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Global Financial Crisis brings Added Challenge to Aceh Economic Transition

July 29, 2009

Banda Aceh, July 29, 2009 – A new report by the World Bank, the Aceh Growth Diagnostic, launched today, analyzes what is constraining private investment and growth in Aceh and points towards the need to create broad-based growth that benefits the majority of the population. This entails focusing on agriculture and other labor intensive sectors.

Aceh Growth Diagnostics identifies the lack of reliable electricity and the exposure of businesses to extortion and security threats as the most pressing problems to attract investment in Aceh. “The end of the conflict in Aceh is an unqualified success story. Going forward, increasing private investment will be necessary to promote sustainable economic growth. This will require addressing perceptions in the businesses community that security is still an issue in the province”, said Enrique Blanco Armas, World Bank economist and lead author of the Growth Diagnostics report.

A separate analysis on Aceh’s economy, also launched today, elaborates on Aceh’s struggle to find new economic footing as reconstruction nears completion and all sectors linked to reconstruction show low or negative growth rates. The latest Aceh Economic Update, a joint analysis by Bank Indonesia and The World Bank, shows a decline in the rate of economic growth in the province, a combination of the impact of the global financial crisis and the decline in reconstruction activities.

Agriculture absorbs over 50 percent of Aceh’s workforce and is expected to be the main driver of growth in post-reconstruction Aceh, especially since oil and gas reserves in the province continue to deplete. The sector began showing promise as Aceh recovered from the tsunami and security improved. However, deteriorating irrigation, erratic rainfall and the conversion of paddy fields into new settlements have caused the sector to grow by only 0.8 percent in the second half of 2008, far below the national growth rate of over 4 percent. Mahdi Muhammad, Head of Bank Indonesia in Banda Aceh said, “In trying to reverse this poor growth performance, increasing private sector investment, in particular for the agriculture sector, is essential. That will entail enhancing access to credit for those active in the agriculture sector.”

Recognizing the challenges facing the economy in the province, the Multidonor Fund for Aceh and Nias (MDF), continues to provide assistance in promoting longer term economic development. Safriza Sofyan, Deputy of Multi Donor Fund, said “About US$50 million have been allocated by MDF to promote sustainable economic growth in the province through the Economic Development Financing Facility.”

The Aceh Economic Update is released on a semi-annual basis, to analyze the impact of tsunami and reconstruction efforts in Aceh, based primarily on the analysis of official government statistics published by BPS and Bank Indonesia. The Aceh Growth Diagnostic uses a tested framework to identify the most pressing constraints to investment and growth that should be the focus of policy making.

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