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Indonesia plans to move its capital from Jakarta. Here's why

Key Points
  • Indonesia's President Joko Widodo plans to relocate the capital to outside of the crowded main island of Java, saying that the island's infrastructure has been strained to the point that a move is necessary.
  • Speaking to CNBC on Thursday, Indonesian Finance Minister Sri Mulyani Indrawati said that it will be a "wise choice," but added that any new location for the capital should not require a big investment in infrastructure.
A bird's eye view of commercial and residential buildings stand as seen from a skyscraper during construction development in Central Jakarta.
Ardiles Rante | Barcroft Media | Getty Images

Indonesia, the world's fourth most populous country, is planning to move its capital away from Jakarta, which is suffering from severe congestion and is rapidly sinking.

The country's president, Joko Widodo, has decided to relocate the capital to outside of the crowded main island of Java, saying that the island's infrastructure has been strained to the point that a move is necessary.

"In Java, the population is 57 per cent of the total for Indonesia, or more than 140m people, to the point that the ability to support this, whether in terms of the environment, water or traffic in the future, will no longer be possible so I decided to move outside Java," he told local media, according to a Financial Times report.

Speaking to CNBC on Thursday, Indonesian Finance Minister Sri Mulyani Indrawati said that it will be a good move, reiterating that it isn't sustainable for economic activities to be focused in Jakarta anymore, with concerns around quality of life as well.

"From the point of view that Indonesia needs to move away from the very central focus in Java or Jakarta on economic development and growth, I think this is really a wise choice. Indonesia is a big country, but we are very much central in Jakarta or Java in terms of development," she said.

Jakarta is home to more than 10 million people, but around three times as many people live in the surrounding towns — adding to the area's severe congestion. The low-lying capital is also prone to flooding and is thought to be sinking due to over-extraction of ground water.

Indonesian Minister of National Development Planning Bambang Brodjonegoro has put the annual economic loss due to traffic congestion in Jakarta at 100 trillion rupiah ($7.04 billion).

According to Sri Mulyani, any new location for the capital should not require a big investment in infrastructure.

"We're not going to be in a totally isolated place (where) we have to invest (in much) infrastructure, I think that's one of the criteria. We would like to have a location which is central enough ... including the environmental sustainability and don't forget that Indonesia is located under the Ring of Fire — so you really have to find a location which is safe enough but not requiring a huge investment cost," she said. The Ring of Fire is a major area around the edges of the Pacific Ocean, where 90 percent of the world's earthquakes occur.

Widodo said on Tuesday that the country is considering spending $33 billion on the move. One of the contenders for the new capital city is Palangkaraya in Central Kalimantan province on the island of Borneo, state news agency Antara reported this year.

Sri Mulyani added that the evaluation would be finalized within a year, and the move might take up to a decade, going by the experience of other countries.

— Reuters contributed to this report.