Indonesia WT/TPR/S/184/Rev.1 
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I. ECONOMIC ENVIRONMENT 
(1) INTRODUCTION  
1. Following rapid growth and declining poverty in the early 1990s Indonesia underwent a 
sudden deterioration of its GDP be tween 1997 and 2000 due to the Asian financial crisis.  Indonesia's 
subsequent economic policy, while making some progress in terms of structural reform, was 
successful in the implementation of macroeconomic policy and the strengthening of the country's economic fundamentals.  Since 2002, Indonesia h as continued to make steady economic progress 
despite some major exogenous shocks  and natural disasters, including the terrorist attacks in Bali in 
2002 and Jakarta in 2003, the regional spread of th e severe acute respiratory syndrome in early 2003, 
the December 2004 earthquake and tsunami, whic h severely damaged Aceh province and Nias 
islands, and most recently the 2006 Yogyakarta eart hquake as well as the threat of avian flu.  
However, growth since the crisis has not been high enough to create suffi cient job opportunities, 
reduce unemployment and cut poverty levels. 
2. In order to create the jobs needed to mitiga te unemployment, which reached 11% in 2005, the 
Government has started a comprehensive reform programme aimed at achieving annual growth rates 
of over 6% and reviving investment.  In the view  of some observers, given Indonesia's vast natural 
resources, growth could exceed 6% if the reform agenda – comprising infrastructure, investment climate improvement, and financial sector reform  – is implemented well enough, and if public 
spending is increased in 2007 and beyond. 
3. Indonesia, the world's largest archipelago, had an ethnically diverse population of 223 million 
in 2005.  It has abundant natural resources, such as timber, fish, petroleum, natural gas, and a variety 
of metals, as well as considerable  biodiversity.  It is ranked 108
th overall on the UN human 
development index, up from 110th at the time of its previous Review (Table I.1).  Current-price GDP 
per capita was US$1,663 in 2006, around 45% higher th an the pre-crisis level in 1996 when it was 
US$1,153.1  Indonesia remains a well diversified trading ec onomy;  the largest exports are oil and gas, 
electrical appliances, textiles, minerals, wood an d paper products, and a range of agricultural 
commodities.  Manufacturing accounted for 28% of GDP and services for 40% in 2006. 
(2) RECENT ECONOMIC DEVELOPMENTS  
4. During the period under review, Indonesia's  stable growth performance has moved the growth 
debate from its focus on recovery and stability to the challenges of attaining higher and sustainable 
growth levels. 
                                                      
1 The authorities note that Indonesia is an extremely diverse and dispersed country.  The diversity and 
geographical disparity are mirrored by significant differ ences in social and economic conditions.  The regional 
GDP per capita differs widely:  for instance, it is almost 20 times higher in Riau and East Kalimantan, two oil 
and gas producing regions, than that Maluku or East Nusa Tenggara.  The levels of districts within provinces 
also show wide disparities.  Poverty rates at the district level vary widely within and across provinces;  rates are 
below 3% in some cities (Denpasar and Bali), but above 50% in Manokwari and Puncak Jaya, Papua.  WT/TPR/S/184/Rev.1 Trade Policy Review 
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Table I.1 
Main economic and social indicators  
Land area 1.9 million km2  Urban share of population, 2004 47% 
Population, 2005 222.8 million  Nominal GDP at current market price, 2006 (US$ billion) 364.5 
Average population growth, 1995-05 1.3%  GDP per capita, 2006 (US$) 1,663.0 
UN human development index   GDP at c onstant 2000 prices, 2006 (US$ billion) 201.6 
- Overall ranking, 2006 108th  GDP share, 2006  
Life expectancy at birth, 2004 67.2 years  - Primary  12.9% 
Infant mortality rate per '000, 2004 30  - Secondarya 47.0% 
Adult literacy rate, 2004 90.4%  - Services  40.1% 
Population below poverty line, 2006 17.8%    
Enrolment ratio in education, 2004     
- Primary 94%    
- Secondary 57%    
a Includes mining, manufacturing, constructi on, and electricity, gas and water;  th e share of manufacturing in GDP is 28%.  
Source : UNDP (2006), Human Development Report ; Bank Indonesia online information.  Viewed at: http://www.bi.go.id/ 
web/en/Riset+Survey+Dan+Publikasi/Publikasi/ Economic+Report/lpi+06+eng.htm;  and IMF, International 
Financial Statistics . 
(i) Growth, employment, and poverty 
5. Indonesia's growth has been stable and modera te since its previous Trade Policy Review.  
Real GDP growth rose steadily from 4.7% in 2003 to 5.7% in 2005 and 5.5% in 2006, while 
macroeconomic vulnerabilities have been declining (T able I.2).  The fiscal deficit narrowed to 1.0% 
of GDP and public debt declined to 39% of GDP in 2006, nearly 20 percentage points over three 
years;  sovereign creditworthiness has improved a nd the overall external position has continued to 
strengthen.  As in much of South-east Asia, str ong domestic demand has driven growth over the last 
few years.  Robust personal consumption has rema ined the principal driver of growth since the 
1997-98 Asian financial crisis.  
6. The continuing recovery in 2005 was achieved despite several major difficulties, including 
the aftermath of a slump in the rupiah, a sharp increas e in domestic fuel prices, and a surge in inflation 
and interest rates.  The cuts in fuel subsidies – le ading to administered fuel price increases totalling a 
cumulative 143% – effectively transferred an estim ated US$10 billion of disposable income from 
consumers to regional and central governments.  This shock, combined with in terest rate increases in 
the second half of 2005, brought Indonesian growth to below 5% in the first half of 2006;  this 
recovered to an average of 6% in the second half.  
7. The Government's Medium-Ter m Development Plan 2004-20092 envisages annual average 
GDP growth of 6.6%.  It targets cutting the poverty incidence to 8.2% and the unemployment rate to 5.1% by 2009.  A key priority is to spur invest ment in manufacturing and infrastructure to generate 
jobs.  Since 1980, the share of manufacturing in GDP has increased from around 13% to about 28%, 
and its share of exports increased by five-fold, to 64%, in the same period.  The medium-term plan's 
target to expand manufacturing by 8.6% annually will not be easy, as growth in 2005 was only half 
this level.  Overall, the medium-term targets app ear somewhat ambitious.  Projections of growth of 
about 6% look more achievable, provided th e investment climate continues to improve. 
                                                     
 
2 Presidential Regulation No. 7 of 2005.  The basic ta rgets for increasing the we lfare of the people are 
summarized in part  1, chapter 1-22. Indonesia WT/TPR/S/184/Rev.1 
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Table I.2 
Selected macroeconom ic indicators, 2002-06  
  2002 2003 2004 2005 2006 
National accounts Percentage change 
Real GDP (2000 prices) 4.4 4.7 5.0 5.7 5.5 
Consumption 4.7 4.6 4.9 4.3 3.9 
Private consumption 3.8 3.9 5.0 4.0 3.2 
Government consumption 13.0 10.0 4.0 6.6 9.6 
Gross fixed capital formation 4.7 0.6 14.7 10.8 2.9 
Exports of goods and non-factor services -1.2 5.9 13.5 16.4 9.2 
Imports of goods and non-factor services -4.2 1.6 26.7 17.1 7.6 
Unemployment rate (%) 9.1 9.6 9.9 11.2 10.3 
Prices and interest rates Per cent 
Inflation (CPI, percentage cha nge) 10.0  5.2  6.4  17.1  6.6 
Time deposita, in rupiah 15.37 11.56 6.83 7.83  11.64 
Time deposita, in US$ 3.65 2.24 1.95 2.62  3.85 
Money credit (end period) Percentage change 
Money supply (M1)b 8.0 16.6 13.4 11.1 28.1 
Money supply (M2)c 4.7 8.1 8.1 16.4 14.9 
Credit to private sector 25.1 22.1 30.4 19.7 14.0 
Exchange rate      
Rupiah to US$ (annual average) 9,311.2  8,577.1  8,938.9  9,704.7  9,159.3 
Real effective exchange rate (percenta ge change) ..  0.1  -8.8  14.1  .. 
Nominal effective exchange rate (percenta ge change) ..  0.8  -8.4  -8.9  .. 
 Per cent of GDP, unless otherwise indicated 
Government fiscal policy      
Total revenue (excluding grants ) 16.0  16.7  17.6  17.7  19.1 
Tax revenue 11.3 11.9 12.2  12.5  12.3 
Total expenditure 17.3 18.5 18.6  18.3  20.1 
Overall balance (excluding grants) -1.3 -1.8 -1.0  -0.6  -1.0 
Primary balance 3.4  1.7  1.4  1.9  1.4 
Public debt 65.4  58.3  55.7  46.5  39.0 
Domestic debt 35.3  31.9  29.9  24.1  22.3 
Saving and investment       
Gross national savings 25.3  26.0  23.4  22.9  .. 
Gross domestic investment 21.3  22.5  22.8  22.5  23.3 
Savings-investment gap 4.0  3.5  0.6  0.4  .. 
External sector      
Current account balance  3.9 3.4  0.6  0.1  2. 6 
Net merchandise trade  11.8 10.3  7.8  6.1  8.2 
Value of exports 29.6 27.0  27.6  30.3  28.2  
Value of imports 17.8 16.7 19.7  24.2  20.0 
Services balance -5.2 -5.1  -3.4  -3.2  -3.1 
Capital/financial account balance -0.6 -0.4  0.7  0.1  0.7 
Direct investment 0.1  -0.3  -0.6  1.8  1.1 
Terms of trade (2000=100) 92.4  94.8 93.3  92.1  93.7 
Merchandise exports (percentage ch ange) 3.1  8.4  10.4  22.9  18.1 
Merchandise imports (percentage change) 2.8  10.9  28.0  37.2  5.1 
Service exports (percentage change) 21.1  -20.6  127.6  7.3  .. 
Service imports (percentage change) 7.3  2.1  19.9  13.8  .. 
Table I.2 (cont'd) WT/TPR/S/184/Rev.1 Trade Policy Review 
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  2002 2003 2004 2005 2006 
Foreign exchange reserves (US$ million)  32,037.0  36,296.0  36,320.0  34,724.0  42,586.3 
in months of imports  6.8  6.1  5.0  4.1  5.0 
Net external debt (US$ billion;  e nd-period) 31.3  135.4  137.0  130.7  125.3 
Debt service ratiod  (end-period) 24.7  25.5  27.1  22.1  25.8 
.. Not available.  
a Six-month time deposit at commercial banks. 
b M1 is defined as currency plus demand deposits.   
c M2 is defined as M1 plus time and saving deposits in rupiah  and foreign currency, and demand deposits in foreign currency hel d 
by residents. 
d Percent of exports of goods and services. 
Source:  Bank Indonesia online information.  Vi ewed at:  http://www.bi.go.id/web/en/ Data+Statistik/ and http://www.bi.go. 
id/web/en/Riset+Survey+Dan+Publik asi/Publikasi/Economic+Report/lpi+06+ eng.htm;  IMF (2006), Country 
Report No. 06/319, August;  and data provided by the authorities. 
8. The steady recovery in growth in recent year s has not been accompanied by an increase in 
employment.  Registered unemployment (at 4.8% in  1997) has been over 9% since 2002, edging up to 
11.2% in 2005 and 10.3% in 2006.  The Government  has made employment creation a central theme 
of its economic programme, with the emphasis on improvements in the business climate to attract 
investment and create jobs, and programmes to impr ove the skills of the working population.  The 
labour force (104 million in 2004) has expanded in line  with population growth, with the participation 
rate at about 67%.  On average, 2-2.5 million Indon esian have entered the job market annually but the 
new workers have not been absorbed.  Historically , annual economic growth of 4-5% was considered 
to be sufficient to absorb new entrants.  It is  now estimated by the Government that the economy 
would need to grow by 6-7% annually to absorb all new entrants.  Employment trends appear to 
indicate that most new entrants absorbed have gone  to the informal sector (particularly agriculture)3, 
which accounts for a large part of employment.  Labour  market rigidities have been cited as one of the 
main causes of rising unemployment.  Indonesia ranks least favourably in the region in terms of standard indicators of labour market rigidities u sed by the World Bank in international comparisons.
4  
It appears that planned revisions to labour laws ar e stalled as the Government attempts to strike a 
balance between the interests of workers and employers. 
9. Despite increased spending on poverty programm es, poverty rose from 16% to 17.8% of the 
population  between 2005 and 20065, due in considerable part to th e high inflation pushed by the hikes 
in fuel and rice prices.  This mean s that the number of people living in poverty rose for the first time 
in six years, according to an assessment by the centr al Bureau of Statistics (BPS).  In 2006, nearly 
39 million people were officially classified as poor6, up by more than 4 million on 2005.  While the 
Government's unconditional cash transfer (UCT)  programme compensated the poor for higher fuel 
prices and the knock-on effect this had on inflation,  a temporary ban on rice imports contributed to a 
30% rise in domestic rice prices by the time of the poverty survey in 2006, which meant it was 40% 
above the international market price.  As the poor  spend nearly a quarter of their income on rice, 
                                                      
3 IMF (2005). 
4 World Bank (2006a).  For example, while Indonesia's per capita income is less than one quarter of the 
region, firing costs are about three times the regional aver age.  At the same time, the gap between wage growth 
and productivity growth in manufacturing has increased co nsiderably given the rapid increases in the average 
minimum wages, which are set by regional governments and vary across the country.  
5 World Bank (2006d), p. 22. 
6 The Government defines the poverty line as an income of less than US$17 per month, the amount of 
money required to afford a diet of 2, 100 calories per day;  this is belo w the accepted international measure of 
US$1 per day.  Using the international measure, more th an 80 million Indonesians or more than one third of the 
population, are poor. Indonesia WT/TPR/S/184/Rev.1 
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poverty inevitably increased.  In response, the Government reopened rice imports, allowing in 
210,000 tonnes, which helped stabilize domestic rice prices.   
(ii) Fiscal developments  
10. Fiscal consolidation has been a hallmark of economic policy in Indonesia during the period 
under review.  The overall budget deficit narrowed from 1.8% in 2003 to 0.6% in 2005, helped by the 
cuts in fuel subsidies and delays in spending caused  by changes to budgetary procedures, and to 1.0% 
in 2006.  Under the medium-term fi scal framework, the ratio of public  debt to GDP is targeted to 
decline to about 30% by 2010, which implies ke eping the overall budget deficit to under 1% of GDP, 
underpinned by improvements in tax administration, which would help compensate for lower oil and 
gas revenues, and lower interest and subsidy cost s, which would enable increased resources to be 
channelled toward social and deve lopment spending.  However, the tax revenue to GDP ratio of only 
12.3% appears insufficient to meet  Indonesia's developmental needs. 
11. Fuel subsidies became a critical issue in 2005 as global oil prices increased strongly, placing 
an increasingly heavy burden on the budget.  The s ubsidies cost nearly US$10 billion that year, or 
3.5% of GDP, and encouraged inefficient use of petroleum products.  In March, the Government 
raised administered prices of petroleum produc ts by 29%, but strong demand and soaring prices 
helped to push oil imports higher.  In October, th e Government more than doubled fuel prices to cut 
the cost of the subsidies.7  An important outcome in fiscal polic y has been the increase in spending on 
development and social goals, facilitated by the reduc tion in fuel subsidies.  The fiscal resources 
conserved by the cut in subsidies enabled the Government to prepare a US$1.4 billion spending 
programme to upgrade education and health f acilities and village infrastructure in 2005-06. 
12. The public sector debt ratio has declined steadily , from 100% in 1999 to an estimated 39% at 
end 2006.  The Government's medium-term progr amme envisages a reduction in the debt-to-GDP 
ratio to below 33% by 2009.  This reflects the fiscal  consolidation policy, declining interest rates, and 
sustained growth in GDP.  About half of the total outstanding public debt is ow ed to foreign creditors, 
mainly multilateral institutions.  A measure of the imp act of debt is the share of government resources 
that have to be paid to service debt, including principle and interest:  debt service as a share of total 
expenditures has improved from 38% in the pre-crisis years (1994-96) to 27% in recent years (2003-05), and is projected to be about 25% in 200 6. Rescheduling of bilate ral debt under the Paris 
Club contributed to easing the debt burden althou gh Paris Club rescheduling expired at the end of 
2005. 
13. In 2006, the Government pressed ahead with its objective of containing the fiscal deficit and 
redirected public expenditures to development and so cial goals.  According to the authorities, the 
deficit for 2006 was 1.0% of GDP against a planne d level of 1.2%.  The October 2005 increases in 
fuel prices cut around US$10 billion from subsidies, wh ich enabled the Governme nt to increase fiscal 
transfers to the regions from 5.4% in 2005 to an estim ated 6.9% in 2006 (Table I.3).  However, while 
fiscal transfers have increased substantially, the funds are sometimes not disbursed due to serious 
capacity limitations.
8  For 2007, the authorities are targeting a budget deficit of 0.9% of GDP.  Given 
the decline in oil revenues and pressing spending requir ements in infrastructure and social sectors it 
                                                      
7 Following the initial price rise, financial markets reacted sharply:  the r upiah slumped and foreign 
exchange reserves dropped by over US$5 billion in the five months to September, as the authorities reduced 
reserves to defend the currency and fund the increasing oil-related import bill.  Following the second price rise, 
which restored investor confidence, the Central Bank ra ised interest rates to support the rupiah and foreign 
reserves recovered to about US$35 billion by the end of the year (Asian Development Bank, 2006). 
8 According to Asian Development Bank (2007), as of November 2006, the regions were estimated to 
hold the equivalent of nearly US$10 billion (over 3% of GDP) in cash deposits. WT/TPR/S/184/Rev.1 Trade Policy Review 
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appears to be  increasingly necessary to rai se non-oil revenue and make improvements in the 
efficiency of public expenditure. 
Table I.3 
Summary of central government operations, 2002-06 
(Per cent of GDP) 
  2002 2003 2004 2005 2006 
Revenues and grants 16.0 16.8 17.6 17.8 19.1 
Tax revenues 11.3 11.9 12.2 12.5 12.3 
Non-tax revenues 4.7 4.9 5.3 5.3 6.8 
Grants 0.0 0.0 0.0 0.0 0.1 
Expenditure and net lending 17.3 18.5 18.6 18.3 20.1 
Current expenditure 10.0 9.2 10.3 10.9 10.2 
Personnel 2.1 2.3 2.3 1.9 2.2 
Subsidies 2.3 2.2 4.0 4.3 3.2 
Interest 4.7 3.2 2.7 2.3 2.4 
Other 0.9 1.5 1.3 2.3 2.5 
Development expenditure 2.0 3.4 2.7 2.0 3.1 
Transfers to regions 5.3 5.9 5.7 5.4 6.8 
Source:  Bank Indonesia online information.  Viewed at:  h ttp://www.bi.go.id/web/en/Ris et+Survey+Dan+Publikasi/ 
 Publikasi/. 
14. Important fiscal structural reforms have been  implemented in recent years although key issues 
remain to be addressed.  On the revenue side, progress has been made in modernizing tax 
administration but this is still hampered by low non-oil revenue collection caused by VAT exemptions, low excise tax levels, and widespread  corruption.  On the expenditure side, the 
restructuring of the Ministry of Finance has help ed to improve budget manage ment, but shortcomings 
in the decentralization framework and the prolifera tion of extra-budgetary funds continue to hamper 
fiscal management. 
(iii) Monetary and exchange rate developments 
15. The onset of the crisis in 1997-98 had led to a severe episode of inflation but the return of 
macroeconomic stability in 1999, to gether with minimal economic grow th, helped to bring inflation 
rapidly under control.  Inflation fell steadily over the course of 2003 owing to an appreciating rupiah, 
falling tariffs under ASEAN, as well the persistence of  considerable spare capacity in the domestic 
economy and stable base-money growth.  In 2004 , supported by a stronger rupiah and declining food 
prices, overall inflation continued the declining trend;   inflation for the full year came in at 6.4%, well 
within the 7% target set by the Government. 
16. Inflation then rose sharply to over 17% in  2005 as result of the Government cutting its 
expensive fuel subsidies in October 2005, more th an doubling the price of fuels.  Bank Indonesia 
raised its policy rate from 8.5% in July 2005 to 12. 75% in December, in an attempt to dampen rapid 
inflation sparked by the fuel price increases.  These two sets of measures restored international 
investor confidence, as reflected in a return of cap ital flows and a 7% appreciation of the rupiah in the 
first seven months of 2006.  But they also affect ed consumer spending, whic h lowered GDP growth to 
5% in the first half of 2006, from 5.9% a year earlier.   Partly due to the hike in interest rates, upward 
pressure on inflation had eased and by end-2006, the in flation rate was down to 6.6% for the full year 
compared with 17.1% in 2005.  The CPI improvement can in part be attributed to appreciation of the 
rupiah exchange rate, reductions in food price volatility, and the G overnment's announcement to defer 
plans to increase electricity tariffs.  Indonesia WT/TPR/S/184/Rev.1 
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17. The overriding objective of the independent Ba nk Indonesia (BI) in the conduct of monetary 
policy is to contain inflation.  It is likely that BI will continue to be cautious  and interest rates will be 
reduced only when inflationary pressures show real signs of dissipating.  The authorities are of the 
view that the flexible exchange rate system has served the economy well, and are committed to 
maintaining it as a system supportive of the inflation targeting framework.  BI's official policy is to 
allow the rupiah to float freely bu t it has intervened in the foreign exchange market to smooth abrupt 
movements in the exchange rate, without ta rgeting any specific exchange rate level. 
(iv) Balance of payments 
18. The current account surplus has been on a dow nward trend in relation to GDP largely 
reflecting a narrowing of the savings/investments gap.  Increasing demand for imports of capital 
goods and raw materials, as the economy picked up, as well as the rising oil import bill have led to a decline in the trade surplus.  Fu rthermore, the services account has remained negative, reflecting high 
transport charges associated with strong imports a nd lower tourism receipts.  Overall, the current 
account surplus fell from 3.4% of GDP in 2003 to 2.6% in 2006.  International reserves, reached 
US$43 billion in 2006 (five months of imports).  Re latively strong growth in international reserves, 
has allowed all remaining debt to the IMF to be repaid early.
9  Capital inflows have increased, 
especially in the form of portfolio investments, attr acted by favourable interest  rate differentials and 
improvement in the risk premium.  Accordingly, Indonesia's credit rating was upgraded in 2006 by the international rating agencies
10, and it is the authorities' aim to translate the gains in rating into 
attracting increased foreign and domestic investment.  
(v) Structural reforms 
19. The IMF programme drew to a close at the end of 2003, to be replaced by a post-IMF 
economic policy framework that emphasized:  firs t, consolidating macroeconomic stability;  second 
strengthening the financial sector;  and, third, strengthening investment, exports, and employment.  
The previous Government (July 2001 to Octobe r 2004) restored macroe conomic and financial 
stability and began a series of structural reforms ne eded to strengthen investment and growth.  The 
current Government (which took office in Octobe r 2004) has carried forward the necessary economic 
reforms with an intensified drive to improve th e investment climate.  Nevertheless, national 
competitiveness rankings continue to put Indonesi a below several comparable economies (such as 
China, India, Malaysia, and the Philippines) in  factors such as business environment, government 
efficiency, and quality of infrastructure.11 
20. The Government launched three policy reform packages in 2006, which include measures and 
actions to improve the investment climate, increas e infrastructure development, and continue reforms 
in the financial sector.  The three policy reform packages are designed to increase investment and 
deliver higher income and job growth over the medium term.  
                                                      
9 Indonesia's economic recovery enabled it to repay four years early the remaining US$3.2 billion of 
the US$11.1 billion it borrowed from the IMF in the years after the Asia n financial crisis.  
10 In May 2006, for example, Moody's upgraded the country's foreign currency rating to B1 from B2, 
citing declining fiscal deficits that have led to an overall improvement in government debt ratios.  It noted that 
Indonesia's debt to GDP ratio (below 50% at end 2005) was better than most countries rated B1.  Although 
Moody's acknowledged that the level of external debt is high, it considers that since the majority is owed to 
official creditors, it is less vulner able to external market shocks. 
11 In September 2006, the World Bank's Doing Business Report shows that, as regards being business-
friendly, Indonesia's ranking was 135 out of 175 countries (compared with 131 in 2005), and behind Thailand (18), Malaysia (25), China (93), Viet Nam (104), and the Philippines (126). WT/TPR/S/184/Rev.1 Trade Policy Review 
Page 8 
 
 
21. The Policy Package for Improvement of the Investment Climate  is a positive step, aimed at 
important improvements in infrastructure, appr oval of the investment law, fairness in tax 
administration, improvements in customs procedures , and labour market flexibility.  Recent measures 
to attract investment are yet to have a real im pact on reversing the decline in FDI, which has 
historically played a catalytic role in maintaini ng Indonesia's competitive edge.  At the heart of the 
policy package, issued as a Presidential Instructi on (Inpres 3/2006), is an investment bill submitted to 
Parliament in March 2006 aimed at drastically re ducing the time (and costs) of starting a business to 
30 days from an estimated 150 (Box I.1).  The proposed  law also seeks to shorten the "negative list" 
of sectors in which foreign investment is prohibited,  and to resolve areas of regulatory overlap created 
by regional autonomy.  The bill also calls for the revitalisation of the National Team for Increasing 
Exports and Investment , which focuses on strategic issues faced by the business community. 
Box I.1:  The investment climate policy package 
The Government announced a major new policy packag e to improve the invest ment climate in early 
March 2006 (Inpres 3/2006).  The pack age has time-bound targets and assigns  a minister for each target.  It 
is divided into:  general investment policies, customs, tax, labour policy, and SME policy.  Highlights 
include: 
- Submit the draft investment law to Parliament, and reach a decision on the status of the draft tax laws 
submitted in 2005, by the end of March 2006. 
- Stipulate a new investment negative list base d on clear, simple and transparent criteria. 
- Issue a Keppres (presidential decree) to revitalize the national export and investment team (PEPI) by 
the end of March 2006. 
- Cut the time to start a business from 150 days to 30 days, and simplify business licence requirements. 
- Activate a team at the Ministry of Finance to accelerate the review process for thousands of non-
business-friendly local regulations ( Perda ). 
- Reduce the percentage of import shipments sent through the red lane (physical inspection) to 20% by 
15 June, 15% by September, and 10% by end-December 2006. 
- Increase the number of priority lane compan ies from 71 to 130 by the end of the year. 
- Submit revisions to the Labor Protection Law (Law 13/2003) by April 2006. 
Most of the reform items in the package are not new, having existed in one form or another in previous 
policy statements.  Many of the items are also quite general, stating only what the government hopes to 
accomplish but not how it will be accomplished.  Howeve r, some of the reforms are specific, such as 
cutting the red lane to 10% and compiling a transparent negative list, and most targets include deadlines to 
ensure rapid implementation and specify the responsible minister. 
Meeting these targets will be challenging and will requi re high level coordination.  For example, cutting 
business start-up time from 150 days to 30 days will require changes in numerous licensing and approval 
procedures involving different ministries, agencies, and local governments.  Issuing the necessary 
implementing regulations for the new investment law will require making tough decisions about the role of the Investment Board, procedures for FDI, and busine ss sectors that will remain closed or restricted to 
foreign investors (the "negative list").  Finalizing the draft tax, customs, and investment laws will involve 
consultations with Parliament, th e business community and other stak eholders.  Because of the broad 
nature of the required reforms, no single ministry, or even a single coordinating ministry, can resolve 
investment climate problems.  
Recognizing the importance of implementation, the Government established an internal monitoring team to 
provide monthly progress reports for Inpres 3/2006.  Among important measures completed were:  
submission of the draft investment law to Parliament (21 March 2006); revitalization of the national export 
and investment team (16 March 2006);  simplification of eight business licences under the Ministry of Trade including the important Trade Business License or  SIUP (29 March 2006);  establishment of a team 
to review non-business-friendly local regulations (29 March 2006);  and simplification of visas and 
residence permit procedures for foreign investors and expatriate employees (29 March 2006). 
Source:   World Bank (2006), Investing for Growth and Recovery: The World Bank Brief for the Consultative Group on 
Indonesia,  14 June.  Viewed at:  http://siteres ources.worldbank.org/INTINDONESIA/Resources/
CGIO3/CGI_Brief2006_ExecSum.pdf. Indonesia WT/TPR/S/184/Rev.1 
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22. Reform of the labour law is central to the G overnment's efforts to boost job creation and 
encourage investment.  These reforms appear to have run into problems in 2006, stemming from a 2003 law that introduced a degree of flexibility to the labour market.  An attempt to ease these 
requirements by revising the 2003 law appeared to have stalled, as discussion continued on, inter alia,  
the law's provisions on severance payments (which are considerably larger than in comparable 
economies) and the ability of employers to outsource task s.  Similarly, legislat ors were still trying to 
resolve their differences, at end 2006, over the propo sed laws on investment and tax.  Early success in 
implementing the package would help enhance c onfidence in the business community.  The overall 
policy package is promising but implementation of su ch packages has been a source of concern in the 
past.
12 
23. The second policy package related to investment in infrastructure is aimed at removing major 
infrastructure bottlenecks, increasing public infrast ructure coverage, and attracting private sector 
investment (in order to sustain 6% to 7% economic growth).  The infrastructure agenda, to last until 
2010, covers nine infrastructure sectors:  land transp ort, air transport, sea transport, railways, roads, 
power, oil and gas, telecommunications, and water supply. 
24. Until recently, strengthening and supervising banks has been at the centre of Indonesian 
financial sector policy focus due to the scale of the economic crisis in the late 1990s.  In one of the 
costliest banking crises in the world, more than  50% of 2000 GDP was spent on recapitalizing the 
banks and putting them on a sound footing.  Afte r recovering about 28% of the US$60 billion assets 
entrusted to the Indonesian Bank Restructuring Agen cy (IBRA), the Government closed its operations 
in 2004.  Further plans to strengthen the financial sector were unveiled in July 2006, in the Financial 
Sector Policy Package, which consists largely of  regulatory changes, focusing on five themes:  
(i) measures to ensure greater financial stability by strengthening policy coordination between the 
Government, as the fiscal authority, and Bank Indon esia as the monetary authority;  (ii) banking 
institutions are to be strengthened by measures to  encourage consolidation through further bank 
mergers, and regulatory changes will permit stat e-owned banks to restructure and recover non-
performing loans;  (iii) capital markets will be strengthened through measure s to improve liquidity, 
efficiency, and integrity, including a merger of  the Jakarta and Surabaya stock exchanges;  
(iv) privatization is to be given new momentum through a privatization committee and the drafting of 
a strategy for privatization;  and (v) non-bank fi nancial institutions (NBFIs ) will be strengthened by 
measures to raise prudential standards and improve consumer protection.  The emphasis on the NBFI 
sector is noteworthy, as about 80% of the financial sector assets remain with the banks, reflecting an 
over-reliance on the banking sector and a lack of ch oice for borrowers and savers, which could be 
provided by robust NBFIs.  
25. Fighting corruption has a prominent place in  the reform agenda of the Government13, and 
while legislation has been in place for several year s, serious enforcement be gan only during 2005.  
The Government has initiated a significant anti- corruption drive, which may increase legal and 
regulatory clarity but its efforts need to be even and sustained at all levels.   
                                                      
 12 For example, a continuing debate on whether the Government should adopt an approval-oriented 
system or a straightforward registration system for investment has damaged investor confidence.  Other 
important concerns relating to investor protection and en forceability of contractual rights, the slowness of the 
judicial process, and corruption contin ue to dampen investor confidence. 
13 World Bank (2003) , p. v.  According  to the authorities, the number of anti-corruption prosecutions 
has increased since 2001, a result of th e combined efforts of the Attorney Ge neral Office, Police,  State Auditory 
Board (BPK), KPK, Anti-Money Laundering Unit (PPATK) and several other agencies.  Major recent 
corruption cases include:  conviction of the Aceh Governor;  several Governors and Bupatis;  Chairman and 
members of the KPU;  former Mini ster of religious Affairs, for mi suse of Haj funds;  and 43 local 
Parliamentarian members in West Sumatera  who were convicted of graft in 2005. WT/TPR/S/184/Rev.1 Trade Policy Review 
Page 10 
 
 
(3) DEVELOPMENTS IN TRADE  
(i) Trade in goods 
26. Declining oil and gas prices in the 1980s prompt ed Indonesia to diversify into non-oil and gas 
exports, pushing the non-oil and gas balance into surplu s in 1993 for the first time in over 20 years.  
In 2006, the impact of this policy could still be seen:  total exports were worth an estimated 
US$100.8 billion but oil and gas accounted for 18% of the total, despite high hydrocarbon prices 
(Table AI.1).  Merchandise exports decreased slightly as a share of GDP, from 29.6% in 2002 to 28.2% in 2006, whereas imports increased from 17.8% to 20%.
14 
(a) Composition of trade 
27. The share of manufactured exports decreased to 44.1% of total exports in 2006 from 54.1% in 
2002 (Chart I.1).  Indonesia is facing increasi ng competition in labour-intensive sectors such as 
textiles, clothing, and footwear from China and Viet Nam.  In 2005, both oil gas and non-oil gas exports contributed to the higher growth in exports.  Oil and gas continue to be exported mainly to 
Japan and the Republic of Korea.  The significant increase in non-oil and gas exports was due mainly 
to increases in primary commodity exports, including  copper, coal, crude palm oils, and manufactured 
products.  According to Bank Indonesia, the 17.7%  increase in exports in 2006 over 2005 was mainly 
attributable to rising prices rather than volume,  indicating that the competitiveness of Indonesian 
exports has not improved.  
28. Manufactured products account for the majority of imports although their share fell in 2006 to 
52.7% of total imports (Table AI.2).  Indonesia' s non-oil and gas imports consist mainly of raw 
materials and capital goods such civil engineering an d contractor plant, engines and parts, products 
related to domestic requirements for production, and investment activities.  The proportion of oil and 
gas imports rose substantially over the same period, from 21% to 31.2% of total imports, triggered by 
higher crude oil and fuel import prices.  Imports te nd to rise and fall in conjunction with exports 
because imports of goods, in particular in the ra w material and capital goods categories, are widely 
used as inputs in the production of export-oriented products. 
(b) Direction of trade 
29. Indonesia's geographical trade structure has shifted slightly since 2002.  Indonesia's major 
trading partners are increasingly Asian countries, which accounted for over two thirds of exports and 
imports in 2006 (Chart I.2 and Table AI.3).  Chin a has emerged as a major trading partner in recent 
years and exports to China have increased from 5.1%  to 8.3% of Indonesia's exports.  The share of 
exports to Japan  has increased slightly, while e xports to the United States and the EU25 have both 
declined.  Asian countries have been the largest suppliers of Indonesian imports for many years, 
particularly Japan (notably motor vehicles, iron, and steel) and Singapore (organic chemical products, 
plastic material)  and more recently China (ir on and steel products, manufacturing machinery).  
Indonesia also imports large amounts from the Unite d States (transportation vehicles, manufacturing 
machinery) and Europe, although their shares of Indo nesia's imports has been declining in percentage 
terms. 
 
 
                                                     
 
14 Based on BOP figures (based on UN Comtrade, figures for 2002 and 2006 are, respectively, 28.6% 
and 27.7% for exports and 15.6% and 16.8% for imports). Indonesia WT/TPR/S/184/Rev.1 
 Page 11 
 
 
Chart I.1
Product composition of merchandise trade, 2002 and 2006
2002 2006
(a)    Exports (f.o.b.)
Other manufactures
10.7
Manufactures
54.1
Total:   US$57.2 billion Total:  US$100.8 billion  
(b)    Imports (f.o.b.)
Iron & steel
4.5Chemicals
16.9Transport  
equipment  
9.5
Manufactures
58.8Non-electrical 
machinery
13.0Electrical
 machines  
5.0Agricultural 
raw materials
5.8
Other semi-manuf.
4.6 Other mining
3.3Fuels
21.0Agricultural raw 
materials
3.5Other
manufactures
3.9
Electrical 
machines
5.3Other mining
9.9
Other  semi-manuf.   
3.9Transport 
equipment  
9.6
Chemicals
14.3Manufacture
52.7Non-electrical 
machinery
10.4
Total:   US$31.3 billion Total:   US$61.1 billion Per cent
Manufactures
44.1
Mining
37.3Other electrical
 machinery
3.2Agricultural raw 
materials
6.4
Other electrical 
machines
3.1Food
11.6
Fuels
24.3
Office machines & 
telecom. equipment
10.7Other
0.5
Other semi-
manufactures  
10.1Office machines & 
telecom. equipment
6.0Agriculture
18.0
Other mining
5.2
Source :  UNSD, Comtrade database (SITC Rev.3).Other  
manufactures
5.3
Mining
35.0Other manufactures
10.5
Textiles & clothing
9.3
Other semi-
manufactures
  12.4Agricultural raw 
materials
4.3Food
11.5
Food
8.8Food
11.1
Mining
 24.2
Iron & steel
5.4Textiles & clothing
12.0
Fuels
27.4
Chemicals  
5.2Chemicals  
5.1Other 
0.6
Other mining
3.8Fuels
31.2Agric.
12.3Agriculture
16.8Mining
29.6Agriculture
15.8
 WT/TPR/S/184/Rev.1 Trade Policy Review 
Page 12 
 
 
Chart I.2
Direction of merchandise trade, 2002 and 2006
2002 2006
(a)    Exports (f.o.b.)
Other Asia  
6.2
Asia
63.8
Total:   US$57.2 billion Total:  US$100.8 billion
(b)    Imports (f.o.b.)
Other Asia  
8.6EC25
12.6United States
8.5
EC25
9.9
China
10.9 Thailand
4.9
Singapore  
16.4United States
6.7
Total:   US$31.3 billion Total:   US$61.1 billionPer cent
Asia
68.3Other Asia  
6.5
Middle East
2.7
Japan
21.1
Other 
Middle East
3.4Korea, Rep. of
4.7Korea, Rep. of  
5.3United States
13.2
Singapore
9.4
Other Asia  
11.3United States
11.2
Source :  UNSD, Comtrade database (SITC Rev.3).Japan
9.0EC25
11.9
Middle East
3.1
Asia
67.0Asia
61.0
Japan
14.1Australia
5.1EC25
14.3
Malaysia
3.6
Japan
21.6Malaysia
4.1
Malaysia  
5.2Chinese Taipei  
3.6Chinese Taipei
2.7
Singapore 
13.1China
5.1Korea, Rep. of
7.6Korea, Rep. of   
7.2
Other
5.3
Africa
5.3Australia
4.9
Other Middle East
3.6India  3.4
Thailand  2.1Australia  3.4
China
8.3Thailand  2.7
Saudi Arabia
3.5Saudi Arabia
5.5
China
7.8Malaysia   
3.3India  2.3Other   
5.8Other 
5.5
Singapore
8.9Australia  2.7
Other   
5.5
Thailand
3.8Africa
1.9
 Indonesia WT/TPR/S/184/Rev.1 
 Page 13 
 
 
(ii) Trade in services 
30. Many of the main elements of the invisibles account  run in constant defi cit.  A small domestic 
ocean-going fleet means that freight and shipping stay  in the red, which has been traditionally offset 
in part by inflows of tourism revenue.  Indonesia' s annual net deficit on services trade increased from 
US$18.5 billion in 2004 to 19.8 billion in 2005;  almost  two thirds of this relates to imports of non-oil 
and gas services.  The deficit in the non-oil and gas services account has widened owing to higher 
costs for freight and a drop in the number of foreign visitors to Indonesia. 
(4) FOREIGN INVESTMENT PATTERNS  
31. Gross domestic investme nt has remained weak:  after a strong recovery in 2000-01, following 
a sharp decline after the crisis, it has been relativ ely flat.  The share of investment in GDP has 
averaged around 22% since 2002, down from a peak of over 30% prior to the crisis.  Similarly, inflows of FDI collapsed after the crisis and ther e have only recently been signs of recovery.  The 
balance of payments recorded persistent net ou tflows of FDI between 1998 and mid-2002.  A more 
stable environment led to a sma ll positive inflow of US$145 million in net foreign direct investment 
but there was a further net outflow of US$597 million in 2003, owing to the poor investment climate 
and relatively ineffective regulation. 
32. The prospect of a more business-friendly enviro nment encouraged foreign direct investment 
to return in 2005;  balance of payments data showed a 79% increa se in FDI flows from US$3.9 billion 
in 2004 to US$6.9 billion in 2005.  It is estimated th at realized foreign direct investment and domestic 
investment fell to around US$6 billion and US$2.2 b illion respectively, in 2006, reflecting to some 
extent higher borrowing costs and continuing deficiencies in the business environment.  However, 
investment approvals rose, suggesting that realized  investment could increase again.  Data from the 
Investment Coordinating Board (BKPM) show that realized foreign investment rose from 
US$4.6 billion in 2004 to US$8.9 billion in 2005.  However, the level of realized foreign investment 
reported by BKPM is much higher than FDI inflows reported by Bank Indonesia (Box I.2). 
33. Investment approvals by the Investment Coor dinating Board (BKPM) remain at about the 
level of their post-crisis average, although there has been some improvement from the lows of 2002.
15  
In 2003, FDI approvals increased by 36% to US$1 3.2 billion over the previous year.  The value 
decreased to US$10.3 billion in 2004, and in creased again to US$13.6 billion in 2005 and 
US$15.6 billion in 2006, suggesting that efforts to pr omote investment may be starting to pay off.  
During the period under review, approved foreign di rect investment has b een concentrated in 
manufacturing, especially chemicals and pharmaceutical s;  food crops and plantations;  and transport, 
storage, and communication;  and construction (Table I.4). 
34. Most approval are for direct investment from Asia, especially Malaysia, Singapore, Korea, 
and Japan;  since 2004, there has been a lot of inte rest by Chinese companies.   European investment 
approvals, especially from the United Kingdom and th e Netherlands averaged around 15% of the total 
between 2002 and 2005 (Table I.5). 
                                                      
15 These approvals do not include investment in oil and gas, banking, non-bank financial institutions, 
insurance, leasing, and certain parts of mining and coal mining.  The BKPM is responsible for promoting 
foreign investment and approving most project proposals in Indonesia.  Other government agencies or ministries 
handle investments in the oil and gas, banking, and insurance industries.  The BKPM or the corresponding provincial board (BKPMD) approves foreign and domestic investment in other sectors. WT/TPR/S/184/Rev.1 Trade Policy Review 
Page 14 
 
 
Box I.2:  Reconciling different data sou rces for foreign direct investment (FDI) 
There are two main sources of FDI data in Indonesia:  balance of payments data from Bank Indonesia, and 
realized foreign investment data from the Investment Board (BKPM).  These two sources sometimes show 
very different levels and contradictory trends.  Both  sources show a large incr ease in FDI between 2004 
and 2005:  79% according to the BI data and 94% according to the BKPM data.  However, the BI data 
show total FDI inflows of US$6.9 billion in 2005, wh ereas BKPM data show realized foreign investment 
of US$8.9 billion during the same period.  The fact that the FDI level reported by BKPM is larger than that reported by BI is puzzling, because BI data are mo re comprehensive, covering all types of FDI, whereas 
BKPM data exclude investment in mining, oil and gas, financial services, and investment through the 
capital market.  The last factor was particularly impor tant in 2005 due to the purchase of local cigarette 
company Sampoerna by Philip Morris – a transaction in cluded in BI data but not in BKPM data.  This 
purchase accounts for roughly US$2 billion of the total US$6.9 billion FDI inflow in the BI data for 2005.  
Differences in the way BI and BKPM compile investment  statistics may explain this  anomaly.  BI collects 
data on FDI from multiple sources  whereas BKPM uses a single source:  the issuance of permanent 
business licences (IUT) by BKPM.  All investors approved by BKPM are required to obtain IUT licences 
after commencing commercial operation.  The IUT is norm ally issued only after a field check by regional 
staff to determine whether the investment has been carried out in accordance with the information on the 
original approval form.  Because th e field visit can be quite costly, many businesses in the past delayed 
applying for the IUT.  In 2005, BKPM extended a holiday on field visits on the condition that investors 
submitted their backlog of investment activity reports (L KPM) and other information required for the IUT.  
An increase in IUT licences in 2005 in response to th is incentive may have boosted the BKPM investment 
realization data and could partially explain the large difference between BI and BKPM data on FDI.  
Source:   World Bank (2006), Investing for Growth and Recovery: The World Bank Brief for the Consultative Group on 
Indonesia,  14 June.  Viewed at:  http://siteres ources.worldbank.org/IN TINDONESIA/Resources/ 
CGIO3/CGI_Brief2006_ExecSum.pdf 
Table I.4 
Approved foreign direct investment by sector, 2002-06 
(US$ million and per cent) 
Sector  2002 2003 2004 2005 2006a 
Total 9,966.6  14,361.6  10,423.5  13,579.2  15,634.0  
 (Per cent of total) 
Agriculture, forestry, and fishery 4.8 1.8 3.3 4.5 5.6 
Agriculture 4.7 1.0 2.0 3.4 5.0 
Forestry 0.1 0.7 0.0 0.9 0.0 
Fishery 0.0 0.2 1.3 0.1 0.6 
Mining 0.5 0.1 0.7 5.7 1.9 
Manufacture 33.2 46.6 61.4 44.4 54.5 
Food 2.7 3.6 7.1 4.7 6.5 
Textiles 1.0 0. 9 3.9 1.0 1.0 
Leather goods and footwear industry 0.1 0.3 0.2 0.6 0.2 
Wood 0.4 1.7 0.2 0.8 0.4 
Paper and printing industry 0.1 9.1 0.6 1.7 8.8 
Chemicals and pharmaceuticals 18.8 21.2 32.8 21.2 9.1 
Rubber and plastic industry 2.9 0.5 1.7 1.2 0.6 
Non-mineral metals 0.4 5.0 0.5 2.7 5.7 
Metal, machinery and electronic 
industry 3.6 2.4 9.8 5.1 19.2 
Precision instruments 0.0 0.0 0.0 0.1 0.0 
Motor vehicles and other transport 
equipment industry 2.8 1.4 4.1 4.6 2.8 
Others 0.4 0.6 0.5 0.6 0.2 
Table I.4 (cont'd) Indonesia WT/TPR/S/184/Rev.1 
 Page 15 
 
 
Sector  2002 2003 2004 2005 2006a 
Electricity, gas, and water 0.9 2.5 2.6 0.2 8.9 
Construction 3.3 6.3 9.3 13.1 15.2 
Services 57.3 42.6 22.8 32.2 13.9 
Trade and repair 8.9 3.4 6.0 4.8 7.2 
Hotel and restaurants 2.6 4.5 5.9 1.9 1.6 
Transportation, storage, and 
communication 37.3 32.0 5.6 22.9 2.1 
Real estate and business ac tivities 0.1 0.4 3.3 0.9 0.3 
Other services 8.4 2.4 2.0 1.7 2.8 
a Subtotals correspond to FDI fi gures up to end-October only. 
Source:  Indonesia's Investment Coordinating Board (BKPM ) online information.  Viewed at:  
http://www.bkpm.go.id/bkpm/file_fact/Tabel-33.xls  [5 April 2006]. 
Table I.5 
Approved foreign direct inve stment by origin, 2002-06 
(US$ million and per cent) 
Country 2002 2003 2004 2005 2006a 
Total 9,966.6  14,361.6  10,423.5  13,579.2  15,624.0  
  (Per cent of total)  
Europe 14.0 11.4 18.8 15.6 12.5 
Netherlands 2.4 2.5 2.5 3.5 0.4 
Belgium 0.1 0.0 0.1 0.1 0.0 
United Kingdom 7.5 7.1 12.6 11.3 6.5 
Germany 0.4 1.2 0.3 0.3 0.1 
Italy 0.0 0.0 0.1 0.1 0.2 
France  2.6 0.5 0.1 0.1 0.1 
Spain 0.1 0.0 0.1 0.0 1.0 
Luxembourg 0.0 0.0 0.1 0.0 0.4 
Switzerland 0.7 0.0 2.9 0.2 3.6 
Other 0.1 0.1 0.1 0.1 0.2 
America 4.8 3.2 2.0 4.7 2.7 
United States 4.7 1.5 1.3 0.7 0.9 
Canada 0.1 0.0 0.0 3.9 1.6 
Other 0.1 1.7 0.7 0.1 0.2 
Asia 63.0 22.9 62.6 49.0 42.5 
Hong Kong, China 17.2 1.8 0.2 0.9 2.2 
Japan 5.2 8.7 16.2 8.7 2.7 
Korea, Rep. of 3.8 1.2 4.0 3.1 4.9 
Malaysia 0.8 2.3 4.6 4.3 16.0 
Philippines 0.6 0.5 0.1 0.1 0.3 
Singapore 33.9 5.6 5.9 29.0 12.3 
China 0.5 1.8 0.3 1.5 0.8 
Chinese Taipei 0.8 0.8 0.7 1.0 1.6 
Thailand 0.1 0.1 0.9 0.1 0.9 
India 0.1 0.0 0.6 0.2 0.5 
Saudi Arabia 0.0 0.0 29.0 0.0 0.0 
Other 0.0 0.0 0.0 0.1 0.1 
Australia 2.8 0.9 4.6 3.8 0.2 
Africa 9.0 31.9 3.5 1.1 10.9 
Other 6.4 29.6 8.5 25.8 31.2 
a Subtotals correspond to FDI fi gures up to end-October only. 
Source:  Indonesia's Investment Coordinating Board (BKPM ) online information.  Viewed at:  
http://www.bkpm.go.id/bkpm/file_fact/Tabel-35.xls  [5 April 2006]. WT/TPR/S/184/Rev.1 Trade Policy Review 
Page 16 
 
 
(5) OUTLOOK  
35. The Government expects to return to higher-gro wth projections of between 6% and 6.5% for 
2007, with lower interest rates, declining infla tion, and structural reforms delivering a stronger 
recovery in investment and exports.  The positive pr ojections for Indonesia's economy also seem to be 
shared by investors and rating agencies as reflected in the recent improvement  of ratings for Indonesia 
by Moody's and Standard and Poor's. 
36. The main challenge in the medium term is to  increase growth to a level that can create 
sufficient jobs to constrain rising unemploym ent and underemployment and reduce poverty. The 
Government has adopted a comprehensive reform ag enda to strengthen publ ic institutions, improve 
the business and investment climate, and boost infrast ructure development.  If implemented in timely 
fashion 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 helping to accelerate 
growth and to reverse the rising trend in unemplo yment.  However, delays in implementing key 
structural measures, including tax and labour laws, could undermine investor confidence;  suggesting 
that growth in this case could remain in the sub-6% range (similar to that seen in the last few years) 
with unemployment continuing to trend upwards.