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ADB’s Support to Indonesia Needs to Focus on Inclusive and Environmentally Sustainable Growth and Financial Inclusion

IED News Release | 4 November 2019

MANILA, PHILIPPINES (4 November 2019) — The Asian Development Bank’s (ADB) assistance has supported Indonesia in achieving its key development objectives, including reducing the number of people living below the absolute poverty line to less than 10%. But ADB still has significant work remaining to support Indonesia in fostering inclusive and environmentally sustainable growth and improving financial deepening and inclusion, according to findings by ADB’s Independent Evaluation Department (IED).

IED’s conclusion is based on its assessment of the performance and results of ADB’s overall support to Indonesia, and a separate assessment of its operations in the finance sector during 2005–2018. ADB implemented three country partnership strategies during the evaluation period, with a total financing volume of over $19 billion, of which over $2 billion was for the country’s finance sector.

The country program evaluation found that 69% of ADB’s financing was provided as budget support or policy-based lending (PBL) to the government for public sector reforms, such as public financial management and the decentralization of public service management to local levels. According to the report, PBL made notable contributions to macroeconomic and financial stability in Indonesia and helped reforms, but agriculture, education, health, water, and transport—sectors more directly related to inclusive economic growth and environmentally sustainable growth—received less support.

ADB financed 72 sovereign loans, 21 grants, 23 nonsovereign loans, and 122 technical assistance operations during the evaluation period. ADB’s lending generally supports infrastructure projects, but this was not the case in Indonesia except in the energy and finance sectors. As indicated, 69% of the sovereign lending was provided through budget support, which were not adequately complemented with investments, especially in infrastructure development.

“Inclusive and environmentally sustainable growth was the central objective of all three of ADB’s country partnership strategies­­­­­ for Indonesia during 2005–2018, but ADB’s operations mainly materialized in three sectors—public sector management, energy, and finance. Assistance to public sector management and finance, which constituted the majority of the portfolio, addressed the objectives of inclusion and environmental sustainability only indirectly,” said ADB Director General of Independent Evaluation Mr. Marvin Taylor-Dormond. “Going forward, ADB should focus on delivering a more balanced set of operations capable of boosting inclusive and environmentally sustainable growth more directly.”

The report found that it was difficult to design viable investment projects and, once approved, they faced implementation difficulties arising from insufficient procurement readiness, inadequate local capacity, and coordination problems at various levels. The evaluation identified ADB project readiness issues including land acquisition, safeguards and procurement, and government’s perception of high transaction costs associated with ADB’s investment loans as the main challenges to developing and implementing investment projects.

“Besides promoting inclusive, environmentally sustainable, and climate resilient growth, it is critical that ADB helps the government strengthen project implementation capacities at the local level, designs better quality investment projects, and provides greater support to government in addressing project readiness issues,” said ADB IED Director Walter Kolkma. The report also underscores the need for ADB to underpin its support for policy reforms on strong diagnostics and expected results frameworks.

The finance sector evaluation concluded that ADB’s support contributed to improving the stability of the sector, particularly with the establishment of the Indonesian Financial Services Authority. However, financial deepening and inclusion—availability and liquidity of a wide range of financial services and access to finance for different social economic groups—in Indonesia require more work. The report found that ADB’s finance sector program lacked scope and strategic vision to better support financial inclusion, by combining sovereign and private sector development efforts with the advances in the digital finance and financial technology industries. The report pointed out that support to the finance sector requires the increased use of analytical diagnostics to inform its design, enhanced provision of appropriate funding in local currency, and better coordination and sequencing of ADB’s sovereign and nonsovereign operations.

“Much more ADB support is needed in furthering financial deepening and inclusion in Indonesia,” said ADB IED Director Mr. Nathan Subramaniam. “To achieve its stated strategic objectives, ADB should enhance the mobilization of local currency financing; develop a pipeline of viable sovereign and nonsovereign projects, where local currency can be deployed in a timely manner; and de-risk investments through the use of credit enhancement products to promote the financing of large infrastructure assets by institutional investors.”

About Independent Evaluation at ADB

ADB's Independent Evaluation, reporting to the Board of Directors through the Development Effectiveness Committee, contributes to development effectiveness by providing feedback on ADB's policies, strategies, operations, and special concerns in Asia and the Pacific.