DevTech Practice Area:
Assessments and Research • Capacity Building • Economic Model Development
Public Financial Management • Business Enabling Environment • MSME & Cooperatives Development • Trade Competitiveness • Gender-responsive Budgeting
In 2019, DevTech began implementing USAID/Indonesia’s Economic Growth Support Activity (EGSA) task order to support the Government of Indonesia (GOI) in strengthening its economy in the face of such challenges as slowing economic growth, persistent poverty, and the inefficient distribution of economic activity.
The primary objectives of the EGSA project, as established by USAID, include:
- Supporting USAID/Indonesia in determining priority areas for economic growth assistance as part of its 2020-2025 Country Development Cooperation Strategy.
- Providing advisory services to the GOI to help boost economic growth, focusing primarily on:
- Strengthening public financial management (PFM) through improved budget execution and tax collection, allowing for greater financial sustainability of the GOI both at the national and sub-national level.
- Improving the country’s business-enabling environment (BEE) for foreign and domestic business entities.
— CPAR 2021
Our Approach and Achievements
Through USAID EGSA, the DevTech team:
- Successfully supported USAID/Indonesia with its economic growth programming. The team helped shape the Mission’s economic growth activities by identifying and recommending areas that could benefit from USAID support and that align with the GOI’s priorities. They derived these recommendations from an analysis of the gap between donor support and the GOI’s demand for economic growth activities. Second, DevTech’s EGSA team conducted a rapid assessment of opportunities for USAID blended financing interventions to support development activities in Indonesia. Lastly, through EGSA, DevTech continues to periodically update USAID and the U.S. Government more broadly on the COVID-19 pandemic’s impact on the Indonesian economy. This monitoring focuses especially on the financial sector; GOI finances; food security; micro, small, and medium enterprises (MSMEs); industry; trade; and investment.
- Strengthened the GOI’s budget execution and planning capacities. Specifically, the team provided assistance in the areas of cost-benefit analysis (CBA) and fiscal risk analysis (FRA), including by creating a manual on using CBA to evaluate the effectiveness of the Government’s budget against its development objectives, which has been adopted by the Ministry of Finance (MOF) Directorate General (DG) of Budget to evaluate five government programs. DevTech’s USAID EGSA team’s assistance on FRA increased MOF’s awareness of the fiscal risks of certain budget decisions, such as debt and infrastructure financing. This technical assistance is timely as Indonesia could face long-term consequences from the unmitigated fiscal risks of increasing external debts. EGSA also worked with the Ministry of Development Planning (Bappenas) to strengthen its capacity to conduct tax analysis, including its ability to measure the effectiveness of tax incentives in the form of rate reductions, tax holidays, and exemptions to achieve the expected targets of boosting growth in specific sectors. Bappenas’ Director of State Finance and Monetary Analysis remarked that USAID EGSA’s support will help strengthen Bappenas’ policy formulation on the optimum size of tax expenditure to achieve development targets taking into consideration budget constraints. Bappenas will use the tax expenditure model and analysis recommended by DevTech’s EGSA team to identify and prioritize sectors with potential to leverage tax incentives to the highest outcomes as input to state fiscal programming.
- Strengthened the GOI’s economic planning capacity by developing a model to forecast provincial economic growth. This is the first model at Bappenas that incorporates province-specific economic characteristics into growth simulations. Bappenas promoted the use of the EGSA-built model, called the Sistem Analisis dan Peramalan Ekonomi Makro (SAPER), to provincial planners and initiated a regional macroeconomic forum to encourage the model’s adoption. DevTech’s EGSA team also supported in updating the IndoTERM Computable General Equilibrium model to enable regional interconnection analysis and the simulation of long-term impacts of policies or external shocks to the economy. Bappenas, through the Director of Macroeconomic and Statistical Analysis Mr. Eka Chandra Buana, expressed their appreciation for USAID EGSA’s support and affirmed that the updated model would strategically support the ministry to ensure consistency in nation-wide development plans using regional development policy simulation scenarios.
- Contributed to the GOI’s efforts to improve trade competitiveness. EGSA supported the Coordinating Ministry for Economic Affairs (CMEA) in its effort to streamline non-tariff measures (NTMs) on select food input commodities—namely sugar, salt, wheat flour, and milk—that affected the competitiveness of Indonesia’s food products. EGSA’s study on streamlining NTMs on food products found that each of the products have different challenges due to the overlap in regulations set by different GOI agencies and to outdated regulations, among others. CMEA will use the study’s findings to help reduce the overlapping and excessive NTMs in food commodities through improved inter-agency coordination.
- Strengthened the GOI’s capacity to create an enabling environment for savings and loan cooperatives to thrive. Through EGSA, DevTech worked with the Ministry of Cooperatives to strengthen the role that savings and loan cooperatives play as private economic entities and financing providers for private businesses. Specifically, the EGSA team provided the Ministry with related capacity building support, assessments, and policy recommendations. This included an assessment on the impact of the COVID-19 pandemic on savings and loan cooperative operations. Following reception of the assessment, the Ministry of Cooperatives requested additional assistance to implement certain recommendations included in the report. In response, DevTech’s EGSA team provided capacity-building support in the following areas: strengthening the GOI’s capacity in cooperative oversight; assisting the Ministry of Cooperatives in developing policies supporting cooperative modernization; and increasing the adoption of IT-based solutions in the operation of cooperatives. EGSA’s recommendations to strengthen oversight of savings and loan cooperatives were also used to inform high-level discussions among GOI Ministries to strengthen the Omnibus law, which seeks to create new jobs and attract investment to Indonesia.
Success Story – Improving Trade Competitiveness in Indonesia’s Food and Beverages Sector
Indonesia’s economy is largely driven by rising household consumption making food and beverages (F&B) an important industry in the country. In 2021, the sector made a 6.66 percent contribution to the country’s gross domestic product (GDP).
Unfortunately, the F&B industry still depends heavily on imported inputs. Indeed, 70 to 80 percent of its inputs—including sugar, salt, milk, wheat, and flour—are imported. Yet, non-tariff measures (NTMs) are intensively imposed on food products. NTMs have become the main barrier to trade for the F&B sector with the total number of NTMs increasing from 58 to 325 between 2010 and 2018.
NTMs can affect food prices in a variety of ways, including by preventing international competition that would otherwise push down domestic prices and thus generate artificially high prices. The increasing prevalence of NTMs has contributed to consistently high food prices in Indonesia. This disproportionately affects the lower-income population, who spend a larger percentage of their income on food. Higher food prices, in turn, increase poverty, inequality, and the risk of malnutrition.
Because of these issues, the Indonesian Coordinating Ministry of Economic Affairs (CMEA) requested DevTech’s USAID EGSA team’s assistance to support their efforts in rationalizing excessive and overlapping NTMs. In response, the team provided technical assistance through four interconnected steps: 1) selecting strategic commodities for an NTM study; 2) identifying targeted NTM regulations and issuing institutions; 3) identifying challenges related to NTM implementation; 4) identifying NTM cost compliance; and 5) formulating the roadmap for streamlining NTMs in selected commodities.
CMEA and DevTech’s USAID EGSA team narrowed down the focus to four key food industry input commodities: sugar, salt, milk, and wheat flour. These commodities were selected as they are key inputs in the F&B industry; the supply quantity of domestic or local production is not sufficient to meet the demand of the F&B industries; and NTMs are intensively imposed on these commodities. Having selected the commodities for the study, through USAID EGSA, DevTech conducted a regulatory analysis of existing NTMs using the UN Conference on Trade and Development method, analyzed trade data, and facilitated discussions and consultations with various GOI agencies and the private sector.
The research found that a total of 103 NTMs issued by various GOI agencies applied to the four commodities. Some of the NTMs are overlapping and outdated, which has undoubtedly affected the competitiveness of Indonesian food products since the domestic industries are using these commodities as raw materials in their F&B manufacturing. Moreover, these NTMs have added to cost and production time, which trickle down to micro and small enterprises in the industry’s value chain. NTMs are more disadvantageous to smaller firms and cause them to be less competitive in the market.
Following its analyses, DevTech’s USAID EGSA team provided policy recommendations in seven key areas: coordination, regulatory harmonization, simplification, transparency, capacity building, facilitation, and standard harmonization. These recommendations are summarized in the image included below.
EGSA presented these findings and policy recommendations to the GOI in October 2021. The GOI responded positively to the recommendations.
CMEA in particular considered the report to be highly useful. Indeed, CMEA utilized EGSA’s study recommendations for the Commodity Balance policy, which supports increased transparency in the commodity market. Additionally, DevTech’s strategic support through USAID EGSA provided CMEA with a detailed roadmap to simplify NTMs for the four identified commodities, which will allow CMEA to replicate the process to rationalize NTMs for other commodities in the future. More strategically, this study is directly relevant to USAID Indonesia’s mission to support the growth of U.S.-Indonesia trade, as the United States is one of Indonesia’s key trade partners for food commodities.