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Indonesia's Economic Optimism

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Indonesia has every reason to be optimistic. In its quarterly report released Monday the World Bank raised its growth forecast for the country's economy from 3.5 percent to 4.3 percent, higher than even the IMF expected. Although the global economy is showing signs of recovery, Indonesia has weathered the economic crisis much better than other countries in Southeast Asia thanks to strong domestic consumption and increased government spending on stimulus measures, the Bank's report noted.

The big topic now that recovery is being hinted at is reform of the financial sector, said Indonesia's Finance Minister Sri Mulyani, speaking before a group of journalists in Jakarta on Tuesday. The dilemma is how to strike the right balance between regulation that strangles the market and regulation that does not go far enough toward preventing the circumstances led to the current collapse.

Despite the sanguine picture the World Bank has painted, Mulyani said the government will not revise its fiscal projections, which predict GDP growth of around 4 percent by year's end.
Mulyani, an outspoken reformer who has gone far toward cleaning up graft in her own ministry, is unapologetic about the decisions she has made during her term as finance minister.

Most recently she's drawn heat for the government's decision to bail out Bank Century -- Indonesia's own mini version of the Lehman Brothers fiasco. The cost to the public, initially projected at Rp1.3 trillion (US$133 million), eventually swelled to Rp6.7 trillion (US$677 million), drawing the ire of some members from the House of Representatives (DPR) who have called for an audit to determine the legal basis for the rescue.

Yet Indonesia's experience with financial crises -- it was the hardest hit during the 1997 Asian economic crisis that saw GDP plummet by 13 percent from the year earlier -- may well have prevented its exposure this time around. "Our policy was to save and secure the financial system," Mulyani said Tuesday, defending the decision for the Bank Century rescue and assuring those present that "there was no political motive behind the bailout."

During her talk Mulyani also touched on government efforts to transfer funds to the country's most needy from the long-running fuel subsidy that President Susilo Bambang Yudhoyono slashed last year. She also said the government would continue its fight against corruption (the Corruption Court established in 2006 and considered the most successful measure the country has taken toward prosecuting high-level officials suspected of graft is likely to be dissolved if the DPR does not vote on a law to renew its mandate by the end of its term in September).

With presidential elections in July Mulyani was clearly cautious about providing any details on the president's plan for his second term, which begins when a new parliament is inaugurated October 1.

A new cabinet will be named in mid-October as well, meaning Mulyani will soon relinquish her post at the Finance Ministry. In the swirl of speculation that often comes with government handovers, Mulyani has been placed in nearly every post, from ministry of education to the head of the central bank.

Given her reformist approach, she would do well whatever position she occupies next. Despite all the reasons for optimism, Indonesia still has a long way to go: foreign investment remains low, the country's infrastructure is woefully inadequate and the government remains protective of key industries, such as telecommunications and construction.

But in a country with 240 million people, the steps taken in the ten years since democracy arrived on this expansive archipelago are looking more and more like a big leap.