Jakarta – Low-income rural people appear to be most vulnerable to growing wealth inequalities in Indonesia following the economic crisis, the World Bank said Thursday.

Citing recent poverty data, the bank said in a macro-economic update there were indications that overall poverty has fallen since February last year. But "this does not mean that all sections of society are coping equally well," it said.

The bank said analyses that take into account household incomes in relation to consumption showed that urban inequality fell due to declining incomes in richer households.

But rural inequality rose, apparently driven by worsening conditions for landless agricultural labourers, the bank said. "The rise in rural inequality is found to be due to increasing inequality in the bottom tail of the distribution [chain] ... while lower urban inequality is primarily driven by a collapse in incomes of the top half of the income distribution," the bank said.

"These results can be interpreted as an increase in vulnerability for rural households, with some sections, likely to be agricultural labourers, who are net consumers, suffering a very strong drop in incomes."

It said data on agricultural real wages, which fell about 40 percent between 1997 to 1998, would support these conclusions. Formal sector wages, meanwhile, have fallen 34 percent in real terms, a shock for the upper and middle income groups in urban areas.

Separately the report said government moves to impose a 30 percent import duty on rice means local prices will remain high, negatively affecting efforts to reduce the poverty rate. Between February 1996 and February 1999, the price of rice rose 180 percent, while non-food items rose 80 percent, making rice prices a major factor in the poverty level.

"This contributed to the rise in the poverty rate over and above what would have been expected due to the fall in output," the World Bank said. "In this regard, the government's decision to impose a tariff on the price of rice – 430 rupiah/kilogram – and hence maintain the high price dictated by the floor procurement price set by Bulog, the National Logistics Agency, is particularly unfortunate," it said.

The report also singled out political divisions within the country's five month-old cabinet and a lack of political support for agencies charged with implementing financial reforms, as hampering changes in the financial sector.

"The cabinet's difficulty in building an internal consensus and providing the political will to support the agencies tasked with financial sector reform reinforces concerns that differing political interests may hamper progress in the financial sector reform program," the macroeconomic update said.

It said while several steps such as the recapitalisation of Bank Mandiri and the trading of bank recapitalisation bonds were encouraging, the challenges facing the government remained "daunting".

Key requirements going forward include strengthening the Indonesian Bank Restructuring Agency's (IBRA) internal operations, accelerating asset resolution, and demonstrating the government's commitment to foreign ownership of banks, it said.