Can Indonesia Still Build its New Capital City?

26 August 2020 Jarryd de Haan, Research Analyst, Indo-Pacific Research Programme

Background

Indonesia’s Planning Minister, Suharso Monoarfa, told Reuters in an interview on 18 August that plans to build a new capital city in the Borneo province of East Kalimantan have been shelved. In that interview, Monoarfa explained that ‘We’re putting as our number one priority the recovery of the economy and overcoming the pandemic…. When the situation improves, only then will we decide what we will do.’ Plans to relocate Indonesia’s capital to East Kalimantan were revealed by President Joko “Jokowi” Widodo in August 2019, with construction scheduled to begin in 2021 and the first residents to move into the city in 2024, Jokowi’s final year in office.

Comment

It is unsurprising that plans to relocate the city have been shelved for the time being. With an expected cost of at least 466 trillion rupiah ($44.2 billion), building the capital while grappling with an economic retraction caused by the pandemic would be difficult to justify. That said, however, it may be some time before Indonesia sees the “light at the end of the tunnel” as Monoarfa described. In a recent interview with Future Directions International, Bill Sullivan, Senior Foreign Counsel with Christian Teo & Partners and Senior Adviser to Stephenson Harwood LLP, described a major fiscal and economic crisis facing Indonesia at the moment:

The country is looking at economic growth dropping from five per cent per year to – at least for the next couple of years – one per cent per annum, or perhaps even into negative figures. That is a huge problem and the Indonesian authorities accept that the economy actually needs to grow at seven per cent per year just to absorb the number of young people coming into the workforce every year.

An economic downturn now will have far-reaching economic consequences in the future. The light at the end of the tunnel that would give the greenlight for building the new capital, therefore, may be more distant than first thought.

While Indonesia’s economic future is uncertain, the government will still likely push for the construction of the capital before Jokowi’s term ends. In his comments to Reuters, Monoarfa said construction could be delayed until 2022 or 2023. Earlier comments by Donny Gahral Adian, a senior adviser in the President’s office, in July, also showed some optimism within the government before the plan was shelved:

For sure there will be a reschedule in the implementation of the stages. The government will only handle 19 per cent of the whole budget of around Rp400 trillion, the rest will be handled by the private sector.

For construction to begin, attracting foreign investment from private sectors overseas will be key to getting the project moving.

If the Indonesian Government does push to begin construction within the next few years, however, numerous delays should be expected. Globally, the pandemic has hit every country differently, and, in the absence of a vaccine, construction could still be susceptible to outbreaks in other countries that would delay the import of materials or impede the travel of skilled workers. Those delays could ramp up costs significantly, and foreign investors will not be willing to bear the brunt of those costs. If the Indonesian Government does push for construction to go ahead, therefore, it could prove to be a very costly exercise, and one that will be difficult to bear, given the current economic circumstances.

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

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