The World Bank delivered a blunt assessment of Indonesia’s ban on mineral ore exports yesterday, warning that it would hit trade and Indonesian government revenue and risked undermining already weak investor sentiment towards Southeast Asia’s biggest economy.
Implemented in January, five years after the law was initially passed, the ban has been met with confusion in the mining sector.
It was introduced to encourage mineral processing in Indonesia in order to increase the value of exports. Yet one group of mining companies has mounted a legal challenge, warning that the ban on exports will force them out of business.
“The long term gains are at best uncertain,” Jakarta-based World Bank economist Jim Brumby said, adding there were no success stories elsewhere in the world where countries had tried to impose similar bans.
Brumby was speaking at the launch of the bank’s quarterly economic report.
The World Bank estimated that for the period this year to 2017, the negative impact on Indonesia’s net trade could be US$12.5 billion because of the loss of export revenue, while capital goods imports, to build smelting capacity, will have to rise.
The potential cost in lost fiscal revenues for Indonesia, including royalties and export tax, could be US$6.5 billion.
And if a proposed major nickel mining and smelting project in Weda Bay in the east of the country does not kick in by then, the negative impact will go beyond 2017.
None of the major parties contesting next month’s Indonesian parliamentary election and the presidential election in July have suggested they would repeal the law, though some have said that they would review its implementation.
Economic nationalism has become more evident in Indonesian politics thanks in part to self-confidence arising from a growing domestic economy. There is a popular belief that foreign investors profit too much from exploiting the country’s enormous wealth of natural resources.
The ban has weakened the investment climate for mining in Indonesia, the bank’s report said.
“Over the longer term, this could prove to be the biggest obstacle in increasing domestic value-addition, as it increases investor risk perceptions at a time when economy-wide investment has already decelerated,” the report said.