RESTRICTED  WORLD  TRADE  
ORGANIZATION  WT/TPR/S/184 
23 May 2007  
 
(07-2018) 
Trade Policy Review Body  
   
 
  
 
TRADE POLICY REVIEW 
 
Report by the Secretariat 
 
INDONESIA 
 
  
 
This report, prepared for the fifth Trade Policy Review of Indonesia, has been 
drawn up by the WTO Secretariat on its own responsibility.  The Secretariat has, 
as required by the Agreement establishing the Trade Policy Review Mechanism 
(Annex 3 of the Marrakesh Agreement Establishing the World Trade 
Organization), sought clarification from Indonesia on its trade policies and 
practices. 
 
Any technical questions arising from this report may be addressed to 
Mr. Mario Kakabadse (tel:  022 739 5172). 
 
Document WT/TPR/G/184 contains the policy statement submitted by 
Indonesia. 
 
 
 
Note: This report is subject to restricted circ ulation and press embargo until the end of the first 
 session of the meeting of the Trade Policy Review Body on Indonesia.Indonesia WT/TPR/S/184 
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CONTENTS 
 
    P a g e  
SUMMARY OBSERVATIONS vii 
 (1) E CONOMIC ENVIRONMENT  vii 
 (2) T RADE POLICY FRAMEWORK AND DEVELOPMENTS  viii 
 (3) S ECTORAL POLICY DEVELOPMENTS  x 
 (4) P ROSPECTS  xii 
I. ECONOMIC ENVIRONMENT 1 
(1) I NTRODUCTION   1 
(2) R ECENT ECONOMIC DEVELOPMENTS  1 
(i) Growth, employment, and poverty 2 
(ii) Fiscal developments 5 (iii) Monetary and exchange rate developments 6 
(iv) Balance of payments 7 
(v) Structural reforms 7 
(3) D
EVELOPMENTS IN TRADE  10 
(i) Trade in goods 10 
(ii) Trade in services 13 
(4) F OREIGN INVESTMENT PATTERNS  13 
(5) O UTLOOK   23 
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 17 
(1) O VERVIEW   17 
(2) G ENERAL CONSTITUTIONAL AND INSTITUTIONAL FRAMEWORK  17 
(i) Decentralization 18 
(ii) Governance 19 
(3) S TRUCTURE OF TRADE POLICY FORMULATION  20 
(4) T RADE LAWS AND REGULATIONS  20 
(5) T RADE POLICY OBJECTIVES  22 
(6) T RADE AGREEMENTS AND ARRANGEMENTS  22 
(i) Multilateral agreements 22 
(ii) Regional arrangements 25 
(iii) Bilateral arrangements 28 (iv) Trade preferences 28 
(7) T
RADE DISPUTES AND CONSULTATIONS  28 
(8) F OREIGN INVESTMENT REGIME  29 
(9) A ID FOR TRADE   34 WT/TPR/S/184 Trade Policy Review 
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    P a g e  
III. TRADE POLICIES AND PRACTICES BY MEASURE 35 
(1) I NTRODUCTION   35 
(2) M EASURES DIRECTLY AFFECTING IMPORTS  36 
(i) Customs procedures 36 
(ii) Customs valuation and rules of origin 39 
(iii) Tariffs  39 
(iv) Other charges affecting imports 46 
(v) Import prohibitions, restrictions, and licensing 46 
(vi) State trading 47 (vii) Government procurement 49 
(viii) Contingency measures 50 
(ix) Standards and other technical requirements 52 
(3) M
EASURES DIRECTLY AFFECTING EXPORTS  56 
(i) Export prohibitions, restrictions, and licensing 56 
(ii) Export taxes 56 (iii) Export assistance 57 
(4) 
MEASURES AFFECTING PRODUCTION AND TRADE  59 
(i) Taxation  59 
(ii) Production assistance 60 
(iii) Competition and consumer policy 62 (iv) Intellectual property rights 64 
IV. TRADE POLICIES BY SECTOR 67 
(1) I
NTRODUCTION   67 
(2) A GRICULTURE AND FORESTRY  69 
(i) Features  69 
(ii) Main developments 71 (iii) Selected items 73 
(iv) Forestry  75 
(3) M
INING AND ENERGY  78 
(i) Mining  78 
(ii) Energy  78 
(4) M ANUFACTURING  80 
(i) Textiles and clothing 80 
(ii) Automotive 82 
(5) S ERVICES   84 
(i) Financial Services 84 
(ii) Telecommunications 90 
(iii) Transportation 93 
(iv) Tourism  96 
REFERENCES   97 
APPENDIX TABLES  99 
 
  Indonesia WT/TPR/S/184 
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CHARTS 
    Page 
 
I. ECONOMIC ENVIRONMENT   I.1 Product composition of merchandise trade, 2002 and 2005 11 
I.2 Direction of merchandise trade, 2002 and 2005 12 
 III. TRADE POLICIES AND PRACTICES BY MEASURE 
 
III.1 Distribution of MFN tariff rates, 2002 and 2006 42 
III.2 Average applied MFN and bound tariff rates, by HS section, 2002 and 2006 43 
III.3 Tariff escalation by 2-digit ISIC industry, 2002 and 2006 44 III.4 Composition of Indonesian National Standards 53 
 
  
TABLES 
 
I. ECONOMIC ENVIRONMENT 
 
I.1 Main economic and social indicators 2 I.2 Selected macroeconomi c indicators, 2002-06 3 
I.3 Summary of central government operations, 2002-06 6 
I.4 Approved foreign direct investment by sector, 2002-06 14 I.5 Approved foreign direct investment by origin, 2002-06 15 
 
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES  
II.1 Trade-related legislation, 2007 21 
II.2 Main notifications by Indonesia under WTO Agreement, April 2003-March 2007 23 
II.3 Indonesia's recent involvement in the WTO dispute settlement mechanism 29 
II.4 Investment negative list, 2006 31 
 
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 
III.1 Planned improvements to Indonesian Customs to be carried out in 2006/07 37 III.2 Structure of the MFN tariff, 2002-06 41 
III.3 Summary analysis of the Indonesian MFN and CEPT preferential tariff, 2003-06 45 
III.4 Major state-owned enterprises, 2006 48 
III.5 Summary of anti-dumping actions, 2002-06 51 
III.6 Taxation revenues, 2004-05 59 III.7 Budget for science and technology institutions, 2004-07 61 
 WT/TPR/S/184 Trade Policy Review 
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    Page 
 
IV. TRADE POLICIES BY SECTOR 
 IV.1 Sectoral GDP and employment, 2002-06 68 
IV.2 Production of major agricultural commodities, 2003-06 70 
IV.3 Exports and imports of major agricultural commodities, 2003-06 70 IV.4 Applicable agricultural bound and applied tariff rates, 2007 72 
IV.5 Price gap between domestic and imported rice, 2003-06 74 
IV.6 Natural (HPH) and plantation (HTI) forest concessions, 1993 and 2002-06 76 IV.7 U.S. imports of clothing from major Asian suppliers, 2004-06 81 
IV.8 Import duties and luxury taxes, 2007 83 
IV.9 Structure of the financial sector, 2006 85 IV.10 Regional comparison of financial sectors, 2006 86 
IV.11 Leading banks, ranked by assets, December 2005 88 
IV.12 Share of bank ownership, December 2005 89 IV.13 Telecom sector, 2004-08 90 
IV.14 Telecommunications market shares in 2006 92 
IV.15 Visitor arrivals to Indonesia, 2003-06 96 
 
 
APPENDIX TABLES 
 
 
I. ECONOMIC ENVIRONMENT 
 
AI.1 Merchandise exports by product group, 2001-05 101 AI.2 Merchandise imports by product group, 2001-05 102 
AI.3 Merchandise exports by destination, 2001-05 103 
AI.4 Merchandise imports by origin, 2001-05 104  
 
 Indonesia WT/TPR/S/184 
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SUMMARY OBSERVATIONS 
 
1. Since its previous review in 
June 2003, Indonesia has made steady 
economic progress with an average annual 
GDP growth rate of 5.2% despite major exogenous shocks and natural disasters. Growth, however, has not been high enough to create sufficient job opportunities to reduce 
unemployment and cut poverty levels.  In order 
to achieve growth rates of over 6% annually to create the jobs needed to mitigate unemployment, which was in the order of 10% in 2006, the Government has started a comprehensive reform programme aimed, 
inter alia, at improving the investment climate, 
the financial sector, and infrastructure, supported by Indonesia's vast natural resources.  
(1) E
CONOMIC ENVIRONMENT  
2. Indonesia's real GDP growth rose 
steadily from 4.7% in 2003  to 5.5% in 2006, while macroeconomic vulnerabilities have been declining.  
3. Fiscal consolidation has been the 
hallmark of economic policy as the overall 
budget deficit narrowed from 2.4% in 2001 to 
0.5% in 2005, helped by  cuts in fuel subsidies and delays in spending caused by changes to budgetary and procurement  procedures, and to 1.1% in 2006.  Under the medium-term 
fiscal framework, public debt declined to 39% 
of GDP in 2006, down nearly 20 percentage points over three years, and is targeted to continue to fall  to about 30% by 2010, which implies keeping the overall budget deficit 
under 1% of GDP in the medium term.  
However, the tax to GDP ratio of 12% appears insufficient to meet Indonesia's developmental needs. 
4.  Inflation in 2006 was down to 6.6%, 
apparently within the inflation target, 
compared with 17.1% in 2005, reflecting the 
deep  cuts in fuel subsidies.  Inflation is forecast to be around 6% in 2007 although this forecast might need to be raised if the Government decides to reduce electricity subsidies. The overriding objective of the 
independent Bank Indonesia in the conduct of monetary policy continues to be to contain inflation.   
5. Strong domestic dem and, particularly 
consumption, has driven growth since the 1997-98 Asian financial crisis.  The steady recovery in growth in recent years, however, has not been accompanied by an increase in 
employment levels. Registered unemployment 
(at 4.8% in 1997) has been over 9% since 2002, edging up to 11.2% in 2005 and then down to 10.3% in 2006.  Labour market rigidities have been cited as one of the main causes of rising unemployment, with Indonesia 
ranking unfavourably in the region, and 
planned revisions to labour laws appearing to be stalled.   
6. Despite increased spending on poverty 
programmes, the number of people living in 
poverty (defined as an income of less than 
US$17 per month) rose for the first time in six years from 16% to 17.8% of the population  between 2005 and 2006.  In addition to the end of fuel subsidies, the  ban on rice imports contributed to a 30% rise in domestic rice 
prices by the time of the poverty survey in 
2006 and, as the poor spend nearly a quarter of their income on rice, poverty inevitably increased.  In response,  the Government 
relaxed the ban, thereby helping to stabilize  
domestic rice prices.   
7. Merchandise exports accounted for 
about 30% of GDP during the period under review, whereas imports as a share of GDP in the same period increased from 18% to 23%.  
Foreign trade patterns have not changed 
substantially although Indonesia has become more dependent on petroleum exports and imports. Most merchandise trade continues to be with East  Asian countries with China increasing its share of both exports and 
imports. Singapore remains Indonesia's main 
ASEAN trading partner.   
8. After a strong recovery in 2000-01, 
following a sharp  decline after the Asian financial crisis, gross domestic investment has WT/TPR/S/184 Trade Policy Review 
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remained relatively flat.  The share of 
investment in GDP has averaged around 23% since 2002, down from a peak of over 30% prior to the crisis, and below the average 
national savings rate of 24%.  Similarly, 
inflows of foreign direct investment (FDI) collapsed after the crisis and there have only recently been signs of recovery. In order to address Indonesia's poor investment climate, 
the Government announced an investment 
policy package in early 2006, which enjoys considerable political commitment through its issuance as a Presidential instruction.  It included submission of an  investment law (passed by Parliament in March 2007), 
creation of a new investment negative list, 
drastically cutting the time to start a business, accelerating the review process of non-business-friendly local regulations, as well as streamlining customs procedures and 
improving customs regulations.  These recent 
measures do not yet appear to have had a real  impact on inbound FDI, which has historically played a catalytic role in Indonesia's external competitiveness.   
9. Improvement of Indonesia's investment 
climate includes stimulating investment in 
infrastructure. While infrastructure received 
high levels of private and public investment in the decades before the crisis, investment has 
fallen since.  Indonesia's  2006  Infrastructure 
Reform Package is wide-ranging and  covers 
power generation, telecoms, water and sanitation, roads and  port and airport modernization.    
10. The Government has also been laying 
the groundwork for judicial and civil service 
reform and undertaking an effective anti-corruption campaign focused on strengthening the institutional framework against corruption.  New institutions such as the Anti-Corruption Commission (KPK), Anti-Corruption Court,  
the Interagency Corruption Eradication Team, 
the Judicial Commission, the Police Commission, and the Prosecutorial Commission have been given considerable authority, and existing institutions like the 
Supreme Audit Commission and the Attorney 
General's office have become more active in combating corruption. Corruption 
investigations have been launched at all levels of government, and among state-owned enterprises, leading to a number of successful 
prosecutions.  In consequence, corruption and 
governance indicators appear to have improved since Indonesia's previous review.   
(2) T
RADE POLICY FRAMEWORK AND 
DEVELOPMENTS  
11. Indonesia has continued its transition 
to a democratic and decentralized State.  The decentralization process, under way since 1999, has transferred control of large amounts of public expenditure and service delivery from the central Government to 440 local 
governments.  Trade policy, however, remains 
the responsibility of the Ministry of Trade and has not changed significantly since the previous Review.  Indonesia provides at least MFN treatment to all WTO Members.  In an 
effort to improve transparency and public 
scrutiny of trade policies, the Government has carried out a review of trade rules and regulations in order to identify and, where necessary, rectify onerous bureaucracy and poorly conceived trade and investment 
policies.  
12. During the period under review, 
Indonesia has begun to follow a triple track strategy of international trade negotiations: multilateral, under WTO auspices;  regional, 
centred on ASEAN and ASEAN+ agreements;  
and, for the first time, Indonesia is also pursuing a bilateral trade agreement with Japan, with other possible bilateral agreements under study.  Indonesia considers 
that a multi-track strategy has become a 
necessity although it considers that the multilateral trading system is  ultimately  the best option.  To further its objectives, the Government has established a National Trade Negotiation Team responsible for overall 
negotiating strategy.  
13. Since its previous Trade Policy 
Review in 2003, Indonesia has continued to undertake systematic e fforts to increase the 
pace of its economic development, including Indonesia WT/TPR/S/184 
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by reducing   constraints to trade, investment, 
and production and streamlining procedures at the border.  Customs reform is high on the Government's agenda and Parliament has 
considered important changes that are 
expected to enter into effect in 2007.  The goal of customs reform is to reduce the time and cost of clearing customs and to limit smuggling and customs fraud.  Indonesia has 
been active in the APEC trade facilitation 
framework with the aim of reducing transaction costs. Computerized documentation requirements and customs clearance have facilitated both imports and exports;  registration of importers has 
remained a requirement. 
14. The tariff has remained Indonesia's 
main trade policy instrument, albeit a relatively small  source of tax revenue, accounting for a little over 4% of total tax 
revenue.  The average applied MFN tariff is 
9.5% (2006), down from 9.9% in 2004 when Indonesia adopted a new tariff classification for MFN (non-ASEAN) tariffs.  The average applied MFN tariff is 9.2% for industrial products and 11.4% for agricultural imports.  
More than 75% of tariff rates are currently in 
the range of zero to 10%.  In line with long-standing sectoral support, the highest tariffs apply mainly to motor vehicles.  As was the case at the time of the previous Review, over 
93% of tariff lines are bound  but at 37.5% the  
average bound rate largely exceeds the average applied rate, imparting a degree of unpredictability to the tariff. The difference between average applied and bound rates 
remains much higher for agricultural products 
(at 11.4% and 47.3% respectively).   Over 99% of applied tariff rates are ad valorem, a feature that contributes to the transparency of the tariff.  Nonetheless, the structure of the tariff has remained complex, involving 16 ad 
valorem rates  and three specific rates.  The 
tariff also embodies a degree of escalation, which has become more pronounced for semi-processed food, beverages and tobacco products as well as for paper, printing, and 
publishing.  By 2006, the ASEAN Common 
Effective Preferential Tariff (CEPT) rate had come down to an average of 2.7% (from 3.4% in 2004), and  as intra-ASEAN trade develops 
it is predicted that Indonesia's CEPT rate will drop further, thus widening the gap with its MFN tariff rate.   
15. During the period under review, 
Indonesia has continued to reduce the number of tariff lines subject to import restrictions, 
currently 141.  Bans for sanitary and other 
reasons have affected im ports of ch icken parts, 
rice, and salt.  No origin-related restrictions have been maintained, except those affecting 
trade with Israel.  It is unclear how restrictive 
remaining non-tariff barriers are;  they include   the producer-importer licences (for  sugar imports, for exam ple) and the  importer 
registration licensing scheme.  
16. Government procurement remains an 
important instrument of industrial policy.   Indonesia is not a signatory of the WTO Agreement on Government Procurement (GPA). It has revised its government procurement regime to, inter alia, increase 
domestic sourcing, reduce corruption, and 
bring its procurement framework more into line with international public procurement practice.  Countertrade transactions, in which  foreign firms tender for certain types of 
government procurement contracts and 
construction projects, have fallen off considerably.    
17. Indonesia  has remained a relatively 
active user of anti-dumping measures, mainly on base metals and chemicals from the region, 
initiating 26 anti-dumping investigations 
between 2002 and 2006;  in 2003 a Safeguards Committee was established, following the enactment of safeguards legislation in 2002.   
18. National standards are formulated in 
accordance with international standards,  
where feasible; as at the time of the previous Review,  mandatory standards  account for about  3% of all standards. Involvement in mutual recognition arrangements has 
increased.  Regarding SPS regulations, animal 
and plant quarantine measures are strictly enforced.  WT/TPR/S/184 Trade Policy Review 
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19. Indonesia has export licensing, 
prohibitions and restrictions to ensure protection of natural resources and endangered species, provide an adequate 
domestic supply of essential products, promote 
higher-value-added downstream industries, and upgrade the quality of export products.  Exports of products s ubject to restrictive 
measures, including coffee, textiles, rubber 
and certain types of wood, have been allowed 
only through registered  and approved exporters.  During the period under review, a ban on log exports was in force, and in 2005, export taxes were introduced on raw skins, white tanned hides and coal.  In 2004 the 
Government ended several credit programmes 
that offered subsidized loans to support exports. Export finance is provided by the state-owned Bank Eksport Indonesia.  
20. Support for production and trade has 
been provided through financial assistance for 
R&D as well as through industry- and/or region-specific tax incentives.  In 2006, the Government proposed tax reforms, inter alia, to simplify the tax in centive regime. Indirect 
taxes, such as VAT and sales tax on luxury 
goods,  are levied, in principle, in a non-
discriminatory manner.  Rising global oil prices obliged the Government to reduce subsidies for fuel in 2005 and bring prices closer in line with world prices;  it is estimated 
that savings from fuel subsidies could free up 
US$6-8 billion annually for developmental spending. Measures to assist domestic production and/or  control/restrain trade in several sectors remain in place;  they include 
exclusive import rights to domestic producers 
of certain sensitive items such as rice,  alcoholic beverages, sugar, hot- and cold-rolled coil iron, and steel products.  State-owned enterprises continue to play a central role in the economy and  are estimated to 
account for up to 40% of Indonesia's GDP.  A 
handful of commodities and services, including petrol, electricity, cement and transport, remain subject to "administered prices".   
21. Indonesia's competition policy 
framework has not undergone any significant 
change in the period under review. The independent Commission for the Supervision 
of Business Competition (KPPU) has continued to implement Indonesia's anti-monopoly legislation. Most of  the cases dealt 
with up to 2006 relate to collusion on tenders 
and bid-rigging in government procurement by  state-owned enterprises or government agencies. The emergence of the KPPU as a body with the authority to handle bid-rigging 
cases is  significant in improving competition 
in the economy, in particular for government contracts.  Government action on consumer protection has continued in terms of preparing 
and introducing implementing regulations of the consumer protection law. 
22. Indonesia has sought to strengthen 
protection of intellectual property rights (IPRs) by expanding its international commitments and improving its legal framework to combat IPR violations.  
Although  institutional constraints have 
continued to impede effective implementation of the laws, the Government appears to have made some progress in controlling piracy, with  the periodic seizure of sizable amounts of pirated optical disc products.  A 2006 
Presidential Decree established a National 
Task Force for IPR Violation Prevention, which is tasked with coordinating law enforcement efforts of the customs authorities and police, and increasing the number of 
qualified judges, prosecutors, and IP lawyers.   
(3) S
ECTORAL POLICY DEVELOPMENTS  
23. Indonesia is the world's largest 
archipelago with an ethnically diverse population of 223 million and abundant 
natural resources, including timber, fish, 
minerals, petroleum, natural gas, and considerable biodiversity. Agriculture (including animal husbandry, fishing and forestry)  accounted for almost 13% of GDP in 2006 and  is home to the largest segment of the 
Indonesian population and of the poor;  it has 
a primary role in achieving the objective of poverty alleviation.  It remains the most important sector in terms of employment, providing livelihoods for over 44% of the 
workforce, which indicates that labour Indonesia WT/TPR/S/184 
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productivity in agriculture is less than one fifth 
of the level in the rest of the economy. 
24. Indonesia's vast range of mineral 
resources has been exploited intensively, 
enabling the mining sector to make an 
important contribution to exports, in the order of 8% in 2005.  Since 1980, the share of manufacturing in GDP has increased from some 13% to about 28% and manufacturing's 
share of exports has increased five fold to 
64%.  The services sector has also expanded, boosted by the travel and tourism industry, and in 2006 it accounted for 40% of GDP and employed nearly 38% of the working population.   
25. As was the case at the time of the 
previous Review, agriculture continues to receive special government assistance, which reflects concern over food security and the view that this can best be met by achieving 
self-sufficiency in food staples, in particular 
rice.  Central to this policy is the stabilization of the price of rice through intervention in the market, to maintain a ceiling price for consumers and a floor price for producers, and by controlling trade. Due to shortages as 
a result of the 2004 ban on rice imports, the 
price of rice rose about 30% above international prices and, given that  two thirds of farming households in Indonesia are net consumers of rice,  was widely considered to 
be the main factor in the increase in poverty in 
2006;   the ban has been partially removed to allow imports to help stabilize prices.  By the time the Uruguay Round Agreements were implemented, Indonesia had removed a 
number of licensing restrictions affecting 
agriculture.  Sanitary and phytosanitary and food quality regulations have led to import restrictions, particularly on animals and animal products and on  food items requiring a halal certificate.   
26. In the forestry sector, regulatory 
controls, including export restrictions, seem to have had very limited success in dealing with the problem of over-exploitation of forests and particularly illegal loggin g,  which is thought 
to account for over 50% of timber production. The ban on log exports, reinstated for the 
duration of the review period, has done little to stem losses from th e smuggling of illegally 
felled logs or to address environmental 
problems, such as damage caused by illegal 
logging,  and instead may have depressed domestic log prices, thereby encouraging  processing of wood-based products.  The Government, both central and regional, has 
stepped up efforts to combat illegal logging, 
but the foreign demand for cheap timber appears to be overwhelming Indonesia's enforcement capacity. 
27. The 2001 liberalization of the oil and 
gas sector has allowed foreign firms  to enter 
the oil market, particularly in exploration and 
production; private companies are now allowed to open retail outlets for fuel.  Pertamina's monopoly on importing and distributing fuel has been lifted, and refining, 
storage, and transport have been liberalized. 
An electricity law passed in September 2002 envisaged an end to the state electric company's monopoly on electricity distribution and the possibility for private companies, both local and foreign, to sell power directly to 
consumers within five years.  In January 2005, 
however, the Constitutional Court announced that the law was unconstitutional and it was annulled. 
28. With respect to manufacturing,  
Indonesia's average applied MFN tariff has 
been reduced, from 9.6% in 2004 to  9.2% in 
2006, but certain sectors (e.g. chemicals, fabricated metal products, motor vehicles, alcohol products, motor cycles, bicycles) 
continue to be subject to high rates, ranging 
up to 150 %.   In the textiles and clothing 
sector, average MFN tariff protection has remained constant at 10.8%.  2002 saw the introduction of a decree concerning textile import arrangements, whereby only companies 
that have production facilities using imported 
fabrics as inputs for finished products may obtain import licences.  There are no limits on foreign ownership in the automotive sector and no local-content requirements or 
incentives.  Tariff barriers have also been 
lowered, although, at an average MFN rate of WT/TPR/S/184 Trade Policy Review 
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26.5%, they remain relatively high by 
international standards.   
29. The financial sector has gone through 
major restructuring and reform since the 
financial crisis in 1997-98. The Indonesian 
Bank Restructuring Agency (IBRA) oversaw substantial consolidation during its six years of operation, but a large portion of the banking system remains in government 
control. During the period under review, 
Indonesia has continued to make progress towards establishing a strong and competitive private banking sector, although the two biggest state banks still have weak governance and large non-performing loans (NPLs). 
According to Bank Indonesia, total banking 
sector NPLs as a percentage of total loans rose to  9.3% in 2006 compared to 8.2% in 2003. Banks still dominate the financial system, accounting for 80% of financial assets, 
but the strengthening of non-bank financial 
institutions (NBFIs), such as insurance companies, finance companies  and pension funds, while small for a country of Indonesia's size, has become a key policy imperative, as articulated in the 2006 financial sector policy 
reform package. The development of NBFIs 
promises to  increase access to low-cost financial services and mobilize domestic savings and channel them into profitable investments. 
30. Indonesia has been undertaking 
significant reform of its policy in the telecommunications sector.  Reform has brought about increased private sector and foreign participation.  Indonesia's two main 
carriers - PT Telkom and PT Indosat, which 
are 65% and 16% state-owned, respectively - have been partially sold to private investors.  Competitive licences have been awarded for the provision of GSM mobile services, Internet services, and other value added services. 
31. Given its size and island structure, 
Indonesia faces considerable challenges in establishing the extensive transport infrastructure  essential for its economic and social development.  Road development policy 
is focused on increasing road capacity and quality by strengtheni ng main national road 
corridors and providing better access to less developed and remote areas. Ports are generally inefficient, imposing additional time 
and costs on domestic cargoes  and exports.  
While the main airports function well, increased transport demand due to deregulation and the proliferation of low-cost airlines is putting pressure on capacity at 
medium-sized and small airports.  
(4) P
ROSPECTS  
32. The Government's Medium-Term 
Development Plan 2004–2009  envisages 
annual average GDP growth of 6.6% and aims 
to cut the poverty rate  to 8.2%  and the 
unemployment rate to 5.1%  by 2009. The Plan recognizes that the main challenge is to increase growth to a level that can create 
sufficient jobs to hold back rising   
unemployment (and underemployment) and reduce poverty.   
33. The Government is implementing a 
comprehensive reform agenda to strengthen 
public institutions, improve the business and investment climate, and boost infrastructure development.  If implementation continues in a timely manner, these reforms will remove 
some of the main obstacles to private 
investment and contribute to a more flexible labour market and more efficient public administration, thus contributing to an acceleration in growth and helping to reverse the rising trend in unemployment. On the other 
hand, delays in implementation of the 
Government's key structural measures, including approval of tax and labour laws, could undermine investor confidence, and growth could remain in the sub-6% range 
(similar to that seen in the last few years) with 
unemployment continuing to trend upwards.  
34. The Government has shown clear 
resolve to carry out major reforms.  Indonesia 
could also take advantage of the multilateral 
system to further  lock-in any  unilateral reforms,  thereby boosting investor confidence and facilitating foreign investment, which will be key to Indonesia's future prospects.