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Tsunami and Aceh reconstruction.

Big magnitude earthquake followed with horrifying tidal waves that ravaged Aceh and part of North Sumatra claimed more than 110,000 lives in the two regions. The quake triggered tsunami on Dec. 26, 2004 left a scene of disaster in the provincial city of Banda Aceh and Meulaboh in western coast of the country's northern most province.

Meulaboh and other smaller cities in western coasts of Aceh were levelled to the ground and became abandoned cities. Buildings were wiped away by huge waves. More than 80% of infrastructure were destroyed. The infliction and un-calculable losses suffered by the people in Aceh have drawn world wide sympathy. In the aftermath the government is confronted with a herculean task of reconstruction especially in Aceh which was already long depressed with conflicts between a rebel group and the security forces.

In an international conference on tsunami in Jakarta on January 6 tens of world leaders including heads of state and government and the secretary general of the United Nations, Vice President Jusuf Kalla tried to explain to the world dignitaries the extent of damages caused by the tsunami and works to be done for reconstruction.

Kalla said the hardest hit are urban areas where tsunami destroyed or damaged power distribution systems and communication networks. He said material losses were estimated to reach up to US$ 2 billion and up to 1 million people were rendered homeless. He said 150,000 people lived in refugee camps as more than 700 villages were ravaged by the tsunami. The disaster also sent around one million people jobless One third of the employees of the regional administration were dead or missing. Hundreds of military and police officers on duty in Aceh were killed or missing.

The latest estimate by the National Development Planning Board (Bappenas) put the loss at around US$ 4 billion. The cost of reconstruction or rehabilitation will be larger if settlement areas or facilities have to be rebuilt in other locations.

Impact on the economy not significant?

Based on a study by the directorate of Economic Research and Monetary Policy of Bank Indonesia the natural disaster in Aceh and North Sumatra would have no significant effect on the country's economy. The central bank maintained its previous prediction that the country's economy will grow by 5%-6% in 2005. The disaster would not cause negative effect on expectation and risk perception of the country's economy. Investment plan and exchange rate would not be affected.

The study also said that inflation could be curbed if distribution of goods could be maintained by using alternative route between East Aceh and Medan. It said the impact is also minor on the banking sector as bank assets in Aceh made up only less than 1% of the country's total bank assets.

The contribution of Aceh to the country's Gross Domestic Product (GDP) is also small, around 2%. The role of Aceh's banking sector to the country's banking industry is very minor. The amounts of third party funds held by banks in Aceh was only 0.7% of third party funds held by the entire banks in the country and the amount of bank credits in Aceh is around 0.5% of the total bank credits in the country. State-owned banks control 85% of banking activities in Aceh.

Exports and imports in Aceh are hardly affected by the natural disaster. Exports from Aceh are dominated by oil and gas products. Imports are made up mainly of chemicals and industrial basic materials. However, the economy of Aceh is predicted to suffer a contraction of 3.5% in 2005.

In general, the Aceh economy is small compared with the country's economy, but with the loss of US$ 4 billion as estimated by Bappenas, the government has to set aside a considerable amount of fund for Aceh reconstruction. The effect, therefore, will be very significant on the state finance. Fortunately foreign aid is not small for Aceh reconstruction. Great solidarity shown by the international community has been impressive as reflected by the floods of relief aid and pledges of financial aid to help in Aceh reconstruction. See the following table.:

The aid commitments are expected to continue to rise. The United Nations even predicted that the amount will reach US$ 9 billion for tsunami victims in Asia--the largest ever recorded by the United Nations for natural disaster victim.

However, the figures given in the table above, are only commitments and based on the experience of the United Nations not all aid pledged for natural disaster victims was realized.

Economic observers asked the government to study the forms of aid especially aid in loans. The government should not rush to accept aid in loans as it will add to the already heavy debt burden of the country, they said.

Infrastructure Development

An enormous amount of funds will be needed for reconstruction of Aceh including rehabilitation of its infrastructure. Estimates by some government officials put the amount from Rp 20 trillion to Rp 30 trillion needed from 2005 to 2009. The amount could be larger as Bappenas estimates loss amounting to US$ 4 billion.

With Aceh reconstruction, the government's program already prepared for infrastructure development in the country might need review. Earlier Chief Economics Minister Aburizal Bakrie said the government planned large scale development of infrastructure to support economic development and the program to be carried out from 2005 to 2009 will cost around Rp 1,300 trillion.

The country needs to develop and modernize its infrastructure to boost it economic development. The country's infrastructure has been in serious condition and could not be expected to support economic development. Good infrastructure is needed to attract investors. The World Bank rated the country's infrastructure the lowest in Asia. In power consumption Indonesia ranks the 11th, in telephone connection the 12th, in access to sanitation the 7th and in road access the 8th among 12 countries surveyed in Asia.

Under the government program priority will be given to construction or modernization of toll roads, bridges, gas pipelines, railways, power distribution networks, airports, and seaports. The projects considered commercially profitable will be offered to the private sector including foreign investors. The projects will not directly contribute to the welfare of the low income people that make up the majority of the population. The projects do not include projects that immediately contribute to improving the welfare of the people such as better irrigation systems, low cost housing and health facility, etc.

The government seems to be more concerned with facilitating investment rather than giving something that will directly benefit the people in general. The reason is the government has no fund to finance such projects and that the private sector will be interested only in projects that promise profit. The chief economics minister has said the cost of the projects offered by the government is around Rp 1,305 trillion. The government, state-owned banks, insurance companies and pension funds are estimated to be able to put up only 38% or Rp495 trillion of the total cost. The rest or Rp 810 trillion are expected to come from the private sector both domestic and foreign investors.

The projects which are estimated to cost Rp 720 trillion will be offered to the private sector at an Infrastructure Summit held in Jakarta from Jan. 17 to 18.

With the emergency condition in Aceh, the government has to allocate some of the funds for reconstruction of that province estimated to cost US$ 4 billion. Hopefully the private sector also is interested in reconstruction projects in Aceh and North Sumatra.

Without the involvement of the private sector, the government could not do much to cope with the jobs.. The government needs to offer certain term and condition to guarantee some profit margin to attract the private sector to take part in the Aceh reconstruction.

Aid pledged by donor countries to cope with disaster caused
by tsunami in Aceh and North Amount of aid

Countries Amount of aid

Europe :

Germany 500 million euro +
 private 350 million

France 179.8 million euro +
 95 million euro

Norway US$ 158 million +
 US$ 63 million

Britain US$ 140.7 million +
 US$ 187.6 million

Italy 70 million euro +
 30 million euro

Denmark US$ 74.2 +
 US$ 19.7 million

Sweden US$ 72.4 million +
 US$ 57.9 million

Spain 50 million euro +
 14 million euro

Finland 50 million euro +
 15 million euro

Belgium 30 million euro

Netherlands 29 million euro

Switzerland US$ 22.85 million +
 US$ 98.1 million

Austria 8.16 million euro +
 10.2 million euro

Portugal 8 million euro +
 5.2 million euro

Czech Rep. US$ 9.6 million dollar
 AS + 6.5 million

Luxemburg 5,25 million euro

Russia US$ 2 million
 (U.N. data US$ 22 mill.)

Poland US$ 1.6 million

Ireland 1 million euro +
 10 million euro

Cyprus US$ 1.3 million

Turkey US$ 1.25 million

Hungary US$ 1.2 million

Greece US$ 1.15 million +
 20 million euro

Croatia US$ 681,000 +
 US$ 236,000

Estonia US$ 390,000

Slovak US$ 360,000

Lithuania US$ 295,000

Rumania US$ 240,000

Latvia US$ 185,000

Monaco US$ 133,000

Slovenia US$ 110,000

Bosnia US$ 67,000

Countries Amount of aid

Asia Pacific:

Australia US$ 760 million +
 US$ 118.3 million

Japan US$ 500 million **

China US$ 83 million +
 US$ 15.1 million

India US$ 23 million

North Korea US$ 150.000

Cambodia US$ 40,000

United States US$ 350 million +
 US$ 350 million

Canada US$ 348.4 million +
 US$123 million
Middle East

Saudi Arabia US$ 30 million +
 US$ 82 million

Qatar US$ 25 million

United Arab US$ 20 million

Kuwait US$ 100 million

Iran US$ 627,000


Zimbabwe US$ 3.2 million

Guinea US$ 200,000

Senegal US$ 200,000

Madagascar US$ 100,000


IMF US$ 1 billion

World Bank US$ 1 billion

BPA *** US$ 500 million

IDB **** US$ 118 million
 (IDB data
 US$ 500 million)
Source: AFP

Note : * data from Kompas daily; ** More aid expected to come
*** Asia Development Bank; **** Islamic Development Bank

Cost of infrastructure development and expected sources of funds,

Sources of funds R p trillion)

Government, banks, insurance companies mutual 495
funds, etc.

International financial agencies/donor countries, 90

Indonesian and foreign private investors 720

Total 1,305

Source: Office of chief economics minister
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Title Annotation:FOCUS
Publication:Indonesian Commercial Newsletter
Geographic Code:9INDO
Date:Jan 11, 2005
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