subsidy (LHS) Decile 10 300 75 Private Reduction in HH benefit consump due to fuel price Commer- -tion (by Decile 9 increase (LHS) cial users 200 50 house- 54% Decile 8 holds) 46% 100 25 0 0 1 3 5 7 9 11 13 15 17 19 Household consumption ventile Source: February 2009 SUSENAS, APBN Financial Note: Average household benefit is the conditional mean of Statement and World Bank staff calculations households who consume gasoline; i.e. households reporting zero gasoline consumption are excluded from this calculation. The benefit is based on the cost of the subsidy in March 2012 Source: February 2009 SUSENAS and World Bank staff calculations To put it in terms of a household’s budget, fuel subsidies are estimated to transfer a car owner who consumes 50 liters of gasoline a week (200 liters a month) IDR 1,115,000 per month (based on the difference between the economic price of fuel and the price of subsidized fuel as of March 2012). This is in contrast with the average motorcycle user who consumes 5 liters a week (20 liters a month) (according to SUSENAS, 2009) and only receives a transfer of IDR 111,000 per month from the fuel subsidy scheme (Figure 10). Over a year, this equates to these wealthier households which use a car receiving a transfer of IDR 13,382,000 – 10 times more than the average motorcycle user which receives IDR 1,338,240 and many times the indirect benefits from subsidized fuel that may be received from those households without a car or motorbike. Poor households are also expected to feel the fuel price increase, despite less than 10 percent of poor households reporting they consume fuel directly, as they are the most vulnerable to changes in the prices of goods and services they consume. World Bank estimates that without any corresponding cash transfer, the poverty rate would increase by 0.7 percentage points with an IDR 1,500 per liter fuel price increase. As described above, the Government proposal in the draft revised Budget included provision for a IDR 150,000 per month cash transfer (BLSM) for 9 months to 18.5 million households (poorest 31 percent of households), which the World Bank estimates could lead to a temporary reduction in poverty, in addition to allowing poor and near-poor more time to absorb the shock once T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 8 Indonesia Economic Quarterly Redirecting spending BLSM stops. If introduced in the same form as originally proposed, the cash transfer is equivalent to about 10 percent of annual spending for a poor household in 2011. For non-poor households there may be a temporary reduction in consumption, due to higher prices of fuel directly and other prices, but this may be mitigated by a corresponding nominal wage increase as seen in 2008 when manufacturing employee’s nominal wage growth moved up in response to both the rise in fuel price and higher food price inflation. The total reduction in the cost of the fuel subsidy if the potential fuel price increase occurs in Q3 2012 is estimated to save IDR 37 trillion in 2012 and with the proposed cash transfer (IDR 26 trillion) and public transport subsidy (IDR 5 trillion) the net reduction in value for consumers would be IDR 6 trillion, or only 0.2 percent as a share of annual private consumption (using national accounts data). As such, any temporary impact to real consumption from higher inflation should be mostly offset through higher nominal wage increases and government compensation programs. Meanwhile, the fiscal savings and opportunities to redirect spending within the Government’s budget would be carried over into future years. Note: This box updates and draws from a more detailed analysis in the March 2011 IEQ on Indonesia’s experience with fuel subsidies over the past five years (see http://go.worldbank.org/USFOQLH060) a Aggregate household consumption of each fuel is estimated by taking the consumption reported by nationally representative households in the SUSENAS survey and scaling up to the national level, with the residual of total consumption (as reported in budget documents) attributed to other users. However, the SUSENAS survey is believed to under represent rich households – who consume higher quantities of fuel – which may lead to underestimation of aggregate household consumption and overestimation of the consumption of other users 4. The potential for higher subsidized fuel prices dominates the inflation outlook Headline inflation has While inflation outcomes have continued to fall, the outlook is for rising inflationary moved down further, pressures going forward, particularly from the potential hike in subsidized fuel prices if oil reaching a 2-year low of prices remain elevated above USD120 per barrel. Headline CPI inflation reached a 2-year 3.6 percent in February low of 3.6 percent year-on-year in February, continuing its downward trajectory of the past 2012… six months (Figure 11). Reflecting the absence of administered price shocks, subdued commodity price shocks and improved macro policy management, this is the first time since BPS produced detailed national accounts data in 1983 that inflation has been contained below four percent and growth has been above 6 percent. Figure 11: Headline inflation has continued to move down Figure 12: The gap between Indonesian and international over the past quarter rice prices has moved up (year-on-year growth, percent) (price of wholesale rice, IDR per kg) Percent Percent Percent Rice Price Rp/kg 24 24 150 10,000 Price gap between domestic Domestic and international (percent), medium LHS quality, RHS 18 18 100 8,000 Food inflation 12 12 50 6,000 Poverty Basket inflation 6 6 0 4,000 Headline inflation Core Vietnam 15 percent inflation 0 0 -50 broken, RHS 2,000 Feb 08 Feb 09 Feb 10 Feb 11 Feb 12 Feb-06 Feb-08 Feb-10 Feb-12 Source: BPS and World Bank staff calculations Source: PIBC, FAO and World Bank …as previous food price Inflation across the components of the CPI remains mixed. Food price inflation continued shocks continue to to decline, reaching an 8-year low of 2.9 percent in February 2012. This was due to the unwind base effects associated with the unwinding of the spike in spice prices in early 2011. This has offset much of the steady increase in retail rice prices, up 15 percent year-on-year in February. The poverty basket inflation rate has remained steady over the quarter, falling from 6.4 percent in November 2011 to 6.3 percent in February 2012. Looking across the other components of the CPI, clothes price inflation continues to be the highest growing component, at 8.7 percent in February. Higher gold prices have pushed up price inflation for personal effects, a subcomponent of clothing. With no changes in subsidized energy prices in more than a year transport and household energy cost inflation has been moderate, at 1.8 percent and 3.4 percent respectively in February. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 9 Indonesia Economic Quarterly Redirecting spending Rising international The gap between domestic and international prices of rice has moved higher (Figure 12). supply of rice and In February 2012 medium-quality domestic wholesale prices were 51-76 percent higher increases in domestic than the comparable international price of rice (from Thailand and Vietnam respectively). prices moved the gap Improved supply of rice onto the market, due to large production gains from Vietnam, between Indonesian and international rice prices Bangladesh, China, India and Pakistan, has pushed down international prices. For higher example, the US dollar price of medium quality Vietnamese rice declined by 23 percent from November 2011 to February 2012 while the price of Thai rice fell by 13 percent. Domestic wholesale prices (medium-quality) increased by 2.2 percent over this period. Domestic retail prices of rice reached a high in February with regular-quality retail rice rising by 6.6 percent since November 2011, and 15.4 percent year-on-year. Domestic rice prices did however ease in March as the harvest begun in some paddy areas (with March to April the main harvest season). The outlook for inflation The outlook for inflation is dominated by the impact of the potential fuel price increase, is dominated by the although the rice harvest in the first half of 2012 will also be critical. The World Bank potential increase in estimates that an IDR 1,500 increase in gasoline and diesel subsidized fuel prices in Q3 subsidized fuel prices, 2012 would add 3.2 percentage points to the level of both headline inflation and Poverty which could add an estimated 3.2 percentage Basket inflation. This would move the projected headline inflation in the final quarter of the points to headline and 2012 up to 8.5 percent year-on-year from 5.2 percent without the fuel price rise. The Poverty Basket inflation… poverty basket projection would rise to 10.2 percent from 6.8 percent. The estimated impacts on the different inflation series are commensurate in scale to the effects seen during the 2008 fuel price increases although several important differences remain (see Box 3). While the fuel price subsidy reform will temporarily increase inflation, the current macroeconomic environment of historically low inflation and strong, stable economic growth provides the most favorable conditions to undertake this important reform. The estimated impact on both headline and Poverty Basket measures of inflation is the same amount although the channels are distinctly different. The average consumer will experience the price increase both at the fuel pump and a generalized increase in prices of other goods while a poor households’ consumer basket, which contains almost no direct consumption of fuel, will be affected largely through the impact of higher transportation costs on the price of food (which represents 60 percent of their consumption basket) and on public transport. …and core inflation Core inflation is also expected to rise by 1.3 percentage points if the fuel price increase is would also be expected implemented. Although excluding administered and volatile items, services and goods to increase within the core price basket will be affected indirectly by rising transportation or other input costs or firms taking the opportunity to reset their prices. Indeed, consumer price expectations for three and six months ahead, measured in February 2012, increased due to anticipation of higher transport costs and to a lesser extent, food costs. As uncertainty remains as to whether the fuel price increase will occur, further anticipatory inflation could build as producers start adjusting prices before any increase is undertaken. Retailers have already reported in the BI Retail Sales survey that they expect rising prices due to higher energy prices. Similar trends occurred ahead of previous fuel price increases with expectations tracking inflation movements, but with a month or two lead. The direct inflationary The direct shock to inflation from a discrete fuel price adjustment would be temporary, impact of a potential rise falling out of the base one year from the date of introduction. Whether there is a more in subsidized fuel prices persistent rise in underlying inflation or expectations depends mainly on the indirect would be temporary impacts, the policy response and broader economic developments (see Box 3 for a comparison of the current situation with the fuel price increases in 2005 and 2008). Overall, inflation in 2013 is expected to move down, falling to 5.4 percent in the final quarter. GDP deflator growth is The broader level of prices growth in the economy, as measured by the GDP deflator, also expected to pick up ended 2011 at 7.9 percent year-on-year, similar to the growth seen over the past two years. With consumer prices representing around 60 percent of the deflator, GDP deflator inflation will also be affected by the potential fuel price adjustment. Accordingly, GDP deflator inflation is projected to rise to 11.3 percent year-on-year in Q4 2012. In 2013, although the direct fuel price impact should unwind, GDP deflator growth is still expected to exceed 10 percent on the back of strengthening economic growth and credit conditions. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 10 Indonesia Economic Quarterly Redirecting spending Box 3: Looking back to previous fuel price increases Examining the previous fuel price increases of 2005 and 2008 provides a useful starting point for exploring the potential impacts of any future fuel price increases on consumers. But there are several factors which distinguish the circumstances around the different periods of price increases, making direct comparisons less clear. First, the level and composition of fuel price increases were different, particularly for the 2005 case compared to the 2008 case and the potential adjustment in fuel prices which may occur in 2012. In 2005, the rising cost of oil had meant the market price for fuel was close to three times the subsidized pump price of IDR 1800 per liter that Indonesian’s were paying and the Government was left to pick up the difference. Subsequently, in two separate hikes within the space of 5 months in 2005, the government increased the price by 150 percent to IDR 4,500 per liter (Figure 13). This is starkly different to the 33 percent increase in fuel prices in 2008 and the potential 2012 increase should the condition for the level of the Indonesian crude oil price be met and a price increase adopted. Importantly, the increase in 2005 was also coupled with the complete deregulation of fuel prices for industrial users of fuel, which was previously also subsidized by the government. This had significant implications for large producers and manufacturers which rely on fuel as an important input in their production. As such, it is misleading to draw direct comparisons between the 2005 fuel price increases and the 2008 increase, and prospective rise in 2012. For these reasons, it is more informative to compare the price increase in 2008 and the potential 2012 one, but this exercise still has its limitations due the considerably different inflation contexts and macroeconomic backdrop. Second, the inflation climates prior to the fuel price increases were very different. Three months following the fuel price increase in 2008, headline inflation peaked at 12.1 percent. Should an IDR 1,500 price increase be implemented in Q3 2012 inflation is projected by the World Bank to peak at 8.6 percent in 2012, well below the peaks of 2008 or 2005 (Figure 13). This is largely for two reasons; food prices are projected to remain relatively stable and inflation growth and expectations to be maintained at relatively low levels. In 2008, unrelated to fuel price increases, food price inflation had reached 16 percent in April (the month before fuel prices increased) due to rice and cooking oil shortages (Figure 13). This meant headline inflation was already 7.4 percent before the fuel price increase and food inflation continuing to build. In contrast to this, in 2012 inflation was at a two year low of 3.6 percent in February (less than half the level of 2008) and food inflation was at an eight-year low of 2.9 percent (Figure 13). While these low levels are in part due to base effects which will unwind in the next few months, and there is the risk of anticipatory price increases, it is still expected that inflation will be lower leading in to any fuel price increase this year than it was in 2008 Third, there are important macroeconomic differences between 2008 and 2012. Most of the downward movement in economic indicators in 2008 occurred not in response to the fuel price increases in mid-2008, but to the global financial crisis in late 2008. In 2012, economic activity has been robust at 6.5 percent in each of the previous four quarters and, while there remain risks to the outlook from the ongoing fragility of international markets and weakening of external demand, it is expected that growth will remain above 6 percent for the year. Additionally, because inflation was high and above BI’s annual target in 2005 and 2008, even before the introduction of the fuel price increases, BI had to rapidly increase interest rates to keep inflation within their target band, with the policy rate peaking at 12.75 percent in 2005 and 9.5 percent in 2008, adding further drag to economic growth. In 2012, the inflation rate, with no subsidized price increase, would be expected to remain within BI’s inflation target band of 4.5±1 percent. The policy rate is currently at the lowest it has ever been at 5.75 percent, with the lower bound of the benchmark corridor a further 200 basis points below. This leaves plenty of scope to tighten policy, if required, through coordinated usage of liquidity management and macro prudential tools along with the policy rate. This will be particularly important should other inflationary pressures start to emerge such as from the impact of higher international oil prices or continued strong domestic activity. Figure 13: A comparison of macro variables around the 2005 and 2008 fuel price increases and potential 2012 increase (inflation year-on-year, percent, LHS; fuel price increase, percent RHS; Consumer Sentiment Index, RHS) Percent Percent/Index 25 250 2005 (Right Hand Axis) 20 200 2008 15 150 2012 (potential 10 increase) 100 5 50 0 0 Inflation prior to Inflation peak Food inflation Food inflation Fuel price Consumer increase prior to increase peak increase % sentiment (Index) Notes: 2012 inflation and food inflation peaks are World Bank projections. Consumer sentiment is a simple average of the BI Consumer Confidence Index and Danareksa Consumer Confidence Index and are taken two months prior to the fuel price increases in each year in order to gauge the level before the decision of the increases were made public. The dates of the fuel price increases were March 2005, October 2005, May 2008, and provided oil prices remain elevated above USD 120 per barrel it is assumed there will be an increase in Q3 2012. For 2005, ‘prior to increase’ is measured at February 2005 and peak is Nov 2005. For 2008, ‘prior to increase’ is April 2008 and peak is September 2008. For 2012, ‘prior to increase’ is Feb 2012 (latest data point available) and, for a Q3 2012 increase, the peak is projected to be November 2012. Source: BPS, BI Consumer Confidence, Danareksa Consumer Confidence and World Bank projections T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 11 Indonesia Economic Quarterly Redirecting spending 5. Further balance of payment outflows were seen in the fourth quarter of 2011 Indonesia’s overall Spillovers from global financial market volatility and the weaker external environment have balance of payments been seen most markedly in the balance of payments deficits of the second half of 2011. recorded a second Following strong inflows in the first half of 2011, the balance of payments saw overall consecutive outflow in Q4 outflows in the third quarter - the first quarterly deficit since the fourth quarter of 2008 - 2011, as the uncertain global environment and this continued into the final quarter of the year. These outflows were driven largely by impacted capital flows financial account outflows although the current account also returned to a small deficit at the end of the year. After USD 3.7 billion in outflows in Q4, the overall balance of payment inflows in 2011 reached USD 11.9 billion (down from USD 31.8 billion in 2010). Banking outflows were Net financial account outflows fell Figure 14: The balance of payments recorded a second the main source of to USD 1.4 billion in Q4 from consecutive deficit in Q4 2011 financial account USD 4.1 billion in Q3 (Figure 14). (USD billion) outflows in Q4 2011, Net direct investment Net portfolio The outflows in Q3 had been along with net sales of driven primarily by portfolio Net other capital Current account government bonds, while outflows on the heightened Overall balance foreign investors international risk aversion USD billion USD billion returned strongly to associated with concerns over 16 16 private assets and FDI inflows also rebounded the Euro zone. In Q4, the 12 12 outflows were mainly on the banking side as the domestic 8 8 private sector increased their currency and deposits overseas 4 4 by USD 3 billion. Foreign 0 0 investor inflows to private share and bonds returned strongly. FDI -4 -4 inflows also rebounded to USD 4.4 billion in Q4 from USD 3 -8 -8 billion in Q3. These inflows were Dec-08 Dec-09 Dec-10 Dec-11 predominantly to the transport, storage, and communication Note: Errors and omissions not shown sectors. For 2011 as a whole, Source: BI FDI inflows reached USD 18.2 billion, 30 percent higher than 2010 inflows. In Q4 2011 the current The trend decline in the current account continued into the final quarter of the year and a account recorded its first current account deficit was registered (USD 0.9 billion, 0.4 percent of GDP) for the first deficit since the height of time since the height of the global financial crisis in the final quarter of 2008. Inflows from the 2008 financial crisis… the declining surplus on goods trade (USD 7.4 billion versus USD 9.6 billion in Q3) and stable current transfers (USD 1.2 billion) were offset by the largest services trade deficit in eight years (USD 3.5 billion) and a still-high income deficit (USD 6.1 billion). While freight service imports continue to be important, the rise in the services deficit was driven by an increase in residents traveling overseas and in their spending. …as Indonesia’s exports The weakening in global demand combined with lower commodity prices resulted in showed signs of being slower growth in both real and nominal exports in Q4 2011. The falls were sizeable across impacted by the slowing all sectors. However, the slowdown for the growth in manufacturing exports has been global economy notable relative to that seen during previous periods with similar declines in global demand (but clearly much less than during the height of the global financial crisis). Measures such as improving electricity and transport infrastructure and improving the business climate could help domestic manufacturers improve their competitiveness to be able to weather such downturns in external demand (for detail see Part C in the December 2011 IEQ). By trading partner, the recent fall off in growth in manufacturing exports has been most prominent for China and Singapore while US and Europe have seen a gradual trend down in growth since mid-2011. On the imports side, growth in real and nominal imports has also slowed in year-on-year terms, but remains higher than for exports, contributing to the shrinking trade surplus (Figure 15). Imports of capital goods, machinery and airplanes remain firm, consistent with still-strong domestic demand. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 12 Indonesia Economic Quarterly Redirecting spending Recently proposed The Government has recently put in place, or proposed, a number of restrictive changes changes to trade and to regulations regarding trade and foreign investment. Some examples include a investment regulations regulation which prohibits exports of raw rattan to ensure the availability of inputs for are aimed at supporting domestic furniture manufacturers and a proposed regulation to implement administered local producers and investors but could import quotas and a non-automatic licensing system for imports of horticulture products, to impact growth and address a perceived influx of horticulture imports. Other regulatory changes include a investment over the requirement for new mining permits that foreign mining firms divest 51 percent of medium-term ownership to local entities by the tenth year of operation. It is also proposed that exports of raw metals including copper, iron, nickel and bauxite might be prohibited from 2014, to encourage the development of the domestic manufacturing sector for material processing. While aimed at supporting domestic investors or demand for local products they may also reduce trade, raise domestic prices and create uncertainty in the investment climate, particularly for foreign investors. Although the policies may not have an immediate impact on growth and investment, as reflected in record high FDI inflows in recent years, they may have significant longer term implications. Figure 15: Trade values have softened in recent months Table 5: The current account is projected to move into a (value of goods trade, USD billion; year-on-year growth of 3- small deficit in 2012 and financial inflows to come down month moving average goods value, percent) (USD billion) Export value (LHS) Import value (LHS) 2009 2010 2011 2012 2013 Trade balance (LHS) Overall Balance USD Export growth 3mma yoy (RHS) Percent of Payments 12.5 30.3 11.9 7.9 12.6 billion Import growth 3mma yoy (RHS) 20 80 Current Account 10.6 5.6 2.1 -4.1 -1.7 Trade 21.2 21.3 23.5 15.4 18.7 10 40 Income -15.1 -20.3 -25.7 -24.2 -25.3 Transfers 4.6 4.6 4.2 4.7 4.9 0 0 Capital & Financial Accounts 4.9 26.6 14.0 11.9 14.3 -10 -40 FDI 2.6 11.1 10.4 9.3 10.6 Portfolio 10.3 13.2 4.2 7.8 8.5 -20 -80 Other -8.1 2.3 -0.6 -5.2 -4.8 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Reserves (a) 66.1 96.2 110.1 112.2 (a) Note: The coverage of imports data was modified in January Note: Errors and omissions not shown. 2012 reserves as 2008 to include imports to Special Economic Zones, of end-February inducing a level-shift up in imports. Year-on-year Source: BI and World Bank staff projections calculations are thus taken from January 2009 Source: BPS and World Bank staff calculations Baseline projections are The outlook for external flows balances a number of dynamics. On the trade side, the for the overall balance of weak global outlook is expected to weigh on export earnings in 2012, narrowing the trade payments to register surplus (Table 5). On the financial account-side, the prospect of improved risk appetite, healthy surpluses in 2012 combined with the recent upgrade by Fitch (in December 2011) and Moody’s (in January and 2013 – however financial inflows remain 2012) of Indonesia’s sovereign long-term debt back to investment grade, augurs well for highly sensitive to global increased portfolio investment inflows, in the absence of renewed financial market market conditions turbulence. FDI inflows are expected to remain solid. Foreign companies continue to be attracted by Indonesia’s resources, growing domestic market and source of inexpensive labor, for example. Indeed, a recent survey by the Japanese Bank for International Cooperation on overseas business operations by Japanese manufacturing companies indicates a steady rise in the share of companies who view Indonesia as among the top five economies for medium-term business opportunities. Nevertheless, balance of payment risks remain firmly weighted to the downside. Further downward revisions to external demand, renewed weakness in commodity prices and additional shocks to global financial markets, are all key external risks to the outlook over the forecast horizon. In terms of domestic factors, it is unclear at this stage how or to what extent portfolio flows will react to the revised 2012 Budget and the uncertainty regarding an adjustment to subsidized fuel prices. It depends in part on the interplay of changing investor perceptions of fiscal risk should oil prices remain high and no price adjustment occur and also the risks to the inflation outlook. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 13 Indonesia Economic Quarterly Redirecting spending Indonesia’s current The annual current account is projected to move into deficit in 2012, for the first time since account is projected to the Asian financial crisis, reflecting the combination of weaker global demand for move into an annual Indonesia’s exports, strong local demand for industrial, capital and transportation imports deficit in 2012 and continued solid profit repatriations consistent with increasing FDI in Indonesia. To the extent that the rising imports of capital and intermediate inputs are associated with increased domestic and foreign direct investment, particularly FDI, the decline in the current account deficit can be viewed as a signal of confidence in the future growth potential of the economy. It reflects the fact that domestic investment exceeds domestic savings with the difference financed by a country borrowing abroad. The investment that is financed can increase the productive capacity of the economy, and future ability to pay off this external borrowing. However, particularly in the current fragile external environment, any sharp further widening of the deficit could lead to greater external financing risks, if portfolio and banking flows suddenly reversed. The rising share of FDI in capital inflows helps to mitigate this risk. Furthermore, the current account deficit is forecast to remain a relatively low fraction of Indonesia’s overall external financing needs (i.e. external debt amortization plus current account deficit, estimated by the IMF at USD 96.5 billion for 2012). 6. Financial markets are likely to remain sensitive to fuel price developments Local currency Domestic financial market movements since the December 2011 IEQ can be split into two government bond yields segments, first driven primarily by international and then by domestic factors. From have recently picked up, December through to early February, in line with the global trends discussed above, in part reflecting equity market gains were seen (Figure 16). Local-currency government bond yields expectations of higher inflation due to the continued to decline, supported by the upgrade of Indonesia to investment grade proposal to increase fuel mentioned above, and non-resident investors increased their holdings of Indonesia’s prices, but remain near government securities and equities (Figure 17). historically low levels Since mid-February local currency government bond yields have moved up, with the five- year yield increasing by 70 basis points from 14 February to 5.2 percent on 26 March (still remaining 1 percentage point lower than in August 2011). Non-resident investor holdings of tradable IDR-denominated government securities declined by IDR 9.2 trillion to IDR 225.4 trillion over this period. Concerns of rising inflation related to the Government’s announcement of a hike in subsidized fuel prices in its draft revised Budget have played a role in these movements, although in the longer-term reducing the burden of fuel subsidies should reduce Indonesia’s fiscal, and suppressed inflation, risk. The Rupiah has gradually fallen against the USD dollar over this period, down 1.6 percent since mid- February, reflecting the moderation of capital inflows and declining trade balance. Figure 16: Bond yields have recently picked up and the Figure 17: February saw a reduction in non-resident investor Rupiah has depreciated gradually against the US dollar holdings of Indonesian government bonds (equity index, 1 August 2011=100; IDR per USD; (USD billion) yield, percent) 1 Aug 2011=100 Percent; 000 IDR per USD USD billion USD billion 100 10 150 5.0 IDR 000 per USD (RHS) 95 9 125 2.5 90 8 JCI equity (LHS) 100 0.0 85 7 Reserves (LHS) 80 6 75 -2.5 75 5 5-yr IDR government 50 -5.0 bond yield (RHS) 70 4 Non-resident portfolio inflows, (RHS): Equities SUN SBI Aug-11 Oct-11 Dec-11 Feb-12 25 -7.5 Feb-09 Feb-10 Feb-11 Feb-12 Source: CEIC and World Bank staff calculations Note: “Flows� for SUN (IDR government securities) and SBI (BI certificates) indicate changes in holdings Source: BI, CEIC and World Bank staff calculations T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 14 Indonesia Economic Quarterly Redirecting spending After a loosening in Bank Indonesia, in anticipation of a worsening external environment, and with core stance in late 2011, BI inflation low and stable, loosened monetary policy at the end of 2011 and the beginning of now faces the challenge 2012. Following total rate cuts of 75 basis points in October and November, BI made an of responding to additional 25 basis point cut in February 2012. This followed its announcement a month emerging inflationary pressures, particularly earlier of a further 50 basis point reduction in the lower bound of its operational corridor related to any adjustment (the overnight deposit facility rate), moving it to 200 basis points below the policy rate. in the price of subsidized fuel Following the announcement of the Government’s proposal to increase subsidized fuel prices, BI maintained its policy rate in March. The central bank also indicated its intention to manage short-term inflationary pressures through liquidity management and macro- prudential tools, while interest rates would “continue to be directed to control inflation pressure from fundamentals� based on the macro outlook. Indeed, BI recently announced maximum loan-to-value ratios for housing loans and minimum down payments on vehicle loans. The challenge will be to use the various policy instruments at BI’s disposal in a consistent way to ensure that temporary inflation pressures do not translate into sustained rises in inflation and inflation expectations. This is made more difficult by the uncertainty over when any rise in the subsidized fuel price might happen and by the relative weakness of the monetary policy transmission mechanisms in Indonesia, as seen, for example, in the limited impact of recent policy rate cuts on commercial bank lending rates. New regulations cap loan- The new regulations announced by BI would cap the loan-to-value (LTV) ratio for to-value ratios for commercial banks’ housing loans (for properties above a certain size) at 70 percent, housing loans and effective mid-June 2012. Vehicle loans from banks are also to be subject to a minimum impose minimum down down payment, for example, of 25 percent for a motorcycle or 30 percent for a private car. payments for car and motorbike loans The Ministry of Finance also issued a similar regulation for multi-finance companies, mandating minimum down payments for cars and motorbikes 5 percentage points lower than the respective levels for the commercial banks. These macro-prudential measures come at a time when overall loan growth is around 25 percent year-on-year. However, around two-thirds of recent loan growth has come from working capital and investment loans rather than consumer loans (and it is also unclear to what extent the new restrictions will be binding). System-wide banking sector indicators have remained solid over the quarter to January. Gross non-performing loans moved down slightly to 2.8 percent while the capital adequacy ratio moved up to 18.4 percent. 7. Uncertainty over the future path of fuel prices adds to Indonesia’s near-term risks External risks remain Indonesia’s economic outlook remains sensitive to adverse shocks to international prominent, including investor sentiment, global commodity prices and external demand. The baseline adverse shocks to international outlook remains that of continued market turbulence, outlined in the October investor sentiment… 2011 IEQ. Although international financial markets have stabilized in recent months, with borrowing costs and spreads falling, there remains considerable uncertainty over the resolution of the Euro zone debt crisis and related banking sector difficulties. … to commodity prices While energy and non-energy prices have recently both moved up, a particularly concern and global demand would be a scenario where their paths de-couple and oil prices continue to rise, due to geo-political or supply problems, but non-energy prices, such as for minerals, decline on the back of a decline in global demand. Higher oil prices would put pressure on Indonesia’s fiscal situation, and also could dampen global activity and increase import costs, while revenues and exports would be hit by a fall in non-energy prices. Indonesia’s recent declines in export growth show that it is not immune from trade spillovers from weakening global growth. If there were to be a further deterioration in external demand this could quickly impact trade volumes, widening further the recently emerged current account deficit. There is, however, also potential upside risk to external demand, particularly if key markets such as the US or China outperform expectations, pulling upwards the growth performance of Indonesia’s regional trading partners. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 15 Indonesia Economic Quarterly Redirecting spending Domestically, the main Domestically, there remains uncertainty over if, or when, there will be an increase in uncertainties relate to the subsidized fuel prices over this year. Relative to the Government’s proposal of an future adjustment of fuel increase in April 2012, the decision by Parliament to allow an increase only if the oil price prices remains sufficiently high represents a missed, or delayed, opportunity to improve the efficiency of spending and reduce the burden of this spending, which adds risk to the fiscal outlook and increases the complexity of the approach to fuel price adjustment. The fiscal risks of The baseline scenario described in this section assumes there is a price increase in Q3 delaying a fuel price 2012. However, if oil prices remain high and there is no price adjustment, either because increase have risen with the oil price threshold foreseen in the 2012 Budget to allow an adjustment is not reached higher oil prices… or it is breached but the adjustment does not occur, the Government will face an expansion of the budget deficit. The higher oil price will push up energy subsidies, transfer to the regions and education spending (which as discussed in Part C is mandated at 20 percent of total spending), more than offsetting increased oil and gas-related tax and non- tax revenues. The World Bank analysis described above suggests that if oil prices average USD 120 in 2012 then the deficit, with no reform could rise to 3.1 percent of GDP. Although imposing an opportunity cost, this burden is manageable from the perspective of debt sustainability given Indonesia’s low government debt and the baseline continued robust growth outlook. However, the risk of hitting the 3 percent deficit limit due to high fuel subsidies may motivate offsetting reductions in line ministry spending, to the detriment of key development spending areas. …and the uncertainty There are, of course, notable risks around the inflation projection. Most clearly these over the path for relate to whether a price rise is indeed implemented and when. The degree, and domestic inflation has stickiness, of any anticipatory price increases is also unclear. Higher international oil also increased prices may also feed into imported inflation, and through input costs, into general prices. The increased uncertainty over the inflation outlook is likely to present challenges for the appropriate setting of monetary policy, given the lags and uncertainties for the impact of policy adjustment on economic conditions. The inflation uncertainty may also affect the consumption and investment decisions of domestic households and firms. The impact of this inflation uncertainty and changing fiscal outlook on investors’ demand for Indonesian assets is unclear at this stage but it does pose an additional risk to the outlook. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 16 B. SOME RECENT  DEVELOPMENTS IN  INDONESIA’S  ECONOMY  1. 2011 budget performance – a brief review Indonesia’s fiscal Delivering the level and quality of public services required for Indonesia to meet its position continued to be objectives for growth and inclusive development requires further improvements in the prudent in 2011 with the allocation and efficiency, as well as the execution of government spending. This section deficit coming in at 1.2 provides insights into these issues, along with recent trends in revenue performance, percent of GDP, well below the revised Budget through a review of the 2011 Budget outcome. target of 2.1 percent Looking at the headline numbers, total revenue moved up to 16.2 percent of GDP from 15.5 percent of GDP in 2010 (Table 6). Total expenditure stood at 17.4 percent of GDP, an increase of 1.2 percent of GDP relative to 2010 (Figure 18). As a result, the realized 2011 budget deficit (based on unaudited figures as of 30 December) was 1.2 percent of GDP or IDR 90.1 trillion. This is well below the revised Figure 18: Indonesia’s Budget deficit has remained low Budget level of 2.1 percent (Revenue, expenditure, budget balance, percent of GDP) of GDP or IDR 151 trillion Percent of GDP Percent of GDP and also the World Bank’s 25 6 December 2011 IEQ deficit Total expenditure, LHS projection of IDR 116 trillion Total revenue, LHS 20 4 or 1.6 percent of GDP. Stronger revenue collection and weak spending of core Primary balance, RHS 15 2 government programs more than offset higher spending on energy subsidies. The 10 0 lower fiscal deficit than planned resulted in a substantial financing surplus 5 -2 of IDR 39 trillion which lifted Fiscal balance, RHS the government’s 0 -4 accumulated unspent 2001 2003 2005 2007 2009 2011 balance (SAL or Sisa Anggaran Lebih) to around Source: MoF and World Bank IDR 96.6 trillion by end 2011. Continuing conservative fiscal policy contributed to further reduction in Indonesia’s debt to GDP ratio to 24 percent of GDP by the end of 2011. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 17 Indonesia Economic Quarterly Redirecting spending Table 6: Despite high energy subsidy spending the deficit in 2011 came in well below the revised Budget level (IDR trillion, unless otherwise indicated) 2010 2011 2011 Nominal growth Difference Revised Outcome Outcome on 2010, relative to revised budget (unaudited) percent* Budget, percent A. State revenue and grants 995.3 1,169.8 1,199.5 20.5 2.5 1. Tax revenue 723.3 878.6 872.6 20.6 -0.7 a. Domestic tax 694.4 831.7 818.6 17.9 -1.6 i. Income tax 357.0 431.9 430.8 20.7 -0.3 - Oil and gas 58.9 65.2 73.1 24.1 12.1 - Non oil and gas 298.2 366.7 357.7 20.0 -2.5 ii. Other domestic taxes 337.3 399.8 387.8 15.0 -3.0 b. International trade tax 28.9 46.9 54.0 86.9 15.1 i. Import duties 20.0 21.5 25.2 26.0 17.2 ii. Export duties 8.9 25.4 28.8 223.6 13.4 2. Non-tax revenue 268.9 286.5 324.3 20.6 13.2 o/w natural resources 168.8 192.0 215.3 27.5 12.1 i. Oil and gas 152.7 173.2 194.7 27.5 12.4 ii. Non oil and gas 16.1 18.8 20.6 28.0 9.6 B. Expenditure 1,042.1 1,320.8 1,289.7 23.8 -2.4 1. Central government 697.4 908.3 878.3 25.9 -3.3 - Personnel 148.1 182.9 175.5 18.5 -4.0 - Material expenditure 97.6 142.8 121.0 24.0 -15.3 - Capital expenditure 80.3 141.0 115.9 44.3 -17.8 - Interest payments 88.4 106.6 93.3 5.5 -12.5 - Subsidies 192.7 237.2 294.9 53.0 24.3 Fuel 82.4 129.7 165.2 100.5 27.4 Electricity 57.6 65.6 90.5 57.1 38.0 - Social expenditure 68.6 81.8 70.9 3.4 -13.3 2. Transfers to the regions 344.7 412.5 411.4 19.4 -0.3 C. Primary balance 41.5 -44.4 3.1 D. SURPLUS / DEFICIT -46.9 -151.0 -90.2 - as percent of GDP -0.7 -2.1 -1.2 E. Net financing 91.6 150.8 129.3 1. Net domestic banking 22.2 48.8 49.0 2. Net debt financing 73.9 123.9 100.7 - Debt securities 91.1 126.7 119.9 - Official loans -4.6 -2.8 -19.2 3. Other net financing -17.7 -21.8 -20.4 Economic assumptions/outcomes Gross domestic product (GDP) 6,423 7,227 7,427 Economic growth (percent) 6.1 6.5 6.5 CPI (percent) 5.1 5.7 5.4 Exchange rate (IDR/USD) 9,074 8,700 8,742 Interest rate (average percent)* 6.4 5.6 6.6 Crude oil price (USD/barrel) 79 95 111 Oil production ('000 barrels/day) 954 945 898 Note: * 2011 outcome is to 30 December Source: MoF, World Bank staff calculations T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 18 Indonesia Economic Quarterly Redirecting spending a. Revenues came in strong although tax collection was slightly below target… Revenue outturns in 2011 The realization of revenue was IDR 1,199.5 trillion, slightly exceeding the target set in the were slightly higher than revised budget (by 2.6 percent) or up by 21 percent in nominal terms compared to 2010 targeted in the revised levels. Both tax and non-tax revenues grew by 21 percent on the back of strong nominal budget… GDP growth and increasing commodity prices, primarily for crude oil and crude palm oil (CPO). Tax and non-tax revenues increased slightly as a percentage share of GDP compared to 2010. The tax-to-GDP ratio was up by 0.5 percentage points on 2010 to 11.7 percent (excluding taxes collected by sub-national government), but came in below the initial target in the Budget of 12.1 percent of GDP. Non-tax revenues rose to 4.4 percent of GDP in 2011, slightly higher than the 2010 level of 4.2 percent of GDP (Figure 19). …driven by higher By type of tax, income tax (non-oil and gas) and value added tax also saw significant commodity prices nominal growth of 20 percent, although came in slightly below the revised Budget. While a relatively small contribution to total revenue, export taxes more than doubled from their 2010 levels in nominal terms in line with increasing CPO prices. Oil and gas non-tax revenues rose by 27 percent in nominal terms in 2011 (up 18 percent in real terms) while oil and gas tax revenues rose by 24 percent in nominal terms (up 15 percent in real terms), coming in 12 percent higher than the revised Budget projection. This was driven by a higher average Indonesia crude oil price (ICP), which reached USD 111 per barrel in 2011, up 40 percent from USD 79 per barrel in 2010. However, offsetting this boost to revenues was the continued decline in oil lifting numbers, with production in 2011 averaging 898,500 barrels per day (bpd), 5 percent lower than the revised Budget’s assumption of 945,000 bpd (Figure 20). Figure 19: Revenue collection in 2011 was relatively Figure 20: Oil lifting has trended downwards, dampening the strong… rise in related revenues from higher oil prices (IDR trillion) (revenues in 2011 prices, IDR trillion; Indonesia crude oil price per barrel, USD; oil lifting, 000 barrel per day) Bar indicates value, LHS, and marker indicates share of Oil and gas non-tax (IDR trillion, 2011 prices), LHS GDP, RHS: Tax revenue Oil and gas income tax (IDR trillion, 2011 prices), LHS Income tax Oil price (ICP USD per barrel), LHS VAT Oil lifting (000 barrel per day), RHS IDR trillion Non-tax revenue Percent of GDP 400 1,400 1,400 14 1,200 12 300 1,200 1,000 10 200 1,000 800 8 600 6 100 800 400 4 200 2 0 600 0 0 2008 2009 2010 2011 Source: Ministry of Finance Note: Lifting for 2011 is December 2010-November 2011 Source: MoF, CEIC and World Bank As in previous years, As in previous years there was significant year-end strength in revenues. The monthly year-end strength in revenue realization in December was IDR 176.6 trillion, almost double the average revenues were seen monthly outcome between January and November and equal to 15 percent of total across major types of revenues for the year. This back loading of revenues was partly driven by strength in oil revenue and gas revenues, and strong corporate income tax and VAT collection due to end of year tax payment deadlines and administration and verification procedures. The Government To improve its tax payer database, reduce tax evasion, and broaden the tax base, the launched a tax census to Government launched a National Tax Census Program on September 30, 2011 register additional tax simultaneously in 37 cities throughout Indonesia, including Jakarta. The tax census was payers, although the able to register 646,000 new census forms/tax payers from the prime central business numbers registered were below the target districts and luxury residential areas in the targeted cities, but this was around one-third T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 19 Indonesia Economic Quarterly Redirecting spending below the target of slightly over 1 million new forms/tax payers. A number of challenges were reportedly faced by tax officials during the implementation of the census, such as the non-availability of shop owners on site when the census was conducted and a shorter effective census period (only two months) than expected. The Government is reviewing its strategy and approach, and plans to conduct another round of tax census in April 2012, as part of the objective to improve income tax revenue collection. b. Rising subsidy spending and weak budget execution continued until year end Total realized expenditure Total expenditure realization Figure 21: Energy subsidy spending significantly was slightly below the in 2011 was IDR 1,289.6 overshoots the revised Budget allocation revised Budget level but trillion, around 2.5 percent (share of actual of the revised budget, percent) spending on energy below the revised Budget Percent of revised Budget allocation subsidies, once again, significantly overshot the allocation. However, in 140 140 nominal terms spending in 2008 2009 revised Budget allocation 120 120 2011 was 24 percent higher 2010 2011 than 2010. Energy subsidy 100 100 spending and weak 80 80 disbursement on core 60 60 programs, particularly on 40 40 materials and expenditures, 20 20 were again key drivers of the expenditure patterns in 2011 0 0 (Figure 21). Spending on energy subsidy substantially exceeded the allocated budget in 2011 by IDR 60 trillion, or 31 percent Source: MoF and World Bank higher than in the revised budget. Fuel subsidy spending reached IDR 165.2 trillion or 27 percent higher than in the revised Budget driven by the large and growing gap between the regulated and market fuel prices and an increase in the volume of subsidized fuel consumed. As discussed above, the oil price in 2011 came in significantly above the revised Budget assumption. The price differential between market and subsidized fuel, along with rising incomes and vehicle usage, contributed to subsidized fuel consumption moving up to 41.69 million kilo liter, 3 percent higher than the revised Budget level of 2 40.36 million kilo liter . The Government postponed an earlier plan to restrict the sale of subsidized fuel for private car users in April 2011, which was planned to be piloted in Jakarta and surrounding areas. The electricity subsidy also substantially exceeded the allocated budget (by IDR 25 trillion) due to rising oil prices and a shortage of gas supply. As described in Part A, parliament has approved the 2012 revised Budget that allows the Government to increase subsidized fuel prices if for 6 months the average oil price is 15 percent higher than the revised Budget assumption, combined with cash transfers to the poor. Spending on capital The execution of capital and material expenditures slightly improved in 2011. The expenditures rose disbursement rates of both capital and material were slightly higher than 2010 levels but markedly in nominal still below the revised budget at 82 percent and 85 percent. However, both spending have terms in 2011, but still risen markedly in nominal terms by 22 percent and 44 percent respectively between 2010 came in well below Budget targets and 2011. Capital spending moved up to 1.6 percent of GDP and is expected to increase to 2 percent of GDP in 2012. Social expenditure, which consist of social programs such as health insurance for the poor (Jamkesmas), school operational fee (BOS) and scholarships for the poor, and national community development programs (PNPM), was disbursed at 87 percent of the revised budget due to delays in the verification process of beneficiaries. Salary and transfers to the region were disbursed as expected. “Other expenditures� came in significantly lower than budgeted as most contingency expenditures were not realized. 2 http://ekonomi.inilah.com/read/detail/1815941/konsumsi-bbm-subsidi-2011-capai-4169-juta-kl T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 20 Indonesia Economic Quarterly Redirecting spending Education, defense, and Reflecting the rise in capital expenditures, and the mandated 20 percent of spending on infrastructure were the education (see Part C for a discussion), education, defense, and infrastructure together three biggest sectors by accounted for 62 percent of total line ministries spending in 2011 (Figure 22). Education spending in 2011 spending increased by 5 percent in nominal terms in 2011 while defense spending rose 63 percent, mainly to finance the modernization and improvement of military equipment. Infrastructure also received a significant spending boost in 2011, up by 57 percent in nominal terms relative to 2010. As a share of GDP, central government infrastructure spending moved to 0.8 percent of GDP from 0.6 percent of GDP in 2010 (Figure 23). The significant budget increase reflected the government priority of supporting domestic connectivity through expansion and improvement of national roads, airport development and rehabilitation and extension of the electricity network. Spending on government administration also increased by 30 percent in 2011, reflecting the on-going process of bureaucratic reform and a nominal 10 percent salary increase for civil servants. Figure 22: Education, defense, and infrastructure accounted Figure 23: Central government spending on infrastructure for 62 percent of 2011 line ministry spending increased markedly in 2011 (Line ministry spending by function, share of total line (percent of GDP, and growth) ministry spending, percent) Share of total line ministry spending, percent CG spending on infrastructure-to-GDP, LHS 0 10 20 30 National spending on infrastructure-to-GDP, LHS CG spending on infrastructure - real growth, RHS Education Defense Percent of GDP Real growth, percent Infrastructure 3.0 100 Public Law and Order General Administration Housing and Public… 2011 2.0 50 Agriculture 2010 Health 2009 Environment 1.0 0 Tourism and Culture 2008 Economy Social Protection 0.0 -50 Religious Affairs 0 10 20 30 40 Source: MoF and World Bank staff calculations Note: GDP deflator used to calculate real growth Source: MoF and World Bank staff calculations Spending continued to be As in previous years, Figure 24: …and capital expenditures continue to be back- skewed towards the end spending in 2011 was loaded towards the end of the year of the year… bunched at the end of the (monthly capital spending, IDR trillion; cumulative capital year. About 22 percent of spending to total revised Budget allocation, percent) total expenditure (IDR 288 Monthly disbursement Cumulative disbursement as trillion) was spent in (IDR trillion) share of full-year revised Budget December alone, tripling the 60 120% Line - Cumulative disbursement (RHS) average monthly spending 50 100% between January and Bar - Monthly disbursement (LHS) November. By type of 40 80% expenditure, 30 percent of 2009 2010 2011 material expenditures, 43 30 60% percent of capital expenditures, and 33 20 40% percent of spending on 10 20% energy subsidies were disbursed in December. The 0 0% weight of capital spending in December was worse in 2011 than in 2010 (Figure Source: MoF 24). As discussed in the December 2010 IEQ, this back loading of spending can undermine the effectiveness and quality of spending. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 21 Indonesia Economic Quarterly Redirecting spending …reflecting on-going Budget execution, particularly for capital spending, remains challenging. Some persistent challenges in budget constraints remain such as the complicated land acquisition process and the lengthy execution budget revision and procurement processes. Some of the reforms introduced to accelerate budget execution in 2010, such as early procurement and the multi-year appointment of implementing unit managers (Satker), have had limited impact due to a lack of dissemination and the necessary technical regulations, or inconsistencies with other regulations. In addition, the policy of budget efficiency (spending cuts) implemented within the fiscal year (from April 2011) affected budget execution through revision of the budget warrant (Daftar Isian Pelaksanaan Anggaran or DIPA). The Government has The Government is aware of the ongoing problems with budget execution and has introduced measures to introduced measures to improve it. The President has established a Budget Execution improve execution Task Force (Tim Evaluasi dan Pengawasan Pelaksanaan Anggaran, TEPPA) led by the Presidential Working Unit for Supervision and Management of Development (UKP4) to closely monitor and accelerate budget execution in 2012. The Ministry of Finance has also issued a regulation on multi-year contracts that allows big and complex infrastructure projects to be implemented simultaneously with construction activities. Prior to that, all projects that required multiyear warrant from the Ministry of Finance needed to complete the land acquisition process before starting activities. The recently passed Land Acquisition Law is expected to accelerate the land acquisition process (Box 4). However, the effectiveness of this Law is subject to the issuance of implementing regulations which are expected later in the year. In addition, the Government is preparing a government regulation on budget execution that is also expected to improve budget implementation. Box 4: Key features of Indonesia’s new Land Acquisition Law To accelerate the land acquisition process, which is critical for infrastructure project, the Government and Parliament approved the new Land Acquisition Law (UU No.2/2012) at the end of 2011. This new law is expected to expedite the land acquisition process, which has been the major constraint for infrastructure development in Indonesia. The new law clarifies roles, imposes time limits on each phase of procedures, and ensures safeguards for land-right holders. Most importantly, the law provides a clear mechanism for enforcing the principle of eminent domain, or revocation of land rights, to prevent small minorities from blocking projects that fulfill the public interest, such as expressway projects. However, the crucial power of revoking land rights will rest with provincial governors. Therefore, the feasibility of projects will vary somewhat, depending on the province and the inclination of the governor involved. Moreover, projects that cross provincial boundaries (i.e. expressways) will be more cumbersome than those contained within one province. Once the land acquisition plan is approved by the governor, the execution will rest with the National Land Agency (Badan Pertanahan Nasional – BPN) a change from local government led execution in the old law. Overall, the new law should significantly increase the feasibility of land acquisition for projects. Source: Law No.2/2012 and World Bank staff analysis c. Looking forward Commodity prices will Commodity prices continue to be a major driver of both revenues and expenditures in remain a key driver of the Indonesia. Revenues related to the oil and gas and CPO sectors account for one quarter budget outlook for of total revenue. Improving the income tax take from other non-oil and gas sectors can Indonesia reduce this fiscal sensitivity to commodity price movements. Improving tax administration and expanding the tax base, such as through the next steps in the tax census, have an important role to play. On the expenditure side, the fiscal burden, risk and opportunity cost of energy subsidies has been discussed in Part A. Reducing the fuel subsidy, with compensating mechanisms for poor and vulnerable households, can play a role in improving the allocation of spending, freeing up fiscal space in the future for more productive spending such as on infrastructure and, as discussed in Part C, programs of integrated social assistance. Further improvements in budget execution are also important to effectively deliver the significant increases in budget allocations planned for key sectors, particularly infrastructure. Improving allocation and execution of public spending can help Indonesia achieve its growth and development targets. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 22 Indonesia Economic Quarterly Redirecting spending 2. Doing Business in Indonesia 2012 Despite Indonesia’s Despite its recent strong growth performance, Indonesia continues to face challenges that strong recent economic stifle private-sector development, including infrastructure weaknesses, access to skilled performance, it faces labor and the burden and uncertainty of the regulatory framework. This regulatory burden challenges that hold back is also an important determinant of the high rates of informality in the economy. According private-sector development to the World Bank’s 2009 Enterprise Survey, nearly 30 percent of firms in Indonesia start operations without being formally registered. Over half the workforce remains in the informal sector, whose lower income security and benefits coverage can make households more vulnerable to adverse economic and health shocks, for example. Effective and harmonious Creating a more favorable business climate and making it easier to do business can policy design and facilitate start-ups, encourage investments, boost employment and improve economic implementation at the competitiveness. It can also promote the expansion of the formal sector helping to provide local government level more opportunities for workers to move into higher quality jobs. However, the regulatory are crucial for the development of small to environment for businesses, and reform progress, can vary markedly across locations medium size domestic within an economy. In a country as decentralized as Indonesia, effective and harmonious firms policy design and implementation at the local level are crucial for the development of small to medium-size domestic firms – the backbone of the economy. Looking at business regulations at the sub-national level can therefore provide important insights into the overall business environment and, more importantly, allow Indonesian cities to compare their regulations among themselves and with other economies and cities globally. Doing Business in The recent Doing Business in Indonesia 2012 report is the second such report analyzing Indonesia 2012 is the 3 business regulations at the sub-national level. It updates the information in the 2010 second in a series report and tracks progress in implementing reforms in three areas: starting a business, analyzing business dealing with construction permits and registering property. The sample is expanded to 6 regulations beyond Jakarta additional cities on top of the original 14. This section provides an overview of the key findings, highlighting the reform progress that has been made, the continued dispersion seen across cities, and how this benchmarking exercise can be used. Box 5 provides a brief background to the report and the broader Doing Business global survey. a. Cities across Indonesia are improving commercial regulations… Business reforms at the Between August 2009 and July 2011, national and local governments carried out twenty- local level are making it two business reforms at the local level that made it easier to do business for local easier for local entrepreneurs in all 14 cities measured for the second time. All these cities improved the entrepreneurs to start business start-up process, while 10 out of 14 improved dealing with construction permits and operate a business (as measured by the requirements to build a warehouse and connect it to utilities ranges). While the economic impact has yet to be measured, these efforts by both the national and local governments have already resulted in time and cost savings for local entrepreneurs. Simplifying local licensing requirements, establishing one-stop-shops, introducing statutory time limits, and eliminating or reducing fees for local licenses are some of the key local reforms that took place since 2010. The national government also issued legislation mandating the simplification of local licensing requirements for the required business trading license and the company registration certificate including setting statutory time limits and the elimination or reduction of associated fees. However, implementation of the new regulations still varies across the cities. The time and cost it takes In the area of starting a business, all Indonesian cities benefited from the nationwide to start a business has reintroduction in 2010 of a computerized system for company registration and the creation fallen on average by one of standard incorporation forms for limited liability companies. Improved efficiency at local quarter since the 2010 branches of national agencies also reduced the time needed for tax, labor and social report… security registrations in several cities. The average time and cost to start a business in cities measured for the second time were reduced by one quarter since the 2010 report (down 13 days and 8 percentage points of gross national income per capita respectively). 3 For more details see http://www.doingbusiness.org/ indonesia. The Doing Business in Indonesia 2012 project was funded by the governments of Australia, Finland, the Kingdom of the Netherlands, New Zealand, Switzerland, and the International Finance Corporation Funding Mechanism for Technical Assistance and Advisory Service. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 23 Indonesia Economic Quarterly Redirecting spending Box 5: About Doing Business and Doing Business in Indonesia 2012 Doing Business is an annual global survey conducted by the World Bank Group which gathers and analyzes comprehensive quantitative data based on a specific set of assumptions and indicators to compare business regulation environments across economies and over time. The indicators look at domestic small and medium-size companies and measure the regulations applying to them through their life cycle. Since the first global Doing Business report in 2003 the survey has grown from 133 economies and 5 sets of indicators to 183 countries and 11 sets of indicators in 2012. With the objective of promoting growth through a vibrant private sector, the Doing Business survey encourages countries to compete towards more efficient regulation; offers measurable benchmarks for reform; and serves as a resource for academics, private sector researchers and others interested in the business climate of each country. While providing a valuable set of benchmark indicators, there are a range of limitations of the Doing Business data which must be kept in mind when interpreting the data, such as the limited coverage, usage of standardized cases and focus on the formal sector. Table 7: The Doing Business methodology allows an objective but limited global comparison Advantages Caveats Transparent as based on factual information about laws and Limited in scope with a focus on 11 areas of regulation regulations (with inputs from the local respondents that affecting local business; does not measure all aspects of includes lawyers, notaries and government agencies with business environment or all areas of regulation respect to the on the ground implementation reality of such laws and regulations based on statistical data and experience ) Comparison and benchmarking valid due to standard Based on standardized case: transactions described in assumptions case scenario refer to specific set of issues and type of company Inexpensive and easily replicable Focuses on formal sector Actionable data which highlight extent of specific obstacles, Only reforms related to indicators can be tracked identify the source and point to what might be changed Multiple interactions with local respondents to clarify Assumes that business has full information on what is potential misinterpretation required and does not waste time when completing procedures Nearly complete country coverage Part of data obtained refer to an economy's largest business city only, although sub-national reports, such as for Indonesia, cover other major cities Doing Business also offers detailed sub-national reports, covering business regulation and reform in different cities and regions within a nation. Doing Business in Indonesia 2012 is the second such sub-national report for Indonesia and limits its analyses to three sets of indicators that are most sensitive to local level implementation – starting a business, dealing with construction permits, and registering property – instead of the 11 indicators covered in the global survey. It is not meant to be a full reflection of the investment climate in Indonesia or an absolute measure of attractiveness for investment. The purpose is not the rankings in themselves but rather using the survey results to uncover potential challenges and to draw the attention, particularly of local government decision makers, to the fact that there are many options for them to improve their investment climate through their own local actions. The data in the report are based on the national and local laws and regulations as well as administrative requirements for a standardized case. Respondents filled out written surveys and provide references to the relevant laws, regulations, and schedules. Data checking and quality assurance are aided by working closely with legal practitioners and professionals who regularly undertake the cases involved. Source: Law No.2/2012 and World Bank staff analysis Note: For more details see www.doingbusiness.org …with the average time Improvements in the construction permit process included the creation of one-stop shops, and cost required to deal improved administrative efficiency of involved agencies, the simplification of requirements with construction permits for commercial buildings, and the reduction or elimination of fees. Some cities, such as also declining Banda Aceh, Surabaya and Surakarta, completely overhauled their building permit process. As a result, the average time required to deal with construction permits decreased by one month from 106 days in 2010 to 77 days in 2012. The average cost dropped from IDR 22.1 million (USD 2,123) to IDR 19.3 million (USD 1,850). In the area of registering property, the government continues to encourage entrepreneurs to formally register their lands by raising the tax-free limit on properties as their market values increased across Indonesia. Eleven of the 14 cities previously measured raised the tax- free value, nine of these only up to the minimum mandated in the national law. b. …but there remain significant differences in performance across cities There are large variations The decentralization process initiated in Indonesia a decade ago provided regional among the different cities governments with the authority to administer business licenses. As a result, local benchmarked – both in governments apply their own license practices and implement national regulations local regulations and in differently. For example, the number of procedures to formally open a business ranges the implementation of the T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 24 Indonesia Economic Quarterly Redirecting spending same national laws from 8 to 11, of which 7 are required by national-level legislation. Yet, starting a business pointing to ample room is fastest in Gorontalo and Palangka Raya at 27 days but takes 44 days in Jambi (Table for improvement 8). The same 6 procedures are required to register property in all 18 cities, with the exceptions of Batam and Semarang, but different local practices and levels of administrative efficiency still lead to wide differences in time across cities. No single city performs There is no single city which is a top performer across all three sets of indicators best across the different examined in the report. It is easiest to start a business in Yogyakarta, deal with indicators construction permits in Balikpapan, and register property in Bandung and Jakarta. It is most difficult to start a business in Manado and register property in Batam. Dealing with construction permits is most burdensome in Jakarta, while no building permits for commercial warehouses had been issued in Gorontalo since 2008. Table 8: Where is it easier to start a business, deal with construction permits or register property? Key = No. of proc is number of procedures; time is in days; cost is as percentage of gross national income per capita; paid in min. capital is minimum paid in capital as percentage of gross national income per capita (2010 Indo GDP=US$ 2,580) Starting a Business Dealing with Construction Registering Property Permits Rank No. Time Cost Paid in Rank No. Time Cost Rank No. Time Cost of Min. of of proc. Capital proc. proc. Balikpapan 7 8 28 26.3 46.6 1 8 52 62.8 12 6 39 10.9 Banda 5 9 29 19.3 46.6 4 10 42 66.5 12 6 39 10.9 Aceh Bandung 12 9 30 24.3 46.6 8 10 44 76.5 1 6 19 10.9 Batam* 15 9 39 22.6 46.6 10 9 45 127.3 20 7 54 13.3 Denpasar 9 8 31 22.9 46.6 17 12 94 71.4 12 6 39 10.9 Gorontalo* 6 9 27 22.2 46.6 n.a. n.a. n.a. n.a. 5 6 31 10.9 Jakarta 8 8 45 17.9 46.6 19 13 158 105.3 1 6 22 10.8 Jambi* 18 10 44 20.2 46.6 2 10 68 32.0 7 6 37 10.9 Makassar 17 10 35 22.0 46.6 11 8 51 131.5 9 6 38 10.9 Manado 20 11 34 30.8 46.6 18 14 107 100.1 15 6 12 11.0 Mataram* 10 9 31 22.4 46.6 12 10 83 58.4 4 6 25 10.9 Medan* 19 11 39 21.2 46.6 6 7 71 70.3 7 6 37 10.9 Palangka 2 8 27 22.0 46.6 14 11 82 37.5 16 6 15 11.0 Raya Palembang 11 10 34 19.0 46.6 3 9 57 50.5 3 6 21 10.9 Pekanbaru 16 10 29 26.5 46.6 15 10 83 64.5 18 6 29 10.9 Pontianak* 13 10 42 17.8 46.6 7 11 59 32.3 9 6 38 10.9 Semarang 4 9 28 19.7 46.6 8 10 72 38.6 19 7 43 10.9 Surabaya 14 9 32 23.5 46.6 16 11 116 71.2 11 6 39 10.8 Surakarta 3 8 29 20.5 46.6 12 11 71 41.9 17 6 54 10.9 Yogyakarta 1 8 29 18.5 46.6 5 7 51 85.5 6 6 36 10.9 Note: The ranking on each topic is based on the simple average of the percentile rankings on its component indicators. ‘ * indicates cities not benchmarked in Doing Business in Indonesia 2010. n.a. indicates no practice in Gorontalo Source: Doing Business in Indonesia 2012 The costs of starting a Starting a business takes, on average, 9 procedures and 33 days. The differences in time business range from 18 and cost across cities reflect in part local licensing requirements. In Yogyakarta and to 31 percent of income Palangka Raya, where the business licensing process was consolidated at one-stop per capita and takes from shops, complying with local requirements is fast - just 1 procedure over 5 days to obtain 27 to 45 days the business trading license, the company registration certificate and the location permit. In addition, the local branches of national agencies are not equally efficient in all locations. The average start-up cost is 22 percent of income per capita but varies from 18 percent in Pontianak to 31 percent in Manado with local licensing fees varying among cities. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 25 Indonesia Economic Quarterly Redirecting spending The performance on the The number of requirements to build a warehouse and connect it to utilities ranges from 7 construction permits is in Medan and Yogyakarta to 14 in Manado. Although the average time required to deal relatively strong, with construction permits is 74 days (3.5 times faster than Malaysia and twice as fast as in although there remain Thailand) there are again considerable variations among cities. All necessary clearances sizeable variations across cities and permits can be obtained in just 42 days in Banda Aceh while in Jakarta it takes 158 days. Variations mainly reflect time required to obtain municipal clearances and permits. It is cheapest to deal with construction permits in Jambi (32 percent of income per capita) whereas in Makassar the relative cost is four times higher. Registering property At 11 percent of the property value, the average cost to register property in Indonesia is continues to be about triple the East Asia and the Pacific average of 4.1 percent. Eighteen of the 20 cities expensive measured require 6 standard procedures to register property, but Semarang and Batam require 1 additional procedure in the process. While it takes almost 2 months to transfer a property title in Batam and Surakarta, it can be done in less than 2 weeks in Manado. c. Learning from each other Cities in Indonesia can Despite the progress that has been made, the relatively high burden of business learn from each other and regulations continues to be a challenge for Indonesian entrepreneurs. However, cities in adopt good practices that Indonesia can learn from each other and adopt good practices already working within the are already working country. In particular, when compared internationally, some Indonesian cities already within the country… perform up to international standards on construction permits and do relatively well on time to transfer property. Indeed, cutting the number of procedures to build a warehouse to that of Yogyakarta or Medan or reducing the time needed to deal with these permits to the 42 days of Banda Aceh would put Indonesia in the top 10 rank globally on these indicators (Table 9). Adopting the time to register property from Manado would cut the time to 12 days, as in the United States, and put Indonesia into position 27 worldwide. Table 9: Some cities within Indonesia already perform to international best practice Indicator Best performing city within Performance Indonesia’s global rank Indonesia (out of 183 countries) if based on best performing city within Indonesia Number of procedures to deal with Medan, Yogyakarta 7 procedures 4 construction permits Days to deal with construction permits Banda Aceh 42 days 5 Days to register property Manado 12 days 27 Cost to deal with construction permits Jambi 32 percent of 42 income per capita Number of procedures to register All cities except Batam, 6 procedures 83 property Semarang Number of procedures to start a Balikpapan, Denpasar, 8 procedures 109 business Jakarta, Palangka Raya, Surakarta, Yogyakarta Cost to start a business Jakarta, Pontianak, 18 percent of 111 Yogyakarta income per capita Days to start a business Gorontalo, Palangka Raya 27 days 117 Cost to register property Jakarta 11 percent of 151 property value Source: Doing Business in Indonesia 2012 …and also look However, Indonesia’s performance on starting a business remains relatively weak, taking internationally to improve about 1 month longer than in Malaysia and costing 4 times as much as in Thailand, for practices that could help example. Adoption of the good practices within Indonesia would still leave the country close the gap between lagging behind more than 100 other economies globally. The same is true for the cost of cities in Indonesia and the global leaders on registering property. Looking to regional and global good practices can help close the gap other indicators where between Indonesia and the global leaders on these indicators. For example, neighboring domestic performance is countries such as Malaysia; Taiwan, China; Thailand and Vietnam, have formed not as strong regulatory reform committees, which can involve private sector and government members, to inform and monitor implementation of the national business climate reform agenda. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 26 C. INDONESIA 2014  AND BEYOND: A  SELECTIVE LOOK  1. Building Indonesia’s social safety net Though absolute poverty Indonesia’s robust economic growth and sound macro policy management have is declining, 40 percent of contributed to a reduction in the national poverty rate from 23.4 percent in 1999 to 12.5 Indonesia’s population percent in 2011. However, declining poverty partially masks a worrying degree of remains highly vulnerable vulnerability: much of Indonesia’s population is clustered just above the 2011 poverty line to shocks that threaten to push them into poverty… of IDR 233,000 per month (about USD 27 at 2011 nominal exchange rates). Around 24 percent of Indonesians live below the official “near-poor� line (1.2 times poverty line expenditure), while 38 percent of the population lives below 1.5 times the poverty line and are highly exposed to poverty-inducing events (Figure 25). Even relatively small shocks to these vulnerable households can be enough to push them into poverty: in recent years, half of all poor households were not poor the year before while more than a quarter of all Indonesians have been in poverty at least once over 2008 to 2010 (Figure 26). Figure 25: Much of Indonesia’s population live just above Figure 26: … and approximately 25 percent of Indonesians the poverty time… have been poor at least once in the past three years. (2011 monthly household per capita consumption, Rupiah) (share of individuals by exposure to poverty, 2008-2010) Thousands of individuals Poverty Line (PL) (12.5 Never poor Poor once Percent Poor three times Percent 1,000 1,500 2,000 2,500 percent below) Poor twice 100 4 100 1.2 X PL (24 percent 7 10 below) 80 15 13 80 1.5 X PL (38 percent below) 19 60 60 40 40 74 57 500 20 20 0 0 0 0 100 200 300 400 500 600 700 800 Number of times poor Number of times near Monthly Household Per Capita Consumption (IDR 000) 2008-2010 poor 2008-2010 Note: The national poverty line was set at approximately IDR Source: Susenas and World Bank staff calculations 234,000 per person per month in 2011 Source: Susenas and World Bank staff calculations …raising the question of Indonesia’s double challenge – helping households escape impoverishment and whether Indonesia’s protecting the highly vulnerable – can be addressed with a social safety net. Social safety current social assistance nets, which consist of non- contributory cash or in-kind transfer programs targeting the programs can provide an poor and vulnerable, are one component in a social protection suite, which typically also effective social safety net includes social insurance, active labor market programs, and provision of high-quality, low-cost education and health services accessible to all. Drawing on recently released World Bank analysis, this section asks to what extent Indonesia’s current social assistance programs provide an effective social safety net. In order to answer this question it considers six intermediate questions: Does Indonesia T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 27 Indonesia Economic Quarterly Redirecting spending allocate the right level of resources to household social assistance? Do programs provide the right benefits? Are benefits reaching the right people? Do people receive the benefits at the right time? Are programs implemented in the right way? Does Indonesia have the 4 right programs and system in place? Social safety nets help to Safety nets serve three main functions. The first is to protect households from impacts of protect households from negative economic shocks. They can provide income or in-kind support and subsequently the impact of negative reduce inequality. By protecting consumption, they can also reduce the likelihood of poor shocks, promote and vulnerable households resorting to negative coping strategies in the face of shocks, opportunities to move out of poverty and facilitate such as pulling children prematurely from school to enter the workforce. the implementation of government reforms, for Social safety nets can also be used to enhance the future opportunities and livelihoods of example on subsidies poor and vulnerable families by promoting their investments in productive assets, including in human capital like education and health. These investments not only help to sever the transmission of poverty to future generations but can leave households better prepared in terms of ex ante strategies to reduce their risk of falling back into poverty, for example, through building up savings or using other financial management products. Finally, safety nets may help governments to implement reforms to address inefficient redistributive policies in other sectors or to put in place policies or investments to improve growth. Most topically, for example, reorienting spending towards progressive transfers and providing consumption support during the acute inflationary environment that follows a subsidy reduction can help sustain pro-poor, and pro-growth, reforms and investments. a. The building blocks exist, but better construction and engineering are needed The Government of Indonesia has rapidly introduced a range of social assistance (SA) programs forming the Indonesia has developed potential foundation of a true social safety net. The first generation of programs was borne a number of household- of the 1997/98 crisis when the Government introduced a number of temporary initiatives to based social assistance protect the poor from large negative shocks. A second generation of more permanent (SA) programs targeting the poor and near-poor programs was introduced in 2005 to help usher in fuel subsidy cuts, and more recently, the Government has piloted and expanded programs that have a greater emphasis on the promotion of health and education services for poor and vulnerable families. Today, social assistance is concentrated in eight household-based programs which are all primarily designed, funded, and executed by the central government (Box 6). Indonesia needs to go Indonesia’s current range of SA programs does not go far enough in protecting beyond program reform populations with the greatest exposure to poverty. These programs have been limited in to build a social safety their effectiveness due to (a) an insufficient ability to find and prioritize poor or vulnerable net providing consistent, households; (b) a total benefit package that is sometimes underfunded, sometimes high-quality, and comprehensive coverage inadequate for addressing the particular household need or risk, and sometimes delivered with less-than-optimal timing; (c) a passive and implicit reliance on poorly-equipped local implementation partners combined with little explicit financial or technical support; (d) weakly-monitored and insufficiently-detailed implementation procedures; or in many cases a combination of all four reasons. The likelihood that an eligible household will consistently receive all benefits is small, while the facilitation, outreach, and information dissemination that are necessary to ensure households with any type of background use programs effectively are not consistently provided. So the current range of SA programs provides partial and non-guaranteed protection to the poor and vulnerable from some, but not all, of the risks faced, but there are risks that are not yet covered by any program – e.g., risks due to sudden job loss or underinvestment in early childhood education. A true social safety net will involve system-wide planning and coordination between programs and agencies in order to ensure that all types of eligible households are reliably protected for all important risks. 4 This section draws on the recently released World Bank (2012) report on Protecting Poor and Vulnerable Households in Indonesia, available at http://go.worldbank.org/5BWH4ZCQM0. Support for this report was generously provided by the Australian Agency for International Development and the Embassy of the Kingdom of the Netherlands in Indonesia. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 28 Indonesia Economic Quarterly Redirecting spending Box 6: Indonesia’s household-based social assistance programs Indonesia’s main household-based social assistance programs are summarized in Table 10. A temporary unconditional cash transfer program (Bantuan Langsung Tunai, BLT) was deployed in 2005-06 to mitigate the inflationary impact caused by fuel price adjustments and again in 2008-09 to protect vulnerable households from the effects of the global financial and food price crises. Raskin distributes subsidized rice to 17.5 million families across the country. Jamkesmas provides health service fee waivers for 18.2 million poor and vulnerable households. A scholarship program (Bantuan Siswa Miskin, BSM) provides cash assistance to approximately 4.6 million students across the country. PKH – a conditional cash transfer – provides income support and investment in health and education services for over 800,000 extremely poor households in pilot areas. Finally, there are cash transfers with facilitated services for highly vulnerable groups including at-risk children (Program Kesejahteraan Sosial Anak, PKSA), the disabled (Jaminan Social Penyandang Cacat Berat, JSPACA) and vulnerable elderly (Jaminan Sosial Lanjut Usia, JSLU). Indonesia also has a range of complementary programs and policies that extend beyond the household to “protect and promote� the poor and vulnerable, including community-driven development programs, job creation and employment strategies, and plans for social security. Table 10: Indonesia’s social assistance program is concentrated in eight household-centered programs Name Transfer Risk Target Target Population Benefit Key type covered group number of coverage level executing beneficiaries (average) agency 1. BLT* Cash Acute Poor & 18.5 million National IDR M. of Social consumption near-poor HH 100,000 Affairs difficulty households per month (Kemensos) (HH) for 9 months 2. Raskin Subsidized Consumption Poor & 17.5 million National 14 kg rice Bureau of rice difficulty near-poor HH per month Logistics HH (Bulog) 3. Jamkesmas Health Health Poor & 18.2 million National Varies Ministry of service shocks; low near-poor HH depending Health fees health HH on (Kemenkes) waived utilization utilization 4. BSM** Cash & Cost of Students 4.6 million National, IDR Ministry of conditions education; from poor students but not full 561,759 Education & low HH scale per year Culture education (Kemdikbud) & Ministry of Religious Affairs (Kemenag) 5. PKH Cash & Low Very poor 810,000 HH Pilot IDR Kemensos conditions incomes; low HH 1,287,000 health & per year education utilization 6. PKSA Cash, Quality of Vulnerable 4,187 Pilot IDR Kemensos conditions life; low children 1,300,000- & Services education; 1,800,000 exclusion per year 7. JSPACA Cash & Quality of Vulnerable 17,000 Pilot IDR Kemensos services life; disabled 3,600,000 exclusion per year 8. JSLU Cash & Quality of Vulnerable 10,000 Pilot IDR Kemensos services life; elderly 3,600,000 exclusion per year Note: BLT details are for last usage in 2008. BSM detail on target number of beneficiaries and benefit level based on 2009 data. Source: Program manuals, regulations, staff reports, and World Bank staff calculations based on 2010 information. b. Is the appropriate level of resources allocated to household social assistance? Social assistance From a low base in the early 2000s, Indonesia’s aggregate national public expenditures expenditures rose on SA programs permanently increased in line with the proliferation of individual initiatives markedly between 2000 beginning then. Since 2005, non-emergency SA spending has remained flat relative to and 2005 … total expenditures (Table 11). Central government spending accounts for almost 90 percent of total Indonesia-wide public SA expenditures. National expenditures on SA programs are estimated at almost IDR 30 trillion (USD 3.3 billion) in 2010, equivalent to 2.9 percent of total national expenditure. Indonesia spends 0.5 percent of GDP on SA, which is low in comparison to regional peers and middle income developing countries: the T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 29 Indonesia Economic Quarterly Redirecting spending average for East Asian developing countries is 1 percent of GDP while the average developing country spends around 1.5 percent of GDP on social assistance (Figure 27). Table 11: After rising to 2005, spending on household SA Figure 27: Indonesia spends relatively little on social has stayed roughly constant in real terms assistance relative to regional and middle income peers (sector’s share in total national spending, percent) (spending on social assistance relative to GDP, percent) 2005 2010 Percent of GDP Percent of GDP Sector Share of Rank Share of Rank 2.5 2.5 total total national national 2.0 2.0 spending spending (percent) (percent) 1.5 1.5 Energy and other subsidies (excl. 22.1 1 15.7 3 SA) 1.0 1.0 Government 17.6 2 19.1 2 administration 0.5 0.5 Education (excl. 15.5 3 20.4 1 SA) 0.0 0.0 Interest payments 13.7 4 8.5 5 Infrastructure 8.3 5 10.3 4 Health (excl. SA) 3.6 6 4.6 6 Household SA 3.3 7 2.9 7 Agriculture 1.0 8 1.3 8 Note: Sub-national spending shares in 2010 are projections Note: * World Bank staff estimates. EAP is developing East Source: Ministry of Finance and World Bank staff Asia and Pacific, LAC is developing Latin America and calculations Caribbean and SA is South Asia (N represent number of countries in the regional group with available data). Most recent available data, year varies by country Source: Adapted from Weigand and Grosh (2008), “Levels and Patterns of Safety Net Spending in Developing and Transition Countries� …but current SA The majority of SA spending goes to consumption protection and smaller amounts are expenditures seem low spent promoting productive behavior and human capital investment. Raskin, the single given the Indonesian risk largest program, accounts for 53 percent of total SA expenditures while both Jamkesmas and vulnerability profile and BSM scholarships – the next two largest programs, together accounting for one-third of all SA expenditures – protect by providing income (BSM) or no-cost healthcare services (Jamkesmas). Cash transfers designed to promote livelihoods and investments in human capital are allocated much smaller resource shares: PKH is allocated 4 percent and programs for marginal groups 2 percent of total national SA expenditures. Resources dedicated to SA expenditures are not commensurate with the Indonesian risk and vulnerability profile described previously. Most social assistance programs do not yet have the mandate or resources to reach all eligible beneficiaries. Programs officially target only poor and near-poor households (and PKH targets only the “extreme poor�), not the additional vulnerable households that are at risk of falling into poverty. Each program prioritizes beneficiaries idiosyncratically (see below), meaning many beneficiaries of one program will not receive other programs and few households are transferred benefits from all available programs and interventions. c. Do programs provide the right benefits at the right time? While the benefits of Some programs are delivering benefits that make a difference. For example, Indonesia some social assistance continues to lag neighboring and middle income countries in important mother and child programs have had an health indicators (see the June 2010 IEQ). The PKH program was developed to tackle impact… these deficiencies by conditioning a cash benefit on household consumption of certain health and education services. At least for the health side, PKH benefits did indeed change behavior: pregnant mothers and their young children did consume more of a variety of health services, including those that can make meaningful changes to lagging health indicators. As discussed in Box 7, the unconditional cash transfer (BLT), provided in 2005/6 for 12 months and 2008/9 for 9 months, also appeared to be effective in T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 30 Indonesia Economic Quarterly Redirecting spending providing temporary protection from the impact of fuel price increases (notwithstanding obvious implementation weaknesses). …the main SA programs Other programs struggle to deliver meaningful benefits. For example, in 2010, Raskin deliver only a fraction of promised beneficiaries 14 kilograms per month but only delivered an average of 3.8 the benefits needed and kilograms per month (Figure 28). These amounts, when purchased at actual Raskin only some are delivered prices, represent a benefit valued at 2 to 3 percent of the household poverty line when needed expenditure, the lowest benefit level provided by any Indonesian SA program. Raskin is continuously delivered every month, but local-level implementation practices – with rotation and sharing of rice amongst households regardless of strict eligibility – negatively impact Raskin’s dependability for poor and vulnerable households. Jamkesmas is generous by design, offering a fee waiver for nearly all medical services available at public hospitals and primary care centers, and is always available to households when needed. However, as outlined in the December 2010 IEQ, the program does not provide enough facilitation and outreach that could make the benefit packages effective for poor households. For example, it cannot address costs, such as transport or lost wages, which households identify as serious impediments in accessing health services. Neither scholarship programs nor conditional cash transfers provide sufficient benefits for the education needs of target households: secondary education expenditures (including placement fees, transportation, and uniforms among others) can be as high as 20 percent of a poor household’s annual income, which puts it well beyond the reach of beneficiary households even after BSM or PKH education transfers, which are less than half the amount of total per-child expenditures on education. A household receiving both PKH and BSM might find the total transfer almost adequate, but separate implementing agencies have in the past prioritized different households and students. Design and The timeliness of the benefits provided can be less than optimal when program design implementation reinforces the negative effects of slow implementation. For example, BSM is delivered in characteristics can one lump-sum payment that arrives more than one year after enrollment and thus is not reduce timeliness available to students in the final year at each level of schooling. The cash transfers, therefore, are absent at the beginning of the school year and during primary-to-secondary or within- secondary transition years, which is precisely when the greatest risk to, and sharpest increases in the costs of, continued education occur. d. Are benefits reaching the right people? Overall, the distribution Overall, the targeting of Indonesia’s social assistance programs, as measured by of SA benefits is pro- coverage of the poor, is pro-poor and in line with international benchmarks. However, also poor, but inclusion and relative to international benchmarks, a large share of benefits accumulates in non-poor exclusion errors show households. Less than half of the poorest and most vulnerable 40 percent of households much room for improvement receive BLT and Jamkesmas, while 20 to 25 percent of total benefits from both programs go to the richest 40 percent. Over 70 percent of the vulnerable receive Raskin, but the program also has high coverage of the non-vulnerable, a result of local-level sharing of the subsidized rice among all households (Figure 28). In a comparison of targeting outcomes, and with 100 percent representing perfect targeting according to program design, BLT performs the best at 24 percent better than random, with Jamkesmas and Raskin at 16 and 13 percent respectively. BSM targeting is neither progressive nor regressive: the share of total BSM benefits in the bottom 40 percent of households is equal to the share in the top 60 percent. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 31 Indonesia Economic Quarterly Redirecting spending Rationalizing and Each program has developed its own beneficiary eligibility rules and targeting in practice coordinating the many 5 has often strayed from these official guidelines. For example, BLT was meant to use a different targeting mix of data collection methods, but each step in the data collection procedure was carried procedures could out with significant revisions: statistical assessment of poverty status was not done produce more consistency and less risk according to international best practice while community-based assessment was in most for potentially eligible cases neither consultative nor transparent. Raskin is meant to use official lists of the poor households to select beneficiaries, but, as mentioned above, in practice communities distribute the rice as they see fit, often sharing it out amongst many or all households. Jamkesmas is also meant to use official lists of the poor but there is considerable variation in beneficiary identities at the local level, with local health officials sometimes choosing beneficiaries, or households selecting themselves based on previous healthcare use. Different targeting approaches mean different beneficiaries for each program while poor socialization and mistargeting have undermined support for SA programs. The percent of communities experiencing protests over the programs ranged from 25 percent for Askeskin (now Jamkesmas), to 56 percent for BLT, with those not receiving assistance being the most likely to complain. Mistargeting and a lack of transparency in, and poor socialization of, beneficiary selection were the main sources of complaints. Figure 28: In practice the Raskin program delivers fewer Figure 29: …while awareness of Jamkesmas benefits levels benefits to the poor than budgeted for… is low (kilogram of rice per household per month; benefit as share of (share of sample, percent) poor household expenditure, percent) Budgeted benefit (kg/hh/mo), LHS Percent answering "covered" Actual benefit (kg/hh/mo), LHS Percent answering "not covered" Share of poor household Percent answering "do not know" Kilogram of rice per month expenditure Medical services 25 25% Labels indicate budgeted and actual Radiol. & electr. 20 benefits as share of poor household 20% expenditure respectively, RHS Dental treatment 15 15% Medicine 11% 11% Blood services 10 10% 8% Pre-natal cares 5 5% 3% 3% 2% 0% 50% 100% 0 0% 2004 2007 2010 Source: Bulog budget reporting documents, Susenas Note: All treatments, services, diagnostics, and medicines (various years) and World Bank staff calculations listed above are officially covered according to Jamkesmas technical manuals and regulations. Radiol. & electr. Is radiology & electromedic Source: Indonesia Corruption Watch (2008) e. Are programs implemented in the right way? Most SA initiatives do not The larger programs – BLT, Raskin, Jamkesmas, BSM – spend too little on administration benefit from and support operations and weak socialization and lack of accountability are the result. administration and The smaller cash transfer programs have higher administrative costs which seem support operations that reasonable given the pilot status and small scale of those programs. Raskin – like most enhance efficiency and effectiveness food delivery programs around the world – has high non-benefit spending overall, but these expenditures are for physical transportation, distribution and packaging of rice rather than on support operations for beneficiaries. 5 For a detailed review and discussion of targeting practices in Indonesia see Targeting Poor and Vulnerable Households in Indonesia, available at http://go.worldbank.org/5BWH4ZCQM0 T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 32 Indonesia Economic Quarterly Redirecting spending Weak socialization has All programs suffer from inadequate socialization guidelines, leading to reduced program translated into a lack of transparency and legitimacy and heightened potential for corruption. Knowledge on bottom-up accountability eligibility rules, program objectives, and beneficiary rights and responsibilities is usually and misunderstanding of spread thinly among beneficiaries, eligible households, communities, and local-level SA goals and objectives program implementers (Figure 29). Therefore, bottom-up monitoring of the targeting and benefit distribution process is limited while intra-community jealousy and misunderstanding are often high. SA programs – with the exception of the pilot Kemensos (Kementerian Sosial, Ministry of Social Affairs) cash transfers – do not include an explicit facilitation or outreach process. This limits beneficiaries’ effective access and leads to increased capture by those already familiar with the services offered, especially for Jamkesmas and BSM. Program monitoring – Monitoring and evaluation, complaint resolution mechanisms, and budget execution are all especially on household underdeveloped. All programs have descriptions (in regulations and manuals) of program outcomes – is also monitoring arrangements and some details regarding the content of monitoring underprovided and does procedures and reports. However, program monitoring and reporting is most often carried not feed into a continuous program out by local-level implementers and delegated with very little financial support, technical improvement cycle support, or systems for quality control. Monitoring and reporting does not always produce information useful for evaluating service delivery performance or household outcomes. Likewise, complaints and grievances processes are usually described but remain only weakly functioning and they are mostly unfamiliar to households and front-line providers. Most SA programs exhibit slow and unsmooth budget disbursement: benefit payments are often “bunched� in the second-half of the fiscal year making them less useful for consumption smoothing. Such delays often stem from lengthy, bottom-up beneficiary identification/verification procedures. Local-level Implementation is also affected by local-level politics and capacities. Local governments, implementation and agencies, service providers, and broader communities are asked to support various delivery partners are stages of most programs. Targeting, beneficiary verification, socialization, funds common, but weak channeling, facilitation, monitoring and evaluation, and the complaints and appeals incentives mean highly- variable SA delivery process are all areas where these actors may be involved. However, weak socialization performance and inconsistent follow-up mean that local actors are free to revise implementation procedures to suit what they feel is needed or desired by the community. This often means minimum service standards in each of the above-mentioned processes cannot be guaranteed and both implementation and outcomes will vary widely from region to region. f. Are the right programs and system in place? Some SA programs are Conditional and unconditional cash transfer programs have effectively protected well- designed, address a households from shocks, promoted good health and education behaviors and facilitated frequent and serious risk, reforms. As described in Box 7, BLT effectively protected households from the shock of and have demonstrated increases in fuel prices and helped facilitate much needed subsidy reforms by delivering positive results… cash transfers at the right time. The PKH pilot program has also produced positive impacts. For example, monthly household consumption increased by 10 percent (over and above initial levels); the largest shares of this increase went to food, especially high- protein foods, and health care. PKH’s presence even produced more pre-natal visits and child weighings in non-beneficiary households living in PKH areas. However, PKH did not have an effect on drawing more children into school, encouraging them to stay, or encouraging them to continue due to poor timing, relatively small benefits, and lack of outreach to school-leavers. Box 7: BLT and BLSM As discussed in Part A, Parliament recently approved a revised Budget including conditions under which the Government could increase the subsidized fuel price. Some of the resulting budgetary savings in the event of a price increase are proposed to fund a variety of targeted pro-poor initiatives, including a one-time, emergency, unconditional direct cash transfer to the poorest 30 percent of households called Bantuan Langsung Sementara Masyarakat, or BLSM (roughly translated as “Temporary Direct Assistance for the People�). In 2005 and again in 2008, Indonesia achieved a similar reorientation of regressive fuel subsidy spending towards pro-poor initiatives and social sector spending. On both occasions part of the budgetary savings funded a large-scale, direct, unconditional BLT cash transfer to poor and near-poor households. An assessment of the experiences and impacts of the BLT can help to inform assessments of which might be expected under a potential BLSM. Government expenditures were noticeably more “pro-poor� during both BLTs. During the first 12-month BLT in 2005/6, total household SA spending rose to approximately 1 percent of GDP, or more than double previous levels. During the second 9-month BLT in 2008/9 T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 33 Indonesia Economic Quarterly Redirecting spending total household SA spending rose to approximately 0.8 percent of GDP. Combined with the decrease in spending on regressive fuel subsidies, BLT significantly shifted the national expenditure profile towards pro-poor initiatives while it was delivered. BLT was delivered when it was most needed and allowed households to continue spending regularly. BLT reached households in all provinces and districts in Indonesia and added cash amounts of approximately 10 to 15 percent of regular expenditures at the time when fuel prices were increasing fastest. The transfer levels (of IDR 100,000 per household per month) were more than enough to cover increased expenditure on fuels and lasted long enough (12 months in 2005/6 and 9 months in 2008/9) for households to adjust spending patterns to new relative prices. Households with BLT did not change their previous consumption patterns noticeably, spending just as much as prior to BLT on nearly all goods and services. BLT households did not resort to negative coping strategies when prices were rising fastest. Household expenditure was protected for BLT households, especially in regions where local economies were weakest and not generating noticeable community-wide growth, while communities with more BLT recipients (whether economically strong or weak) saw increased consumption gains for non-BLT households. BLT households removed their children from labor at increased rates while overall health service utilization also increased more for BLT than non-BLT households. In 2008/9, when a BLT payment coincided with due dates for school enrolment and registration fees, households with BLT reported using it to pay these fees and keep their children in school. BLT helped households find work and did not create dependency. In fact, households who received BLT were more likely (by a significant margin) to find new jobs than households without BLT. And there was no difference between non-BLT and BLT households in the rate at which they left or were dismissed from jobs. In other words, BLT was responsible for a net increase in employment. Likewise, the number of hours worked (for adults) was essentially the same in both BLT and non-BLT households. BLT beneficiary households as well as other community observers noted that BLT amounts were nowhere near enough to live on and that employment continued to be essential and desirable for maintaining even poverty-level living standards. BLT support operations – from targeting through to complaint resolution – were carried out under severe constraints… Compressed delivery schedules, insufficient guidelines and incentives, a lack of clear accountability between BLT agencies and operational bodies, poor technology, and a difficult and varied poverty environment made implementation problematic. As there was a very short “incubation� period for BLT, a monitoring and evaluation program, a complaint and grievances mechanism, and an audit system were not included. This prevented any serious implementation improvements in real time or between the 2005 and 2008 BLTs. BLT has a very light administrative footprint and does not consume many resources in operation, but BLT was not efficient in terms of safeguarding program expenditures (see below). …and these pressures led to most of the ground-level confusion surrounding BLT. The allocation of BLT to poor, near-poor, and vulnerable households proved better than in Raskin, Jamkesmas, or BSM (for example). However, the hurried manner in which targeting procedures were socialized and implemented led to tremendous frustration in the majority of communities. Nearly all BLT-related complaints and protest activity focused on the prioritization, allocation, and distribution of benefits, as well as irregularities and malfeasance in that process. Furthermore, most complaints were made by non-beneficiaries who considered the actual allocation of benefits inequitable. Relatedly, informal deductions of BLT benefits increased markedly between rounds. These deductions and the redistribution of benefits to a wider population were common strategies that local-level administrators pursued to “keep the peace� in areas where confusion and envy regarding BLT, its prioritization of some households over others, and its objectives were elevated. The rush to distribute BLT – and lack of time spent developing proper support systems – meant that benefit deductions were not recorded, monitored, evaluated or remedied while insufficient socialization kept beneficiary households from interrupting, reporting, or acting on these unexpected modifications. Moving forward to BLSM, several home-grown innovations in direct cash transfers are worth noting. Most importantly, the recent introduction of a Unified Database for Social Protection Programs (Basis Data Terpadu untuk Program Perlindungan Sosial) based on PPLS11 data will improve the prioritization of BLSM (and other social programs) in targeting the poor and vulnerable. This new database covers 40 percent of the population, which is a significant improvement on the previous databases, while a more technical and transparent approach, based on lessons learned in Indonesia and other countries, should result in improved targeting. A responsive grievance mechanism can enhance overall coverage of the poor and vulnerable while leading to better understanding of the goals behind the prioritization to the poorest and most vulnerable. An improved socialization campaign will deepen public awareness of program goals and facilitate smooth implementation while continuing improvements in ongoing social assistance programs in health, education, and food security will ensure that BLSM cash benefits can be allocated to high return investments in human capital and nutrition. Lastly, simple and transparent administrative procedures with low overhead will maintain the program's cost effectiveness for the GOI. All of these improvements should enhance the objectivity and integrity of the BLSM system. A temporary cash transfer can perform modest protection functions, but it alone is not a poverty reduction system. BLT provided temporary protection to poor households in a more pro-poor manner than the fuel subsidies it replaced. But for long-term poverty reduction goals, BLT or BLSM will not be appropriate. Continuing investments in health, education, and business development, all of which can help disrupt the intergenerational transmission of poverty, are better encouraged by programs like conditional cash transfers, free health insurance, secondary and university scholarships, and micro-loans for entrepreneurs. Note: For more details see the background reports to World Bank (2012), Protecting Poor and Vulnerable Households in Indonesia (at http://go.worldbank.org/5BWH4ZCQM0) and the summary of the BLT evaluation in the December 2010 IEQ …while others are The remaining SA programs are struggling to meet their overarching objectives and are logically designed and likely not cost-effective initiatives. For example, Jamkesmas has increased utilization of could address frequent health services, but the effects are much larger for non-poor households and households and serious risks but with previous experience with the healthcare system. Poor beneficiaries are not taking have not been effective advantage of Jamkesmas’ nearly unlimited benefits due to lack of awareness of services provided and inability to meet supplemental costs of access. BSM and Raskin are not likely to significantly protect households or promote good behaviors because of design T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 34 Indonesia Economic Quarterly Redirecting spending and implementation weaknesses. While BSM delivery looks efficient – i.e., with minimal overheads – the program is less well-known and less used by target groups. Raskin spends the most to deliver rice, but beneficiaries end up with a very small transfer, making Raskin the least cost-effective program when considering actual benefits delivered. Overall, the current The current SA system leaves vulnerable groups uncovered and risks unaddressed. collection of SA There is currently no program that anticipates risks from, and prevents negative coping programs in Indonesia do behaviors during, household-idiosyncratic risks such as temporary unemployment. not constitute a true Indonesia also does not have an automatic safety net that kicks in to protect households social safety net: many gaps still remain… in response to global, macro, regional or micro shocks. Large numbers from marginalized groups such as destitute elderly and disabled remain unprotected. Promotion on a large scale is also underprovided. PKH is a relative success story but is confined to a small subset of very poor households. BSM serves a larger proportion of the population with a valuable protection-and-promotion benefit, but is not effective. …and fragmentation in These programs operate in isolation creating a fragmented approach to social protection. SA policy and The eight major SA programs are spread across five different implementing agencies implementation has while many additional institutions are involved in support operations, disbursing and prevented the delivering benefit packages, and policy planning. Fragmentation also occurs within construction of a logical and efficient social safety agencies: the scholarships program is actually comprised of 10 different independent net system initiatives spread across the Ministry of Education and Culture and Ministry of Religious Affairs with little inter-connectivity between them. The PKH, JSLU, JSPACA, and PKSA programs are run independently out of four different administrative clusters within the Ministry of Social Affairs, which means many common processes are needlessly duplicated. Implementing agencies do not realize economies of scale or scope in their operations and households cannot be inducted into the entire array of initiatives available. g. Building a true social safety net in Indonesia The creation of an This assessment points to a number of important steps are necessary for the creation of effective social safety net an effective social safety net system in Indonesia. The first is to spend better by improving system in Indonesia will programs and achieving a more optimal mix of initiatives. This includes increasing the require more effective benefit level and delivery schedule of the cost-effective PKH conditional cash transfer spending through improving programs and program; instituting a package of radical reforms for stopping leakage and improving optimizing the mix of targeting in Raskin’s subsidized rice program; upgrading capacity for the pilot cash initiatives… transfers targeting highly vulnerable groups; re-engineering the BSM scholarship program; and redefining an appropriate benefit package for Jamkesmas in order to provide financially sustainable and reliable health care utilized by all poor households. …scaling up programs to The second step is to scale up programs to protect more households from health risks, protect all vulnerable promote continuous education and protect from shocks threatening welfare. This includes households,… expanding Jamkesmas and BSM to reach all vulnerable households, and introducing a pilot early childhood education program. The PKH program and the collection of programs that target marginalized populations can be scaled up to reach all chronically poor households. Raskin should be right-sized to cover only poor households. Finally, existing gaps in the safety net can be filled by adding a coordinated emergency response system, featuring a revised version of the BLT unconditional cash transfer. …and integrating the The third step is to integrate the social safety net programs. This includes consolidating programs of a social program support operations, such as socialization, complaints handling and monitoring safety net by and evaluation, under a single roof and developing a single National Targeting System consolidating support (NTS). Creating a reliable public face for the social safety net under a single agency with operations and encouraging a single employees that perform outreach and socialization activities can encourage and facilitate window of access single window access to all initiatives available in the social safety net. The costs of building the The next generation of social assistance in Indonesia is affordable. With increases in next generation of social coverage for most current programs; with the addition of a public works program; with safety assistance in increases in benefit levels for most current programs; increases in administrative costs Indonesia are and spending on support operations for approximately half of the current programs; and in manageable a year during which an emergency, temporary, unconditional cash transfer was used, SA spending would double from around 0.5 percent of GDP (2010) to approximately 1 percent of GDP. This is still far less than Indonesia spent on energy subsidies in 2011 (3.4 percent of GDP), for example, or is projected to in the 2012 Revised Budget. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 35 Indonesia Economic Quarterly Redirecting spending 2. Turning quantity into quality in education The constitutional Over the past few years, education Figure 30: The “ 20 percent rule� triggered a mandate to provide 20 has become a bigger priority in significant increase in education spending starting percent of the national Indonesia, which was reflected in a 2009 budget for education has constitutional mandate to allocate a (education spending in 2009 prices, IDR trillion; as resulted in a significant increase in education minimum of 20 percent of the total share of GDP, percent) Real spending, 2009 prices (LHS) resources state expenditure towards the 6 education sector. The “20 percent Share of total state expenditure (RHS) rule� was originally introduced in a 2002 Amendment to the Share including SN education spending financed by own revenue sources (RHS) Constitution but, after the IDR trillion Percent Constitutional Court finally defined 250 25 and clarified the rule, it was met for the first time in 2009, triggering an 200 20 increase in education resources by 150 15 over 20 percent in real terms relative to the previous year 100 10 (Figure 30). In light of the significant implications of the rule 50 5 for education resources, this 0 0 section examines where additional resources have gone and why, despite the increase in resources, Source: World Bank staff estimates based on state the quality of education remains an budget data and Regional Financial information issue. Our analysis in particular system data (Sistem Informasi Keuangan focuses on the challenges Daerah,SIKD), Ministry of Finance associated with the allocation of spending and inefficiency in teacher management processes. a. Access to education has improved but quality remains an issue The improvement in The progress in enrollment rates has been impressive. Indonesia has achieved universal educational access and primary education and has advanced significantly in secondary and higher education, with equity has been an increase of 10 percentage points and 7 percentage points in their gross enrollment impressive, but rates (GER) respectively from 2001 to 2009. Perhaps the most impressive achievement enrollment rates are still low in higher education has been in early childhood education (ECD), which now reaches half of 3 to 5 year-olds (up from 25 percent a decade earlier). Most importantly, the biggest improvements in access at all levels have been for poorer segments of the population and in rural areas, leading to a big improvement in equity. There is, however, room for further progress since it is still the case that only about 4 percent of 18-20 year olds from the lowest income quintile are enrolled in higher education. Despite the increase in While access has improved, the quality of education remains an issue. Indonesia’s access, quality of performance in standardized international exams is lower than those of students in most education is still an issue other middle income countries. In the OECD Programme for International Student Assessment (PISA), which tests a representative sample of 15 year old students in the country, half of Indonesian students scored below level 1 in mathematics (the most basic level out of 6. No Indonesian students achieved levels 5 or 6, which measure creative problem solving and students’ complex reasoning (Figure 31). The results are similar when looking at 8th grade students tested in the Trends in Mathematics and Science Study (TIMSS). When gross enrollment rates of grade 8 students in several East Asian countries are adjusted for “some knowledge of whole numbers, operations, and basic graphs�, the gross enrollment rates of Indonesia drop more dramatically than in other countries in the region, with the exception of Philippines (Figure 32). 6 The 20% rule requires the allocation of minimum 20% of total state budget (central government expenditure and transfers to regions) to education (Ministry of Finance Decree 86, 2009). T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 36 Indonesia Economic Quarterly Redirecting spending Figure 31: Comparable measures of the quality of Figure 32: …resulting in a reduction in gross enrollment educational outcomes are relatively weak in Indonesia… rates, adjusted for quality (share of students by level of PISA math scores, percent) (gross enrollment rates in secondary education) Below level 1 Level 1 Level 2 As percent of 14 year olds Level 3 Level 4 Level 5 or 6 0 20 40 60 80 100 120 Percent Percent Malaysia Grade 8 enrolled 100 100 Philippines 80 80 Indonesia Grade 8 with a 60 60 basic knowledge Japan such as decimals 40 40 Korea Grade 8 who can 20 20 Thailand apply basic mathematical Hong Kong knowledge 0 0 SAR, China Indonesia Brazil Mexico 0 20 40 60 80 100 120 Note: Higher score indicates better performance Source: UNESCO Institute of Statistics, World Bank Edstats, Source: OECD, PISA 2009 and TIMSS Advanced 2008 International Report Mullis, Martin, and Foy 2008 b. Inefficient spending, particularly on teachers, may explain why increases in resources have not translated into improved education quality Part of the reason for low When the “20 percent rule� Figure 33: Most of the recent rise in education spending performance in was implemented in 2009, went to teachers’ salaries and certification program educational outcomes is the share of the total stage subsidies inefficiency in spending, budget going to education (share of total state budget, percent) particularly overstaffing increased by 6 percentage Teacher salaries Teacher certification points, a majority of which Universities BOS went to teacher’s salaries Other programs and teacher certification. Percent Percent More concretely, about 4 25 25 percentage points was allocated to teachers’ 20 7 20 salaries and teacher certification subsidies, with 1 15 2 15 6 2 percentage point each in 2 10 2 10 additional resources for 1 1 higher education programs 11 5 8 5 and for all other programs (Figure 33). As a result, 0 0 about half of the education 2006-08 2009-10 budget in 2009 was spent on Source: World Bank staff estimates based on SIKD-MoF teacher salaries – and this data does not yet take into account the 30 percent of the School Operational Assistance Program (Bantuan Operasional Sekolah, BOS) funds spent on school-hired teachers. This share is not extraordinarily high by international standards. In fact, many high performing countries spend a higher share of the budget in salaries. The problem lies in how the salary bill is spent: high performing countries spend a large share of the budget because attracting and retaining the best performers into teaching is expensive. In Indonesia, the high salary bill is due to an exceptionally low student teacher ratio (STR). Indonesia has one of the At 20:1, Indonesia already has one of the lowest STR in the world at the primary school lowest student teacher level; the global average is 31:1. At the secondary school level, comparisons are even ratios in the world and it more striking, with the average Indonesian STR at 12:1 – the lowest ratio in the East Asia continues to decline region. (Figure 34). Moreover, the STR in Indonesia continues to decline, with the number of teachers increasing at a faster pace than students at all levels of education (Figure 35). T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 37 Indonesia Economic Quarterly Redirecting spending Figure 34: Indonesia already has one of the lowest STR in Figure 35: The growth in teachers has outstripped that of the world students across different levels of education (Student Teacher Ratio in primary and secondary schools) (index of numbers by education level, 2004=100) Primary Secondary Index (2004=100) 0 10 20 30 40 50 200 200 United States Number of teachers Malaysia 180 180 Number of students High income 160 160 Thailand Indonesia 140 140 China Singapore 120 120 Japan Vietnam 100 100 Korea, Rep. World 80 80 2004 2006 2008 2010 2004 2006 2008 2010 2004 2006 2008 2010 2004 2006 2008 2010 2004 2006 2008 2010 Middle income Philippines Cambodia TK SD SMP SMA SMK 0 10 20 30 40 50 Student teacher ratio Source: UNESCO Institute for Statistics, 2009 Note: TK: Pre-School, SD: Primary School, SMP: Junior Secondary school, SMA: Senior Secondary School, SMK: Vocational school Source: Ministry of Education & Culture The low student teacher At the school level, STR is highly correlated with per student spending, and the effect is ratio appears to be the large. Using school-level data of a nationally representative sample of primary schools, main driver of inefficiency the World Bank estimates that a rise in the STR by 5 students per teacher is associated in spending and is not with a one-third reduction in spending (Figure 36). More importantly, with the current associated with better outcomes distribution of teachers, the STR shows no correlation with learning outcomes (Figure 37) – more teachers do not result in more learning. Figure 36: The relationship between the Student Teacher Figure 37: The STR is not correlated with learning outcomes Ratio and spending per student is very strong if the class size is below the regulatory maximum of 32 (Student Teacher Ratio; spending per student, IDR 000) (Bahasa test score; Student Teacher Ratio) 50 50 80 80 40 40 Student Teacher Ratio 60 60 Bahasa test score 30 30 40 40 20 20 20 20 10 10 0 0 0 0 0 2,000 4,000 6,000 8,000 0 10 20 30 40 Total spending per student including salaries Student Teacher Ratio (000 IDR) Note: Test is for a representative sample of public primary Note: Test is for a representative sample of public primary schools in Indonesia. Line indicates linear regression fit schools in Indonesia. Score is out of 100 and a higher test (coefficient statistically significant at 1 percent significance score indicates better performance. Line indicates linear level) regression fit (coefficient statistically insignificant). Schools Sources: World Bank School Based Management Survey, with more than 32 students per teacher (the maximum 2010 allowed by Ministry regulations) are excluded (if included, the relationship turns negative) Source: World Bank School Based Management Survey, 2010 T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 38 Indonesia Economic Quarterly Redirecting spending The current transfer So why does Indonesia have such a high number of teachers? To a large extent, mechanism to districts overstaffing is the result of the current financing system of intergovernmental transfers (DAU) is the main reason (see September 2011 IEQ). Although local governments are responsible for hiring for the overstaffing teachers, they do not bare the majority of the costs, as the central government pays the salaries of civil servants through funds that are transferred to the districts in the form of Dana Alokasi Umum (DAU) or a general block grant. The formula for this largest central government transfer includes the number of civil servants (Basic Allocation), which creates a perverse incentive for overstaffing - local governments with more civil servants receive a larger transfer. Delinking the basic allocation part of the day from staffing would ensure that districts hire teachers more rationally. In addition, having districts cover some of the costs of teacher allowances, such as the functional allowance, and assume part of the financial burden of hiring additional teachers, would further increase incentives for districts to control teacher hiring. There has also been a In addition to civil servant teachers, the number of contract teachers hired by districts or large rise in contract schools has also increased significantly. For example, about 30 percent of BOS funds are teachers, in part due to spent on honoraria for contract teachers. How these teachers affect learning is unclear, the large inequality in but the long term consequences of these practices for the budget are concerning. There is teacher distribution an expectation that contract teachers will one day be converted to civil servant teachers and be entitled to salary and subsidy increases. The very large inequality in civil servant teacher distribution, characterized by many schools being severely understaffed while others enjoy extremely low STR, is the reason why understaffed schools use BOS funds for contract teachers. The reason for the inequalities in teacher distribution is in part geographical: in a country like Indonesia one would expect problems in staffing schools in remote, low population density areas. However, the inequality of teacher distribution is not unique to remote rural areas – some districts and provinces in Java also suffer from it. To address this problem, the Government is trying to put in place mechanisms to improve teacher management. A recently issued decree signed by the 5 ministries involved in teacher hiring will provide guidelines to districts for teacher management, but its implementation will not be easy. Moving teachers across schools within a district is the responsibility of the district, so while these transfers may come at a cost (unclear in the regulation), they are feasible. But movement across districts and across provinces will likely prove more difficult. The preliminary analysis of the magnitude of the redeployment needed to ensure equitable allocation of teachers shows that about 15 percent of the teaching force would need to be redeployed, at least half of them across districts or provinces. c. Improving the quality of the teaching force in Indonesia is critical for improving the quality of education Improving the quality of In addition to improving teacher distribution, improving learning outcomes will depend on the existing teaching improving the quality of the teaching force. The introduction of the teacher certification force can include further program in 2005 was meant to do just that, improve and recognize teacher competencies improvements in the and professionalism. While it was a well intentioned and well developed program in its process of teacher certification… inception, the implementation gave space for ineffective paths for certification. More concretely, the “portfolio certification� allowed teachers with certain years of work experience and previous completion of training or workshops programs to receive a waiver to fulfill other certification training requirements. While there is no definitive evidence of the impact of the certification yet, early evidence suggests this was not an effective method of certification. The pass rate for these teachers is nearly 100 percent. A process of assessment and targeted training, as well as periodic re-certification or review might provide options to improve the program. …and the re-design of Teaching practices may also need to be re-designed. A pioneering 2007 video study teaching practices 7 conducted by the World Bank provided cross-country comparison on teacher and student behavior in classrooms, including during comparative TIMMS examinations. The study found that the traditional teaching method of rote learning, which is used extensively in Indonesia, tends to have a negative relationship with test scores. It also found a strong 7 World Bank (2010), Inside Indonesia’s mathematics classrooms: a TIMSS video study of teaching practices and student achievement. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 39 Indonesia Economic Quarterly Redirecting spending relationship between classes with high student involvement (such as student presentations and problem-solving and teacher-student interaction) and higher scores. Key preparatory activities, such as lesson planning, were strongly positively related to 8 student outcomes. But, no one policy can International experience in teacher management shows that no one policy can improve improve teacher quality teacher quality. Top-ranking countries in the 2009 and 2003 PISA scores, including China, Singapore and the Republic of Korea, have attributed great importance to improving teaching quality assurance, including through raising the quality of initial teacher training, attracting top candidates into teaching, providing comprehensive but cost-effective professional development programs to teachers, and creating teacher appraisal systems that promote improvement.9 In addition to teacher Another strategy that has shown positive impacts on learning in other countries is quality, there is room for increasing the role of schools in managing the education budget, and increasing parental additional cost-neutral participation in schools. Indonesia has taken steps in that direction, increasing discretion reforms to improve at the school level and decentralizing education management. Since 2005, Indonesia has quality of education… had a school grants program (Bantuan Operational Sekolah, BOS) that provides schools with a per student amount to cover operational costs, and many local governments have decided to increase the amount transferred to schools through district block grants for school operational assistance (Bantuan Operasional Sekolah Daerah, BOSDA). …such as greater These reforms show some promising results. BOSDA funds tend to be spent mostly on discretion and grant students and materials and are correlated with higher achievement (Figure 38). Whether funding to schools it is only the additional discretionary funds that lead to better results or the combination of funds and stronger involvement of the local government in supporting schools, the BOSDA programs have shown positive relationships with learning outcomes (Figure 39). This suggests that these types of programs should be supported in the future, perhaps through performance based transfers or matching grants schemes that provide incentives for districts to provide funds to schools while improving accountability. Figure 38: Discretionary budget at the school level is Figure 39: Students in schools with BOSDA perform better, associated with higher student test scores even controlling for other factors (Bahasa test score; non-salary school budget per student, (Math and Bahasa test score out of 100) IDR, ln scale) Bahasa test score out of 100 Test score out of 100 80 80 50 50 BOSDA No BOSDA 45 45 60 60 40 40 35 35 40 40 30 30 20 20 25 25 20 20 0 0 10 12 14 16 15 15 Math Bahasa Non-salary budget per student, IDR (ln scale) Sources: World Bank School-Based Management Survey, Note: Differences in performance between BOSDA and no 2010 BOSDA schools are significantly different at 1 percent level Source: World Bank School-Based Management Survey, (2010) 8 World Bank (2010), Transforming Indonesia’s teaching force. 9 World Bank (2011), Systems Assessment and Benchmarking for Education Results (SABER): What are the Different Profiles of Successful Teacher Policy Systems? T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 40 Indonesia Economic Quarterly Redirecting spending Continuing to expand Secondary and higher education should also be given a greater share of resources. More access for students, classrooms will be needed to expand access to senior secondary education. Scholarship especially at secondary programs for poor students was only 1 percent of the total education budget in 2009 and and higher education, will the existing program (Bantuan Siswa Miskin, BSM) does not cover the full cost of require a refocus in the allocation of spending education for many poor students and does not provide the right incentives to continue and improvements in education in transitions between levels. Taking into account recent substantial increase in spending efficiency the education public spending and pressing demands for the government to allocate more resources to the currently underfunded sectors, including infrastructure, health and social assistance programs, it is unlikely that the education budget will continue to increase at the same rate in the next decade. It is important for Indonesia to assess the quality and efficiency of spending of its education resources to create room for policies and programs that can improve education quality. Indonesia is ready for a Indonesia has made an important commitment to expanding education opportunities and qualitative jump of its has implemented important reforms to improve the quality of education. But not all the education sector, it is work is done. While access has improved, it is still low in higher education, and even at time to translate the senior secondary level poor students and students in remote areas face difficulties in strong commitment to education into higher accessing education. Quality is a concern, and should be the next priority. With the large quality amount of resources devoted to education, many of the reforms that would improve education quality would not increase costs; by better aligning spending with discretion and decision making, and increasing accountability, existing funds can result in better outcomes. Others, such as expanding scholarships or senior secondary education, will require resources. For those, freeing up resources will be crucial, and the key to this is improving teacher management. The current inefficiencies in teacher numbers and teacher allocations are the result of years of policies that incentivize hiring and prevented careful management of teachers at the district level. Important steps are being taken to fix those policies, and their success will be essential to ensure that Indonesia takes the next step towards a high quality education sector that prepares the country to meet its future economic and development challenges. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 41 Indonesia Economic Quarterly Redirecting spending 3. Gender equality is smart economics Similar to the rest of the Indonesia, and the rest of the East Figure 40: East Asia and Pacific has experienced East Asia and Pacific Asia and Pacific (EAP) region, has region, Indonesia’s historic rates of poverty reduction experienced significant economic (poverty headcount ratio of per capital daily household significant economic growth, structural transformation, consumption below PPP USD 1.25, by region) growth and development has been associated with and poverty reduction in the last EAP ECA reduced gender few decades. The shift away from agriculture toward manufacturing Percent LAC MNA Percent inequalities in a number of areas and services has contributed to SAR SSA significant growth and poverty 80 80 reduction; the region grew at 7 percent on average between 2000 60 60 and 2008, faster than any other developing region. High and sustained growth has translated 40 40 into higher living standards for the vast majority of the region’s inhabitants; extreme poverty – the 20 20 share of the population living below USD 1.25 per day (measured at 0 0 purchasing power parity, PPP) – in EAP countries has fallen by over 50 percent since 1990 and its incidence declined from the Note: EAP – East Asia and Pacific; ECA – Europe and highest in the world to among the Central Asia; LAC – Latin America and Caribbean; lowest (Figure 40). These trends of MNA – Middle East and North Africa; SAR – South growth, structural change, and Asia; SSA – Sub-Saharan Africa poverty reduction in Indonesia and Source: PovcalNet World Bank other regional economies have been accompanied by considerable progress toward gender equality in several key areas, particularly in education and health. But economic growth and There are, however, a number of dimensions where regional gender inequalities are development have not “stickier�, where the above trends have not been sufficient to overcome persistent gender been enough to attain disparities. Women still have less access than men to a range of productive assets and gender equality in all its services, including land, financial capital, agricultural extension services and new dimensions information technologies. There remains substantial employment segregation, by gender, across industries and occupations. As a result, women are less likely than men to work in formal sector jobs and more likely to work in poorly remunerated occupations and enterprises. Despite education gaps closing, women continue to be paid less than men for similar work. Moreover, women in EAP countries still have weaker voice and influence than men, whether in household decision-making, in the private sector, in civil society or in politics. Women across the region also remain vulnerable to gender-based violence, often at the hand of an intimate partner. Working toward gender Gender equality and women’s empowerment are development objectives in their own equality is both a right. In addition, a growing body of empirical literature from around the world development objective in demonstrates that promoting gender equality is also a good development policy – or as its own right and is smart stated in the World Bank’s World Development Report (WDR) 2012, “Gender equality… is economics, potentially increasing productivity smart economics.� Promoting gender equality in access to productive resources and per worker in Indonesia economic opportunity can contribute to higher economic productivity benefitting women by as much as 14 percent and men alike. If Indonesia’s society were to allocate resources on the basis of people’s skills and abilities, rather than by gender, per worker productivity could increase by as much as 14 percent, with important implications for growth and poverty reduction. Across 10 countries in the region the increase could be 7 to 18 percent. Promoting gender equality is also an investment in the next generation. Healthier, better educated mothers 10 These estimates are from World Bank (2012, forthcoming) Toward Gender Equality in East Asia and the Pacific, Regional Companion Piece to WDR 2012. The WDR 2012 report can be accessed at http://wwwr.worldbank.org/wdr2012. The estimates for Indonesia are from D. Cuberes and M. Teignier Baqué (2011), “Gender Inequality and Economic Growth� Background paper for WDR 2012. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 42 Indonesia Economic Quarterly Redirecting spending have healthier, better educated children; greater female earnings and assets are also associated with greater investments in children. The effects begin before child birth and are long-lasting, contributing to improved economic prospects for the next generation. Promoting gender equality in voice and influence in society contributes not only to more representative but also higher quality development decision making. When more women participate in policymaking, decisions better reflect both women’s and men’s preference. Recent evidence shows that greater female participation in government also improves the provision of public goods. The following overview of Drawing on the World Bank’s forthcoming WDR 2012 regional companion piece, Toward recent progress and Gender Equality in East Asia and the Pacific, this section surveys Indonesia’s recent pending challenges in progress and pending challenges in achieving gender equality in endowments (human achieving gender equality capital, such as education and health as well as productive capital, such as land and is structured around endowments, economic credit), in economic opportunity (economic participation and returns) and in agency opportunity and agency (women’s voice and influence). a. Gender equality in endowments has increased, however some disparities remain While gender disparities As described in the preceding piece on education, economic growth and poverty reduction in enrollment have in Indonesia, and the region as a whole, has been associated with rapid increases in closed, gaps in education school enrollment and closing of gender gaps at all levels of education (Figure 41). In fact, quality and choice of in several countries in the region, including Indonesia at the basic education level, there is academic streams persist now a reverse gender gap, where many more girls are attending school than boys. There are indications of “gender streaming� in education, however, which contributes to persistent inequalities between women and men in the types of jobs they do. Data from Indonesia, Thailand and Vietnam indicates that the fields of engineering and law are heavily dominated by males while the fields of education, health and business 11 administration are dominated by females. TIMSS and PISA test scores from Indonesia, Malaysia, Philippines, and Thailand suggest, however, that there are no systematic differences between males and females in math and science scores (Figure 42). Moreover, consistent with the global findings, women in East Asia outperform men in reading assessments (Schleicher, 2008). Nonetheless, different norms and expectations for males and females, including those promoted from an early age through school curricula, are likely to influence preferences by gender and, therefore, affect the choice of education streams. 11 In OECD countries men are also more likely to be found among mathematics and computer science graduates than women and have been found to outperform women in mathematics (Schleicher, A., 2008 “Student Learning Outcomes in Mathematics from a Gender Perspective : What does the International PISA Assessment Tell us?� In M. Tembon and L. Fort, eds, Girls’ Education in the 21st Century). T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 43 Indonesia Economic Quarterly Redirecting spending Figure 41: Enrollment rate gaps for tertiary education have Figure 42: There are no systematic differences between closed and are reversed in some countries males and females in mathematics and science scores (ratio of female to male tertiary school gross enrollment) (ratio of female to male performance) 0 0.5 1 1.5 2 Math Science Reading Tonga Mongolia 1.10 1.10 Malaysia Philippines Thailand 1.05 1.05 Fiji China Vietnam Indonesia 1.00 1.00 Lao PDR Timor-Leste Vanuatu 0.95 0.95 Papua New Guinea Cambodia 0.90 0.90 0.0 0.5 1.0 1.5 2.0 Indonesia Thailand Malaysia Philippines Note: Data is 2008 or 2009, except the following: Fiji 2005, Note: Most recent year is 2003 for Philippines, and 2007 for Papua New Guinea 1999, Tonga 2004, and Vanuatu 2004 all other countries. Philippines is not a participant in PISA. Source: Global Education Digest 2009 and 2011, UNESCO Malaysia 2010 PISA data not available online yet Institute for Statistics Source: Mathematics and science scales for 8th graders are from TIMSS. Reading scale is from PISA, 2009 Indonesia’s maternal Although maternal mortality Figure 43: Maternal mortality in Indonesia is high for its mortality rate remains rate declines with higher income level high compared to other incomes (Figure 43), (maternal mortality ratio per 100,000 live births; GDP per countries in the region at Indonesia’s maternal capita, in logs) similar levels of development mortality rate remains high Maternal Mortality Ratio compared to other countries (per 100,000 live births) at similar levels of 1500 1500 development, and progress Rest of the world in reducing maternal mortality has been slow. East Asia and Pacific Indonesia’s rate is as high as 1000 1000 in low income neighbors such as Cambodia. Recent analysis by the World Bank 500 500 highlights that the current approach in Indonesia, which Indonesia emphasizes the use of a midwife for delivery and 0 0 community-based 5 7 9 11 interventions, has not had Log GDP per capita (constant 2005 international dollar) the anticipated impact.12 Health centers and hospitals, Note: Data are for 2008. Maternal mortality ratios are which are key elements of a modeled estimates. Dashed line is exponential trend line referral system designed to Source: World Health Organization and WDI 2011 address emergency complications, are also still not performing at an optimal level. The continued use of traditional birth attendants and delivering at home are some of the contributory factors to the levels of maternal mortality in Indonesia. Acknowledging its risks, the Government for the last two years has discouraged home delivery and promoted institutional or facility delivery, including through a program paying for costs of delivery in Puskemas (community health centers) and in those other facilities which have a Memorandum of Understanding with the District Health Office. 12 World Bank (2010a), Indonesia Maternal Health Assessment: and Then She Died. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 44 Indonesia Economic Quarterly Redirecting spending Gender disparities in the In most countries, women remain less likely to own land (or hold formal land titles) than access to and control of men. Moreover, data from Indonesia as well as China, Lao PDR, Mongolia, Timor-Leste, productive assets, such and Vietnam indicate that when women – or, specifically female-headed households – do as land and capital, are own land, they typically have smaller holdings. A recent study of women’s land holdings in pervasive in Indonesia and around the world and post-Tsunami Aceh similarly found that women’s land holdings were considerably lower 13 remain challenges than men’s. Women have traditionally also had systematically less access to capital than despite significant growth men; this has been compounded by their poorer access to land, an important source of and development collateral. While gender differences in access to capital remain, data suggest that obtaining credit can remain a challenge to both male and female entrepreneurs. Among micro and small firms in Indonesia, both female-and male-run enterprises cite access to finance as the most significant business constraint, with the share of female-run firms reporting this constraint is only slightly higher than the share of male-run firms (30 vs. 25 percent, respectively). b. On economic opportunity, female labor participation rates has risen but lags the region The female labor force While Indonesia’s female labor force participation rate increased from around 45 percent participation rate is in 1980 to about 55 percent in 2008 (Figure 44), it still remained below the average for the lagging behind that of the region of 70 percent (even though it is at about average, worldwide, for Indonesia’s region and women are income level). In Indonesia, women are mostly found in informal sector and are the mostly found in the informal sector and majority of unskilled migrant labors. The participation in the agriculture and industry account for the majority sectors by women was fairly similar between 1980 and 2007. The bulk of the increase in of unskilled migrant female labor force participation came from the entry of women into the service sector. labors There remains employment segregation, by gender, in the Indonesian economy. For example, 2009 survey data indicates that over half of the female labor force in Indonesia is employed in the commerce sector, compared with just over a quarter of male workers. Female workers are also relatively more likely to be employed in the education, health and social sector, for example. Returns to work for Women still earn less than men in all sectors in Indonesia and in all countries in the women tend to be lower region. Earnings in the government sector seem to be the most equal, but gender gaps in region-wide, including in wages in the service, industry and agriculture sectors in Indonesia are among the largest Indonesia, where female- in the region (Figure 45). The important socioeconomic variations in Indonesia are that led enterprises also tend to be smaller and more urban educated women have higher returns than men with the same education, while precarious women at the bottom end of the wage distribution (i.e. among the lowest educated individuals) face the biggest wage gap.14 Enterprise surveys also suggest that, within the same firms, women are more likely than men to be temporary workers – around 25 and 17.5 percent of women workers in exporting and non-exporting firms compared to less 15 than 10 percent of male workers are on temporary contracts in Indonesia. Female-led enterprises across the region tend to be smaller and more precarious than male-led enterprises, operate in the informal sector, be home-based or operate out of non-permanent premises. While female-owned and managed enterprises are not inherently less productive, they tend to be less capitalized and operate in less- remunerative sectors. For instance, in Indonesia, the Indonesia Family Life Survey indicates that female-led enterprises are relatively more likely to locate in the food, retail and garment manufacturing sectors – among the least capital intensive and productive sectors – while male-led entrepreneurs are relatively more likely to locate in sectors such as transportation – among the most capital intensive, highest productivity sectors. 13 World Bank (2010), Indonesia - Reconstruction of Aceh Land Administration System Project. Evidence from other parts of Indonesia suggests that land ownership patterns, by gender, can differ in important ways, depending on local norms and customs. In matrilineal region of West Sumatra, Indonesia, for example, at the time of marriage, husbands commonly own more forest land than their wives, while wives commonly own more paddy land (Quisumbing, A.R., and J. Maluccio. 2003, “Resources at Marriage and Intra-household Allocation: Evidence from Bangladesh, Ethiopia, Indonesia, and South Africa�, Oxford Bulletin of Economics and Statistics 65, pp. 283-327). 14 World Bank (2011). Indonesia Job Report: Towards Better Jobs and Security for All. 15 World Bank staff estimates using Enterprise Survey, 2006-2011. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 45 Indonesia Economic Quarterly Redirecting spending Figure 44: Indonesia’s female labor force participation rate Figure 45: Women still earn less than men across all is lower than the regional average of 70 percent sectors, but with less divergence in government (female labor force participation in 2008, percent) (ratio of female to male wages) Percent Percent 100 100 Agriculture Industry Services Government 0 0.5 1 1.5 80 80 60 60 Cambodia 2008 40 40 Thailand 2009 20 20 Philippines 2006 0 0 Vietnam 2006 Malaysia Mongolia Tonga Thailand Cambodia Fiji Vietnam Samoa Philippines Indonesia Korea, Rep. Timor-Leste China Vanuatu Lao PDR Papua New Guinea Timor Leste 2007 Lao 2008 Indonesia 2009 0 0.5 1 1.5 Female to male wage ratio Source: WDI 2010, Gender Statistics, World Bank. Source: World Bank staff estimates using Household Surveys, 2006-2011 c. Women’s agency – voice and influence – can be strengthened in both the private and public spheres Women still face Agency – that is women’s voice and influence – can be looked at in two main dimensions. challenges in exercising The first is the ability of men and women to make choices related to themselves and to voice and influence, their households. This could be proxied through control over own earnings, ability to travel whether in the home or in without husband’s permission, and the gap between desired and actual fertility. The society second is the ability of men and women to make choices and be represented in the political and economic spheres. This is usually measured by women’s activity in the public domain such as their share of parliamentary seats. While there has been some progress in raising women’s voices with development, there is substantial work that remains to be done in strengthening the voice of women in both private and public spheres. Some indicators suggest Women in Indonesia have a relatively good control over their own income, compared to that women’s voice in other countries in the region, including several Pacific Island countries, the Philippines and personal and household Timor-Leste (Figure 46). Greater influence in personal and household decisions could be decisions is relatively a function of several factors, including recent increases in female education and access to balanced in Indonesia economic opportunities. Region-wide, East Asia and the Pacific, and Indonesia in particular, seems to perform well on several indicators of women’s autonomy, such as control over household purchases and the ability to travel. Women’s voice in the Women have relatively low levels of representation in political assemblies, whether at the public domain – as national or local levels. For example, women make up just over 19 percent of national measured by political parliamentarians worldwide. The share of female parliamentarians in East Asian and representation – remains Pacific countries is slightly lower, at approximately 18 percent in 2011, barely changed weak since 1990. This stands in contrast to other developing regions, where levels of female 16 political representation have tended to increase, at least since 2000. In Indonesia in 2009 18 percent of parliament seats were held by women, around the regional average, and up from 13 percent in 2004. Women also continue to be seriously under-represented in the top echelon in government. Furthermore, decentralization in Indonesia, which should have provided more opportunities for women, has led to a proliferation of discriminatory legislation at the local level. Discriminatory local government policies against women increased from 154 in 2009 to 189 in 2010.17 16 In the Europe and Central Asia region, female representation in national assemblies fell substantially falling the dissolution of the Soviet Union, although levels increased again between 2000 and 2008. 17 Komnas Perempuan (Indonesia's National Commission on Violence Against Women), Terror and Violence Against Women: The Loss of Control by the State. A Note on Violence Against Women 2010, March 2011, revised version. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 46 Indonesia Economic Quarterly Redirecting spending Figure 46: Strength of women’s voice in personal and Figure 47: …but remains weak in the public domain household is relatively high… (shares of parliamentary seats held by women as of December (wives’ control of own earnings, percent of sample) 2011, percent) Mainly wife Jointly Mainly husband Percent Percent 100% 35 35 30 30 80% 25 25 20 20 60% 15 15 10 10 40% 5 5 0 0 Kiribati Nauru Palau Vanuatu Mongolia Samoa Tuvalu Japan Indonesia Philippines Timor-Leste Marshall Islands Thailand Cambodia China Lao PDR Vietnam Micronesia, FS Myanmar Tonga Malaysia Papua New Guinea Korea North Korea Singapore Solomon Islands 20% 0% Note: Wives include currently married women aged 15-49 Source: Inter-Parliamentary Union www.ipu.org who receive cash earnings for employment Source: Demographic and Health surveys, various years Gender-based violence – The incidence of gender-based violence in the region remains high. Its prevalence reflects defined here as the several factors, including societal norms, the socio-economic characteristics of the victim extreme deprivation of and perpetrator, the extent of legal protections against violence, and women’s access to female agency – remains justice. A recent study in Indonesia indicates that the most common forms of violence pervasive in the region against women in Indonesia include psychological, economic, physical and sexual, violence against women by their husbands.18 While the factors that enable gender-based violence are multiple and complex, the phenomena is exacerbated by a lack of adequate legal protections in many countries in the region. In this context, it is worth noting that Indonesia has put in place several legal and institutional measures to address domestic abuse in recent years. d. Priority areas for action Some of the priority areas This brief review of gender equality by endowment, opportunity and agency indicators for action to promote points to a number of areas for further improvement within Indonesia. For example, in gender equality in education, with the gender gap in access eliminated, Indonesia’s education system could Indonesia include concentrate on addressing gender stereotypes in school curricula and in reducing “gender reducing gender silos in education and labor streaming� in education. In the health sector, maternal mortality rate needs to be strongly markets while promoting targeted through better institutional management of pregnancy care and child birth. affirmative action in the Reducing gender wage gaps in the labor market could also be addressed through positive public domain action to eliminate discrimination such as enforcement of existing legal measures for equal employment opportunities. . Enhancing women’s voice and influence, especially in the political sphere, seems to remain a particular challenge. Specific steps to strengthen women’s agency will need to be taken, including better enforcement of existing affirmative action policies for female representation in parliament. 18 See above study by Komnas Perempuan. T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 47 Indonesia Economic Quarterly Redirecting spending APPENDIX: A SNAPSHOT OF INDONESIAN ECONOMIC INDICATORS Appendix Figure 1: Quarterly and annual GDP growth Appendix Figure 2: Contributions to GDP expenditures (percent growth) (quarter-on-quarter, seasonally adjusted) Percent Percent Percent Percent 4 8 4 4 Year on year (RHS) 2 2 3 6 Quarter on quarter seasonally adjusted 0 0 2 (QoQ sa) (LHS) 4 Average QoQ sa (LHS)* -2 -2 1 2 -4 -4 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 0 0 Discrepancy Net Exports Investment Dec-05 Dec-07 Dec-09 Dec-11 Gov cons. Private cons. GDP Note: *Average QoQ growth between Q4 2005 – Q4 2011 Source: BPS via CEIC and World Bank Sources: BPS, World Bank seasonal adjustment Appendix Figure 3: Contributions to GDP production Appendix Figure 4: Motor cycle and motor vehicle sales (quarter-on-quarter, seasonally adjusted) (monthly sales) Percent Percent '000 '000 3 3 900 110 Motor cycles (LHS) 2 2 700 90 1 1 0 0 500 70 -1 -1 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Other (incl services) 300 50 Trade, Hotel & Restaurant Transport & Communication •Motor vehicles (RHS) Manufacturing Mining & construction Agriculture etc 100 30 GDP Jan-09 Jan-10 Jan-11 Jan-12 Source: BPS via CEIC Source: CEIC Appendix Figure 5: Consumer indicators Appendix Figure 6: Industrial production indicators (index levels) (year-on-year growth) Index Index Percent Percent 150 150 15 60 Cement sales BI Retail Sales index (RHS) 125 125 10 40 BI Consumer Survey Index Industrial production index (LHS) 100 100 5 20 75 75 0 0 50 50 -5 -20 Jan-09 Jan-10 Jan-11 Jan-12 Jan-09 Jan-10 Jan-11 Jan-12 Source: BI via CEIC Source: CEIC T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 48 Indonesia Economic Quarterly Redirecting spending Appendix Figure 7: Real trade flows Appendix Figure 8: Balance of Payments (quarter-on-quarter real growth, nsa) (USD billion) Percent Percent USD billion USD billion 20 20 16 16 Overall Balance 12 12 10 10 Imports Current account 8 8 0 0 4 4 Exports 0 0 -10 -10 Errors and omissions -4 -4 Capital and financial account -20 -20 -8 -8 Dec-08 Dec-09 Dec-10 Dec-11 Dec-08 Dec-09 Dec-10 Dec-11 Source: BPS (National Accounts) and World Bank Source: BI and World Bank Appendix Figure 9: Trade balance Appendix Figure 10: Reserves and capital inflows (USD billion) (USD billion) USD billion USD billion USD billion USD billion 20 5.0 150 5.0 Trade balance Non-resident portfolio inflows Exports (RHS) (RHS) (LHS) 125 2.5 10 2.5 100 0.0 0 0.0 75 -2.5 Reserves (LHS) -10 -2.5 50 -5.0 Imports (LHS) -20 -5.0 25 -7.5 Jan-09 Jan-10 Jan-11 Jan-12 Feb-09 Feb-10 Feb-11 Feb-12 Source: BPS and World Bank Source: BI and World Bank Appendix Figure 11: Term of trade and monthly export & Appendix Figure 12: Inflation and monetary policy import chained Fisher price indices (month-on-month and year-on-year growth, percent) (index 2000=100) Index (2000=100) Index (2000=100) Percent Percent 300 300 3 12 Headline inflation, YoY (RHS) Terms of trade Chained export 250 250 price Core inflation, YoY (RHS) 2 8 BI policy rate (RHS) 200 200 150 150 1 4 100 100 Chained import price 0 0 50 50 Headline inflation MoM (LHS) 0 0 -1 -4 Dec-05 Dec-07 Dec-09 Dec-11 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Source: BPS and World Bank Source: BPS and World Bank T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 49 Indonesia Economic Quarterly Redirecting spending Appendix Figure 13: Monthly breakdown of CPI Appendix Figure 14: Inflation among neighboring countries (percentage point contributions to monthly growth) (year-on-year, February 2012) Percent Percent Percent 1.8 1.8 Volatile Administered -1 0 1 2 3 4 5 6 Core Headline Singapore* 1.2 1.2 Philippines * Korea* Indonesia 0.6 0.6 Thailand China USA 0.0 0.0 Malaysia Japan * -0.6 -0.6 -1 0 1 2 3 4 5 6 Feb-09 Feb-10 Feb-11 Feb-12 Percent Sources: BPS and World Bank *January is latest available month Sources: National statistical agencies via CEIC, and BPS Appendix Figure 15: Domestic and international rice prices Appendix Figure 16: Poverty and unemployment rate (in IDR per kg) (percent) IDR/Kg IDR/Kg Percent Percent 11,000 11,000 25 25 Medium quality: Muncul I (domestic) 20 20 9,000 9,000 Thai 100% B 2nd grade (international) Poverty rate 7,000 7,000 15 15 5,000 5,000 10 10 Unemployment rate 3,000 3,000 5 5 Low quality: IR 64 III (domestic); Thai A1 Super (international) 0 0 1,000 1,000 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 2001 2003 2005 2007 2009 2011 Note: Dashed: international Thai rice (cif) prices. Solid: Note: Labor data from August Sakernas domestic wholesale rice Sources: BPS, and World Bank Sources: PIBC, FAO and World Bank Appendix Figure 17: Regional equity indices Appendix Figure 18: Dollar index and Rupiah exchange rate (daily, index January 2009=100) (daily, index and levels) Index (Jan 2009=100) Index (Jan 2009=100) Index (5 Jan 2009=100) IDR per USD 300 300 120 8,000 JCI IDR/USD (RHS) 250 250 SET 110 9,000 200 200 BSE Dollar Index (LHS) 100 10,000 150 150 Shanghai 90 11,000 100 100 SGX IDR Appreciation 50 50 80 12,000 Jan-09 Jan-10 Jan-11 Jan-12 Jan-09 Jan-10 Jan-11 Jan-12 Sources: World Bank and CEIC Sources: World Bank and CEIC T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 50 Indonesia Economic Quarterly Redirecting spending Appendix Figure 19: 5 year local currency government bond Appendix Figure 20: Sovereign USD Bond EMBI spreads yields (daily, basis points) (daily, percent) Percent Percent Basis points Basis points 15 15 1000 250 Indonesia 750 125 10 10 Indonesia spreads less overall EMBIG Index spreads (RHS) Philippines 500 0 5 5 Malaysia 250 -125 Thailand United States Indonesia EMBIG bond spreads (LHS) 0 0 0 -250 Jan-09 Jan-10 Jan-11 Jan-12 Jan-09 Jan-10 Jan-11 Jan-12 Sources: World Bank Sources: World Bank and CEIC Appendix Figure 21: International commercial bank lending Appendix Figure 22: Banking sector indicators (monthly, index January 2008=100) (monthly, percent) Index (Jan 2008=100) Index (Jan 2008=100) Percent Percent 225 225 100 10 Indonesia 200 200 Loan to Deposit Ratio (LHS) 80 8 India 175 175 Singapore 60 6 Return on Assets 150 150 Ratio (RHS) Non-Performing Malaysia Loans (RHS) 40 4 125 125 Thailand 20 2 100 100 USA Capital Adequacy Ratio (LHS) 75 75 0 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Sources: CEIC and World Bank Sources: BI and World Bank Appendix Figure 23: Government debt Appendix Figure 24: External debt (percent of GDP; USD billion) (percent of GDP; USD billion Percent USD billion Percent USD billion 50 250 50 250 Government debt ratio to GDP (LHS) External debt ratio to GDP (LHS) 40 200 40 200 30 150 30 150 20 100 20 100 10 50 10 50 0 0 0 0 2005 2006 2007 2008 2009 2010 2011 2005 2006 2007 2008 2009 2010 2011 Domestic debt, RHS Public external debt, RHS External debt, RHS Private external debt, RHS Sources: BI and World Bank Sources: BI and World Bank T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 51 Indonesia Economic Quarterly Redirecting spending Appendix Table 1: Budget outcomes and proposed budget (IDR trillion) 2008 2009 2010 2011 2012 2012 Outcome Revised Outcome Outcome Outcome Budget (Unaudited) Budget A. State revenue and grants 981.6 848.8 995.3 1,199.5 1,311.4 1,358.2 1. Tax revenue 658.7 619.9 723.3 872.6 1,032.6 1,016.2 2. Non-tax revenue 320.6 227.2 268.9 324.3 278.0 341.1 B. Expenditure 985.7 937.4 1,042.1 1,289.6 1,435.4 1,548.3 1. Central government 693.4 628.8 697.4 878.3 965.0 1,069.5 2. Transfers to the regions 292.4 308.6 344.7 411.4 470.4 478.8 C. Primary balance 84.3 5.2 41.5 3.2 -1.8 -72.3 D. SURPLUS / DEFICIT -4.1 -88.6 -46.9 -90.1 -124.0 -190.1 (percent of GDP) -0.1 -1.6 -0.7 -1.2 -1.5 -2.2 Source: MoF Appendix Table 2: Balance of Payments (USD billion) 2008 2009 2010 2011 2010 2011 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Overall Balance of Payments -1.9 12.5 30.3 11.9 6.6 5.4 7.0 11.3 7.7 11.9 -4.0 -3.7 As percent of GDP -0.4 2.3 4.3 1.4 4.1 3.1 3.7 6.0 3.9 5.6 -1.8 -1.8 Current Account 0.1 10.6 5.1 2.1 1.9 1.3 1.0 0.9 2.1 0.5 0.5 -0.9 As percent of GDP 0.0 2.0 0.7 0.2 1.2 0.8 0.6 0.5 1.0 0.2 0.2 -0.4 Trade balance 9.9 21.2 21.3 23.5 4.8 4.6 5.4 6.4 6.6 6.3 6.8 3.9 Net income & transfers -9.8 -10.6 -16.2 -21.5 -3.0 -3.2 -4.4 -5.6 -4.5 -5.8 -6.3 -4.9 Capital & Financial Account -1.8 4.9 26.6 14.0 5.7 3.8 7.5 9.7 6.6 12.8 -4.1 -1.4 As percent of GDP -0.4 0.9 3.8 1.7 3.5 2.2 4.0 5.2 3.4 6.0 -1.8 -0.6 FDI 3.4 2.6 11.1 10.4 2.6 2.4 1.8 4.4 3.5 3.2 1.7 2.1 Portfolio 1.8 10.3 13.2 4.2 6.2 1.1 4.5 1.4 3.6 5.5 -4.7 -0.3 Other -7.3 -8.2 2.3 -0.6 -3.1 0.3 1.2 3.8 -0.4 4.1 -1.1 -3.2 Errors & omissions -0.2 -3.0 -1.5 -4.2 -0.9 0.3 -1.6 0.7 -1.1 -1.4 -0.3 -1.4 (a) Reserves 51.6 66.1 96.2 110.1 71.8 76.3 86.6 96.2 105.7 119.7 114.5 110.1 Note: * Reserves at end-period Source: BI and BPS T H E W O R L D B AN K | B AN K D U N I A Ap r i l 2 0 1 2 52 Investing in Indonesia’s Institutions for Inclusive and Sustainable Development