Regions and Countries

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p. 14 of 33 BACK | NEXT I. Current Development Trends and Issues II. The Government's Development Strategy A. Development Goals and Strategy B. Resource Mobilization and Investment C. Role of External Assistance D. ADB’s Assessment of the Government’s Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2006-2009 (Draft for Consultation): Indonesia : II. The Government's Development Strategy

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C. Role of External Assistance

46. The level of external assistance to Indonesia has been declining. Official pledges at the Consultative Group for Indonesia²³ have declined from over $7 billion in 1998 to less than $3 billion in 2006. Budgetary financing by World Bank and ADB has been of significant value to the management of the Government budget. In addition, donors pledged over $0.5 billion in support to be channeled outside the budget to NGOs and local governments.

47. A key element of Indonesia’s development strategy is the recently drafted borrowing strategy,²⁴ which aims at reducing the debt by $1 billion to 2 billion per year, and provides guidelines to government entities at all levels for the use of foreign loans. The draft indicates four priority areas for Government debt: health and education; job creation, investments and exports; revitalization of agriculture, fisheries and rural development; and poverty reduction. The strategy also includes strict criteria for agencies to be able to finance projects through debt, as well as project readiness criteria. The strategy was developed out of concern that at the end of 2005, public foreign debt stood at $61 billion, combined domestic and foreign debt was 45% of GDP, debt servicing requirements over 2004-2005 averaged 25% of the overall budget, and for the 189 loan funded projects under implementation there was an undisbursed balance of $8.1 billion. The RPJM has three related targets: (i) reducing the stock of debt to 31.8% of GDP by 2009, (ii) improving the impact of loan funded projects, and increasing their efficiency, and (iii) increasing the use of local content in goods and services. Indonesia has embarked on a program of loan cancellations,²⁵ debt swaps in the case of bilateral loans, and more prudent borrowing for new projects. Up to 2009, when Indonesia hopes to achieve a budget surplus, the Government has financing needs for the budget in the form of international and domestic bond issues and policy-based loans from multilateral and bilateral sources. The scope for project borrowing depends on identifying activities for medium term engagement on-budget, and new opportunities off-budget.

48. Recently, more external assistance has been directed at policy and thematic support, local governments and communities, and emergency, rehabilitation and reconstruction support for large scale disasters. As part of the Paris agenda for harmonization and alignment of external assistance, the Government has been reorganizing and streamline its foreign assistance procedures, so that foreign assistance is better aligned with country priorities. Donors have increasingly harmonized around certain themes to engage the Government in policy dialogue and influence outcomes. Most notable are the investment climate (through the Japan-led investment climate working group), decentralization (through the CIDA-led decentralization working group and increasingly the multi-donor Decentralization Support Facility (DSF), and macro-policies (through the series of World Bank-led development policy loans). The increased support to local governments and communities potentially makes a significant difference at the local level, but often does not have a measurable national impact, nor is it readily up-scaleable.

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