- Half of the estimated reconstruction program funds have been disbursed. Sectors related to the reconstruction effort (construction, transport) are therefore likely to continue playing a key role in Aceh’s economy in the short term.
- The large investments being undertaken are likely to increase productivity in Aceh, although maintenance of these assets will also have large budgetary implications for Aceh’s sub-national governments.
- The reconstruction has created short-term employment opportunities in related sectors. In the long term, employment is likely to remain a challenge unless significant investments are made in sectors capable of absorbing large numbers of workers, such as agriculture or labor-intensive industries.
Aceh at a Glance (2006) | Aceh | Indonesia | | Poverty & Social | Population (thousands) | 4,073.00 | 222,192.00 | GDP per capita (US$) | 1,962.75 | 1,613.13 | Unemployment Rate | 12.08 | 10.45 | Poverty (% of population below poverty line) | 26.5 | 17.8 | Annual Population Growth Rate (%) | 0.37 | 1.27 | Human Development Index (2005) | 69.00 | 69.60 | Economic Ratios & Indicators | Annual Growth (%) | 2,4 | 5,5 | Annual Growth (without oil and gas - %) | 7,7 | 1,58 | Agriculture share to GDP (%) | 24.7 | 12.9 | Industry share to GDP (%) | 15.8 | 28.0 | | | | Economic & Trade | 2006 | 2006 | GDP (Rp Billion, Constant) | 37,158.76 | 1,846,658.50 | Export (in million US$) | 1,834 | 100,798.62 | Oil & Gas | 1,820 | 21,209.48 | Estate Crop | 5.1 | 3,170 | Manufactures | 8.4 | 64,560 | Import (in million US$) | 68 | 61,065 | Source: BPS, 2006. |
The Economy
The structure of the economy has changed significantly since 2003. The decline of oil and gas and related manufacturing since 2003 continues unabated. The weight of the services sectors (construction, trade, transportation), which was already growing prior to the tsunami, accelerated as a result of the reconstruction effort which drove a modest economic recovery in Aceh and was the main driver of economic growth. Growth in Aceh was strong in 2006 and 2007 at 7.7 percent and 7 percent respectively (excluding oil and gas). Figures for 2008 show growth in the province contracting by over 8 percent, as reconstruction activities reached completion and sectors not linked to the reconstruction effort (agriculture, manufacturing and oil and gas) exhibit lackluster performance. Downward pressure on the economy will continue with the depletion of oil and gas reserves and the impact of the global financial crisis. Although some activities continue, the bulk of the reconstruction effort has been completed and additional contraction in some sectors (trade, construction) is being seen in 2009. Production that is dependent on global demand, such as coffee, will also be experiencing a contraction, as many developed countries struggle to escape from recession in 2009.The agricultural and manufacturing sectors remain stagnant. The ending of the conflict and assistance linked to the reconstruction effort have marginally increased agricultural production, but growth is still disappointing at 0.8 percent. Manufacturing, closely linked to the availability of cheap gas, has contracted consistently for the past five years, with large negative growth of over 40 percent in 2008. Creating sustainable employment remains a major challenge. Reconstruction has generated short-term employment opportunities, especially in construction and services, but the primary and secondary sectors are not creating significant employment opportunities. Since mid-2008, inflation in Aceh has been lower than the national level. After peaking in 2005, when the reconstruction effort started, inflation remained high for several years. By 2008, the slowdown in reconstruction and restored supply networks resulted in relatively low inflation. In February 2009, YoY inflation was 5.9 percent, below the national level of 8.6 percent and below 7.7 percent in neighboring Medan. Inflation is likely to continue its downward trend. With demand, both local and global, flattening and commodity prices declining further, inflation will continue to be benign.
Economic Development in Aceh and the World Bank
The reconstruction effort is now focusing on long-term and sustainable development, including the strengthening of institutions and communities so that these can play a decisive role in Aceh’s future. The World Bank, with the financial support of the Danish International Development Assistance, is supporting the Government of Aceh and the Reconstruction and Rehabilitating Agency in their efforts to promote sustainable economic development. Such development needs to be broad-based and ensure the well-being not only of all Acehnese today, but also future generations of Acehnese.In order to help manage the transition from reconstruction to longer-term sustainable economic development, the World Bank is working with BRR and local governments with the aim to: - Manage economic and environmental policy decisions better through the establishment of a task force / think tank to discuss economic issues;
- Understand the impact of the tsunami and reconstruction on poverty, the environment and the economy through systematic monitoring of environmental and economic fundamentals;
- Provide inputs (short policy briefs) for a comprehensive sustainable economic development strategy that particularly addresses the transition from reconstruction to longer-term development; and
- Leave behind a better system for the Acehnese institutions to analyze and monitor economic performance and environmental quality by continuing previous efforts to strengthen analytical capacity of government and academic institutions and think tanks on economic and environmental issues, as well as offering a forum for discussion.
Aceh's Investment climate
Aceh’s economy has historically registered lower growth rates than Indonesia as a whole, and the neigbouring province of North Sumatra with less than 50 percent of all the PMAs/PMDNs (registered foreign and domestic businesses) active during the conflict period. The slow economic growth rate post-tsunami reflects sluggish business activity. From 2007 onwards, Aceh’s economy has contracted (including oil and gas), despite the boost in the economy driven by the reconstruction effort. The better security situation in the wake of the Helsinki Memorandum of Understanding of mid 2005 and the passing of the Law on the Governance of Aceh in mid 2006 has thus far had minimal impact on the overall economic condition of the province. Many potential investors still regard Aceh’s political stability and related security issues as a live issue, and have adopted a “wait and see” attitude for further signals of stability.
Specific sector studies into the value chains of key Acehnese commodities have revealed critical gaps in handling and processing capacity – in mills, cold chains, refining capacity etc. These ‘missing investments’ by the private sector are themselves impediments to the achievement of both the scale and quality of production that are required for competitive, export oriented chains of operations. They are a product of a deficient investment climate. If Aceh is to turn latent advantage into a basis for growth it must achieve reduction in risk and uncertainty about access to land, simplification of investment procedures, securely serviced infrastructure, improved market intelligence, scale and quality of inputs to agri-processing. A World Bank and International Finance Corporation policy paper discusses measures designed to address this investment climate deficiency. See outputs below to download a copy:
Poverty in Aceh
Poverty in Aceh pre-tsunami, at 28.4 percent of the population in 2004, was substantially higher than in the rest of Indonesia, at 16.7 percent. Poverty in Aceh increased in the aftermath of the tsunami to 32.6 percent. Poverty levels had declined below pre-tsunami levels to 26.5 percent by 2006, facilitated by the reconstruction activities and the end of the conflict.
Poverty in Aceh, while still far higher than in the rest of Indonesia, increased only slightly in 2005 — an achievement given the magnitude of the 2004 tsunami. Poverty then declined from 2006 onwards to below pre-tsunami levels and economic growth started to recover, reversing a trend of increasing poverty and stagnant economic growth. Credit for this turnaround should go first and foremost to the stoicism of the Acehnese. Helping to shelter each other in the immediate aftermath of the tsunami, they then started the task of rebuilding their lives and grasping the chance for peace. The central and regional governments also deserve credit despite the adversity in overseeing one of the largest reconstruction efforts ever witnessed — and one that has worked remarkably well. Finally, the international and NGO communities should also be encouraged by events in Aceh. They assisted the Government of Indonesia in averting a major humanitarian crisis and have been reliable partners to central and regional authorities in rebuilding the province.
Priorities for alleviating poverty in Aceh
In 2008, the World Bank released its assessment of the impact of the conflict, the tsunami and reconstruction on poverty in Aceh. It identifies a number of priority areas that should be considered in order to address and reduce poverty levels in the province:
- Longer-term development efforts should focus on the poorest areas of Aceh, in particular those in the rural interior and more remote areas. The current concentration of resources in tsunami-affected areas, particularly Banda Aceh and areas close to the capital, should be broadened to cover other areas affected by the conflict.
- Any poverty alleviation strategy should focus on increasing the productivity of the agricultural and fisheries sectors. This should be linked to a strategy to improve the capabilities of the poor (skills development, rehabilitation of physical assets) and link them to growth poles in urban areas (better rural infrastructure and access to markets).
- In order to avoid any renewal of the conflict, which historically has been closely linked to natural-resource wealth, the Government of Aceh can (i) diversify the economy away from natural resources, (ii) increase transparency of the distribution and use of revenues, and (iii) ensure the rule of law.
- The Government of Aceh should invest in a strong civil service that ensures an efficient allocation of resources, as well as the provision of quality public services. Strengthening local administrations is more urgent in Aceh that in other regions of Indonesia, given the difficult tasks that lie ahead, managing one of the largest reconstruction efforts in the world and dealing with the negative heritage of a 30-year conflict.
- The Government of Aceh should scrutinize spending patterns, such as the increased spending on government administration and the civil service wage bill.
- The Government of Aceh should continue its high levels of investment in education, increasing the efficiency of spending. Secondary and tertiary education, closely related to lower poverty levels, should be part of the poverty reduction strategy of the Government of Aceh.
- Better planning is necessary to match identified needs and allocation of resources in key sectors. Current spending patterns, with a focus on building new facilities and an already large number of public employees, are failing to address the poor quality of service delivery and the low allocation of resources to the operation and maintenance of public facilities and infrastructure.
- Aceh Growth Diagnostic:
- Aceh Economic Update (May 2009):
- Aceh Economic Update (October 2008):
- Aceh Economic Update (April 2008):
- Aceh Poverty Assessment
- Aceh Economic Update (November 2007):
- Aceh Economic Update (April 2007):
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