ADB Fiscal Stimulus Loan to Boost Indonesia's Economic Recovery

he Asian Development Bank's (ADB) Board of Directors today approved a $500 million Countercyclical Support Facility (CSF) loan for Indonesia to help revive its sluggish economy.

"Indonesia's economy has been resilient during the global crisis, but with exports, private investment, and consumption still sluggish, a strong countercyclical fiscal stimulus is needed to protect the social sectors and support poverty reduction," said Arjun Thapan, the Director General of the ADB's Southeast Asia Department

The government earlier had announced a Rp73.3 trillion (around $7.6 billion) fiscal program to compensate for the fall in private consumption and investment, through tax relief, capital spending, and expansion of flagship social assistance programs, among others. The government has also significantly increased maintenance and material spending in the initial 2009 budget. Altogether, the fiscal stimulus program is estimated at Rp113 trillion.

Over the years, Indonesia's poverty rate has fallen one percentage point per year since 2003 to reach 14.2% in early 2009. However, poverty remains a serious problem, with over 35 million people still living below the national poverty line. Another 42% of the population is still vulnerable to fall into poverty if their circumstances suddenly deteriorate.

Without the fiscal stimulus package, Indonesia's economic growth could have weakened from its current rate of 4.3% to between 2% to 3%, a marked slowdown from a robust range of 5.0% to 6.3% growth per year since 2004. Informal employment and unemployment could rise by more than 1.8 million persons, ADB warns.

An economic growth rate of about 6% is necessary to bring Indonesia's unemployment and poverty reduction programs back on track and is expected to be achieved by 2011. "Indonesia has the fiscal space for its stimulus package, which is expected to be temporary, and is also taking measures for structural reforms to sustain growth over the longer term," said Mr. Thapan.

The Countercyclical Support Facility, established in June 2009, supports ADB's developing member countries (DMCs) needing to increase fiscal spending to counter the global economic crisis. To be eligible to access the CSF, DMCs must be adversely affected by the global economic crisis, demonstrate sound macroeconomic policies, and have a countercyclical program in place.

ADB has approved CSF loans to the Philippines, Kazakhstan, and Viet Nam. The CSF loan has a five-year repayment term, with a three-year grace period, and will cost around 200 basis points over ADB's financing cost, pricing that reflects spreads prior to the onset of the global economic crisis.(EOM)