Identifier
Created
Classification
Origin
06JAKARTA8006
2006-06-26 10:39:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Jakarta
Cable title:  

DONORS OFFER FINANCING, EARTHQUAKE HELP AT CGI

Tags:  EAID EINV ECON EFIN KMCA PTER PREL ID 
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VZCZCXRO0301
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #8006/01 1771039
ZNR UUUUU ZZH
R 261039Z JUN 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6337
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHKO/AMEMBASSY TOKYO 9873
RUEHBJ/AMEMBASSY BEIJING 3498
RUEHBY/AMEMBASSY CANBERRA 9659
RUEHUL/AMEMBASSY SEOUL 3685
UNCLAS SECTION 01 OF 05 JAKARTA 008006 

SIPDIS

SIPDIS
SENSITIVE

AIDAC

DEPT FOR EAP/MTS AND EB/ODF
TREASURY FOR IA-BAUKOL
USDOC FOR WGOLIKE/4430 AND JBENDER
DEPT PASS TO USTR DKATZ AND WEISEL

E.O. 12598: N/A
TAGS: EAID EINV ECON EFIN KMCA PTER PREL ID
SUBJECT: DONORS OFFER FINANCING, EARTHQUAKE HELP AT CGI
MEETING


UNCLAS SECTION 01 OF 05 JAKARTA 008006

SIPDIS

SIPDIS
SENSITIVE

AIDAC

DEPT FOR EAP/MTS AND EB/ODF
TREASURY FOR IA-BAUKOL
USDOC FOR WGOLIKE/4430 AND JBENDER
DEPT PASS TO USTR DKATZ AND WEISEL

E.O. 12598: N/A
TAGS: EAID EINV ECON EFIN KMCA PTER PREL ID
SUBJECT: DONORS OFFER FINANCING, EARTHQUAKE HELP AT CGI
MEETING



1. (U) Summary. Coordinating Minister for the Economy
Boediono and other Government of Indonesia (GOI) ministers
expressed optimism that economic growth and investment would
pick up in the second half of 2006 at the June 14
Consultative Group on Indonesia (CGI) meeting in Jakarta.
Several Ministers emphasized the need to boost investment,
and expressed hope that new investment and infrastructure
measures would help. The GOI also announced several
ambitious anti-poverty intitiatives, including nationwide
community development and conditional cash transfer
programs, though these are only in the concept and
assessment phase. Coordinating Minister for Political,
Legal and Security Affairs Widodo Adi Sucipto reaffirmed the
GOI's commitment to reducing corruption and said the GOI
will establish a civil service reform institution reporting
to the President. Finance Minister Sri Mulyani Indrawati
announced the GOI faces a USD 4.3 - 4.6 billion financing
gap in 2006, which donor pledges of loans and grants more
than covered at USD 5.4 billion. A preliminary damage and
loss assessment for the May 27 Yogyakarta earthquake was
larger than expected, at about USD 3.1 billion. Donors have
already provided or pledged USD 64.1 million in earthquake
assistance. The Head of the Aceh Rehabilitation and
Reconstruction Agency, Kuntoro Mangkusubroto urged donors
not to forget Aceh, which still has a USD 1.3 billion gap
between pledged funds and needs. End Summary.

Economic Outlook
--------------


2. (U) Coordinating Minister for the Economy Boediono
chaired a meeting of the CGI meeting on June 14 attended by
approximately 30 donor representations and a quarter of the
GOI cabinet ministers. Boediono and other Ministers
emphasized that, "Indonesia needs more growth, and needs
this growth to reach the poor better than the past."

Boediono said he hopes that the new policy packages on
infrastructure and investment would begin to stimulate
growth in the second half of the year. The GOI will also
announce a new financial sector reform package to help
strengthen capital markets, the banking sector, and the non-
bank financial sector including pensions and insurance.

More Investment Needed
--------------


3. (U) Boediono noted the "urgent need to change investor
sentiment" about Indonesia. Finance Minister Mulyani echoed
Boediono, noting that growth has not been high enough to
create sufficient job opportunities and cut poverty levels.
First quarter growth was 4.6 percent YoY but Mulyani said
she believes Indonesia could return to growth of 6 - 6.5
percent in 2007. She also acknowledged the need for more
investment in Indonesia. "We realize regional competition
for investment dollars is increasing with our Asian
neighbors focusing their energies on creating a more
favorable environment for the private sector. Not only do
we need to do the same, but better and faster." Mulyani
admitted the GOI was not happy with the pace of
infrastructure projects, but noted she had recently signed a
Ministerial decree (PMK 38/2006) for GOI risk sharing in
infrastructure projects with public-private partnership.
She said the Ministry of Finance (MOF) is also working hard
to modernize the Directorates General of Tax and Customs,
and remove illegal local taxes and levies.

Fiscal Prudence
--------------


4. (U) Mulyani emphasized that the GOI remains committed to
fiscal prudence despite rising social needs and that
Indonesia's economy is strong enough to weather macro
shocks. The budget deficit is trending towards 1.3 - 1.5
percent of GDP for FY 2006, higher than the 0.5 percent in
the 2005 budget. Mulyani said the deficit is financeable
despite recent volatility in foreign exchange and capital
markets. The MOF hopes the deficit would fall to between

JAKARTA 00008006 002 OF 005


0.7 and 0.9 percent in 2007. The GOI's budget
implementation is improving, with budget spending proceeding
more efficiently than in previous years but still slower
than expected. As of April 31, the GOI had only spent Rp
9.4 trillion (USD 1 billion) of a budgeted Rp 21 trillion
(USD 2.2 billion) carryover spending from 2005.


5. (U) Mulyani noted that President Yudhoyono approved a
reorganization plan for the MOF in early June that will
create new Directorates General for Fiscal Balance and Debt
Management as well as a new Fiscal Policy Office with the
goal of improving the quality of treasury management and
public spending. Despite the challenges, Mulyani was
optimistic that the GOI would "continue to maintain
macroeconomic policies that can endure potential external
shocks and market disruptions."

Development Policy Initiatives
--------------


6. (U) Boediono also briefed donors on two new major
development policy initiatives. Under the first initiative,
the GOI plans to scale up community-driven development
programs, currently covering several thousand villages, to
nationwide coverage over the next three years. The goal is
to improve local infrastructure and empower villagers to
prioritize spending. The second program would create a
"world-class" Conditional Cash Transfer (CCT) program under
which the GOI would give monthly cash transfers to poor
families if they meet certain conditions, possibly including
enrolling children in secondary school and obtaining pre-
natal care for expecting mothers and vaccinations for
children. Boediono says the GOI envisions the CCT as an
adaptation and improvement of the current unconditional cash
transfer program, initially designed to protect the poorest
households from the shock of the fuel price increases of
October 2005. The GOI hopes the new program could begin in
2007, after the State Ministry for National Development
Planning (Bappenas) completes an evaluation of the
unconditional cash transfer program.

Security, Governance and Civil Service Reform
--------------


7. (U) Coordinating Minister for Politics, Law and Security
Widodo Adi Sucipto acknowledged Indonesia's security
problems, stating that the GOI still needs to increase its
efforts to fight terrorist acts. The GOI has revised laws
in Anti-Terrorism, and its Criminal Procedures Code. The
GOI also ratified the International Convention for the
Suppression of Terrorist Bombing (through Law 5/2006) and
International Convention for the Suppression of Financing
Terrorism (through Law 6/2006). Incidents of sea piracy
have fallen from 94 in 2004 to 79 in 2005. Legal sector
reforms are still "far from public expectations, however."
Widodo also acknowledged bureaucratic reform as a principle
problem, stating "there have been numerous examples of
nepotism within the recruitment, career and promotion system
for civil servants that bring about the seeds of corruption,
which breeds in every element of governance."


8. (SBU) Boediono also noted that the GOI "recognizes the
need for comprehensive civil service reform" and would
establish a "new institution connected to the President's
office, which will report directly to him." In their
comments, many donors noted that civil service reform is
both politically and bureaucratically difficult. The old
socialist mindset of full employment regardless of results
dies hard, and a number of overlapping agencies have
responsibility for various aspects of the civil service.
Indonesia's bureaucracy is currently an obstacle to reform,
operating with distorted incentives, obsolete procedures and
inappropriate skills. Members of the CGI's Legal, Judicial
and Anti-Corruption Working Group stated in writing that,
"Donors consider a professional, merit-based, performance-
focused, and responsive civil service as a major pillar of
an effective corruption prevention strategy." USAID is also

JAKARTA 00008006 003 OF 005


assisting in this area with programs to assist in anti-
corruption efforts, as well as legal and judicial sector
reform.

Financing Gap
--------------


9. (U) Mulyani said that Indonesia's financing needs for
2006 would be between USD 16.7 - 17.0 billion, of which the
GOI will finance domestically USD 12.0 to 12.3 billion. The
GOI plans to utilize foreign grants and loans to finance the
additional USD 4.4 to 4.7 billion, of which CGI members will
contribute USD 3.9 - 4.2 billion. The GOI thus requested
USD 4.3 to 4.6 billion to fill its financing gap.

Yogyakarta Earthquake Damage and Loss
--------------


10. (U) Indonesia suffered its third major natural disaster
Indonesia in 18 months on May 27, when a 6.3 magnitude
earthquake struck the Javanese cultural and historical
center of Yogyakarta and surrounding districts. GOI
officials presented the "Preliminary Damage and Loss
Assessment" estimating the total loss and damage at USD 3.1
billion. (See www.rehabyogyajateng.bappenas.go.id for the
full report.) Estimates were much higher than previously
expected because the quake hit 11 of the most densely
populated districts in the country, home to more than 8.3
million people, where much of the housing was poorly
constructed. An estimated 50,000 substandard houses
collapsed, severely injuring thousands. Yogyakarta is also
Indonesia's second most popular tourist destination after
Bali. While its famous Borobudur Temple was undamaged, the
9th Century Hindu Prambanan Temple suffered a "medium"
amount of damage. An estimated 30,000 small and medium
enterprises (SMEs),including thousands of small-scale
handicraft producers, suffered damage from the quake,
causing a loss of earnings to about 650,000 workers and 2.5
million of their dependents.


11. (U) The human toll, while not as huge as Aceh, was still
significant. There are an estimated 5,700 dead, 40,000
injured and 200,000 homeless. Fortunately, unlike the
December 2004 tsunami disaster in Aceh, much of the
infrastructure (roads, airport) surrounding the Yogyakarta
disaster area remain functional enough for relief supplies
to flow in quickly. Housing damage and losses account for
50 percent of the total with 154,000 houses destroyed and
260,000 damaged.


12. (U) Boediono was unsure exactly how much budget funds
the GOI would be able to put toward the earthquake
reconstruction in 2006 and 2007. However, at earlier
meetings, senior BAPPENAS officials have said they hope the
GOI could provide at least USD 500 million in funds. Donor
pledges to date for earthquake assistance total USD 64.1
million, with several donors stating they could provide more
after consultations with capitals and Parliaments.

Don't Forget Aceh
--------------


13. (U) The head of the Rehabilitation and Reconstruction
Agency for Aceh and Nias (BRR) Kuntoro Mangkusubroto urged
donors not to forget the ongoing needs in the tsunami-and
earthquake affected areas of Aceh and Nias. Of the USD 6
billion needed in Aceh, donors have only committed USD 4.7
billion of a pledged USD 7.1 billion. Kuntoro expressed
concern that international non-governmental organizations
(NGOs) and other donors may not cover the USD 1.3 billion
gap because they are distracted by new crises.
Reconstruction is expensive, Kuntoro noted, and inflation is
affecting prices for materials and labor. Kuntoro also
reaffirmed BRR's commitment to fighting corruption, noting
its anti-corruption unit had investigated 465 of 528 reports
of corruption. Aceh remains the "biggest reconstruction
challenge in recent history," Kuntoro emphasized. "There is

JAKARTA 00008006 004 OF 005


no room for complacency or misplaced competition. More help
is needed."

Donors Respond Generously
--------------


14. (U) Donors responded generously to Indonesia's request
for assistance, more than covering Indonesia's financing
gap. Total CGI pledges came to USD 5.4 billion, USD 3.9
billion in the form of loans or grants channeled through the
central government budget. Of the USD 3.9 billion, USD 3.7
billion is loan assistance and USD 200 million is grant
assistance. The World Bank said it would provide USD 900
million - 1.1 billion, noting it was impressed with the
"clarity of Indonesia's objectives." The Asian Development
Bank said it would provide USD 300 million in project loans
and 600 - 700 million in program loans, along with USD 10
million for earthquake response. Indonesia is the U.K.'s
largest development program in Southeast Asia at USD 92
million with additional USD 45.5 million of grant
assistance. South Korea is providing USD 100 million in
loans. Germany is giving USD 240 million in project
assistance this year along with USD 1.6 million in
earthquake relief. Japan did not announce a dollar figure,
but noted its assistance to Indonesia includes soft loans,
grants, infrastructure lending and other project assistance,
as well as disaster mitigation and response planning.


15. (U) USAID Director Frej emphasized that the GOI's
leadership has been impressive in several areas including
community-driven reconstruction efforts; commitment to peace
in Aceh; its regional leadership in ASEAN; and its deepening
of democracy and its counter-terrorism efforts. USAID has
committed USD 170 million for FY 2006 and anticipates the
Millennium Challenge Corporation's Threshold program, if
approved, would be about USD 55 million. The U.S. also
provided USD 5 million in emergency earthquake assistance.
USAID's ongoing assistance programs will help in several
priority areas:

a) improving the quality of basic education;
b) improving the delivery of essential public services at
the community level;
c) creating a better business, trade and investment
environment that will support economic growth;
d) promoting more accountable and transparent governance
at the national and local levels; and
e) promoting biodiversity and environmental protection.

GOI Participation
--------------


16. (U) Vice President Jusuf Kalla delivered a luncheon
address to CGI participants. Other GOI Ministers who
attended all or some of the meeting included Coordinating
Minister for Political, Legal and Security Affairs Widodo
Adi Sucipto; Coordinating Minister for the Economy Boediono;
State Minister for National Development Planning Paskah
Suzetta; Minister of Finance Sri Mulyani Indrawati; Minister
of Trade Mari Elka Pangestu; Attorney General Abdul Rachman
Saleh; and Minister of Industry Fahmi Idris. Governor of
Bank Indonesia Burhanuddin Abdullah attended the morning
session, and Anti-Corruption Commission (KPK) Deputy
Chairman Erry Riyana Hardjapamekas also participated in the
meeting.

Comment: Has the CGI Format Run its Course?
--------------


17. (SBU) For the second consecutive time, the GOI organized
and hosted the CGI meeting, which it had postponed several
times from January, to March, to June. At the end of the
day, the Yogyakarta eatthquake likely motivated the GOI to
nail down ad ate. We agree with Canada, Germany, and other
donors who have suggested the CGI format may have run its
course and should be redefined to facilitate more
substantive discussion of development policies rather than

JAKARTA 00008006 005 OF 005


serve as a pledging forum. Given Indonesia's heavy debt
burden, the GOI is also uncomfortable with the image of
Indonesia seeking foreign loans from so many wealthy
countries. Although the GOI did not announce any changes on
June 14, we suspect it will reform the CGI format before
calling the next meeting, possibly by eliminating the
pledging session and relabeling the CGI as a "development
forum."

AMSELEM