Completion Report. Program Number: Loan Number: 2563 August Indonesia: Countercyclical Support

Transcription

1 Completion Report Program Number: Loan Number: 2563 August 2011 Indonesia: Countercyclical Support

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3 CURRENCY EQUIVALENTS Currency Unit Rupiah (Rp) At Loan Negotiations At Program Completion (7 September 2009) (31 March 2010) Rp1.00 = $ $ $1.00 = Rp10,115 Rp9,095 ABBREVIATIONS ADB Asian Development Bank BAPPENAS Badan Perencanaan dan Pembangunan Nasional (National Development Planning Agency) CCT conditional cash transfer CSF countercyclical support facility GDP gross domestic product GFC global financial crisis INO-CS Indonesia Countercyclical Support MOF Ministry of Finance OCR ordinary capital resources PESF Public Expenditure Support Facility PFM public financial management RPJM Rencana Pembangunan Jangka Menengah (national medium-term development plan) UCT unconditional cash transfer

4 NOTES (i) (ii) The fiscal year (FY) of the Government and its agencies ends on 31 December. In this report, "$" refers to US dollars. Vice-President-in-Charge B.N. Lohani, Operations 2 Director General K. Senga, Southeast Asia Department (SERD) Director S. Hattori, Public Management, Financial Sector, and Trade Division, SERD Team leader Team members K. Bird, Senior Economist, SERD E. Dizon, Operations Assistant, SERD E. Ginting, Senior Economist, Indonesia Resident Mission, SERD L. Jovellanos, Senior Economics Officer, SERD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

5 CONTENTS Page BASIC DATA I. PROGRAM DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2 A. Relevance of Design and Formulation 2 B. Impact of the Indonesia Countercyclical Support Loan 3 C. Loan Costs and Disbursements 8 D. Loan Schedule 8 E. Implementation Arrangements 9 F. Conditions and Covenants 9 G. Related Technical Assistance 9 H. Performance of the Borrower and the Executing Agency 9 I. Performance of the Asian Development Bank 9 III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Effectiveness in Achieving Objectives and Scope 10 C. Efficiency in Achieving Objectives and Scope 10 D. Preliminary Assessment of Sustainability 11 E. Impact 12 IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons 12 C. Recommendations 12 APPENDIXES 1. Indonesia Selected Infrastructure and Social Assistance Programs Status of Compliance with Loan Covenants 15

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7 i A. Loan Identification BASIC DATA- INDONESIA COUNTERCYCLICAL SUPPORT BASIC DATA 1. Country Indonesia 2. Loan Number Project Title Countercyclical Support 4. Borrower Republic of Indonesia 5. Executing Agency Ministry of Finance 6. Amount of Loan $500 million 7. Project Completion Report Number 1248 B. Loan Data 1 Loan Negotiations Date Started 7 September 2009 Date Completed 10 September Date of Board Approval 07 October Date of Loan Agreement 31 December Date of Loan Effectiveness In Loan Agreement 14 February 2010 Actual 29 January 2010 Number of Extensions Closing Date In Loan Agreement 31 March 2010 Actual 31 March 2010 Number of Extensions 0 6. Terms of Loan Interest Rate (Grace Period) LIBOR rate plus 2% spread Maturity (number of years) 5 years Grace Period (number of years) 3 years 7. Disbursements a. Dates Initial Disbursement Final Disbursement Time Interval 26 March 2010 One-time release 0 Effective Date Original Closing Date Time Interval 29 January March months b. Amount (SDR) Original Actual Original Allocation $500,000,000 Amount Disbursed $500,000,000 Undisbursed Balance 0

8 ii C. Program Performance Report Ratings Ratings Implementation Period Development Objectives Implementation Progress 1 January to 31 March 2010 Satisfactory Satisfactory D. Data on Asian Development Bank Missions Name of Mission Date No. of No. of Specialization Persons Person-Days of Members 1.Contract 7 8 September a, a, b Negotiations 2.Loan Review May a, c, a a = economist, b = counsel, c = senior governance specialist.

9 I. PROGRAM DESCRIPTION 1. The Indonesia Countercyclical Support (INO-CS) program was a single tranche loan of $500 million from the ordinary capital resources (OCR) of the Asian Development Bank (ADB) under ADB's Countercyclical Support Facility (CSF). 1 The INO-CS loan was approved by ADB on 29 October 2009 and the loan agreement became effective on 29 January The loan was designed to maintain the momentum of Indonesia s economic recovery that started at the end of 2009 and key development efforts at a challenging time of limited access to global financial markets and the first global recession since World War II. As the global financial crisis intensified after September 2008, it affected the Indonesian economy in four related ways: (i) the first-round effects of the global financial crisis had repercussions for the domestic financial sector, leading to significant capital flight and exchange rate depreciation in the second half of 2008; (ii) the second-round effects of the sharp contraction in global demand hurt the real economy, resulting in a slowdown in economic growth from the fourth quarter (Q4) of 2008 until Q3 2009; (iii) the crisis resulted in a decline in tax revenue collection and a higher national budget deficit than initially planned, at a time of limited access to global credit markets; and (iv) the crisis threatened to undo recent gains in reducing unemployment and poverty. 2. As the second-round effects of the crisis began to harm the real economy and the government's fiscal position, the Government of Indonesia requested that ADB provide a countercyclical support loan of $500 million to support its public expenditure program for the second half of 2009 and The request for financing stemmed from the government s concerns about ensuring predictability in its budget financing, given the necessity for a temporary fiscal stimulus in 2009 and its continuation in The government had projected a budget deficit of 2.5% in 2009, with a net financing requirement of Rp133.0 trillion. The proposed budget deficit for 2010 was 1.6%, with a net financing requirement of Rp98.0 trillion. The objective of the INO-CS loan was to provide the government with financing to provide additional fiscal stimulus in 2009 and 2010, while servicing the costs of existing debt, which were projected to rise. (footnote 2). 3. The government s fiscal policy response to the economic slowdown was swift. It announced a revised national budget in February 2009 that included significant countercyclical spending measures including tax cuts and increased spending on existing social assistance programs. It announced additional spending on infrastructure and maintenance in July 2009 as part of its fiscal stimulus package. It also introduced measures to speed up disbursement of critical public spending, and included a more modest second-round fiscal stimulus package in the 2010 budget. 4. The objective of the INO-CS loan was to provide the government with financing to provide additional fiscal stimulus in 2009 and 2010, while servicing the costs of existing debt, which were projected to rise. The loan supported government infrastructure investments aimed at improving the welfare of targeted groups in the social sector. The loan targeted competitiveness-enhancing projects in agriculture and traditional distribution sector, and other investments with a clear development impact. It also supported the scaling up of social assistance programs in 2009 and ADB Enhancing ADB s Response to the Global Financial Crisis-Establishing the Countercyclical Support Facility. Manila. 2 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of the Indonesia: Countercyclical Support. Manila.

10 2 II. EVALUATION OF DESIGN AND IMPLEMENTATION A. Relevance of Design and Formulation 5. The loan program was highly relevant in design and formulation as it was embedded in the government s fiscal stimulus packages for 2009 and 2010, and was an outcome of ADB policy dialogue with the government and coordination with development partners under existing loan programs to Indonesia (footnotes 3 and 4). The program was designed to support an effective fiscal stimulus program, which required a financing facility that was timely, welltargeted, and temporary. ADB businesses processes were simplified to enable rapid processing of the loan, with Board approval occurring about 10 weeks after loan processing began. The loan became effective on 29 January 2010 and disbursement was made on 26 March The loan has a short tenure of 5 years, and was priced at 200 basis points above the London interbank offered rate (LIBOR) to reflect the special features of the facility as a temporary crisis mitigating measure, as opposed to a policy-based program loan with policy conditionality aimed at a longer term development impact. 6. A central feature of the loan was the monitoring of the government s countercyclical fiscal stimulus program. The government, in coordination with ADB and other development partners, established a monitoring mechanism for its fiscal stimulus program. Semiannual reviews of macroeconomic performance and the government s countercyclical expenditure program are carried out under the mechanism. The monitoring mechanism is based on country monitoring systems and comprises three parts: (i) an established interministerial committee is responsible for monitoring the fiscal stimulus package, with the National Development and Planning Agency (BAPPENAS) responsible for reporting on the infrastructure component of the package; (ii) the country's public financial management systems are used to monitor aggregate budget data; and (iii) the mechanisms of civil society organizations and development partners are used to monitor selected projects supported under the loan. 7. The loan did not include required policy actions, as its objective and scope were to provide budget support for the government s fiscal stimulus. Nevertheless, the loan is an outcome of ADB policy dialogue with the government and coordination with development partners under existing loan programs to Indonesia. The loan complemented two existing programs: the Development Policy Support Program, a series of six annual, single-tranche loans supporting the development policy agenda of the government, as envisioned in the national medium-term development plan (RPJM); 3 and the Public Expenditure Support Facility (PESF), a stand-by loan facility approved by the ADB Board of Directors in June The key objective of the PESF is to provide insurance in the event that global financial markets once again severely tighten as they did in Q To access the funds, the government must be unable to meet specified quarterly financing targets within agreed market access conditions, and must continue to maintain an appropriate macroeconomic policy framework. No PESF funds have been disbursed, as global credit market conditions improved substantially relative to September 2008, and the PESF was financially closed in September Cofinanced by the World Bank and the Government of Japan. ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of Indonesia for the Fourth Development Policy Support Program. Manila. 4 ADB Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of Indonesia for Public Expenditure Support Facility Program. Manila.

11 3 B. Impact of the Indonesia Countercyclical Support Loan 8. The government and ADB agreed to monitor the impact of the INO-CS loan in two respects: (i) macroeconomic management of the increased risks to the domestic economy resulting from the global financial crisis (GFC), and (ii) actual implementation of the government s programs supported by the loan, as described in the report and recommendation of the president (footnote 2) and detailed in Appendix The Government s Macroeconomic Management in The government s macroeconomic management of the increased risks to the economy from the GFC and its fiscal stimulus package allowed Indonesia to weather the GFC much better than originally expected. This performance is reflected in the country's respectable economic growth rate in 2009, its strong recovery in 2010, a better-than-expected fiscal outturn, an improved balance of payments, and yields on government bonds returning to lower pre-gfc levels. The fiscal stimulus, the front-loading of budget financing in the first semester of 2009, and an accommodative monetary policy contributed to the better-than-expected performance. 10. After declining for three consecutive quarters (starting in Q4 2008), economic growth began to recover in Q With economic activity picking up toward the end of the year, gross domestic product (GDP) grew 4.6% in 2009 better than earlier projections of 3.0% 4.0% growth. Consequently, the output gap of -1.4% in 2009 was lower than the projected -3.0%. 5 As Figure 1 (graph a) shows, the negative output gap in 2009 turned out much smaller than the negative output gaps that arose from the trade shocks of the early 1980s and While the earlier shocks were different in nature and the economy is much more diversified today than it was in the 1980s, the difference is also indicative of the government s better macroeconomic management in The government s fiscal stimulus package contributed to the lower-than-expected negative output gap. Government consumption on routine expenditure items expanded by 17.0% year-on-year, which contributed an estimated 1.4 percentage points to the economic growth rate in 2009 (Figure 1, graph b). However, the real effect of fiscal stimulus on the economy was much larger, as the 1.4 percentage point figure does not include the effects on household spending from the tax cuts (Rp53 trillion) and additional infrastructure spending (Rp9.2 trillion). In the national income accounts, public investments are recorded in the investment component and not the government consumption component. ADB staff estimate that overall the fiscal stimulus package contributed percentage points to GDP growth in Thus, economic growth would have been about 3.0% in 2009 without the stimulus package (Figure 1, graph d). Household consumption remained resilient in 2009, expanding by 4.9%, aided by sizeable tax cuts made in early Exports also recovered toward the end of 2009 after contracting sharply during the first half of the year. However, the contribution of exports was offset by a strong recovery of imports. Investment growth (except for construction) remained subdued throughout 2009, with large contractions in the machinery, equipment, and transport categories (Figure 1, graphs a and b). 12. The acceleration of economic growth that began in Q continued into 2010, with the economy expanding by 5.9% in the first half of Consumption and investment have 5 The output gap measures the difference between actual economic growth and the economy s potential growth rate. A negative output gap indicates growth below potential.

12 % growth % growth yoy 4 been the main drivers of growth in All categories of investment rebounded strongly in Government spending contracted relative to 2009 as the government began to unwind its fiscal stimulus. Figure 1: Indonesia s Growth Performance (a) Actual and Potential Economic Growth (quarterly growth, year-on-year) (b) Components of Economic Growth (quarterly growth, year-on-year) Q1 Q2 Q3 Q4 2010Q1 Q2 Actual Growth Potential growth GC PC INV EX IM (c) Components of Investment Growth (quarterly growth, year-on-year) (d) Economic Growth With and Without the Fiscal Stimulus Q1 Q2 Q3 Q4 2010Q1 Q Construction Machinery and equipment Transport Growth with stimulus Growth w/o stimulus Notes: GC = government routine spending, PC = private consumption, INV = public and private investment, EX = exports, IM = imports. GDP = gross domestic product. Indonesia's potential economic growth rate is estimated using the Hodrick-Prescott filter, which estimates a nonlinear trend in the economic growth data. The difference between the potential and actual growth figures is defined as the output gap. The fiscal response assumes a fiscal multiplier of slightly above 1.0 with smaller carryover effects into Sources: National Income Accounts, Central Bureau of Statistics; Ministry of Finance; ADB staff estimates. 13. The fiscal outturn for 2009 was also better than expected. The actual budget deficit for the year was 1.6% of GDP, lower than the 2.4% projected in the revised budget. Tax revenue ended very close to the government's revised target (99.8%) despite the reduced tax rates under the government's stimulus package. The better-than-expected performance in tax collection was attributed to substantial payments of value-added tax arrears made in December 2009, supported by the government's efforts to enhance tax administration and compliance. At

13 5 the same time, non-tax revenue from the gas industry also performed stronger than expected because of increased gas extraction. On the expenditure side, the government managed to spend about 95.6% of its spending target listed in the revised budget. The government also managed to spend 94.7% of the additional infrastructure budget under the fiscal stimulus package (Rp9.2 trillion) by the end of The pressure on budget financing also eased significantly toward the end of the year. The improved confidence in the economy resulted in yields for both dollar and rupiah bonds declining significantly across all tenors (Figure 2). Reflecting improving economic prospects and lower risks, the rating agencies upgraded Indonesia's foreign and local-currency sovereign bonds. 6 Figure 2: Spread over UST 10-Year UST = US Treasury bills. IND-US = spread between Indonesia sovereign dollar bonds and UST. PHI-US = spread between Philippines sovereign dollar bonds and UST Source: Asian Development Bank. 14. Monetary policy was accommodative in However, credit growth was much lower than expected given the accommodative policy. Despite Bank Indonesia s money rate falling 300 basis points in 2009, lending rates barely moved. Deposit rates fell, resulting in an increase in interest rate margins, perhaps indicative of increased risks in the banking system during the GFC. Credit to the private sector expanded by just 11.5% in 2009, compared with 32% in However, toward the end of 2009 credit growth improved significantly, supported by improved investor confidence and growth expectations. 15. Indonesia's external position also improved markedly. Overall, the balance of payments recorded a surplus of $12.5 billion, compared with a deficit of about $2 billion in The rebound was supported by significant improvement of both the current account and the capital account. Net export of goods recovered markedly from $6.9 billion in Q to $11.5 billion in Q The surplus in the financial accounts was driven by increased capital inflows into government local-currency bonds, equities, and private sector bonds. Net portfolio investment increased from $1.9 billion in Q to $3.3 billon in Q However, foreign direct investment declined from $3.4 billion in 2008 to $2.3 billion in With significant improvement in the balance of payments, the country's gross international reserves increased to $66.1 billion at end-december 2009, sufficient to cover 6.5 months of imports and debt service payments. 6 Moody's in September 2009; Fitch and Standard & Poor's in early 2010.

14 6 16. The labor market had also improved in Four years of solid economic growth generated 2.7 million formal jobs from 2005 to 2008, of which 1.6 million were created in Coinciding with robust employment growth was a continuous decline in unemployment, from 11.5% of the labor force in 2003 to 8.1% in According to the Central Bureau of Statistics Household Labor Force Survey, employers reduced hiring activity as the crisis took hold only about 400,000 additional formal jobs were created from February 2008 to February However, the informal sector continued to expand, with the hiring of more than an additional 2 million workers in informal activities (defined as casual workers, self-employed, and unpaid family workers). The labor market rebounded strongly in the second half of 2009 and this continued into The unemployment rate fell to 7.4% in February 2010 from 8.1% a year earlier. Formal employment also recovered strongly, as 2.2 million additional regular wage jobs were created by February 2010 over February Informal employment expanded by 3.2 million. BAPPENAS estimates that the government s infrastructure stimulus program created about 1.1 million wage jobs in Respectable growth in 2009 and the government s fiscal stimulus package also mitigated the worst effects of the GFC on poverty. The latest poverty data indicate that the incidence of poverty fell to 13.3% in March 2010, two percentage points lower than in early The Government s Countercyclical Fiscal Stimulus Program 17. The government included fiscal stimulus measures in the revised 2009 national government budget announced in February 2009 and announced an additional infrastructure stimulus package in July ADB estimates that the total stimulus measures were about Rp138 trillion. Figure 3 (graph a) shows the composition of the fiscal stimulus implemented in About 95.0% of commitments were implemented in Tax cuts amounting to Rp53 trillion accounted for the largest component, at 38.0% of the stimulus package, followed by capital spending on maintenance and materials, social assistance, and the additional capital spending on infrastructure program. Figure 3 (graph b) shows the composition of the capital spending on the infrastructure program of the fiscal stimulus. About 94.7% of commitments were disbursed and implemented in Projects under the Department of Public Works, which covered construction and rehabilitation of national roads, bridges, rail infrastructure, and ports, accounted for 57% of implemented projects. Next most prevalent were projects implemented under the Ministry of Transportation (19%). Appendix 1 reports on the implementation rates of the government s stimulus programs supported by the INO-CS program.

15 7 Figure 3: Composition of the Fiscal Stimulus Package (a) Key stimulus measures Social assistance 33% Tax cuts 38% Capital maintenance and materials 22% Infrastructure 7% (b) Composition of the Infrastructure Component of the Fiscal Stimulus Ministry of Housing 4% Others 11% Ministry of Trade 3% Ministry of Health 1% Ministry of Labor and Transmigration 2% Ministry of Transportaton 19% Ministry of Public Works 60% Source: Ministry of Finance and Ministry of National Development and Planning (BAPPENAS). 18. Disbursement of capital spending on maintenance, materials and infrastructure improved significantly following the policy to simplify disbursement procedures introduced in early 2009, which contributed to a high rate of disbursements for However, despite the improved disbursement rate, the spending pattern was still severely skewed toward the end of the year. Almost 50% of the budgeted capital spending on maintenance and materials were disbursed in Q About 67% of capital spending on the additional infrastructure projects under the fiscal stimulus package was disbursed in Q (Figure 4). This skewed spending pattern limited the timeliness of the fiscal stimulus from capital spending, as the fiscal impulse was most needed in the first half of 2009, when the economy was slowing sharply. On the other hand, the tax cuts implemented in early 2009 and the scaling up of social assistance had a timely impact on household consumption and economic growth.

16 % of total planned 8 Figure 4: Disbursement rate of the Infrastructure Component of the Fiscal Stimulus in Mar Jun Jul Aug Sep Oct Nov Dec Notes: The total budget allocation for the infrastructure component of the fiscal stimulus was Rp10.2 trillion. Of this, 94.7% was disbursed and implemented in Source: December 2009 Report on Monitoring the Fiscal Stimulus, National Development and Planning Agency (BAPPENAS). 19. The skewed disbursement pattern was primarily caused by significant weaknesses in public financial management and project readiness. The key spending agencies (the ministries of education, health, public works, communication, and transportation) suffer from low capacity, which caused disbursement and procurement delays and resulted in under-execution (especially in capital spending) and back-loaded spending toward the end of To address the low disbursement rates typical in the first half of every fiscal year, the Ministry of Finance implemented measures at the end of 2008 aimed at accelerating the procurement process and using savings from the 2008 budget outturn. These measures included (i) promoting advance procurement processing, appointing multiyear Treasury officers, and speeding up disbursements through the Treasury; (ii) establishing a committee to monitor the 2009 budget activity list and improve budget disbursements; (iii) improving the recording and reporting system in budget spending units; and (iv) issuing a series of circulars with simplified mechanisms and processes to carry over unspent 2008 budget funds. But these measures only modestly improved the disbursement rate of government expenditures. C. Program Costs and Disbursements 20. The INO-CS program was a single tranche loan of $500 million from ADB s ordinary resources. Disbursement of the loan followed the simplified procedures and related requirements for a program loan. The loan proceeds were released in a single tranche on 26 March 2010, 2 months after the loan became effective. D. Program Schedule 21. The period specified for the loan was 1 September 2009 to 31 March 2010, with a single tranche loan of $500 million to be disbursed when the government had met the conditions for loan effectiveness. Disbursement occurred on 26 March 2010 and the loan was financially closed on 31 March 2010, as planned.

17 9 E. Implementation Arrangements 22. As the executing agency, the Ministry of Finance coordinated, monitored, and evaluated the government s countercyclical fiscal stimulus programs supported by the loan. The Ministry of Finance formed a committee to oversee the government s countercyclical programs. The committee met regularly to monitor and oversee the implementation of the countercyclical public expenditure program, and BAPPENAS would report on monitoring and implementing the infrastructure component of the fiscal stimulus program. F. Conditions and Covenants 23. The loan had no policy actions. The loan had covenants related to monitoring and reporting of the stimulus program. These were all complied with. G. Related Technical Assistance None provided H. Performance of the Borrower and the Executing Agency 24. Overall, the performance of the government and its agencies involved in the INO-CS program is rated highly satisfactory. The government, led by the Ministry of Finance as chair of the coordinating committee, efficiently and effectively coordinated with relevant ministries and development partners in monitoring and reporting on macroeconomic conditions and the implementation of the fiscal stimulus program on a quarterly basis. ADB staff from the Southeast Asia Public Management, Financial Sector and Trade Division and the resident mission was invited and attended these meetings. I. Performance of the Asian Development Bank 25. ADB's performance in processing and implementing the loan is rated highly satisfactory. ADB processed the loan quickly, released the loan on time in the first quarter of 2010, and financially closed the loan as scheduled on 31 March ADB actively participated in the quarterly monitoring meetings with the government and development partners, and coordinated with BAPPENAS in establishing the monitoring and reporting mechanism for the infrastructure component of the fiscal stimulus program. III. EVALUATION OF PERFORMANCE A. Relevance 26. The INO-CS program was assessed as highly relevant when the loan was formulated in 2009, given the urgent need to provide budget support for Indonesia s fiscal stimulus program in an environment of modestly volatile global credit markets, elevated yields on government debt, and uncertainty about the duration of the global recession; and the need to ensure predictability in Indonesia s financing requirements including debt due in 2009 and While the global credit markets began to stabilize in early 2009, they remained modestly volatile and global financial markets remained subject to significant risks throughout The global economy had been in severe recession since the onset of the GFC in September At the same time, 7 The government had projected gross financing requirements for 2009 at $24.5 billion including domestic and external debt that matured in 2009.

18 10 governments were demanding an effective and coordinated response to the GFC. Most countries relaxed their monetary policies and provided fiscal stimulus in a synchronized approach that, although not perfect, did prevent a more severe global recession. Indonesia s fiscal stimulus package was in line with this synchronized approach. The INO-CS as budget support to Indonesia s stimulus program was therefore highly relevant to addressing the adverse effects of the GFC on the Indonesian real economy. It was designed to reflect the special temporary circumstances with a much shorter tenure (5 years) than standard OCR loans and priced much higher at 200 basis points above LIBOR. B. Effectiveness in Achieving Objectives and Scope 27. The INO-CS program is rated effective in achieving its objectives and scope, as it provided financing for the fiscal stimulus package in 2009 and It was effective for the following reasons: (i) the government had a sound macroeconomic management framework that helped mitigate the increased risks to the domestic economy from Q through end This ensured that the stimulus package was effective and that its impact not undermined by macroeconomic instability; (ii) the government had developed a fiscal stimulus program with a mixture of complementary measures, including tax cuts, additional infrastructure spending, and a scaling up of social assistance mechanisms. Projects were selected on the basis of readiness and labor intensity. The tax cuts and social programs had an immediate stimulus effect; (iii) the government, in coordination with ADB and other development partners, established an effective monitoring and reporting mechanism with well-defined reporting responsibilities among agencies. The Ministry of Finance monitored macroeconomic conditions and the disbursement rates of the stimulus projects, and BAPPENAS led the monitoring and reporting of the infrastructure component of the fiscal stimulus; and (iv) the loan was an outcome of ADB policy dialogue with the government and coordination with development partners under the Development Policy Support Program (footnote 3) and Public Expenditure Support Facility (footnote 4). The program's biggest drawback was the Government s slow disbursement rates for capital spending, which resulted in more than 50% of capital spending on maintenance and materials and more than 67% of infrastructure funding being disbursed in Q (Figure 4). This compromised the timeliness of the stimulus from infrastructure projects, thereby limiting the program's impact in the first semester of 2009 when the stimulus was most needed. Another drawback that affected effectiveness was that the countercyclical facility was not available until June If it had been in place at the time the GFC began in September 2008, the CSF facility would have been available for disbursement at the time when it was most needed in the first semester of Once the facility was available, the CSF loan was processed and made available to the government relatively quickly. ADB's Board approved the loan 10 weeks after processing of the loan began. The loan became effective on 29 January 2010, about 2.5 months after Board approval. C. Efficiency in Achieving Outcome and Outputs 28. The program is rated efficient in achieving its objective and scope, as it was efficiently managed by both the Ministry of Finance and ADB. The loan was processed and made available to the government relatively quickly. It helped the performance of the program that the government already had a well-designed and targeted fiscal stimulus package in place to support.

19 11 D. Preliminary Assessment of Sustainability 29. For the purposes of this evaluation, the sustainability of the INO-CS program is not assessed in the same way that a program loan would be, as the INO-CS loan did not require policy actions designed to have a long-term development impact. Instead, the assessment is based on criteria that are more appropriate for a short-term, quick-disbursing countercyclical support loan: (i) Was the government s fiscal stimulus package timely in its design and implementation? (ii) Was the fiscal stimulus package well targeted? (iii) Was the fiscal stimulus package temporary and was there a sequenced exit strategy? and (iv) Did the fiscal stimulus package have components that could have longer-term development impacts while still meeting the first three conditions? 30. The assessment indicates that on balance the fiscal stimulus was timely. The government moved quickly to revise the 2009 budget to incorporate fiscal stimulus measures. This was done 3 months after Parliament approved the 2009 budget. A supplementary package of additional infrastructure spending was announced in July The total stimulus package comprised of a series of complementary measures, with tax cuts accounting for 38% of the package followed by social assistance, capital spending on maintenance and materials, and spending on infrastructure. The tax cuts and social assistance measures were quickly implemented and had an immediate impact on household consumption. The capital outlays took longer to disburse, which limited the timeliness of the capital outlay components (Figure 3). 31. The assessment indicates that the fiscal stimulus package was well targeted. The bulk of tax cuts were aimed at increasing household net income and lowering the costs of hiring workers and purchasing materials for companies. Social assistance was aimed at the poor and was administered under existing social assistance programs, including the unconditional cash transfer program. The infrastructure projects were selected on the basis of their readiness and labor intensity. 32. The fiscal stimulus measures were designed to be temporary and the government had an exit strategy. When the worst effects of the GFC were felt in early 2009, the government planned a 2-year fiscal stimulus ( ). At the time it was unclear how long the crisis would last and how severe it would be. The bulk of the fiscal stimulus was disbursed in 2009, and it was gradually wound down in The government achieved a modest fiscal contraction in 2010 of 0.95% of GDP, and projects a modest fiscal expansion of 1.0% in the 2011 budget. 8 A substantial proportion of the tax cuts were permanent and part of the government s tax reform program. The bulk of the spending initiatives were one-off and therefore will not permanently increase the government budget. Most infrastructure projects were already in the pipeiine, but were moved up. The new infrastructure projects were primarily small-scale projects with relatively low budget implications (such as low-cost housing and upgrades of traditional markets). 33. The stimulus program included spending that will have a longer-term development impact. The package did include investments in the long-term competitiveness of the economy, including projects to upgrade roads, rehabilitate bridges, upgrade rail infrastructure, and modernize traditional markets (Appendix 1). 8 The fiscal contraction of 0.95% of GDP in 2010 is estimated as the difference between the realized 2010 budget of 0.65% of GDP and the 2009 realized budget deficit of 1.6% in The fiscal contraction in 2011 is based on the proposed budget deficit of 1.7% of GDP in 2011 compared with actual deficit of 0.65% in 2010.

20 12 E. Impact 34. The program was assessed as Category C with respect to environment, involuntary resettlement, and impact on indigenous people. The fiscal expansion added at least 1.6 percentage points to GDP in 2009, accounting for just over one-third of the growth created in that year. As a consequence, the negative output gap was estimated at 1.4%, much lower than the output gap was projected to be without the stimulus, and much lower than output gap resulting from previous external shocks. The formulation of the INO-CS loan benefited from ADB s dialogue with the government through existing program loans with the government. IV. OVERALL ASSESSMENT AND RECOMMENDATIONS A. Overall Assessment 35. The program was implemented as conceived and was highly relevant to the government s fiscal stimulus program and ADB s strategic objective of maintaining critical public spending. Because of the government s strong commitment to mitigating the effects of the GFC on the domestic economy and the effective high-level coordination among the executing agency, implementing agencies, and development partners, the loan was effective and efficient in achieving its objectives. It is rated most likely sustainable because the fiscal stimulus supported by the loan was on balance timely, well-targeted, and temporary. The investments in infrastructure are likely to improve competitiveness of the economy and have a longer-term development impact. Overall, the program is rated successful. B. Lessons 36. Based on this performance evaluation there are two lessons. First, efficient public financial management (PFM) systems are important to ensure timely disbursements. While Indonesia has made progress in PFM reform, it clearly needs to do much more to address the chronic problem of back-loaded spending in the fourth quarter of each fiscal year. Second, Indonesia s fiscal stimulus package was successful because it included a mix of measures including tax cuts, social spending, and labor-intensive small-scale infrastructure projects and because effective and regular monitoring and reporting mechanisms were in place. The CSF loan would have been more timely if the facility itself was in place at the time the GFC began in the third quarter of C. Recommendations 37. There are two key recommendations. First, the CSF facility itself should be a permanent ADB loan modality to provide budget support to protect critical public spending at a time of temporary economic turbulence. The CSF facility should not be limited to systemic regional or global crisis, but also to individual country crises. Second, the Government of Indonesia should deepen PFM reform and address weaknesses in budget execution.

21 Appendix 1 13 Program Indonesia Selected Infrastructure and Social Assistance Programs Program Description Targeted Beneficiaries for 2009 Budget Allocations in 2009 and 2010 (where applicable) Implementation Progress (as of December 2010) Infrastructure Programs Investments in the social sector 1. Low-cost Provides low-cost housing housing for poor families engaged in program for fishing in remote coastal poor families a villages 2. Low-cost housing program for families of police and army personnel and for students in poor and remote locations a Provides low-cost housing for police and army personnel and students; up to 40 complexes to be constructed in remote locations Poor families engaged in fishing. Program targets 12,000 new jobs Police and army personnel, students in remote locations. Program target 8,000 new jobs Additional low-cost housing budget for 2009: Rp400 billion. 99.3% (Rp397.0 billion) disbursed from the Department of Housing and implemented Competitiveness-enhancing investments 3. Projects to enhance rural productivity a 4. Projects to facilitate trade through better infrastructure a 5. Projects to enhance the competitiveness of traditional distribution a 6. Other capital maintenance and material spending projects Construction and rehabilitation of rural feeder roads and irrigation systems Construction and rehabilitation of national roads, bridges, rail infrastructure, airports, and ports Construction and rehabilitation of traditional urban wet and dry markets and construction of facilities for micro-small and mediumsized informal traders. Capital maintenance for roads and other infrastructure and material spending increased. Farmers in rural areas. Program targets 60,000 new jobs Private enterprises. Program targets 282,000 new jobs Small traders in traditional markets and other informal traders. Program targets 43,000 new jobs Covers beneficiaries across the economy Total budget for 2009: Rp650 billion Total budget for 2009: Rp8.9 trillion. Total budget for 2009: Rp335 billion. Increased spending in 2009 budget: Rp31 trillion over 2008 budget. 0%. No disbursements made from the Department of Agriculture 98.5% (Rp8.5 trillion) disbursed from the Departments of Public Works and Transportation and implemented 94.3% (Rp316 billion) from the Department of Trade and implemented 96.0% (Rp29.8 trillion) disbursed Social Assistance Programs 7. Unconditional UCT provides income cash transfer support of Rp100,000 per (UCT) month to recipient poor families. UCT extended for 2 months in 2009 and covered 18.5 million families Total budget for 2009: Rp3.7 trillion 100% (Rp3.7 trillion) disbursed in the first 2 months of 2009

22 14 Appendix 1 Program 8. Conditional cash transfer program (CCT) a Program Description CCT provides income support with attached conditions related to children s attendance at primary school, and regular check-ups of children under the age of 5 and pregnant mothers at health clinics. Targeted Beneficiaries for 2009 CCT is pilot-tested among 720,000 families in 13 provinces Budget Allocations in 2009 and 2010 (where applicable) Total budget for 2009: Rp1.1 trillion Total budget for 2010: Rp1.1 trillion Implementation Progress (as of December 2010) 100% (Rp1.1 trillion) disbursed in 2009 and Operational Aid to School Program a 10. National Community Empowerment Program a 11. Rice subsidy program (Raskins) 12. People health insurance (Jamkesmas) Provides block grants to schools to cover operational costs and capital expenditures Scholarships are provided to school students under the program Provides block grants to communities for communitybased health and other development projects Provides subsidized lowquality rice to poor families Pays health insurance premiums for poor families Virtually all elementary schools nationwide targeted under program Covers 6,408 subdistricts in 2009, up from 3,999 subdistricts in Community committees are established to select projects. Provides 3.3 million tons of rice to 18.5 million poor households. Rice distributed each month 74.5 million persons nationwide CCT = condition cash transfer, UCT = unconditional cash transfer. a Programs to be supported by the Countercyclical Support loan to Indonesia. Source: Ministry of Finance, Republic of Indonesia. Total budget for 2008: Rp12.5 trillion Total budget for 2009: Rp19.1 trillion Total budget for 2010: Ro19.8 trillion Total budget for 2008: Rp4.2 trillion Total budget for 2009: Rp8.2 trillion Total budget for 2010: Rp12.9 trillion Total budget for 2008: Rp8.3 trillion Total budget for 2009: Rp12.9 trillion Total budget for 2010: Rp17.6 trillion Total budget for 2008:Rp4.7 trillion Total budget for 2009: Rp5.3 trillion Total budget for 2010: Rp6.5 trillion Total budget disbursed in first half of 2009 amounts to Rp17 trillion, compared with Rp9.7 trillion in first half of % (Rp8.2 trillion and 12.9 trillion) disbursed in 2009 and 2010 respectively. 100% disbursed in % disbursed in 2008 to 2010.

23 Appendix 2 15 STATUS OF COMPLIANCE WITH LOAN COVENANTS Covenant Loan 2563-INO The Borrower shall cause the Support Program to be carried out with due diligence and efficiency and in conformity with sound administrative, public financial management, public policy, social protection, and governance practices. The Borrower shall perform all obligations set forth in Schedule 5 of the Loan Agreement. The Borrower shall make available, promptly as needed, the funds, facilities, services, and other resources, which are required, in addition to the proceeds of the Loan, for the carrying out of the Support Program. The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Support Program are conducted and coordinated in accordance with sound administrative policies and procedures. The Borrower shall maintain, or cause to be maintained, records and documents adequate to identify the Eligible Items financed out of the proceeds of the Loan and to indicate the progress of the Support Program. The Borrower shall enable ADB's representatives to review any relevant records and documents referred to in LA Section 4.04 (a). During the Program Period, the Borrower shall furnish to ADB semiannually reports and such other information as ADB shall reasonably request concerning the implementation of the INO-CSP and/or the Support Program as set out in the Policy Letter. The reports furnished under LA Section 4.05 (a) shall be used at the completion of the Support Program to produce a comprehensive report on the overall impact of the INO-CSP operations described in the Policy Letter. Within three months after the Program Period, the Borrower shall cause MOF, supported by the relevant line ministries, to submit a program completion report to ADB that assesses the extent of progress and the impact of actions under the INO-CSP. Reference in Loan Agreement LA Section 4.01 (a) LA Section 4.01 (b) LA Section 4.02 LA Section 4.03 LA Section 4.04 (a) LA Section 4.04 (b) LA Section 4.05 (a) LA Section 4.05 (b) LA Schedule 5, para. 7 Status of Compliance Complied with. Complied with. Complied with. Complied with. Complied with. Complied with. Complied with. Complied with. Complied with.