Indonesia is at risk of an economic slowdown, due to regulations deemed unsuitable for the current global economic climate, the World Bank said in a recent report. (Antara Photo/Aprillio Akbar).

Indonesia Needs Reforms to Attract Foreign Investment, Survive Coming Global Recession: World Bank

BY : NUR YASMIN

SEPTEMBER 09, 2019

Jakarta. Indonesia is at risk of an economic slowdown, due to regulations deemed unsuitable for the current global economic climate, the World Bank said in a recent report.

In a study titled "Global Economic Risks and Implications for Indonesia," the World Bank found that an approaching global recession may curtail growth in the country's economy. This also applies to the United States, where there have already been signs of a recession, and Europe and China, which have been posting weak industrial output growth.

Low productivity, slow job growth and weaker global commodity prices are impacting Indonesia's gross domestic product.

The country relies heavily on foreign direct investment to cover its current-account deficit. However, global conditions are slowing investment flow, which ultimately hurt the economy. Complicated regulations further hamper investment inflows.

The study shows that Indonesia has been focusing on lowering its deficit through portfolio investments, which are unstable, as investors can withdraw them at any time. The World Bank recommends that Indonesia closes its current-account gap with stable capital from exports.

Moreover, increased foreign investment requires the country to remove complicated and time-consuming regulations.

President Joko "Jokowi" Widodo recently called out members of his cabinet for the country's failure to attract investment, while industries increasingly leave China for other countries.

Coordinating Maritime Affairs Minister Luhut Binsar Pandjaitan admitted that Indonesia's regulations turn investors away.

"The problem is that we have complicated regulations. Now the president is cutting all those regulations," Luhut said on Monday.

His recommendation is for Indonesia to follow the examples of Vietnam, Thailand, Singapore and Malaysia, who have made life easier for foreign investors.

The study shows that 33 manufacturers have left China for other countries, among them Vietnam, Cambodia, India, Malaysia, Mexico, Serbia and Thailand. Vietnam, the Philippines and India took measures last year to reduce restrictions on foreign investment, while it remains a risky process to relocate a factory to Indonesia, where such process may take more than a year to complete.

Manufacturing

The study also shows that Indonesia is largely cut off from the global supply chains of export manufacturers. Again, this is often due to unnecessary procedures.

An import permit can take up to six months to process, while a letter of recommendation from the Ministry of Industry is also required. Moreover, state-owned entities Sucofindo and Surveyor Indonesia must perform pre-shipment inspections, while third-party verification of compliance with the national standards is a further requirement.

Recommendations

The World Bank report makes some recommendations on how Indonesia could increase foreign investment. Firstly, it must improve the ease of doing business by eliminating pre-shipment inspections and letters of recommendation, which cause delays and sap investors' patience.

If the country wants to follow in the steps of Vietnam, Thailand and Singapore, it must relax limits on foreign participation in key sectors of its economy. More options for investors translate to more opportunities.

Due to often incoherent regulations issued by regional governments, Indonesia must create an instrument to ensure these are in sync with those made by the central government. The government must also sanction officials who obstruct the president's policy directions.

There have been too many and contradictory rules, which create uncertainty for investors. More than 6,300 ministerial regulations were issued between 2015 and 2018, compared with 5,000 between 2011 and 2014.

Additionally, there is no single entity tasked with ensuring that laws and regulations comply with the government's policy priorities.

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