One of Indonesia’s crucial economic problems today lies in the fact that despite much improved macro-economic indicators, yet the real sector has remained stagnant, while most regional economies have remained sluggish. On the macro-economic front, economic growth in 2006 reached 5.5%, inflation for the year was pressed down to 6.6%, down from the 17.1% the year before. Exports reached a record US$ 100 billion value, the highest since the Asian economic crisis in 1997, while the Rupiah strengthened to Rp. 9,000 to the US Dollar, and the central bank again reduced its interest rates by 25 points to 9.5%.

So, why is it then, that in spite of the above positive economic signs and reformed legislation, where a large part of national budget is today remitted to the regions for implementation, - instead of being spent at national level - industry has been declining and regions have not shown much improvement.

Recent financial studies on this anomaly have shown that instead of spending these funds on development programs, most regions have preferred to place these in deposits or in BI certificates at their own regional development banks, to ensure availability of cash at a moment’s notice, thereby withholding funds that should have been channeled to the private sector and the community to improve industry and agricultural activities. 

To correct this situation, Minister of Finance, Sri Mulyani, has instructed autonomous regions to spend the funds that have been transferred to them to be utilized immediately, - rather to remain idle in banks - in order to advance regional economic activities. In a parallel action, the central bank, Bank Indonesia has re-activated its regional branches to ensure faster availability of loans, in particular to the real sector.

Bank Indonesia Deputy Governor, Muliaman Hadad, told the Kompas daily that one of the main focal points in the Bank’s development program for 2007 is the economic development of regions. For this reason the central bank has revitalized the function and roles of its regional branches to support the real sector. 

According to Bank Indonesia data, there is a huge imbalance in the distribution of loans in Indonesia. Jakarta alone absorbs 50% of all bank loans amounting to Rp. 382.27 trillion out of total of Rp. 767.07 trillion nation-wide. This means that the remaining 50% are channeled to no less than 29 other provinces. To correct this imbalance, BI will act as a center for information and data analysis at national, regional and sectoral levels, said Hadad.
 
In response, BNI bank said that it has given the authority to its regional heads to decide on loans of up to Rp. 25 billion.  Whilst BII said that it has long since decentralized powers to its regional heads to decide on regional loans.

But not only Regional Banks are slow in channeling loans. National Banks are similarly slow in providing loans to the real sector for fear of non-performing loans.
 
In an article in Bisnis Indonesia of 30 January, economist Rofikoh Rokhim wrote that of the total BI certificates of Rp. 212 trillion, some 40% are controlled by Regional Banks, of which the larger amounts are development funds for the account of Regional Governments.

There is nothing wrong with prudence, said Rokhim, however, when funds are lying idle in the banks, whilst these were in fact intended to boost the local economies, this becomes one of the main reasons why regional development has remained at a standstill.

A number of problems exist at the regional leadership, both at local Government as well as local parliament, said Rokhim, and they include : firstly: there is a lack of proper planning at regional level, while the decision-making process at the executive as well as the legislative levels is slow, with the result that regions have problems to absorb the allocated budget funds.

Secondly, regions consider Regional Banks as an important asset, and these are, therefore, not free from political interests and wrangling.

Thirdly, Regional Parliaments seem to indicate that there must be an increase in Regional Earnings (PAD). Therefore, in order to show on record that increased amounts have been earned by regions, funds are deposited at the regional banks.

Fourthly, Credit managers at the Regional Banks are also too slothful to study business potentials and regional prospects in their regions, including to find out what are existing business drawbacks and risks.  

Fifth, local Parliaments’ endorsement to the 2006 budgets in all of the 467 autonomous regions have proceeded very slowly indeed, with the result that only 20% of the allocated budget was absorbed during the first quarter, 55% in the second quarter and 69% in the third quarter.

Sixth, regulations on government procurement are overly complicated, causing slow implementation of projects.

In all, continues Rokhim, credits channeled by all banks grew by only 11% from a targeted 18%, while the real sector at national and regional levels have almost grounded to a standstill.

A number of options to solutions suggested by Rokhim are:

Firstly, there must be strong leadership at regional level, so that regional planning and implementation of the budget can be executed according to plan and timing.  Secondly, regional parliaments should change their paradigm of thinking. Namely that improving regional economy through increasing the activity of the real sector is more important than merely enriching the coffers of the region in banks.  Thirdly, Regional Governments as owners of Regional Banks must not only underline profits for these banks but also regional banks’ ability to channel loans for investments and industrial activities, since it is only through economic activities that the welfare of  local communities can be improved.
Fourthly, Regional Banks should increase the number of bank managers who are capable of channeling loans to various kinds of industries. Fifth, Regional Banks must strengthen their function as intermediary institutions, and focus on offering loans to specific segments of industry that offer best potentials to the region. Sixth, local governments and local parliaments must accelerate the formation and debate on the annual budget, to be approved one month before due implementation.

The Minister of Finance and Minister of Internal Affairs have together issued regulations, that provide sanctions to regions that can only show large incomes and investments, but neglect to implement the 24 areas of powers that are now entrusted to them as autonomous regions, that include, among others, the areas of health, development planning, transportation, the environment, land tenure, population issues, gender, labour issues, cooperatives, investments and others.

(Sources: Kompas, Bisnis Indonesia )       (Tuti Sunario)