The OECD urged Indonesia, Southeast Asia’s biggest economy, to renew efforts to reform its bureaucracy, invest in infrastructure and cut greenhouse gas emissions, in a report released on Monday.
The report comes as critics fear President Susilo Bambang Yudhoyono’s government has lost the will to implement reforms needed to lift millions out of poverty and address chronic pollution that often poisons the air for neighbouring countries.
The world’s fourth most populous country saw out the global downturn well and posted the third-highest real growth of the G20 nations, the Organisation for Economic Cooperation and Development (OECD) said.
Indonesia now has “a unique opportunity to pursue its reform agenda and achieve lasting, strong and inclusive growth,” said the OECD, which groups together the world’s most advanced economies.
Gross domestic product (GDP) growth “is projected to accelerate to around six per cent this year and next,” the report added.
But it also warned that “inflation pressures may re-emerge”, so that authorities “should thus start to raise” interest rates before the end of 2010.
And echoing recent comments by the International Monetary Fund, the OECD said Indonesia would only fulfill its potential if it tackled “a number of weaknesses … still holding back progress”.
“Changes to the policy and institutional framework will be necessary if Indonesia is to achieve its economic growth objective of seven to 7.7 per cent in 2014” and reach its poverty target of eight to 10 per cent, it said.
The poverty rate was 13.3 per cent in March.
The OECD called on the government to launch “a rapid implementation of bureaucratic reforms, to improve both efficiency and governance”.
“Phasing out energy subsidies will free up fiscal resources,” it said.
The subsidies, which have become a very politically sensitive issue, are expected to cost the government a total of 144 trillion rupiah ($A16 billion) in 2010, about 2.3 per cent of GDP.
“Energy subsidies have been introduced for social motives to make energy, a basic need, affordable to low-income groups,” the report noted.
But “benefits of fuel subsidies accrue mainly to high-income groups while their cost falls on the whole taxpaying population.”
“As a result, more than 90 per cent of fuel subsidies benefit the 50 per cent of the richest households in Indonesia,” the OECD said.
Jakarta should also consider further relaxing barriers to foreign direct investment, it added.
Foreign direct investment jumped by 32 per cent during the first nine months of the year, to 111 trillion rupiah, including in real estate, mining, telecoms and agribusiness.
The target of 130 trillion rupiah for the whole of 2010 should be exceeded, the government predicted on Sunday.
The OECD said Indonesia also needed to take strong measures to protect its forests, the third-largest in the world after Brazil and the Democratic Republic of Congo.
The departure of finance minister Sri Mulyani Indrawati in May was seen as a major blow to reformers in Indonesia, raising fears the president’s second term has been marked by drift and a loss of energy in facing up to problems.
But the market has since been relieved by the way her successor, ex-PT Bank Mandiri chief Agus Martowardojo, has handled Southeast Asia’s biggest economy and shares have risen by more than 30 per cent since the end of May.
