7 August 2013 | Vol. 4, № 28.

From the Editor’s Desk Dear FDI supporters,

Welcome to the Strategic Weekly young blogger. Also in that region, we Analysis. This week’s edition begins with a look into the US$1 billion deal that will focus on . The first article see the United Arab Emirates acquire examines the implications for Pakistani state-of-the-art military surveillance Prime Minister Nawaz Sharif of the recent satellites from France. The UAE will be suicide bombing at the Indian Consulate only the second country in the region to in the Afghan city of Jalalabad. We then possess such a capability. assess the ability of incoming Pakistani President to play a role Coming closer to home, we conclude with a report on the latest economic news in improving relations between the two from Indonesia, where a rising inflation countries. rate is among several signs that the Next, we look at the continuing economy may be slowing down. importance to India of its longstanding Later this week, the Global Food and relations with Mauritius, which have been further cemented by India’s construction Water Crises Research Programme will of an Offshore Patrol Vessel destined for re-publish an Associate Paper from Lester Brown, founder and president of the the island state. Earth Policy Institute, examining the Moving across to Africa, we consider the threat that water shortages pose to future continuing concerns of neighbouring food security. countries about Ethiopia’s ambitious I trust that you will enjoy this edition of hydropower plans. the Strategic Weekly Analysis. In the Middle East, we evaluate changing attitudes among young Saudis to the Major General John Hartley AO (Retd) Institute Director and CEO country’s governance system, in light of Future Directions International the sentence recently handed down to a

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Explosions at Indian Consulate in Afghanistan Cause Problems for Nawaz Sharif in Pakistan

The explosions at the Indian consulate in Jalalabad are causing Pakistani Prime Minister Nawaz Sharif unwanted concern, as he attempts to renew relations with India.

Background

On 3 August, three suicide bombers blew themselves up near the Indian consulate in Jalalabad, Afghanistan. While no Indians were hurt or killed in the blasts, the bombers killed at least eight children, who were at religious class in a nearby mosque, and four other people. Officials in New Delhi have blamed “Pakistani nationals” who, they allege, travelled from Pakistan to Kunar near Jalalabad, where they were provided with accommodation by “Arab terrorists”. This appears to be diplomatic speak for the Haqqani network and al-Qaida respectively. India has blamed the Haqqani network, which comes under the Taliban umbrella headed by Mullah Omar and the Quetta Shura Taliban, for previous attacks on its consulates in Afghanistan. If that assessment is correct, it leaves Pakistani Prime Minister Nawaz Sharif with the unenviable task of reining in, or at least showing concrete signs of attempting to curb, the Haqqanis and the Directorate of Inter-Services Intelligence (ISI) of the Pakistani Army.

Comment

Recently-elected Prime Minister Nawaz Sharif acknowledges Pakistan’s dire economic situation, including its energy crisis. Reports indicate that he has called for renewed talks with India. He said that there is no other way that the two countries can scale back their arms expenditure, provide their governments with added resources to use for the welfare of their citizens. To achieve this, however, Sharif knows that there must be better relations between the two states, which have fought three wars since their independence in 1947. The attack on the Indian consulate, therefore, is not only an impediment to better relations, but also a setback to Sharif’s attempts to portray himself as a peacemaker and the legitimate ruler.

If India is correct and the Haqqanis are behind the attack on the Jalalabad consulate, it would imply that, while Sharif may believe he is the rightful, elected head of Pakistan, there are forces in that country acting according to their own perceptions and needs. The Haqqani network was allegedly created by the ISI and subsequently controlled by it. This was acknowledged by former Director-General of the ISI, Lieutenant-General Ahmed Shuja Pasha, who claimed it was created to fight against the Soviets during their occupation of Afghanistan.

This leaves Sharif with a pressing problem. He has to determine if the Haqqanis were indeed responsible for the Jalalabad attack and, if they were, determine whether they did so at the behest of the ISI. Any indication that the ISI was instrumental in the Jalalabad attack could demonstrate that Sharif is not in control of his own government and the armed forces. That could undermine his peace-making efforts entirely and show him to be a lame-duck Prime Minister. It would also indicate that, even if he is sincere in his efforts to bring about better

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relations between the two countries, other more-powerful forces in Pakistan decide the direction of the country’s foreign affairs and relations, making his efforts inconsequential at least. An Indian official has put forward the view that the blasts may have been planned to sabotage Sharif’s dialogue initiatives with India.

This would indicate that the long-standing power struggle between the various Pakistani administrations, the judiciary and the Army, has not been settled in any real sense, which would add to Sharif’s problems. The Supreme Court Justice, Iftikhar Mohammed Chaudhry, who has long been at odds with Pakistan’s various governments in his bid to retain the judiciary’s independence, is due to retire this year. It will be interesting to see who his successor will be and whether that person will antagonise the government, as Chaudhry often did. It will be just as interesting to see what course the Army will take if that happens. If the judiciary reasserts itself, will the relatively weakened Army also seek to do so. If it does, how will it be done and to what extent?

Sharif is to meet his Indian counterpart, Prime Minister Manmohan Singh, at the United Nations General Assembly in September. It will be instructive to see what solutions he brings to this meeting, assuming he can bring any at all.

Lindsay Hughes Research Analyst Indian Ocean Research Programme [email protected]

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What Role Will Pakistan’s New President Play?

Apart from potentially acting as an icebreaker for India-Pakistan talks, Pakistan’s President-elect, Mamnoon Hussain, is unlikely to contribute significantly to Pakistani politics. The presidency has become largely ceremonial and he effectively achieved his office as a reward for his loyalty to Nawaz Sharif.

Background

On 30 July 2013 Mamnoon Hussain, a textile businessman turned politician and a known loyal ally of current Prime Minister Nawaz Sharif and his Pakistan (PML-N) party, was easily elected as the twelfth by the country’s electoral council. This result was widely seen as a forgone conclusion, with the PML-N dominant in most legislatures, the main opposition withdrawing its candidate and the rest of the opposition remaining divided. Hussain is due to be sworn in on 9 September.

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Comment

Given that the president’s role is largely ceremonial, Hussain’s ability to significantly contribute to Pakistan’s political scene is inherently limited. While Pakistan has a history of powerful presidents, they were either coup leaders or the heirs to the enhanced powers that military leaders granted to the presidency during their own terms. The Eighteenth Amendment to the Constitution, passed in 2010, rescinded many of the powers the presidency acquired under the rule of General Pervez Musharraf, returning power to the Parliament. In essence, this means that Hussain’s presidential duties will primarily revolve around signing legislation into law and heading formal events.

Prior being elected president, Hussain held few important political roles, except briefly as the Governor of province, a position he held for less than half a year. He was expelled following General Musharraf’s coup for remaining loyal to Sharif. Therefore, Hussain owes his present position primarily to his loyalty to Sharif and the PML-N, rather than to any political constituency of his own. While Hussain has resigned his PML-N membership, in a gesture to indicate his intention to be non-partisan, it is unlikely that a longstanding PML-N loyalist, who has articulated few policies of his own, will do much apart from providing a supporting role to Sharif’s agenda.

Nonetheless, there are several areas where Hussain could play an important role. Being an established businessman, he can provide advice, or at least insight, into the many economic problems facing Pakistan and could even lend support to the petitions of various business lobbies. There have also been calls in the Pakistani media for him to strengthen the democratic process in Pakistan by remaining aloof from the day-to-day politics of the country and bringing a sense of respectable professionalism back to the office. Thus far, Hussain’s words and actions indicate that he is willing to heed these calls. He publicly resigned his PML-N membership and stated that the president’s job is to ‘act on the advice of the Prime Minister and be a facilitator in accordance the law.’ In addition, Hussain is also the first -based politician to be elected to the presidency, in a political scene traditionally dominated by Punjabis. Consequently, he has the potential to at least be a true symbol of national unity in Pakistan’s notoriously fractured federation.

What may be Hussain’s most significant legacy, however, is the role he can play in India- Pakistan relations. While a key policy of the Sharif PML-N Government has been to improve relations with India, negotiations have been stuck on Track II, that is unofficial, diplomacy for some time. Hussain has openly expressed his desire to help improve the antagonistic relationship between the two countries. He is actually in a prime position to do this, because he was born in India. His family moved to Pakistan during the Partition, when he was a small boy. Not only does Hussain’s India-friendly stance strengthen the position of those in Pakistan who wish to normalise relations, it also provides Indian society with a Pakistani official that it can actively associate with. As one of the problems to the improvement of relations has been the anti-Pakistan sentiment periodically stirred up in the Indian media, the emphasis on Hussain’s Indian roots and his efforts to reach out in some media interviews, may pave the way for more positive exchanges between the two countries. Hussain cannot contribute much in the way of policy breakthroughs, but it appears that he is

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willing to use his potential as an icebreaker to help smooth the official dialogue, which both governments seem interested in pursuing.

Stephen Westcott Research Assistant Indian Ocean Research Programme

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New Warship Strengthens Indo-Mauritian Relations

India has launched an Offshore Patrol Vessel that is to be delivered to Mauritius by September 2014. This further strengthens bilateral relations and emphasises the significance of the Indo-Mauritian relationship as an anchor for Indian influence in the Indian Ocean.

Background

On 2 August, India strengthened its defence ties with Mauritius by launching an Offshore Patrol Vessel (OPV) for delivery to the island state. The vessel is to be used to ensure the security of the maritime and exclusive economic zone (EEZ) in the waters surrounding Mauritius. The vessel, named the CGS Barracuda, was launched at the Kolkata-based Garden Reach Shipbuilders and Engineers (GRSE), a public sector shipyard in India. It is expected to become operational in September 2014.

Comment

India has historically close political, economic and security relations with Mauritius. Indo- Mauritians make up approximately 70 per cent of the total Mauritian population, forging close cultural associations. India is a favoured destination for Mauritian higher education students, as it serves as a ‘’home away from home.” The Government of India has been a source of economic support for the Government of Mauritius, by extending several lines of credit at concessional rates to assist in infrastructure development and improving human resource skills. The OPV and a new radar system were partly funded through such credit lines. Additionally, contributing to the economic rapport, Mauritius has acted as a major gateway of foreign investment into India, owing to a favourable taxation treaty.

The defence relationship

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has also strengthened over the past few decades. Under the Indian Technical and Economic Co-operation (ITEC) programme, about 120 civilian officials from the Mauritian Government undergo training in Indian institutions each year. Indian naval vessels regularly undertake joint patrolling and surveillance of the Mauritian EEZ and India has also assisted in the procurement of military equipment. In 2009, the Advanced Light Helicopter Dhruv was delivered to Mauritius. The launch of the OPV reinforces such defence relations.

The US$58 million ($65.1 million) OPV is the first defence export warship constructed in India. The vessel is expected to aid the Mauritian Coast Guard to police the country’s vast EEZ, which spreads across an area of 1.9 million square kilometres, against piracy, smuggling, illegal fishing and drug trafficking. It will also provide logistical support: including search and rescue; the transportation of general cargo, oil and fresh food; pollution response teams and small detachments of military personnel; and helicopter operations. Mauritius and India signed the warship contract in March 2011, marking a milestone in their relations and ushering in a new chapter of shipbuilding in India. In September 2013, India will also commence the installation of a Coastal Surveillance Radar System (CSRS) in Mauritius, to provide coverage of areas that remain difficult to monitor.

The long-standing Indo-Mauritian relationship is a significant part of India’s influence in the Indian Ocean. Over the past three decades, the Indian Navy has been active in developing its security relationships, to enhance India’s ability to project influence and constrain China’s ability to develop security relationships in the region. Although fears of Chinese naval encirclement in New Delhi are criticised as being groundless, competition with China is an important factor driving India’s strategic ambitions in the Indian Ocean.

Furthermore, India is heavily dependent on seaborne trade for its economic prosperity and security. A sizeable percentage of India’s trade, 95 per cent by volume and 70 per cent by value, travels via sea routes. In addition, India imports more than 75 per cent of its oil and 16 per cent of its natural gas. The country’s continued rapid economic growth and growing population, points to a growing dependence on imports and emphasises the importance of securing trade routes.

As part of this maritime strategic outlook, India has paid attention to forming relationships at key points around the Indian Ocean – the Persian Gulf, the Malacca Strait and southern Africa. The south-western portion of the Indian Ocean is economically and geo-strategically important, as it forms the entry point to the Atlantic Ocean. India has a growing security relationship with Madagascar, Mozambique and the Seychelles, but it is the Indo-Mauritian relationship that continues to serve as a stronghold for India’s influence in the south-west region of the Indian Ocean.

Mauritius is an African social and economic success story; one of the few states in the developing world to maintain a successful democracy. Mauritian leaders have publicly indicated their willingness to permit the establishment of Indian naval facilities on the island. Reports also indicate that Mauritian officials have offered India access to the North and South Agaléga Islands, some 1,000 kilometres north of the Mauritian mainland, which have an air strip capable of handling small aircraft.

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The already strong cultural and bilateral relations between the two countries, strengthened by the provision of CGS Barracuda, indicate that Mauritius will remain India’s anchor for influence in the area.

Kaelin Lutz Research Assistant Indian Ocean Research Programme

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Ethiopian Hydropower Aspirations Cause Tensions with Neighbours

There is a new addition to the debate surrounding the likely impacts of Ethiopia’s hydropower plans. Kenya is seeking a guarantee that the GIBE III dam project will not adversely impact flows into Lake Turkana. Ethiopia’s plans for extensive development of hydropower promise considerable economic reward, but if they are not well executed, they could contribute to water and food scarcity, as well as adding to local and regional conflict.

Background

The development of hydropower is a keystone in Ethiopia’s plans for economic development. The current Growth and Transformation Plan aims to increase production capacity fivefold by 2015, encompassing the construction of several new hydropower dams. These plans have already caused some regional conflict; the Grand Renaissance Dam Project, on the Blue Nile River, has angered Egypt because of concerns that Nile flows would be adversely affected, contributing to existing water scarcity.

The construction of another of these projects, the GIBE III Dam on the Omo River, began in 2006 with completion expected by 2015. Southern neighbour Kenya is now raising concerns about the impact of the project on Lake Turkana, the country’s major water source. The lake receives 80 per cent of its inflow from the Omo River, supporting the livelihoods of tens of thousands of people. It harbours fish species on which local people depend for subsistence, as well as providing water for livestock and crop irrigation.

The Kenyan Government initially supported the hydropower project, as it intends to purchase some of the electricity produced, but is now concerned about the environmental and social impacts. Kenya recently announced plans to enter negotiations with Ethiopia, aiming to develop a bilateral agreement. This would ensure that water collected by the dam will later be discharged and allowed to flow downstream, rather than harvested for use in local irrigation. This has been prompted by concerns that the elimination or substantial reduction of downstream flows from the dam could decrease the lake’s water level, thereby reducing water availability for local people and agriculture. This would also contribute to

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increased salinity, groundwater depletion and adverse impacts on fish stocks, all of which would contribute to food scarcity.

Comment

The projected benefits for Ethiopia if these developments successfully go ahead are significant. The development of the energy sector is an important part of the Growth and Transformation Plan, which aims to achieve ten per cent annual growth in GDP. This encompasses increases in the production and distribution of electricity, which will generate income from the sale of electricity, as well as contributing to development in other key areas such as agriculture and industry. Achieving greater access to electricity for the Ethiopian population would facilitate further development and also provide additional benefits. Likewise, these development benefits would extend to neighbouring countries, which would also have greater access to electricity by buying into the grid. The dam developments may also enable the expansion of irrigated agriculture. There are, however, potential costs for both Ethiopia and its neighbours and also potential catalysts for conflict, these issues also demand consideration.

A major concern surrounding these hydropower projects is the impact on the livelihoods of local populations. Many people who depend on healthy river ecosystems for survival, have not been consulted about the projects and have a poor understanding of their implications. Some populations in already poverty-stricken areas have been relocated to facilitate the construction of dams. Any environmental impacts of the projects will affect these populations significantly. If not effectively managed, these pressures could contribute to internal instability.

Another major concern is that damming will impact flows to water resources in neighbouring states, such as the Nile River in Egypt and Lake Turkana in Kenya, causing geopolitical conflict. This would compound existing pressures on the availability of water and food in these regions, which is projected to result from population increases and concurrent rainfall decreases due to climate change. Egypt has already secured a bilateral agreement with Ethiopia and Kenya’s current concerns reflect this problem. Use of the water from the dams for local irrigation would accelerate agricultural development in Ethiopia, but would reduce downstream flows. If Ethiopia fails to balance its own economic gains against the effects on its neighbours, the risk of conflict is significant.

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To prevent regional conflict, Ethiopia must respond to Kenya’s demands for a bilateral agreement and also increase its co-operation with neighbouring states. Furthermore, there is an urgent need for more comprehensive and independent assessments of the potential environmental, social, and economic risks of these projects, to better inform decision making and management.

Charlotte Jones Research Assistant Global Food and Water Crises Research Programme

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Religion and Rule in Saudi Arabia: Can the Relationship Last?

The recent sentencing of a Saudi blogger, Raif Badawi, has once again sparked concerns about human rights in Saudi Arabia. On a political level, it has highlighted the shifting attitudes of young people in Saudi Arabia in questioning religion and theocracy.

Background

On 29 July, a sentence of 600 lashes and seven years imprisonment was given to Raif Badawi, on charges of insulting Islam through electronic channels. The lashes will be administered over a period of weeks or months. In a country that still practices amputation, stoning, beheading, eye-gouging and various other methods of punishment, the recent sentence against Badawi is still seen as excessive. Nevertheless, as the members of the Saudi royal family grow older, with few clear plans for succession, these sentences are a principal tool used to limit dissenting civic opinion.

Comment

The House of Saud, and King Abdullah in particular, face two pertinent problems that need to be addressed. The first is the succession process for the throne, as the agnatic seniority system has created a pool of potential candidates, but few are less than 70 years of age and many closer to 80. The second issue is the young people in the population, who have, in recent years, due in large part to globalisation, begun to question the legitimacy of the monarchical system. Though Saudi Arabia successfully navigated the Arab Spring that washed over the region in 2010-11, its government and societal structures mirror many of those in the countries that were affected.

Consequently, the combination of these two factors has produced significant internal problems for Riyadh. One of the principal critiques made by Badawi in his blog commented on the role of religion in Saudi Arabia and was highly critical of senior Saudi Islamic figures. That role has remained a key issue in recent years, as the young people become increasingly exposed to Western culture, through both foreign workers and the media. The end result is that the young people, those most affected by societal inequality, have questioned the legitimacy of the Islamic system enforced in Saudi Arabia.

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For King Abdullah, addressing these matters has been no easy task. The Saudi legal system and its government are based on a strict application of Islamic Law. Questioning the legitimacy of the system, as Badawi has done, is likely to increase in the years to come, as the heavy-handed approach by the government loses touch with the changing population dynamic. Until now, Riyadh has been able to keep a lid on the boiling pot, through large government revenues that have provided education and work placements for many thousands of Saudi nationals. Oil revenues are expected to decline over the next decade, due to diminishing exports. This raises the question of how the al Saud house will maintain stability in the future.

A fortunate aspect for King Abdullah is that Arab monarchies seem to be significantly harder to overthrow than military despots. Therefore, we do not expect to see a level of revolution in Saudi Arabia comparable to that in Tunisia, Libya, Syria and Egypt. In the years to come, however, there will be more calls by the youth of Saudi Arabia questioning the legitimacy of the state and its Islamic doctrine. The direction that King Abdullah and his successors take in the matter will very much dictate whether Saudi Arabia can compete with the more dynamic states on its periphery, such as Turkey, Iran, Qatar and, in the long run, perhaps Egypt.

Raif Badawi is representative of a growing segment of Saudi society that seeks change to the existing order. His sentence of seven years imprisonment and 600 lashes highlights the seriousness with which Saudi Arabia, throughout its government, demands stability. With King Abdullah having celebrated his eighty-ninth birthday on 1 August, change may happen sooner rather than later. Addressing these concerns should be a priority for the King, before the haphazard succession process occurs.

Gustavo Mendiolaza Research Analyst Indian Ocean Research Programme [email protected]

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French Military Exports Given a Jump-Start in a US$1 Billion Deal with United Arab Emirates for Spy Satellites

A US$1 billion deal involving military spy satellites, will make the United Arab Emirates the only country in the Persian Gulf region to have that capability. It will also boost Franco- Emirati defence ties and provide a catalyst to French military exports, which dropped by 26 per cent in 2012.

Background

The United Arab Emirates (UAE) has ordered two military surveillance satellites from French companies Astrium Satellites and Thales Alenia Space, in an effort to bolster its surveillance

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and reconnaissance capabilities. The US$1 billion deal provides Abu Dhabi with geospatial intelligence capabilities to detect troop movements and monitor installations in key strategic locations around the Middle East. The signing of the deal indicates a further deepening of Franco-Emirati defence relations, particularly since Paris will be providing continuous after sale support to Abu Dhabi through intelligence analysis and technical expertise.

Comment

The project, dubbed “Falcon Eye”, was finalised on 22 July. It will be built by Astrium, the space division of the European Aeronautics Defence and Space Company (EADS), and Thales Alenia Space, a joint venture between Thales of France and Finmeccanica of Italy. Falcon Eye will involve the launch of two high-resolution optical reconnaissance systems by 2018, providing the UAE military with one of the most potent and competent geospatial intelligence capabilities in the region. Although the project had been contemplated by the UAE and other Gulf Co-operation Council (GCC) countries since the mid-1990s, officials in France and the UAE had begun to view it as a mirage and unlikely to materialise. The latest developments, however, will boost defence ties between the two countries, particularly since, shortly after the deal was signed, Abu Dhabi agreed to purchase 17 French GM200 air defence radars, at a total price of €300 million (US$400 million).

The deal is also seen as a providing a crucial boost to France’s defence exports. According to figures published by the French Ministry of Defence, the value of orders for French military equipment fell by 26 per cent in 2012 (although the Middle East still accounted for more than 20 per cent of French military exports in the 2008-12 period). The deal also came as a surprise to Lockheed Martin, a leading United States aerospace and defence company, as France’s Astrium saw off competition from the US giant in the bid to secure the contract. The contract has the potential to herald much greater penetration by French and European military sales, in a region that is heavily reliant on US equipment and technology. Emirati defence officials considered the French option because of the freedom of action allowed compared to the US option, which severely limits the use of its technology. The deal also provides the UAE with more than just the satellites; France is said to be providing training of specialists in intelligence analysis and the use of image processing software, transmission systems and encryption. The contract is thus effectively a partnership between the French and Emirati intelligence services.

These attempts by the GCC countries to modernise their armed forces, comes at a time when growing Iranian influence in the region is increasingly seen as a threat by the member states. Although a regional Middle East conflict sometimes seems likely, particularly with the events unfolding in Syria and Israeli and Gulf State concerns over Iran’s nuclear programme, it is unlikely that any flashpoint in the Middle East will involve the UAE. The Strait of Hormuz chokepoint is a potential hotspot of instability, but that would depend on whether Iran is attacked, which seems to be increasingly unlikely. With this deal, the UAE becomes the first country in the Persian Gulf, and the second in the Middle East after Israel, to independently own and operate military-grade surveillance and spy satellites capable of capturing high- resolution images of objects measuring less than one metre across. Perhaps less positively, though, the deal has the potential to encourage the acquisition of similar satellites by other states in the region, particularly Iran, despite the difficulties faced by Tehran in doing so.

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Mo Hineidi Research Assistant Indian Ocean Research Programme

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Indonesian Inflation Rising as Economic Growth Slows

Indonesia’s inflation rate has risen to 8.18 per cent, its highest level in nearly four-and-a- half years. While the increase was largely expected, given the recent cut in fuel subsidies, there are signs that South-East Asia’s largest economy may be beginning to slow.

Background

The inflation rate in Indonesia has risen to its highest rate in almost four-and-a-half years, the country’s central bank chief said on 30 July. Officially, inflation hit 8.18 per cent in July, exceeding the government’s target of between 7.2 and 7.8 per cent. The larger-than- expected rise is likely to hit Indonesian families hardest, as interest rates and the price of goods continue to increase. Moreover, as Indonesia’s markets contract and foreign investors scare, there are growing concerns that South-East Asia’s largest economy is beginning to slow.

Comment

Though inflation was widely expected to climb as a result of the recent cut to fuel subsidies, few economists had predicted such a sharp increase. In a recent Bloomberg survey of 23 economists, none had estimated that inflation would reach such levels this year. This is the highest Indonesia’s inflation rate has been since February 2009, when it hit 8.61 per cent.

The larger-than-expected increase may have come as a surprise, but officials remain confident that inflation can soon be brought under control. Bank Indonesia (BI) Governor Agus Martowardojo said that despite the high July rate, he was optimistic that inflation can be brought down to the 3.5 to 5.5 per cent range in 2014. Economists, for the most part, tend to agree; the rise in inflation was, after all, largely due to a cut in fuel subsidies, which led to a 33 per cent increase in the price of fuel in June.

Such predictions will come as little consolation for ordinary Indonesians, however. As well as spending more on fuel, they are now also paying more for basic goods as a result of the cut in subsidies. That trend now looks set to continue with the latest inflation figures. Moreover, the rise in inflation has also prompted BI to lift interest rates twice in the last two months; last month the increase was double what was expected, placing further pressure on Indonesian families. The next rate meeting is to be held on 15 August and another increase is likely.

For the most part, such trends were expected. Indeed, the cut in fuel subsidies was welcomed by most observers, even with the accompanying rise in inflation, given that the

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subsidies were sapping the government’s budget. But there are now emerging signs that South-East Asia’s largest economy, and one of Asia’s brighter performers, is running into problems.

In early July 2013, the World Bank cut its forecast for economic growth in Indonesia. This was due to a slower-than-expected recovery in exports, softer commodity prices and a weaker outlook in foreign investment. It now expects economic growth of around 5.9 per cent in 2013, down from its March forecast of 6.2 per cent and well below the government’s initial target of 6.8 per cent growth. That growth rate is still impressive, of course, but the World Bank also warned that ‘the risk of a more pronounced growth slowdown is high.’ Worryingly, some economists are now predicting Indonesia’s growth for 2014 may not exceed 5.5 per cent.

In response, Jakarta has tried to address its weak exports and growing trade deficit by implementing policies designed to boost domestic business. The recent introduction of regulations stipulating that foreign miners must gradually give up majority ownership of mining assets, is one such example; the list is growing however.

This protectionist policy may give domestic markets a short-lived boost, but, in the long run, is likely to deter foreign investment, including investment from Australia. As Rajiv Biswa, chief Asia-Pacific economist at global consultancy HIS warned, ‘the combination of rising political and regulatory risks in Indonesia could create a toxic cocktail that deters foreign investors, despite Indonesia’s fast-growing consumer market’. At a time when the country desperately requires foreign money to finance infrastructure projects, the strategy looks particularly ill-conceived.

More broadly, the plan seems at odds with the government’s decision to cut subsidies and an overall sentiment that short-term pain is needed for long-term gain. As emerging economies face increased challenges and Indonesia aims to become a top ten world economy by 2025, attracting foreign investment will be crucial.

With an election scheduled for next year, economic nationalism is seemingly in vogue and foreign investment could well be further deterred, at least in the short-term. Eventually, however, Indonesians are going to have to accept more short-term pain for long-term gain, at least if the country is to achieve its potential.

Andrew Manners Research Analyst Indian Ocean Research Programme [email protected]

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What’s Next?

 US Ambassador-at-Large to Monitor and Combat Trafficking in Persons, Luis Cdebaca, is on an official visit to Bangkok, Thailand. Mr Cdebaca will meet with officials from the Thai Ministry of Labour and representatives from local civil society organisations.

 The African Growth and Opportunity Act pre-summit discussions will be held in Addis Ababa, Ethiopia from 9-11 August.  The twenty-fifth Security in Government Conference will be held by the National Security Resilience Policy Division of the Attorney-General’s Department at the National Convention Centre, Canberra, from 12-14 August. More information is available from: http://www.ag.gov.au/NationalSecurity/SecurityGovernmentConference/Page

s/SecurityinGovernmentConference2013.aspx.  Forces from more than 38 African countries are participating in the African

Endeavour 2013 military exercise in Lusaka, Zambia. Held under the auspices of US Africa Command, the exercise runs until 15 August.

Any opinions or views expressed in this paper are those of the individual authors, unless stated to be those of Future Directions International.

Published by Future Directions International Pty Ltd. 80 Birdwood Parade, Dalkeith, WA 6009 Tel: +61 8 9389 9831 Fax: +61 8 9389 8803 E-mail: [email protected] Web: www.futuredirections.org.au

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