1. This statement provides an update on recent economic developments based on information received after the staff report was issued. The new information does not alter the thrust of the staff appraisal.
2. Inflation has fallen further in June and high frequency indicators suggest that the recent robust pace of economic growth is being maintained. CPI inflation declined to 5.8 percent y/y in June (compared with 6.0 percent in May). Meanwhile, core inflation eased to 5.4 percent. Bank Indonesia cut its policy interest rate by another 25 bps to 8.25 percent at its July 5 Board meeting. Latest short-term indicators suggest that the economy continues to expand at an annual rate of about 6 percent, in line with staff’s projections. Exports continue to perform well, in line with staff projections. The trade surplus narrowed slightly as a result of rising imports in recent months, in particular non-oil and gas exports. The trade balance remained broadly unchanged as a reflecting rising imports in recent months.
3. Rupiah appreciation pressures have eased as the strong portfolio inflows during April/May subsided in June. Foreign investors reduced their positions in fixed income securities, although moderate inflows into the stock market continued. As a result, the rupiah weakened in June to about 9,000 Rp/US$, reversing some of the appreciation observed in May, but the stock market continues to reach new highs.
4. The latest estimate of the poverty rate has been released, indicating a decline to 16.6 percent as of March 2007 (compared to 17.8 percent in March 2006), despite significantly higher food prices. While the rate still remains higher than in 2005 (16.0 percent), when food prices were much lower, the new data suggest that strong growth is beginning to have an effect on poverty, as well as on unemployment, as noted in the staff report.
5. Important progress has been achieved toward implementing the structural reform agenda in the fiscal area. Parliament passed on June 19 amendments to the Law on General Tax Rules and Procedure. This amended law, which will take effect as of 1 January 2008, improves legal certainty and achieves a better balance between taxpayers’ rights and tax agency’s powers. In particular, it makes the appeal process less onerous to the taxpayer. Two more tax law amendments (VAT and income tax) are scheduled for deliberation by Parliament during the remainder of the year and are expected to also take effect by 2008.
6. The government is in the process of finalizing a set of implementing regulations for the investment law. A negative list relating to foreign investment has already been issued. It retains a broadly open investment regime and clarifies existing ownership limits, which were previously opaque. The vast majority of business sectors will remain as open, or even more so, than previously, with only a handful of sectors subject to lower foreign ownership limits. While the negative list has raised some concerns in the foreign business community, in recent days the authorities have been meeting with concerned investors to explain the rationale for the list, and to address concerns about how it will be applied.