Capital Market Development Program Cluster: Completion Report
sector: Finance | country: Indonesia
Long-term perspective. The adoption of the medium-term blueprint for a capital market master plan meant that the government had a set of long-term objectives to guide and shape medium-term policy design and implementation. The close consultations involving the government, ADB, and other development partners strengthened the government’s ownership and increased the potential for funding agency buy-in.
Flexibility in design. Capital market development is complex and involves major changes to the legal and regulatory framework, institutional arrangements, financial infrastructure, and human capacity. Hence, sufficient time must be allocated to program implementation. Design flexibility is also a key consideration. The use of the program cluster approach gave CMDPC (Capital Market Development Program Cluster) implementers the opportunity to refine the policy actions proposed for succeeding subprograms to reflect the government’s achievements, changes in the policy and economic environment, and lessons from previous subprograms.
Technical assistance resources. Under the CMDPC (Capital Market Development Program Cluster), the government adopted legal, policy, and institutional measures and established supporting infrastructure. Many of the concepts were relatively new and therefore required extensive consultation and coordination to ascertain stakeholders’ understanding, acceptance, and adoption of the new measures. Substantial TA support was necessary to ensure that best practices were incorporated and then consolidated throughout implementation to achieve the intended results. The CMDPC identified a program of TA projects at the outset to help implement the medium-term program and improve the likelihood of compliance with completed activities. The selection of individual consultants was based not only on merit but also on their perceived ability to work well with local counterpart staff and their sensitivity to the local culture. These criteria are considered essential for the successful transfer of knowledge.
Emerging risks. The transition from a centrally controlled economy to a market-led economy creates new forms of risks. The presence of international banks, the offer of more sophisticated services to depositors (credit and debit cards for automatic teller machines and electronic funds transfer systems), and the increase in lending demonstrate increasing investor confidence in Indonesia’s capital market system. With these encouraging developments, however, come new risks and challenges – such as the impact of global financial crises on Indonesia’s fiscal sustainability, i.e., close to 30% of Indonesia’s bond holders are foreigners.
The project completion report (PCR) identified a few important lessons. It pointed out that adopting a long-term perspective based on a capital market master plan is important in guiding and shaping policy design and implementation. It also affirmed that the use of the program cluster approach provided flexibility in refining policy actions, and this could be adopted by succeeding subprograms to reflect government achievements, changes in the environment, and lessons learned. It noted that substantial technical assistance (TA) resources are needed to implement a medium-term program and increase the likelihood of success, especially for a comprehensive program that introduces various relatively new concepts. The PCR noted that a significant number of foreign bond holders could affect fiscal sustainability during a global financial crisis, which suggests that there are new forms of risks associated with an economy transitioning from a centrally controlled economy to a market-led economy. This validation finds the lessons in the PCR suitable. This validation adds the lesson on the need for a strong ownership of the government and stakeholders to help ensure the successful implementation of a reform program.