Indonesia Country Partnership Strategy

The World Bank Group’s (WBG) Country Partnership Strategy (CPS) for Indonesia for FY2009–12, which marked Indonesia’s emergence as a strong middle income country, was approved by the WBG Board in September 2008. The CPS focuses on improving Indonesia’s institutions, both at the central and sub-national level, through five core areas of engagement: private sector development, infrastructure, community development, education, environmental sustainability, and disaster mitigation.

CPS implementation is progressing apace, marked by strong dialogue and solid partnership with the Indonesia’s core economic ministries and several line ministries and agencies, including education, public works, people’s welfare, anti-corruption commission (KPK), and supreme and state audit agencies (BPK and BPKP). The engagements with regional/local counterparts including in Aceh, Papua, Central Java and Jakarta, are broadening. In addition, a major effort to engage more seriously with civil society, academia and media has been launched. Partnerships with the key bilateral and multilaterals, including EC, Japan, Australia, Netherlands, ADB, UNDP and IMF remain robust.

World Bank Engagement: Selected Highlights

Supporting Indonesia’s Efforts to Mitigate the Impact of the Global Financial Crisis. Only a few months into the implementation of the new CPS, Indonesia encountered the growing global financial crisis. The Government of Indonesia (GOI) has taken precautionary and preemptive actions to address financial and fiscal concerns including approaching the WBG and other development partners for financing support in a difficult environment. The WBG has helped the Government mobilize contingent financing, including from bilateral, multilateral and other sources, of US$5.5 billion, of which US$2 billion is in a WBG - supported Development Policy Loan with a Deferred Drawdown Option (DPL-DDO). Through adoption of a robust platform of reforms aimed at strengthening its resilience, Indonesia is not only expected to weather the current crisis, but also emerge stronger in its aftermath.

Strengthening the Governance Agenda. The WBG under the new CPS is supporting the strengthening of Indonesia’s country systems. The fight against corruption is central to the Government’s program and relevant institutions continue to be strengthened. Although progress is being made, challenges remain, as epitomized by slow progress on implementing the legal and judicial reform agenda. The CPS seeks to move away from a WBG focused approach of “ring-fencing projects” to one designed to strengthen and build upon Indonesia’s own systems, policies and procedures. This approach focuses on policy formulation, policy and program implementation, financial management, procurement, budget implementation, audit, social and environmental safeguards, monitoring and evaluation, and supports Indonesia’s priority budget programs to enhance the quality of overall public spending.

Deepening Indonesia’s Decentralization. The decentralization and empowerment of local governments has been one of Indonesia’s most remarkable achievements in the past 10 years. As a result, Indonesia’s almost 500 sub-national governments now manage close to 40% of all public spending. Many of elected heads of provinces and districts/cities are implementing innovative reforms, although challenges are considerable. Needs, opportunities and the WBG’s capacity to respond to the demand vary greatly across the archipelago. Over the CPS period, the WBG will seek to engage with a limited number of sub-national governments that demonstrate a clear commitment to reforms through the Public Expenditure Analysis and Capacity Harmonization (PEACH) program. PEACH programs focus on local planning and budgeting and are demand-driven, tailored to the needs of local governments and implemented by them, together with local Indonesian research institutions. In addition, the WBG has re-structured several Bank financed local government support programs, to expedite their progress and resolve implementation bottlenecks. Lastly, the WBG-administered Decentralization Support Facility brings together a number of development partners with a broad mandate to engage Indonesian institutions essential to the local accountability framework, such as legislatures, media and NGO networks.

Enhancing Poverty Reduction and Sustainable Growth. The WBG is supporting comprehensive policy reforms and innovative investment programs to support Government’s poverty reduction and sustainable growth programs. Learning from the effectiveness of successful engagements, such as the decade-long well performing Kecamatan Development Project or KDP, the world’s largest program that uses the Community-Driven Development approach, and the Urban Poverty Project (UPP), the WBG - supported operations in this area have expanded, including support to the National Community Empowerment Program - PNPM. Such operations build on what has worked well, focus on mechanisms for social accountability, promote external transparency and access to information, enhance planning and budgeting capacity, and integrate AAA/Trust Funds with lending and supervision. Recent major operations also include a series of development program loans (DPLs and Infrastructure DPLs) in support of the government’s reform program to improve the investment climate, public financial management, public service delivery and infrastructure. Investment projects support, among others, the School Assistance—BOS-KITA program to better manage education funding and Indonesia Infrastructure Finance Facility for infrastructure funding.

Supporting Indonesia’s Emerging Regional and International Role on Environmental Sustainability and Climate Change. Indonesia emits significant levels of greenhouse gases, mainly from deforestation and land use change. The GOI recognizes this issue and is developing an initiative on Reduced Emissions from Deforestation and Degradation (REDD) supported by the WBG. Indonesia achieved global visibility as host of the United Nations Framework Convention on Climate Change (UNFCCC)’s Conference of Parties (COP) - 13 in 2007 and is now working together with Poland and Denmark toward COP 14.

The GOI is pursuing an innovative and potentially path-breaking engagement with the WBG on geothermal energy. The WBG is also deepening the relationships established with the National Planning Agency (Bappenas) and the local governments of Aceh, Nias and Jogjakarta in supporting selected elements of the Government’s actions to strengthen natural disaster resiliency. In addition to investment operations, the WBG is supporting the GOI with background studies and other analytical work and technical assistance provided to the Government agencies at the central and local levels. One example of such support is the provision of technical assistance to the Ministry of Public Works to support development and implementation of the master plan for peatland rehabilitation in South Kalimantan.

Support for Sustainable Recovery of Aceh, Nias and Yogyakarta. Reconstruction efforts after the tsunami in Aceh and the series of earthquakes devastating Nias, Central Java and Jogyakarta have become a key element of the WBG’s program, anchored around two substantial multi-donor trust funds. The Multi-Donor Fund (MDF) for Aceh and Nias brings together some 15 partners and is providing nearly US$700 million in resources, while Java Reconstruction Fund (JRF), supported by six partners, brings in an amount close to US$85 million. Post-disaster reconstruction and recovery in both provinces are progressing well. Following the closure of the Reconstruction and Rehabilitation Agency’s (BRR) operations in April 2009, tasked with the reconstruction of Aceh and Nias, the local Government has resumed the authority over the development. As the recovery process progresses, the sustainability of reconstruction investments and promotion of economic development through livelihoods and income generation programs are becoming vital. Both the MDF and JRF are supporting the preparation of new economic development/livelihoods programs. Long term development will also hinge on continuation of peace and stability.

Bank Operations in FY09 and FY10

Lending. FY09 (July 2008 to June 2009) was marked by a strong lending performance, with 9 projects for US$4.225 billion, including US$2 billion in DPL-DDO, a regular DPL and an infrastructure DPL, the National Community Empowerment Program (PNPM) - Urban and Rural, a School Grants Assistance Program (BOS-KITA), a Tax Administration Reform project (PINTAR), a Dam Operations and an Infrastructure Financing Facility. The active portfolio as of end-April comprises 30 projects, including 2 additional financing operations.

In FY10 (July 2009 to June 2010), the WBG expects to deliver 9–10 projects across CPS engagement areas. The base scenario envisages a lending volume in line with that in the CPS of some US$2.6 billion including DPL6, IDPL3, Urban Water Supply and Java Bali Additional Financing Emergency Reconstruction Project. Other projects expected to be delivered in FY10 are projects to enhance medical education, strengthen statistical capacity of the Government, increase youth employment, and expand community development in rural and urban areas, etc.

Analytical and Advisory Services. In addition to the lending program, the WBG is delivering to the Government of Indonesia policy notes and just-in-time advice, technical assistance, as well as reports including a Development Policy Review, a report on Budget Reform (with the IMF), Labor Markets, Health Financing, HIV/AIDs interventions, and a Country Environment Assessment.

In the year ahead the WBG expects to deliver continuing analytical and advisory support, including policy notes and reports for the new Government including on Agriculture and Social Protection, Public Spending, Teacher Management, Low Carbon Growth, Papua Infrastructure Strategy, and Urbanization.

Trust Funds. Trust funds (TF) and grant financing are an integral part of the WBG program. The Indonesian TF portfolio is around US$1 billion at present. Going forward, knowledge partnerships in delivering on the CPS agenda will become more important.

For questions relating to this annex, contact Bill Wallace, at (+62–21) 5299–3000 or Preeti Ahuja at 202 473–1657

Real Sector

2. The annual national accounts have 2000 as the base year. Quarterly GDP data are published in a timely manner for both expenditure and production sides. The estimates are based on a limited set of indirect indicators of uncertain quality. Some sectors are influenced strongly by seasonality, and seasonally adjusted data are prepared but not published. In addition, no survey of nonfinancial services is prepared. An economic census of businesses is undertaken every 10 years, without updates in the intervening period. The household budget survey does not cover higher income households. There are inconsistencies with the Bank Indonesia (BI) in imports and exports; and, with the Ministry of Finance (MoF) regarding local government figures. The five-yearly input-output tables remove statistical discrepancies, but there are large discrepancies in the intervening years. The Fund has recommended: (i) development of a system to continuously update the census of businesses; (ii) introduction of comprehensive annual establishment surveys for nonfinancial services industries; (iii) publication of annual GDP estimates, including a time series of at least 20 years; (iv) development of a set of annual supply and use tables (SUTS) starting from 2000; and (v) enhancing the convergence exercise on trade data with BI.

3. Labor market data, including wages and employment, are available, albeit reported with some delay, through the annual labor market survey (Sakernas) published by the Bureau of Statistics. Data on minimum and maximum wages for the formal sector are also available. Quarterly data are available on industrial wages, with some delay.

Public Finance

4. Available government finance data suffer from a number of weaknesses, in terms of classification, coverage, and timeliness. Data on budgetary central government were available until recently with a one-month lag, but subnational (provincial and local) government data are available only with a lag of two years, and the quality of this data is variable. Problems in budget and accounting systems have been compounded by the recent decentralization initiatives, which have shifted substantial resources to the subnational governments. Substantial efforts are in train, and significant progress has been made to overcome these problems, ranging from the planned adoption of advanced accounting and statistical standards, to the introduction of best practice budget management processes, and the development of computerized financial management information systems.

5. Against this background, the MoF and the Ministry of Home Affairs are committed to keeping the requirements of fiscal statistics at the forefront of ongoing fiscal reforms, so as to make better statistical monitoring one of the goals of the current efforts. The coverage and timeliness of public debt statistics is generally adequate; however, only limited information on contingent liabilities is available. The new expenditure classification introduced in the 2005 budget, is generally consistent with the Government Finance Statistics Manual 2001 (GFSM 2001) on functional codes and classification, although the data are compiled on a cash basis.

6. The authorities have committed to adopting GFSM 2001 standards. To this end, the Fund staff has recommended in the short term: (i) establishment of a register of all extrabudgetary units to improve the coverage of central government activity; and (ii) inclusion of the economic codes consistent with the GFSM 2001 in the chart of accounts to ensure that general government units report in a statistically meaningful way all transactions and balances over which they exert control. Over the medium-term, priority should be given to (i) seizing the opportunity offered by the two new subnational fiscal reform efforts to simultaneously establish the underlying reporting arrangements to obtain timely preliminary data for local government statistics; and (ii) to develop GFSM 2001 operating statements, statements of sources and uses of cash, and partial balance sheets, all of which should be published on the MoF websites.²

Monetary Accounts

7. Good quality monetary statistics are compiled by the BI on a timely basis. With STA assistance, BI has developed an integrated database from which alternative presentations of monetary statistics can be drawn to meet the needs of BI and the Fund. Further work, however, is needed to expand the coverage of depository corporations to include mutual funds (REKSA DANA), which report data to BAPEPAM—an agency that supervises some of the nonbank financial institutions. To this end, BI is currently developing institutional data-sharing arrangements that would enable it to access the register of—and data on—mutual funds.

8. To strengthen monetary statistics, STA missions have recommended: (i) collection of source data on mutual funds in a format that meets statistical requirements; (ii) expansion of the coverage of the monetary statistics to include mutual funds; and (iii) harmonization of the reported interbank positions between the BI and commercial banks.

Balance of Payments

9. Trade data are affected by some shortcomings. While customs sources utilized by the BI are considered generally reliable, coverage of merchandise trade flows is insufficient. Also, when the online reporting system for exports and imports was introduced in 2004, the historical series were reconstructed only as far back as 2003. As a result, prior to 2003 balance of payments statistics are not entirely consistent with the national accounts estimates. Data on services suffer from outdated surveys and weak methodologies. The BI adjusts the customs data to cover exports and imports of Batam and other bonded zones. Data on services suffer from outdated surveys and weak methodology. Adjustments are also made to data on compensation of employees and workers’ remittances to cover professional workers, legal workers not reported to the Ministry of Manpower, and illegal workers.

10. For the capital and financial account, the methodological basis for the compilation of FDI data needs substantial improvement. Inflows are currently calculated based on loan disbursements to companies that have foreign equity using a fixed ratio to estimate equity inflows. Surveys conducted by BI to collect FDI data have a low response rate and the coverage of the directory of enterprises should be improved. Other areas that need improvement include the recording of trade credits and the asset data for portfolio investment and other investment transactions. The magnitude of the errors and omissions item has been significant and appears to be related to the methodology used, for instance, for unrecorded assets in the financial account. Financial transactions data have not been reconciled with changes in the International Investment Position (IIP).

11. The BI has proposed a range of measures to address these weaknesses. On trade-related data, a working group has been established to reconcile differences between BI and customs data. The BI is planning to collect and publish data on goods imported for processing, goods procured in ports by carriers, and transactions with the oil and gas sector. On the financial account, the BI is planning to collect and publish data on direct investment abroad, portfolio investment assets, other investment assets, and trade credits, to help address the shortcomings in the recording of private financial flows.

International Investment Position

12. An annual IIP is compiled, but the underlying data are weak in several areas, notably for FDI. External debt statistics have improved considerably with the introduction of an External Debt Information System (EDIS) in 2002. The system records external debt of government and over 800 other entities that report to the BI on a monthly basis. The system generates data for public sector external debt and debt service, as well as those for private banks, that are considered reliable. However, improvements are still needed with respect to components of private corporate sector data, particularly in distinguishing between scheduled and actual debt service, in estimating the accumulation/reduction of private sector payments arrears, and in estimating rescheduling and debt reductions received by the private sector from external creditors.

Indonesia: Table of Common Indicators Required for Surveillance

(As of June 11, 2009)

¹Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

²Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

³Foreign, domestic bank, and domestic nonbank financing.

⁴Including currency and maturity composition.

⁵Includes external gross financial assets and liability positions vis-a-vis non residents.

⁶Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); NA: Not Available.

⁷Reflects the assessment provided in the data ROSC published on July 20, 2005 (based on the findings of the mission that took place during March 28-April 11, 2005), for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).

⁸Same as footnote 7, except referring to international standards concerning source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

Indonesia: Table of Common Indicators Required for Surveillance

(As of June 11, 2009)

	Date of Latest Observation	Date Received	Frequency of Data6	Frequency of Reporting6	Frequency of Publication6	Memo Items:
						Data Quality - Methodological soundness7	Data Quality - Accuracy and reliability8
Exchange Rates	6/11/09	6/11/09	D	D	W/M
International reserve assets and reserve liabilities of the monetary authorities1	5/29/09	5/29/09	D	M	M
Reserve/base money	4/09	6/6/09	D	D	W/M	O, LO, O, O	LO, O, O, LO, O
Broad money	4/09	6/6/09	M	M	M
Central bank balance sheet	4/09	6/6/09	M	M	M
Consolidated balance sheet of the banking system	4/09	6/6/09	M	M	M
Interest rates2	6/11/09	6/11/09	D	D	W/M
Consumer price index	5/09	6/1/09	M	M	M
Revenue, expenditure, balance and composition of financing3-general government	05/09	06/09	M	M	Mid-year	LNO, LNO, LO, LNO	LNO, LO, LO, LO, LNO
Stocks of central government and central government-guaranteed debt	05/09	06/09	M	Q	A
External current account balance	3/09	5/28/09	Q	Q	Q	LO, LO, LO, LO	LO, O, LO, O, O
Exports and imports of goods and services	3/09	5/28/09	M	M	M
GDP/GNP	2009 Q1	6/09	Q	Q	Q	LO, LO, O, LO	LO, LO, LO, LO, LNO
Gross external debt4	12/08	4/09	Q	Q	A
International investment position5	2007	4/09	A	A	A

¹Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

²Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

³Foreign, domestic bank, and domestic nonbank financing.

⁴Including currency and maturity composition.

⁵Includes external gross financial assets and liability positions vis-a-vis non residents.

⁶Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); NA: Not Available.

⁷Reflects the assessment provided in the data ROSC published on July 20, 2005 (based on the findings of the mission that took place during March 28-April 11, 2005), for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).

⁸Same as footnote 7, except referring to international standards concerning source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

View Table

Indonesia: Table of Common Indicators Required for Surveillance

(As of June 11, 2009)

	Date of Latest Observation	Date Received	Frequency of Data6	Frequency of Reporting6	Frequency of Publication6	Memo Items:
						Data Quality - Methodological soundness7	Data Quality - Accuracy and reliability8
Exchange Rates	6/11/09	6/11/09	D	D	W/M
International reserve assets and reserve liabilities of the monetary authorities1	5/29/09	5/29/09	D	M	M
Reserve/base money	4/09	6/6/09	D	D	W/M	O, LO, O, O	LO, O, O, LO, O
Broad money	4/09	6/6/09	M	M	M
Central bank balance sheet	4/09	6/6/09	M	M	M
Consolidated balance sheet of the banking system	4/09	6/6/09	M	M	M
Interest rates2	6/11/09	6/11/09	D	D	W/M
Consumer price index	5/09	6/1/09	M	M	M
Revenue, expenditure, balance and composition of financing3-general government	05/09	06/09	M	M	Mid-year	LNO, LNO, LO, LNO	LNO, LO, LO, LO, LNO
Stocks of central government and central government-guaranteed debt	05/09	06/09	M	Q	A
External current account balance	3/09	5/28/09	Q	Q	Q	LO, LO, LO, LO	LO, O, LO, O, O
Exports and imports of goods and services	3/09	5/28/09	M	M	M
GDP/GNP	2009 Q1	6/09	Q	Q	Q	LO, LO, O, LO	LO, LO, LO, LO, LNO
Gross external debt4	12/08	4/09	Q	Q	A
International investment position5	2007	4/09	A	A	A

¹Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

²Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

³Foreign, domestic bank, and domestic nonbank financing.

⁴Including currency and maturity composition.

⁵Includes external gross financial assets and liability positions vis-a-vis non residents.

⁶Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); NA: Not Available.

⁷Reflects the assessment provided in the data ROSC published on July 20, 2005 (based on the findings of the mission that took place during March 28-April 11, 2005), for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).

⁸Same as footnote 7, except referring to international standards concerning source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.