Indonesia had quite a difficult year in 2005: it opened with the government still figuring out how to deal with a natural disaster of unknown dimensions (the tsunami of December 26 which left more than 200,000 victims dead and caused more than 5 billion dollars in damage). It tested the organization skills of a government that had only been appointed three months before. During the year, some external events (in particular the high rise of oil prices) forced the Government to enact some unpopular measures such as cutting fuel subsides (with two successive raises, in March and October, totaling 150%).  This had a significant impact on inflation of the average price of goods in the country. The Government, buoyed by high popularity, has in fact maintained its economic program based on macro-economic stability, pro-poor reallocation of the public expenditure and commitment to the promotion of bigger public/private investments in infrastructure. In December, a cabinet reshuffling brought some new “prestigious technicians” to the economic Ministries. For them the immediate objective is to bring the inflation rate back to a more sustainable level than the high inflation rate experienced when the fuel subsidy was reduced (about 17% in mid February 2006).

The security situation remains of concern, exemplified by persistent threats of terrorism. In October 2005 the second Bali bombings had a strong impact on tourism, the economic mainstay on the island. Minor incidents of terrorist threats have continued mainly in isolated areas within the region. On the positive side, the conclusion of the peace agreement in the Province of Aceh ended more than 30 years of conflict between the central government and separatist rebels.
 
The country continues to overcome the difficult years of the financial crisis that hit South East Asia at the end of the 90’s and that for Indonesia in particular, had serious political consequences. The return of political stability has been accompanied by strong growth above 5%.  However, most of this growth is based on the rise of internal consumption. The growth is still far from initial estimates projected by the government, which hopes to bring it back to pre-crisis levels (7-8% on annual basis) in the course of its mandate. The double-digit inflation at beginning of 2006 has been kept under control and was down to 6.6% at year end.

The last comprehensive World Bank report (Making the New Indonesia Work for Poor, 2007) says the drastic 2005 reduction in fuel subsidies, sharply declining debt service payments and an impressive increase in revenues have left the country with a massive US$ 15 billion windfall to spend on development. Policymakers are planning to allocate much of that towards bolstering the country’s creaky infrastructure, which threatens to put a brake on economic growth, and alleviating the plight of almost half of the country’s population (49%) who earn less than $2 a day. There has also been general stability in the exchange rate, which is affected by speculation pressures but still is maintained by the wise monetary policy held by the Central Bank.

On the other hand, despite the generally positive macro-economic picture, inefficiencies still abound. These include a high debt service; the public control of at least a third of the banking system — reducing efficiency in the sector; and the urgent need to continue reorganizing key sectors to modernize infrastructure. Foreign investment continues to be discouraged by the burden of an inefficient and often corrupt bureaucracy, the lack of clarity in the procedures of public administration, the uncertainty of fiscal norms and labor relations, the unreliability of energy distribution, and the decentralization process which was enacted in a hasty and confused manner.

The Yudhoyono government is still promoting structural reforms in the judicial system, the fiscal sector, and in labor regulations.  They are also striving to further define relations between the center and the composite periphery.    

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