Magazine article Global Finance

Jakarta: Indonesia Has Announced Its Third Fiscal Reform Package in Two Years

Magazine article Global Finance

Jakarta: Indonesia Has Announced Its Third Fiscal Reform Package in Two Years

Article excerpt

Indonesia has announced its third fiscal reform package in two years.

irst-time visitors are often surprised by Jakarta's prosperity, which is inconsistent with Indonesia's indigent image. The Golden Triangle, the business and financial heart of Jakarta, is the financial and business hub for an archipelago of more than 13,700 islands with a population of more than 200 million.

Compared with its ASEAN neighbors, Jakarta has a brief history as a financial center, even though it had an early head start. The Dutch administration set up an exchange in 1912. But World War II and the tumult after that saw many financial institutions collapse. In 1987, the Jakarta Stock Exchange was revived in tandem with far-reaching economic reforms introduced as part of President Suharto's attempt to move Indonesia from an oil-based economy to one based on more general exports.

In 1988, as reforms extended to banking deregulation, foreign financial institutions began pouring in. During the past two years the government has widened the trading band of the rupiah from 2% to 12% and has allowed foreign investors full equity participation in export-oriented businesses.

Indeed, investors now view Indonesia's shortcomings as opportunities. "Indonesia has been very strong in attracting foreign direct investment," says Irene Cheung, a Singapore-based analyst for Merrill Lynch, pointing to an inflow of $40 billion in 1995 and $30 billion last year. The largest investments have been in project financing, an area the government is also emphasizing: In fiscal year 1996-1997, 16.1% of the federal budget was allocated to infrastructure, particularly in transportation, mining, and energy development.

Although the economy grew 7.8% last year, critics warn of a slowdown. In a June 1997 report, the World Bank says the drive to deregulation has reversed in some areas, particularly in scheduled tariff cuts, and insists that domestic regulations continue to hurt efficiency. …

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