Indonesia: Competitiveness, Industrial Modernization, and Trade Acceleration Program (CITA)

OBJECTIVE

The Program objective is to support the Government of Indonesia (GoI) to foster a more competitive and investment-friendly business environment in the country and to support an accelerated economic recovery from the coronavirus disease (COVID-19) pandemic.

DESCRIPTION

This proposed Program will provide a policy-based loan under the COVID-19 Crisis Recovery Facility of the Bank and will be co-financed with the Asian Development Bank (ADB).

The pandemic has driven up unemployment and poverty levels in Indonesia. The adverse impact of reduced working hours, lockouts and unemployment caused a reversal of the structural transformation of the economy. The risk of a prolonged recovery from the COVID-19 pandemic could further stall economic development. While domestic consumption has been the main driver of economic growth, it is likely to remain dampened due to the income loss experienced by households. In the post-pandemic context for Indonesia to meet its target of becoming a high-income country by 2045, critical reforms are needed to address productivity, creation of quality jobs, and income growth.

The proposed Program is anchored on GoI’s structural reforms, combining reforms in the investment, trade, and MSMEs (micro, small, and medium-sized enterprises) sectors. The proposed Program will support the following three reform areas:
(i) Reform 1 (creating an enabling environment for investments) - this reform area aims to improve the business climate;
(ii) Reform 2 (easing barriers to trade) - this reform area will reduce impediments to trading, both domestic and cross-border; and (iii) Reform 3 (growing and upscaling enterprises) - this reform area will help firms increase their productivity and upscale operations.

ENVIRONMENTAL AND SOCIAL INFORMATION

As noted above, this Loan will be co-financed with ADB as the lead co-financier, and the Program’s Environmental and Social (E&S) risks and impacts have been assessed in accordance with ADB’s Safeguard Policy Statement (SPS) applicable to PBL. AIIB’s Environmental and Social Policy (ESP) was designed to apply to investment projects and has no provisions for its application to PBL operations. Therefore, as permitted by the decision of the Board of Directors set forth in the Decisions to Support the Facility, AIIB will apply the provisions of ADB’s SPS to this PBL in lieu of the ESP. This will provide for a harmonized approach to addressing the E&S risks and impacts of the Program.

Based on the E&S assessments carried out according to the SPS requirements, no adverse impacts have been identified with respect to involuntary resettlement, Indigenous Peoples, or the environment. Therefore, ADB has categorized the Program as Category C for involuntary resettlement, Indigenous Peoples, and the environment. An E&S risk assessment on the policy matrix was also undertaken, along with E&S due diligence, to confirm no outstanding E&S issues remain and to provide guidance on the E&S aspects for future reforms of state-owned enterprises.

Data from the Ministry of Cooperatives and Small and Medium-sized Enterprises (SMEs) show that Indonesia had 64.2 million business units in 2018, of which 99.9% were MSMEs. Micro enterprises make up 98.7% of the total, while 1.2% are small enterprises, and 0.1% are medium-sized enterprises. Government contracts have been awarded to only 0.26% of these SMEs, with even lower levels for women-owned SMEs as they generally have more restricted access to financial resources. A 2021 presidential regulation set a minimum of 40% of government procurement spending on MSMEs and cooperative domestic products. However, data on cooperatives and MSMEs, including WOB (Women-owned Business), are still disorganized and non-uniform, which has compromised the effectiveness of empowerment programs for cooperatives and MSMEs. To address this, The Ministry of Cooperatives and SMEs, in collaboration with Statistics Indonesia and supported by the Ministry of National Development Planning (BAPPENAS), is conducting an exercise called Complete Data Collection on Cooperatives, Micro, Small and Medium Enterprises, 2022–2024.

The program addresses gender-related constraints through the (i) implementation of a program to support the participation of WOB in government procurement, including gender-responsive procurement training and annual reporting on and identifying areas for strengthening the participation of WOB in government procurement; (ii) establishment of an inter-ministerial committee, chaired by the minister of cooperatives and SMEs with committee members including the minister of women empowerment and child protection, to improve the delivery of government services to enterprises; and (iii) development of an integrated MSME system, with sex-disaggregated data, for monitoring and reporting on the performance of WOB. The program has synergies with subprogram 2 of the Promoting Innovative Financial Inclusion Program, particularly in promoting access to finance by MSMEs and marginalized groups including women and youth.