Borrower Republic of Indonesia Classification Economic Growth Environmental Assessment Category B. Environmental implications of the proposed Project were reviewed at appraisal. The subprojects to be financed by the Asian Development Bank (ADB) will be required to satisfy ADB’s environmental guidelines.
Project Description The Small and Medium Enterprise Export Development Project
(SMEEDP) comprises a part of the Government and ADB efforts to promote development of small and medium enterprises (SMEs) in Indonesia and is a follow up to the earlier approved Industrial Competitiveness and SME Development Program (Loan 1738-INO, approved in March 2000), which focuses on regulatory framework and policies, and technical assistance (TA) for the development of business development services (TA 3829-INO, approved in January 2002). The SMEEDP focuses on the issue of SME financing, specifically that for small and medium exporters and their network of suppliers, and will consist of (i) a loan of $85 million to provide investment credit, and (ii) TA of $500,000. To complement the proposed TA, the Government of Japan, through the Japan International Cooperation Agency (JICA), will finance, on a grant and parallel basis, technical assistance to support development of SMEs.
The proposed TA and the Japans SME promotion program will be implemented in close coordination with technical assistance to the SME sector being provided by other development partners.
Rationale The 1997-1998 crisis pushed a large number of people below the poverty line. During the process of economic recovery, SMEs, especially export-oriented firms, offered particular resilience; benefited from the depreciation of the rupiah; and provided substantial job opportunities, contributing to poverty reduction. Yet it was clearly recognized that Indonesia had failed to fully take advantage of the SME sector because of a number of impediments.
Recognizing the importance of SMEs for Indonesia’s economic recovery and future growth, and for poverty reduction through employment creation, the Government  considered development of SMEs among the country’s most important economic initiatives, especially in its strategy for poverty reduction. Accordingly, the Poverty artnership Agreement between the Government and ADB also noted SME development as a key area for ADB’s future assistance in Indonesia.
Key impediments to the development of SMEs include (i) regulatory framework biased against SMEs; (ii) the lack of sustainable business development services for SMEs; and (iii) difficulty of SMEs to obtain financing, particularly for meeting investment requirements. Through iv ADB’s earlier assistance, the issues of regulatory framework and business development services are being addressed; however, there have been no effective initiatives to address the issue of SME financing.
One of the major lessons from the crisis is that firms should secure funds to meet their investment needs in the same currency as their revenue stream. Export-oriented SMEs would be naturally hedged against foreign exchange risks. At the same time, given the current market conditions, SMEs are having difficulty in obtaining financing. Indonesian banks often look only at collateral and offer only shortterm funds. The introduction of foreign exchange term financing for investment purposes with TA for improving the communication between banks and SMEs will help to channel needed funds to SMEs for high quality projects.