JAKARTA, March 18 The World Bank delivered a blunt assessment of Indonesia ban on mineral ore exports on Tuesday, warning that it would hit trade and 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. But, 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 2014-2017, the negative impact on net trade could be $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, including royalties and export tax, could be $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 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.
Indeed, all the main parties agree Indonesia should do more to make its exports more valuable.
Economic nationalism has become more evident in Indonesian politics thanks in part to self-confidence arising from a strengthening 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 increased policy uncertainty, weakening the investment climate for mining in Indonesia, when it was already seen as one of the world's weakest, the World Bank 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.
It urged deeper analysis and wider consultation on the issue.
(Editing by Simon Cameron-Moore)