Regions and Countries

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p. 15 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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D. ADB’s Assessment of the Government’s Development Strategy

49. The RPJM is a comprehensive document, analyzing past failures, in particular the weaknesses of public and market institutions, and how these should be addressed. Constraints to development are stated clearly. The macroeconomic framework now is more stable, in that the question is no longer one of recovery but one of achieving and sustaining higher growth. Sectoral analysis in many cases is good, with clearly stated targets, albeit often ambitious. The poverty reduction strategy is based on a strong poverty diagnostics, but could be stronger in terms of prioritization, and as yet lacks an action plan with monitoring indicators for measuring progress²⁶. The system of annual plans to implement the RPJM is effective, especially as it forms the basis for part of the budget. With Indonesia moving towards a medium-term expenditure framework, this system will become more effective over time. The comprehensive reform programs and the debt management and borrowing strategies are also strong aspects of the Government’s development strategy.

50. Going forward, there is a need for the Government to adopt a policy that more actively supports increased public sector investment, as well as measures to enhance the quality of public expenditures. The combination of continued high interest rates and inflation, a strong currency, high international oil prices, and a continued push for a balanced budget by 2009 threatens the Government’s growth objectives, and may not allow the economy to regain the loss in competitiveness since the Asian financial crisis. The Government needs to achieve a proper balance between its own resources and external support, and focus on leveraging private sector investments to meet its medium-term growth targets. Although debt servicing requirements amount to roughly one-third of budgetary expenditures, a moderately expansionary fiscal stance in combination with continuous improvements in revenue performance could be a viable option to ensure future economic growth. Recognizing that macroeconomic and sector reforms will be vital to, attract greater private sector investments, the Government has begun to articulate its short and medium-term reform agenda in investment climate, infrastructure, and financial sector areas.

51. Implementation of the development agenda so far has been mixed. For the Government to realize the goals reflected in the RPJM, and harvest the fruits of the reform processes, there is a clear need for drastically improved coordination within the Government in the short to medium term, and public sector and civil service reforms in the medium to long term. Continued low development expenditures, low investments in infrastructure, and development indicators that show little improvement, are a result of a lack of coordination between line agencies at the central level and between the centre and the regions. The lack of capacity within the civil service to deliver and implement is another dimension of this. There is an urgent need to design a reform program that clarifies the now overlapping roles and functions of the myriad of government institutions, and overhauls the civil service to make it more accountable. Implementation of such a program will take a long time, but the ambitions of the Government threaten to founder in the absence of such reforms

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