VZCZCXRO0301
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #8006/01 1771039
ZNR UUUUU ZZH
R 261039Z JUN 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6337
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHKO/AMEMBASSY TOKYO 9873
RUEHBJ/AMEMBASSY BEIJING 3498
RUEHBY/AMEMBASSY CANBERRA 9659
RUEHUL/AMEMBASSY SEOUL 3685

UNCLAS SECTION 01 OF 05 JAKARTA 008006 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
AIDAC 
 
DEPT FOR EAP/MTS AND EB/ODF 
TREASURY FOR IA-BAUKOL 
USDOC FOR WGOLIKE/4430 AND JBENDER 
DEPT PASS TO USTR DKATZ AND WEISEL 
 
E.O. 12598: N/A 
TAGS: EAID EINV ECON EFIN KMCA PTER PREL ID
SUBJECT: DONORS OFFER FINANCING, EARTHQUAKE HELP AT CGI 
MEETING 
 
 
¶1. (U) Summary.  Coordinating Minister for the Economy 
Boediono and other Government of Indonesia (GOI) ministers 
expressed optimism that economic growth and investment would 
pick up in the second half of 2006 at the June 14 
Consultative Group on Indonesia (CGI) meeting in Jakarta. 
Several Ministers emphasized the need to boost investment, 
and expressed hope that new investment and infrastructure 
measures would help.  The GOI also announced several 
ambitious anti-poverty intitiatives, including nationwide 
community development and conditional cash transfer 
programs, though these are only in the concept and 
assessment phase.  Coordinating Minister for Political, 
Legal and Security Affairs Widodo Adi Sucipto reaffirmed the 
GOI's commitment to reducing corruption and said the GOI 
will establish a civil service reform institution reporting 
to the President.  Finance Minister Sri Mulyani Indrawati 
announced the GOI faces a USD 4.3 - 4.6 billion financing 
gap in 2006, which donor pledges of loans and grants more 
than covered at USD 5.4 billion.  A preliminary damage and 
loss assessment for the May 27 Yogyakarta earthquake was 
larger than expected, at about USD 3.1 billion.  Donors have 
already provided or pledged USD 64.1 million in earthquake 
assistance.  The Head of the Aceh Rehabilitation and 
Reconstruction Agency, Kuntoro Mangkusubroto urged donors 
not to forget Aceh, which still has a USD 1.3 billion gap 
between pledged funds and needs.  End Summary. 
 
Economic Outlook 
---------------- 
 
¶2.  (U) Coordinating Minister for the Economy Boediono 
chaired a meeting of the CGI meeting on June 14 attended by 
approximately 30 donor representations and a quarter of the 
GOI cabinet ministers.  Boediono and other Ministers 
emphasized that, "Indonesia needs more growth, and needs 
this growth to reach the poor better than the past." 
Boediono said he hopes that the new policy packages on 
infrastructure and investment would begin to stimulate 
growth in the second half of the year.  The GOI will also 
announce a new financial sector reform package to help 
strengthen capital markets, the banking sector, and the non- 
bank financial sector including pensions and insurance. 
 
More Investment Needed 
---------------------- 
 
¶3. (U) Boediono noted the "urgent need to change investor 
sentiment" about Indonesia.  Finance Minister Mulyani echoed 
Boediono, noting that growth has not been high enough to 
create sufficient job opportunities and cut poverty levels. 
First quarter growth was 4.6 percent YoY but Mulyani said 
she believes Indonesia could return to growth of 6 - 6.5 
percent in 2007.  She also acknowledged the need for more 
investment in Indonesia. "We realize regional competition 
for investment dollars is increasing with our Asian 
neighbors focusing their energies on creating a more 
favorable environment for the private sector.  Not only do 
we need to do the same, but better and faster."  Mulyani 
admitted the GOI was not happy with the pace of 
infrastructure projects, but noted she had recently signed a 
Ministerial decree (PMK 38/2006) for GOI risk sharing in 
infrastructure projects with public-private partnership. 
She said the Ministry of Finance (MOF) is also working hard 
to modernize the Directorates General of Tax and Customs, 
and remove illegal local taxes and levies. 
 
Fiscal Prudence 
--------------- 
 
¶4. (U) Mulyani emphasized that the GOI remains committed to 
fiscal prudence despite rising social needs and that 
Indonesia's economy is strong enough to weather macro 
shocks.  The budget deficit is trending towards 1.3 - 1.5 
percent of GDP for FY 2006, higher than the 0.5 percent in 
the 2005 budget.  Mulyani said the deficit is financeable 
despite recent volatility in foreign exchange and capital 
markets.  The MOF hopes the deficit would fall to between 
 
JAKARTA 00008006  002 OF 005 
 
 
0.7 and 0.9 percent in 2007.  The GOI's budget 
implementation is improving, with budget spending proceeding 
more efficiently than in previous years but still slower 
than expected.  As of April 31, the GOI had only spent Rp 
9.4 trillion (USD 1 billion) of a budgeted Rp 21 trillion 
(USD 2.2 billion) carryover spending from 2005. 
 
¶5. (U) Mulyani noted that President Yudhoyono approved a 
reorganization plan for the MOF in early June that will 
create new Directorates General for Fiscal Balance and Debt 
Management as well as a new Fiscal Policy Office with the 
goal of improving the quality of treasury management and 
public spending.  Despite the challenges, Mulyani was 
optimistic that the GOI would "continue to maintain 
macroeconomic policies that can endure potential external 
shocks and market disruptions." 
 
Development Policy Initiatives 
------------------------------ 
 
¶6. (U) Boediono also briefed donors on two new major 
development policy initiatives.  Under the first initiative, 
the GOI plans to scale up community-driven development 
programs, currently covering several thousand villages, to 
nationwide coverage over the next three years.  The goal is 
to improve local infrastructure and empower villagers to 
prioritize spending.  The second program would create a 
"world-class" Conditional Cash Transfer (CCT) program under 
which the GOI would give monthly cash transfers to poor 
families if they meet certain conditions, possibly including 
enrolling children in secondary school and obtaining pre- 
natal care for expecting mothers and vaccinations for 
children.  Boediono says the GOI envisions the CCT as an 
adaptation and improvement of the current unconditional cash 
transfer program, initially designed to protect the poorest 
households from the shock of the fuel price increases of 
October 2005.  The GOI hopes the new program could begin in 
2007, after the State Ministry for National Development 
Planning (Bappenas) completes an evaluation of the 
unconditional cash transfer program. 
 
Security, Governance and Civil Service Reform 
--------------------------------------------- 
 
¶7. (U) Coordinating Minister for Politics, Law and Security 
Widodo Adi Sucipto acknowledged Indonesia's security 
problems, stating that the GOI still needs to increase its 
efforts to fight terrorist acts.  The GOI has revised laws 
in Anti-Terrorism, and its Criminal Procedures Code.  The 
GOI also ratified the International Convention for the 
Suppression of Terrorist Bombing (through Law 5/2006) and 
International Convention for the Suppression of Financing 
Terrorism (through Law 6/2006).  Incidents of sea piracy 
have fallen from 94 in 2004 to 79 in 2005.  Legal sector 
reforms are still "far from public expectations, however." 
Widodo also acknowledged bureaucratic reform as a principle 
problem, stating "there have been numerous examples of 
nepotism within the recruitment, career and promotion system 
for civil servants that bring about the seeds of corruption, 
which breeds in every element of governance." 
 
¶8. (SBU) Boediono also noted that the GOI "recognizes the 
need for comprehensive civil service reform" and would 
establish a "new institution connected to the President's 
office, which will report directly to him."  In their 
comments, many donors noted that civil service reform is 
both politically and bureaucratically difficult.  The old 
socialist mindset of full employment regardless of results 
dies hard, and a number of overlapping agencies have 
responsibility for various aspects of the civil service. 
Indonesia's bureaucracy is currently an obstacle to reform, 
operating with distorted incentives, obsolete procedures and 
inappropriate skills.  Members of the CGI's Legal, Judicial 
and Anti-Corruption Working Group stated in writing that, 
"Donors consider a professional, merit-based, performance- 
focused, and responsive civil service as a major pillar of 
an effective corruption prevention strategy."  USAID is also 
 
JAKARTA 00008006  003 OF 005 
 
 
assisting in this area with programs to assist in anti- 
corruption efforts, as well as legal and judicial sector 
reform. 
 
Financing Gap 
------------- 
 
¶9. (U) Mulyani said that Indonesia's financing needs for 
2006 would be between USD 16.7 - 17.0 billion, of which the 
GOI will finance domestically USD 12.0 to 12.3 billion. The 
GOI plans to utilize foreign grants and loans to finance the 
additional USD 4.4 to 4.7 billion, of which CGI members will 
contribute USD 3.9 - 4.2 billion.  The GOI thus requested 
USD 4.3 to 4.6 billion to fill its financing gap. 
 
Yogyakarta Earthquake Damage and Loss 
------------------------------------- 
 
¶10. (U) Indonesia suffered its third major natural disaster 
Indonesia in 18 months on May 27, when a 6.3 magnitude 
earthquake struck the Javanese cultural and historical 
center of Yogyakarta and surrounding districts.  GOI 
officials presented the "Preliminary Damage and Loss 
Assessment" estimating the total loss and damage at USD 3.1 
billion.  (See www.rehabyogyajateng.bappenas.go.id for the 
full report.)  Estimates were much higher than previously 
expected because the quake hit 11 of the most densely 
populated districts in the country, home to more than 8.3 
million people, where much of the housing was poorly 
constructed.  An estimated 50,000 substandard houses 
collapsed, severely injuring thousands.  Yogyakarta is also 
Indonesia's second most popular tourist destination after 
Bali.  While its famous Borobudur Temple was undamaged, the 
9th Century Hindu Prambanan Temple suffered a "medium" 
amount of damage.  An estimated 30,000 small and medium 
enterprises (SMEs), including thousands of small-scale 
handicraft producers, suffered damage from the quake, 
causing a loss of earnings to about 650,000 workers and 2.5 
million of their dependents. 
 
¶11. (U) The human toll, while not as huge as Aceh, was still 
significant.  There are an estimated 5,700 dead, 40,000 
injured and 200,000 homeless.  Fortunately, unlike the 
December 2004 tsunami disaster in Aceh, much of the 
infrastructure (roads, airport) surrounding the Yogyakarta 
disaster area remain functional enough for relief supplies 
to flow in quickly.  Housing damage and losses account for 
50 percent of the total with 154,000 houses destroyed and 
260,000 damaged. 
 
¶12. (U) Boediono was unsure exactly how much budget funds 
the GOI would be able to put toward the earthquake 
reconstruction in 2006 and 2007.  However, at earlier 
meetings, senior BAPPENAS officials have said they hope the 
GOI could provide at least USD 500 million in funds.  Donor 
pledges to date for earthquake assistance total USD 64.1 
million, with several donors stating they could provide more 
after consultations with capitals and Parliaments. 
 
Don't Forget Aceh 
----------------- 
 
¶13. (U) The head of the Rehabilitation and Reconstruction 
Agency for Aceh and Nias (BRR) Kuntoro Mangkusubroto urged 
donors not to forget the ongoing needs in the tsunami-and 
earthquake affected areas of Aceh and Nias.  Of the USD 6 
billion needed in Aceh, donors have only committed USD 4.7 
billion of a pledged USD 7.1 billion.  Kuntoro expressed 
concern that international non-governmental organizations 
(NGOs) and other donors may not cover the USD 1.3 billion 
gap because they are distracted by new crises. 
Reconstruction is expensive, Kuntoro noted, and inflation is 
affecting prices for materials and labor.  Kuntoro also 
reaffirmed BRR's commitment to fighting corruption, noting 
its anti-corruption unit had investigated 465 of 528 reports 
of corruption.  Aceh remains the "biggest reconstruction 
challenge in recent history," Kuntoro emphasized.  "There is 
 
JAKARTA 00008006  004 OF 005 
 
 
no room for complacency or misplaced competition.  More help 
is needed." 
 
Donors Respond Generously 
------------------------- 
 
¶14. (U) Donors responded generously to Indonesia's request 
for assistance, more than covering Indonesia's financing 
gap.  Total CGI pledges came to USD 5.4 billion, USD 3.9 
billion in the form of loans or grants channeled through the 
central government budget.  Of the USD 3.9 billion, USD 3.7 
billion is loan assistance and USD 200 million is grant 
assistance.  The World Bank said it would provide USD 900 
million - 1.1 billion, noting it was impressed with the 
"clarity of Indonesia's objectives."  The Asian Development 
Bank said it would provide USD 300 million in project loans 
and 600 - 700 million in program loans, along with USD 10 
million for earthquake response.  Indonesia is the U.K.'s 
largest development program in Southeast Asia at USD 92 
million with additional USD 45.5 million of grant 
assistance.  South Korea is providing USD 100 million in 
loans.  Germany is giving USD 240 million in project 
assistance this year along with USD 1.6 million in 
earthquake relief.  Japan did not announce a dollar figure, 
but noted its assistance to Indonesia includes soft loans, 
grants, infrastructure lending and other project assistance, 
as well as disaster mitigation and response planning. 
 
¶15. (U) USAID Director Frej emphasized that the GOI's 
leadership has been impressive in several areas including 
community-driven reconstruction efforts; commitment to peace 
in Aceh; its regional leadership in ASEAN; and its deepening 
of democracy and its counter-terrorism efforts.  USAID has 
committed USD 170 million for FY 2006 and anticipates the 
Millennium Challenge Corporation's Threshold program, if 
approved, would be about USD 55 million.  The U.S. also 
provided USD 5 million in emergency earthquake assistance. 
USAID's ongoing assistance programs will help in several 
priority areas: 
 
  a)   improving the quality of basic education; 
  b)   improving the delivery of essential public services at 
     the community level; 
c)   creating a better business, trade and investment 
environment that will support economic growth; 
  d)   promoting more accountable and transparent governance 
     at the national and local levels; and 
  e)   promoting biodiversity and environmental protection. 
 
GOI Participation 
----------------- 
 
¶16. (U) Vice President Jusuf Kalla delivered a luncheon 
address to CGI participants.  Other GOI Ministers who 
attended all or some of the meeting included Coordinating 
Minister for Political, Legal and Security Affairs Widodo 
Adi Sucipto; Coordinating Minister for the Economy Boediono; 
State Minister for National Development Planning Paskah 
Suzetta; Minister of Finance Sri Mulyani Indrawati; Minister 
of Trade Mari Elka Pangestu; Attorney General Abdul Rachman 
Saleh; and Minister of Industry Fahmi Idris.  Governor of 
Bank Indonesia Burhanuddin Abdullah attended the morning 
session, and Anti-Corruption Commission (KPK) Deputy 
Chairman Erry Riyana Hardjapamekas also participated in the 
meeting. 
 
Comment: Has the CGI Format Run its Course? 
------------------------------------------- 
 
¶17. (SBU) For the second consecutive time, the GOI organized 
and hosted the CGI meeting, which it had postponed several 
times from January, to March, to June.  At the end of the 
day, the Yogyakarta eatthquake likely  motivated the GOI to 
nail down ad ate.  We agree with Canada, Germany, and other 
donors who have suggested the CGI format may have run its 
course and should be redefined  to facilitate more 
substantive discussion of development policies rather than 
 
JAKARTA 00008006  005 OF 005 
 
 
serve as a pledging forum.  Given Indonesia's heavy debt 
burden, the GOI is also uncomfortable with the image of 
Indonesia seeking foreign loans from so many wealthy 
countries.  Although the GOI did not announce any changes on 
June 14, we suspect it will reform the CGI format before 
calling the next meeting, possibly by eliminating the 
pledging session and relabeling the CGI as a "development 
forum." 
 
AMSELEM