World Trade Organization |
RESTRICTED |
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WT/TPR/G/184 23 May 2007 | |
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(07-2038) |
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Trade Policy Review Body |
Original: English |
TRADE POLICY REVIEW Report by Indonesia |
Pursuant to the Agreement Establishing the Trade Policy Review Mechanism (Annex 3 of the |
Note: This report is subject to restricted circulation and press embargo until the end of the first session of the meeting of the Trade Policy Review Body on Indonesia.
CONTENTS
I. introduction 5
II. ECONOMIC ENVIRONMENT 6
A.
B. Financial Sector Restructuring 7
C. Investment 8
D. Infrastructure 8
E. Decentralisation And Special Economic Zones 9
III. INSTITUTIONAL FRAMEWORK 9
A. Political Change 9
B. Institutional And Legal Reform 10
C. International Trade Relations 13
1. Multilateral Cooperation 13
(a) World Trade Cooperation (WTO) 13
(i)
(ii) Regular Activities 15
(b) South-South Cooperation 15
(i) Global System of Trade Preferences (GSTP) - UNCTAD 15
(ii) Developing 8 (D-8) 15
(iii) Organization of Islamic Conference (OIC) 15
2. Regional Cooperation 16
(a) Association of South East Asian Nations (ASEAN) 16
(i) ASEAN Economic Integration 16
(ii) ASEAN-Dialogue Partner 16
(b) Asian Pacific Economic Cooperation (APEC) 17
(c) Asian-Europe Meeting (ASEM) 17
3. Bilateral Cooperation 17
4. Others 17
D. Investment Treaties 17
IV. TRADE AND RELATED POLICIES 18
A. Overview of policy and development 18
B. Trade developments and policy 18
1. Developments 18
2. Tariff policy 19
3. Tariff Quotas 19
4. Tariff Exemptions or Concessions and Duty Drawbacks 20
5. Non-tariff measures 20
6. Incentives 20
Page
C. Sectoral policies 21
1. Agriculture 21
2. Fisheries 22
3. Oil, gas and minerals 23
4. Manufacturing 23
5. Services 24
V. FUTURE DIRECTIONS 24
A. Economic Perspectives 24
B. Government Programmes 25
C. Constraints, Challenges And Opportunities 25
I. introduction
1. Since the previous Trade Policy Review in 2003,
2. Political and institutional reforms are central to the modernization of the economy, and in the last ten years
3. Consistent with its broad approach to modernising the economy, the Government of Indonesia is also progressing on trade policy. Tariffs – now the main trade policy instrument - are in the process of being lowered and made more uniform in line with the ASEAN Tariff Harmonization Program. As a consequence of these changes and the deeper integration in the regional and the world, the overall import weighted applied MFN rate has come down to a moderate 8.3 per cent in 2006,[1] demonstrating the openness of the Indonesian economy. Moreover, non-tariff measures are continuing to be reduced and eliminated. Agriculture, critical to the livelihood of a large part of the Indonesian population, has started to benefit from a revitalization programme providing support for infrastructure, financial services, research and development and institutional reform. Industrial policy is oriented to fostering cluster groups, with selective use of incentives to support the development of
4. In international trade relations,
5. High among the Government’s priorities is to continue to build on the existing reforms, further lifting economic growth to increase employment opportunities. Among the newer reforms, investment legislation that was approved by the legislature on
II. ECONOMIC ENVIRONMENT
A. Main Economic And Policy Developments
6. Since the previous Trade Policy Review of Indonesia, the Government has been carrying out its own economic reform package, following completion of the IMF reform program in 2003. This has taken place against the background of a series of devastating natural disasters, including the tsunami of December 2004 in Aceh and Nias, the large earthquake in Yogyakarta and Central Java in May 2006 and other smaller but also very destructive earthquakes in Nias, Papua, West Sumatra, Nusa Tenggara, North Sulawesi, the mud volcano in East Java that has been flowing since May 2006, the July 2006 earthquake and tsunami in West Java and floods which hit various parts of Indonesia in the early part of 2007. In addition, avian influenza has already claimed many Indonesian lives.
7. The economic reforms are being implemented within the overall framework of the Agenda for National Development for 2004-2009, which has three main goals, namely i) A Safe and Peaceful Indonesia, ii) A Just and Democratic Indonesia, iii) A Prosperous Indonesia. With regards to the agenda for enhancing the prosperity of the people, the main target is to reduce total number of the poor population and lower unemployment. To attain these targets, the Indonesian Government under President Susilo Bambang Yudhoyono and Vice-President Yusuf Kalla created a "cut-through" strategy: i) to accelerate economic growth (pro-growth); ii) to create employment (pro-job) and reduce poverty (pro-poor); and iii) to revitalize the agricultural sector.
8. In order to accelerate economic growth, in 2005 the Government announced several refinements of policy to impart great dynamism to the economy and to cope with external pressures, such as the oil price rises and the increase of interest rates. The modifications extended to energy, monetary, fiscal and investment policies. In the energy area, the government outlined its intention to reduce fuel demand and encourage the progressive development of new energy sources such as bio-fuels. The specific measures taken covered: i) the adjustment of the fuel price for the industry and mining sector with the market price, ii) economizing the use of fuels in government activities, iii) the adjustment of overall fuel prices; and iv) the accelerated the reduction of fuel usage by electricity power plants. Cuts were also made in fuel subsidies, but these were offset by the unconditional cash transfer programme (UCT) to reduce the impact of the changes on the poor, although this is to be modified later this year to a cash for work program and a comprehensive program to improve the welfare of the poor people such as in the areas of education and health. Fiscal incentives were also introduced to help industry, including by strengthening competitiveness, improving the business climate and compensating workers. The incentives, listed in the October 2005, package involved changing the value added tax status of primary products to non-taxable products, and the waiver of customs duties for several industrial inputs.
9. These adjustments, together with interest rate increases, were intended to put fiscal and monetary policy on a solid footing, but they also occasioned a slow down in the economy in early part of 2006. This was partly offset by export growth that reached 17.6 per cent, and recovery was evident in the latter part of 2006, with growth accelerating to 6 per cent in the last two quarters, bringing the rate of growth of the economy to around 5.5 per cent for the year as a whole. Inflation, which had surged to 17.1 per cent in 2005 (when fuel prices had increased by more than 100 per cent), was curtailed to 6.6 per cent by the end of 2006 (2 percentage points below the targeted level). Inflation stabilization and relatively good performance in the balance of payments, with a surplus of 3.7 per cent of GDP and a historical high of foreign exchange reserves of US$43 billion (even after early repayment of $7.8 billion in debt to IMF) , contributed towards a stable Rupiah exchange rate throughout 2006. However, despite these encouraging indicators, renewed growth has not been matched by similar growth in employment opportunities, and the Government is making an effort to lift growth to around 6.3 per cent in 2007 to help address this problem. This should also contribute to poverty alleviation, as should a number of other specific policies, as discussed below.
B. Financial Sector Restructuring
10. Financial sector reforms are aimed at overcoming the problem of access to capital and finance needed as working capital and for growth. While large businesses have access to international financial markets, small and medium-size business face high domestic interest rates. To help overcome this problem, Government and Central Bank have been working to drive down inflation to single-digit levels, which it achieved in 2006, following an increase in 2005. This should pave the way for a further decrease in interest rates that will also provide a stimulus to growth.
11. The Government is seeking to address weaknesses in the financial market by diversifying the sources of funding available to the real sector, both from financial institutions and capital markets. In addition, the Government is also taking steps to strengthen financial sector stability to re-build public and market confidence in the Indonesian financial sector, decreasing the risk of any recurrence of the financial crisis. The Government is also seeking to promote competition between banks, other financial institutions and the capital market to improve the overall efficiency of the financial sector. If successful, the competition will drive down current inflated margins, and hence the cost of finance. The financial sector package, aimed at assisting in this process, is targeted mainly at regulatory and institutional reforms. A follow up financial sector package, being prepared in early 2007, is directed at increasing access to finance and lowering the cost of finance.
C. Investment
12. While the Government plays a key role in the provision of public services, including health, education, infrastructure, etc., private sector investment, including inward foreign direct investment, is important for the modernisation and greater efficiency of the economy. Therefore, investment policy has been an important component of the policy changes that were introduced in 2005. These reforms, intended to improve, the country’s investment climate cover are contained in three policy reform packages launched in the first half of 2006. The investment policy package (February 2006) covers the following areas: i) general investment policies; ii) customs; iii) taxation; iv) the labour market; v) small and medium-size enterprises (SMEs). The Infrastructure Development Package (March 2006) provides the policy framework for public private partnership and the risk sharing to enable acceleration of the building of infrastructure with private sector participation. The Financial Sector Reform Package (July 2006) aims at improving coordination between the Government and the central bank, Bank Indonesia, and to continue reform steps to strengthen the banking industry, non-bank financial institutions and the capital market.
13. A number of areas in each of these reform packages have been completed such as the risk sharing framework for infrastructure; the revised Customs Law; and most recently the Investment Law which was passed in Parliament on
14. In the last three years domestic investment has risen sharply, doubling between 2002 and 2005 (from Rp.26 trillion to Rp. 50.6 trillion). In 2006, realized domestic investment until November amounted to Rp 153.9 trillion and realized foreign investment amounted to Rp 42.8 trillion (with
D. Infrastructure
15. Apart from the general objective of improving the investment climate, the reforms also targeted the challenges in improving infrastructure. Government of
16. Despite improved public finances, the Government does not have the economic capacity to finance all necessary infrastructure development. It is estimated that around 60 percent of funding needed for infrastructure building will need to come from the private sector. To deal with this budget constraint, Government has adopted some strategies such as promoting Public Private Partnerships (PPP). Under this strategy, a risk sharing framework has been designed with the private sector, and funding has been allocated in the 2006 budget for the initial capital for an infrastructure fund which is expected to be supplemented by other investors to increase the pool of funds accessible for infrastructure development by the private sector. This strategy will also enable Government to focus its efforts to improve infrastructure development in lagging areas of the economy such as eastern part of
E. Decentralisation And Special Economic Zones
17. The decentralisation process that started in 2001 is intended to extend economic progress to
18. The Government is also taking action to create a number of special economic zones which can also be islands of excellence and best practices. That is, whilst the process of economic and institutional reforms will be achieved in the medium term, in the shorter term, the government will create the best practices in terms of policies, institutions and investor service in these geographically defined zones. There are areas with existing clusters of industries or infrastructure where it is possible to create best practices in term of policy, in local government and quality of institutions. These will have a single zone authority responsible for regulatory framework, licensing and dealing with investors. It will involve working closely with local government which will play the key role within the overall framework set by the central government.
III. INSTITUTIONAL FRAMEWORK
A. Political Change
19. Since 1998,
20. The highest representative body at national level is the People’s Consultative Assembly (MPR). Its main functions include supporting and amending the Constitution, inauguration of the President and the formalization of broad outlines of state policy. The MPR contains two houses: the House of Representatives (DPR) with 550 members and the Regional Representatives Council (DPD) with 168 members.
21. The DPR passes legislation and monitors the executive branch. Members of the DPR are elected for five-year terms on a proportional representation system from more than two thousand electoral districts. Since 1998, the DPR's role has increased markedly, including a total control of statutes production without executive branch interventions, all members are now elected The DPD is a new chamber, based on the 2001 constitution amendment. Its members are representatives from the thirty-three provinces; each has four non-partisan representatives. The DPD represents regional areas within national politics and its role is restricted to bills concerning matters of regional management.
22. As a unitary state, a political power was highly concentrated at the national government. Through the decentralization process, however, the central government has devolved significant powers to regional government with a view to extend the regional government power and responsibility in fostering social and economic development. Between the years 2004 and 2009, all 480 provincial governors, heads of districts and mayors will be directly elected. This is intended to improve the political and economic accountability of the local public officials to their constituents.
23. One of implications of those democratic reforms is on the policy formulation process. Since a policy needs to be debated in order to achieve consensus across the country, policy formulation process may take a longer time. Nevertheless, the process has created a greater sense of ownership of all stakeholders on the importance of a policy.
B. Institutional And Legal Reform
24.
25. A central element is the determination of the Government to stamp out corruption. To this end, the Corruption Eradication Commission (KPK), established under Law 30/ 2002, has extensive powers to deal with corruption, including wire-tapping, blocking the travel of persons being investigated, inspection, blocking of bank accounts and prosecution. It can cut red tape to investigate any national public servant suspected of being involved in corruption. Furthermore, Indonesian Presidential Decree Number 11 year 2005 has set the Establishment of Special Team to fight Corruption, which has been able to carry out people’s concerns to fight against corruption cases. Its activities have led to jailing of officials, including at senior levels.
26. In its efforts to create economic stability and a conducive investment climate, the Government of Indonesia recognizes that development and enforcement of the protection of IPRs which would encourage creativity and innovation is fundamental. Therefore, the Government of Indonesia, under Presidential Decree Number 4/2006, has created a special task force on Intellectual Property. Several significant efforts have been taken since the decree was issued. The National Team is now coordinating reports on IP-related data/activities from various government institutions including the national police, customs, the Attorney General’s Office, the Supreme Court, the Ministry of Industry, the Ministry of Trade, and the Ministry of Agriculture. The National Team has determined that all related activities on IP shall support the national policy on the strengthening of IP enforcement system. This concerted effort has resulted in the downgrading from Priority Watch List status to Watch List status imposed on
27. In relation to government procurement, the Government of Indonesia has introduced new procedures to improve the transparency and efficiency of procedures and to foster competition in bidding for Government contract (Presidential Decrees 80/2003 and 8/2006). The procedures covered by the decree relate to transparency, efficiency and effectiveness, fairness and accountability, including by simplifying bid procedures and acquirements and encouraging post qualification method for open tender. The decree obliged to all government agencies to declare Government project plans and announce the tender invitations. Widespread procurement public notices are expected to increase the number of procurement participants, to enhance the quality of procurement process and to achieve more accountability and reliability of the process and simultaneously obtain government expenditure savings, as a result of more options to gain the best tender. The President Decree also allows procurement participants to file complaints and/or claims if there is any indication of corruption, collusion, nepotism and violation of contracts. The decree urges that moral integrity and responsibility along with technical qualifications and capability of procurement professionals is essential to conduct procurement operations, and this is enforced through a training and examination programme. Presidential Decree 8/2006 requires agencies to announce projects, invite tender, and provide related information in one national newspaper, and by 2008 the announcement of tenders will also be publicized in a national procurement website currently under development.
28. The Government is developing an Electronic Government Procurement System (E-GP) to enhance transparency, accountability, and efficiency in the procurement system, and by reducing opportunities for corruption (Presidential Instructions 5/2003 and 5/2004) on the subject of Electronic Government Procurement (E-GP). In early 2008 the Government will conduct an E-GP pilot project in several line ministries and selected provinces/local governments. In the future, the E-GP will be progressively implemented nation-wide.
29. The government has been modernizing customs administration, to facilitate trade. Under this programme the time for customs clearance has been greatly reduced. The customs administration has accelerated the restitution of duties on imported goods that are used in exports and established a priority channel for producer-importers as well as qualified general importers. The Government of Indonesia intends to improve its business environment and strengthen business competition by enhancing trade facilitation. This includes improving the transparency and efficiency of export, import and customs procedures by establishing a National Single Window. On Line Certificate of Origin facility was also launched in January 2006 as an integral part of the National Single Window. In 2006 the
30. In 2002, the Directorate General of Taxes (DGT) launched a modernization programme for tax administration. The essence of this programme is to implement the spirit of good governance through the application of a transparent and accountable tax administration system by utilizing the reliable and the modern information technology. The modernization has three major purposes: i) to achieve the high level of compliance; ii) to achieve the high level of public confidence to tax administration; and iii) to achieve the greater productivity of tax personnel in ensuring the compliance of taxpayers. To this end DGT has also implemented a public awareness campaign. Among the efforts to improve its services, DGT is simplifying administrative requirements and filing procedures, and modernizing tax offices. It also plans call-centres in district tax offices. DGT is progressively introducing electronic filing to reduce personnel contacts with official and reduce the opportunities for corruption.
31. Concerning income tax, a draft law proposes, inter alia, the reduction of income tax rate for individual and corporate taxpayers. Minister of Finance Regulation No. 137/PMK.03/2005 raises the amount of exempt income as deduction of net taxable income for calculation of Individual Income Tax as well as Withholding Income Tax.
32. The key steps in the investment reform package, noted in the previous chapter, cover: general policies; customs (see above); tax rates, structure and administration; labour market reform and programmes to assist small and medium-size enterprises.
33. Competition policy is an important part of the Government reforms, intended to improve the functioning of the Indonesian economy. In recent years there has been considerable progress in deregulating international trade policy in
34. Standards. The National Standardization Agency of Indonesia (BSN) has the responsibility for developing and promoting National Standardization in
35. Considering the importance of standards for trade facilitation,
36. In the context of WTO, BSN acts as a Notification Body and Enquiry Point for
37. In the field of conformity assessment,
C. International Trade Relations
38.
1. Multilateral Cooperation
(a) World Trade Cooperation (WTO)
(i) Doha Development Agenda
39.
40. For
41. In NAMA
42. In services,
43. The protection of intellectual property rights is crucial for an environment that is conducive to innovation. However, it is important that this be seen in the context of the greater need to protect welfare, as in the case of access to affordable drugs and technologies, as well as providing some protection to traditional knowledge. There is a need in the WTO to resolve the issues of the relationship of the TRIPS to the Convention on Biodiversity and the extension of Geographical Indications to products other than Wines and Spirits. The objective of
44. In the issue of TRIPS and Public Health,
45. The different needs and capacities of developing countries have been recognised in the GATT and WTO since 1955 as the basis for special and differential treatment. Addressing these development needs and capacities was rightly central to the Doha Ministerial Declaration, and
46. Trade Facilitation.
47. Trade and Environment.
(ii) Regular Activities
48.
49. The Indonesian government has adopted trade remedy policy in the form of anti-dumping, subsidy and countervailing duties, as well as safeguards:
- Government regulation number 34 dated
- Presidential decree number 84 dated
On anti-dumping measures, KADI (Indonesian Committee on Anti Dumping) has investigated 34 cases between 1996 and 2007, and cases have been terminated. The Indonesian Government has imposed the duties in 14 cases, of which six have been imposed since January 2004 (Calcium Carbide, Carbon Black, Uncoated Writing, Paracetamol, Wheat Flour HS, and Cavendish Bananas).
50. The Indonesian Government has taken serious steps to respond to allegations of dumping raised by foreign government against
51. On safeguard measures, the Indonesian government has imposed a safeguard duty on Ceramic Tableware and terminated the Matches case as well as thee Cast and Rolled Glass case. The Authority which conducts global safeguard investigations is KPPI (Indonesian Committee on Safeguards).
(b) South-South Cooperation
(i) Global System of Trade Preferences (GSTP) - UNCTAD
52.
(ii) Developing 8 (D-8)
53. As a member of Developing 8,
(iii) Organization of Islamic Conference (OIC)
54.
2. Regional Cooperation
(a) Association of South East Asian Nations (ASEAN)
(i) ASEAN Economic Integration
55. Twelve priority integration sectors were identified for accelerated economic integration (Agro based, wood based, Textile and Apparel, Automotive, Electronic, Healthcare, e-ASEAN, Tourism, Rubber based, Air Travel, Fisheries and Logistic Services). Steps towards policy integration include in the ‘horizontal’ areas (e.g., customs, including the ASEAN Single Window); standards; rules of origin; non-tariff measures; and the liberalization of trade in services.
56. At the 12th ASEAN Summit, the Leaders affirmed their strong commitment to accelerate the establishment of an ASEAN Community by 2015 as envisioned in the ASEAN Vision 2020 and the ASEAN Concord II and signed the Cebu Declaration on the Establishment of ASEAN Community by 2015. In particular, the Leaders agreed to hasten the establishment of the ASEAN Economic Community by 2015 and to transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and freer flow of capital. Several Member Countries took on the coordinator role for each sector. Each priority integration sector has a roadmap, which combines specific initiatives of the sector and the broad initiatives that cut across all sectors such as trade facilitation measures. Integration of Services Liberalisation towards 2015.
(ii) ASEAN-Dialogue Partner
57. ASEAN is seeking to establish RTAs with partners such as
58. The Framework agreement between ASEAN and
59. Other than FTAs negotiations, ASEAN also involved in cooperation under Trade and Investment Framework Arrangement (TIFA) with United States, Trade and Investment Framework (TIF) with Australia, and in the process of establishing ASEAN-Canada Trade and Investment Cooperation Arrangement (TICA).
(b) Asian Pacific Economic Cooperation (APEC)
60.
(c) Asian-Europe Meeting (ASEM)
61. As a member of Asian-Europe Meeting (ASEM), Indonesia will take part in implementing the Leaders’ vision of deepening the partnership to face future challenges, broadening the perspective through marking out focussed areas for action, and reinforcing the institutional mechanism by forging a stronger partnership as outlined in the Helsinki Declaration.
3. Bilateral Cooperation
62. In line with its policy of establishing closer economic relations with countries in the Asian region,
63. Talks and consultation on a range of trade and investment issues are also being held with major developed countries i.e.
4. Others
64.
65. Considering the importance of human resources and infrastructure development,
(D) Investment Treaties
66.
IV. TRADE AND RELATED POLICIES
A. Overview of policy and development
67.
68. With regard to the structure of the Indonesian economy, services now make the largest contribution to GDP, around 40 per cent in recent years. Manufacturing is second at some 28 per cent, while the share of agriculture has fallen form 15.5 per cent in 2002 to 12.9 per cent in 2006, and mining and quarrying has grown for 8.8 per cent tot 10.6 per cent in the same period. Construction has grown slightly to 7.5 per cent, while the electricity, gas and water sector has remained stable at around 1 per cent. Clearly services and industry are now major employers, particularly in the urban areas, and any sectoral policy changes need to take account of the potential impact on employment. However, the agricultural sector is also critical for the poorest regions of the country. The sector has an important role in the provision of the most basic food of the nation, rice, but it also has a large element of subsistence farming, and, overall, the agricultural sector is a net consumer of rice.
69.
B. Trade developments and policy
1. Developments
70. Since the last Trade Policy Review,
71. Oil and gas exports reached some $2.2 billion in 2006, an increase of 17.6 per cent over the previous year. (In 2005 the increase was partially associated with world price increase of crude oil, which also triggered an increase in the value of oil and gas imports since
72. In the light of reduced expectations for the growth of the world economy, the Government target for non-oil export growth in 2007 is 14.5 per cent. Reaching this target will require special effort, in particular on trade-related infrastructure, but much depends on the external environment, such as the economic growth of major markets and commodity prices.
2. Tariff policy
73. To fulfil its commitments in the Uruguay Round,
74. To accommodate national economic interests, however, some products have been excluded from the general schedule of tariff reduction program. These are mainly in the agricultural, chemicals, plastics, metals, alcoholic beverages and automotive sectors, as well as products related to moral and security items. The tariff reduction schedule for these products was stipulated in the Minister of Finance Decree No. 542/KMK.01/1997.
75. The implementation of the tariff reduction program has changed Indonesian tariff structure significantly. In 1995, the average tariff rate was 15.6 per cent, with rates ranging from 0 to 10 per cent covering 3,832 tariff lines (or just over half of the total of 7,386 tariff lines). In 1996, the year when the program was first launched, the average rates declined to 13 per cent, with an expansion of the rates lying in the 0-10 per cent range to 56 per cent of lines. By the end of the tariff reduction program (2003), the average rates had fallen to 7.2%, while rates lying in the 0-10 per cent range had increased to 83.4 per cent of lines.
76. In 2004, one year after the tariff reduction program ended,
77. With the new classification, the total tariff lines increased drastically from 7,540 in 2003 to 11,163 in 2004. As a consequence of the technical classification changes, tariff rates also changed, and the average tariff increased to 9.9 per cent, with rates between 0 and 10 per cent covering 8,387 tariff lines (75 per cent of the total of 11,163 tariff lines).
78. As a continuation of the tariff reduction program,
3. Tariff Quotas
79. Currently,
4. Tariff Exemptions or Concessions and Duty Drawbacks
80. To increase the efficiency and the competitiveness of domestic industries,
81. In addition,
5. Non-tariff measures
82. In order to improve the functioning of the economy in line with its dynamic comparative advantage and make it more responsive to long-term international price movements, Indonesia has also been progressively eliminating non-tariff measures, in particular the use of import licences which is currently limited to dangerous materials; explosives; ozone-depleting substances; alcoholic beverages; salt; propylene copolymers; lubricant; clove; textiles and textile products; nitrocellulose; machines and machinery; optical discs; and rough diamonds.
83. The most important measures still in place are: i) the regulation on the timing of the import of rice and sugar: ii) verification and other requirements for the export of tin and granite; and ii) the ban on the export of logs and sand.
84. The rice import regulation is intended to provide support for poor farmers in the face of distorted world prices as a result of subsidies by some rice-exporting countries, but it is periodically relaxed at times of shortage, that is during non harvest periods, to stabilise prices.
85. The ban on the export of logs is used to support
6. Incentives
86. Concerning central and local authorization of investments, the Ministry of Domestic Affairs is now preparing the amendment to Government Regulation No.25 Year 2003. This process is expected to reach its final stage coinciding with the Investment Law Bill that has just been approved by the legislature.
87. To anticipate challenges that will be faced by Indonesia such as global competition and as mandated in Law No. 32 year 2004 regarding Local Government (an amendment of Law No. 22 year 1999), the Government is now preparing a Government Regulation Bill (GRB) concerning the Guidance for Granting Incentives and Investment Facilitation in Local Area. A draft is currently being discussed with affected sectors.
C. Sectoral policies
1. Agriculture
88. Agriculture plays an important role in the Indonesian economy, providing employment for over 38 million people. There is also an important linkage to poverty, since the majority of
89. To further develop the sector, the Government launched the agricultural revitalization programme in 2005. A set of policy instruments on rural infrastructure, financial services, research and development and institutional developments are used in support of this programme. Under the programme, the Government provides subsidies to increase production on food crops such as on fertilizers and hybrid seeds. Subsidized credit to smallholder farmers (“food security credit”) is intended to motivate smallholder farmer to have more access to commercial banks, sharing risk between the Government, the commercial banks and the farmers.
90. As noted the Government regulated rice imports in 2004, with the main restrictions operating during harvesting. BULOG as a state-owned agency procures and buys rice from farmers using the HPP (Government procurement price). BULOG, however, has the capacity to absorb 5 to 6 % of the total domestic rice production. BULOG also distributes rice to the needy and poor families nation-wide under the RASKIN (Rice for the Poor) programme, funded with state finance amounting to IDR 4,000 billion a year or around $435 million a year. The RASKIN program distributes 15 to 20 kg of rice per poor household per month. There are 10.8 million households classified as eligible, as real food support to maintain food security of poor households. The Government also reserves a rice stock in BULOG for emergencies and price stabilization within the country.
91. The Government switched from ad valorem to specific tariffs for sugar in 2003. Currently, the tariff is Rupiah 550 per kg of raw sugar and Rupiah 700 per kg for refined/white sugar. The Government regulates sugar imports to protect domestic farmers from low prices, particularly during the harvesting periods when prices tend to fall. The importer registration mechanism is therefore applied to registered importers who have to absorb at least 75 percent of small farmers’ sugarcane. In 2006, the Government restricted the amount of import of sugar to 300,000 tons for the period of November to April.
92. Based on the risk analysis and OIE recommendation on BSE, and in line with the current situation of diseases, a new regulation - Agriculture Ministerial Decree No. 482/Kpts/PD.620/8/2006 dated
93. To prevent fruit fly to Indonesia from other country, Indonesia applied Minister Agriculture Decree No.37/Ktps/HK.060/1/2006 concerning Technical Requirements and Plant Quarantine Actions for the importation into the territory of The Republic of Indonesia of Fresh Fruits and/or Fruit Vegetables which had been notified to the WTO Secretariat with notification no. G/SPS/N/IDN/24 on 18 May 2006. According to above decree,
1 Tanjung Priok Seaport, Jakarta
2 Tanjung Perak Seaport, Surabaya
3 Belawan Seaport, Medan
4 Batu Ampar Seaport, Batam
5 Soekarno-Hatta International Airport, Jakarta
6 Ngurah Rai International Airport, Denpasar
7
94. Government of
2. Fisheries
95.
96. In order to improve fisheries management, the Government issued Government Decree number 17/2006 on Fisheries Management. The Government Decree applied new scheme of fisheries management which eliminates foreign vessels from operating in the Indonesian Economic Exclusive Zone or build Land Based Industry through Integrated Fisheries Investment Management Unit in
97. However, productivity in the sea-fishing industry has remained low while over-fishing in some areas has threatened to deplete fish stocks. Illegal fishing, by both foreign and domestic operators, also has been a serious problem and causing environmental damage. Therefore in order to conserve fish stocks, the Minister of Marine Affairs and Fisheries has published Ministerial Decree number: KEP.34/MEN/2006 regarding the establishment of a coordination team on illegal fishing measures and fisheries processing industry revitalization.
3. Oil, gas and minerals
98. While
99. A noted in the previous TPR, the oil and gas sector has been liberalised under enabling legislation passed in 2001, and a number of foreign firms have entered the oil and gas market for exploration, production and retailing. The Government is also privatizing Pertamina, the state oil and gas company.
100. Except for tin, commercial mining is relatively unimportant in
4. Manufacturing
101. Prior to the financial crisis of 1997-98,
102. The cluster theory gives prime importance to interaction among local firms and institutions whereas the global value-chain theory accords prime importance to interaction with global buyers. Under the cluster approach, the main objective is to promote collective efficiency or competitive advantage derived from externalities economies and joint actions. This is achieved through a product upgrading in the context of inter-firm interactions such as pool of skilled workers, specialized inputs and quick dissemination of knowledge within the cluster. Small firms in clusters are able to overcome some of the major constraints due to a lack of specialized skills, difficult access to technology, inputs, market, information, credit, and external services. Clusters overcome the constraints by facilitating interactions among firms, allowing resource sharing and transfer of skills and knowledge. Clusters emphasize the importance of geographical proximity and networking also to reduce shipping and transaction cost.
103. In accordance with the National Medium-term Development Programme (Presidential Regulation 7/2005), the focus is on strengthening and developing core clusters in the following areas: food and beverages, fishing, textiles and textile products, footwear, palm oil, timber (including rattan and bamboo), rubber and rubber products, pulp and paper, electrical engineering, and petrochemical engineering. The strategy involves strengthening linkages at all value chain levels in a cluster of related industries, improving value added along the value chain, improving resources employed by the industry, and developing small and medium-size industries. This is to be achieved by promoting a conducive business environment (as described in earlier sections), determining prioritized industries and their spread, developing industries within the cluster approach and developing technological innovation capability. Applying this approach is expected to induce industrial sector growth of the order of 8.5 per cent annually in the medium term.
5. Services
104. Services account for around 40 per cent of GDP, but exports of services only account for 7 per cent of total exports of goods and services, a net deficit of around $20 billion. This performance is less than satisfactory, and Indonesia recognizes that having access to efficient services is important to the good functioning of a modern economy, including as an important input into the production and trade of traditional exports of goods. Access to basic services is also important for human development. In this respect, the WTO framework on services should not erode the flexibilities that are characteristic of the GATS and should allow developing countries to open up their services sectors at a pace that is consistent with their level of development.
105.
106. Supervision of services monopolies is intended to ensure security, efficiency and quality of services at a fair price, which also provides for maintenance and a reasonable return to the service supplier.
107. Development of an efficient financial services sector has been a particular preoccupation of the government for some time, but particularly since the financial crisis. This sector is important as a source of finance for small and medium-size enterprises, which do not have easy access to international sources. Regulation of financial services is intended to ensure proper prudential supervision, security for account holders, and to help promote the real sector of the economy.
108. Other services that are particularly important for
V. FUTURE DIRECTIONS
A. Economic Perspectives
109. The economic outlook for
110. Economic growth in 2007 and 2008 is expected to reach 6.3% and 6.8% respectively. The main source of growth in the next two years is expected to come from revival of investment which in turn will expand the capacity of exports, as well as consumption growth and to a lesser extent compared with previous years, government spending.
B. Government Programmes
111. Progress has been made in the Government’s reform programme as already indicated above in terms of a number of new laws and regulations, as well as an ongoing process of changing legislation and regulations which are in different stages of implementation. Further reforms, for example in the area of investment, are also under way or are being considered in the light of developments. As part of the effort to improve efficiency and public finances, further privatization of state-owned enterprises is being considered, but it will take time to prepare some of these businesses for privatization, and due account will need to be taken of the social consequences as well as the development implications, for example in the areas of public services such as transport and communications.
112. There is a need for further efforts to modernize and develop the real sector. As noted in the report, efforts are being made to revitalize the agriculture and industrial sectors, while the Government also recognizes that an efficient services sector is also a key to the development of international competitiveness. From this perspective, its already open trade regime should be seen as a complement to other domestic policies, while the Government is moving carefully but progressively toward even greater opening up of the economy by reducing tariffs and non-tariff measures, facilitating trade and encouraging investment. In this the Government is confident that the new Investment Law and the implementing regulations, as well as the other components of the investment package, will contribute in an important way towards improving the investment climate. Apart from its effort to improve the institutional and legal framework, the central Government needs to work more closely with the regional governments and the private sector in a number of areas, and to further develop an enabling environment for business, encouraging domestic as well as foreign direct investment.
C. Constraints, Challenges And Opportunities
113. The major internal challenges that are now faced by the Government of Indonesia are in implementing its reform programme to bring improvements to the quality of life for all its peoples. In this respect, some of the greatest needs are in the areas of health and social programmes, education, and physical infrastructure, and the challenge is to deliver improvements across its diverse regions. Despite the improved economic performance, lower debt and an improved reserve position,
114. Externally, the constraints facing
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[1] The duty collected/import value ratio is 2.2 per cent in 2006, which is comparable to the weighted average of applied MFN and preferential rates.
[2] See Communiqué of
wto/G33_Communique_21March07_.pdf.
[3] Document WTO G/L/223/rev. 13,