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Down to Earth IFIs Factsheet Series

No 24, July 2002



IFIs in Indonesia

This series of monthly factsheets on International Financial Institutions (IFIs) will include information on the World Bank Group, the International Monetary Fund (IMF) and the Asian Development Bank (ADB), focussing on their involvement in Indonesia.


A Summary of INFID's Position Paper on the CGI 2002


The International NGO Forum on Indonesian Development (INFID) has released its position paper prepared for the coming Consultative Group on Indonesia (CGI). INFID is an international NGO comprised of approximately 100 members 60 from Indonesia and 40 from countries that are members of the CGI. INFID monitors bilateral and multilateral loans as well as the pledging sessions for new loans. The CGI is the official forum of Indonesia's creditors and donors and is chaired by the World Bank (for further background and information on the last CGI meeting, see DTE Factsheet 19, Special CGI 2001 Edition).

An INFID position paper on the CGI 2002, entitled "Comprehensive Strategies Needed for Indonesia's Recovery", was published in June 2002. This early release, four months before the CGI meets in November 2002, gives enough time for the CGI members to incorporate it in their position and work plan.

INFID raises seven key issues in the position paper that are believed to be essential to Indonesia's economic recovery and to the continuation of the democratization process. They are:

  -   Reform of the CGI
  -   Indonesia's indebtedness and the need for a comprehensive solution
  -   Poverty
  -   The progress of military reform
  -   Forestry
  -   Decentralization
  -   Privatization

Reform of the CGI

INFID indicates that the CGI has a history that needs to be acknowledged and resolved, including the cosy relationship between the Indonesian government and CGI members that resulted in: (a) an absence of supervision and accountability on the part of the donors and creditors, (b) the corrupt use of many loans and grants by the Indonesian government, and (c) the CGI's failure to effectively address the complete absence of public participation from the decision making process.

In INFID's view, the CGI simply functions as an 'extended hand' of creditors. The CGI has not shown genuine partnership with the government and the people of Indonesia. The Indonesian government commits to wide-ranging reforms to impress donors and creditors and convince them to pledge and disburse funds. There is also a problem of incoherence and inconsistency between different donors' programs and policies on Indonesia. Another problem is 'ownership' of the CGI which is in the hands of the World Bank and the International Monetary Fund (IMF) and the subordinate position of the Indonesian government in the CGI.

INFID recommends that the CGI reforms its organizational and decision-making structures by creating an independent and multi-stakeholder panel or committee for Indonesian recovery and poverty reduction. This would produce analyses and make recommendations on alternative policies and programs on how to achieve economic recovery and reduce poverty. The panel's report would be submitted to CGI for consideration and adoption. The panel would consist of Indonesian and international experts, the Indonesian government, representatives of donor countries, and independent civil society representatives from inside and outside Indonesia. The CGI also needs to strengthen monitoring and evaluation practices, including independent assessments of the social, environmental, and economic impacts of CGI member loans and grants to determine whether the efforts have benefited the poor and to root out corruption. INFID also demands that the CGI declare that all CGI member loans and grants will be untied from 2002 forward. This is to ensure that "aid" will really mean "aid" and not tools for donor countries to protect and increase exports of their own goods and services.

It is also necessary for the CGI to assess the sustainability and legitimacy of Indonesia's debt burden and agree to support and participate in a fair and transparent debt arbitration process to seek sustainable and equitable solutions to the mounting debt problems.

Indonesia's indebtedness and the need for a comprehensive solution

Indonesia's debt burden has been building since before the 1997 financial crisis and rose significantly after the crisis to around USD 136 billion. The World Bank's Global Development Finance 2002 reports that Indonesia's status is "Severely Indebted Low Income Country" (SILIC), similar to Afghanistan, Pakistan, and Nigeria. Even though Indonesia received reschedulings from the Paris Club, it has been rejected for any consideration for debt relief, based on the assumption that the debt problem is one of liquidity rather than solvability.

INFID recommends that the Indonesian government, Indonesia's creditors, and members of CGI should incorporate into the assessment of debt sustainability the impact of debt obligations on poverty and human development, with the underlying assumption that external debt repayments should be seen as secondary to human development expenditures. The Indonesian government should request, and creditors and members of the CGI should consider seriously, providing debt reduction to Indonesia. INFID also calls on the Indonesian government, creditors, and CGI members to undertake an examination and audit of the debt incurred by Indonesia during the Soeharto regime 1967-1999 for the purpose of determining the legitimacy of such debt and identifying the portion that was "odious" or "criminal".

In INFID's opinion, the Indonesian government and CGI policies and actions on domestic debt should be governed by the principles that (a) there shall be no conversion of private debt into public debt, and (b) there shall be burden-sharing by the private sector, i.e., the private sector should share that part of the debt burden for which it is responsible. Given the enormous cost of financial restructuring on the public sector, the performance of the Indonesian Banking Retructuring Agency (IBRA) and its asset sales must be reconsidered on the basis of these principles. In addition, the Indonesian government should undertake firm and appropriate legal action against debtors that violate agreements or refuse to cooperate with the government in its efforts to settle outstanding obligations.

INFID says the Indonesian government, with the support of CGI members, should adjust banking sector reform to minimize the burden on the public sector. The second and third re-capitalization and the resulting uncertainties in the financial system destabilized the system, and had serious negative effects on the Indonesian population and must not be undertaken again.

INFID also calls on the Indonesian government, with support of CGI members, to end immediately the blanket guarantee policy and revoke its legal basis (Presidential Decision (Keppres) No 26/1998) and replace it with an insurance system for the banking sector like the FDIC system in the United States.

Poverty

Using the World Bank poverty line standard of USD 2.00 per day, in 2002 55.1% of the Indonesian population is living below the poverty line. This figure is projected to decrease slightly to 49.5% in 2005, still leaving an enormous number of Indonesians in a vulnerable condition. To address this poverty problem, INFID recommends that to ensure coherency and consistency in policies and programs, the Indonesian government and CGI should review the Indonesian government budget and fiscal sustainability based on the human development and poverty reduction goals as mandated by United Nations Millennium Goals (by 2015 half the population should be free from poverty).

To ensure genuine partnership between Indonesia and donor countries, INFID is also calling on the CGI to transform its current working group on poverty reduction into a Partnership for Poverty Reduction and Social Exclusion comprised of representatives of the Indonesian government and donors. The Partnership's mandate would be to review the current economic policies (monetary and fiscal) to ensure that efforts to reduce poverty and social exclusion are adequately financed. The Partnership would also review and evaluate official development assistance (ODA) and loan-based projects from a poverty reduction and human development perspective. It would also evaluate the effects of tied aid on economic and social development in Indonesia.

The progress of military reform

Significant changes in the defence sector and the reduction of the political role of the military (TNI) in Indonesia are prerequisites for long-lasting reform in Indonesia.

Some good progress took place from mid-year 1998 to the end of 1999, such as the separation of the TNI from the police, abolishing of the military's dual role in civilian institutions such as Parliament, and public commitments from the TNI to obey civil government authority. However, since 2000, there have been more setbacks than there has been progress. These include: the June 2002 proposal by the Minister of Defence that TNI members shall have the right to serve as members of Parliament, the maintenance and extension of territorial commands, the problematic tribunal on East Timor, appointments of human-rights-violating military officers to senior positions, disrespect for civilian institutions on accountability issues, and the military's obstruction of the reform process by supporting communal conflicts.

INFID therefore recommends that, before providing any assistance to the military, donors must seriously consider the effects and implications of such assistance on the expanding role of the military and the fact that such assistance will further strengthen the military in its already dominant political role. INFID further emphasizes that any support strategy for the military must take into account the overwhelming inclination of the TNI to prioritize the receipt of military aid over any efforts to improve its political legitimacy and accountability to the people of Indonesia. A prerequisite for military assistance of any kind to the Indonesian government should be the demonstration of genuine changes in TNI and the defence sector as a whole, including substantial reform of the TNI. This must include a demonstration that civilian authorities and democratic processes exercise control over the military. Bilateral support for efforts in the field of internal security and anti-terrorism must be based solely on the existence of the rule of law and principles of law enforcement. All off-budget spending must be brought under the control of civilian authorities, and military officials involved in open or clandestine business activities should be made accountable to the government.

Forestry

CGI members already have much experience working with Indonesia on forestry issues, including the CGI's participation in managing the forestry sector. What has been done so far since the first IMF Letter of Intent was signed in January 1998, which incorporated all the recommendations for the forestry sector proposed by the IMF, World Bank, and CGI members, has fallen short of expectations. One of the reasons for this is that the recommendations dealt only with the symptoms, not the roots, of the forestry problem. INFID therefore recommends that the Indonesian government, with strong encouragement and support from CGI members, should implement the Decree of the People's Legislative Assembly (MPR) No. IX/2001 concerning Agrarian Reform and Natural Resource Management. This decree urges the government to implement several policies and measures, including: a comprehensive change in the legal sector, opening access to information on natural resources management to the public, the resolution of conflicts about natural resources on the basis of justice, etc.

INFID also recommends that national and regional bodies need to be established as executing agencies, adopting a mechanism that is open to public scrutiny and that constantly takes into account the needs of decentralisation. The system of forest management involving forest concessions and state-owned forest companies needs to be evaluated and immediately revised. The rights to tenure, ownership, and management of agrarian and natural resources must be reinstated, with priority given to providing indigenous and other local communities the opportunity to assume these rights. Since technical recommendations have not proved a success, policy should be oriented towards making the functions and tasks of the Department of Forestry more efficient. This requires developing a mechanism for achieving consensus between central and regional governments in each of the steps needed to control illegal logging, restructure the industry, rehabilitate the forest, and control forest fire. Given that the executing agency is the regional government, priority should be given to measures to strengthen the capacity and capability of regional forestry agencies. CGI member nations could participate in this process, focusing on regions that have conservation and protection functions.

Decentralization

Decentralization, which has been in effect since 2001, is beneficial only for some people, especially the elites, in resource-abundant areas. It is creating problems in many districts where becoming autonomous is a real challenge, owing in part to a lack of capacity to run district administrations effectively and accountably.

INFID recommends that Law No.22/1999 on Decentralization is supplemented with the necessary governmental regulations to ensure the consistency of regional autonomy. This includes authority for decentralization be ing placed at the provincial level, not the district level; the elimination of uniformity of the bureaucracy at the local level, and restrictions on intervention by the central government.

INFID also emphasizes that the process of decentralization should be based on the principles of transparency and accountability. At the very least, the Indonesian government must produce periodical public reports on the progress of decentralization. It says that the process of decentralization at the district level is one of the main causes for the emergence of horizontal conflicts. Considering the huge impact of these conflicts on several regions (West and Central Kalimantan, Maluku, and East Nusa Tenggara), the assistance program should prioritize the following areas: (a) planning and immediately implementing rehabilitation programs that will reconstruct all infrastructure destroyed by the horizontal conflicts; (b) allocating special funds, either from rich regions or the central government, to implement the plan mentioned above; and (c) reducing the role of groups that are from outside the area, including the military, and moving the process of reconciliation to the local people themselves. The implementation of decentralization has also resulted in the denial of people's rights to manage their natural resources. This in turn exacerbates conflicts over access to and management of these resources. Any assistance program should therefore be oriented to the acknowledgement of communal property rights and access to natural resources.

Privatization

The policy on restructuring and privatizing the power sector, which is part of the structural adjustment strategy designed by the IMF and supported by the World Bank and the ADB, has become one of the conditionalities for the International Financial Institutions' (IFIs) support for Indonesia's economic recovery. Similar situations and conditionalities are also found in other sectors. INFID believes that restructuring and privatizing state-owned enterprises (SOEs) cannot be considered the appropriate way to resolve the problems and challenges that SOEs are facing. Privatization, especially when it is implemented under pressure from the IMF, simply transfers capital owned by SOEs into the hands of private investors. This is done under conditions that increase the likelihood of the SOEs being sold off cheaply. Thus, privatization can be misused by powerful international investors and companies to plunder the wealth of Indonesia.

Regarding the privatization of SOEs in general, INFID believes that the appropriate strategy to reform SOEs is to protect the management of the SOE from political and government interference. Otherwise SOEs will only serve as "cash cows" for those in power. To do this, an independent SOE Management Body should be created and the government and the Parliament must immediately formulate the Law on SOEs to address these issues.

Response from the Indonesian Government and CGI Is Awaited

INFID's position paper lays out key concerns regarding the CGI and the issues that the government and CGI should address. This well-written and researched document provides strong data and arguments that the Indonesian government and CGI should not ignore; it is just the kind of civil society participation the government and CGI say they are striving for. The Indonesian government and CGI have more than four months to discuss the issues raised in the paper and internalize and incorporate them in the key decisions to be made in the coming CGI meeting.

(Source: Comprehensive Strategies Needed for Indonesia's Recovery. INFID Position Paper on the CGI 2002. June 2001)

Contact:
INFID Secretariat infid@nusa.or.id, website www.infid.or.id
INFID European Liaison Office infid@infid.be, website www.infid.be


This IFI factsheet is published by Down to Earth, the International Campaign for Ecological Justice in Indonesia.

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