ACEH -- ECONOMIC DOWNTURN COULD IMPACT PEACE

C O N F I D E N T I A L SECTION 01 OF 04 JAKARTA 002233 SIPDIS DEPT FOR EAP, EAP/MTS, EAP/RSP, EAP/MLS NSC FOR E.PHU DEPT PLS PASS TO USAID E.O. 12958: DECL: 12/11/2018 TAGS: PGOV PINS PREL ECON ID SUBJECT: ACEH -- ECONOMIC DOWNTURN COULD IMPACT PEACE PROCESS REF: JAKARTA 1638 AND PREVIOUS Classified By: DCM John A. Heffern, reasons 1.4(b+d). ¶1. (U) This message was coordinated with Consulate Medan. ¶2. (C) SUMMARY: Since the 2004 tsunami, the Aceh reconstruction effort has made real progress thanks to international and GOI assistance, buoying the economy. A considerable amount of funding remains in the pipeline, but assistance is slated to wind down from December 2008. This happens just as Aceh's economy appears headed for its most difficult stretch since the end of hostilities with economic growth sharply negative going into 2009. ¶3. (C) SUMMARY (Con'd): This economic double whammy will put strains on the political process as Aceh gears up for regional legislative elections next spring. The peace process can stay on track if parties continue to cooperate, but leaders in Aceh and Jakarta will need to temper some provocative tendencies on both sides. END SUMMARY. ASSISTANCE AGENCY TO END OPERATIONS ¶4. (SBU) The Aceh Rehabilitation and Reconstruction Agency (BRR) will cease operations as scheduled in April 2009. Though BRR has essentially been in transition mode since the middle of 2008, the official transition will begin on December 15 when BRR loses authority to obligate funds and sign new contracts. The BRR can then transfer completed projects to local authorities and liquidate its assets and draw down staff. Due in large part to BRR Chief Kuntoro's deft management of the situation behind the scenes and cooperation from Aceh Governor Irwandi Yusuf, the process is proceeding smoothly and pragmatic solutions have been devised to minimize potential problems. RECONSTRUCTION MAKES SOLID PROGRESS ¶5. (U) With the exception of a few major projects, notably including the U.S.-funded Aceh road, reconstruction is virtually complete. The road has been especially vulnerable to "gansterism" by a whole range of local interests trying to make a buck by obstructing progress. In many regions, infrastructure and access to government services are better now than before the tsunami. Housing and health facilities are two good examples. By December 2008, BRR and its partners had constructed nearly 125,000 permanent houses, approximately 5,000 more than were destroyed in the 2004. At the same time, 650 health facilities, including hospitals and community health centers, had been constructed or repaired. Though estimates of damage to the health sector vary considerably, this figure is more than double the number of health facilities needed to simply return Aceh and Nias to pre-disaster levels. ¶6. (U) Acehnese say--and official statistics confirm--that the level of economic development in Aceh is in most areas higher now than it was before the tsunami: Required* Completed Houses 120,000 units 124,454 units Health facilities 127 units 954 units Government Buildings 795 units 979 units Schools 2,006 units 1,450 units JAKARTA 00002233 002 OF 004 Seaports 14 units 20 units Airports/airstrips 11 units 2 units Agricultural land 60,000 ha10 3,273 ha Road 3,000 km 3,055 km Teachers 2,500 died 38,911 trained Sources: BRR November 30, 2008 Progress Report BRR Two Year Report The World Bank Reconstruction Update April 2008 *Note: sources do not provide consistent estimates of damaged and destroyed facilities. ECONOMY SLIPS INTO RECESSION ¶7. (SBU) Just as Aceh heads into this new phase where it will need to meet its own needs, Aceh's economy is slipping into recession. According to statistics from Bank Indonesia (the central bank),Aceh's economy grew an estimated 3.9 percent in the first half of this year. Since then, a combination of lower reconstruction spending and falling commodity prices have caused Aceh's economy to stall. Publicly, BI officials have said that Aceh's economy could grow from 2 to 4 percent this year. Privately these officials state that they believe the Aceh economy has fallen into recession. This means that, heading into 2009 and the election campaign, the economy will be shrinking and the momentum will be downward. This, in a region that already has its share of severe poverty. COMMODITY PRICE COLLAPSE ¶8. (U) Turning off the reconstruction taps is only one of the problems facing the Acehnese economy; weak commodity prices are also causing strain. After construction and energy, agriculture is the single most important component of Aceh's economy and is the province's largest employer. Aceh's most important crops are oil palm, rubber and coffee. Palm oil and rubber, two crops thought to hold the most promise for Aceh, have failed to deliver increased employment and, due to record-low commodity prices in recent months, are producing less in dollar terms now than they were a year ago. ¶9. (SBU) As palm oil prices soared to record heights earlier this year (before falling sharply),Governor Irwandi hoped expansion in this sector would absorb Aceh's unemployed while helping to reforest degraded lands around the province. Due to legal uncertainties and cautious political risk assessments, no major palm or rubber projects were announced either in 2007 or in 2008. Until recently the coffee sector had also shown promise as an export industry where Aceh's high-quality Arabica coffee could garner revenues and create employment. The recent fall in world coffee prices, while still not approaching the palm oil and rubber price collapses at this point, have also dimmed hopes for this industry. ACEH POLITICAL FACTORS ¶10. (C) Since returning from an illness, Governor Irwandi has reduced his working hours. Irwandi has left much of the day-to-day administration in the hands of Vice Governor Muhammad Nazar, who filled in smoothly during Irwandi's illness. Irwandi continues to work in a positive direction regarding the peace process. ¶11. (C) The visit by Hasan Di Tiro, the founder and JAKARTA 00002233 003 OF 004 spiritual father of GAM, to Aceh for ten days in September occurred without major incident, despite the provocative exuberance of some ex-GAM members. Di Tiro urged support for the peace process and was treated well by the GOI. ¶12. (C) In the meantime, the Aceh Party's (former GAM) lack of vision could undermine its own cause. Some members of the party have told supporters that their first priority is to revise the Law on the Governance of Aceh (LOGA),enacted in 2006, something absolutely impossible for the provincial body, since the LOGA is a national law. A few have said they want a referendum on the status of Aceh, a position clearly at odds with the letter and the spirit of the Helsinki Memorandum of Understanding. So far, the Aceh Party has yet to distance itself officially from such inflammatory statements. This has led to suspicion within the TNI and in Jakarta. ¶13. (C) The Aceh Reintegration Agency (BRA) remains paralyzed by internal frictions and disorganization, largely as a result of the abominable management of its director, Nur Juli. Many ex-combatants have yet to receive the jobs and two hectares of land that, according to their interpretation of the Helsinki MOU, are due to them as part of the "peace dividend." ¶14. (C) The GAM community also remains concerned that central authorities will make policy decisions regarding Aceh without consultation. A total of 17 provisions of the Helsinki MOU remain in dispute in terms of their fulfillment through the LOGA, enacted in 2007. From Aceh's perspective, the most contentious issue is the role of the military. From the GOI's perspective, delimiting Irwandi's foreign activities is also a priority, given the province's separatist past and his international visibility. SOME CONCERNS ABOUT MILITARY ¶15. (C) During the Di Tiro visit, provincial Indonesian military (TNI) commander MG Soenarko made statements to the effect that GAM was not serious and that the peace was a sham. These comments caused concern. Under Soenarko, the TNI has also been setting up intermittent checkpoints in the countryside of the central highlands, where non-Acehnese ethnic groups have called for the creation of their own province. It has also reverted to a practice, common during the conflict, of setting up security outposts, which the ex-GAM find intimidating, in villages which historically have had significant anti-separatist sentiment. ¶16. (C) Some observers note that the views of Soenarko's predecessor, MG Supiadin, who oversaw the Helsinki MOU and the first stages of the peace process, moderated over time and they hope that will happen in this case. So far, there has been no evidence of such an evolution with Soenarko. Most observers are skeptical that his views will change and believe he will continue to be an irritant. PEACE DIALOGUE A SUCCESS ¶17. (C) On the positive side, the Commission to Support the Peace in Aceh (CoSPA) now occupies a central place in the peace process. Comprising representatives from the military, police, Coordinating Ministry for Political, Legal and Security Affairs, etc., the CoSPA has, since September, also included intermittent support from the Aceh Party. This, in JAKARTA 00002233 004 OF 004 addition to consistent representation from former GAM commanders as well as senior leadership from other former anti-separatist militias. Discussions are generally frank, constructive and substantive. MOVING TOWARD ELECTIONS ¶18. (C) Forty-four political parties, including six local ones, are preparing to contest the 69 seats in Aceh's provincial legislature that are up for election in April ¶2009. Of those six, only the Aceh Party (GAM) and SIRA have significant name recognition. The Justice Welfare Party (PKS) and National Mandate Party (PAN) are currently favored among the national parties. To keep electioneering within commonly acceptable bounds, the CoSPA convened party representatives to sign a code of ethics for the election. With the notable exception of the Aceh Party, which has been accused of illegal tactics and intimidation, all parties agreed. A SENSITIVE TIMEFRAME AHEAD ¶19. (C) Despite political differences, continued cooperation by Jakarta and Acehnese parties is keeping the peace process on track. As Aceh heads into 2009, however, the economic situation is of increasing concern. The sharp fall in commodity prices seriously impairs an economy that is still heavily dependent on agriculture. Because of the global outlook, this negative economic dynamic probably will not be reversed any time soon. ¶20. (C) At the very least, the economic situation will place strains on the political fabric of the province. The peace process can stay on track if parties continue to cooperate, but leaders in Jakarta and Aceh will need to work hard to temper provocative tendencies on both sides. In the meantime, law and order remains an issue, and authorities will need to continue to combat crime and gangsterism (which may become more serious as problems given the economic headwinds). Mission will continue to push the road project forward. HUME