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Contact: PRESS RELEASE Coordinating Ministry of the Economy, R.I. · Mahendra Siregar (021) 380-8384 [email protected] Bank , R.I. · Rizal A. Djaafara (021) 381-7311 [email protected] The World Bank · Mohamad Al-Arief (021) 5299-3084 [email protected]

CGI SUPPORTS WHITE PAPER, SAYS IMPLEMENTATION WILL SPUR GROWTH

Jakarta, December 11, 2003 – At the 13th annual Consultative Group on Indonesia (CGI) Meeting, donors voiced their strong support for the Government’s macroeconomic achievements and its commitments to the Indonesian people to improve the investment climate, to fundamentally reform the court system, and to develop a long-term vision for poverty reduction. Delegates recognized that effective implementation of these plans is now the key challenge. In the coming year, elections will offer both opportunities and risks for this ambitious agenda and donors urged the Government to maintain the momentum of reform.

“Graduating from the IMF program, next year’s phasing out IBRA and moving towards a modern guarantee system will end the key crisis related programs and institutions in Indonesia, closing the book on this episode in Indonesian history,” said Dorodjatun Kuntjoro-Jakti, Coordinating Minister for Economic Affairs. “But the reform agenda remains challenging.”

“All eyes are now on next year,” said Jemal-ud-din Kassum, Chairman of the CGI Meeting and World Bank Vice-President for East Asia and the Pacific Region. “If the Government delivers on the commitments it has made in such impressive documents as the White Paper and the Supreme Court blueprints, then growth in Indonesia is set to take off. But significant slippage, especially on improving the investment climate and governance, would put emerging gains in market confidence at risk.”

Representatives of 30 bilateral donors and multilateral agencies met with a large number of Government Ministers and officials, and a range of observers from civil society and the private sector, to strengthen partnerships in meeting Indonesia’s development goals. The Government’s progress in achieving macroeconomic stability, in reducing the economy’s vulnerability, and in restoring external viability was widely praised. CGI members expressed comfort with the Government’s decision to graduate from the IMF- supported program since most macroeconomic indicators show that the economic and PAGE 2 OF 6 financial crisis is over. But concerns continue to be raised about the quality of governance and the investment climate.

Donors pledged their ongoing financial support for the Government’s development efforts. For next year’s budget, total support will amount to US$ 2.8 billion, well within the range that the Government requested. Of this, around US$ 0.2 billion is in the form of grants, the rest in the form of concessionary loans. Disbursement on some US$ 1 billion of the amount pledged will depend on the Government’s progress on its policy agenda. In addition to the support through the budget, donors pledged technical assistance and other support in the amount of US$ 550 million through other channels, including NGOs and local governments.

In his remarks to the CGI, Minister of Finance, summarized the Government’s economic achievements: “The macroeconomic picture is good and more importantly there is a solid foundation for future growth. The banking system is largely back in private hands ready to play its role along side expanded capital markets. Most importantly there is a homegrown Letter of Intent to the Indonesian people and we are already delivering on the commitments in it.”

Though some donors and civil society observers expressed concern about the broad scope and short time frame of the Government’s Economic Policy Program (or White Paper), the plan received significant support from the CGI delegates, who highlighted the importance, now, of implementation. “While some additional prioritization might be helpful,” said David Nellor, Senior Resident Representative of the IMF, “the White Paper provides a sound policy framework that, if adhered to, would help bridge the potential “credibility gap” that could emerge as the Fund-supported program expires.” Several CGI participants noted that considerable risks remain in the macroeconomic situation and that financing needs will remain high due to the expiration of the Paris Club rescheduling.

The CGI discussions placed particular emphasis on enhancing the investment climate. Yutaka Iimura, Ambassador of Japan, said, “Growth of 3-4 percent is not enough to absorb new entrants in the labor force and to reduce poverty. To achieve higher growth, Indonesia should shift its economy from consumption-led to investment-led growth, and for that, improving the investment climate is a matter of urgency.” Reflecting on the views of other delegates, Ambassador Iimura highlighted the importance of tackling corruption because it hinders the investment climate. Also, while welcoming the White Paper with its detailed 2003/04 timetable, participants noted the need for a medium-term roadmap to attract investment in infrastructure and other long-term projects.

Private sector representatives, while welcoming the White Paper, noted that the current climate for investment remains difficult and continues to discourage many potential investors. They put legal certainty, contract enforceability, policy consistency, sound tax and customs administration, labor, and infrastructure at the top of their list of concerns. They called for a more consistent voice of support for private sector investment from the highest levels of the Indonesian Government and concerted action from the new PAGE 3 OF 6

Investment Team to address problems affecting investments. In response, the Government welcomed the in-depth dialogue with the private sector, and promised follow-up meetings on a regular basis. “We are looking forward to regular exchange of views with the private sector,” Coordinating Minister Dorodjatun Kuntjoro-Jakti said.

Some delegates observed that donors could do their part to increase the pay-offs of Indonesia’s reforms by further liberalizing their own markets. “An open check book with closed markets is not helpful to Indonesia” said the Ambassador of New Zealand, Chris Elder.

Throughout the discussions, issues of governance took center stage. “To restore public and investor confidence, of utmost urgency is the need to address the weak governance structures at different levels including political institutions, different levels of governments and administration as well as within the legal and judicial system,” said ADB Deputy Director General, Shamshad Akhtar. “Weak governance has acted as a major barrier to sound development in Indonesia nurturing corruption and rent seeking and weakening the impact and effectiveness of development projects.” Dr. Ursula Schaefer-Preuss, Head of the German delegation, encouraged the Government to embark on a civil service reform, she said: ”efforts towards good governance cannot be successful without a performance based, responsible and responsive civil service”.

Prof. Dr. Bagir Manan, Chief Justice of the Supreme Court of Indonesia, outlined a comprehensive blueprint for reform of the Supreme Court as well as plans for shifting to a “one-roof” system of management of the entire judiciary under the Supreme Court. Donors expressed high hopes for this new reform momentum in such a critical area and pledged their financial and technical support. They also welcomed the Chief Justice’s presence at the meeting as an indication of strong commitment to judicial reform. Ruud J. Treffers, Ambassador of the Netherlands, said, "Policies to improve Indonesia’s investment climate will and can only be successfully implemented where they are supported by an effective, predictable, transparent and equitable justice sector.”

Delegates also urged other key justice sector institutions where continued performance concerns have been raised to undertake similar efforts. Speaking on behalf of the European Union, Francesco Maria Greco, Ambassador of Italy, underlined, “Legal and judicial reform can succeed only on the basis of an unremitting commitment to implementing and enforcing the law. Hence all institutions within the legal and judicial process, including the Ministry of Justice and Human Rights, the Attorney General’s Office and the Police need to become active party to this reform effort.”

Donors welcomed recent progress in the long-awaited establishment of the Anti- Corruption Commission, whose members are now being considered by the Parliament. CGI members trust that public integrity will remain the key factor in the appointment of its members and are encouraged by the openness of the process to date. The new Commission also needs to be given the necessary resources and independence to allow it to fulfill its mandate effectively. PAGE 4 OF 6

But one governance challenge in which donors expressed concern about continued lack of progress is in forestry. Despite initial efforts to develop a collaborative approach to some of the problems in this sector, one of Indonesia’s most valuable natural resources – the forests – continues to be eroded at a devastating pace. “There is a sense of frustration among the donors since their support and commitments have yet to materialize into substantial results and there is a pressing need to demonstrate real progress,” said Aldo Dell’Ariccia, Deputy Head of Southeast Asia Unit, European Commission.

Togu Manurung, representing Indonesia’s forestry NGO, one of the civil society observers to the CGI, remarked, “We are in crisis and radical emergency measures are needed now, as we are running out of time. If this continues the result will be total destruction of Indonesia’s tropical forests.” He further added that “there must be a coordinated approach to combat forest crimes between the Ministry of Forestry, Ministry for Trade and Industry, Ministry for Foreign Affairs, the police and the judiciary and the Ministry of Finance”.

The meeting was encouraged by the recent gains in poverty reduction in the wake of renewed macroeconomic stability. Donors stressed that to make further gains, higher growth and better services for the poor are critical. Concerns were expressed about large regional disparities and social inequalities, as well as Indonesia’s lagging social indicators. “Reductions in poverty will also require a more equitable allocation of resources, so districts are able to finance improvements in social services and infrastructure,” said Martin Dinham, Director for Asia, DFID. The UNDP Representative, Gwi-Yeop Son, further noted that a “failure to make a real difference to the lives of ordinary people through effective governance reforms will pose a threat to both democracy and security.”

Donors welcomed the Government’s renewed commitment to meeting the Millennium Development Goals (MDGs) and the engagement to discuss the progress towards MDGs at the next CGI meetings. They also welcomed the commitment in the White Paper to developing a Poverty Reduction Strategy. Once completed, the Strategy should be reflected in policies and budget allocations that better benefit the poor. It should also reduce significant regional disparities thereby moving Indonesia forward on the MDG targets. CGI participants also stressed the need to make decentralization work better so that the quality and access of services are more responsive to the needs of the poor. Listening to the voices of the poor and developing a poverty reduction strategy through a participatory process was emphasized by donors and civil society alike. Coordinating Minister for People’s Welfare Jusuf Kalla said, “The Government will continue to invite community participation to enhance empowerment of local communities. We should be able to develop a common platform from which poor people and communities can link with service providers to get higher quality and more equitable access to basic services like health and education facilities, clean water and sanitation.”

Donors expressed particular concern about the direction of several trade measures and their possible impact on the poor. “Government policies that are supportive of increased PAGE 5 OF 6 trade are also essential to increased economic growth, and can have significant impact on poverty reduction,” said Ralph L. Boyce, Ambassador of the United States. Donors pointed out that a pro-poor trade agenda would include better rural infrastructure, well-governed customs, and abolition of local taxes on domestic trade.

CGI members participated in a pre-CGI dialogue on the critical issue of security and development in Indonesia. “The issues of human security, national security and international security are inseparable,” said Coordinating Minister for Political and Security Affairs , “and they are an essential pre-condition for economic growth.” He called for a significant reform of the security sector, including appropriate on-budget financing and greater accountability and transparency of public expenditures in security agencies. Chronic under-funding of these institutions has led to a variety of institutional distortions that need to be addressed so that these agencies can play a more effective and accountable role in providing security for Indonesia’s citizens. Civil society emphasized the importance of civilian oversight of the armed forces. Bruce Davis, Director General AUSAID, remarked, “Security is very much a development issue for Indonesia.” Donors agreed on the importance of setting-up a new Working Group within the CGI specifically dealing with security and development issues.

The and the international community recognize the need of finding a peaceful solution to the conflict in Aceh based on special autonomy in the context of a unitary Indonesian state. The donors believe that rule of law and good governance, as well as long-term economic development, are crucial to establishing trust in the integrated operation and restoring the people's sense of security in the province. Open humanitarian access to Aceh will help to promote this trust and contribute to a solution. The Government of Indonesia took note of the readiness of the international community to provide assistance to this effort and briefed the donors that some international organizations have been provided access to the province to provide humanitarian assistance.

This year, the CGI forum was redesigned to promote a more interactive and open dialogue between the Indonesian Government and its development partners through a day-long series of informal policy dialogues on the key issues prior to the official meeting. Delegates welcomed this new format as a step in strengthening the evolving partnership between Government, civil society and the donors in addressing development challenges. “The CGI forum itself must continually evolve in response to Indonesia’s changing needs,” remarked Andrew Steer, the World Bank’s Country Director for Indonesia. “The new spirit of this year’s meeting is a further step towards a more genuine dialogue. We warmly encourage moves towards full Indonesian leadership of the CGI process.”

The meeting was attended by senior government officials, including Coordinating Minister for Economic Affairs Dorodjatun Kuntjoro-Jakti, Chief Justice Bagir Manan, Governor Burhanuddin Abdullah, Coordinating Minister of Politics and Security Susilo Bambang Yudhoyono, Coordinating Minister for People’s Welfare Jusuf Kalla, Minister of Finance Boediono, Minister of National Planning/BAPPENAS PAGE 6 OF 6

Chairman Kwik Kian Gie, Minister of Health Achmad Sujudi, Minister of Housing and Regional Infrastructure Soenarno and Theo Toemion, Head of the Indonesian Investment Agency. A representative of the Indonesian National Police, Erwin Mappaseng, also attended. Over thirty donor agencies, both bilateral and multilateral, as well as observers from civil society and the private sector were present. A meeting with a broad range of civil society groups representing community, environment groups, watchdog organizations, think tanks, and academia was held prior to the CGI to elicit their views.

Next meeting: Coordinating Minister Dorodjatun announced that he had invited the CGI to hold its next annual meeting in at a date to be determined.

CGI Pledge for 2004 Budget (US$ billion) 2003 December 2003 January CGI CGI for FY2004 for FY2003

Through Budget 2.8 2.7 Of which program loan 1.0 1.1 Of which project loan (including Grants) 1.8 1.6 Other Channels * 0.6 0.4 Total Pledge 3.4 3.1

* Including technical assistance, grants to regional governments and NGOs

______*For more information on the Consultative Group on Indonesia, visit: www.worldbank.or.id