Aceh - Economy of Aceh

Economy of Aceh

In 2006, economy of Aceh grew by 7.7% after having minimal growth since the devastating tsunami. This growth was primarily driven by the reconstruction effort, with massive growth in the building/construction sector.

The ending of the conflict, and the reconstruction program has resulted in the structure of the economy changing significantly since 2003. Service sectors now play a more dominant role, whilst oil and gas production continues to decline. The economy continues to rely upon depleting oil and gas production and agriculture.

NB: ... = less than 0.5%

After peaking at around 40% in December 2005, largely as a result of the Dutch disease impact of sudden aid flows into the province, inflation declined steadily and was 8.5% in June 2007, close to the national level in Indonesia of 5.7%. Persistent inflation means that Aceh’s consumer price index (CPI) remains the highest in Indonesia. As a result, Aceh’s cost competitiveness has declined as reflected in both inflation and wage data. Although inflation has slowed down, CPI has registered steady increases since the tsunami. Using 2002 as a base, Aceh’s CPI increased to 185.6 (June 2007) while the national CPI increased to 148.2. There have been relatively large nominal wage increases in particular sectors, such as construction where, on average, workers’ nominal wages have risen to almost Rp.60,000 per day, from Rp.29,000 pre-tsunami. This is also reflected in Aceh’s minimum regional wage (UMR, or Upah Minimum Regional), which increased by 55% from Rp.550,000 pre-tsunami to Rp.850,000 in 2007, compared with an increase of 42% in neighboring North Sumatra, from Rp.537,000 to Rp.761,000.

Poverty levels increased slightly in Aceh in 2005 after the tsunami, but by less than expected. The poverty level then fell in 2006 to below the pre-tsunami level, suggesting that the rise in tsunami-related poverty was short lived and reconstruction activities and the end of the conflict most probably facilitated this decline. However, poverty in Aceh remains significantly higher than in the rest of Indonesia and a large number of the Acehnese remain vulnerable, reinforcing the need for a smooth landing after the reconstruction boom ends.