Report No. 8455-IND Indonesia Foundations for Sustained Growth May 4, 1990 Country Department V Asia Regional Office FOR OFFICIAL USE ONLY Docant of the World Bank This document has a restricted distibution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. GMRE= ELIOU1ALK Before November 15. 1978 US$1.00 Rp.415 Annual Average 1979-88 1979 US$1.00 Rp.623 1980 US$1.00 - Rp.627 1981 US$1.00 - Rp.632 1982 US$1.00 - Rp.661 1983 US$1.00 - Rp.909 1984 US$1.00 - Rp.1,026 /a 1985 US$1.00 - Rp.l,lll 1986 US$1.00 Rp.1,283 lb 1987 US$1.00 - Rp.1,644 1988 US$1.00 - Rp.1,681 1989 US$1.00 - Rp.1,770 av 1. 1990 US$1.00 - Rp.1,830 FISCAL YEAR Governmen. - April 1 to March 31 Bank Indonesia - April 1 to March 31 State Banks - January 1 to December 31 /a On March 30, 1983 the Rupiah was devalued from US$1.00 - Rp.703 to US$1.00 = Rp.970. i On September 12, 1986 the Rupiah was devalued from US$1.00 - Rp.1,134 to US$1.00 - Rp.1,644. FOR OFFICIAL USE ONLY TITLE Indonesia: Foundations for Sustained Growth COUNTRY : Indonesia REGION Asia SECTOR Country Economic REPORT TYPE CLASSIFIGATION m LANGUAGE 8455-IND ERA Official Use 05/90 English PUBDATE . May 1990 ABSTRACT : This report describes Indonesia's emergence from a period of adjustment during which significant progress was made in developing a more diversified and competitive economy while achieving substantial reductions in the incidence of poverty. Chapter 1 reviews the Government's adjustment strategy and its impact on economic performance and poverty reduction in the 1980s and outlines the main elements in Indonesia's'. strategy for sustained growth in the 1990s. These central elements are to continue prudent management of the macroeconomy (Chapter 2), to introduce further reforms in the incentive, regulatory and legal framework to promote efficient private sector development (Chapter 3), and to implement well managed public sector programs to support the growth of the private sector and to meet the needs of the poor (Chapter 4). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - i-X INDONESIA: FOUNDATIONS FOR SUSTAINED GROWTH Table of Cgntgnts Page No. SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . v to xviii CHAPTER 1 PROGRESS IN ADJUSTMENT AND POVERTY REDUCTION . . . . 1 A. Introduction and Overview of the Report 1 B. Adjustment Response and Macroeconomic Performance . . . . . . . . . . . . . . . . . 2 External Shocks and Adjustment, 1983-88 . . 2 Economic Developments during 1989/90 . . . . 9 C. Progress in Poverty Reduction . . . . . . . . . . 14 Factors Contributing to Poverty Reduction during the Adjustment Period . . . . . . . 16 D. The Tasks Ahead . . . . . . . . . . . . . . . . . 20 CHAPTER 2 - A MACROECONOMIC FRAMEWORK FOR SUSTAINED GROWTH . . . 23 A. Introduction . . . . . . . . . . . . . . . . . . 23 B. Macroeconomic Strategy and Policy Framework . . . 23 C. The Medium-Term Macroeconomic Outlook . . . . . . 25 The External Environment . . . . . . . . . . 25 Macroeconomic Projections . . . . . . . . . 27 Implications for Employment and Sustained Poverty Reduction . . . . . . . . . . . . 34 Risks and Uncertainties in Prospects . . . . 37 D. Public Resource Mobilization . . . . . . . . . . 38 Central Government's Non-Oil Tax Effort . 39 Strengthening Local Government Finances . 42 Local Government Borrowing . . . . . . . . . 43 E. External Borrowing and Debt Management . . . . . 44 Implications for External Debt Management . 48 This report was prepared by a team led by Jim Harrison. The principal authors were Donald Hanna, Vladimir Konovalov, Kyle Peters, Nicholas Prescott and Dennis Whittle. Other major contributors were Sadiq Ahmed and Swati Ghosh. Yasmine Hamid prepared the Statistical Annex and, together with Cyrus Talati, provided statistical support. The report also draws on background inputs prepared by Victor Agius, Jean-Charles Crochet, Dipak Dasgupta, Elmo Fernando, Ahbmed Galal, Colin Gannon, David Hawes, Andres Liebenthal, Laszlo Lovei, Samuel Paul, Vicente Paqueo, A. Shanmugarajah, Willem Struben, and John Wilton. - it - I'Age No. CHAPTER 3 - EFFICIENT PRIVATE SECTOR DEVELOPMENT . . . . . . . . . 51 A. Introduction . . . . . . . . . . . . . . . . . . . 51 B. Trade Policy . . . . . . . . . . . . . . . . . . . 52 The Changing Pattern of Price Incentives . . . 52 Directions for Continued Reform . . . . . . . 57 C. Domestic Incentives and Regulatory Framework . . . 61 The Intestment Licensing System . . . . . . . 63 Foreign Direct Investment . . . . . . . . . . 64 Local Level Laws and Regulations . . . . . . . 64 Local Content Programs . . . . . . . . . . . . 65 Labor Regulations . . . . . . . . . . . . . . 65 The Commercial Law Framework . . . . . . . . . 66 D. Financial Sector Development . . . . . . . . . . . 67 Recent Policy Developments . . . . . . . . . . 67 Impact of the Reforms . . . . . . . . . . . . 69 The January 1990 Reforms . . . . . . . . . . . 70 The Remaining Agenda . . . . . . . . . . . . 71 E. Transport Services . . . . . . . . . . . . . . . . 74 F. Environmental Management for Private Sector Development . . . . . . . . . . . . . . . 76 CHAPTER 4 - PUBLIC SECTOR MANAGEMENT FOR GROWTH AND POVERTY REDUCTION 79 A. Introduction . . . . . . . . . . . . . . . . . . . 79 B. Public Expenditure Priorities . . . . . . . . . . . 81 Supporting Private Sector Development . . . . 81 Improving Basic Services for the Poor . . . . 86 C. Pricing Policy for Public Services . . . . . . . . 90 Agriculture . . . . . . . . . . . . . . . . . 90 Energy . . . . . . . . . . . . . . . . . . . . 92 Telecommunications . . . . . . . . . . . . . . 93 Transport .... . . . . ... . . . . . . . 93 Health Services . . . . . . . . . . . . . . . 94 Water Supply . . . . . . . . . . . . . . . . . 96 D. Program Management and Implementation Capacity . . 96 Budgetary Fragmentation . . . . . . . . . . . 96 Administrative Reform . . . . . . . . . . . . 98 Environmental Assessment . . . . . . . . . . . 99 E. Developments in the Public Enterprise Sector . . . 100 Introduction . . . . . . . . . . . . . . . . . 100 Background, Current Reforms and Performance 100 Remaining Reform Agenda . . . . . . . . . . . 103 - iii. v Page Ng, ANNEX 1 - RECENT ECONOMIC DEVELOPMENTS . . . . . . . . . . . . . 107 ANNEX 2 - NOTE ON REVISIONS TO CDP SERIES . . . . . . . . . . . . 123 STATISTICAL ANNEX ........................ 125 MAP Text-Table_s Table No. PagL No. Chagter 1 1.1 Recent Economic Developments, 1975-1989 . . . . . . . . . 5 1.2 Savings-Investment Balances, 1981-89 . . . . . . . . . . . 6 1.3 Indonesia's Economic Structure, 1981/82-1989/90 . . 9 1.4 Balance of Payments, 1981/82-1989/90 . . . . . . . . . . . 12 1.5 Central Government Budget, 1982/83-1988/89 . . . . . . . . 13 1.6 Official Estimates of Poverty, 1976-87 . . . . . . . . . . 15 1.7 Trends in Real Wages, 1983-89 . . . . . . . . . . . . . . 18 Chagter 2 2.1 Selected Indicators of lnternational Economic Activity: 1989-2000 .... . . . .... . . . . . . 26 2.2 Indonesia's Terms of Trade, 1988/89-2000/01 . . . . . . . 27 2.3 Base Case - Selected Economic Indicators, 1983-2000 . . . 28 2.4 Balance of Payments, 1989/90-2000/001 . . . . . . . . . . 30 2.5 Projections of Non-Oil Export Growth . . . . . . . . . . . 31 2.6 Growth and Composition of GDP, 1983-2000 . . . .33 2.7 Projected Expansion of Employment and Labor Productivity. 35 2.8 Government Expenditure and Tax Effort in Selected Asian Countries, 1983-1988 ..39 2.9 Indonesia's Non-Oil Tax Structure, 1981/82-2000/01 . . 40 2.10 Tax Compliance Indicators, 1983-89 . . . . . . . . . . . . 41 2.11 External Capital Requirements and Sources . . . . . . . . 44 2.12 Medium- and Long-Term Debt Indicators, 1987-2000 . . . . . 48 Chapter 3 3.1 Impact of Reform Packages on Import Licensing Coverage Since 1986 .... . . . . . . . . . . . . . . . . . . 54 3.2 Changes in the Import Tariff Schedule for the Whole Economy Since 1985 .... . . . . . . . . . . . . . . 55 3.3 Implementation of Duty Exemption and Drawback Scheme . . 56 3.4 Illustrative Effects of a Tariff Reform on Unweighted Average Tariffs and Dispersion . . . . . . . . . . . . 59 3.5 Indonesia: Structure and Growth of the Financial Sector, 1978-89. . . . . . . . . . . . . . . . . . . 65 - iir - Chagter 4 4.1 Sectoral Distribution of Development Expenditures . . . 80 4.2 Costs and Benefits of Rubber Development Schemes . . . . . 83 4.3 Electricity Supply and Demand in Java-Bali . . . . . . . . 84 4.4 Aggregate Indicators of Public Enterprise Performance, 1983-1989 ..... . . . . ..... . . . . . . . . 103 Figuses Figures No. ........................... Page No. ChaRter I 1.1 Non-Oil Import Trends, 1983/84-89/90 . . . . . . . . . . . 7 1.2 Non-Oil Export Performance, 1983/84-89/90 . . . . . . . . 7 1.3 Consumption Distributions ..16 Boxes Boxes No. Pate No. Chater 3 3.1 Garments from Bali: Export Success . . . . . . . . . . . 53 ChaRter 4 4.1 Water Prices and Subsidies for the Poor . . ........................ ........ 95 SUMMARY AND CONCLUSIONS FOUNDATIONS FOR SUSTAINED GROWTH (i) Indonesia is entering the 1990s following a period of adjustment to severe external shocks. It starts the new decade with an economy that has reduced macroeconomic imbalances and lowered distortions in the incentive system. A strong private sector response is restructuring and diversifying the production base, substantially enhancing the prospects for sustained growth. Moreover, Indonesia's adjustment strategy generated a pace and pattern of growth that led to improved living standards and substantial declines in the incidence of poverty. Continued access to capital markets and strong support from the donor community, in appropriate amounts and forms, helped to ensure the resources needed to implement this strategy. (ii) These achievements have created new opportunities and challenges. With per capita GNP less than US$500, Indonesia is still a relatively low income country. While poverty has declined, millions of people remain poor and may be difficult to assist, as they are likely to be concentrated in the less productive areas of the country. Indonesia now haf the opportunity to enter into a period of sustained and relatively rapid growth, leading to a further significant reduction in poverty and an improvement in the living standards of its people. Establishing the foundations for such sustained growth requires continued skillful macroeconomic management, rapid consolidation of the deregulation process to foster efficient private sector development, and continued improvements in the management of public sector programs to support growth and poverty reduction. Progress on Economic Adiustment and Poverty Reduction (iii) Adjustment in the 1980s. After a rapid growth in income, consumption and investment during the 1970s, Indonesia faced a series of severe external shocks in the 1980s. At that point the economy was heavily dependent on oil, which provided more than 80% of export earnings and 70% of budget revenues. Consequently, the large declines in real oil prices between 1982 and 1986 sharply reduced export earnings and budget revenues. Combined with international currency fluctuations that increased the debt service burden, these shocks resulted in a large income loss and called for a strong policy response to stabilize the economy and restore growth. The Government's policy response had two main thrusts: to restore macroeconomic balance, and to restructure the economy in order to reduce dependence on oil and improve economic efficiency. (iv) Strong stabilization policies were rapidly implemented in response to the external shocks. Two major devaluations of the exchange rate, buttressed by austere monetary and fiscal policies, resulted in a 55% depreciation of ;he real effective exchange rate over the decade. Current account deficits, which had exceeded 7% of GNP, were reduced to below 2% by 1989. Budget deficits were also reduced to below 2% of GDP, in part through a freeze on civil service salaries, major cuts in spending on large capital- and - vi - import-intensive projects, sharply reduced transfers to public enterprises, and increased uon-oil revenues. Inflation was contained bel'w 10% in most years and was reduced to about 6% by 1989. (v) Public MLT debt rose rapidly over the decade, from about US$20 billion in 1982 to US$44 billion by 1988. This reflected boch the need to finance the current account deficits and the depreciation of the US Dollar between 1985 and 1988, which alone accounted for over half of the increase in debt. The quick reduction in tne current account deficit slowed the growth in debt. Indonesia continued to meet its external debt obligations on time, retaining its access to commercial borrowing throughout the 1980s. At the same time, the strong support from the donor community enabled Indonesia to limit its commercial borrowing. Thus, the debt structure in terms of interest rates and maturities was better than that of most developing countries. By the end of the decade the debt burden was declining, and is expected to continue declining in the coming years. (vi) Structural reforms were aimed at establishing a more diverse and efficient economy. Tax reform tapped more buoyant and reliable sources of revenue. Financial sector reforms removed interest rate and credit ceilings, improving the flow of resources to the private sector. Major reforms in the trade regime reduced tariffs and non-tariff barriers, increasing competitive pressures in the economy. Together with exchange rate devaluations and a more realistic management of the exchange rate, these reforms sharply increased the incentives to export. The following table indicates the impact of these reforms on the structure of the economy. Of particular note is the sharp increase in the role of non-oil activities as the major source of export earnings and budget revenues. The rapid rise in the share of non-oil manufacturing in GDP and the share of private investment in total investment are important additional indicators of the increased diversity of the economy, and the growing role of the private sector. INDONESIA'S ECONOMIC STRUCTURE, 1981/82-1989/90 1981/82 1985/86 1989/90 ------- in percent ------ Ratios of: Oil/LNG exports to total merchandise exports 81.9 66.6 39.8 Non-oil exports to non-oil imports 28.6 55.2 85.8 Oil/LNG revenues to total revenues 70.6 57.1 38.2 Private fixed investment to total fixed investment 52.1 49.1 62.0 Non-oil manufacturing to GDP 8.4 11.5 14.3 (vii) The swift implementation of stabilization measures, combined with the structural reforms which facilitated the flow of resources to more efficient, often export-oriented activities, supported the rapid return to - vii - higher growth rates by the end of the decade. From the start of the adjustment period in 1983 to the end of the decade, real GDP growth averaged 5.5% p.a., with non-oil GDP rising by 6.2% p.a. in real terms. Non-oil manufacturing and non-oil exports grew particularly rapidly, averaging 12.3% and 13.2% p.a., respectively. By 1988 and 1989, non-oil GDP was growing at 7-8% p.a. Initially the stabilization measures resulted in a sharp reduction in investment in both the public and private sectors, with much of the production growth achieved through higher capacity utilization. After 1985, however, private settor investment resumed growth, rising by nearly 18% in 1989. The surge in private investment will help generate more diversified and stable sources of growth, strengthening prospects for robust growth in the future. (viii) Progress in poverty reduction. Maintaining solid growth during the 1980s despite the external shocks had important effects on poverty reduction. The analysis presented in the Poverty Assessment and Strategy &eport,l/ indicates that poverty continued to decline during the decade, while the distribution of income improved slightly. There was a substantial decline in the percentage of poor from 22% in 1984 to about 17% in 1987. This implies a decline in the absolute number of Indonesians in poverty, from 35 million in 1984 to about 30 million in 1987. Similar conclusions are obtained using a variety of alternative assumptions about the poverty line. Income inequality also declined during 1984-87, as indicated by a rising share of consumption going to the poorest 20% of the population, aiid declining income concentration ratios. (ix) The speed and comprehensive nature of the Government's policy response to the external shocks of the 1980s, combined with the supportive response from the donor community and continued access to internatiotnal capital markets, have been the main factors fostering a decline in poverty during a difficult adjustment period. The pace and pattern of economic growth, and a reorientation of public expenditures were of particular importance in achieving this result. The Government's adjustment strategy supported economic growth strong enough to allow improvements in real -'nings for most workers in the poorer income groups, despite the severe external shocks and a rapid increase in the labor force. Using wages for urskilled agricultural workers in Java as a proxy for the wages of lower income groups, real wages for these groups appear to have risen duing the 1983-88 period as a whole. (x) Although large cutbacks in real government spending played a major role in achieving macroeconomic balance, the cuts were made selectively to moderate the effect on the poor. Two basic features of the expenditure strategy were: protecting operations and maintenance (O&M) expenditures and transfers to the provinces; and reallocating development expenditures to programs which benefitted the poor. The continued rise in real O0M expenditures enabled the physical and social infrastructure created in earlier years to be used productively. Similarly, changes in the sectoral composition of development expenditures tended to protect areas with higher employment coefficients, such as programrs in agriculture, human resource development and regional development (e.g., TNPRES expenditures), which have the greatest 1/ IBRD Report No.8034-IND, May, 1990. - viii - potential to help the poor. Another important aspect of the adjustment strategy was that most of the required expenditure reductior. fell on investment, allowing a continued rise in per capita consumption. The Tasks Ahead (xi) Indonesia is emerging from a difficult but successful adjustment period with a more robust, diversified, and competitive -.onomy. The strong surge in private sector growth, *nvestment, imports, and exports, particularly during the past year, indicatei that the foundations are being laid for a period of sustained and robust growth. It is important that Indonesia take full advantage of the chance this presents to continue to reduce poverty and widen the economic opportunities for all. Sustained growth -- with non-oil GDP growing at 6-7% p.a. -- is needed to make substantial progress in raising living standards and providing productive employment opportunities for a growing population and labor force. At the same time, growth needs to be carefully managed to reduce the debt burden and broaden the future options for the country. Furthermore, to ensure that growth pressures do not compromise the long term sustainability of development, continuoas efforts will be needed to protect the environment. (xii) The Government's underlying development strategy contains the key elements to achieve these objectives. In the near term, this strategy calls for: * Continued prudent macroeconomic management to contain inflation, improve the external balance and maintain the competitiveness of exports. Reductions in the major remaining budget subsidies, and full implementation of the recent reforms of the liquidity credit system are of central importance. * Continued substantial reform of the trade regime. Reductions in non-tariff barriers which protect much of domestic manufacturing, and reform of the tariff system which now allows substantial protection to specific products, would help ensure that the large volume of private investment now underway will be in areas where Indonesia will be competitive, resulting in a more efficient, lower-cost economy in years to come. Reduction in the remaining export restrictions will widen the opportunities for producers of exports. • Strengthened prudential regulations and supervision for the financial sector. The activities already underway, including technical assistance and the legislation on banking, insurance, and pensions, should be fully supported and accelerated where possible, so that the financial sector retains the confidence of the business com4unity essential for solid growth. * Further progress in streamlining procedures and reducing remaining restrictions on investment licensing, consolidating the substantial improvements introduced in the past year. * Steps to identify and reduce potential infrastructure constraints, particularly power supply on Java. - ix - (xiii) The Government's strategy also calls for continued progress on more fundame;.tal and complex areas of reform, where the full benefits will emerge over the medium-term. These include: e Continued efforts to raise non-oil revenues and increase domestic savings so the economy's investment needs can be financed while reducing the reliance on foreign savings. * Meeting the needs of the poor by improving the quality and availability of basic services, particularly in education, health, family planning, water supply and other social infrastructure. * Improving the efficiency of the public enterprise sector through restructuring, including joint ventures, public stock issue, selective divestiture, and liquidation of non-viable firms and through improvements in organization and management of firms remaining under public ownership. O Development of a strong institutional and regulatory framework for protecting the environment. * Establishment of a modern framework of corporate legislation. * Improvements in the design, management and implementation of public sector programs. The evolving role of the public sector towards increased emphasis on quality of services, more effective operations and maintenance, and smaller, often more complex programs carried out in a decentralized fashion, will call for a variety of administrative improvements in procedures, organization, personnel and training. (xiv) The main features of the Government's development strategy outlined above can be grouped into three interrelated areas: the macroeconomic framework, efficient private sector development, and public sector management for growth and poverty reduction. Each of these areas is discussed in more detail in the following paragraphs and in the main report. Macroeconomic Framework for Sustained GroVth (xv) Indonesia's adjustment experience during the 1980s demonstrates the critical role of timely implementation of prudent macroeconomic policies. Skillful macroeconomic management will be equally important in the 1990s to ensure tthat the growth path is consistent with macroeconomic stability, especially given Indonesia's debt burden and the effects of reforms of the trade regime and the financial sector. The main macroeconomic management task ahead is to continue improving the external and internal financial balances in the medium term while maintaining growth. Containing and gradually reducing the current account deficit as a share of ()P will steadily lower the burden of Indonesia's debt and expand the economy s options in the future. Maintaining strong policies to support non-oil export growth is central to this strategy. These policies include maintaining a competitive exchange rate through coordinated fiscal, monetary and exchange rate policies. Further reforms of the trade regime are essential to enhance economic efficiency and the incentive to export. Public and private savings rates will need to rise to finance the higher investment rate required to sustain growth in output and non-oil exports, while offsetting the decline in foreign savings resulting from the gradual reduction in the current account deficit. Continued implementation of thie Government's policies in several important areas would raise public savings and improve the fiscal balance. This would include maintaining the priority given to public resource mobilization, and particularly to raising non-oil tax revenues through continued improvements in tax administration. The rapid implementation of the Government's intentions to reduce the major remaining budget subsidies would release public resources needed for other purposes and improve resource allocation through better price signals. Finally, 'nublic expenditure programs will need to be carefully designed and focused on the Government's main priorities as outlined in REPELITA V to be consistent with available resources. (xvi) Sustaining growth while avoiding pressure on prices and the balance of payments calls for carefully balanced monetary Dolicv. Given Indonesia's open capital account, domestic interest rates are closely tied to international interest rates and exchange rate expectations, thus limiting the ability of monetary policy to influence interest rates. Coordinated monetary and fiscal policies, however, can work to lower inflation and expectations of exchange rate devaluation, thereby reducing the margin between domestic and international interest rates. With the ongoing financial sector reform, the relationships between monetary variables are likely to shift, calling for close monitoring of de-elopments so that timely action can be taken. The phasing out of liquidicy credits announced in Janueary 1990 is expected to lead to a tighter monetary stance and increase the effectiveness of Bank Indonesia's monetary insrruments. Other components of the financial sector reforms are expected to improve the efficiency of credit allocation and to lower real lending rates by reducing intermediation margins. Continued development of prudential regulations and supervision are of central importance to strengthen the stability of the system. (xvii) A further increase in reserves to cope with unanticipated fluctuations would be supported by the tighter monetary policy indicated above and would complement the overall macroeconomic strategy. Adequate reserves are particularly important for macroeconomic management given Indonesia's open capital account. Maintaining lines of untied commercial credit (currently about US$1.8 billion) is another cushion against unexpected developments. Another policy option to consider would be using unanticipated gains from higher oil revenues to reduce borrowing or to accumulate fiscal reserves so that the fiscal balance can be improved and such windfalls used in an orderly and efficient fashion. The continued reduction in dependence on oil as a source of foreign exchange and fiscal revenues should add another element of increased stability to the economy as non-oil exports and non-oil fiscal revenues expand. Efficient Private Sector DeveloRment (xviii) Since the mid-1980s, the Government has encouraged the private sector to play a more important role in the econe. iy, especially in reducing the economy's dependence on oil and improving efficiency and competitiveness. A series of regulatory reforms have complemented the successful macroeconomic stabilization policies and have produced a strong supply response. The - xi - performance of supporting services, especially in the financial and transport sectors, has been improved through extensive deregulatory measures. Private investment has recovered and has laid the foundation for a rapid growth in exports. Much of the investment has been directed towards labor-intensive production which has led to widening employment opportunities. While the increase in private _tor activity is encouraging, much can be done to improve the trade regime and investment incentives. Further reforms would ensure that new productive capacity is created in areas where Indonesia can compete in world markets. Now is an opportune time for such reforms, as the strong growth of the economy will quickly absorb labor, capital and managerial resources which might be displaced. The reform process needs to be supported b; further efforts to provide infrastructure and develop sound financial sector services. Given the intense pressure on land and water rescurces, it is also vital that natural resources be managed carefully to protect the environment for sustainable development. (xix) Trade reforms. Since the mii-1980s, the Government has embarked on a series of trade and deregulation measures to improve the international competitiveness of domestic production. The primary objective of reforms is to move from a trade regime based on import licensing to tariffs. Accordingly, the Government removed many import licenses between 1986 and 1988. The share of domestic -roduction protected by import licenses declined from 41% to 29% over the period. Also, exporters have benefitted from a facility that enables them to obtain imported inputs at world prices. (xx) Further trade reform would improve consumer welfare and the allocation and use of domestic resources. Such reform would reduce protection to the manufacturing sector relative to agriculture and further improve the incentive for export production. The remaining non-tariff barriers (NTBs) continue to be a major source of protection. These barriers have drawn resources into activities in which Indonesia does not have a comparative advantage, thereby lowering economic growth and employment creation. In the case of manufacturing, almost half of domestic production is still protected by NTBs on competitive imports. While there have been impressive reductions in the incidence of tariff protection, in recent years the proliferation of split tariffs and surcharges have resulted in increased protection for specific items. The increase in export restrictions also runs counter to the reform trend. (xxi) There is considerable scope to reduce NTBs, particularly in those sectors where NTBs provide high protection to domestic production. Further restructuring of the economy would be facilitated by a tariff reform which included the elimination of split tariffs and surcharges, followed by a gradual reduction of tariff ceilings. In most cases the process of restructuring protected industries is underway and they should be able to compete with tariffs no higher than 20 to 30%. Further reduction in export restrictions would widen opportunities for producers of exports. The rapid reform of the trade regime would ensure that new investment flows into areas where Indonesia has a clear comparative advantage. (xxii) Domestic incentives and regulatory framework. In order to translate trade reforms into an efficient supply response, the Government has broadened and intensified its efforts to improve domestic incentives and the regulatory environment for the private sector. So far, the reforms focused on - xii - areas that have been the most urgent and implementable in the short run. Reform has progressed significantly in the areas of investment licensing and regulation of foreign direct investment. The investment process has been streamlined and made less restrictive, particularly after May 1989, when the Governmert replaced a long list of activities open to investment with a short list of activities which were closed. In formulating this negative list, there has been a conscious attempt to keep the number of restricted items to a minimum and to remove the ad hoc conditions that had been introduced over the years. The Government has also undertaken steps to improve the attractiveness of Indonesia to foreign investors, particularly by easing ownership controls on invest"ient in export-oriented activities and other priority areas. (xxiii) Domestic deregulation has led to a sharp increase in domestic and foreign investment. The bulk of new investment approvals are directed towards export activities. Further measures would help reduce the remaining barriers to the entry and mobility of private investment. The main policy options for further reform are to: maintain a short negative investment list by opening additional areas to domestic and foreign investment; simplify and streamline further the licensing system by eliminating licenses where possible (e.g., capacity expansion licenses) and improving coordination at the local level; and further ease divestiture obligations of foreign investors. At the same time, a start could be made on the more complex and longer run issues of developing a modern1 corporate legal system and reforming the factor markets, particularly land and labor. (xxiv) Policy -nvironment for support services. Financial services and transport services both play a vital role in private sector development. An expanding private sector will require a broad array of financial services and intermediaries. Indonesia has already done much to promote the financial system, especially commercial banking and the stock exchange. A series of reforms was introduced over the period 1983-88 to deregulate interest rates, replace credit ceilings with reserve money management and increase competition through easier entry by private domestic and foreign banks. Sources of long term finance were expanded by encouraging the development of the capital market. A start was made to improve the soundness of the system. These reforms led to dramatic changes within the financial system. The number of intermediaries and services expanded rapidly, while assets and deposits soared. Both lending and deposit rates have declined in response to the incteased amounts of resources mobilized. Competition has gradually reduced spreads. The capital and bond markets also became more active, with the volume of shares traded expanding eight-fold during 1989. (xxv) One critical issue not fully addressed in the earlier reforms was the role and extent of subsidized, directed credits (referred to as liquidity credits) within the banking system. Bank Indonesia (BI) had been refinancing loans for a large number of selected activities at interest rates varying from 3% to 14.5%. On January 29, 1990, a major reform of the liquidity credit scheme was announced. The number of areas eligible for liquidity credit was sharply reduced, and even where continued, interest rates for final borrowers were moved much closer to market rates. The reduction in the scope of liquidity credits and the increase in interest rates will greatly enhance BI's ability to manage base money. The changes will improve incentives to assess credit risk and facilitate targeting of priority users. Segmentation in credit markets will be reduced, and new commercial banks will - xiii - expand into these sectors more rapidly. For state banks, the reform will lead to a strongar effort to mobilize deposits from the public since a large share of their portfolio has been financed through liquidity credits. The reform will also call for efforts by the state banks to improve their efficiency and ensure the quality of their loan portfolios. The soundness and stability of the financial system calls for the strengthening of financial regulations and institutions. The Government has alrvady introduced several important regulations in this area such as establishing legal lending limits on commercial bank portfolios and restricting their net open position in foreign exchange to 25% of their equity. Four main items remain as priorities: (a) strengthening the prudential regulation of financial markets; (b) enacting updated laws governing financial institutions and commercial relations; (c) bolstering managerial and technical expertise in financial institutions; and (d) strengthening state banks through improving their portfolios. The rapid pace of financial sector growth just'fies the urgent attention being given these issues by the Government. (xxvi) In the transport sector, the Government has made concerted efforts to deregulate and remove impediments which previously caused widespread inefficiencies. These reforms have focused initially on the maritime sector and have resulted in some impressive improvements in performance and quality of service. The rates for international shipping have declined significantly, while services have improved. Important changes are also taking place in domestic shipping as shown by increased reliance on more efficient vessels and services. However, there is still scope for further improvements, particularly for the ports, where efficiency is constrained by structural and management problems. More recently the Government has focused on the land transportation system, in particular road transnortation. The -osts of road transportation remain significantly higher than they need be, reflecting the poor standard and condition of the road network, inappropriate taxation and user charges, and road traffic and transport regulations that are overly restrictive and unevenly applied. The Government is committed to develop a transport system able to meet the nation's growing and increasingly sophisticated transport needs quickly and efficiently. Consequently, the Government is formulating a series of policies designed to establish a modern and coherent framework of laws, regulations and taxes for road transport; strengthen central and regional transport departments; and improve transport sector policy formulation and planning. (xxvii) Environmental management. Private sector development depends heavily on the availability of natural resources, particularly water and land. These resources are already scarce in some parts of Indonesia, and rapid growth in both production and population will lead to greater shortages in the years to come. In addition, industrial use of land and water, if unregulated, can have serious health effects. To maint.An private sector growth while safeguarding public health, it will be vital to manage the natural resource base carefully. Current efforts to plan land use and water resource management are hindered by weak institutions. There is a reasonable policy framework in place for pollution control, but the current division of responsibilities among many different agencies has meant that standards have not yet been systematically developed and enforced. The main challenge for the year ahead is to put in place institutional arrangements that will ensure that land and water resources are managed efficiently. - xiv- Public Sector Management for Growth and Poverty Reduction (xxviii) Indonesia's successful adjustment performance has set the stage for sustained growth and poverty reduction in the 1990s. If maintained for long, the sharp expenditure cutbacks made to restore financial stability would have constrained growth. Accordingly, the focus of the public sector has shifted from the management of expenditure cutbacks to the efficient management of a growing level of public spending. The policy challenge for the public sector will be to provide sufficient complementary resources to support private sector growth and poverty reduction while continuing to contain the level of public expenditures to preserve macroeconomic stability and ensure adequate resources for the private sector. (xxix) The realization of the Government's policy objectives for the 1990s calls for a sharper focus of public spending on two broad priorities: (a) ensuring adequate provision of basic infrastructure and services to remove potential constraints on sustained private sector growth (agricultural support services, power, telecommunications, and transport); and (b) meeting the needs of the poor for basic services (primary education, community health, family planning, water supply and sanitation, and other poverty-related infrastructure). To some extent these priorities overlap and reinforce each other. Adequate economic infrastructure will be essential to support economic growth, non-oil exports, private investment, and employment, and such growth will also reduce poverty. Provision of agricultural support services will be necessary both to increase agricultural output and to increase the earnings of poor smallholders and landless labor. Human resource development will play an important dual role in promoting growth and reducing poverty by creating a more skilled and productive labor force. (xxx) Recent budgetary allocations have been consistent with these broad priorities. Nevertheless, it will be important to monitor the allocation of public spending within individual sectors to ensure that resources are not spread thinly between low and high priority programs. Improved targeting of public expenditures between programs will need to be complemented by better pricing policies designed to raise revenues, induce greater efficiency of resource use, and improve the equity of public spending. These considerations call for a concerted effort to promote administrative reforms designed to overcome institutional problems in planning, budgeting, and implementation capacity which are likely to constrain the effectiveness of an expanded public expenditure program. At the same time it will be important to move ahead with public enterprise reforms aimed at improving the efficiency and financial performance of the large public enterprise sector. (xxxi) Imnroving public expenditure griorities. The role of public expenditure in meeting the goals of steady growth and poverty reduction differs from sector to sector. Despite these differences, all sectors face the same fiscal dilemma of controlling total spending and allocating it efficiently to high priority uses. Four points emerge from a cross-sector review: (a) opportunities exist for private sector participation in providing services which will remain largely in the public domain; (b) reallocation to higher priority programs could improve the effectiveness of public spending; (c) higher levels of operations and maintenance (06M) spending are vital to improve the productivity and strengthen the quality of public infrastructure; -xv- and (d) greater emphasis needs to be placed on attracting and motivating qualified staff and on administrative improvements to strengthen the implementation of public programs. (xxxii) The most serious potential infrastructure constraint on grivate sector development is the possiDle shortfall in the power generating capacity of the power utility (PLN). The rapid growth in demand from the buoyant economy, combined with lags in bringing planned power generating capacity on line, could result in some power shortages in Java in the next few years. This problem could be reduced by making greater use of private sector captive generation capacity. More efficient use also needs to be made of PLN's existing generation capacity through appropriate operations and maintenance, improvements in transmission and distribution, and other efficiency improvements. In addition, the planned generating capacity needs to be installed as rapidly as possible, and appropriate power pricing policies should continue to restrain demand growth. Another priority area for public expenditures will be assisting farmers to sustain agricultural output growth. This calls for increasing O&M funding to improve the productivity of irrigation infrastructure, together with selective expansion emphasizing completion of existing command areas instead of new construction. At the same time, tree crop development could be spread to a larger number of smallholders by switching to approaches that cost less per beneficiary. Expansion of the telecommunications network could be facilitated by greater private sector participation in project management and facility maintenance. Port investment priorities should support containerization of inter-island cargo movements from provincial ports, and efficient capacity expansion in the major international ports in line with demand growth. Priorities for the road transport network emphasize increased O&M, with capacity increases of the main road network limited mainly to congested approaches to major cities and key links within those cities. (xxxiii) The Government's poverty reduction strategy calls for improving basic services for the Roor. These services (particularly in education, health, family planning, and water supply) redress the most severe consequences of being poor. But they also attack some of the most important causes of poverty, thus providing the basis for long-term poverty reduction. In education, the priority is to improve the quality of primary education for the poor by increasing O&E funding for textbooks and other essential teaching materials. This wouid require additional resources for O&M in primary education, together with new criteria for allocating more funding to schools in poor communities. In health, there is a need to increase access by the poor through improving both the quality and quantity of available services. This would also strengthen the delivery of better family planning services for the poor who account for most of the unmet demand for contraception. A related priority is to expand the very low coverage of clean water supply in both rural and urban areas. Important priorities are to provide adequate O&M funding for new water supply facilities, and, in urban areas, to increase the numbers and operating efficiency of public standpipes. (xxxiv) Pricing policies. Against a background of clear spending priorities, appropriate pricing policies can help to improve investment decisions, raise operational efficiency, and improve equity in public service provision, while raising needed resources. For example, removing the cross-subsidy for diesel oil as part of an effort to rationalize domestic - xvi - energy prices would lower the incentive for excessive use of heavy goods vehicles for commercial freight transport. Many public services are provided free or at low cost for equity reasons so that poor people have access to them. But in practice budget constraints tend to ration such subsidized services, with the result that the better-off often get most of the benefit. Thus, charging efficien- rices to better-off users while targeting subsidies to poor beneficiaries can help to alleviate poverty and improve efficiency at the same time. For example, raising the subsidized water tariffs charged to high-volume residential consumers would release resources to increase the availability of water to the poor, through such measures as an expansion of the Government's program to increase the numbers of community standpipes for the urban poor. Even when revenue is not transferred directly to the budget, higher prices reduce the need for borrowing or budgetary payments for subsidized expenditures. Reducing the large remaining budgeet subsidies is of particular importance as this would release resources for higher priority uses and would substantially improve resource allocation through better price signals. (xxxv) Program management and imolementation. The projected expansion in public expenditures on infrastructure and human resources will pose a major challenge for the design, selection and implementation of programs and projects in the 1990s. Ensuring the efficiency and effectiveness of higher levels of public spending will require continued improvements in program management and implementation by the Government departments. This calls for a variety of administrative improvements. An important step would be to improve information on individual sectoral expenditures which are now carried out through a variety of budgetary channels. This would make resource allocations more transparent and improve budgetary decisions. Underlying these areas for improvement is the continuing need to attract and motivate higher quality staff botn in the central and regional governments through better training and compensation systems. Finally, an emerging challenge is the new requirement for environmental impact analysis, which will be phased in over 1990-92. This is a potentially enormous task for which strong measures are needed to ensure prompt and effective review of projects. (xxxvi) Public enterorise management. Indonesia has a large and diversified public enterprise (PE) sector. Over the past year several steps have been taken to improve the efficiency of these enterprises and to support an expanded role for the private sector. The Government reforms aim at restructuring enterprises to increase their efficiency and reduce their fiscal burden. Financial data on PEs indicate an improvement in their financial performance, and the Government now plans restructuring involving stock sales, management contracts, mergers, and liquidations to make more thorough-going changes for a large number of PEs. Implementation of these objectives could be facilitated by a clear articulation of the Government's intention to focus the role of PEs increasingly on the provision of goods and services that cannot be efficiently produced by the private sector. Within this overall strategy, the subsequent stages would concentrate on (a) preparing viable PEs that will not remain in the public sector for divestiture; (b) defining a core of enterprises that will stay public and initiating the reforms needed to further improve their performance; and (c) liquidating unviable commercial PEs. A more efficient set of core public enterprises would improve the availability and lower the cost of essential inputs and services (such as power and telecommunications) for the private sector. - xvii - Growth ProsRects and Resource Needs (xxxvii) Medium term outlook. Continued strong implementation of the Government's development strategy outlined in the paragraphs above, would help achieve a 6-7% annual growth in non-oil GDP. Such growth would permit continued reductions in poverty and in the debt burden. To sustain a 6-7% p.a. growth in the non-oil economy while maintaining external balance, non-oil exports will need to grow in real terms by about 11% p.a. over the next three years, and by about 7% p.a. over the remainder of the decade. This compares with an average growth in non-oil exports of over 13% p.a. since 1983. As noted, sustaining this progress in non-oil exports will require that the real exchange rate be maintained at a competitive level. Furthermore, complementary policies will be needed to improve the incentive framework through further trade and industrial policy reforms, to strengthen financial and transportation services, and to supply the necessary infrastructure, particularly in power and telecommunications. The outlook for the world economy in the 1990s suggests a relatively supportive external environment. With sustained progress in non-oil exports, the current account deficit would gradually decline from about 2% of GNP currently to about 1% by the end of the decade, with the non-interest current account remaining in surplus throughout the period. On the domestic front, a higher investment rate will be needed both for expanding private sector capacity, particularly in non-oil export production, and for providing adequate public investment to deal with emerging constraints in power and telecommunications. To finance this investment, at a time when foreign savings are falling, national savings will need to rise from about 21% of GDP currently to 27% by the end of the decade. Continued progress in raising non-oil tax revenues, improving returns on public enterprises, and reducing subsidies will be of critical importance in generating public savings, thereby contributing to the required increase in national savings. (xxxviii) Implications for employment and goverty reduction. The projected pace and pattern of economic growth would allow Indonesia to employ its growing labor force at higher levels of productivity und income. The manufacturing sector is expected to absorb a much larger share of employment than in the past, reflecting a rapid rate of growth, particularly in relatively labor-intensive activities. The bulk of new employment will still come in agriculture and services as both sectors become more diversified and productive. Such a pace of growth would also lead to further substantial reductions in poverty, though it should be recognized that the remaining poor are becoming concentrated in more remote areas, with more limited resources, and so will be more difficult to assist. Continued large reductions in the incidence of poverty will also require specific measures to improve labor absorption in the services sector, boost employment prospects in the Outer Islands (particularly the eastern areas), and target public expenditures, especially in social and basic services, into those areas of greatest potential benefit to the poor. (xxxix) External borrowing strategy. While the current account deficit as a percentage of GDP is projected to fall in the medium term, its absolute size will increase slightly, reflecting a faster rate of GDP growth. This, combined with higher debt service payments and the need to build up reserves, causes the total annual financing requirement to rise. An increasing share of the needed financing can be obtained from private sources: direct foreign - xviii - investment, private non-guaranteed capital flows and commercial borrowing by the Government. In the near term, however, use of import-related credits should be restrained, and applied only to well-selected projects with sound financial arrangements. Untied commercial credits can be used more flexibly, but since they are more expensive than official assistance, their use should also be moderated to help ease the debt burden. Consequently, it is essential that IGGI continue to provide a major share of Indonesia's financing needs in the years ahead. It is recommended that the level of IGGI assistance to Indonesia in 1990/91 be US$4.5 billion, slightly higher than pledged last year. (xl) Following the sharp drop in oil prices and adverse international exchange rate movements in 1986, a special effort was made to provide Indonesia with assistance in the form of fast-disbursing program aid and local cost financing to offset losses in foreign exchange and budget revenues. A strong and encouraging response from donors led to disbursements of about US$5.4 billion in special assistance over the past three years. These funds have enabled Indonesia to pursue its structural reforms while sustaining growth and reducing poverty. Special assistance has also contributed to a more favorable structure for Indonesia's debt, improving the confidence of investors and the international financial market in the adjustment program. Indonesia's situation continues to justify special assistance. Balance of payments projections indicate that the special assistance need in 1990/91 will be US$1.2 billion. This is a substantial reduction from the US$1.8 billion pledged last year, reflecting the Government's commitment to reduce its reliance on special assistance as non- oil exports and fiscal revenues rise. While our current projections indicate that special assistance could be phased out after 1990/91, a more gradual phasing out of special assistance may be required if actual developments are less favorable than projected. In such a case the donor community should be prepared to respond flexibly. This will provide Indonesia with the confidence to pursue trade and other reforms vigorously. As special assistance declines, there will be a need to increase the level of project assistance and shift its composition towards relatively quick disbursing operations such as sector loans which can provide a flexible form of financing well-suited to Indonesia's needs. (xli) With appropriate macroeconomic policies and a prudent borrowing strategy, the growth in Indonesia's debt will continue to slow in the next few years. Medium and long-term (MLT) public and private debt outstanding and disbursed (DOD) is projected to rise less than 2%, from US$48.3 billion at end-1989 to US$49.2 billion at the end of 1990. With most of the increase in official borrowing in the form of concessional loans, there has been an improvement in the maturity and term structure of the public debt. This, combined with the projected solid economic performance, results in steady improvement in the main debt indicators. The ratio of total DOD to GNP has fallen from a peak of 66.7% in 1987 to 54.7% in 1989. Debt service on total debt has declined from a peak of 38% of exports of goods and services in 1986 to about 32.1% in 1989. It is projected to decline further to about 22% by 1995. CHAPTER I PROGRESS IN ADJUSTMENT AND POVERTY REDUCTION A. Introduction and Overview of the ReRort 1.01 Indonesia is entering the 1990s following a period of sustained, successful adjustment to severe external shocks. It enters the new decade with an economy which has reduced macroeconomic imbalances and lowered distortions in the incentive system. A strong private sector response to the Government's deregulation program is restructuring and diversifying the production base, substantially enhancing the prospects for sustained growth. Moreover, the adjustment strategy adopted generated a pace and pattern of growth which led to substantial declines in the incidence of poverty and sustained growth in the living standards of the people. Access to capital markets and strong support from the donor community, in appropriate amounts and forms, augmented the resources needed to implement this strategy. 1.02 The progress achieved creates new opportunities and challenges. With per capita GNP at less than US$500, Indonesia is still a relatively low income country. While the number and proportion of the people living below the poverty line have fallen, millions of people remain below the line and may be more difficult to assist. Indonesia now has the opportunity to enter into a period of sustained and relatively rapid growth, leading to a further significant reduction in poverty and an improvement in the living standards of its people. Chapter 1 deals with Indonesia's Rrogress in adjustment and Roverty reduction and identifies the tasks ahead to lay the foundations for sustained growth. Those tasks--skillful macroeconomic management, rapid consolidation of the deregulation process to foster efficient private sector development, and continued improvements in the focus and efficiency of public sector operations to sustain growth and poverty reduction--form the core of the rest of the report. 1.03 Chapter 2 deals with the macroeconomic outlook and Roliyv framework for sustained growth. A key theme is the need for continued careful macroeconomic management to mobilize the resources needed for growth and to anticipate and avoid potential sources of instability. Policies to reinforce and sustain the growth of diversified nor.-oil exports and non-oil fiscal revenues and to mobilize and allocate private savings efficiently will be essential to achieve the growth potential of the economy. Continued progress in reducing poverty and raising living standards depends critically on sustained growth. This Chapter also assesses the implications of the macroeconomic scenario for continued improvements in Indonesia's creditworthiness. 1.04 Chapter 3 focuses on the recent measures to deregulate the economy and improve the structure of incentives, and how these reforms have stimulated a strong private sector response, generating growth in output, non-oil exports, and employment. The strong surge in investment which developed in the past few years underscores the importance of consolidating and implementing the structural reforms to remove remaining distortions and improve the functioning of the regulatory and legal framework. The effects of the recent reforms of the financial sector and of the transport sector in supporting efficient private sector development are discussed. Finally, to ensure that the growth process is sustainable, it will be essential to manage the natural resource base carefully and protect the environment. Therefore, the Chapter concludes with an assessment of the main challenges ahead in developing appropriate institutional arrangements for land and water resource management. 1.05 Chapter 4 discusses public sector management for growth and Roverty reduction. Four areas are reviewed: (i) focussing public expenditure programs to remove growth constraints and to provide better services and opportunities to the poor; (ii) appropriate public sector pricing policies to help improve investment decisions, raise operational efficiency and reduce inequalities in public service provision; (iii) overcoming iustitutional problems in planning, budgeting and implementation through aiministrative improvements in the effectiveness of public expenditure programs; and (iv) reform of public enterprises to improve their efficiency aid enhance their overall contribution to the economy. B. Adiustment Response and Macroeconomic-Performance 1.06 The rest of Chapter 1 assesses progress in adjustment and poverty reduction. First, the main elements of the Government's adjustment program and its effect on economic performance are analyzed, concluding with a preliminary assessment of policy changes and economic developments in 1989/90 (Section B). Next, progress in reducing poverty and the links to policies followed during the adjustment period are discussed. Here two factors appear to have been critical. First, the Government undertook measures which fostered efficient growth in output and consumption, while shifting resources from inward-oriented, capital-intensive activities towards labor-intensive export activities. Second, while reducing public expenditures in real terms to restore fiscal balance, the Government protected poverty-related expenditures relative to other expenditures. The support of the donor community helped provide the resources to support this effort. These issues are discussed in Section C. Finally, Section D outlines the tasks ahead in preparing for sustained growth. External Shocks and Adjustment. 1983-88 I/ 1.07 After experiencing a rapid growth of income, consumption and investment during the 1970s, Indonesia faced a much worse external environment beginning in 1983. The real price of oil declined by about 60%;Z/ the effect of this decline on the Indonesian economy was massive since oil earnings accounted for 82% of export receipts and 71% of Government revenues in J/ This discussion is bared on the analysis contained in last year's economic report. See, Indonesia: Strategv for Growth and Structural Change, Report No. 7758-IND, May 3, 1980. ZI The real price of oil (in 1985 US Dollar terms) was US$11.8 in 1989, compared to US$29.2 in 1983. - 3. 1981/82. Moreover, the deep, world-wide recession of the early 19809 also hurt Indonesia's balance of payments. During 1985-88, the depreciation of the US Dollar was another source of external shocks, as a large proportion of Indonesia's debt is in currencies which have appreciated against the US Dollar. The combination of lower oil prices and adverse curre&icy fluctuations led to a rapid increase in Indonesia's debt service burden, over this period. 1.08 Indonesia responded effectively to the challenge posed by those external shocks by implementing a broad range of macroeconomic stabilization and structural adjustment measures starting in 1983. In broad terms, two types of policy adjustments were made. First, the Government adopted more austere macroeconomic policies to restore financial stability. Second, to sustain the developmeint momentum over the medium to longer term, it embarked on a major program to restructure the economy, aimed both at reducing Indonesia's heavy dependence on oil as a source of foreign exchange and budgetary revenues, and at improving economic efficiency. The specific policy responses can be grouped in the following four categories: (a) To restore balance of payments stability and sustain growth over the medium term, the Government adopted an active exchan&e rate policy. Major devaluations were implemented in March 1983 and September 1986 and the flexibility of the exchange rate was increased through a more actively managed float. In conjunction with prudent fiscal and monetary policies, these measures supported a real effective exchange rate depreciation of about 55% between December 1981 and December 1988. This played a key role in boosting non-oil exports and reducing the current account deficit. (b) The objectives of demand restraint and structural change were served by the implementation of a number of strong fiscal measures, designed to restrain public expenditure, mobilize public reventues and reduce the overall fiscal deficit. Budget austerity and more careful selection of projects reduced public investment by over 30% in real terms between 1983/84 and 1988/89. In addition, a sweeping tax reform implemented over 1984-86 boosted non-oil tax revenues and improved the efficiency of the tax system. (c) Supportive mogtarygy.nd financial policies were maintained to contain inflationary pressures, prevent capital flight, mobilize financial resources and improve the efficiency of the use of financial resources. A major financial sector reform was introduced in June 1983, which deregulated domestic interest rates and increased the flexibility of monetary management. A second round of financial measures initiated in October-December 1988, aimed at enhancing financial sector efficiency and boosting capital markets. (i), The Government also intitiated a series of trade and other structural refor.um to support demand management policies in reducing macroeconomic imbalances and to enable a recovery of economic growth over the medium term. A number of measures were undertaken: a comprehensive reform of the tariff system (1985); a reorganization of customs, ports and shipping operations (1985); the creation of a duty exemption and drawback facility (1986); the elimination of a significant number of non-tariff barriers (1986-88); a reduction in - 4 - investment and capacity licensing restrictions (1986-89); a relaxation of the rules governing foreign investment (1986-89); and, a deregulation of maritime activities (1988). These reforms have led to the development of a more efficient and dynamic private sector. 1.09 As a result of the Government's balanced adjustment program, good progress was made towards restoring financial stability and stimulating the recovery of economic growth (see Table 1.1). Prudent macroeconomic management helped to reduce current account and fiscal deficits, as well as lower inflation. Along with structural reforms, it also supported the recovery of economic growth by boosting non-oil exports, stimulating private investment and enabling a noticeable gain in economic efficiency. As a result of these factors, growth of the non-oil economy was much better than expected, averaging 5.9% p.a. during 1983-88; the non-oil manufacturing sector provided the primary impetus for this growth, expanding by 12.4% p.a. Another notable feature of Indonesia's adjustment performance was that private consumption per capita grew throughout this period. 1.10 The magnitude of Indonesia's internal adjustment is also illustrated by Table 1.2. The collapse in oil prices and the surge in external interest payments caused gross national savings to decline by 4.1% of GDP in 1986, with most of the decline (3.4% of GDP) concentrated in public savings. A large reduction in public investment enabled the Government to contain the public sector savings-investment gap at only 4.0% of GDP in 1986. Through a combination of the Government's public resource mobilization effort and restraints on public investmant, this gap had been reduced by 1988, despite higher external interest paymernts. 1.11 Trends in the balance of payments. The Government's adjustment program helped to bring down the current account deficit from 7.8% of GNP in 1982/83 to 2.2% of GNP in 1988/89. The balance of payments adjustment was achieved through a combination of demand management and expenditure switching policies. The specific measures that helped restore balance of payments stability included: (a) depreciation of the real exchange rate, which boosted non-oil exports and reduced the demand for imports; (b) the rephasing of large capital projects in May 1983 and cutbacks in real capital spending in subsequent years, which sharply reduced imports of capital goods by the public sector; (c) the redefinition of public expenditure priorities, which focused expenditures on less import-intensive sectors; (d) strict limits on non- concessional external borrowing; (e) austere budgets and supportive monetary and financial policies, which reduced demand for imports and discouraged capital flight; and (f) trade and other regulatory reforms, which stimulated non-oil exports. 1.12 A reduction in the level of imports was initially the most important part of the improvement in the balance of payments (see Figure 1.1). This objective was achieved primarily through general macroeconomic instruments. Large real exchange rate depreciations served to raise the price of tradeables relative to non-tradeakles, thereby causing private sector demand to switch from imports towards domestic substitutes. By rephasing large projects in May 1983 and by cutting real capital expenditures in subsequent years, imports of capital goods were redutced sharply. These measures were complemented by a redefinition of public expenditure priorities; expenditures were diverted away Table 1.1: RECENT ECONOMIC DEVELOPMENTS, 1975-1989 JA Actual lb Estimate a 1975-83 1984-85 1986 1987 1988 1989 Real growth rates (% g.a.) GDP 6.5 4.6 5.9 5.0 5.6 7.4 Non-oil GDP 7.0 5.2 6.2 5.8 7.3 8.1 - Agriculture 3.5 4.2 2.5 2.2 4.3 4.4 - Mining 6.8 -1.8 10.7 7.0 4.8 11.0 - Manufacturing 10.6 12.7 11.1 11.4 13.5 12.2 - Construction 10.8 -1.0 2.2 4.2 8.9 10.0 - Other services 8.6 4.9 7.4 6.3 6.7 8.4 National income 8.5 3.8 0.1 5.7 6.0 7.8 Consumption 8.9 3.7 4.9 3.5 4.0 6.5 Fixed investment 10.7 Xc -5.8 -5.5 2.6 10.3 13.0 - Public 12.6 & -2.9 -19.1 -4.5 10.2 6.2 - Private 9.1 /c -8.6 8.7 8.1 10.4 17.7 Non-oil exports 10.5 /c 10.4 4.1 25.3 14.5 15.9 Non-oil imports 13.8 £ -11.8 -13.6 5.0 7.8 18.2 Ratios (%) Ld Overall public sector balance/GDP -4.8 La -3.0 -4.1 -2.7 -3.4 -2.2 Current account/GNP -7.8 L -2.6 -5.8 -2.3 -2.2 -1.9 Debt service/exports 16.8 LI 25.1 38.0 35.5 36.1 32.1 Fixed investment/GDP 25.1 20.5 20.1 19.2 20.0 21.1 National savings/GDP 21.0 21.6 17.5 19.2 20.0 21.3 Prices Oil prices (US$/bbl) id 28.4 25.0 12.5 17.6 15.1 17.9 Terms of trade (1983/84-100) Ld 100.0 93.2 62.4 71.6 69.6 73.0 Domestic inflation (% p.a.) Lf 16.2 8.1 5.8 9.6 9.3 6.3 /a Balance of payments and fiscal data are for fiscal years 'starting April 1). Other indicators are for calendar years. fb National accounts data for 1983-89 are based on the preliminary revised national accounts series recently published by BPS (see Ainex 2). These data are subject to further revision. Lc For 1978-82 only. Ld For last year of multi-year periods. /e For 1982/83. L As measured by the 17-cities consumer price index, with an adjustment for rice prices during 1987-89. Source: Central Bureau of Statistics (BPS) and World Bank staff estimates. - 6 - from relatively high import-intensive sectors (mining and industry) to less import-intensive sectors (agriculture, education and regional development). As a result of these policies, public sector imports declined by about 53% in real terms during 1983/84-88/89, reflecting the direct and multiplier effects of cutbacks in the public investment program. Private sector imports also declined by 20% in real terms during 1983/84-86/87. In the early phase of the adjustment period, imports were also compressed by non-tariff barriers (NTBs). However, as part of the adjustment program, the Government began dismantling these NTBs in 1986. Consequently, since 1986/87, private sector imports have risen steadily, as the demand for both intermediate and capital good imports has surged to support the rapid expansion of non-oil exports. Table 1.2: SAVINGS-INVESTMENT BALANCES, 1981-89 /a (X of GDP at current prices) 1981 1982 1983 1984 1985 1986 1987 1988 1989 Total domestic investment 29.7 29.2 27.0 25.2 24.0 23.0 22.5 22.2 23.2 - Fixed inveatment 24.2 25.9 25.1 22.2 20.5 20.1 19.2 20.0 21.1 - Chanse in stocks 5.5 3.3 1.9 3.0 3.5 2.9 3.3 2.2 2.1 Gross national savings 27.8 22.6 21.0 21.8 21.6 17.5 19.2 20.0 21.3 Savings-inv stment gap lb -'.9 -6.6 -6.0 -3.4 -2.4 -5.5 -3.3 -2.2 -1.9 Public sector Gross domestic investment / 10.7 12.7 12.0 10.1 10.4 8.8 8.3 8.8 8.6 Savings 9.2 8.2 8.9 10.0 8.2 4.8 5.4 5.4 6.2 Savings-investment gap -1.5 -4.5 -3.1 -0.1 -2.2 -4.0 -2.9 -3.4 -2.4 Private sector Gross domestic investment 19.0 16.5 15.0 15.1 13.6 14.2 14.2 13.4 14.6 -Fixed investment 13.5 13.2 13.1 12.1 10.1 11.3 10.9 11.2 12.5 -change in stocks 5.5 3.3 1.9 3.0 3.5 2.9 3.3 2.2 2.1 Savings 18.6 14.4 12.1 11.8 13.4 12.7 13.8 14.7 15.1 Savings-investment gap -0.4 -2.1 -2.9 -3.3 -0.2 -1.5 -0.4 1.2 0.5 la All data converted to calendar year basis. As a result, the data on the cutrent account deficit and the public sector differ slightly vith other tables. Lk The inverse of the current account deficit expressed in calendar years. /q Fixed investment only. Investment in stock ch*anges is assumed to be financed by the private sector. Source: Central Bureau of Statistics and World Bank staff estimates. 1.13 The most striking feature of the adjustment in the balance of payments has been the dramatic response of non-oil exports which grew by 13% p.a. in real terms during the 1983/84-88/89 period (see Figure 1.2). Non- oil manufactured goods exports, which increased by 26% p.a. during this period, were the principal source of export growth. This performance reflects the competitiveness of the Indonesian economy, that was created and maintained by appropriate exchange rate policies and the series of deregulation reforms started in 1985. Initially, excess capacity in manufacturing caused by weak domestic demand was also an important contributing factor. But as the deregulation process gathered momentum, new export capacity has been created across a wide range of manufacturing items. This illustrates the value of adopting broad policy reforms that reduce costs and enhance efficiency across a spectrum of activities. - 7 - Figure 1.1: Non-oil Import Trends, 1983/84-89/90 (constant 1983 values) 16 14 12 7 ~~~~~~~....~..: :::*:::*:::*:.... * 44 2 0 1983 1984 1986 1986 1987 1988 1989 Fis.cl %tar l\ Intermedlate EZ Capital 3 Consumption Souffes Oentral Buroeu of Statistlo Figure 1.2: Non-oil Export Performance,1983/84-89/90 (constant 1983 values) 1'', 14- 12 0 1983 1984 1986 1986 1987 1988 1989 Flscal Oara \l Agriculture l Minerals Manufactures Soures flank Iidones - 8 - 1.14 Trends in the fiscal deficit. inflation. and interest rates. During 1982/83-88/89, the Govetnment's prudent fiscal and monetary management also succeeded in reducing fiscal Imbalances and domestic inflation. As a result of the tax reform effort, non-oil taxes grew from 7.4% of non-oil GDP in 1982/83 to 10.1% in 1988/89. The Government's expenditure control measures were also effective, as total expenditures as a share of GDP declined significantly between 1982/83 and 1988/89, despite the large increase in external interest payments. As a result of these revenue mobilization measures and expenditure controls, the budget deficit declined from 4.3% of GDP in 1982/83 to 3.0% in 1988/89. The austere fiscal policy stance during this period (1982/83-88/89) is also illustrated by the large improvement in the primary budget balance from a deficit of 3.1% of GDP to near balance..I/ Budget austerity, combined with appropriate monetary management, in turn contributed to a reduction in the rate of inflation. Inflation decelerated significantly during this period, averaging 8.2% p.a. during 1983-88, compared to the double digit r&tes of the late 1970s and early 1980s. Furthermore, the deregulation of interest rates in June 1983 helped to mobilize financial resources and restrained capital flight. The close coordir'tion of exchange rate, fiscal and monetary policies has been a distinguishing feature of the Government's macroeconomic policy framework. It strongly reflects a recognition of the linkage between the exchange rate, interest rate and inflation necessitated by Indonesia's open capital account. 1.15 Trends in economic growth and efficiency. The large decline in oil revenues convinced the Government of the need to intensify efforts to improve economic efficiency and stimulate the private sector. The fairly comprehensive and far-reaching deregulation measures initiated since 1985 were in response to this need. Although the benefits of these measures have not yet been fully realized, there is already some evidence of an improvement in economic efficiency in recent years as discussed in last year's economic report. Furthermore, there has been a noticeable improvement in the structure of the economy with a substantial decline in the importance of oil/LNG revenues in the budget and the balance of payments (see Table 1.3). As a result, Indonesia is now reliant on more promising and sustainable sources of growth. These gains in economic efficiency and higher mobilization of non- oil resources have helped to sustain a better-than-expected rate of economic growth, despite the loss of oil revenues. 1.16 The deregulation measures in conjunction with sound macroeconomic policies have also led to an encouraging recovery of private sector investment, which increased by 9.3% p.a. during 1986-88. This was a dramatic reversal of the stagnation experienced during 1983-85. Furthermore, the data available on foreign and domestic investment approvals from the Inventment Coordination Board (BKPM) indicate teat significant amounts of these investments are planned for export-oriented activities. The rapid growth in private sector investment bodes well for the economy's future growth prospects, but also illustrates the need to consolidate the deregulation process rapidly. i. The primary budget balance is defined as the budget balance net of interest payments. - 9 - Tab-le 1.2: INDONESIA'S ECONOMIC STRUCTURE, 1981/82-1989/90 (%) 1981/82 1985/86 1989/90 Ratios of: Oil/LNG exports to total merchandise exports L 81.9 66.6 39.8 Non-oil exports to non-oil imports .a 28.6 55.2 85.8 Oil/LNG revenues to total revenues 70.6 57.1 38.2 Private fixed investment to total fixed investment /b 52.1 49.1 62.0 Non-oil manufacturing to GDP Lb 8.4 11.5 14.3 ,L Goods only; in current dollars. a Calendar year basis; in 1983 prices. Source: World Bank staff estimates. 1.17 Trends in external debt. Despite considerable success in reducing financial imbalances and the Government's cautious approach to external borrowing, the debt burden rose sharply due to the adverse external environment faced by Indonesia since the early 1980s. Depreciation of the US Dollar after 1985 added US$12.6 billion (31%) to Indonesia's public debt at end-1988 and US$1.9 billion (25%) to its debt servicing during 1988. During 1985-88, oil prices fell by about one half, severely reducing Indonesia's export earnings and capacity to service debt. Even with the high level of debt, and the adverse impact of external shocks, Indonesia did not face a foreign exchange crisis or a cash flow constraint on payment of its external debt obligations. This reflected the Government's cautious approach to external borrowing and responsive economic management, as well as the strong support provided by the donor community. The Government maintained strict limits on import-related and commercial credits, and reduced exposure to private banks. This voluntary restraint limited the total net transfer of resources to Indonesia, but improved the maturity and term structure of external debt. As a result, Indonesia's debt structure is now better than in most developing countries, with a relatively high share of concessional debt and a relatively low share of variable interest debt. Combined with policies to promote efficiency impiovements and non-oil export development, this prudent external borrowing has already led to an improvement in Indonesia's debt indicators. Economic Developments during 1989/90 y 1.18 During the past year, the Government has continued to pursue prudent macroeconomic policies in order to ensure that economic growth is consistent with macroeconomic stability. The Government sought to maintain the Economic developments during 1989/90 are analyzed in greater detail in Annex 1. - 10 - competitiveness of the exchange rate by depreciating the nominal exchange rate by 2.38 and reducing the rate of inflation. During October 1989, Bank Indonesia also introduced a new procedure for exchange rate manatement of the Rupish allowing it more flexibility to reflect market trends. The Government continued to implement fiscal policies designed to strengthen public resource mobilization. In order to increase non-oil revenues during 1989/90, three important measures were introduced: (i) the VAT tax bass was extended; (ii) a strengthening of audit efforts for income taxes as well as beginning preparations for the full auditing of VAT returns; and (iii) tax administration was strengthened with a reorganization of the Tax Directorate and the appointment of new higher level staff. Further progress was also made in reducing budgetary subsidies, through the implementation of the elimination of the pesticide subsidy and the raising of the retail prices of fertilizer by a weighted average of 16%. 1.19 The Government has also pushed ahead with important structural reforms in the areas of finance and public enterprises to reduce the Government's direct intervention in the economy and to strengthen the private sector. In the financial sector, several measures were announced, including the phasing out of subsidized, directed credits (liquidity credits), a significant relaxation of the rules governing the foreign exchange activities of commercial banks and the relaxation of rules limiting foreign capital from participating in the stock market.>/ The Government has also made progress towards reforming public enterprises in the past year./i Following upon Presidential Decree No. 5 in October of 1988, two ministerial decrees, issued in June 1989, set out the financial performance criteria for public enterprises and outlined a number of options to improve their efficiency and productivity. In trade and industrial policy, efforts have concentrated on ensuring the timely implementation of past reforms. For example, the negative list on investment is being smoothly implemented and foreign investment approvals, in general, are being handled in a timely and efficient manner. 1.20 Economic developments during 1989/90 indicate that the economy is continuing to respond strongly to the structural reforms of the last several years. Economic growth is estimated at about 7.4% in 1989, with non-oil activity increasing by around 8.1%. Economic growth was also more broadly- based than in the past. Within the non-oil economy, there was continued robust growth in the agriculture sector, led by the highest growth in rice production since 1984. Manufacturing continued to grow at a very high rate, driven by the performance of non-oil manufactured exports. SerVices, particularly trade, construction, and financial, also grew strongly. Increased activity in the banking sector and the stock market as a result of financial sector reforms raised the growth of the finance, insurance and real estate subsector by 13%. Finally, after two years of stagnation the oiL/NG sector grew by over 4%. On the expenditure side, private fixed investment l/ These measures are reviewed and analyzed in detail in Chapter 3 of this report. W These measures are reviewed and analyzed in detail in Chapter 4 of this report. - 11 - provided a major impetus to this growth. As noted earlier, the increase in private investment has been largely in response to the Government's deregulation policies. 1.21 The strong growth of the economy also influenced developments in the balance of payments during 1989/90 (see Table 1.4). The oil/LNG current account rose by US$1.2 billion, reflecting primarily an 18.5% increase in the price of oil. Moreover, non-oil exports continued to grow rapidly, increasing by 15.6%, reaching an estimated US$14.1 billion. This represented a volume growth of nearly 16%, as non-oil export prices declined slightly during 1989/90. As in previous years, the primary impetus to this growth was from a broad range of manufacturing goods. However, higher export earnings were offset by a rapid rise in non-oil imports, which increased by about 18% in real terms. The surge in non-oil imports demonstrates the strength of the private sector response to deregulation, with private sector capital goods' imports accounting for the largest share of the import growth. Monetary policy appeared to accommodate this strong import growth. Overall, the current account deficit declined slightly to US$1.7 billion (falling to 1.9% of GNP from 2.2% in 1988/89). Net disbursements of public MLT loans fell by about US$1.3 billion in 1989/90, reflecting the decline in new commitments of special assistance, lower disbursements of project assistance from official donors,J/ a reduction in the use of commercial and import-related credits, and a decline in financing for LNG/LPG projects, as well as a small increase in principal repayments. There was also a net outflow of capital, which can be attributed to several factors, including investments abroad by some private companies, a very large unwinding of swaps with Bank Indonesia,l/ and increased foreign borrowings by commercial banks that were channelled into domestic credit in foreign currency.2/ Nevertheless, net official reserves rose by US$0.3 billion. 1.22 The fiscal outturn for 1989/90 indicates a strong non-oil tax revenue performance, with these revenues rising by 29% (see Table 1.5). This resulted from buoyant economic growth, the new non-oil tax measures, and improvements in tax administration. Oil revenues also rose, primarily due to the increase in oil prices. The increase in revenues exceeded the rise in routine expenditures and generated higher Government savings, at 5.6% of GDP compared to 4.4% in 1988/89. In turn, higher savings permitted a rise in 1/ This partly reflects the shift in the composition of donor's commitments towards special assistance in the past several years, which has reduced the pipeline of project aid. IV A reduction in swaps outstanding with Bank Indonesia is a positive development to the extent that it reflects increased confidence in the Rupiah and reduces Bank Indonesia's contingent foreign exchange liabilities. / This was the result of a new regulation that removed the limit on foreign exchange borrcwings by commercial banks, but limited their net positions in foreign exchange to 25% of their equity. This is discussed in more detail in Chapter 3. - 12 - lable 1.4: BALANCE OF PAYMENTS, 1981/82-1989/90 (US$ billion at current prices) ActuAls Eit 1982/83 1985/86 1986/87 1987/88 1988/89 1989/90 Merchandise exports (fob) 18.6 18.5 I13. 1.1 19A 23.4 Oil & LNG 14.7 12.3 7.0 8.6 7.6 9.3 Non-oil 3.9 6.2 6.7 9.5 12.2 14.1 Merchandise imoorts (cif) .20.6 -14.4 .12L7 -14.2 -15.7 -19.0 Oil & LNG -4.8 -3.2 -2.3 -2.4 -2.1 -2.6 Non-oil -15.8 -11.2 -10.4 -11.8 -13.6 -16.4 Trade balance -2.0 4.1 1.0 3.9 4.1 4.4 Non-factor services (net) -1.7 -1.8 -1.5 -1.2 -1.2 -0.9 Interest payments (MLT) -1.5 -2.2 -2.5 -2.8 -3.0 -3.1 Other factor services and transfers (net) -2.1 -2.2 -1.2 -'.6 -1.7 -2.1 Current account balance -7.3 . -4.2 -1.7 -1.8 -1.7 Public lLT loans (net) 4.0 1.31 1.9 2i 1.6 - Disbursements 5.1 3.8 5.2 6.1 7.3 6.1 - Principal repayments /a -1.1 -2.5 -2.5 -4.2 -4.4 -4.5 Other capital (net) 0.0 1.7 -1.5 1.0 -1.3 -1.0 U e of net foreign assets 3.3 -0.9 3.0 -1.2 0.2 1.1 Memo items: Net official reserves 1k 3.0 5.8 5.0 6.0 5.4 5.7 - Months of imports /g (2.0) (5.5) (4.3) (4.6) (3.4) (3.2) Total net foreign assets 7.5 12.6 9.6 10.8/d 10.6 9.5 Current account/GNP (%) -7.8 -2.6 -5.8 -2.3 -2.2 -1.9 Non-interest current account balance (% of GDP) -6.0 0.7 -1.7 2.4 2.3 2.4 MLT debt service/ exports (%) La 16.8 25.1 38.0 35.5 36.1 32.1 La Includes prepayments of US$420 million in 1985/86, US$626 million in 1987/88, US$341 million in 1988/89 and US$300 million in 1989/90. fb Net official reserves are defined as gross official reserves minus outstanding liabilities to the IMF and other short term liabilities. /c Net official reserves in months of next year's expected imports (oil/LNG and non-oil) of goods. d Excludes US$326 million of prepayments, committed during the year but not completed until June 1988. le Debt service on public and private debc, excluding prepayments; denominator is gross exports of goods and services. Source: Bank Indonesia and World Bank staff estimates. - 13 - Central Government capital expenditures (about 5% in r:al terms), reflecting Government initiatives to support poverty reduction and to eliminate infrastructure bottlenecks. Despite higher capital spending, the budget deficit declined from 3.0% of GDP in 198/89 to 1.4% in 1989/90. In anticipation of a weakening of oil prices in 1990/91. the Government intends to continue its efforts to raise non-oil revenues and reduce budgetary Table 1.5: CENTRAL GOVERNMENT BUDGET, 1982/83-1988/89 (Rp. trillion at current prices) Actuals Estimated 1982/83 1985/86 1987/88 1988/89 1989/90 Revenues and grants 12.0 1I8. 21.8 23.2 29.5 Oil and LNG taxes 7.6 10.7 10.4 9.2 11.3 Non-oil taxes 3.8 6.4 9.0 11.9 15.4 Non-tax revenues /a 0.5 1.5 2.0 1.6 2.1 Grants 0.1 0.2 0.4 0.5 0.7 Current expenditures 8.2 12. 155 I6.8 19.9 External interest 0.7 1.8 3.8 4.3 4.5 Subsidies 1.4 1.4 1.4 1.0 1.5 Other 6.1 9.5 10.3 11.5 13.9 Government savings .8 6.1 6.3 6.4 9.6 Capital expenditures 686 1.8A 12.0 Budget balance -2.9 -2.7 -2.6 -4.4 -2.4 Financed by: External loans (net) 2.4.5 2 Disbursements 2.7 4.3 8.9 11.6 10.2 Principal repayments 0.7 2.5 6.4 7.1 7.5 Asset drawdown 0.9 .9 .-0.1 -0.3 Memo items (I of GDP): Non-oil taxes (% of non-oil GDP) 7.4 8.2 8.8 10.1 11.3 Government savings 5.7 6.2 4.9 4.4 5.6 Budget balance -4.3 -2.7 -2.0 -3.0 -1.4 Total expenditure 22.4 21.8 19.0 18.7 18.7 Net domestic expenditure / 11.3 8.2 3.5 2.8 2.4 Primary balance Lq -3.1 -0.8 1.1 0.0 1.3 i_ Includes domestic oil surplus in 1986/87. /b Defined as the domestic content of expenditure less non-oil revenues. /c Budget balance net of external interest payments. Source: Ministry of Finance and World Bank staff estimates. - 14 - subsidies. Furthermore, cautious fiscal management will be needed to ensure that public expenditures do not put urdue pressure ona the balance of payments, rekindle inflationary forces or reduce the efficiency of expenditure allocation and program implementation. These priorities are recognized in the 1990/91 budget announced in January, as the Government intends to lower the budget deficit and focus public expenditures on infrastructure and poverty- related programs. 1.23 During 1989, monetary policy was more expansionary than in the past several years. Monetary and credit aggregates grew strongly throughout the year: reserve money increased by 23% from December 1988 to December 1989; broad money rose by 38S; and domestic credit to the private sector rose by 50S. This rapid growth in credit was supported by a large increase in liquidity credits. Despite this, inflation was further reduced in 1989, with the CPI growing by about 6% compared with about 9% in 1988.1Q/ In response to concerns about pressures on the balance of payments, the Government is monitoring trends in the monetary aggregates closely. In 1990, the phasing out of liquidity credits will help to slow the growth of domestic credit and improve the effectiveness of monetary policy instruments. This, combined with the continued cautious stance indicated by the 1990/91 budget, indicates a continuation of prudent macroeconomic management in the future. C. Progress in Poverty Reduction 1.24 During the 1970s and early 1980s, Indonesia experienced a rapid rate of economic growth and a sustained reduction in the incidence of poverty. A major concern has been the effect of the economic adjustment during the 1980s on the living standards of the poor. The analysis presented in the Poverty Assessment and Strategy Renort, indicates that poverty continued to decline during this period and that the distribution of income may have improved slightly.11/ 1.25 Using the official poverty line, there was a substantial decline in the percentage of poor in both urban and rural areas during 1984-1987 (see Table 1.6). The incidence of poverty was 22.0% in Indonesia in 1984. By 1987, this percentage had declined to about 17%. There was also an absolute 1Q In this report, annual inflation rates are calculated as the percentage change between the simple average of the monthly 17-cities CPI in year t and the average in year t-l. IV/ For a detailed analysis, see, Indonesia: Poverty Assessment and Strategy Report, World Bank Report No. 8034-IND, April 1990. The Central Bureau of Statistics (BPS) has estimated an official poverty line based on 2,100 calories and necessary non-food expenditures. In this report, we use this line as a benchmark for measuring the incidence of poverty and its trend. However, other sources have also estimated poverty lines for Indonesia using slightly different methods. While these other methods yield different estimates of the percentage of the population and the number of people that are poor, the basic conclusions regarding trends in poverty reduction remain unchanged. - 15 - decline in the number of Indonesians in poverty, from 35 million in 1984 to about 30 million in 1987. This decline reflected a substantial reduction in rural poverty. Income inequality, as measured by household irtome and expeanditure data, also declined during 1984-87.32. This is indicated by the increase In the consumption share of the poorest 20% of the population during 1984-87 and a slight decline in the Gini coefficient. Table 16.: OFFICIAL ESTIMATES OF POVERTY, 1976-87 1976 1978 1980 1984 1987 Percentage of Poor in Total Population Urban 38.8 30.8 29.0 23.1 20.1 Rural 40.4 33.4 28.4 21.2 16.4 Total 40.1 IL.I 2L.i 21.6 17.4 Number of Poor (millions) Urban 10.0 8.3 9.5 9.3 9.7 Rural 44.2 38.9 32.8 25.7 20.3 Total I4.I 47. AL 35.0 30.0 Memo items: Gini coefficient 0.34 0.38 0.34 0.33 0.32 Consumption share of the bottom 20% of the population (%) 8.0 7.3 7.7 8.0 9.2 Average per capita caloric intake - - 2,489 2,516 2,660 fa La For 1986. Source: Kemiskinan Distribusi Penda2atan dan Kebutuhan Pokok, and Statistik Indonesia 1988, Biro Pusat Statistik, August 1989. 1.26 An alternative approach to measuring the trend in poverty is to compare the cumulative distribution of real expenditures per capita (in 1984 prices) between the two years..2/ This analysis indicates that the 1984 12/ This analysis uses data from the 1984 and 1987 National Socioeconomic Survey (SUSENAS) conducted periodically by the Central Bureau of Statistics. I/ This analysis adjusts household consumption expenditures per capita from the SUSENAS to 1984 prices using the consumer price index (CPI), reweighted to reflect more accurately the consumption pattern of the poor. - 16 - distribution lies entirely above the 1987 distribution (see Figure 1.3). This implies that, at any particular level of real expenditures per capita (or any "designated" poverty line), there was a lower percentage of the population at or below that level in 1987 than in 1984. Thus, it can be concludtad that all possible poverty lines will show an unambiguoius decrease in aggregate poverty between 1984 and 1987. This result is also robust to any plausible adjustment to the rate of inflation during this period. Figure 1.3: Consumption Distributions tioo /= 480 3 1 It 15 19 23 27 3f 35 39 43 47 St $5 St Monthly conartimplb perr poison (Roeee} -004 - -237 $wcc:RlmlID*lt loan sopl t1109). Factors Contributing to Poverty Reduction-duringz the Ad-justntent Period 1.27 As noted above, there is strong evidence that poverty has continued to decline despite the macroeconomic adjustmtents necessitated by external shocks. The success in reducing poverty is attributable partly to the development programs and policies pursued during the 1970s, but chiefly to the comprehensive nature and the speed of the Government's policy response to these external shocks. The supportive response to the Government's adjustment program from the donor community and Indonesial's access to international capital markets, facilitated the implementation of these policies. In - 17 - particular, two aspects of the adjustment program--the pace and pattern of economic growth, and public expenditure policies--were important in sustaining the reduction of poverty during this period. 1.28 The pace and nettern of economic growth. Because of the flexibility of Indonesia's labor markets, the policies for growth, employment and poverty alleviation are largely complementary. The rapid pace of economic activity during the 197Gs supported a large expansion of employment at higher real wages. During the early 1980s, Indonesia's growth rate did decline relative to the 1970s because of external shocks. Nevertheless, the Government's growth-oriented adjustment effort supported a pace of economic activity sufficiently robust to allow !aprovements in real earnings for most workers belonging to poorer income gr.ups. Increases in employment and real wages both contributed to a rise in real earnings. 1.29 Overall, employment grew faster relative to output in 1982-87 than in 1976-82, as evidenced by the rise in the elasticity of employment with respect to output from 0.44 in 1976-82 to 0.65 in 1982-87. A/ An important factor contributing to this was the change in the composition of output during the adjustment proaram. Although rice output growth slowed somewhat, which pulled down the agriculture sector's growth rate, a diversification of production towards non-rice food crops and non-food farm activities supported a faster growth of agricultural employment. In manufacturing, slower expansion of domestic-oriented, capital-intensive production was partially offset by a rapid growth of labor-intensive, export-oriented activities, especially during 1985-88.D-/ This changing pattern of output and employment in agriculture and manufacturing was supported by: the depreciation of the real excbange rate which improved the incentives for non-oil exports in both agriculture and manufacturing;li/ decontrol of interest rates which helped to reduce the bias towards capital-intensive production; and trade deregulation which increased the efficiency of production while also significantly reducing the bias against exports. 1.30 Using wages for unskilled agricultural workers in Java as a proxy for the wages of lower income groups, real wages for these groups appear to have risen from 1983 until 1987 (see Table 1.7).12/ Real wages did, however, 14/ This analysis is based on data from the 1976 and 1987 Labor Force surveys (SAKERNAS) and labor force data collected as part of the 1982 SUSENAS survey. 1/ The available evidence suggests that manufacturing employment in enterprises with more than 15 employees increased by 9.9% p.a. during 1985-88, compared to only 5.1% p.a. during 1982-85. ]/ For econometric evidence on the role of exchange rate in the expansion of Indonesia's non-oil exports, see, Ahmed and Chhibber, Dow Can In gzonesia Maintain Creditworthiness and Non-Inflationary Growth?, PPR Working paper, Washington, D.C. (1989). 11/ This analysis uses nominal wages for weeding, hoeing and planting in Java collected as part of the Farmer's Terms of Trade Index by the Central Bureau of Statistics. These wage data are deflated by the Household consumption component of that index (base 1983-100). - 18 - decline in 1988, reflecting the increase in rice prices which occurred due to the 1987 drought. Real wages appear to have recovered in 1989, as inflation declined significantly. For the period 1983-89 as a whole, agricultural wages rose by about 1% p.a., with the largest increase in Yogyakarta. These results are consistent with the available evidence from village surveys, and also are closely correlated with changes in the incidence of poverty during the adjustment period. In industry, the available evidence shows that industrial wages rose significantly, although at a much slower pace than average labor productivity. Real wages, however, did decline for civil servants, resulting from the Government's decision to institute a wage freeze in 1985-88. This was an important adjustment response to reduce fiscal deficits. The real wages of rural construction workers also stagnated, reflecting the large cutbacks in public capital spending. However, real wages in rural construction activities would have declined further without active policies to protect labor intensive construction activities (through INPRES program). Table 1Z.: TRENDS IN REAL WAGES, 1983-89 (index numbers, 1983-100) Average Growth Rate 1983 1984 1985 1986 1987 1988 1989 1983-89 AGRICULTURE West Java 100.0 101.4 112.8 110.3 111.0 105.7 105.6 0.9 Central Java 100.0 97.9 103.2 105.2 102.9 100.0 103.9 0.6 Yogyakarta 100.0 97.1 115.1 136.1 132.1 131.8 138.1 5.5 East Java 100.0 102.2 105.5 98.6 98.1 99.1 100.9 0.1 INDUSTRY Average 100.0 105.2 115.2 120.4 120.3 118.7 n.a. 3.5 /a La For 1983-88 only. Source: Central Bureau of Statistics and World Bank staff estimates. 1.31 What are the implication of these trends in employment and real wages for the poor? Since the bulk of Indonesia's poor reside in rural areas, labor earnings in agriculture are an important determinant of progress in alleviating poverty. The evidence presented here suggests that real earnings of workers in agriculture continued to grow, as both the level of employment and real wages increased. Outside agriculture, employment expanded in rural non-farm activities. Workers employed in small-scale rural manufacturing enterprises benefitted from the surge in non-oil exports. The returns to some - 19 - non-farm rural activitwes (trade and transport) may have declined initially (1982-8) but are &lso likely to have grown during 1986-88. Therefore, total labor income for the rural poor continued to grow during the adjustment period. Ir: the urban areas, both employment and real wages grev in the manufacturing sector; however, wages grew more slowly than productivity. In the urban informal sector, incomes may have stagnated or fallen in 1982-85 but are likely to have risen during 1986-88. In summary, the ability to sustain a reasonable pace of economic growth, based on higher economic efficiency and a more labor-intensive pattern of production, was a key factor in Indonesia's ability to reduce poverty even as major adjustments were implemented to restore financial stability. This has important implications for Indonesia's development strategy in the 1990s. 1.32 Public exoenditure Dolicy. As noted earlier, public expenditure policy played a major role in achieving internal balance. While raising non- oil revenues the Government made large cutbacks in real public investment. These cutbacks were done selectively to moderate the effect on the poor. Two basic features of the expenditure strategy were: (a) protecting operations and maintenance (O&M) expenditures, and transfers to the provinces, relative to other expenditures; and (b) reallocating capital expenditures to programs which yielded more benefit to the poor. 1.33 Although real capital spending was cut by about 30% between 1983/84 and 1988/89, expenditures on 06W continued to grow in real terms. This made it possible for the Government to maintain many of its ongoing programs, including those in agriculture and the social sectors, allowing the productive use of much of the physical and social infrastructure created in the late 1970s and early 1980s. The overall level of O&M, however, continues to be a problem, reflecting a lack of balance between current and capital spending during the oil boom period of the late 1970s. Raising O&M funding to a more appropriate level is a priority for public expenditures during the 1990s.1f/ 1.34 A related factor was the protectior. of transfers to the local governments. These transfers finance over two-thirds of total public expenditures by local governments and thus, are an important factor in determining local demand. An important component of these transfers is the INPRES program, which is implemented by the provincial governments and is used to finance physical and social infrastructure (including 0&K), which contribute significantly to regional development. Selected projects are generally either small-scale construction projects which generate low-wage, unskilled employment or are used to finance social services. 1.35 The Government also made significant changes in the sectoral composition of development outlays. There were several important features of this change: IV This issue is discussed in Chapter 4. 20 - (a) the share devoted to industry and mining was reduced sharply. Many large, capital-intensive, industrial projects, berun during 1979- 1981, were dropped. Similarly investments in miring proje.:ts were scaled back; (b) the share of development expenditures was also substantially reduced in areas where implementation constraints or environmental concerns were severe. For example, the proportion of expenditures allocated to the transmigration program was reduced substantially; (c) a larger share was allocated to poverty-related sectors, such as agriculture and human resource development; and (d) the share of expenditures on physical infrastructure was increased. This reallocation of development expenditures had two important effects in reducing the social costs of adjustment for the poor. First, the employment coefficients were higher in those sectors into which development expenditures were reallocated. Second, expenditures were switched to sectors (agriculture and human resource development) where they are of greatest potential benefit to lower income groups. These initiatives to protect poverty-related expenditures during 1983-88 played an important role in softening the effect of expenditure cutbacks on the poor. The scope for further improvements in public expenditure management to assist the poor, however, remains significant. D. The Tasks Ahead 1.36 Indonesia is emerging from a difficult but successful adjustment period with a more robust, diversified and competitive economy. The strong surge in private sector growth, investment and imports, par.icularly during the past year, indicates that the foundations are being laid for a period of sustained and relatively rapid growth. It is important that Indonesia takes full advantage of the opportunities this presents. While living standards have improved and poverty has declined during the adjustment period, sustained growth is needed to make further progress in raising the living standards and providing productive employment opportunities for a growing population and labor force. 1.37 Sustained growth would enable Indonesia to make continued progress in poverty reduction. Poverty reduction must remain a priority for several reasons: (i) the number of absolute poor is still high at about 30 million people and a large proportion of the population, "the near poor", have incomes only slightly above the poverty line; (ii) despite significant progress in a number of social indicators (e.g., infant, mortality, life expectancy and malnutrition) Indonesia still lags behind other Asian countries; and (iii) population and labor force growth rates are still rapid, with about 2.4 million Indonesians expected to enter the labor force annually in the 19908. - 21 - 1.38 The Government's underlying development strategy contains the key elements which would provide the foundations for a period of sustained growth. The main features of this strategy can be grouped into three interrelated areas: macroeconomic management, efficient private sector development, and efficient public sector programs to support private sector development and poverty reduction. 1.39 The continuation of Indonesia's prudent macroeconomic management is an essential part of the development strategy. In recent years macroeconomic policies have provided a stable setting which has helped foster the private sector growth response. Through the balanced application of fiscal, monetary and exchange rate policies, the Government has contained domestic demand growth, provided incentives for strong non-oil export growth, and eased pressure on the balance of payments. Continued improvements in non-oil fiscal revenues and reductions in fiscal subsidies will strengthen fiscal policies and reduce their vulnerability to oil price fluctuations. Keeping the fiscal deficit within sustainable levels, combined with appropriate monetary restraint and the ongoing implementation of financial sector reforms, will encourage a growth in savings sufficient to finance the investment needed for sustained growth while reducing dependence on foreign savings. Effective implementation of such policies will serve Indonesia well in the coming years as growth in private sector investment and imports responds increasingly to deregulation and improved incentives. The main elements of the macroeconomic policy framework for sustained growth are discussed in Chapter 2. 1.40 The promotion of efficient private sector development depends on the rapid consolidation and implementation of the Government's program of reforms to the incentive structure; the reform of the legal and regulatory framework to encourage private initiative while protecting the public interest; and reforms in institutions and services which support private sector activity, notably the financial sector and transport. The acceleration of investment over the past few years underscores the urgency of implementing the Government's agenda to improve the incentive regime by removing non-tariff barriers, reforming the tariff system and reducing export constraints. Such reforms would help ensure that investment takes place in efficient activities, and would reinforce the macroeconomic incentives to export by reducing protection. The need for a more modern, streamlined system of corporate. land. and labor laws and regulations governing private sector activity poses more complex issues which will take considerable analysis and time to resolve, which only emphasizes the importance of the efforts underway in these areas. Supplementing recent reforms of the financial sector by improvements in prudential regulations and supervision, both in the banking system and the capital market, will enhance the stability of the financial system. Further progress is called for in extending the benefits of deregulation in transport to the road transport subsector. Finally, for the pace of private sector development to be sustainable, increasing attention is being given by the Government to resolving environmental issues and constraints, particularly the problems of water supply and quality in Java. These issues are discussed in greater detail in Chapter 3. 1.41 The third element in the strategy is efficient public sector programs to remove constraints on private sector growth while improving basic services to meet the needs of the poor. This also includes improving the efficiency and performance of the gublic enterprise sector. REPELITA V - 22 - sought to allocate development expenditures along these lines and these expenditure priorities were reaffirmed in President Soeharto's presentation of the draft budget: '... we must use the development budget as appropriately as possible in order to give maximum stimulus to development activities outside the Government's sector, namely activities conducted by the public, including the private sector. This means that development activities conducted by the state must be carefully selected and directed to strategic areas so as to stimulate and encourage self-reliance and public participation in all development sectors .... throtagh the provision of basic means and infrastructures that cannot be provided by the people themselves.n W2' Key areas to support private sector development include agricultural infrastructure and support services for farmers, and expanding capacity in power and telecommunications. The priorities for basic services for the poor include education, health, family planning and water supply and sanitation. Focusing expenditures on these strategic priorities is of crucial importance because the investment needs in these areas are likely to be very large, while expenditures will need to be kept within strict limits to sustain macroeconomic balance. These issues are assessed in Chapter 4. 1.42 Sustained donor support and access to capital markets will continue to be important in providing the resources needed to implement this strategy. An additional year of special assistance support, at a level lower than last year, would provide the Government with the flexibility and confidence to manage the surge in private sector activity and continue the deregulation effort, while maintaining reserves in terms of months of imports. Project assistance would support high priorit; projects and sector programs, and a modest level of commercial borrowing would round out the financing requirements. Beyond 1990/91, Indonesia will continue to require substantial amounts of official assistance to finance priority public investments in support of higher growth and poverty reduction. 2/ Government Statement on the Draft State Budget for 1990-91 to the House of the People's Representatives, January 4, 1990. - 23 - CHAPT ER 2 A MACROECONOMIC FRAMEWORK FOR SUSTAINED GROWTH A. Introduction 2.01 As noted in Chapter 1, Indonesia is emerging from a period of successful adjustment to a series of external shocks. Prudent macroeconomic management helped to reduce current account and fiscal deficits and, together with structural reforms, supported a recovery of economic growth by boosting non-oil exports and stimulating private investment. Moreover, the pace and pattern of economic growth enabled a significant reduction in poverty. The success of Indonesia's adjustment during the 1980s is demonstrated by a GDP growth rate in 1989 similar to rates reached in the oil-boom years of the 1970s. Indonesia's fundamental macroeconomic challenge for the 1990s is to make further progress in improving living standards by sustaining a relatively rapid rate of growth while preserving macroeconomic stability. The favorable environment expected in the 1990s will help in meeting this challenge. 2.02 This Chapter analyzes policy issues relating to the macroeconomic framework, employment and sustained poverty reduction, public resource mobilization and the external debt strategy. The main elements of the macroeconomic policy framework necessary to sustain a relatively rapid rate of economic growth, ensure macroeconomic stability and improve living standards are presented in Section B. The medium-term prospects for growth, employment and poverty reduction based on the macroeconomic framework, are discussed in Section C. This is followed by a more detailed review of policy options for public resource mobilization in Section D. Finally, the financing requirements for the medium term macroeconomic scenario and the key elements of Indonesia's external debt strategy are outlined in Section E. B. Macroeconomic Strategy and Policy Framework 2.03 Sustained, steady growth in non-oil GDP at around 6-7% p.a. would enable Indonesia to make major progress towards its fundamental objective of reducing poverty and raising the living standards of all its people. It is important that Indonesia continue its present macroeconomic strategy to ensure that this growth path is consistent with financial stability, especially given Indonesia's substantial debt burden This strategy combines prudent macroeconomic management with structural changes which strengthen and diversify the economy. The adjustment experience during the 1980s described in Chapter 1, demonstrates the Government's ability to take firm, timely action to restore financial stability, employing the full range of macroeconomic policies. Skillful macroeconomic management will be equally important in the 1990s. During the adjustment period, investment was curtailed to restore external and internal stability. Reasonably robust economic growth was achieved through efficiency improvements, the use of excess capacity and postponing public investment whenever possible, particularly in infrastructure. But to sustain a growth of 6-7% p.a. in the non-oil economy during the 1990s will require significant increases in - 24 - investment and savings. Macroeconomic policies will need to be geared towards achieving this objective, while structural reforms in the trade regime, in industrial policy, and in the financial sector are implemented. This will call for a careful monitoring of economic trends so timely policy adjustments can be made as needed. Such prompt actions will help avoid costly interruptions in the growth path and will maintain an atmosphere of confidence within the business community conducive to sustained growth. 2.04 Macroeconomic management will continue to focus on improving the external and internal financial balances in the medium term while maintaining growth. Containira nd gai dg- 4011Y rci.ng thc current account deficit as a share of GDP will steadily lower the burden of Indonesia's debt and expand the economy's options in the future. A continuation of policies to support non- oil export growth is central to this strategy. This includes maintaining a competitive exchange rate through coordinated fiscal, monetary and exchange rate policies. Further reforms of the trade regime will also be necessary to enhance economic efficiency and the incentive to export. 2.05 Appropriate fiscal and monetarv Dolicies are needed to support the improvement in the external balance and reduce inflationary pressures. With the fall in foreign savings implied by the projected decline in the current account deficit, and with the rise in the investment rate needed to support sustained growth, public and private savings will need to rise faster than income and consumption. Continued efforts in several important areas will further improve public savings and the fiscal balance while financing a public expenditure program adequate to meet the needs of a growing economy and provide better opportunities for the poor. First, the Government's priorities in gublic resource mobilization need to be maintained. This includes raising non-oil tax revenues through continued improvements in tax administration, with a primary focus on the VAT, corporate and personal income taxes, and the property tax. Apart from their revenue potential, these taxes are also likely to have a positive effect on income distribution. Other areas for strengthening public resource mobilization include: (i) improving cost recovery from public services; (ii) reducing the financial burden of public enterprises through improvements in their financial and operating performance and selective divestiture; and (iii) strengthening local government finances. Second, continued implementation of the Government's efforts to reduce subsidies for fertilizer and oil will both release needed public resources for other priority purposes and improve resource allocation through better price signals. Finally, as outlined in Chapter 4, public expenditure grograms will need to be carefully designed and focused on the main priorities, as set out in REPELITA V, of ensuring adequate infrastructure and services to support private sector growth and improving basic social services for the poor. 2.06 Monetary Dolicy will need to be designed carefully to support growth while avoiding pressure on prices and the balance of payments. Given Indonesia's open capital account, domestic interest rates are closely tied to international interest rates and exchange rate expectations. This limits the ability of monetary policy to influence interest rates except possibly in the short run. An expansionary monetary policy designed to achieve low domestic rates would be self-defeating over the longer term, putting pressure on prices and the balance of payments. Coordinated monetary and fiscal policies, however, could work to lower inflation and expectations of exchange rate depreciation and thereby reduce the margin between domestic and international - 25 - interest rates. With the ongoing financial sector reform, the relationships between monetary variables can change rapidly, calling for close monitoring of developments so that timely action can be taken. The phasing out of liquidity credits announced in January 1990 is expected to lead to a tighter monetary stance and increase the effectiveness of Bank Indonesia's monetary instruments. Other components of the financial sector reforms are expected to improve the efficiency of credit allocation and to lower lending rates by reducing intermediation margins. Continued development of prudential regulations and supervision will strengthen the stability of the system. 2.07 A further increase in reserves to cope with unanticipated fluctuations would be supported by the strengthening of monetary policy mentioned above and would complement the overall macroeconomic strategy. Adequate reserves are particularly important for macroeconomic management given Indonesia's open capital account. Maintaining lines of untied commercial credit (currently about US$1.8 billion) is another cushion against unexpected developments. Another policy option to consider is the use of unanticipated gains from higher oil revenues to reduce borrowing and/or to accumulate fiscal reserves for the budget so that the fiscal balance can be improved and such windfalls used in an orderly and efficient fashion. The continued reduction in dependence on oil as a source of foreign exchange and fiscal revenues should add another element of increased stability to the economy as non-oil exports and non-oil fiscal revenues expand. 2.08 The remainder of this Chapter discusses the implications of the macroeconomic strategy for sustained growth and reduction in poverty. Sustaining growth, however, will require that sound macroeconomic management be accompanied by other measures to foster efficient private sector development and improve the efficiency and focus of key public sector programs. Those measures are discussed in Chapters 3 and 4. C. The Medium-Term Macroeconomic Outlook The External Environment 2.09 A major objective of the Government's adjustment program has been to improve the economy's capacity to withstand external shocks. As discussed earlier, the economy's dependence on oil has been substantially reduced and the export base has been expanded from a reliance on a small group of resource-based commodities to a broad range of agricultural, mining and manufacturing products. Even so, Indonesia's economic fortunes remain strongly linked to conditions in the world economy, particularly the oil market. Table 2.1 summarizes the key external assumptions underlying Indonesia's medium-term prospects presented in this section. 2.10 Since 1983, economic activity in OECD countries has increased by 3.6% p.a. In the near term, economic activity is expected to slow down in the early 1990s, although the G-5 countries are not expected to go into a recession. By the mid-1990s, however, growth in the industrialized countries is expected to reach and be sustained around 3% p.a., based upon the efficiency improvements embodied in the investment boom of the late 1980s and the gradual reduction of large external and internal balances in the - 26 industrialized countries, particularly the United States. Any financial turbulence caused by the adjustment, is expected to be short-lived, not depressing economic activity over a sustained period. With gradual adjustment, real interest rates are projected to decline during the l990s, with the real rate on six-month dollar deposits (LIBOR) falling from 4% in 1990 to 3% in 2000. The average for the 1990s would be 3.3%, substantially below the 5.3% average for the 1980s. Exchange rate movements are also expected to abate somewhat. Table 2.1: SELECTED INDICATORS OP INTERNATIORAL ECONOMIC ACTIVITY: 1989-2000 Estimated Proiected Ia Growth Rate (X v.a.) 1989 1990 1991 1993 2000 1989- 1990- 1993- 1990 1995 2000 Economic activity G-5 growth (X p.a.)./b 3.4 2.3 2.6 3.0 3.0 2.8 3.0 3.0 Price indices (1985-100) Commodity prices in constant dollars LI 86.7 75.5 n.a. 73.8 76.8 -12.9 0.1 0.3 banufacturins unit values in current dollars 137.6 144.4 151.5 183.7 220.1 4.9 4.9 3.7 Oil Prices (USSIbarrell In 1985 dollars ld 11.9 11.3 11.3 12.0 15.3 -5.0 1.2 5.0 in current dollars le 17.9 16.5 17.5 22.0 33.7 -0.8 6.2 8.9 Interest rates (X) LI80R LI 9.4 9.1 8.7 8.0 7.5 Real interest rate Jg 4.1 4.0 4.7 4.0 3.0 L End of period. /b Weighted average of real growth rates for USA, UK, Japan, Prance and Germany. Ic Nominal price index for 33 commodities (excluding energy) deflated by the World Bank's G-5 manufacturlng unit value (MUV) index. Id Deflated by Mnv index. LI Prices are for the Indonesian fiscal year (April 1 - March 31). LI Six-month US$ London Interbank Offered Rate (LIBOR). L& LIBOR deflated by the changes in the US GoP deflator. Source: World Bank staff estimates. 2.11 The short-term trend for oil prices is uncertain. After declining at the end of 1988, oil prices steadily recovered throughout 1989 and into the first quarter of 1990. Short-term prospects are for a softening of the oil market in mid-1990, causing prices to fall by US$1-2/bbl. This would result from the expected near-term slowdown in OECD's economic growth, restoration of production and export levels from non-OPEC sources (especially the United Kingdom and the USSR), and OPEC output remaining above the existing quota ceiling of 22.0 million bb/d. The present outlook, therefore, is for oil prices to average about US$16.5/barrel during 1990/91, which is about an 8% decline from the 1989/90 level. Over the medium t. m, the trend is more favorable with real oil prices expected to rise by about 3% p.a. during the 1990s. Even so, the projected oil price in 2000 is only 52% of the level of 1980, in real terms. - 27 - 2.12 The short-term outlook for non-oil commodity prices is not bright. Prices of palm oil, coffee, rubber and tin are expected to decline in 1990 relative to 1989. This will lead to a slight decline in the terms of trade index (both the non-oil index and the total) for 1990/91. The medium-term outlook for non-oil commodity prices is better, but import prices are also expected to keep pace. As a result, the non-oil terms of trade index is projected to show an improvement of only about 1% p.a. for the 1990s (see Table 2.2). But including oil, the overall terms of trade index will rise by 2.6% p.a. Table 2.2: IDONESIA'S TI3MS OF TRADE, 1988189-2000101 (1983184=100) Rate of Growth (1 D.a.) 1988189 1989190 1990191 1995196 2000/01 1990191- 1995196- 1990/91- 1995196 2000101 2000/01 EUport price index Total 3xports 85.3 91.8 93.0 134.3 181.0 7.6 6.2 6.9 yon-oil eaports 124.8 124.5 126.2 171.6 206.1 6.3 3.7 5.0 Imnort orice lndex Total imports 123.0 125.7 131.7 163.5 198.7 4 6 3.7 4.2 Non-oil imports 121.9 124.8 130.8 164.2 197.3 .7 3.7 4.2 Terms of trade index Total 69.6 73.0 70.6 81.2 91.1 2.8 2.3 2.6 son-oil 102.3 99.8 96.5 104.5 104.4 1.6 0.0 0.8 Source: World Bank staff estimates. 2.13 Despite the expected sluggish growth in the non-oil terms of trade, as Indonesia enters the 1990s, the outlook for the external environment appears to be favorable. Oil prices are expected to grow from the depressed level of the 1980s; real interest rates are projected to decline and display a more stable trend; and world economic activity is likely to be sustained at about 3% p.a. These favorable trends should present Indonesia with an opportunity to sustain a higher level of economic growth, than was achieved during the 1980s. Macroeconomic Proiections 2.14 This section provides illustrative macroeconomic projections based on the external environment described above and on the Government implementing its macroeconomic strategy as described in Section B. In the near term, economic activity is expected to slow slightly in comparison to the rapid pace of 1989 (see Table 2.3). This moderation in economic activity will result from: (a) stagnant oil production due to capacity constraints; (b) a leveling off of rice production after a bumper harvest in 1989; and, (c) a gradual decline in the rate of growth of non-oil manufacturing and exports from the extraordinary levels of the last several years. Moreover, infrastructural constraints in supporting services, particularly power, telecommunications and transport, may act to limit growth in the near term. - 28 - Table-2.3: BASE CASE - SELECTED ECONOMIC INDICATORS, 1983-2000 /_ Actual Estima Proiected 1983-88 1989 1990 1990-95 1995-200 Average real erowth rates (% p.a.) 1k Gross national income (GNY) 3.8 7.8 6.1 6.4 6.1 Gross domestic product (GDP) 5.1 7.4 6.0 5.6 5.5 Non-oil GDP 5.9 8.1 7.0 6.6 6.4 Non-oil exports /c 12.7 15.9 15.9 8.1 6.9 Non-oil imports ic -4.9 18.2 10.7 8.6 6.3 Fixed investment -1.0 13.0 12.0 8.6 6.4 - Public -4.3 6.2 4.1 8.4 6.4 - Private 1.6 17.7 16.8 9.0 6.4 Consumption 4.0 6.5 5.0 5.5 5.9 Structure of the economy (%) Id Non-oil manufacturing/GDP L 13.7 14.3 15.2 18.4 21.7 Non-oil exports/non-oil imports /f 89.7 85.8 86.9 91.7 94.5 Public savings/GDP 5.5 6.2 6.4 8.7 9.1 National savings/GDP 20.0 21.3 22.2 25.6 26.5 Fixed investment/GDP 20.0 21.1 22.4 25.3 25.8 Private fixed investment/total fixed investment 55.7 59.4 61.0 60.4 60.5 Consumption/GDP 74.4 73.3 72.8 70.4 70.2 Macroeconomic balance (,) /d Current account/GNP -2.2 -1.9 -2.1 -1.4 -1.0 Non-interest current account/GNP 2.3 2.4 2.1 1.6 1.1 Overall public sector balance/GDP -3.4 -2.2 -2.4 -1.5 -1.0 Public sector primary balance/GDP -0.4 0.6 0.4 0.5 0.5 MLT debt service/exports 36.1 32.1 33.0 21.8 16.8 MLT debt/exports 218.6 189.0 177.6 130.7 99.7 MLT debt/GNP 61.0 54.7 52.3 43.6 33.2 ,a Balance of payments and fiscal data sre for fiscal years (starting April 1). Other indicators are for calendar years. /b Based on revised national accounts. / Goods only. d End of period; in current prices. /a In constant 1983 prices. LE Goods only; in current dollars. Source: Central Bureau of Statistics and World Bank staff estimates. 2.15 Throughout the 1990s, the rate of growth of non-oil GDP will be sustained at 6-7% p.a. This growth is fuelled by improvements in productivity resulting from structural reforms and a strong investment effort. Non-rice agriculture, non-oil manufacturing and non-oil exports will provide the main stimuli to future growth. Substantial buildups of production capacity in the - 29 - agriculture and manufacturing sectors, as well as supporting improvements in economic infrastructure are incorporated in the base scenario projections. As a result, it is estimated that the rate of fixed investment grows quite rapidly (about 7-8% p.a.), reaching about 26% of GDP by 2000, an increase of 5 percentage points of GDP. To finance this increase, the growth of national savings will need to keep pace with investment. This would reflect in part a strong public resource mobilization effort. The economy is also expected to continue the process of structural change, which began in the mid-1980s, with the share of non-oil manufacturing increasing from about 14% of GDP in 1988 to nearly 22% in 2000. This growth path will allow Indonesia to absorb its burgeoning labor force at rising levels of productivity and income and achieve a sustained rise in per capita consumption, while the burden of external debt eases considerably. 2.16 External balance. The performance of non-oil exports since 1986 has allowed Indonesia to miake considerable progress towards reducing external imbalances and lowering the debt service ratio, despite larger debt service payments and lower oil prices. The strong non-oil export performance continued in 1989/90, with non-oil exports reaching an estimated US$14.1 billion, which represents about a 16% rise in real terms (see Table 2.4). The strength of the private sector's response to deregulation is also shown by a surge in intermediate and capital goods imports; in aggregate, non-oil imports rose by about 21% in value terms in 1989/90. As a result, the current account deficit declined only slightly to US$1.7 billion (about 1.9% of GNP compared to 2.2% in 1988/89). Over the medium term, these imports of capital goods will lead to a strengthening of the balance of payments position, since private sector investment is increasingly directed towards export-oriented activities. However, the continuation of strong import growth, reflecting high levels of private sector investment and further progress on trade and industrial deregulation, will contribute to a slight widening of the current account deficit to US$2.0 billion, about 2.1% of GNP in 1990/91. A second contributing factor is the expected decline in oil prices from US$17.9 per bbl to US$16.5 per bbl. The widening of the current account deficit in 1990/91 illustrates the need for the Government to monitor trends in the balance of payments closely, especially in the near term, and to exercise prudent fiscal, monetary and exchange rate policies. A recovery in oil prices, rapid growth of non-oil exports and the resumption of more normal import growth are projected to reduce the current account deficit in 1991/92 to US$1.7 billion (1.6% of GNP). An important assumption underlying the projections is that progress is made in reducing the oil subsidy, thereby slowing domestic consumption and raising the volume of oil exports. Without progress in this area, oil exports will decline and the positive effect of higher oil prices over the medium term will be partially lost. 2.17 Over the medium term, management of the balance of payments will require a careful balancing between the growth required to absorb the labor force at increasing levels of productivity and the need to achieve further improvement in Indonesia's debt service burden. Monetary and fiscal policy will have an important role in achieving these objectives. To support the economic growth envisaged under the base case, non-oil imports will have to grow at about 7-8% p.a. in real terms during the 1990s. High investment outlays by both the public and private sector, and the increasing demand for raw materials in exporting sectors will be the principal sources of import growth during this period. - 30 - lable 2.4: BALANCE OF PAYMENTS, 1989/90-2000/01 (US$ billion) Estimated Projected 1989/90 1990/91 1991/92 1995/96 2000/01 Gross merchandise exports (fob) 23.4 2.5.1 244.5 71.0 Oil and LNG 9.3 8.5 9.2 11.3 15.3 Non-oil 14.1 16.6 19.3 33.2 55.7 Gross merchandise imports (cif) -19.0 -21.A -2&I -IL -64.4 Oil and LNG -2.6 -2.3 -2.5 -3.3 -5.4 Non-oil -16.4 -19.1 -21.8 -36.2 -59.0 Trade balance 4.4 3.7 4.2 5.0 6.6 Net non-factor services -0.9 -0.8 -0.9 -1.0 -0.9 MLT interest payments -3.1 -3.3 -3.2 -3.8 -4.5 Other factor services and transfers (net) -2.1 -1.6 -1.8 -2.3 -3.7 Current account balance -1L. -2.0 -L.7 -ZA1 -2.5 Public MLT loans (net) LA 1.1 1.8 2.1 2Q - Disbursements 6.1 6.2 6.4 6.8 7.6 - Principal repayments -4.5 /a -4.7 -4.6 -4.7 -5.6 Other capital (net) -1.0 1.4 1.5 1.9 3.3 Use of -:,et foreign assets 1.1 -0.9 -1.6 -1.9 -2.8 Memo items: Net official reserves 1k 5.7 6.5 7.6 14.5 29.8 Net official reserves (in mons. of imports) tc 3.2 3.2 3.3 4.0 5.0 Total net foreign assets 9.5 10.4 12.0 19.5 31.6 Current account/GNP (%) -1.9 -2.1 -1.6 -1.4 -1.0 Non-interest CA/GNP 2.4 2.1 2.1 1.6 1.1 MLT debt service/exports (%) 32.1 33.0 28.8 21.8 16.8 Le Includes prepayments of US$300 million. /b Net official reserves are defined as gross official reserves minus outstanding liabilities to the IfW and other short term liabilities. jc Net official reserves in months of next years's expected imports (oil/LNG and non-oil) of goods. Source: Bank Indonesia and World Bank staff estimates. 2.18 To reconcile the growth and external targets, non-oil exports will have to grow at around 8% p.a. throughout the 1990s. This will require maintaining the competitiveness of the exchange rate, and reducing the domestic cost of production through continued deregulation of trade policy, - 31 - local level regulations and supporting services. The prospects for Indonesia's non-oil exports remain bright for three reasons. First, import growth in Indonesia's major trading partners is expected to be robust over the medium term. Second, Indonesia's share of the market for most manufacturing products (excluding plywood and textiles) is still small, leaving room for expansion. Finally, in the last several years, there has been a large increase in investment, particularly in export-oriented, manufacturing industries. Capacity in existing export industries has expanded and investments in new, manufacturing export industries by small- and medium-scale entrepreneurs have also grown dramatically. Data obtained from the Investment Coordinating Board (BKPM) on recent investment approvals for foreign and domestic investment also indicate that these investment outlays are being increasingly directed into export-oriented activities, particularly in textiles, agroprocessing and wood processing industries. Accordingly, the base case assumes that non-oil exports will increase rapidly in the next three years (about 11% p.a.), but then are expected to slow to about 7% p.a. over the medium term (see Table 2.5). Table 2.5: PROJECTIONS OF NON-OIL EXPORT GROWTH (real growth rates, % p.a.) Actual Projected 1983/84- Estimated 1990/91- 1992/93- 1988/89 1989/90 1992/93 2000/01 Non-oil manufactures 26-0 z2.7L 1 Li Textiles 31.6 17.9 14.8 8.4 Plywood 21.8 6.7 7.5 2.6 Other 31.6 51.8 21.1 9.9 Primary commodities 5.1 5. 2.3 5.2 Metals and minerals 6.7 12.6 7.4 5.0 Total non-oil exports 12.7 15.9 11.3 71 Source: Bank Indonesia and World Bank staff estimates. 2.19 The implications of these balance of payments trends for external financing requirements and the external debt situation are discussed in Section E below. In brief, there are several important implications of the base case scenario. First, Indonesia will continue to require substantial amounts of official assistance to finance priority public investments in support of higher economic growth and poverty reduction. Special assistance will be needed, for at least one more year, to manage with confidence the rise in imports resulting from the faster pace of economic growth and trade policy deregulation. Second, there is likely to be a substantial increase in private sector debt associated with the ongoing investment boom. While the effect of this trend is expected to remain manageable, Indonesia needs to monitor - 32 - carefully trends in private sector indebtedness as this can affect Indonesia's ereditworthiness. Third, given the projected growth in non-oil exports, the debt service ratio for public and private medium- and long-term debt (MLT) declines from 36% in 1988 to 22.3% in 1995 and to 17.1% in the year 2000. Similar declines are also achieved in the Debt/Exports and Debt/GNP ratios, indicating a substantial improvement in Indonesia's creditworthiness. Finally, the projected increase in net official reserves would provide Indonesia with the flexibility to respond to external shocks without unduly disrupting economic growth. 2.20 Internal balance. Feducing the current Ae'ount deficit to more sustainable levels over the medium-term will require that savings increase faster than investment. Even allowing for gains in economic efficiency, the rate of fixed investment will need to expand from 21% of GDP currently to about 26% of GDP by 2000 to support the projected growth rate. These trends imply that investment and saving will have to grow faster than output and consumption. This expansion in investment is particularly important given the low rates of investment, especially public investment, during the adjustment period. To support economic growth during the 1990s, critical investments are needed in supporting infrastructure (e.g., power, telecommunications, roads and ports). Substantial amounLts of private investment will also be required to create the capacity for non-oil exports. To achieve this projected expansion of private investment, further progress with trade and industrial sector reforms, as well as improvements in the financial sector, will be essential to erhance the profitability of private investment. Macroeconomic policy will also be important in maintaining an environment conducive to private sector investment, as it affects expectations regarding exchange rates, interest rates and inflation. In order to finance this higher level of investment activity while reducing the current account deficit, national savings will need to rise from 21% of GDP in 1989 to about 27% in 2000. Part of the increase in national savings will be achieved through an increase in private savings. Household savings are expected to improve with sustained higher economic growth, while business savings will respond positively to higher profitability. However, these factors alone will not be adequate to achieve the required increases in national savings; public savings will need to increase to achieve the savings target. 2.21 The conduct of fiscal policy during the 1990s, therefore, will be crucial to the success of this macroeconomic scenario. Additional public resources will need to be mobilized to offset the expected phasing out of special assistance, as well as finance an increase in the investment rate to support higher economic growth and poverty reduction. Furthermore, budgetary resources also need to be raised to meet Indonesia's substantial debt service obligations. The focus of fiscal policy appears to be moving in the appropriate direction with the Government's intention to reduce budgetary subsidies, increase non-oil tax revenues, and improve the finances of public enterprises. The increase in non-oil tax revenues is expected to be derived primarily from improvements in tax administration and a strengthening of local government finances; these measures are discussed in greater detail in Section D below. Enhancing the contribution of public enterprises to public resource mobilization will need to be achieved through improvements in their financial and operating performance (see Chapter 4 for a detailed discussion of public enterprises). Based on these public resource mobilization measures, the projected economic growth and higher oil prices, the public savings rate is expected to grow from 6.2% of GDP in 1989/90 to 9.1% by 2000/01. - 33 - 2.22 The likely improvements in public resource mobilization will be adequate to allow a growth of real public investment of about 7% p.a. during the 1990s, which should be sufficient to achieve the Government's expenditure priorities. Given the projected progress in resource mobilization, this rate of expansion of public expenditures, would enable an expanding role for the private sector while maintaining macroeconomic stability. It should also permit the systematic strengt'aening of implementation capacity. The policy challenge for the public sector will be to provide sufficient complementary resources to support private sector growth and poverty reduction while containing the level of public expenditures to preseive macroeconomic stability and ensure adequate resources for the private sector. This would imply focussing the public sector investment effort on basic infrastructure (power, roads, and telecommunications) and essential social services (health, basic education, water supply and sanitation, and kampung improvement), which are largely complementary rather than competitive with private activities. Expenditure priorities are explored in greater depth in Chapter 4. 2.23 The Dace and oattern of economic growth. The expansion of non-oil exports and the substantial production capacity which will be put into place in the early 1990s will allow the non-oil economy to grow by 6-7% p.a. (see Table 2.6). The main factors supporting this growth are: (i) the higher level of private investment in the late 1980s which has created substantial export capacity in existing export industries and significantly broadened the base of the manufacturing sector into a number of new activities; (ii) higher levels of public sector investment which are expected in such critical areas as transport, telecommunications, and energy in order to support the growth of private sector activities; and, (iii) the external environment which will be relatively favorable with strong import growth in the economies of Indonesia's major trading partners. Underlying this projection is the assumption that the remaining reforms in the incentive framework are implemented in the early 1990s in order to ensure that private sector investment reflects an appropriate set of incentives. Table 2_6: GROWTH AND COMPOSITION OF GDP, 1983-2000 La Growth Rates (% D.a.) Share in GDP /b 1983-88 1988-90 1990-95 1995-2000 Estimate Proiecte 1989 2000 Non-oil CDP 5.9 7.6 6.6 6.4 81.2 89.8 Agriculture 3.5 3.9 3.5 3.5 20.5 16.4 Manufacturing 12.4 12.1 9.7 9.0 14.3 21.7 Services, etc. 5.5 7.8 6.8 6.4 46.4 51.7 Oil/LNG 2.0 2.8 0.4 -0.9 18.8 10.2 Total GDP 5.1 6.7 5.6 5.5 100.0 100.0 /a Based on revised National Accounts Statistics. Lk In 1983 prices. Source: Central Bureau of Statistics and World Bank staff estimates. - 34 - 2.24 At the sectoral level, the primary impetus to economic growth is provided by the non-oil ma fagcturjg sector. This sector is projected to grow in excess of 9% p.a. during the 1990s, raising manufacturing's share of GDP to almost 22% by the year 2000. Given that the ongoing program of trade and industrial deregulation will enhance profitability in efficient export industries which are relatively labor intensive, manufacturing growth will also make an important contribution to employment growth. Agriculture will continue to increase by 3.5% p.a., the same pace as during the 1980s. The pattern of agricultural growth is likely to change gradually over this period. Increases in rice production, which made a major contribution to growth in both output and employment in the past, are likely to decelerate somewhat in the 1990s. Other activities, such as non-rice food crops, smallholder tree crops, and other non-food farm activities will grow more rapidly (especially on the Outer Islands). However, this pattern of agricultural development needs to be supported by policies that encourage farmers to raise their productivity and diversify their production within an efficient cropping system. This will involve bringing the pattern of input and output prices more closely in line with world prices, improving rural infrastructure, providing more responsive research and extension services, and reducing regulatory restrictions. There also exists substantial untapped potential for the development of agribusiness to increase value added of agricultural sector output. Although agriculture's share of GDP is expected to decline to about 16% by 2000, its role in employment creation will continue to be significant. Finally, the construction and services sectors will increase in line with overall economic activity during the 1990s. Infrastructure-based services, such as telecommunications, electricity and transport, will need to grow rapidly to avoid infrastructural bottlenecks which could slow growth in the industrial and agricultural sectors. Tourism, in response to recent deregulation measures and an intensive Government promotional campaign, will also increase rapidly during the 1990s. The contribution of the oil/LNG sector to the Indonesian economy is projected to gradually decline in the years ahead, although an increased pace of exploration activities, if successful, could lead to higher growth from this subsector, which would push GDP growth above the levels projected in the base scenario.1/ Implications for Employment and Sustained Poverty Reduction 2.25 During the 1990s, meeting the employment challenge and reducing further the incidence of poverty are central concerns of Indonesia's development strategy. There are three important aspects to the employment challenge in Indonesia: (i) the labor force is projected to grow very rapidly with an average of 2.4 million persons entering the labor market annually; (ii) open unemployment, which has traditionally been very low in Indonesia, is high among secondary and university graduates between the ages of 15 and 24, particularly in urban areas;2/ and (iii) the percentage of the labor force 1/ Oil exploration was very low in 1986 and 1987, and increased only slightly in 1988; however, exploration activities began to rise in 1989. Recently, there have been several major finds. 2/ The rate of unemployment in urban areas for persons between the ages of 15 and 24 was 22.5% and in rural areas, only 4.1%. These data can be compared with an economy-wide unemployment rate of 2.6%. - 35 - that is underemployed as measured by those working less than 35 hours per week was estimated at 42% in 1987.J/ Moreover, despite the substantial progress achieved during the 1980s, Indonesia needs to continue to make progress in reducing the incidence of poverty, as about 30 million persons remain below the absolute poverty line and a significant number of Indonesians, the "near poor", have incomes only slightly above the poverty line. The poverty problem is also characterized by considerable regional variation, with the prevalence of poverty relatively high in the eastern areas of Indonesia. The macroeconomic strategy outlined above is designed to enable Indonesia to address these employment and poverty challenges. 2.26 The projected pace and pattern of economic activity, coupled with complementary specific programs and policies, should allow Indonesia to absorb its expanding labor force at higher levels of productivity and income (see Table 2.7). While a strong agricultural sector will be essential to absorb a large proportion of the incremental labor force, the manufacturing sector will need to play a dynamic role in absorbing a much larger proportion of new employment than in the past. Again, this underlines the importance of expanding manufactured exports and maintaining the policies necessary to induce this expansion. The projected rate of growth of output and investment will also spur growth in the services sector. The experience of other countries in East Asia, such as Korea and Thailand, indicate that productivity in the service sector is closely linked to progress in industry and able 2.7: PROJECTED EXPANSION OF EMPLOYMENT AND LABOR PRODUCTIVITY 1990-2000 Annual Growth Rate Share in Average Labor Increment __ D.a) Employment Productivity (millions of Value (L . (R2-- millimi) persons) Added Employment 1990 2000 1990 2000 Agriculture 0.69 3.5 1.6 53.1 47.2 0.58 0.63 Manufacturing 0.67 9.4 6.5 9.8 13.9 2.44 2.79 Other services 1.08 6.6 3.3 37.1 38.9 1.45 1.66 Iotal non-212 2.4 i8fL 100.0 100.0 3 L1 La The projections of labor force and employment are based on the 1987 Labor Force Survey (SAKERNAS). GDP data are based on the revised national accounts series. Zk At 1983 prices. Source: World Bank staff estimates. / This figure may considerably overstate the true extent of underemployment, as the 1982 SUSENAS found that only a small proportion of those working less than 35 hours per week in rural areas indicated that they would be available for extra work. - 36 - agriculture. The projected level of economic activity is, therefore, likely to lead to improved earnings for workers currently engaged in low-wage activities, as well as generate additional productive employment opportunities in the sector. Continued deregulation in transportation and other services, as well as a strengthening of financial services, will be critical in this regard. Furthermore, the attitude of local governments towards service sector activities will also be important, as regulations and restrictions on informal traders and transportation could inhibit growth in services, which would have an adverse effect upon employment, particularly for the poor. 2.27 Achieving this pace and pattern of economic growth could also have a dramatic effect on the incidence of absolute poverty in Indonesia. Assuming that the elasticity of poverty reduction with respect to economic growth remains unchanged throughout the 1990s from its level during the 1976-87 period, the incidence of poverty would decline from about 17% in 1987 to 8lightlv less than 9% by the year 2000. As a result, the number of absQlute Roor in Indonesia in the year 2000 would be 20 million (the total population is estimated at 213 million in the year 2000). This would imply an absolute decline of about ten million persons from the 1987 level. 2.28 These projections are, however, illustrative. As the number of poor decline, the poor are becoming more concentrated in remote areas and in areas with less productive resource base.i, thus becoming harder to assist. Therefore, sustaining reductions in the incidence of poverty of these magnitudes will also require specific measures to improve labor absorption in the services sector, boost employment prospects in the Outer Islands (particularly the eastern part of Indonesia), and target public expenditures, especially in social and basic services and smallholder agricultural support services, into those areas of greatest potential benefit to the poor. Several principles will need to guide the introduction of these types of measures. First, over the long term, income and employment generating programs should be sustainable and direct income transfers are often not sustainable. Second, targeting is necessary to ensure that the programs actually reach the intended beneficia-ies, thereby minimizing the leakage of benefits to the less needy. And finally, these programs are likely to be most effective if they are an integral part of an overall development strategy. 2.29 In this regard, several measures could be considered by the Government.6/ First, providing the poor and underemployed with greater access to Indonesia's available land resources and improved agricultural technology can make an important contribution. In the Outer Islands, there is a substantial amount of underutilized and degraded land that could potentially be made available. Much of this land is suitable only for activities such as tree crops, which require a relatively high degree of infrastructure and inputs, including appropriate financing. Second, Central Government transfers to local governments are another vehicle to stimulate income-generating activities and employment particularly in poorer areas. The INPRES program is a potentially important instrument in this regard, and there may be scope for targeting these expendit-ires more effectively to poorer areas. In the 1990/9i budget, the Government made important steps in this direction through i/ A detailed formulation of a strategy for poverty reduction is contained in Indonesia: Poverty Assessment and Strategy Report, Chapter II, op.cit. - 37 - modifications in the allocation criteria for the general INPRES, but further action may be warranted. Finally, specific measures to increase employment and incomes also need to be supplemented by measures to target human resource development towards the poor. This would have both an investment effect, in the form of augmenting the human capital of the poor leading to increased productivity and incomes, and a consumption effect, by improving present welfare. This is true for the social services--health, education and nutrition--as well as other basic services--water supply, sanitation and related infrastructure--which directly affect living conditions and hence health status. Priorities for public expenditures in these areas are discussed in Chapter 4. Risks and Uncertainties in ProsRects 2.30 In general, Indonesia's medium-term prospects described in Table 2.3 could be adversely affected by three types of risks: (a) an undermining of financial stability through excessive expansion of the economy; (b) a slower pace of domestic reforms; and (c) a deterioration in the external environment. The Government's record on economic management, including ongoing reforms and the recognition by policymakers of the need to maintain macroeconomic stability because of Indonesia's high level of indebtedness, indicates that the risks from these sources are relatively low for Indonesia. The most significant risk arises from the external environment. Given its structure and openness, Indonesia is vulnerable to an array of external factors including oil prices, exchange rates, other commodity prices, world trade, and interest rates. The existence of these uncertainties underscores the need to sustain the momentum of policy reform, diversify sources of foreign exchange and fiscal revenues, build up reserves and maintain a prudent external borrowing strategy. 2.31 Policy reforms and financial stability. Indonesia's economic prospects, particularly in the near term, are sensitive to assumptions concerning the performance of non-oil exports and public resource mobilization. The scenario presented above assumed continued policy reforms in trade and industry and further strengthening of the financial sector. An alternative scenario, without adequate policy improvements, would result in slower non-oil export growth. Moreover, without an appropriate incentive framework, private sector investment could be channelled into areas which are not economically viable over the medium term. Similarly, without determined efforts to increase public resource mobilization, the Government will not be able to finance the required investments in infrastructure without a deterioration in the fiscal balance. In the near term, these factors could undermine financial stability, which in turn, could result in slower per capita consumption growth, stagnant labor incomes, and inadequate progress on poverty reduction. Over the longer term, the growth prospects of the economy will be adversely affected, as there would be interruptions in the building of infrastructure and the establishment of non-oil export capacity. However, as long as the existing programs of reform are producing the kinds of positive results in exports and growth seen to date, there is little reason to expect a weakening in the Government's commitment to policy reform. Through continued implementation of structural reforms, a buoyant level of economic growth can be sustained, while financial stability is preserved and further progress is made towards poverty reduction. - 38 - 2.32 Adverse external environment. A number of uncertainties cloud the outlook for the external environment. Sustained policy changes are required in industrialized countries to reduce existing macroeconomics imbalances and contain growing inflationary pressures. Without these policy actions, the 1990s could be characterized by slower economic growth, higher real interest rates and increased protectionism. Moreover, there are some downside risks in oil price projections, stemming from higher OPEC production. This could lead to a larger decline of oil prices in 1990/91 than envisaged in the base case scenario. To a limited extent, a loss of resources can be offset by drawing on the country's external reserves and pipeline of commercial credits. But, in the event of an unexpected major external shock, it would be important to move quickly to ensure that the current account deficit remains within manageable limits. This would require an acceleration of economic reform, as well as renewed stabilization efforts. A depreciation of the real exchange rate and tightening of monetary and fiscal policies would need to be accompanied by additional measures to improve competitiveness and promote investment in the non-oil tradeable sector. In the short term, economic growth would be lower than projected. However, growth would recover over the medium terse supported by accelerated economic reforms. Under such circumstances it would be important that the donor community stand ready to support the Government's efforts with additional fast-disbursing assistance as needed, to smooth out the adjustment process. Indonesia's exposure to external shocks arising from fluctuations in oil prices and the availability of external finance, will diminish over the longer term, as the structure of the economy continues to shift away from dependency on oil. Thus, the nature of country risks will shift towards growth trends in industrial countries and access to export markets. This highlights the need to sustain progress in the reform of trade and industrial sector policies and in the strengthening of the financial sector, in order to diversify Indonesia's exports and import markets. D. Public Resource Mobilization 2.33 As noted in Section C, the importance of public resource mobilization lies in the need to improve the fiscal balance (in order to maintain macroeconomic stability), and increase expenditures in certain priority areas such as physical infrastructure (to promote private sector development) and basic services (to help reduce the incidence of poverty). While a reallocation of expenditures towards higher priority areas can help, the scope for cutbacks in total expenditure is limited. The Government has generally maintained a cautious approach to public expenditures and the level of government spending in Indonesia remains broadly comparable to other Asian countries (see Table 2.8). 2.34 Despite the substantial progress made in resource mobilization over the past five years, particularly in 1989, Indonesia's tax effort still remains below that of other countries in the region, and there is room for further improvement. Therefore, the goal of raising public savings will need to be achieved largely through additional public resource mobilization. Greater public resource mobilization will primarily involve increasing non- oil tax revenues. In addition, strengthening local government finances, increasing the efficiency of public enterprises, and improving cost recovery - 39 - from public services will also be important. The rest of this section reviews issues pertaining to the Central Government's non-oil tax effort and local government finances. Public enterprise finance and cost recovery issues are discussed in Chapter 4. Table 2.8: GOVERNMENT EXPENDITURE AND TAX EFFORT IN SELECTED ASIAN COUNTRIES, 1983-1988 La (% of GDP) Expenditure Ratio /b Tax Ratio Lc 1983 1985 1987 1988 1983 1985 1987 1988 ASEAN Region Korea 17.5 17.7 17.0 n.a. 16.7 16.0 15.3 n.a. Malaysia 40.3 35.1 35.0 n.a. 19.7 17.0 13.1 n.a. Thailand 19.3 20.5 18.0 17.1 14.6 14.7 14.9 16.2 Philippines 13.6 13.6 16.1 16.0 10.4 10.0 12.1 11.1 Indonesia Ld 21.2 21.8 19.0 18.7 7.1 8.2 8.8 10.1 Other Asia Pakistan 19.5 19.6 21.8 26.2 12.9 12.2 13.2 13.6 India 17.8 20.8 21.0 16.1 7.5 8.1 8.4 8.5 Bangladesh 19.1 17.3 19.1 17.7 6.7 7.1 7.0 7.0 L Central Government only. b Excludes amortization payments. La Excludes petroleum revenues. A Non-oil taxes expressed as a percentage of non-oil GDP. Source: World Bank Country Economic Reports and International Financial Statistics, IMF. Central Government's Non-oil Tax Effort 2.35 The Government has recognized the importance of mobilizing non-oil tax revenues, and has already undertaken significant measures to improve performance. Based on a major tax reform in 1984-86, and subsequent improvements in tax administration, non-oil taxes of the Central Government were boosted from 7% of non-oil GDP in 1983/84 to 11% in 1989/90 (see Table 2.9). In raising these revenues, care has been taken to minimize the distortions and disincentives resulting from taxation. For example, the tax reform focussed on income and value added taxes rather than on international trade taxes; the tax system was greatly simplified with relatively low marginal rates; and the reform program removed most special tax incentives. The non-oil tax drive w&s further intensified in 1989/90, by extending the VAT coverage to the wholesale level and to most services, increasing the number of items in the luxury tax category and their rates, and strengthening audits for income taxes. These changes have led to a significant shift in the composition of non-oil taxes during the 1980s. - 40 - Table 2.9: INDONESIA'S TAX NON-OIL STRUCTURE, 1981/82-2000/01 (% of total non-oil taxes) Before Reform After Reform Projected 1981/82 1988/89 1989/90 1990/91 1995/96 2000/01 Income and property taxes 45.3 36.7 39.4 40.7 43.1 46.2 Value-added tax 16.4 La 37.8 37.8 36.3 35.7 35.1 International trade taxes 20.5 11.3 11.4 11.5 11.6 9.2 Excise Tax 16.8 11.7 9.6 9.9 8.1 7.9 Miscellaneous 1.0 2.5 1.8 1.7 1.6 1.6 Memo item: Non-oil taxes (% GDP) 5.5 8.2 9.4 9.7 11.8 12.0 Non-oil taxes (% of non-oil GDP) 7.2 10.1 11.3 11.6 13.4 13.1 a& Refers to sales tax prior to reform. Source: Ministry of Finance and World Bank staff estimates. 2.36 Given that the current tax rates and structure are broadly in line with the efficiency and equity aims of the tax reform, efforts to increase non-oil taxes in the near term need to be focussed on further improvements in tax administration, particularly in the area of income and property taxes, and the VAT. These improvements will be essential to realize the budget target of increasing the tax ratio by half a percent of non-oil GDP in 1990/91 and to make progress towards the goal of raising non-oil taxes to 13-14% of non-oil GDP by 1995/96. 2.37 Tax administratio. The Government has made progress towards improving tax administration in three key areas: (i) an increase in tax registration and compliance; (ii) an improvement in the tax audit effort; and (iii) a reorganization of the Tax Directorate. Several steps have been taken to improve tax registration and compliance. First, a tax registration campaign that aims to disseminate information to the public has been sustained since 1986. Second, the number of taxpayer offices has been raised from 69 in 1983/84 to 120. Third, the Government has implemented measures to improve its information base at the district level in order to increase the number of registered taxpayers. These efforts are being reinforced through a cross- checking system: telephone and electricity bills are required to carry a taxpayer's identification number in order to identify potential taxpayers; trade and industry data are used to identify companies; and for the VAT, a cross-checking system between buyers and sellers to verify claims for refunds is being planned. The Government's enforcement efforts have also been intensified. A payment control system which computerizes all incoming payments and shows individual taxpayer's liabilities at any point in time has been set up in five districts of Jakarta. The system allows precise - 41 - monitoring of tax payments due, and facilitates a systematic follow-up in cases of non-compliance. The Government plans to extend this system throughout Jakarta by 1991. In addition, implementation of penalty measures for non-compliance has been strengthened, including the confiscation of corporate property. As a result of these initiatives, there has been some improvement in tax compliance (see Table 2.10). Table 2.10: TAX COMPLIANCE INDICATORS, 1983-89 Ls No. of Registered TaxMayers Filing Ratio /b 1983 1987 1988 1989 1987 1988 -- - (000s8) ----- Personal Income Tax /£ 327.5 674.5 703.1 780.3 64.0 72.8 Corporate Income Tax 83.6 178.1 191.8 210.1 43.8 57.4 Value Added Tax (VAT) n.a 80.4 86.0 133.1 42.0 43.9 La End of year figures. Lh Ratio of filed returns to number of registered taxpayers. Le Excludes personal income taxpayers on whose behalf personal income tax was withheld and the withholding represented the final tax liability. Source: Ministry of Finance. 2.38 A second area of improvement in tax administration has been the enhancement of the tax audit effort, especially for corporate income taxes. Although direct evidence on the additional revenue from this audit effort is not available, the expected revenue outcome from income taxes in 1989/90, much in excess of the growth of non-oil GDP, suggests that the audit effort is having a noticeable effect. 2.39 Finally in 1989/90, the Tax Directorate was reorganized along functional lines. Under the new organization, audit and enforcement functions have been taken out of the district level offices and centralized in the Tax Directorate. By separating operations, evaluation and enforcement functions, the reorganization aims at clearly defining areas of management responsibility, enhancing the expertise of both staff and management in their trained areas, and simplifying communications. The implementation of the reorganization has proceeded well at the management level, but there is a need to strengthen the delivery of services at the district level. 2.40 These are notable achievements and maintaining this effort will be essential. A key priority is to strengthen the audit effort especially for corporate and personal income taxes, as well as for the VAT. The Government's recent steps to establish audit offices at the district level, introduce a comprehensive audit selection mechanism, and increase the number of trained auditors to 1,000 are important indicators of progress. Nevertheless, a strengthening of the institutional capacity to undertake systematic and comprehensive audits is essential. Since the supply of auditors is still significantly below that required, adequate budgetary support for training, both through the foreign and national training programs, needs to be provided. - 42 - Some modification of the job rotation policy, which allows tax auditors to be assigned to non-auditing duties is also required. One possibility is to limit rotations to similar functional duties. The scope of the audit effort, which has focussed on income taxes needs to be extended to the VAT. The Government is planning to address this problem by issuing new directives that will require VAT taxpayers to report their cumulative tax liabili%iy along with their monthly obligations. Total VAT paid will then be reflected in the monthly return filed at the end of the fiscal year, providing a basis for yearly audits. 2.41 Despite the progress in increasing personal income tax compliance, the amount of revenue remains below potential mainly because the number of registered taxpayers (including those for whom tax is withheld) is significantly below potential. At present, urban wage earners in the organized sector constitute the bulk of income taxpayers. The recent decision to raise the family level exemption from Rp.2.9 million to Rp.4.3 million will result in a reduction in the number of wage earners who pay withholding tax. Income tax collection will, therefore, fall unless there is a corresponding effort to increase the number of self-employed taxpayers, raise the filing ratio, and strengthen income tax audits. Similarly, tax compliance for corporate and value added taxes needs to be improved. Effective implementation of the registration drive described above will be a major determinant of this progress. Auiother prerequisite for achieving these improvements in tax compliance is the systematic application of legal sanctions for tax evasion. More extensive use of the confiscation of property and stiffer penalties, along with more vigorous monitoring of tax compliance, could help improve non-oil tax performance. 2.42 Finally, the effectiveness of the reorganization of the Tax Directorate could be improved by streamlining operations at the district level. At present, a key aspect of the work at the district level is to prepare reports for management review. As progress in implementing the payments control system is made, the reporting function is becoming much less useful. Similarly, the guidelines for report preparation are not well defined, resulting in excessive reporting. These examples illustrate the need for setting priorities and presenting clear guidelines for district level offices. At the same time, quality of staff, especially at the district level, remains a major concern. There is a clear need to strengthen the training effort along with progress in streamlining the district level functions. 2.43 While the priority for the next 2-3 years is to continue efforts to improve tax administration, there may be a need to consider some increases in the tax rates or base over the medium term. One option for consideration is extension of the VAT to the retail level. Experience with extension of the VAT to the wholesale level suggests that a strengthening of the administrative capacity would be an important prerequisite for implementing this measure. Strengthening Local Government Finances 2.44 Local governments are playing an increasingly larger role in the implementation of public expenditure programs, and the Central Government intends to continue to devolve responsibility over the medium term. However, resource mobilization by local governments has not been commensurate with - 43 - these trends despite the constraints on the Central Government budget. To support the decentralization policy as well as to increase available resources, there is a need to strengthen the reaource mobilization efforts of local governments. 2.45 The major source of revenue available to the local government is the land and building tax (PBB) introduced in 1986 as a replacement for the old land tax (IPEDA) and the net wealth tax (PPK). In line with the tax reform, it aimed to broaden the local government's tax base and simplify tax administration. The property tax is also a potentially important tool for promoting equity through fiscal policy. Under the PBB, a flat rate of 0.5% tax is imposed on the market value of land and buildings. Since the official assessment ratio is 20% of the market value, the present effective tax rate is 0.1%. Additional revenues from the PBB can, therefore, be raised through an increase in the official assessment ratio as well as through an increase in the market valuation of the property. The Government's present focus, appropriately, has been on establishing a valuation standard for properties and on improving staff training in property valuation. Two pilot programs have been initiated: one to revalue urban properties and increase the registration of properties in three pilot cities; and a second to introduce a new payments system in Tangerang. This new payment system is expected to be extended to 12 other cities over the next two years. The Government is also working to strengthen its enforcement efforts, and penalties for non- compliance are now being applied, including the confiscation of properties. 2.46 Although revenues from property taxes have grovwi significantly from Rp.190 billion in 1985/86 to Rp.590 billion in 1989/90, revenue yields in relation to the potential, remain very low. The Government intends to step up its effort in this area, by extending the pilot schemes to other parts of the country. Over the medium term, however, the full potential of the property tax will be realized if, in conjunction with measures to improve tax administration, the effective tax rate on property is increased. 2.47 Other existing local taxes have smaller revenue potentials and administrative efficiency can be improved by eliminating those taxes that result in higher collection costs than revenue. At the same time, some broadening of the tax base may also be required. The Government is currently preparing draft legislation to improve local taxes. The speedy finalization and implementation of this legislation will be an important step in improving the finances of local governments. Local Government Borrowing 2.48 So far, local borrowing has been confined to small loan schemes that are sponsored by the Central Government for specific projects. Recognizing the potential of the borrowing option as a means to ease the dependence of local governments on central government resources, a special fund, known as Regional Development Account (RDA), is being established under the management of the Ministry of Finance. This revolving fund would consolidate the existing channels of loans for urban infrastructure investments. The objectives of the RDA are to help: (i) rationalize the existing complex and fragmented pattern of regional government loan financing through a uniform set of audit and financial policies with independent analysis and monitoring; (ii) provide access to credit on market or near-market terms to local . 44 - governments with a capacity to service debt, and thereby strengthen the financial and economic viability of projects at the local level; and (iii) encourage local governments and enterprises to establish service charges on an increasingly cost-recovery basis, and thereby enable available grants to be targeted at the poorest regions. To realize the potential benefits of the RDA, care will need to be exercised to ensure that it starts on a sound basis along the lines of the objectives stated above. Thus, the long-term viability of this fund would depend on the consistent application of realistic market- based interest rates, project appraisal based on standard criteria, appropriate cost recovery measures, and appropriate procedures to enforce repayment. The ability of the RDA to provide technical assistance aimed at strengthening the capacities and responsibilities of the local governments would also be important in ensuring its effectiveness. E. External Borrowing and Debt Management 2.49 Projections of Indonesia's external capital requirements and sources are based on the macroeconomic scenario presented in Section C (see Table 2.11). Although the current account deficit (as a percentage of GDP) table 2.11: EXTERNAL CAPITAL REQUIREMENTS AND SOURCES (annual averages in US$ billion) Actual Projected 1987/88- 1990/91- 1992/93- 1996/97- 1989/90 1991/92 1995/96 2000/01 Reauirements 6.8 g.0 10.5 12.6 Current account deficit 1.7 1.9 2.0 2.3 (of which interest payments) 3.0 3.3 3.5 4.3 Principal repayments 5.2 5.9 6.6 7.8 Increase in net foreign assets -0.1 1.2 1.9 2.5 Sources 6.8 9.0 10.5 12.6 Direct foreign investment 0.4 0.9 1.3 2.0 Disbursement of private MLT loans 1.0 1.9 2.5 3.5 Short-term and other capital (net) /a -1.0 0.0 0.0 0.0 Disbursements of public MLT loans 6.4 6.3 6.7 7.1 of which: Project aid 2.6 3.1 4.2 4.4 Special assistance /b 1.6 0.7 0.0 0.0 Others jL. 2.2 2.5 2.5 2.7 ja Includes errors and omissions, and valuation adjustments. 1k Fast-disbursing program aid and local-cost financing. /c Import-related credits, untied commercial credits, and credits for LNG expansion, LPG and paraxylene projects. Source: World Bank staff estimates. - 45 - declines steadily after 1990/91, the current account deficit is projected to rise slightly in absolute terms during the 1990s, reflecting higher growth than projected last year. Moreover, once allowance is made for rising debt service requirements (both interest and principal repayments) and the need to build up adequate reserves (in relation to the growing import requirements), the annual financing requirement is projected to continue rising, averaging US$9.0 billion in 1990/91 and 1991/92, about 32% higher than in the 1987/88- 89/90 period. 2.50 An important change in the source of this financing is likely to occur during the 1990s, as an increasing share of this financing requirement is expected to be provided through 2rivrate non-guaranteed capital flows--in the form of direct foreign investment and disbursements of private MLT loans. This change reflects the growing importance of the private sector in Indonesia's economy as a result of the ongoing regulatory reform and the non- oil export response. The potential strength of private capital inflows is reflected in the recent surge in private sector investment and in particular, foreign investment. Based upon this trend, the macroeconomic projections assume that private capital flows total about US$6.0 billion during 1988/89- 91/92, with US$2 billion in direct foreign investment and US$4 billion in private non-guaranteed debt._/ This is a significant increase over the levels realized during the 1980s. Over the medium term, private non-guaranteed debt and direct foreign investment are assumed to grow rapidly in line with expectations regarding future investment trends. 2.51 These levels of private capital flows have two important implications for Indonesia's macroeconomic situation in the 1990s. First, rapid progress on removing the remaining distortions in the policy environment is critical, in order to ensure that these capital flows are being used to finance economically viable and export-oriented projects. This is important because if some projects encounter debt servicing difficulties, the access to foreign loans of other private sector borrowers could be adversely affected. Second, the investment activities of state enterprises in joint ventures with the private sector need to be closely supervised, as foreign borrowing under these arrangements could develop into public sector liabilities. The existing guidelines that apply to the external borrowings of state enterprises need to be applied rigorously to all joint ventures with the private sector, regardless of the Government's equity position. 2.52 Despite the increasing importance of private capital flows, the lion's share of Indonesia's external financing requirements will have to be met by disbursements of public MLT loans over the next two y-ars. About half of these disbursements are expected to come from existing commitments. The outstanding balance of undisbursed commitments has declined relative to previous years, because of lower project aid commitments and higher >/ These flows are estimatea from data collected by Bank Indonesia on the planned financing of foreign investment which indicate that about 22% is in the form of foreign equity, 67% in foreign debt and the remainder from domestic sources. - 46 - commitments of special assistance. With some improvements in project implementation performance, pipeline disbursements are projected to average about US$2.1 billion p.a. over the next two years. In aggregate, the financing requirement could be met with annual commitments of public loans and grants averaging US$6.5 billion during 1990/91-1991/92. About 70% of these commitments are projected to be official assistance, primarily from the IGGI. Over the longer term, the composition of public borrowing shifts gradually toward import-related and untied commercial credits.fi/ 2.53 The case for special assistance, in the form of fast-disbursing program aid and local-cost financing, was presented in the last three Economic Reports and endorsed at the subsequent IGGI meetings. Special assistance has been intended to provide temporary support to Indonesia while it implemented policies to adjust the balance of payments and the budget to external shocks, such as lower oil prices and adverse exchange rate movements, while removing trade and investment restrictions. The response from IGGI members has been substantial, with disbursements of special assistance totalling US$5.4 billion over the past three years. This assistance has played a valuable role in helping the Government push ahead with its deregulation measures, in facilitating the recovery of economic activity and in sustaining the momentum of poverty reduction. It has also enabled Indonesia to restructure its external debt, improving the average maturity and term structure, while maintaining financial market and investor confidence in its adjustment program. The balance of payments projections presented in Section C indicate that the requirement for new commitments of special assistance will total US$1.2 billion for 1990/91, a significant decline from the level pledged for 1989/90. There are two important elements of the justification for this level of special assistance. First, there is a need to support the Government's ongoing program of reforms of trade, industry and financial policies, especially in the context of the rapid growth of imports associated with the non-oil export and investment boom resulting from these reforms. Second, there is a strong case for the need to maintain the level of official reserves in the near term in order to provide 'ndonesia with the flexibility required to respond to external shocks, especially given Indonesia's open capital account. In line with the anticipated improvement in Indonesia's balance of' payments position and the favorable external outlook, particularly in the oil market, our current projections assume that commitments of special assistance could be phased out by the end of 1990/91; however, in the event that macroeconomic developments, and especially the external environment, are less favorable than assumed in the projections, the phasing out would need to be more gradual. The donor community should be prepared to respond flexibly in this event. This will be important for enabling Indonesia to move ahead with confidence in trade and other regulatory reforms. 2.54 The level of project aid commitments recovered in 1989/90 from the levelling off in previous years. An important shift in the composition of project aid towards faster disbursing, sector-based operations often including local-cost financing is also occurring. As special assistance declines there i/ Also as a result of the changing composition of public commitments; and the increasing role of private capital flows, the share of IGGI assistance in total sources of external capital falls from 47% in 1989 to 35% in 2000. - 47 - will be a need for this shift to continue as the level of project assistance rises. This type of assistance will continue to have a high priority for a number of years due to the need for financial support of structural reforms in some sectors and major sector investmert needs. Moreover, as economic activity and investment levels pick up, there will also be increased scope for specific projects to expand capacity. Total commitments of project aid are therefore projected to rise rapidly in the next year, from US$3.4 billion in 1989/90 to US$3.8 billion in 1990/91. As discussed in Chapter 4, public investments need to be focussed on two areas: Investments in infrastructure and human resource development to support higher economic growth; and, investments in social and basic services to reduce further the incidence of poverty. Donors need to work closely with BAPPENAS to develop a pipeline of projects in these areas. In addition, given the increasing role projected for private investment, it will be important to strengthen mechanisms to channel aid-financed funds to the private sector, such as two-step loans and financial sector operations. 2.55 As in the past, a portion of the projected requirements for special assistance and project aid is expected to be provided outside the IGGI. However, these amounts are declining rapidly, as the extraordinary financing provided by some donors is phased out. Allowing for this trend, it is recommended that the level of IGGI assistance to Inxdonesia in 1990/91 be UISS4.5 billion, slightly higher than pledged for last year. While this represents a modest increase in total assistance, it implies a significant rise in project and sector assistance because of the US$600 million decline in special assistance. Through the mid-1990s, the requirement for new commitments from the IGGI is projected to remain high, but decline in relative importance as private capital flows increase. 2.56 Indonesia has reduced its reliance on imnort-related credits in recent years. This trend reflects the Government's decision to reduce public investment in large capital-intensive projects and to place strict limits on the use of non-concessional credit under Presidential Instruction No. 8 of 1984. The projections presented in Section C assume that new commitments of import-related credits rise over the madium term, reflecting the emergence of opportunities for new investments. However, as in the past, it will be important to review these proposals carefully, to ensure that the projects warrant priority in the public investment program and that the financing arrangements are appropriate. Disbursements of untied commercial credits, which declined during the adjustment period, were about US$900 million (excluding disbursements for prepayments) during 1989/90.2/ During 1990/91, new commitments are assumed to total only about US$700 million, implying a further decline in Indonesia's exposure to commercial banks. Over the medium term as Indonesia's external debt burden eases, greater use of commercial credits is anticipated, especially since these credits are untied and therefore, can be used more flexibly than import-related credits. 2/ Indonesia's pipeline of undisbursed syndicated loans totalled about US$1.8 billion at end 1989/90, a US$0.2 billion decline from the previous year. - 48 - Imolications for External DLebt Management 2.57 With the borrowing strategy outlined above, the growth of Indonesia'4 external debt will slow over the next few years. Medium- and long-term (MLT) public and private external debt disbursed and outstanding (DOD) is projected to rise from US$48.3 billion at end-1989 to US$49.2 billion at end-1990, an increase of about 2%. Reflecting the increasing levels of foreign investment activity in Indonesia, private non-guaranteed debt continues to rise, with the private debt/GNP ratio rising from 5.3% in 1987 to about 6.3% in 1995. The private debt/export ratio also rises until 1994, but then declines through 2000, due to the growth in non-oil exports generated by these investments. Since most of the increase in borrowing over the past several years has been in the form of official assistance, there has been a significant improvement in the overall maturity and term structure of external public debt. Combined with the projected improvement in economic performance, these trends lead to a substantial improvement in all of the key debt indicators. The ratios of DOD to GNP and exports have been falling since 1987, and these trends are projected to continue throughout the 1990s (see Table 2.12). Similarly, the total MLT debt service ratio is expected to decline from a peak of 38.0% in 1986 to 33.0% in 1990 and to 21.8% by 1995. Table 2.12: MEDIUM- AND LONG-TERM DEBT INDICATORS, 1987-2000 (%) Actual Projected la 1987 1988 1989 1990 1995 2000 DODiGYPb 66.7 61.0 54.7 52.3 43.6 33.2 Public 60.9 55.7 49.4 48.0 37.3 27.6 Private 5.8 5.3 5.3 4.3 6.3 5.6 DOD/eorts k 239.6 218.6 189.0 177.6 130.7 99.7 Public 218.8 199.5 170.9 163.0 111.9 82.6 Private 20.8 19.1 18.1 14.6 18.8 17.1 Debt service/ex&oorts / 35.5 36.1 32.1 33.0 21.8 16.8 Public 30.3 30.7 26.9 27.1 15.7 11.5 Private 5.2 5.4 5.2 5.9 6.1 5.3 Interest/exoorts b 14.4 13.9 12.2 11.8 7.8 5.8 Public 12.6 12.1 10.5 10.0 6.2 4.4 Private 1.8 1.8 1.7 1.8 1.6 1.4 La Based on exchange rates of December 31, 1989. / Denominator is gross exports of goods and services. /c Debt service excludes prepayments. Source: Bank Indonesia aud World Bank staff estimates. - 49 - 2.58 The Government continues to handle the administration of its external debt payments in an efficient manner, with no significant errors or delays. However, two areas of debt management require attention. The first priority is to establish a unified debt reporting and analysis system, which can provide up-to-date and comprehensive information to policymakers on the status of Indonesia's public external debt. This information could help to guide the Government's overall borrowing strategy. Second, as our estimates indicated that private sector debt is increasing rapidly, there is a need to develop an information base on private non-guaranteed debt in a way which does not impede individual transactions. Timely information on private debt flows can make a positive contribution to debt management. - 51 - CHAPTER 3 EFFICIENT PRIVATE SECTOR DEVELOPMENT A. Introduction 3.01 Since the mid-1980s, the Government has encouraged the private sector to play a more important role in the economy. The need to reduce the economy's dependence on oil and to tap the dynamic potential of the private sector, provided the impetus for regulatory reform in Indonesia. This reform has complemented the successful stabilization of the economy through macroeconomic policies and has provided a policy framework that has facilitated a strong supply response. It has sought to re-orient the economy to a more outward-looking growth strategy and lower barriers to entry and competition in the domestic market. The Government has also adopted major financial sector reforms to promote the efficiency of financial intermediation and the development of capital markets. In support of the reform strategy, public expenditure has become focussed on the provision of physical infrastructure and improving human resource development. Extensive deregulatory measures have been undertaken to improve port and customs operations and the efficiency of shipping services, which were earlier a major impediment to trade. 3.02 The private sector has responded to the challenge. Private investment has recovered in response to the improved incentive and regulatory environument. Approvals for both domestic and foreign investment issued by the Investment Coordinating Board (BKPM) have surged. Much of the new investment has been directed towards labor-intensive manufacturing for exports and average rates of return on investment and total factor productivity have increased. The pattern of investment has facilitated the striking growth of non-oil exports, which have increased almost threefold over the past six years to reach about US$14 billion in 1989/90. As a result, the share of non-oil exports in total exports rose from 21% in 1982/83 to 61% in 1988/89. It is encouraging that the strongest growth in non-oil exports has been across a wide range of products in the 'other' manufactured goods category. The response of a bi ad range of firms exporting a wide variety of products is suggestive of expanding opportunities for smaller entrepreneurs. 3.03 So far the manufacturing sector has been the primary target of trade and regulatory reforms. Consequently, the effects of reform are most evident in this sector. The manufacturing sector has grown strongly at over 11% during 1989 and now accounts for 14.3% of GDP. Growth has facilitated structural adjustment within industry as a broad range of export activities have expanded at a much faster pace than production of import competing goods. Employment opportunities have expanded as resources have shifted towards those labor intensive activities in which Indonesia is internationally competitive. Growth in manufacturing employment has been associated with increased real wages and absorption of large numbers of women and unskilled labor into the industrial work force. This has been an important factor in ensuring the success of Indonesia's adjustment program and has also played a part in the - 52 - reduction of poverty in the 1980s. One impressive example of the widening opportunities for indigenous entrepreneurs is shown by the 'Bali experience' as described in Box 3.1. 3.04 The agriculture sector, by contrast, has seen little reform of trade and domestic regulation. Nevertheless, the sector profited from the maintenance of a competitive exchange rate and the introduction of improved technology, and was thus able to grow steadily at about 4% p.a. in the 1980s. This growth led to an expansion in agricultural employment of 2.3% p.a. and helped reduce considerably the incidence of poverty in the sector. Although the food crop subsector will continue to be the main source of agricultural output and employment in the 1990s, non-food activities will need to provide the bulk of incremental output and employment in the future. In addition, there appears to be potential for agro-industry to increase value added of agricultural sector output. Trade and regulatory reforms in agriculture and agro-industry will help these sectors maintain solid growth in the 1990s. 3.05 While the increase in private sector activity is encouraging, the barriers remaining in the trade regime need to be lowered quickly to ensure that new investment is channelled into areas where Indonesia has a clear comparative advantage and to accelerate the implementation of investment plans. This argues for a rapid pace of reform. Continued strong growth will facilitate adjustment to further changes in incentives by quickly absorbing displaced labor, capital and managerial resources. Policy options for improvements in trade policy, domestic incentives and regulations, the financial sector and transport will be discussed in the subsequent sections. This is followed by a section or the environment, which covers important issues of land and water use and pollution. To maintain private sector growth while safeguarding public health it will be vital to manage carefully the natural resource base. This section discusses the main challenges for the year ahead in developing institutional arrangements that will ensure that land and water resources are managed efficiently. B. Trade Policy The Chaneing Pattern of Price Incentives 3.06 Since the mid-1980s, the Government has embarked on a series of trade and deregulation measures to improve the international competitiveness of domestic production. These measures supported demand management policies in reducing macroeconomic imbalances and enabled a recovery of economic growth. To restore balance of payments stability and sustain growth over the medium term the Government adopted an active exchange rate policy. Significant real exchange rate depreciations between 1981 and 1988 played a key role in boosting non-oil exports and reducing the current account deficit. A central component of economic strategy has been trade reform. Between 1985-89, four major policy packages were introduced, addressing three principal areas: (a) non-tariff barriers (NTBs); (b) tariffs; and (c) duty free inputs for exporters. - 53 - Box 3.1: Garments from Bali: Export Success Garment producers in Bali have established a marketing niche in sales to high fashion stores in Europe and the United States. This market niche has developed from a modest start involving sales of simple clothing to tourists in the 1970s, to an $80 million export business employing 45,000 workers in 1989. Exporters in Bali are successfully competing in a market characterized by small orders made to exacting fashion designs with rapid turnaround times. The industry that has evolved in Bali has provided decentralized employment based on labor- intensive production techniques. It has provided opportunities for indigenous entrepreneurs and much of the production has been sub- contracted to workers in rural villages. Moreover, women form most of the workforce. Most of the raw materials used are produced in Indonesia. The industry has developed within a relatively open regulatory framework as there have been few restrictions on entry and exit. Also most of the training of workers has been undertaken 'in house'. The origins and growth of the garment industry can be traced to the interaction between local retailers/tailors and individual foreign entrepreneurs. Thus, one impetus for development came from the availability of information about overseas markets, production techniques and marketing skills from foreign visitors. Because Bali was targeted for tourism, immigration controls were, for the most part, flexibly administered which facilitated the operation of foreign buyer- consultants. However, the industry has by no means become dominated by foreigners. In fact through a process of learning-by-doing, local firms have become increasingly adept at solving their own production problems. Thus, foreign entrepreneurs have played the role of catalysts for development. From the viewpoint of this report, the Bali experience shows how the private sector can achieve desirable social objectives if it is allowed to operate in a relatively open regulatory framework. In this case foreign buyer-consultants were afforded an opportunity to work with local entrepreneurs and entry into and out of the industry was unconstrained. The result has been an impressive development of the garment industry with linkages extending to the textiles and other sectors and worthwhile employment for rural labor. 3.07 Non tariff barriers. By 1986 NTBs were the most important distortion in the trade regime, contributing not only to the high level and variability of protection but also fostering unproductive 'rent-seeking' behavior. At that time, there were more than 1,700 tariff items under NTBs, covering over 40% of total import value and about the same proportion of domestic production. - 54 . 3.08 Since then the incidence of NTBs has been reduced through a series of trade reform packages. The cumulative impact of the trade reform packages is shown in Table 3.1. In brief, these measures resulted in the removal of 839 items from license control, which halved the total import value previously restricted. More importantly, the share of total domestic production protected by import licensing restrictions declined by about a third, from 41% to 29%. The reduction in NTBs has been concentrated in the manufacturing sector, where both nominal and effective rates of protection are highest. The share of domestic manufacturing production covered by NTBs declined from 68% in 1986 to 45% in 1988. Nevertheless, substantial scope remains to reduce further the protective impact of these NTBs. Table 3.1: IMPACT OF REFORM PACKAGES ON IMPORT LICENSING COVERAGE SINCE 1986 Mid-1986 End-1987 End-1988 % of CCCN items 31.5 21.7 16.3 % of import value 42.9 25.2 20.8 % of total domestic production 41.4 37.6 28.9 Memo item: % of domestic production in: /a Manufacturing 67.7 58.1 44.5 Agriculture 53.8 52.9 40.9 Mining and minerals 0.2 0.2 0.2 /a The estimates of domestic production under import license protection for manufacturing and agriculture differ from earlier Bank staff estimates due to the reclassification of the food and beverages industry into the manufacturing sector and out of the agricultural sector. Source: World Bank staff estimates. 3.09 The removal of NTBs has had three beneficial effects on the pattern of incentives. First, the move towards tariff-only protection has greatly increased the transparency of the trade regime. Second, the price of imports relative to the price of exports has fallen since 1986. At least part of this decline reflects the removal of restrictive import licensing requirements. Third, domestic users of the deregulated imports have benefited not only from lower prices but also from more certain delivery times and improved quality. Such 'non-price' factors are crucial for export production and encourage domestic producers of inputs to become more cost and quality conscious. 3.10 Tariffs. The various reforms of the Indonesian tariff schedule have resulted in a marked decline in the average weighted tariff from 22% to 12% by import value or from 29% to 19% by domestic production value (see Table 3.2). However, the introduction of surcharges and splits has eroded some of the gains. Surcharges have been imposed both as additional protection to products moved off NTBs and as a de facto anti-dumping measure. Surcharges have created an easy mechanism by which additional protection can be granted - 55 - domestic producers and does not constitute an appropriate anti-dumping mechanism. The introduction of split-tariff positions has involved the sub- division of the tariff schedule into ever finer product descriptions. These have been used to tailor protection for specific products. Table 3.2: CHANGES IN THE IMPORT TARIFF SCHEDULE FOR THE WHOLE ECONOMY SINCE 1985 LA Pre-1985 1985 1988 1989 Average Tariff Rates (%) Unweighted 37.3 27.0 24.0 27.0 Weighted - by import value 22.0 13.0 14.5 12.0 - by domestic production 1k 29.0 19.0 18.0 19.0 Index of Dispersion X 61.5 107.8 90.0 92.7 La "Pre-1985" refers to the 1983 Tariff Law in effect from 1983 to 1985; 1985 reflects rates in effect after the 1985 reform; 1988 refers to rates in effect after the November 1988 package; and 1989 refers to the Harmonized System as provided by the Department of Finance in mid-1989. Tariffs are inclusive of surcharges. Specific duties have been converted to ad valorem equivalents. /_ Based on a sample of 1,200 tariff positions. - Measured by the coefficient of variation. Source: Ministry of Finance, Central Bureau of Statistics and World Bank staff estimates. 3.11 In January 1989, Indonesia converted to the new Harmonized System of classifying traded goods. In the process the number of items with specific tariffs was reduced significantly which improved the transparency of the tariff schedule. However, surcharges and split-tariff positions were extended which has led to a slight increase in the unweighted and production-weighted average tariffs for 1989. Dispersion of the tariffs has also increased. 3.12 Export incentives. The most important change in export incentives was the creation of a duty exemption and drawback facility on May 6, 1986. The facility partially protects exporters from the 'high-cost' local economy by allowing them to import their inputs free of duties and, just as important, allowing them to by-pass import license restrictions.J/ The duty exemption 1/ Import duty and VAT exemptions can be given for either a firm's total imported inputs (if the firm exports 65% or more of total production) or on a consignment basis (where a particular import order is directly linked to an export order). A duty-drawback facility also exists to assist "indirect" exporters but this has not been used extensively. - 56 - scheme has been administered by a unit within the Ministry of Finance (BAPEKSTA) and has worked extremely well. BAPEKSTA has administered the scheme with an 'arms length' policy which minimizes direct contact with potential applicants and has made continuous efforts to simplify and standardize application and processing procedures. As shown in Table 3.3, the number of firms using the scheme has increased rapidly with processing time for applications significantly falling.2/ The total value of imports approved under the scheme has more than doubled over the past two years, to a level which accounts for 38% of total non-oil imports. The total value of exports which have benefitted from using the facility has also expanded rapidly to a level of 24% of total manufactured non-oil exports in 1989. Access to the scheme has broadened to include more of the 'emerging' sectors that have recently shown strong export growth. BAPEKSTA approval to import has ensured better services and more competitive prices from domestic suppliers. Table 3.3: IMPLEMENTATION OF DUTY EXEMPTION AND DRAWBACK SCHEME Value of Taxes" Processing Time No. of Value of Imports (USS million) (No. of days) Firms (US$ million) Duty Duty For For Approved Realized Exempt Drawback Exempt Drawback 1986 (July-Dec.) 247 201 65 64 0 12 24 1987 (Jan.-Dec.) 501 849 297 203 6 7 17 1988 (Jan. -Dec.) 1,102 2,206 626 767 20 7 16 1989 (Jan.-Dec.) 1,950 6,312 n.a. 2,601 45 9 10 /a On approval basis. Source: BAPEKSTA. 3.13 Another important policy component of the export incentives regime has been the provision of pre-shipment export finance guarantee (PEFG) and export credit insurance/guarantee (ECI/G). These measures are available to all firms that contribute to non-oil export value added. However, they appear to be utilized most by larger, well-established exporters and the PEFG and ECI have not been effective in encouraging banks to provide small or new firms access to credit. Until recently exporters were also afforded subsidized 2/ In addition to the underlying growth in the scheme, this rapid growth reflects two changes in coverage: (a) the scheme was expanded to incorporate foreign aided public sector projects; and (b) the definition of producer-exporters was changed in December 1987, when the ceiling for qualifying for duty/tax exemption was lowered from 85% to 65% of total production (except for textiles producers). - 57 - short-term export financing. However, in early 1990 the interest rate subsidies were eliminated in line with financial sector reforms (discussed in Section D). 3.14 One policy development that runs counter to the reform trend is the increased coverage of export regulations. During 1988, the existing export ban on raw rattan was extended to cover semi-processed rattan and a new export ban was introduced for certain rubber products. Most recently the Government has introduced a prohibitive export tax on sawn timber. Many export restrictions are designed to encourage domestic processing or 'value-added' by lowering the domestic price of the restricted item. This has, for example, reduced the income of raw rattan growers/collectors (most of whom are relatively poor and live in rural areas) and increased the revenue to rattan product manufacturers. The negative effects of these restrictions are discussed below. Directions for Continued Reform 3.15 Despite major improvements in the past several years, the trade regime still taxes domestic consumers and hampers the efficient allocation and use of domestic resources. The import regime provides high protection to manufacturing relative to agriculture and favors production for the domestic market over exports. The remaining NTBs continue to be the primary cause of price distortions in manufacturing and agriculture. These price distortions have drawn resources into activities in which Indonesia does not have a comparative advantage, thereby lowering economic growth and employment creation. Export assistance measures partially reduce the overall anti-export bias of the trade regime but they leave many potential economic activicies and the losses incurred by consumers untouched. The main directions for future reform are discussed in the following sections. 3.16 Non-tariff barriers to imnorts. The Government intends over time to eliminate most non-tariff barriers on imports. Exceptions would be limited to a small group of products that are harmful to health or involve strategic or national defense needs or involve special economic and social considerations. The reduction of the coverage of NTIs may involve: the removal of the NTBs remaining in industries that have already been subject to deregulation (e.g., steel, textiles, chemicals, paper and pharmaceuticals); reducing the trading monopolies on agricultural commodities and processed food and beverages; and dismantling the curre~nt mix of import license restrictions, import bans and domestic regulations protecting durable goods industries. Further trade reform will assist the restructuring of the economy. In most cases the process of restructuring these industries is already underway, and the move to an import tariff of, say, 20% or 30% would not cause major dislocations. 3.17 The NTBs on the agricultural commodities (primarily rice, wheat, wheat flour, sugar, soybeans and soybean meal) cover a large share of agricultural value added and trade. For some products (such as rice), import licensing has been used to achieve domestic distribution and food security objectives, and not necessarily to protect domestic producers. For other products such as sugar and soybean meal, the distortions resulting from import restrictions and directed area/production controls have encouraged agricultural resources to be used in activities which yield low economic rates - 58 - of return and have taxed Indonesian consumers. Given the important role that these crops play in the agricultural sector, changes in trade policy will have to be assessed in the context of the Government's overall agricultural strategy. Nevertheless, these crops are also important to consumers. The reduction in import license protection on agricultural products would be a logical part of a broader trade reform effort. This would pave the way for more uniform and lower assistance across the agriculture sector and encourage farmers to respond to changing market signals. Where continued protection is desirable, this could be provided through import tariffs. 3.18 Tariff reform. It has been five years since the last major reform of Indonesia's tariff schedule. Since that time, the substantial progress made in reducing NTBs has increased the relative importance of tariffs in the incentive regime. At the same time ad hoc changes have been introduced in the tariff structure which have increased the level and dispersion of tariffs, particularly in the manufacturing sector. Given the anticipated removal of most NTBs and the recent increase in private investment, it is opportune to consider a systematic reform of the current tariff schedule. 3.19 A reform of the tariff schedule would seek to reduce the absolute level and the variance between rates. Such a reform would reduce the range of protection provided to different economic activities, lower the tax on domestic consumers, and remove the pressures to provide special treatment to powerful lobby groups..' A tariff reform would involve 'tidying up' the current schedule through the removal of split-tariff positions and the gradual elimination of surcharges. The removal of splits will result in a reduction of the dispersion of tariff rates, both overall and within commodity groups. Also all surcharges could be removed in a phased, systematic manner. Surcharges do not constitute an appropriate anti-dumping device. They apply to particular commodities over a period of time whereas anti-dumping procedures constitute essentially legal actions by one party (for example, a firm) against another with respect to a particular shipment. Thus, the appropriate response to dumping is the imposition of specific penalties related to a particular supplier rather than measures which apply to a broa4 commodity group. If dumping is indeed a significant problem within certain industries, then the appropriate response is to establish anti-dumping procedure aligned with GATT rules.A/ i/ For empirical support for this strategy see "Trade Liberalization: The Lessons of Experience", by Michaely, Choksi and Papageorgiou; and "Strengthening Trade Policy Reform", World Bank; and 'Issues in the Design of Tariff Reform" by A.C. Harberger. See also Thomas, Martin and Nash: "Lessons in Trade Policy Reform", Policy and Research Series Paper No. 10, World Bank. i/ GATT principles require that duties be imposed only to the extent of any dumping margin and that they be imposed only after it has been established that: (a) dumping has occurred; (b) injury has been caused or threatened to a domestic industry; and (c) there is a causal link between dumping and injury. ^ 59 - 3.20 In addition, a further reform of tariff rates would reduce both average tariff rates and the degree of tariff dispersion. This would be best achieved by tariff reductions across the whole tariff structure as opposed to reductions in tariffs for particular industries. A desirable strategy would be to reduce the highest allowed tariff rates to a common ceiling, and then lower the ceiling tariff over time, for example ultimately reducing the ceiling rate to 20-30%. This approach would result in a reduction in the level and variance of protection at each step. The business community should be advised in advance of the direction of future policy change in order to reduce investor uncertainty and to enable more informed investment decisions to be made. 3.21 The effects of a broad based tariff reform on average import duty rates across the main categories of industrial activities can be illustrated in Table 3.4. As can be seen from the table, the tariff schedule would become much more uniform through the phased reduction of the tariff ceiling over a period of several years to, say, 20% (the index of dispersion is almost halved). The tariff structure could be rationalized further by the imposition of more uniform rates within commodity groups. This would result in some low rates (zero or 5% import duties) being raised. Finally, the Government could consider eliminating some of the exemptions to import duty, replacing them, where appropriate, with less distortionary corporate or investment tax credits. Table .4:t ILLUSTRATIVE EFFECTS OF A TARIFF REFORM ON UWtWIGNTZD AVERAGE TARIFFS AND DISPERSION La current Tariff CeilinS 202 Average Dispersion Average Dispersion Tariff X Tariff X Economy-vide 27 92 14 53 Agriculture 16 74 16 57 Mining 5 80 S 80 Manufacturing 28 91 14 52 Manufacturinx sector Food, Beverages end Tobacco 30 56 17 31 Textiles, leather and footvear 46 43 19 23 Wood, cork, and products 30 ;8 18 19 Paper and printing 22 62 14 55 Chemical, petrol and coal 15 140 9 14 Ron-metallic industries 36 64 16 44 Basic metal product. 15 121 8 83 Metal products and machinery 23 124 13 60 Other manufacturing 36 42 18 28 /a Dispersion is measured by the co-efficient of variation. A lower nwxber means tariffs are more uniform. Source: World Bank staff estimates. 3.22 It is important that the Government be informed as to how the reform program is proceeding and monitor its effects. This is a data-intensive and complex task, which would be best undertaken by a unit specifically equipped (both in terms of hardware and expertise) to analyze and examine changes in the trade regime in an economy-wide context. Such a unit would provide - 60 - quantitative information and analysis to the government concerning the effects of reform and to represent the public interest in dealing with the inevitable lobbying for exceptions. Further, trade reform needs to be implemented within a balanced macroeconomic framework which takes into account adjustments in the trade regime. 3.23 The exnort reaime. Indonesia's export regime is comprised of export regulations (bans, quotas, taxes and approved exporter arrangements), and export assistance measures (the import duty exemption scheme and the subsidized export credit program). As far as exeort regulations are concerned, while the effort to increase domestic processing is understandable, care needs to be taken in deciding on the appropriate policy instruments for achieving this objective. In general, export restrictions are beneficial to a country only under very specific (and rather uncommon) conditions, Factors such as the share of the world market, the price elasticity of demand, the availability of substitute products and the supply col.ditions in the export country, all need to be taken into account. Experience in other countries which have imposed export barriers, provides strong evidence that such restrictions can be counterproductive. The products which are subject to export regulations in Indonesia can usefully be divided into three categories: * those products which are subject to externally imposed trade barriers (i.e., textiles and tapioca); e those products where Indonesia has a large enough market share to influence world prices (i.e., logs, plywood, rattan, nutmeg and rubber); and e those products where Indonesia is largely a price taker. 3.24 Wlhere external barriers exist, the key requirement is to create an efficient and equitable mechanism for allocating the externally determined quotas. First, the Government could improve the current system by publishing information on quota holders, the export performance of quota holders and production capacity. A second option would be to move to an open auction system. This would have several benefits including: quick and relativrely straightforward administration of iae quota allocations; ensuring that quotas are allocated to exporters who have an incentive to maximize returns by exporting high value export items; discouraging 'rent-seeking'; and ensuring that the quota rents are appropriated by the Government and can be monitored. Whether the first or second option is adopted, it will be important to create an open secondary market where quotas can be freely traded. 3.25 Where Indonesia can influence the world market price, a case for an optimal export tax exists. In practice, determining such an export tax is difficult. While part of the costs of the tax will be passed on to foreign consumers via higher prices, part of the benefits are also passed on to foreign producers. As a result, the benefits derived by the country imposing the tax may be short-lived - except where the costs of entry are high. In addition, world demand will decline as a result of the more efficient use of the taxed commodity and a switch in consumption to substitute goods. If it is decided to impose an export restriction, there are strong reasons for choosing - 61 - an export tax rather than a quota or ban.5/ Quotas and bans can create incentives to engage in wasteful 'rent-seeking' behavior and can be used to restrict domestic competition. 3.26 Where Indonesia cannot influence the world price, the case for any type of export restriction is weak. Export restrictions on commodities in which Indonesia is a 'price taker' are unlikely to be in the country's own best interest. The result is to lower returns in activities in which Indonesia is competitive (e.g., crude palm oil, crude coconut oil and copra) in order to provide a subsidy to downstream processors (e.g., edible oil producers). This lowers investment/technical change, and hence growth, in the taxed activity, as well as fostering the development of an uncompetitive downstream industry. All export restrictions on commodities in the tree crops category (with possible exception of rubber) could be removed. 3.27 As far as exRort assistance measures are concerned, the duty exemption facility operated by BAPEKSTA works efficiently and has provided essential support to Indonesia's expanding non-oil exports. Over the medium term an important component of improving BAPEKSTA's operations will be to simplify application procedures in an effort to encourage more small-scale or new exporters to apply. BAPEKSTA's operations could also be improved by modifying the system for granting duty drawback to encourage greater participation by indirect exporters. One option would be to use the domestic L/C system introduced by Bank Indonesia in October 1988 as an administrative mechanism. Likewise there are elements of the export finance guarantee and insurance schemes that could be improved in order to extend their benefits to small or new exporting firms. For example, the resolution of claims on the finance guarantee scheme, both in terms of administration and time taken to settle claims, is considered a major problem by banks. C. Domestic Incentives and Regulatory Framework 3.28 As discussed in the previous sections, there has been substantial progress made in reducing the anti-export bias of the trade regime and exposing domestic industry to import competition. In order to translate these reforms into an efficient supply response the Government has broadened and intensified its efforts to improve domestic incentives and the regulatory environment for the private sector. These reforms stem from a clear recognition of the constraints to the private sector that need to be addressed. So far, they have focussed on areas of reform that have been the most urgent and implementable in the short run. 3.29 Reform has progressed significantly in the areas of investment licensing and regulation of foreign direct investment. The investment process has been made streamlined and less restrictive. Importantly, the policy 51 An example of the type of economic analysis required to determine if an export tax is appropriate is provided in the World Bank's recent report on the Indonesian Tree Crops Sector - No. 7697-IND. - 62 - stance has shifted from control to encouragement of investment. In this regard a fundamental change occurred in May 1989, when the Government replaced a long list of activities open to both domestic and foreign investment with a short list of activities which were closed. In formulating this negative list, there has been a conscious attempt to keep the number of restricted sectors to a minimum and to remove the ad hoc conditions that had been introduced over the years. The reforms to investment licensing have opened up more activities to competition and enhanced the transparency of licensing procedures. The changes also lessened the distinction between investment by various types of domestic companies and between domestic and foreign companies for the purposes of licensing. 3.30 The Government has also undertaken steps to improve the attractiveness of Indonesia to foreign investors. Various packages of reforms since 1986 have addressed concerns of foreign investors on several fronts and, in particular, eased ownership controls on investment in export-oriented activities and other priority areas. Moreover, the conversion period for domestic majority ownership has been extended. Further easing of restrictions have also taken place for foreign investors in access to export credit and marketing. Foreign companies are now permitted to take over local firms if investment is in a priority area and provided 20% of equity remains under domestic ownership. In addition to these measures the Government responded to growing concerns of the foreign investment community by implementing copyright laws and submitting a draft law on patents for legislation by 1991. 3.31 The initial response to domestic deregulation of investment has been a sharp increase in domestic and foreign investment. Domestic investment approvals, which had sagged in the mid 1980s, doubled in 1987 and increased by a further 40% (in dollar terms) in 1988. The rate of increase was about 31% in 1989. Similarly, after recording a sharp and steady decline since 1983, foreign investment approvals increased by 78% in 1987 and a remarkable 300% in 1988 to reach US$4.4 billion. The rate of increase of approvals of foreign investment slowed to about 7% in 1989. Moreover, unlike the 1970s and early 1980s when much of the private investment was oriented towards the domestic market, the bulk of new investment approvals are directed towards export activities. 3.32 In order to ensure that Indonesia can build upon this progress in mobilizing domestic and foreign investment efficiently, it will be important to continue reviewing and improving the regulatory framework. While the increase in private sector activity is encouraging, it should be noted that realization of investments is lagging behind approvals due partly to the remaining complexities and weaknesses in the domestic regulatory framework. Further measures would help reduce the remaining barriers to the entry and improve the mobility of private investment. Broadly the priorities are to: maintain a short negative investment list by opening additional areas to domestic and foreign investment; simplify and streamline further the licensing system - by eliminating licenses where possible (such as capacity licensing) and improving co-ordination at the local level; and further ease divestiture obligations of foreign investors. At the same time a start could be made on the more complex and longer run issues of developing a modern legal system and reforming the factor markets, particularly access to land and labor. - 63 - The Investment Licensing System 3.33 The adoption of the negative investment list has made the investment regime much more transparent, and there is a clear perception among investors that bona fide investment in areas that are designated as open are being approved speedily. Although most fields of investment have been declared as open to domestic and foreign private investment, there are still 165 sectors where entry is restricted in the negative investment list. These restricted sectors are concentrated in the metal products subsector (71 items); food, beverages and tobacco subsector (44); wood products subsector (13); the chemicals subsectors (13); and the paper subsector (6). The policy objective and criteria for selecting goods to be included on the negative list could be re-examined and the list shortened. In general, there are likely to be few grounds apart from say national security, for maintaining a negative list. Also, with the adoption of the negative list, the capacity expansion license has become redundant. Existing enterprises have to meet the test of bona fide businesses, and capacity expansion is only an issue in restricted sectors. Accordingly, consideration could be given to eliminating the capacity expansion license for non-restricted activities and replacing it with a reporting requirement. 3.34 In addition, there are a large number of production activities where entry is limited to the small-scale domestic investors. Although these restrictions are not applied rigidly, they are a source of uncertainty and a potential barrier to new investment. These restrictions are particularly important in the food and textiles sectors and could prevent small firms growing into an efficient scale of operations. An investment is considered small-scale under the investment licensing system if it involves an investment covering buildings, machinery and equipment of more than Rp.50 million i/ and less than Rp.200 million (or about US$100,000). These are extremely low limits in the context of the large number of products covered by the small-scale restrictions on entry. 3.35 In view of the social importance placed by the Government on encouraging small industrial investment, steps to reduce entry barriers that would also be more consistent with efficient investment could be to: reduce the number of products restricted to the small-scale sector significantly; raise the limits of the definition of a small industry and permit foreign investment in the small-scale sector by reducing the minimum foreign investment requirement. This would make available the benefits of technology, design and marketing conta-ts of smaller foreign firms. 3.36 Foreign and domestic firms obtaining BKPM approvals are eligible for limited fiscal incentives (duty exemptions on approved capital imports and raw materials for the equivalent of two years). Given that the main motivating element for investment is the overall investment climate, ajid in view of the improvements made to the investment licensing system, tnese fiscal incentives could be reexamined for future projects. The rates of duty to be applied to imports of capital machinery and raw materials could be assessed within the ambit of the tariff reform. WJ Investments less than this amo*l~it do not need a business license and can function with a registration certificate. - 64 - Foreign Direct Investment 3.37 As mentioned earlier various packages of reform since 1986 have improved the attractiveness of Indonesia to new foreign investors. Nevertheless, some negative perceptions about foreign investment regulations still persist especially the need to divest ownership over time. The Government could further relax its restrictions on foreign investment consistent with its opening up of the investment licensing system. Consideration could be given to reducing the local ownership and divestiture requirements to say 49% of equity and allowing majority (up to 51%) foreign ownership in most sectors open to foreign direct investment under the negative investment list. The present 51% divestiture requirement could be retained for only a small number of sectors such as extractive and strategic industries. The floor at which export-oriented f'--t'1s are allowed majority foreign ownership could be lowered to bring it more into line with divestiture requirements in Thailand or Malaysia. For example, firms in Thailand or Malaysia that export at least 50% of their output are allowed to retain majority foreign ownership. Consideration also could be given to providing investors with greater flexibility as to the terms and length of leases relating to investment in plantations and agriculture. 3.38 In addition, BKPM could improve further the investment climate through enhanced investor services. Some restructuring of BKPM's functions and operations may be necessary as it continues to turn to investment promotion rather than regulation. Particular attention could be given to improving the links between regional and national BKPM efforts at investment promotion. Local Level Laws and Regulations 3.39 In addition to the investment and business operacion license there are three principal steps involved in establishing an enterprise: obtaining local approval, which in turn requires land reservation and location permits; land rights acquisition, which involves registering and titling land; and construction approval, which involves obtaining a 'nuisance' license (including compliance with environmental regulations) and the construction permit. Although the objectives of these various licenses are similar to those in other countries, the procedures for obtaining them involve several layers of local government and a multiplicity of central and local government agencies. These licensing procedures could be examined with a view to streamlining procedures. Also the rules governing the decision making process could be clarified and made public. 3.40 Private enterprises face particularly difficult problems in acquiring land because the laws governing land ownership are restrictive, and the procedures for acquiring, registering and obtaining a title to land are complex. Indonesian corporations (domestic or foreign) are not allowed ownership of land but are granted varying tenure rights, usually 20 to 30 years. This short tenure right discourages long-term investment. These difficulties are heightened by a number of deficiencies in land use classification. For example, about 75% of total land area in Indonesia is classified as public lands falling undet the Forestry Department boundaries, although a large part of such lands is already deforested and under alternative uses. Also, private land markets do not work efficiently because - 65 - of: limited land registration; the absence of adequate legal framework or ownership/lease rights; and cumbersome procedures for land transfer, registration, and titling. 3.41 The problems of land use seem to be most acute in: the extensive and fast growing urban and industrial areas and urban fringes in the inner islands (especially in Java); agricultural lands and areas of rapid agricultural encroachment on forest lands in the outer islands; and finally, a separate approach to forestry sector management in the outer islands to conserve forest resources in the longer term. In these areas reforms could encompass: increasing the availability of land by improved land classification; policies establishing appropriate use of these lands; and improving the enforcement of land use policies. A complete cadastral survey and registration of land and titles to improve the functioning of private markets in land could be started upon although it is achievable only in the long run. Local Content Programs 3.42 In Indonesia, certain products in the automotive, metal and engineering sub-sectors are subject to local content (or deletion) programs. In recent times, these programs have been flexibly administered and have avoided overly rigid schedules of deletion. In most cases, final goods producers can opt to import any component subject to the p"jment of import duty (usually 60% or less). Also with trade reform it is now possible to import many of the final goods which are subject to local content plans both for final and component goods producers. Thus import duties provide an upper bound on the protective effect of the plans. Also the Government has been responsive to industry concerns about quality and availability of locally made components in choosing items to be deleted. 3.43 Many of the programs are close to the end of their timetables and it is an appropriate time to review them. Although as mentioned above the plans have been flexibly administered, they are still underpinned by high import duties and in some cases NTBs. Many of the plans could now be phased out and replaced with a rationalized and lower system of tariff protection. This would greatly facilitate the operational flexibility of praducers, reduce disincentives to new investment and encourage efficient development of industries. Labor Regulations 3.44 An important consideration for foreign investment in Indonesia is the attraction of its large labor force and low wage rates. Indonesia's labor market is relatively undistorted and there is little distinction between informal and formal labor markets and wage rates. Labor regulations are guided by the Basic Law of 1969, which covers among other matters: hiring and retrenchment of workers; protection and supervision of workers; and employment of expatriate workers. As employment in the industrial sector expands, there is a possibility that these restrictions could become increasingly binding. This is already evident, in the form of increasing constraints faced by firms in hiring labor on a permanent basis, employment of women, overtime work, and legal actions under criminal law against some employers for failing to meet rigid labor laws on dismissals and lay-offs. - 66 - 3.45 The regulations on firing permanent staff are rigid. Layoffs can be undertaken only if it is proven that all possible steps have been taken to avoid retrenchment. Complex arbitration procedures need to be followed. If satisfactory mutual consent and conditions cannot be established, a firm has to approach a committee at the central government level, with the final decision lying 'iith the Minister for Manpower. The result is that companies minimize the hiring of permanent labor and rely on temporary workers. The regulations on protection and supervision of workers provide extensive controls on firms' with regard to: the number of hours and overtime work allowed per employee; the employment of women; and wages and social w&lfare that employers must provide. 3.46 Firms are allowed to hire expatriate workers only in a few sectors and restrictions are enforced through requirements for work permits. Since 1987, a significant relaxation has occurred in the case of export-oriented foreign investment firms. In particular, a work permit is no longer required for temporary expatriate emplcyees who provide consultation, training, and technology services. This has been the most widely used route to employ foreign technical workers. The easing of restrictions has facilit!ated improved performance and productivity at the firm level in these sectors and has speeded technology transfer. However, for other sectors the restrictions are at times inflexible and obtaining work permits involves complicated and lengthy procedures. An example of the positive effects of easing restrictions on foreigners is shown by the experience of the Bali garment industry (see Box 3.1). 3.47 Labor regulations need to be re-examined and reforms initiated. Some specific steps in this direction could include: reliance on published industry-wide guidelines or norms for hours of work, minimum wages and overtime; simplification of the procedures for termination of employees, since the rules now discourage employment and training of permanent workers; and expanding opportunities for firms to hire expatriate skilled labor, since the benefits of on-the-job training and effective technology transfer that such expatriate labor provide may far outweigh the potential risks of temporary displacement of local skilled labor. The Commercial Law Framework 3.48 In many important areas the existing commercial laws are outdated, and do not meet the requirements of a modern economy. The gaps in the commercial law framework will need to be addressed as an urgent priority in the next few years. Perhaps most importantly, the system of enforcement and interpretation of laws by courts, and generally the efficiency of the legal process needs to be improved. Currently, there are long delays, cumbersome procedures, legal uncertainty (since legal decisions are rarely published), and high costs of the legal process. Alternative dispute settlement mechanisms, such as the functioning of Arbitration Boards could be developed. Legal reforms and the development of institutions involve difficult and complex issues and will take time to be completed. Legislated changes are needed to lend greater legal certainty and codify recent changes made through deregulation measures in a few key areas (such as banking, foreign and domestic investment, companies and securities laws). Changes in the commercial legal framework are also essential if these broader reforms are to have their desired effects. - 67 - D. Financial Sector DeveloRment 3.49 An expanding role for the private sector will also require development of a broad array of financial services and intermediaries: commercial banks providing working capital and long-term debt finance; venture capitalists and the stock exchange contributing equity; insurance and pension funds supplying long-term funds; and leasing companies and securities houses offering alternative financing options. An increasingly diverse financial system should contribute tt savings, investment and growth by: (a) mobilizing greater amounts of savings through offering instruments better suited to the needs of the public; (b) transforming the maturity and size of savings to fit the needs of investment projects; and (c) allocating funds to the highest return projects at lower costs. A sound financial system can contribute to overall financial stability by accurately pricing and disbursing risks throughout the economy, increasing the flow of information available to savers and investors and pressuring for the productive investment of funds. Recent Policy DeveloRments 3.50 Indonesia has already done much to promote the financial system. A key reform was the Government's June 1983 announcement directed to: (a) stimulating private financial savings; (b) improving the allocation of financial resources; and (c) allowing for more agile management of monetary policy. Accordingly the Government deregulated commercial bank interest rates, replaced credit ceilings with a system of reserve money management and adjusted interest rates on a simplified structure of directed, subsidized credits. In 1984 and 1985, money market instruments were introduced along with a rediscount window at Bank Indonesia (BI) to improve further the control of monetary policy. The financial system responded to this first set of reforms with a rapid expansion of assets--over 23% p.a. between 1982 and 1988, (see Table 3.5). As a share of GDP, financial assets held by the banking system rose from 18% in 1982 to 30% in 1988. At the same time, the number of non-bank financial intermediaries expanded sharply. Prior to 1988, however, the equity and bond markets were inactive. 3.51 While the mobilization of higher levels of financial assets was welcome, the following problems remained: * regulatory barriers to entry that protected existing commercial banks from competition and led to high intermediation costs; * the domination of .ne financial system by state banks because of regulatory advantages in branching, capital adequacy, provisioning, and because of their monopoly on public enterprise deposits; * the large and growing shares of subsidized liquidity credits received from BI--these credits reduced incentives to raise long-term funds from the public, weakened state banks' portfolios, fragmented credit markets unnecessarily and complicated the implementation of monetary policy; and Table 3.5 IDDONe8IAt STRUCTURE AND GROWTH OF TIM YINCIAL SECTOR, 1978-89 /a Numher In Assets Assets 1982 98 1989* 1982 1988 1989* 1978-82 1982-88 1989* (In billions of rupiah) (Annual rate of change) lb Bank Indonesia 1 1 1 13,707 42,445 39,388 26.4 25.4 (9.5) Deposit moey banks 114 107 128 15,952 63.284 86,542 31.8 31.7 37.2 National foreign exchange banks s 1S 17 21 12,724 30,051 68,807 32.6 31.3 37.4 ForeLa banks 11 11 18 1,172 3,215 4,803 23.4 22.4 49.4 Other cormerctl banks Id 60 51 81 720 4,972 6,427 29.5 67.2 29.3 Developmnt banks 28 28 28 1,336 5,046 6,303 33.1 30.4 34.9 Nonbank finamcial institutions /a 14 14 14 805 3,063 3,564** 42.6 30.7 16.4** saving baks a 3 3 3 452 2,409 2,900 86.3 39.7 20.4 Insurance coalnies 83 106 117 528 1,883.6 n.a. 35.0 23.6 n.-. Leasing companies 17 83 83 114 1,735 n.a. 44.0 57.4 n.a. Other credit institutions La 5,808 5,771 7,448 86 637 579 14.6 49.2 (9.1) All institutions 6,040 0,085 7,794 31,644 111,838 131,925 30.0 23.4 18.0 source: Bank IndonesLa: Indonesian Fiancial Statistics, data provided by the Indonesia authorities, and staff estimates. 03 Jg Orgsanised financial sectors end of period. f Lk, Annual compound rates. L Includes five state banks. The retmaider &re national private banks. /a National private banks undertakLng only domestic currency business. la Nine investment finance, three development finance, and tro other fluance companLes. / Ones state savings bank and two prlvate savings banks. Vlllage banks, rural paddy banks, and government-owned pawnshops, October 1989. C October, 1989 *5 September, 1989 - 69 - * an inadequate legal and accounting and supervisory framework which hindered sound growth. 3.52 1988-89 policy reforms. The first two of these problems were addressed in a major package of reforms announced on October 27, 1988. Besides strengthening competition, the reforms were designed to enhance stability within the financial system and improve the implementation of monetary policy. Competition was fostered by: (a) lessening restrictions on entry an& branching for foreign and domestic-banks;'(b) allowing public enterprises to place up to 50% of their deposits outside the state banks; (c) allowing non-bank financial institutions (NBFIs) to issue certificates of deposit (CDs); (d) permitting banks and NBFIs to raise capital in the stock markets; and (e) lowering barriers to entry in leasing, insurance, consumer finance, venture capital and securities activities. The soundness of the system was buttressed by reforms (a) defining loan portfolio concentration ratios for banks and NBFIs, (b) setting minimum capital standards for banks and solvency ratios for insurance companies, and (c) establishing rules prohibiting insider trading on stock exchanges. The conduct of monetary policy was improved by: (a) unifying reserve requirements for all bank liabilities at 2%; and (b) lengthening the maturity of BI certificates (SBIs) and initiating a secondary market. 3.53 This impressive list of reforms was followed in March 1989 with a smaller series of decrees clarifying, among other matters, the development and control of NBFIs, lending limits, joint venture bank capital ownership and bank mergers, the definition of bank capital, reserve requirements and bank investment in stocks. An important new regulation was introduced which limited commercial bank net positions in foreign exchange to 25% of their own capital, while at the same time eliminating the ceiling on commercial bank foreign gross indebtedness.2/ This regulation limits banks' exposure to exchange rate fluctuation. However, the elimination of the borrowing ceiling could create a fiscal burden in the unlikely event of payments difficulties, arguing for continued careful monitoring of private borrowing by commercial banks. Impact of the Reforms 3.54 Enhanced competition and the increased focus on equity have led to dramatic changes within the financial system. New financial intermediaries have flourished in the last year. There are thirty-six new domestic banks and fourteen new joint venture banks. Branches of existing banks have also grown significantly from 5,887 in July 1988 to 6,285 in June 1989. The overall number of financial intermediaries has risen from 6,085 in 1988 to 7,794 in October 1989, a 28% increase (see Table 3.5). Fiercer competition among banks fostered by the reforms is reflected in the falling share of deposits held with state banks as new banks aggressively bid for customers using new or better priced services. These developments have been accompanied by strong Z/ The net open position is the difference between foreign exchange assets and liabilities both on and off the balance sheet. Own capital is the sum of paid-up capital: capital, general and specific reserves; retained earnings; undistributed profits and subordinated loans. - 70 - growth in assets (18% in 1989). Deposit money bank assets have soared 37% after rising by a similar amount in 1988. As with the growth in the number of intermediaries, however, the pace of growth may call into question the quality of some assets. More generally the growth of the financial system has led to shortages of capable financial managers and heightened concerns about the soundness of the system. 3.55 For the year through September 1989, deposits of all kinds at deposit money banks have increased by 32%. The composition of Ml (see Annex 1, Table 8) shows the growing importance of demand deposits for holding , transactions balances. Maturities have lengthened, with the highest growth in 6 and 12 month time deposits. This has been matched with a lengthening of the loan maturities. Between December 1988 and September 1989, Rupiah loans with tenor of six months or less have actually fallen. Loans of 6 months to one year rose 34% to Rp.25.3 trillion. 3.56 Both lending and deposit rates have declined over the year in response to the increased amounts of resources mobilized (see Annex 1, Table 9). Six month time deposit at private national banks have declined about three points through February. State banks time deposit rates fell even more. After discussions with the Government, they announced at the end of January 1 'O a three point drop in their prime lending rate from 19% to 16%, accompaniea -v a lowering of their time deposit rate from 16% to 15.25%. Maintaining profitabilities at these low spreads will be difficult, particularly given the planned reduction in liquidity credits (see below). 3.57 The response of the capital market has been even more impressive. For the first 12 years of its existence, there were only 24 companies listed (trading averaging 210,000 shares a month in 1987). Over half of the shares were held by Danareksa, the state underwriter which acted as a market maker. In contrast, in 1989 39 companies offered new issues, raising over Rp.3.75 trillion in capital. The volume of shares traded increased eight- fold. The composite Stock Price Index rose precipitously to over 500 points in September 1989 from just below 300 at the start of the year. Su.bsequently it declined to about 400, but by March 1990 had recovered to over 600 points. The over-the-counter (OTC), established at the end of 1987, and the corporate bond markets were also more active. The January 1990 Reforms 3.58 One critical issue not addressed in the 1988 and 1989 reforms was the role and extent of subsidized, directed credits (referred to as liquidity credits) within the banking system. Bank Indonesia (BI) had been refinancing loans to various activities--small-scale industries, exporters, tree crops, and housing--at interest rates varying from 3% to 14.5%. These loans originated as a mechanism for channeling windfai'i oil revenues to the public in the mid-seventics. By end 1989 the stock of outstandirg credits had reached Rp.16.2 trillion. Most of these loans were eligible for insurance coverage (through the state-owned insurance company ASKRINDO) at premia that did not cover company losses. The system had a number of drawbacks. It complicated the control of monetary policy because of a lack of overall refinancing limits. Incentives for participating banks, chiefly the five state banks, to do adequate credit analysis were eroded by the cheap insurance and ability to rediscount up to three quarters of a loan to Bl. Repayment - 71 - performance was poor. Lax credit policies allowed the subsidized credit to be misdirected, reducing the benefits to the targeted sectors. Liquidity credits also limited the expansion of market based lending. 3.59 On January 29, 1990, a significant reform of the liquidity credit scheme was announced. The number of sectors eligible for liquidity credit were reduced to: farmers, for working capital; cooperatives, for financing food purchases or productive activities; BULOG, for financing stockpiling of food; and development banks, NBFIs and estates for investment credit. Incerest rate& were moved much closer to market rates. All insurance is now voluntary, with market-based premia. A regulation was also introduced requiring all but foreign or joint ventureVQ banks to lend 20% of their portfolio to small scale firms and cooperatives.2/ Banks are given one year to comply with this regulation. No formal sanction was specified for not meeting the target, beyond noting the BI would consider compliance in determining the overall rating of a bank. 3.60 The reduction in the scope of liquidity credits and the increase in interest rates will greatly enhance BI's management of base money. During last year, liquidity credits expanded by Rp.2.7 trillion, more than 50% of the expansion in base money. The changes in interest rates and in insurance will improve incentives to assess credit risk and reduce incentives to divert credits away from priority users. Segmentation in credit markets will be reduced and new commercial banks will expand into these sectors more rapidly. For the state baiks the reforms will require a stronger effort to mobilize deposits directly since a large share of their portfolio had been funded with liquidity credits. The reform will also call for efforts by state banks to improve their efficiency and ensure the quality of their loan portfolios. 3.61 Two areas of follow up on the recent reform of liquidity credits merit careful attention. First, there is no timetable or target for the reduction in the stock of credits. However, BI estimates that over the course of the next fiscal year these credits will decline by about Rp.5.2 trillion, leaving a stock of Rp.12 trillion. Second, the imposition of the 20% requirement for lending to small business could distort credit allocation even though at present it is not much different from the amount of credit already reaching cooperatives and small businesses. It would be far preferable to design programs to eliminate barriers holding banks back from lending to these sectors rather than mandating a quota. The Remaining Agenda 3.62 The comprehensive reforms undertaken by the Government and the rapid growth they have engendered present two challenges. First, financial markets need to continue to grow to fulfill their role of supporting real investment L/ Foreign banks have to lend 50% of their portfolio for exports. 2/ Small-scale is defined as firms whose capital, excluding fixed assets, is less than Rp.600 million. Loan sizes are limited to Rp.200 million. - 72 - and growth.IQ/ Second, the stability of the financial system and the overall economy require that this growth be based on sound institutions operatixi' competitively under a transparent legal and regulatory structure. The mushrooming of financial assets and institutions is straining the capacity of the authorities to supervise and regulate markets. Meanwhile, the capacity of private institutions to continue to grow is hampered by the scarcity of qualified staff and management. The imperatives of sound and stable growth leave three principal items on the agenda: @ strengthening the prudential regulation of financial markets; e enacting updated laws governing financial institutions and commercial relations; and * bolstering managerial and technical expertise in financial institutions. While the Government is actively pursuing various efforts on these fronts, their urgency is compounded by the rapid pace of financial sector growth. 3.63 Prudential supervision. BI has already begun to improve its banking supervision with technical assistance from the IMF. A prototype questionnaire for early detection of potentially unsound banks has been designed and tested on a limited basis, but still needs to be refined and used on a broad scale. Efforts are underway to improve general examinations by including: a greater emphasis on management and management systems rather than accounting values and compliance with regulations; off-balance-sheet items; evaluation of liquidity based on an appraisal of asset and liability management rather than simply adherence to minimum reserve requirements; and assessments of portfolio quality based on the financial condition of borrowers rather than simply the state of interest payments. The huge expansion of banks and branches requires greater concentration on off-site examinations, with detailed examinations targeted at apparently risky banks. Finally, a graduated set of responses by BI to mismanagement in financial intermediaries needs to be developed so that shortcomings can be remedied quickly and efficiently. 3.64 Transparency and confidence in financial markets will be gyeatly enhanced by improving the quality and availability of information to BI and the public. Sound prudential regulation will be advanced by more stringent accounting practices for accruing income and capitalizing interest, accompanied by timely reporting of data updated to fit the requirements of the new deregulated market place. Greater disclosure of information to the public will allow potential investors/depositors to enforce market discipline on financial intermediaries, aiding BI in its supervisory efforts. Of course, the quality of the accounting information also needs to be improved. In this regard, a credit rating company could be established. The creation of a 1Q Comparisons of the depth of financial intermediation with neighboring countries such as Thailand and Malaysia, indicate that financial markets in Indonesia need to develop further. Indonesia has a current estimated ratio of broad money to GDP of 35%, while that of its neighbors is over 60%. - 73 - company registry which listed major shareholders would increase the amount of information available to potential investors in the stock market as well as help BI enforce lending limits. 3.65 State banks need close attention, particularly in light of the sharp reduction of liquidity credits that will occur over the coming years. They require a detailed portfolio audit to determine their soundness. It would be then be possible to assess their need for, and amount, of recapitalization. Any recapitalization would also provide an opportunity to disperse ownership in state banks more 'idely, perhaps through share issues.1i/ 3.66 Stricter regulation of the capital markets is also critical to maintain the confidence of small investors and eliminate opportunities for manipulation. In particular, more disclosure requirements for issuing companies and intermediaries, strengthened minority rights, and a more up-to- date transfer, payment and settlement system are needed. As with banks, greater and more reliable accounting information available to the public will facilitate control. Some steps on along this road have already been taken. The relationship between underwriters and companies floating new issues has been revamped after criticism that ownership ties between the two caused underwriters to misrepresent the value of stocks. Plans for restructuring BAPEPAM, the government agency dealing with stock markets, along the lines of the US Securities and Exchange Commission are also well advanced. The implementation of both the restructuring and the privatization of the stock market are important for its further sound growth. 3.67 Legal framework. An integrated legal framework spelling out the scope and activities of various financial intermediaries and the supervisory role of BI, MOF and BAPEPAM is important for creating a stable financial system. Draft laws on the role of BI, commercial banks, insurance companies, investment (mutual) funds, pension funds are already well advanced. These laws should provide ground rules for the operation of these entities. It is also crucial that BI's authority and ability to set and carry out monetary policy be clearly delineated. Establishing and maintaining a sound capital base in financial institutions requires particular attention. Regulations need to be harmonized to eliminate unnecessary barriers or advantages for some group of institutions. Anotner element of legal reform concerns the commercial code. Modernizing this body of law is critical for advancing not only the stable growth of the financial system, but the growth of the private sector overall. 3.68 Technical and managerial expertise in financial intermediaries. The rapid surge in the numbers of financial institutions has put severe pressure on the market for skilled employees. While the private sector can be expected to provide and finance training for staff, adequate oversight by the BI, BAPEPAM and MOF will require that their staff training keep pace. Not only training, but also levels of staffing and salaries will need to be increased jJ/ State banks are included in the series of actions proposed in Chapter 4 for improving the soundness and efficiency of public enterprises generally. - 74 - to cope with the demands of the burgeoning financial sector. Consideration could be given to allowing a larger number of foreigners to enter the financial sector to help increase the supply of qualified personnel. E. Transport Services 3.69 , In the transport sector, the Government has made concerted efforts to deregulate and remove impediments which previously were the cause of widespread inefficiencies. These reforms have focussed initially on the maritime sector and have resulted in some impressive improvements in performance and quality of service. However, there still remains some scope for further deregulation and streamlining of institutional arrangements, particularly for the ports. Improvements in these areas would facilitate further growth of the private sector in Indonesia. More recently the Government has turned its attention to the land transportation system, in particular road transportation. The issues in both sub-sectors are discussed below. 3.70 Maritime sub-sector. Before 1985, regulation in the maritime sector was especially restrictive, with shipping, ports, stevedoring and forwarding governed by layers of complex rules, regulations and administrative interventions. By 1985, it had become evident that inadequate performance and lack of responsiveness within the maritime sector would retard non-oil export growth. Accordingly, the Government dismantled many of the unnecessary regulations and restrictions within the sector. The major deregulation measures were introduced in two packages - Presidential Instruction No. 4 of April 1985 (Inpres 4/1985) and Paknov 21, issued November 21, 1988. The more important elements of the Inpres 4/1985 package removed or relaxed restrictions on port access for foreign shipping, domestic cargo tariffs, entry to freight forwarding and general agency. In addition the package provided for major improvements in customs procedures. The measures comprising Paknov 21 were similarly sweeping and included: greater freedom of entry into different types of shipping activity; removal of restrictions on routing; and the ability to charter foreign vessels of any size or type. More recently the ban on importing vessels below 10,000 DWT has been reduced to 5,000 DWT. By March 1990, it is reported that orders for 17 vessels between 5,000 and 10,000 DWT have been placed. 3.71 With these reforms, Indonesia has moved toward an efficient, responsive and user-oriented shipping industry. The Government has now set up a regulatory framework conducive to the development of an efficient maritime transport industry. The benefits of deregulation have been compounded by those stemming from technological innovation, in particular, containerization. Deregulation has resulted in improved services and has better integrated Indonesia into the international shipping network particularly through feeder services into Singapore. In domestic shipping, important changes are also taking place, including increased use of tug/barge combinations and special purpose vessels. Equally important have been changes to freight forwarding and the promotion of door-to-door transportation. The rates for international shipping have declined significantly, both in absolute terms and relative to rates from other regional ports which feed Singapore. For example, on the main feeder line between Jakarta and Singapore, freight-all-kind (FAK) rates - 75 - (per 20 ft container), which have reportedly been as high as US$450, had fallen to US$200 by mid-1989. Although improvements have been observed in the quality of service on domestic routes, it is still too early to discern significant changes in prices. 3.72 Easing entry restrictions to different sections of the shipping industry fostered competition and stimulated restructuring to adapt to the changing market requirements imposed by rapid containerization. Deregulation has allowed national-flaf shipping companies to make their own routing, decisions, charter in tonnage'from overseas and chioose whether to dock their ships within Indonesia or overseas. These factors have introduced flexibility into the evolution of the shipping networks (liner and tramp) and into the choice of type, size and docking of vessels. Concerns that deregulation would lead to a reduction in actual service to outports do not appear to have been realized. To date, actual service frequencies to such ports appear in general to have increased. A major benefit of deregulation is the freedom for a tramp market to develop according to the needs of shippers. 3.73 Despite the substantial improvements in performance, a number of significant constraints remain that preclude the realization of the full benefits of deregulation. The efficiency of port operations is limited by structural problems especially in stevedoring, port charges and port management. Stevedoring activities are subject to restrictive labor practices and limitations on innovations in managesent and reorganization. The loading/destination port charge is still regulated and applies per ton of cargo handled (not handling time). These constraints have led to lower productivity levels in Indonesian ports relative to other ports in the region. 3.74 Road transport. Despite significant progress in recent years the overall cGsts of road transportation remain significantly higher than they need be. The poor standard and condition of much of the road network raises vehicle operating costs, while comparatively few arterial links have been designed and constructed to the standards needed to permit the use of the most efficient multi-axled truck-trailer combinations. Overly restrictive and unevenly applied road traffic and transport regulations have militated against tbe introduction of new technologies; for example, the present vehicle height limit means that standard containers may be transported on public roads only by special dispensation. In some instances, regulations have also served to protect inefficient and unresponsive public transport operators from competition. 3.75 The present structure and level of road user taxes also serves to promote inefficiency. While total receipts from road users are now at a level comparable with total public spending on the road network, operators of large trucks are required to pay little if any of the infrastructure costs attributable to them. Consequently the pattern of demand between modes tends to be distorted, with roads carrying some traffic for which other modes - such as rail - are inherently better suited. Equally importantly, the structure of road user taxes provides no incentive for truck operators to invest in the types of multi-axled vehicles which would reduce road pavement damage. 3.76 The Government is committed to the adoption of policies which will permit and promote the development of a transport system capable of responding quickly and efficiently to the Lation's growing and increasingly sophisticated - 76 - transport needs. In the land transport subsector, the Government has adopted policies which provide for a neutral and well administered regulatory regime under which operators will be able - subject to compliance with appropriate safety and environmental standards - to tailor their facilities and services to users' requirements without the distortions imposed by subsidies and unnecessary quantitative restrictions on entry, routes, fleet sizes, and service frequencies. 3.77 To this end the Government has adopted a series of policies designed to: implement a modern and coherent legal a-d regulatory framework for road traffic and transport; strengthen the capabilities and improve the efficiency and effectiveness of central and regional transport departments; and improve coordination and integration of transport sector policy formulation and planning. In the process the Government intends to revise the structure and level of road user taxes progressively and to amend and simplify limits on vehicle weight and size and the load-bearing classification of roads. F. Environmental Management for Private Sector Development 3.78 Private sector development depends heavily on the availability of water, land, and forests. These resources are already very scarce in many parts of Indonesia, and rapid growth will lead to wider shortages in the years to come. In addition, industrial use of land and water, if unregulated, can have serious environmental side-effects that affect people's health. To maintain private sector growth while safeguarding public health, it will therefore be vital to manage carefully the natural resource base. Current efforts at land use planning and water resource management are hindered by both weak policies and fragmented institutional arrangements. Vith respect to pollution control, there is a reasonable policy framewfork in place, but institutional fragmentation has meant that standards have not been systematically enforced. The main challenge for the year ahead is to put in place institutional arrangements that will ensure that land and water resources are managed efficiently. 3.79 Land use and forest management. The population density on Java, which has 106 million people, is about 800 per square kilometer, one of the highest in the world. The population is increasing by about 1% p.a. in rural areas and 3.5% p.a. in urban areas. This has led to sharp competition for land between competing uses. For example, it is estimated that some 10% of agricultural land will be required for conversion to urban and industrial uses over the next 20 years, and such conversion carries with it a strong potential for environmental degradation. The efficient management of these intense pressures on available land is necessary if economic development is to proceed smoothly and be environmentally sustainable. The outer islands are sparsely populated, with an average population density of only 38 per sq. km. Most of the area in the outer islands is covered with either tropical rain forests (110 million ha), which are among the most important in the world or degraded and fragile deforested land. The forest resource is being rapidly reduced, with estimates of annual depletion ranging from 600,000 to over 1 million ha. Such rapid deforestation is very costly, both economically and in terms of the adverse effect on the environment (loss of species and land degradation). * 77 - 3.80 Land use planning has been especially difficult in Indonesia because of three factors; (i) national land policies and institutional arrangements for land use classification are weak and fragmented; (Hi) private land markets do not work efficiently; and (iii) government land acquisition procedures for infrastructure development are inefficient. Recognizing these problems, the Government set up a National Land Agency (Badan Pertanahan Nasional-BPN) in 1988 and charged it with the task of overall coordination of land use planning and registration. In the same year, the Ministry of Forestry took steps to reduce the backlog of uncollected royalties ard made some progress in improving enforcement of regulations concerning timber-cutting. 3.81 In 1989, the Government moved to consolidate the initiatives of the previous year. To give BPN a higher profile and wider representation within government, the Government established an inter-ministerial committee to oversee and coordinate land use planning across all sectors. With respect to progress on the agenda for improving forestry management, the Ministry of Forestry has taken several steps in 1989/90 including: increasing the reforestation fee by 75%; improved monitoring of forests through remote sensing; and introducing a new Bill for Conservation in the Parliament for enactment in 1990. 3.82 Further progress in improving institutional arrangements, especially by clarifying and strengthening the role of BPN, is essential for successful land use planning and forestry management. As isstitutional arrangements are strengthened, future reforms should concentrate on land policies. Also high priority now must be given to the completion of the geodetic reference system, so that the committee and BPN will have accurate information necessary to develop and implement proper policies. In the forestry sector, further steps are needed to improve revenue collection and enforcement of regulations concerning timber cutting to ensure more sustainable development. A review of the recent sharp increase in the export tax on sawnwood would also be advisable. 3.83 Water resource management and gollution control. Due to the increasing densities of both industrial development and human habitation, water availability and quality are becoming major constraints in many areas, especially on Java. Rainfall on Java is relatively abundant, but it is heavily concentrated in a 6-month period. This concentrated rainfall, combined with increasingly deforested catchments and relatively short rivers, produces frequent flash floods, fast run-off, and sharp variations in flow. Due to the population density in Java, water availability is low and the problem is exacerbated by the scarcity of suitable dam sites for storage and river regulation. Coupled with rapid industrial growth, the competition for water has become intense. 3.84 Careful planning will be necessary to ensure orderly and efficient development in the future. The challenge is to ensure water for both industrial users and for human consumption. The designation of forestry lands for timber production or agricultural conversion also needs to take into account the impact on watersheds and catchments. Industrial development and forest land conversion both have broader implications for the availability of irrigation water needed to maintain agricultural production. The Government - 78 - is already undertaking initiatives to address water resource problems in specific areas. However, there is a strong need to consolidate these efforts into a standardized strategy and institutional arrangement. 3.85 With respect to pollution control, legislation already requires that envvironmental impact analysis (EIA) be done prior to approval of government projects. Most of the Lajor external donors have now instituted EIA requirements for all p.ojects they finance in both the public and private sectors. Private sector investors must also comply with certain environmental regulations. However, the responsibility for monitoring compliance with environmental regulations is extremely fragmented, and agencies lack the droper equipment and training. 3.86 The Government is currently considering the establishment of a centralized environmental agency that would have broad authority to set standards, assist in manpower development, and impose penalties for non- compliance with regulations. Issues related to the proposed agency's legal mandate and degree of authority at the provincial level, however, remain to be resolved. - 79 - CHAPTER 4 PUBLIC SECTOR MANAGEMENT FQP GROWTH AND POVERTY REDUCTION A. Introduction 4.01 Indonesia's successful adjustment performance has set the stage for sustained growth and progress in poverty reduction in the 1990s. The sharp expenditure cutbacks made to restore macroeconomic balance, although focused on less vital areas, could not be sustained indefinitely without constraining growth. Accordingly the focus of the public sector has shifted from the management of expenditure cutbacks to the efficient management of a growing level of public spending. The rate of expansion of public expenditures, however, needs to be carefully balanced. The policy challenge for the public sector will be to provide sufficient complementary resources to support private sector growth and poverty reduction while containing the level of public expenditures to preserve macroeconomic stability and ensure adequate resources for financing private sector investment. 4.02 The realization of the Government's policy objectives for the 1990s calls for a sharper focus of public spending on two broad priorities: (a) ensuring adequate provision of basic infrastructure and services to remove potential bottlenecks constraining higher growth of private sector activity (agricultural support services, power, telecommunications and transport); and (b) better targeting of public expenditures to meet the needs of the poor for basic services (primary and nonformal education, community health, family planning, water supply and sanitation, and other social infrastructure). Allocations for REPELITA V (Table 4.1) show that the Government intends to respond to these requirements, and recent budgetary allocations have been consistent with these overall priorities. Key elements are: (a) a reduction in the share of development expenditure for direct production activities in industry and mining, falling from 10% in REPELITA IV to 7% in the 1990/91 Budget; (b) a sharp increase in the share of development expenditure allocated to complementary economic infrastructure and agricultural support services, rising from 40% to 52% in the 1990/91 Budget; and (c) a continued large share going to human resource development, up from 22% to 23%. 4.03 These broad shifts in resource allocation between sectors are appropriate. Adequate availability of economic infrastructure will be essential to support economic growth, non-oil exports, private investment and employment. Provision of agricultural support services will be necessary both to sustain the projected rate of agricultural output growth and to increase the earnings of poor smallholders and landless laborers. Human resource development will play an important dual role in promoting growth and poverty reduction by creating a more skilled and productive labor force. This chapter reviews and illustrates selected public resource management issues which need to be addressed in achieving these policy objectives. Section B analyses opportunities for allocating public spending within individual sectors to ensure that available resources are not spread thinly between low and high priority areas for public intervention. Section C examines the need to complement improved targeting of public expenditures with better pricing - 80 - Table 4.1: SECTORAL DISTRIBUTION OF DEVELOPMENT EXPENDITURES (t of total) REPELITA IV REPELITA V 1989/90- 1990/91 Actual Plan Budget/a Budget Agriculture 15.2 20.8 19.7 20.3 Agriculture fb 5.3 9.8 9.6 10.1 Irrigation 4.4 6.2 4.7 4.6 Transmigration 3.2 3.0 2.7 3.6 Resources and environment 2.2 1.7 2.6 2.0 Infrastructure 29.2 30.0 32.3 31.5 Energy 13.3 9.9 11.3 11.5 Transportation and communications 16.0 20.2 21.0 20.0 Industry and mining 10.0 4.9 6.7 6.6 Industry 5.6 2.1 3.2 2.9 Business development 2.5 1.7 1.4 1.4 Mining 1.9 1.1 2.2 2.2 Regional development Xc 9.7 10.5 11.6 12.3 Human resource development 21.5 27.2 21.8 22.6 Education and manpower 14.4 16.7 13.4 14.1 Health 2.0 2.6 1.9 2.5 Population and social welfas. 1.3 1.4 1.2 1.2 Housing and water supply 3.8 6.5 5.3 4.8 General services /d 14.5 6.5 8.0 6.8 Total 100.0 100.0 100.0 100.0 Memo item (Rp. trillion): Total at current prices 48.0 101.7 13.5 15.2 4a~ Includes supplementary budget (ABT) allocations totalling Rp.1.15 trillion. /b Excludes fertilizer subsidy (assumed to be Rp.1 trillion during the REPELITA V plan period). /c Comprises INPRES grants, which include specific sectoral !llocations. d Excludes defense. policies designed to raise revenues, induce greater efficiency of resource use and improve the equity of public spending. Section D discusses selected areas where a concerted effort will be required to overcome institutional problems in program management which are likely to constrain the effectiveness of the projected expansion in the public expenditure program given the changing composition to smaller and more complex projects increasingly managed by the - 81 - regional governments. Finally, section E reviews the Government's progress in public enterprise reform aimed at streamlining their efficiency and financial performance. Since public enterprises provide a number of goods and services essential for private sector development (power and telecommunications) improved efficiency will contribute directly to sustaining growth. Better financial performance combined with selective divestiture will free public sector resources for higher priority uses. B. Public Expenditure Priorities 4.04 The role of public expenditure in meeting the goals of stable growth and poverty reduction differs from sector to sector. Despite these differences all sectors face the same fiscal challenge of controlling total spending and allocating it efficiently to high priority uses. Resolving this in practice depends on an appreciation of where government involvement needs to be concentrated in order to complement and support private sector activities, and of where limited resources can be spent most effectively in areas wher_ public involvement is called for. This section illustrates these considerations in selected sectors. It has four recurring themes: (a) opportunities exist for private sector participation in providing services that will remain largely in the public domain; (b) reallocation to higher priority programs could improve the effectiveness of public spending; (e) higher levels of operations and maintenance (O&) spending are vital to improve the quality and productivity of public infrastructure; (d) greater emphasis needs to be placed an attracting and motivating qualified staff to improve the implementation of public programs. SuoDorting Private Sector Development 4.05 An important requirement for rapid development of the private sector is the complementary development of basic infrastructure and support services to avoid bottlenecks to higher growth in the 1990s. Key areas for government involvement include the provision of agriculture support services to farmers, public utilities (power and telecommunications) and transportation (ports and roads). A critical potential constraint is the power capacity shortage emerging in the face of rapid economic growth which could disrupt the investment climate, manufacturing output growth and the non-oil export drive. 4.06 Agricultural support services. A vital factor in sustaining the projected rate of growth in agriculture will be the provision of agricultural support services to farmers. Opportunities exist for improving the effectiveness of public spending on these programs, notably in irrigation, tree crops and research and extension. The past emphasis on developing new irrigation systems played a major role in Indonesia's achievement of rice self-sufficiency and also raised the income of many poor farmers. However, most of the areas highly suitable for irrigation have now been developed and economic returns to construction of new systems (headworks and the main and secondary structures) are now very low (less than 10% in most areas). By contrast, the past underfunding of systems maintenance has led to a situation where higher funding of operations and maintenance (06M) has very high returns (usually exceeding 50%). Ensuring efficient operations and maintenance (EON) would improve water delivery throughout the system, especially to poorer - 82 - farmers at the tail end of the systems, who suffer most from irregular or inadequate water delivery. Better water delivery would permit a roughly 20% higher cropping intensity within existing systems, and this would yield higher rice production. These factors suggest that the REPELITA V period should be one of consolidating past investments and operating them efficiently. This is the approach outlined in the text of the RVRELITA V plan. Although expenditures on Q&M have been rising, adequate funding of EOM would require increasing the O&M budget by about Rp.80 billion over 1989/90 levels to around Rp.140 billion. The additional funding required would amount to only one- fifth of the amount spent on new irrigation system construction in 1989/90. The full benefits of increased funding will be reaped with greater attention to effective planning and budgeting of these resources (see para 4.52). 4.07 Recent studies indicate that about 200,000 to 275,000 hectares of additional irrigated land would be needed to meet rice production targets over the next five years. By concentrating on completing the backlog of land and tertiary development within existing command areas, the required increase in area could be achieved more quickly and at less cost than new system construction. These existing areas contain at least 500,000 hectares of potentially irrigable land, and the cost of bringing such land under irrigation is only about one-half the cost per hectare of constructing entirely new systems. These efficiency considerations need to be carefully weighed in evaluating proposals to construct new irrigation systems in areas that are presently entirely unirrigated. 4.08 In allocating tree cros expenditures the Government confronts a choice between concentrating its limited resources on a few farmers using costly high-input approaches or spreading them across a larger number of farmers using lower cost alternatives. To date, the smaliholder tree crop program has reached less than 15% of existing rubber farmers and less than 5% of existing coconut farmers, many of whose trees are old and very low-yielding. This partly reflects the high costs of the current approach, which involves large amounts of agronomic inputs and technical support with the aim of achieving very high yields. This approach has also been constrained by difficulties in establishing a viable credit mechanism to finance farmers' purchase of inputs. Thus, the Government needs to consider developing lower cost per beneficiary approaches that would use lower levels of inputs and enable the farmer to self-finance a larger portion of total costs (see Table 4.2). Such approaches, such as provision of nursery material only, would place more emphasis on tree crops as only one component of a mixed farming system and would permit farmers to spread planting over a number of years. They would not attempt to reach the yield levels aimed for under the current higher cost approach, but they would still help many more existing tree crop farmers achieve much higher yields than are possible with their current unimproved tree crop varieties. They would also substantially raise the incomes of poor farmers who do not yet grow tree crops. 4.09 In order to support a progressive broadening of the production base and, in particular, to increase the productivity of dryland farmers, the Government's research and extension services need to be strengthened. The tight budgetary situation constrained the ability to carry out effective research in the 1980s. Similar constraints have meant that extension services reach only about half of all farmers. Ltpenditures on research and extension have since begun to rise, primarily because of new externally funded projects. - 83 - In conjunction with the increased funding, the Govern=ent is beginning to shift the focus of its research programs from a purely commodity-based approach to a greater emphasis on palawija (secondary) crops and a farming systems approach that treats the various on-farm activities as an integrated enterprise. This new focus holds special promise for helping poorer farmers in remote and upland areas, where soils are often poor and access to inputs is limited. It will be important to ensure that the extension system is appropriately structured and adequately funded to convey the results of such research to its intended beneficiaries. able 4.2: COSTS AND BENEFITS OF RUBBER DEVELOPMENT SCHEMES Financial Beneficiaries Economic Model Development Costs per Rate of Return (Rp.2000/ha.) Rp. billion (S) Present approach 1,496 668 24 Partial assistance 1,196 836 23 Nursery material only 415 2,410 23 Source: Indonesia: Strategies for Sustained Develonment of Tree Crops, IBRD Report No.7697-IND, December 7, 1989. 4.10 Eleotricity. The projacted growth in economic activity, particularly manufacturing, implies a rapid increase in the demand for power. Recent information from PLN's waiting list indicates that the annual increment in connections by industrial customers in Java-Bali, where most of the increase is concentrated, could double from about 500 MVA/year between 1986/87-89/90 to over 1000 MVA/year from 1990/91-93/94. As shown in Table 4.3, there is a clear risk of power shortages emerging in Java in the near future, as rising demand outstrips the available supply form PIN's grid. In view of the lead time required for increasing supply, it will be important for PLN for PLN to develop a strategy for balancing supply and demand in order to prevent load shedding and consequent disruptions to the economy. 4.11 A comprehensive strategy would include both supply and demand side measures to achieve equilibrium. Priority least-cost options for enhancing supply include the following. First, measures tc accelerate planned additions to generating capacity, particularly the gas-fired Combined Cycle Plant at Gresik, the coal-fired Steam Power Plant at Paiton, and the Coal-fired Suralaya Steam Power Station. Implementation could be accelerated by using simplified procurement procedures. At the same time, it would be important to finalize arrangements for supply of gas to the Gre,sAk plant to minimize initial reliance on more costly diesel oil. Secord, measures to 4mprove maintenance management to reduced planned downtime could have sigLificant benefits. And third, measures by PLN to purchase surplus energy and capacity from capture generators for resale to its other customers. - 84 - 4.12 Complementary demand management measures would take advantage of the existing large stock of captive capacity. In addition to maintaining appropriate electricity prices, the principal measures which need to be considered to reduce the demand from the grid in a least-cost manner include: (a) suspending the program to substitute grid supply for existing captive capacity in order to reduce the rapid rate of increase in sales. Of all types of customers, those that already have installed captive generation face the lowest alternative cost of supply, as they only have to pay the fuel and operating cost of their own equipment; and (b) encouraging PLN customers to use their existing generation equipment in lieu of PLN supply. This can be pursued through tariff incentives or administrative directives to ration the available supply. 4.13 Overall, as shown on Table 4.3, the above measures offer the potential for eliminating the imbalance between supply and demand. This would avoid the need for more costly and less desirable options, such as a freeze on new industrial customer connections, a slowdown of the rural electrification program, a crash program for the installation of gas turbines (other than those required for the Gresik Combined Cycle Plant), antd major planned outages, with the attendant disruptions to the economy. Table 4.3: ELECTRICITY SUPPLY AND DEMAND IN JAVA-BALI (Gross energy generation in TWh) Supwly Demand a/ Without With Without With Enhanced supply Enhanced supply Demand management Demand management 1990/91 29.0 29.2 28.9 28.1 1991/92 29.0 29.8 33.5 29.8 1992/93 29.1 30.5 39.1 30.5 1993/94 32.7 37.6 45.2 37.6 1994/95 40.2 43.1 51.9 43.1 V/ Includes transmission and generation losses and power plant use. Source: PLN and World Bank staff estimates. 4.14 Telecommunications. A prerequisite for supporting private sector development is the provision of an efficient countrywide telecommunications network. In the past, the telecommunications network has not grown sufficiently to support the overall growth of the economy. Since 1981, the gap between expressed demand for telephone service and available telephone lines has widened. In recent years, the waiting list for telephones has increased at an average of 14% p.a. By end-1988, unmet registered demand for telephone service had increased as a proportion of total supply from 39% of lines in 1982 to 70%. At the expansion rate achieved during 1984-89 (average 50,000 lines p.a.), it would take 10 years to meet the current backlog of registered demand alone. Over the next five years, growth in demand for new - 85 - services is expected to surge, fueled by expansion of export-oriented industries and the tourism sector. The total demand for telephone service is expected to grow at only an average annual rate of 15%. Over the same period, the number of main lines is projected to grow at 15% per year, a rate which is too low to make any progress in reducing the backlog. Therefore, despite rehabilitation and a large increase in investment, the supply of telecommunications facilities and services is likely to remain inadequate relative to demand throughout REPELITA V and beyond. 4.15 Achieving a rapid and cost-effective increase in the availability and quality of telecommunications services in Indonesia will require substantially increased investment levels and improved implementation capacity. To relax these constraints the Government and PERUMTEL are seeking to identify activities, including the provision of certain network telecommunications services, where private sector participation can be increased. In the short term, PERUMTEL, as part of the process of increasing its commercial orientation and efficiency, may assess the merits of increased contracting out of a number of operations such as design and construction of outside plant and other telecommunications facilities on a turnkey basis, project and construction management, and the maintenance of certain telecommunications facilities. 4.16 With respect to ownership, long-term options extend from a 100% government-owned corporation to various levels of private sector ownership with or without foreign participation. Given the limitations of funds that can be obtained through the Government, a critical consideration in assessing these options is to ensure that investment levels adequate for the required rapid expansion in service and improvement in service quality will be available. In the short term, consideration could be given to increasing the operational autonomy of PERUMTEL by estab'lishing it as a 100% government-owned corporation (along the lines of PT. Indosat) that would be allowed to retain earnings, subject to the payment of dividends and taxes. 4.17 Transgort. Rapid growth of manufactured exports in recent years has been accompanied by dramatic increases in cargo flows at specific points in the maritime transgort system. This is illustrated by developments at Tanjung Priok port container terminal where containerized exports have more than quadrupled over the past 4 years from 0.33 million to 1.4 million tons. The Government has taken major steps to provide new port infrastructure over the last decade. The result has been significant expansion and upgrading of numerous facilities and especially, the development of specialized container terminal facilities in Tanjung Priok (Jakarta), in Belawan (Medan) and in the near future, in Tanjung Perak (Surabaya). Because the Indonesian port system will need to become increasingly container-driven to support the growth in non-oil exports, port investment priorities need to focus on facilitating movement of general cargoes in containers from all locations, including interisland origins which are not yet equipped for containerisation. While there is currently adequate capacity in the key ports, it will be important to monitor the growth and pattern of demand very closely and to plan carefully for the provision of additional capacity. 4.18 Although the quality of Indonesia's main inter-urban road transport network has improved substantially in the past ten years, it is still largely unsatisfactory. Only about 40% of the 50,000 km of national and provincial - 86 - roads are in good or fair condition while about 25% requires heavy maintenance and 35% need rehabilitation or reconstruction. In addition, about 1,100 km located in suburban or very densely populated areas are faced with congestion problems. These circumstances should guide the allocation of expenditures to and within the highways sub-sector in the coming years. In broad terms, expenditures need to be allocated to minimize the total road transport system costs. The planning tools to facilitate this are available and are being implemented (see para 4.55). Given the high cost of transport on poor quality roads, the aim would be to maintain all roads in good or fair condition and upgrade those which have deteriorated or are carrying a larger volume of traffic. At the same time it will become increasingly important to increase the capacity of radial roads on th.e approaches to the major cities, and key links within those cities, which are becoming congested. Sound traffic management and road pricing policies would complement these expenditure priorities (see para 4.43). A key objective is to enhance the road network's ability to carry larger and heavier multi-axled commercial vehicles, in order to improve the overall efficiency of road transport. 4.19 The Government plans to spend about one-third of total road expenditures on rural roads. To achieve better returns from this expenditure the Government intends to raise quality standards for roads through higher allocations per unit. Improvement in local government and contractor capacity, together with more effective central and provincial government supervision and monitoring of the program, would complement this initiative. Future levels of spending on rural roads would need to be realistic and closely matched to improvements in the absorptive capacity of the kabupaten public works units (DPUKS). ImRroving Basic Services for the Poor 4.20 Improving access to and the consumption of basic services (education, health, family planning and water supply and sanitation) is a necessary condition for the Government's anti-poverty policies to be successful in the long run. These interventions address first of all the most severe consequences of being poor. But they also constitute investments in human capital which address some of the most important causes of poverty, thus providing the basis for long-term poverty reduction. 4.21 Educatign. Education plays an important role in reducing poverty over the long term, both indirectly by improving the productivity of the work force and also directly by providing the poor with the skills necessary to raise their productivity and incomes. Primary education or its equivalency are critical for the latter, as shown by the high social rates of return to primary school education in Indonesia. In the past decade, the Government has made a concerted effort to improve the availability of education. This program has succeeded in providing access to primary schooling to virtually all Indonesian children of primary school age. 4.22 The nearly complete coverage of primary schooling leaves little room for differentials in enrollment by income class. Equalising educational opportunities at primary level is, therefore, principally an issue of equalising the quality of education. There are significant income-related quality differentials in both primary and secondary education. One indicator is primary school repetition rates, which vary considerably across provinces - 87 - and are significantly higher in poorer provinces. These differences in quality arise from differences in the capacity of individual communities to supplement budgetary resources which are inadequate for nonsalary needs. Thus, education quality is much higher in the more affluent communities which are able to raise funds through private contributions. Those communities or individuals that cannot afford to pay higher fees suffer because their schools do not have the complementary inputs necessary to improve education quality. The problem is that the allocation of central government funds for primary education does not compensate for the inability of poor areas to mobilize local resources. 4.23 There are two policy options for improving access by the poor to the full benefits of education. First, while primary school enrollment is virtually complete, there is evidence that inability to pay the costs of schooling increases primary school drop-out rates among the poor and is a deterrent to school attendance among the poor at higher levels of schooling. The Government might consider providing financial support to the poor for this purpose. Second, there is substantial scope to improve the quality of primary and secondary education provided to poor children and in poor areas. The most important needs are for adequate financing of essential supplies such as textbooks, teacher's manuals and chalk together with improving teacher quality through in-service training. Currently, budgetary allocations per student increase sharply with the level of education, indicating that the better off students who are able to remain in school are receiving a disproportionate share of the Government's education outlays. Some reorientation of budgetary priorities within the education sector would therefore be appropriate. In particular, increasing budgetary outlays for improving the quality of primary education, while restraining subsidies for higher education, would improve the efficiency and equity of the system. In addition, it will be essential to develop a proper mechanism for targeting larger subsidies to primary schools in poor communities. 4.24 Non-formal education (NFE) also has a role to play in poverty reduction. First, there is a close association between illiteracy and poverty. About one third of the poor are illiterate and almost 50% of the poor above the age of 29 are illiterate. Second, since the rapid expansion in primary school enrollments only occurred in the early 1980s, many oldea. Indonesians have not had the opportunity to acquire the basic education skills needed to participate actively in the labor market. The nou-formal education directorate of the Ministry of Education and Culture has a number of programs designed to teach basic literacy and numeracy, raise community awareness, and support local income generating activities. The options to improve NFE during the REPELITA V period include: (a) expanding the resources available to these NFE programs; (b) increasing the number of extension workers, as well as improve their training in the income generating aspects of NFE programs; and (c) targeting NFE activities to those areas where poverty is the highest. 4.25 Health. Indonesia's record of mortality reduction has been solid and impressive. A key indicator is infant mortality, which has been roughly halved in the past two decades. However, the poor have benefited much less from the progress in mortality reduction than the non-poor. In addition, the sick poor use fewer modern curative health services than the better-off. Most of this difference in outpatient visits is due to the higher use of high- quality providers (doctors and hospitals) among the better-off. The - 88 differential in hospital admission rates is wide, averaging three times as many for the non-poor compared to the poor. Even more striking than the relatively low utilization zates among the poor in Indonesia, especially for hospital admissions, is the fact that overall these rates are extremely low, even for the non-poor, compared to levels prevailing in other countries. Other developing countries have average hospital aumission rates between 5 and 10 times higher than the Indonesia average of 13.6 per 1,000 per year.L/ Even in the poorest consumption quintile, hospital admission rates are 3 to 6 times higher than the average for Indonesia as a whole. 4.26 The low level of utilization of health services by the poor in Indonesia indicates a need to further lower barriers to access by improving both the quality and quantity of available services. High priority needs to be given to the scope for raising recurrent expenditure on operations and maintenance inputs necessary to provide adequate service through fixed facilities, and to support the mobile outreach inputs to the village-level service delivery mechaiism for preventive health intervention (POSYANDU). Key components of the effort to raise quality include: redistribution of specialist doctors from tertiary to lower level hospitals; increasing the supply of medical and paramedical staff to understaffed health centers; increasing the supply of health center drugs, which presently cover about three-quarters of annual requirements; and increasing the operational budget of health centers to ensure sufficient funds for travel in support of POSYANDU activities. On the investment side, priority needs to be given to increasing the supply of community health centers and subcenters in order to reduce travel time in poorer areas with more dispersed populations. The need to improve both the quantity and quality of health services for the poor presents a potential trade-off between investment and recurrent expenditure from constrained budgetary resources. Resolving this trade-off will require a stronger resource mobilization effort both to increase the low health sector budget share and to raise the low level of cost recovery in the sector. On the budgetary side, it will be important to continue to improve the distribution of government resources to poorer regions. On the cost recovery side, a key element will be to raise reimbursement levels from the health insurance scheme for government employees (ASKES) in order to reallocate subsidies now received by the better-off with insurance to the uninsured poor (see para. 4.46). 4.27 Family planning. The role of family planning in poverty reduction is well appreciated in Indonesia. A successful family planning program creates better conditions for sustained economic growth and improves the ability of the poor, and especially women, to participate in and benefit from economic development. Slower population growth also eases growing pressures on Indonesia's limited land and water resources, thus helping to postpone the emergence of environmental constraints. Although substantial progress has been made, much remains to be done about the population problem. The total fertility rate of 3.4 is still significantly higher than replacement level and the population is projected to rise to 195 million in 1994 and 213 million in 2000. Contraceptive prevalence overall remains at only 45% of married couples' and the contraceptive needs of large segments of the population ]/ For details see Indonesia: Poverty Assessment and Strategy Relort, IBRD Report No. 8034-IND. - 89 - re&ain unmet, particularly among the poor, less educated, and rural women. It is estimated, for example,, that the vast majority of women with unmet family planning needs in Indonesia (71%) have not completed primarv education. 4.28 To reduce the total fertility rate from 3.4 to the Government's 1994 target of 2.89 the number of couples using contraception would .ed to increase substantially, from 14.2 million in 1988 to 19.4 million in 1994. During this period, the contraceptive pvvalence rate would have to rise from 45% to 54.4%. This would require a continuing increase in domestic budgetary outlays. At the same time it will be necessary to target these resources more efficiently to reach the large number of poor women with unmet needs for family planning. In particular, the Government might consider giving higher subsidies to contraceptive methods that are more cost-effective and for which there is unmet demand among the poor (e.g., sterilization). 4.29 Water supply and sanitation. Improved water supply and sanitation in rural areas can have wide-ranging health, economic, social and environmental benefits. The greatest effect on health from the provision of rural water supply and sanitation (RWSS) is likely to come from improved sanitation facilities and an increase in water quantity. Furthermore, the benefits of KWSS can be especially important for women and children, as they play a major role in carrying water. Rural service levels are low in Indonesia, with available coverage favoring water supply (36% of households) over sanitation (18% of households), and biased in favor of the better-off. The Government has committed itself to making an intensified effort in REPELITA V to increase substantially the coverage of RUSS. This will require: (a) a clear definition of institutional responsibilities and an effective coordinating mechanism; (b) the use of low-cost appropriate technology; (c) the use of a cost recovery mechanism to provide funds for the operations and .xaintenance of these systems with the capital cost provided through the INPRES program; and (d) the use of community-based groups in implementation to encourage local acceptance, provide education about health benefits, and help overcome the financial and staffing constraints of the Government. 4.30 Progress has been made in improving access to safe drinking water in urban areas but significant disparities in access still remain between poor and non-poor households. The situation for the poor is becoming critical, especially in the larger cities and the role of standpipes or a viable alternative has become increasingly important. Recognizing this, the Government has recently embarked on a major initiative to improve the access of the urban poor to water at affordable prices (see para. 4.48 and Box 4.1). 4.31 Human waste disposal is generally unsanitary in Indonesian cities. This can have severe effects upon human health, especially in crowded and congested urban areas. As with water, there is a significant disparity between the poor and the non-poor, with almost one third of poor households indicating that they do not use formal sanitation facilities. Despite the apparent need for and availability of appropriate technology, public expenditures on sanitation have lagged. The Government plans to give greater priority to the improvement of urban sanitation during REPELITA V. Although public investment in the subsector would increase significantly in real terms, it remains small compared to overall needs. Given these limited public resources, the focus should be on providing more and better toilets for poor households with on- site disposal. This would require the adoption of appropriate technologies on - 90 - a larger scale, clarification of institutional roles, formulation of a list or priority areas within cities, and greater involvement of the community. In this regard, an evaluation of the ongoing pilot program in Solo and Semarang could be undertaken with a view towards wider replication. It is also important to improve the knowledge of poor urban residents about the benefits of sanitary disposal of human waste. 4.32 Kanmunf improvement program (KIP). The KIP is a nationwide program for upgrading unplanned urban villages, particularly in lower-income commnuities and is, therefore an important mechanism for improving basic services for the urban poor. It provides a range of infrastructure at minimal standards including local roads, footpaths, drainage, water supply, public sanitation facilities and solid waste collection. In the past, this program has successfully focused on badly serviced areas in a number of cities. Recognizing its potential to address the needs of lower income groups, the Government is increasing its expenditures on the KIP program during REPELITA V. The effectiveness of expenditures in this area could be raised by more fully addressing community priorities, which is likely to result in more funding being allocated to sanitation, solid waste or water supply where the needs of the poor are the greatest. In order to improve the performance of these components, it will also be important to make complementary improvements to primary systems outside the kampung and to provide adequate 0&K funding. C. Pricint Policy f-or Public Services 4.33 Against a background of clear spending priorities, appropriate pricing policies can help to improve investment decisions, raise operational efficiency and reduce inequalities in public service provision. Many public services are provided free or at low cost for equity reasons so that poor people have access to them. But in practice budget constraints can ration the provlsion of subsidized services with the result that they disproportionately benefit the better-off. Charging efficient prices to better-off users while targeting available subsidies to poor beneficiaries can, therefore, help to alleviate poverty and improve efficiency at the same time. Even when revenue is not transferred directly to the budget, higher prices reduce the need for borrowing or budgetary payments for subsidized expenditure. The budgetary savings which result can provide more resources for priority needs or can be used to reduce the budget deficit. Thus, pricing policy can be an important complementary instrument in the effort to target public expenditures on high priority areas. Agriculture 4.34 Most prominent among the policies affecting the allocation of public resources to agriculture are the input subsidies on fertilizer, credit, and irrigation. The policy of subsidizing zIertlfer has kept the retail price well below economic levels, and Indonesia's farmgate prices are among the - 91 - lowest in the region.2/ The Giovernment originally introduced the subsidy to encourage farmers to apply the inputs necessary to fully exploit the productive potential of the new high-yielding varieties of rice, and this policy succeeded: fertilizer application rates increased by over 500% between 1970 and the mid-1980s, and by 1984 application rates were more than twice as high as in the Philippines and more than three times as high as in Thailand. Indonesia's farmers are now generally well aware of the benefits of fertilizer. Given subsidized prices, however, profit maximizing farmers use more fertilizer than is economically optimal, which means that the fertilizer subsidy is generating very low returns. It also has negative environmental effects on water quality due to run-off. The Government's successful decision co eliminate the pesticide subsidy in 1989 demonstrated that input subsidies can be removed with little impact on production and with positive environmental effects. The integrated Pest Management initiative, introduced in 1988, attempts to train farmers to apply inputs such as fertilizer and pesticide more efficiently in order to lower costs and help to reduce environmental side-effects. 4.35 Recognizing that the fertilizer subsidy is now distorting the allocation of resources, the Government has begun a series of annual real increases in the retail prices per unit of fertilizer. However, these increases have been largely offset by higher overall fertilizer demand, so that the financial subsidy continues to exceed Rp.700 billion, which amounts to about one-third of total agricultural development expenditures. Recent agro-economic evi ence suggests that prices for all the fertilizers could be increased substantially without slowing the growth of rice production, especially if rice prices remain strong; this evidence is supported by the experience of the last two years, during which rice production has increased about 10% despite a 27% rise in the real price of fertilizer. Reallocation of this subsidy could substantially increase the effectiveness of agricultural spending. 4.36 Major input subsidies on credit have been a past feature of agricultural strategy, but the Government has taken dramatic measures to remove them. Past programs nearly all lent money at highly subsidized rates, and all suffered both from diversion of funds to unintended beneficiaries and from high arrears. The banking deregulation of 1983 set the stage for the emergence of KUPEDES, a very successful unsubsidized rural lending program that has lent at market rates to over 6 million borrowers and achieved a recovery rate in excess of 96%. KUPEDES has also reached out to the poor. A recent survey suggested that over 70% of borrowers are landless or near- landless, and that over 70% of poor borrowers had climbed over the poverty line after three years of participation in the program. In early 1990, the Government announced the termination of most subsidized credit programs across all sectors. Of those left in the agriculture sector, intermediation margins and onlending rates have been increased significantly. Even though the onlending rates are still subsidized, the higher intermediation margins in conjunction with the withdrawal of government guarantees against default 2/ In late 1989, for example, farmgate prices for urea and TSP in Indonesia were estimated to be 45% lower than their economic levels and 50% lower than the average farmgate prices prevailing in a wide selection of other Asian countries. - 92 - should strengthen financial discipline over time. One major remaining issue is the lack of long-term financing available in the agriculture sector. This problem is especially acute in subsectors such as tree crops, which yield high economic returns and have a substantial poverty reduction impact. 4.37 A th,_ area where agricultural inputs are subsidized by the Government is in irrigation. Although farmers enjoy substantial benefits from irrigation, they are not required to pay directly for any of the costs of construction; however, some farmers have paid a small land tax which is an indirect cost-recovery mechanism. In a situation where many poor farmers have only limited or no access to irrigation services, it would be more equitable to redirect part of the subsidy away from already irrigated areas and use it for expanding the irrigation network to include more farmers. Indeed, the Government is now beginning to institute a system of partial cost recovery for irrigation O&N in a few provinces. Although this initiative is currently proceeding only on a pilot basis, it deserves high priority both for general cost recovery reasons and also because a well-designed cost recovery system can improve water delivery to farmers. Since O&M is currently underfunded by over 50%, and the returns to improved 0&M are very high, farmers are likely to be willing to pay irrigation service fees if the revenue is used directly to improve O&M for the same systems and if farmers are given the opportunity to participate in water management Energy 4.38 As Indonesia moves towards a more deregulated economy, there is a need to rationalize the structure of domestic energy prices to support the Government's strategy of guiding energy-related investment and operating decisions towards least-cost solutions and improved efficiency. Government price controls on energy (electricity and petroleum products) are among the most important domestic price controls in Indonesia. Power tariffs were raised on average by 25% on April 1, 1989, to improve the financial performance of the power utility and the efficiency of electricity consumption. Undertaking future adjustments in power tariffs on a more systematic basis would help to ensure that PLN is able to operate on a solid financial basis with adequate internal resource generation to implement its expansion plan. At projected prices for 1990/91 there are substantial budget subsidies (over Rp.600 billion) for 2etroleum products unless domestic sales prices increase in line with the rise in world oil prices. Elimination of these subsidies would have important macroeconomic effects by: (a) freeing up large fiscal resources for reallocation to higher priority uses; and (b) reducing the rapid growth in domestic demand for oil, thereby slowing the decline in the exportable oil surplus and avoiding adverse consequences for oil exports and the balance of payments. Thus, President Soeharto has recently announced that "low domestic oil fuel prices cannot be maintained for too long because it has encouraged inefficient use of the energy resource'.3 4.39 Petroleum prices are also characterised by cross-subsidization of some products. The primary objective of energy pricing is to signal to producers and consumers the economic cost of supply of the different energy sources. As petroleum products are traded goods, a straightforward t/ Jakarta Post, March 5, 1990. - 93 - rationalization of petroleum product pricing to reflect world prices would involve increases in the prices of diesel and kerosene which are subsidized at present, and reductions in the prices of fuel oil and gasoline which are taxed. Elimination of the diesel oil subsidy would have favorable efficiency impliations by discouraging its use in industrial applications where less valuable fuels (gas, coal and fuel oil) can be substituted, and also the exeessive use of heavy goods vehicles for commercial freight transport by road. Reducing the kerosene subsidy intended for poverty reduction purposes would reduce the disproportionate leakage to better-off domestic consumers. Telecoimimications 4.40 Tariff policies for telecommunications services need to be structured to meet several goals. In order to contribute to economic efficiency, tariffs should reflect costs and, where unmet demand exists, serve to ration scarce capacity. For the operating entity to achieve satisfactory financial returns, tariffs must also attain revenue targets. Finally, they should be seen as equitable by the public. In order to provide access to telephone service for those who cannot afford private connections at such prices, the tariff policies should be accompanied by a serious program to provide service through public pay phones. 4.41 Certain changes in the level and structure of tariffs would be appropriate. First, telephone installation charges (currently Rp.500,000 in the Jakarta area) could be increased in order to moderate the excess demand for new service. h. additional measure would be to reserve a significant proportion of new lines for customers who would pay a higher installation fee in return for priority service within a one-month time frame.. Second, telephone service monthly subscription charges (currently Rp.3,500 per month in Jakarta) are very low compared with costs and with charges in other countries. Significant increases would tend to remove the existing incentive for certain subscribers to retain telephone services that have a very low utilization. Third, while local calls are relatively inexpensive, long-distance calls (especially those over 1,000 km) are expensive relative to long-run marginal costs and to equivalent long-distance rates charged in other countries. The structure of telephone usage charges therefore needs to be reviewed and adjusted. Given the congestion problems on the network, it would also be appropriate to introduce peak and off-peak charges for local and long distance service. 4.42 In addition to the structure and level of rates, other important factors to be considered are: (a) tariff changes designed to moderate excess demand and to improve the financial viability of PERUMTEL should be considered as integral to the ambitious REPELITA V telecommunications investment program; and (b) PERUNTEL and the Government should agree to periodic revisions of telecommunications tariffs (for example, every two years) in order to avoid larger rate changes that would otherwise be required at longer intervals. Transoort 4.43 The level and structure of road user charges in Indonesia have been inadequate for many years. When properly structured so that payments by different categories of users reflect their road wear and tear, the user charge regime for roads would: (a) induce operators to make economically - 94 - efficiont investment and operating decisions; (b) contribute towards eliminating distortions in the pattern of demand for different transport modes (particularly between road and rail); and (c) mobilize revenues to fund the road programs. In the past, total Government revenues from road users have not covered total expenditures on roads except in FY 1986/87. Moreover, there is a serious imbalance ln the tazation structure, as more than 90% of tax receipts accrue from small gasoline-engined vehicles. Heavy goods vebicles, which cause most of the read damage and require the construction of strong pavements, contribute very little to their road wear and tear costs. 4.44 In Indonesia, the fuel tax and the annual vehicle registration tax (which are the two most commonly used instruments to achieve cost recovery from heavy road vehicles) are too low and are not appropriately structured to encourage the use of vehicles which tre efficient from both the private and public point of view. In particular, diesel oil is subsidized (see para. 4.41) and the structure of the annual registration tax for heavy goods vehicles does not reflect the relative road wear and tear imposed by these vehicles. As a result, rigid two-axle trucks, which represent the majority of goods vehicles, carry loads which from the point of view of the road system would more economically be carried by multi-axled vehicles. Appropriate pricing of diesel to reflect world prices would help but would not be sufficient by itself to eliminate the distortion resulting from the low annual registration fees which are based on age and engine size. A restructuring of registration fees to encourage vehicle configurations and axle loads which are efficient from the point of view of the overall road transport system is also needed. Health Services 4.45 Targeting more public expenditures on health to poor beneficiaries would be helped by charging higher prices to better-off users and lowering prices for the poor. This price discrimination could be effected by charging full cost-recovery tariffs to the insured who tend to be among the better- off. This would require a fundamental reform in the pricing structure for government-sponsored health insurance which is based on reimbursing public health services at regular tariffs which are heavily subsidized. On average this subsidy amounts to around 75% of the unit cost of public services. 4.46 The service utilisation rates of beneficiaries insured under the ASKES insurance scheme for government employees are around five times higher than for non-ASKES users of public services. Because of the subsidized reimbursement policy, this insurance-induced boost to the demand for services entails a larger requirement for public subsidies to finance services for the better-off with insurance, thus depriving the poor of the benefits which could be provided by those public resources. Subsidized health services therefore disproportionately benefit the better-off. For example, the net subsidy per capita for ASKES users of public sector hospitals and health centers is about Rp.6,500 compared to Rp.1,200 per capita for the rest of the population. 4.47 The unequal distribution of subsidies associated with the ASKES health insurance scheme will tend to be exacerbated by present efforts (through the experimental PKTK schemes) aimed at expanding coverage along similarly subsidized lines but on a mandatory basis for the potentially large social security scheme (ASTEK) membership base of 5.5 million private sector - 95 - Box 4.1: Water Prices and Subsidies for the Poor Setting low official prices for public services does not necessarily ensure that intended subsidies benefit the poor. In 1988 only 14% of households in Jakarta had access to clean water through direct connections to the slowly expanding municipal water system. The rest generally relied on wells which are a cheap but increasingly contaminated source of groundwater. But in Northern Jakarta intensive withdrawal has resulted in depletion of the fresh water aquifers and alternative river sources are heavily polluted. As a result, private vendors had become the major source of drinking water for the less fortunate who do not have access to piped water. The private vendors obtain their iater supply mainly from public standpipes purchased by licensed operators from the municipal water company. The objective of this public standpipe program is to provide water for the poor who cannot pay for a house connection. The municipal water company sells subsidized water to the standpipe operators at an official tariff of Rp.150/ms. The operators then sell the water to private vendors for prices ranging from Rp.600 to Rp.l,000/ms, depending on the area and the season. Until recently, the vendors sold the water for prices which reached as high as Rp.9,000/m3 in the dry season for households who are 2 km or more from the nearest standpipe; even in the rainy season the average price only fell to around Rp.4,000/m3. Thus, the actual price charged to the end-user was usually much higher than the official subsidized price. The key to helping the poor get better access to subsidized water is to relax the supply constraints whick ration its availability. Recognizing this the Government has recently embarked on two major policy initiatives to increase the density of water outlets, and bring them closer to the poor. First, it is implementing an expanded investment program aimed at substantially increasing the number of public standpipes. An additional 655 were installed in Jakarta during 1989/90, thus raising the available number by nearly two-thirds. Program monitoring data indicate that this has already helped lower the average prices charged by water vendors by 40%. Second, this system expansion will be augmented by deregulation of the sale of water from private household connections. This would substantially increase the effective number of water outlets at no additional cost, thereby considerably improving access and further lowering prices for the poor. - 96 - employees. These considerations imply the need for a systematic review of issues and options for health insurance within the context of overall health financing arrangements aimed at improving access by the poor. This would need to provide an integrated analysis of the role of insurance, pricing policy and budgetary subsidies. Water SuRpIy 4.48 The main elements of the municipal water tariff structure are typically: (a) a relatively large cross-subsidy provided to connected households (in the form of subsidized water rates even at relatively high consumption levels) which is financed by a high surcharge levied on commercial and industrial users; and (b) high connection charges, which for certain areas are typically set above the cost of the installation. This pricing structure is not optimal given either the efficiency or the equity objectives of pricing policy. The high industrial and commercial water rates push these users towards private provision of water, which in turn risks inefficient over- extraction of groundwater resources. The large lump sum connection charge also prevents the poor from gaining accers to the subsidized piped water. Thus, the domestic consumption subsidy disproportionately benefits the better- off users who are able to afford the connection charge and also consume water more heavily than low income users. These considerations indicate the need to redesign the tariff structure. For efficiency reasons the surcharge on industrial and commercial users should be dropped. For equity reasons, the residential subsidy should be targeted at lifeline consumption levels (e.g., Sm3i/month) with higher rates charged for higher consumption volumes, in order to reduce the leakage of the subsidy to better-off users. The subsidy could then be reallocated to support the Government's intensified efforts in recent years to construct standpipes in poor residential areas (Box 4.1). D. ftogram Management and Imglementation Capacity 4.49 The projected expansion in public expenditure on infrastructure and human resources will pose a major challenge for project selection and implementation in the 1990s. Ensuring the efficiency and effectiveness of higher levels of public spending will require significant improvements in the planning, budgeting and implementation capacity of the Government departments. This section highlights three areas where improvements could bring substantial benefits to the project selection and implementation process: budgetary fragmentation, administrative reform and environmental assessment. Budgetary Fragmentation 4.50 Effective sectoral expenditure planning is complicated by the lack of transparency caused by the fragmentation of funding sources across multiple budgetary channels. Development project funding is channelled through many different sources, including: (a) the normal DIP allocations to central sectoral departments, a large part of which is spent in the regions; (b) INPRES transfers to the regional governments, which are split between several different block and sectoral grant programs; and (c) provincial and district development expenditures financed by local resources. Recurrent expenditure financing for O&M also tends to be fragmented, including sectoral allocations - 97 - in both the central development and routine budgets, as well as lump-sum transfers (the SDO salary grant) to regional governments, together with locally financed expenditures. 4.51 Development of an information base which aggregates these budgetary expenditures into corsolidated annual statements of expenditure totals and patterns for individ.-'l sectors would help sectoral planners to evaluate trends in the total amount of government spending, its composition between recurrent and investment spending, and its allocation between different sectoral programs and between regions. As such this information base on budgetary expenditures would improve the allocation of spending to high priority uses at a sectoral level. Development of consolidated budgetary information for individual sectors would, therefore, be an important step to improve sectoral planning and budgeting in the short term. In the longer term it may be desirable to move towards reform of the underlying budget structure in order to consolidate existing funding channels. 4.52 Budgetary fragmentation can also create difficulties in implementation. These are exemplified by the irrigation subsector where complex planning, budgeting, and implementation arrangements have put heavy strains on inter-agency coordination and made it difficult to ensure integrated development of irrigation works, agriculture, and land preparation. In this subsector, five central Government agencies (the Ministries of Agriculture, Public Works, Home Affairs, and Finance, and BAPPENAS) all have major roles in allocating expenditures for investment and O&M. However, it is the district branches of these agencies (most of which report to the provircial rather than central government) that actually implement the programs and are in the best position to estimate the timing and levels of funding needed for the development and efficient operation of the irrigation system. The situation is further complicated by the fact that funding comes from at least three sources: the central government DIP and INPRES channels, and the local routine budget. The irrigation service fee (para 4.37) will add yet another source of funding that will need to be considered. The division of planning, budgeting and implementation responsibilities makes it difficult for planners at the top to communicate effectively with implementers at the bottom, which means that funding allocations for O&M are often made on the basis of average costs per hectare rather than responding to specific needs in individual areas. Recognizing this, the Government has recently begun to give more emphasis to needs-based budgeting. Reducing the division of responsibilities between the implementing agencies would substantially improve long-term planning. It would also facilitate the ranking of projects according to a consolidated set of technical and economic criteria. 4.53 Budgetary fragmentation has also impeded successful implementation of urban programs. The Integrated Urban Infrastructure Development Program (IUIDP) attempts to overcome this by providing longer term perspective and predictability to the budget process. IUIDP is now being implemented in several provinces, notably in East Java and Bali. IUIDP provides a long term framework for a balanced expenditure program, together with a financing plan for urban infrastructure prepared with strong involvement of individual local governments, and to which provincial and central government agencies would also be committed. The IUIDP process does not generate budget commitments. It, however, provides a detailed indicative expenditure plan, with priorities - 8 9 and an assurance that these priorities will be considered in the budget process. It also provides a systematic analysis of the capacity of the local government to mobilize resources and implement the development programs. 4.54 Budgetary fragmentation underlies the problems associated with dual administration of p2rmary education. Recurrent expenditures for primary education are underfunded under the current arrangement of shared responsibility between the Ministry of Education and Culture (MOEC) and the provincial Ministry of Home Affairs (MOHA) for primary education. Additional recurrent budget resources are a prerequisite for improvement of primary education, yet neither ministry has sought the resources needed to improve the quality of primary education. Recently, BAPPENAS has made a creative effort to provide additional teaching resources to primary schools by earmarking a large part of the INPRES grant for improving essential instructional inputs such as textbooks, chalk and teachers' manuals. However, care needs to be taken to ensure the regional governments share these priorities and use these resources for quality-enhancing inputs to the teaching process. 4.55 The Government's systems for planning and budgeting works on national and Rrovincial roads have improved considerably. Because of the considerable efforts that have been expended in the past years to develop . sophisticated road management system, the Government is developing an extensive data base on its road network and a stronger capability to identify expenditure priorities at a detailed sub-project level for road maintenance and rehabilitation. The quality of this data input needs to be improved to match the sophistication of the system; this could be facilitated by more training. On the basis of this system the Government has started to put in place a multi-year planning framework to assess the financing needs of road works on a comprehensive basis and to coordinate all internal and external sources of funding. However, full use has not yet been made of the system, with the result that the actual road programs selected do not fully conform to the economically optimal program. Administrative Reform 4.56 The expanding public expenditure program, and its changing composition towards the provision of higher quality services and smaller and more complex projects increasingly managed by the regional Governments, will have important implications for the functions and administrative structure of the Government. The role of the Central Government is expected to shift away from detailed project implementation towards overall policy analysis, guidance and performance monitoring. This will entail the need for more highly educated and skilled civil servants, which in turn will require a thorough review of the compensation policies and practices of the Government. The shortage of highly qualified and motivated management and staff is one of the most serious impediments the Government is facing at every level and in every sector. Although the low level of official remuneration is a major disincentive, there are a host of other factors providing managers and staff with either incentives or disincentives. This is a complex issue which will require sustained attention from the Ministry for Utilization of State Apparatus (HENPAN), the Civil Servants Administration Agency (BAKN), and the National Institute of Administration (LAN). The introduction of a system of functional streams for some essential professions, allowing for remuneration based on professional training and experience, is a major step in the right direction. This needs to be expanded and also to cover essential regional - 99 - government staff. It should include the preparation of job descriptions, development of functional positions, development of personnel data, improvement of the training delivery system, and development of more effective training programs. 4.57 An example of the constraints imposed on implementing rapid program expansion by the shortage of high- level technical, management and financial staff is the telecomnicatis sector. This shortage is becoming increasingly serious in view of the growing technical sophistication and the planned expansion ot the network. Time and resources are needed to train and develop managers as well as to install the systems needed to aid their decision-making. Another concern is the inadequacy of both the level and structure of compensation for staff and the poor working conditions of lower level staff. As a government institution, PERUNTEL's salary structure and levels are substantially below those paid by private enterprises. Although the salaries of higher level staff are supplemented by such facilities as cars and houses, they are still very low. Other classes of personnel must resort to a second job. Performance suffers accordingly. Review and reform of the compensation and reward system are needed to enable PERUNTEL to attract and retain the high quality staff needed to operate and expand the enterprise in an efficient and effective manner. Other public enterprises, such as PLN and the state banks, face similar difficulties. Environmental Assessment 4.58 An emerging issue in project planning and implementation is the requirement for environmental impact analysis, which will be phased in over the period 1990-92. Government Regulation 29/1986 requires a preliminary environmental information review (PIL) for all projects, and a detailed environmental impact assessment (ANDAL) for projects that could have significant adverse impacts on the environment. In addition, the Regulation requires a retrospective environmental review of all ongoing projects. To minimize environmental degradation, it is important that this review process be carried out effectively. At the same time, however, sueh a comprehensive requirement for review is a potentially enormous task that could substantially slow the rate of new project implementation. External donors have committed substantial resources to help Government agencies formulate guidelines relevant to individual sectors, but more needs to be done to put in place the technical capacity and institutional arrangements necessary to ensure that projects are appropriately, but expeditiously screened. One potential problem is that there is no independent review of environmental assessments, as special committees within ministries are responsible for approving analyses undertaken by directorates within the same ministry. Government is now considering whether a centralized body with greater technical expertise might be useful for reviewing environmental assessments and providing technical assistance to the ministries. - 100 - E. Developments in the Public Enternrise Sector Intr9ductioM 4.59 Indonesia has a large and diversified public enterprise sector, reflecting the major role in the past of public investment in providing direct production capacity in industry and, to a lesser extent, in agriculture. In parallel with an expanded role for the private sector, the role of public enterprises will be focused and modified. This shifting policy emphasis is shown in the sharp cutbacks in development budget allocations for industry and mining in recent years. The reorientation of Government involvement toward areas where private markets cannot produce outputs more efficiently has important implications for streamlining public enterprise management. The private sector growth impact of scarce public resources could be greatly enhanced if public enterprises operated more efficiency. Not only would this reduce the budgetary burden of public enterprises, thus freeing financial and administrative resources for higher priority uses, it would also improve the availability and efficiency of inputs supplied by public enterprises to the private sector (such as power and telecommunications). Against this background, this section reviews recent developments in the Government's policy towards the public enterprise sector. Background. Current Reforms and Performance 4.60 Historically, the public enterprise (PE) sector expanded rapidly with the nationalization of Dutch companies in 1958. Subsequently, the PE sector expanded further in the 1970s, bouyed by large oil revenues, to perform four broad objectives: (1) contribute to economic development and state revenues; (2) provide basic goods and services for the general public; (3) pioneer activities, which promote or complement private sector development; and (4) generate income and profits.A/ 4.61 The Government's past strategy for the PE sector is reflected in the classification of the state enterprises into three broad categories, reflecting the relative importance of social objectives: Perjans (Government agencies), Perums (public corporations), and Perseros (limited liability companies). The commercial motive becomes progressively more important along the spectrum from Perjans to Perseros. Other state enterprises, most importantly the state banks and Pertamina, derive their status and objectives from separate legislation. 4.62 Of the 212 PEs owned by the central government (there are also numerous provincial and local PEs) the largest number (116) are concentrated in Vie Persero class (with about 34 additional joint-venture Perseros). They span the tree crop PTPs, manufacturing and mining PEs, and service sector PEs (airlines, state trading companies). There are 33 Perums, mostly in the infrastructure areas, the most important ones being PLN in power, Perumtel in telecommunications, ports, housing, and gas. There are 2 Perjans, the most important one is the railways. Finally, there are 8 state-owned banks, and 18 enterprises in various sectors, the largest being Pertamina. i/ These goals are set out in Government Regulation No. 3, 1983. - 101 - 4.63 By 1983 the PEs contributed roughly 25% of overall GDP.V/ Although some PEs were efficient and profitable, the overall pre-tax rate of return on total assets in the PE sector had declined from about 4% in 1979 to about 1% in 1982. The Government then implemented a major policy shift to focus the role of the PE sector in the economy while increasing efficiency. This shift involved reforms specific to PEs, as well as general reforms. 4.64 Among the general reforms the process of deregulation and trade teform has been particularly important. Although there are some key areas (e.g., strategic industries, steel, fertilizer, and agriculture) where competition from imports and/or private investment is still restricted, many PEs now operate in a more competitive environment. Good ex.amples are the airline and financial service sectors. The reduction of iLuport and investment barriers across a range of manufacturing sub-sectors where PEs are particularly important is also laudatory, though import bans in some sectors continue to provide protection. Another key area affected by deregulation is the financial sector, where the Government has moved to 7->er barriers to entry and introduce market pricing. This has profoundly affected the performance and prospects of state-owned financial intermediaries. A further area of improvement has been a reduction of the regulatory impediments to the efficient functioning of key PEs, e.g., the deregulation of maritime and port services. A start has also been made in dealing with the labor laws and regulatiorns that have prevented almost all PEs from streamlining their workforce. Here an important precedent was set in the Tanjung Priok port reforms of 1984. 4.65 Critical targeted reforms carried out include the curtailment of transfers to PEs for new investments. The use of bank credits, including that from Bank Indonesia, has been restrained (see Annex 1, Table 8).i/ Public enterprises have also not been allowed to borrow independently from foreign sources. To lower the budgetary impact of PEs and promote the efficient use of there products by the public the Government has moved in some cases to market- or efficiency-based pricing, while -icreasing the flexibility companies have in setting their prices. Examples of this include the banking and manufacturing sector, as well as more gradual reforms in power, telecovmunications and agriculture. 4.66 Much of the Government's current efforts at improving PE efficiency and financial soundness are embodied in a series of three decrees dating from Octobe 1988 through June 1989. Collectively, these decrees establish a set of financial soundness measures covering profitability, liquidity, and solvency, which are used to rank individual PEs. Using financial data from 1985-88, 189 PEs have been classified into four categories: very sound, sound, less sound and unsound. Based on the type of good or service involved and these financial indicators, a set of corporate restructuring options have been l/ Exact calculation of the contribution of PEs to GDP is not possible because firms do not separately report employee wages, a critical element of their value added. W The large increase in 1989 is due to borrowings by BULOG for increasing commodity buffer stocks. - 102 - proposed jointly by the Ministry of Finance (MOF) and the line ministries. These options, specified in MOP Decree 740/1989, range from change in legal status of the firm, to sale of equity on the bourse, to liquidation.Z/ 4.67 Accompanying this initial design for restructuring are also instructions to the PEs to prepare five-year corporate plans and annual work programs for use by the management of the PEs (Boards of Directors, BOD), Boards of Commissioners and Supervisors (BOC/BOS), the line ministries, and HOF in managing, monitoring, and evaluating the operations of PEs. MOF Decree 741/1989 briefly sets out the uses to which both corporate and annual plans will be put to by the relevant actors. These two instruments, and the clarified roles of the PE management, BOD, BOC/BOS, MOP and line ministries are the nucleus of an improved system of accountability and control of PEs. 4.68 The reforms undertaken so far are in part responsible for an improvement in the fiscal impact of PEs. The overall budgetary burden of PEs has shrunk from -4.6% of GDP in 1983 to -0.6* in 1988/89.1/ Since 1982, profitability has steadily risen to about 5.2% in 1989 (see Table 4.4). The improved profitability is due chiefly to higher profit margins, rather than expanding production or increased Government transfers. This reflects, in part, the increased flexibility in setting prices allowed PEs by the Government. Non-operating performance has improved as the discrepancy between the after-tax profit and operating margins has declined (tax payments have held steady). Measures of capital structure and liquidity also show improvement particularly after 1986-87. 4.69 Despite this improvement, the rate of return to PEs overall remains low compared to the general rate of return to investment in the economy (about 13-22% between 1982-88), or in relation to the real rates of interest on lending in the financial sector (over 10% p.a.), a measure of the opportunity cost of capital. Furthermore, the bulk of profits are concentrated in a few sectors. Finally, the current level of profits is still low in comparison to the investment requirements of the public enterprises. By streamlining the public enterprise sector and further improving its efficiency, this sector could contribute more substantially to public resource mobilization and to overall growth in the economy. 2/ Seven different options are actually set out in the decree. They are: 1) Change of legal status; 2) Sale of stock on the bourse; 3) Direct placement of stock; 4) Consolidation or merger; 5) Sale of company to a third party; 6) Establishment of a joint venture; and 7) Liquidation. 3/ As noted in Table 4.4, the budgetary burden of PEs is the sum of profit transfers, debt service, less capital participation, subsidies and 'two step loan' disbursements. Tax receipts from PEs are excluded because the concept of fiscal burden quantifies the annual financial cost of keeping enterprises in the public sector (if private, the enterprises would make the same tax payments). This figure may underestimate the burden as there are central government domestic and foreign loan guarantee costs, as well as implicit interest subsidies which are not included. Furthermore, unrealized losses and gains, for example losses from probable non-performing assets on the books of state banks, are not included. - 103 - Table_4.4: AGGREGATE INDICATORS OF PUBLIC ENTERPRISE PERFORMANCE, 1983-1989 (Percent) 1983 1984 1985 1986 1987 1988 1989 FinanciAl profitabiliy PE profit/total assets /A n.a 2.9 3.0 2.8 2.0 2.6 3.1 NFPE profit/total assets ii 2.3 3.0 1.8 1.9 2.2 4.0 5.2 NFPE profit/non-current assets 3.2 4.4 2.6 2.7 3.1 5.8 7,2 NFPE profit/net worth 4.9 6.5 3.9 4.2 4.8 6.6 8.7 NFPE after tax profit margin 2.6 4.8 2.8 3.5 3.4 5.7 6.3 NFPE operating profit margin 8.4 10.1 5.1 5.1 5.1 8.2 9.1 Number of firms 184 184 184 179 174 183 179 Capital structure (ratio) NFPE total debt/net worth n.a 2.1 2.1 2.2 2.2 1.2 1.6 NFPE LT debt/net worth n.a 0.7 0.7 0.8 0.8 0.2 0.4 LL.uidity (ratio) NFPE current assets/current liab. n.a 1.4 1.4 1.8 1.8 1.2 2.2 Budg2t imDact Overall budgetary impact of PEs (t of GDP) i -4.6 -2.6 -2.6 -1.8 -0.6 -0.6 n.a 4a Consolidated putblic enterprises; proLits are defined before tax and treat depreciation as cost. Assets are evaluated at current cost for some enterprises, but for many enterprises assets are measured at historical cost. 4b Consolidated non-financial public enterprises; profits are defined before tax and treat depreciation as cost. /c Defined as: profit transfers plus debt service payments less "two-step loans", capital participation, and transfers; on a fiscal year basis. Source: Ministry of Finance and World Bank staff estimates. Remaining Reform Agenda 4.70 An overall golicy framework. The reforms outlined above are evolving into an overall policy framework. A concise presentation of this policy framework, however, that set out clearly the overall goals of the PE sector, and the strategy for restructuring the sector to achieve these goals, would - 104 - aid in speeding the process. Once such a framework is in place, particular options for reforming individual PEs, many of which are now under consideration, can be chosen more coherently. 4.71 The goal of oublic enterprises. PEs are expected to stren&then the economy through the efficient production of high quality goods and services to meet the needs of the public. In reaching this goal, the Government needs to retain in the public fold only those core PEs where public ownership is judged essential for the firm to meet its economic and social goals efficiently. This change in the role of PEs is possible because, with the general growth in the economy and the deregulation efforts, the private sector is now better able to meet the needs of the public for many goods and services. As the response of non-oil exports has demonstrated, the private sector is also capable of responding to government policy initiatives promptly and effectively. At the same time, years of experience have demonstrated that PEs have not been overly successful in their efforts to meet their objectives. 4.72 Underlying strategy. The key elements of the Government's strategy are to: a) prepare for divestiture to the private sector viable PEs which should not remain in the public sector; b) liquidate non-viable commercial PEs; and c) define a core group of enterprises that will stay in the public sector and institute appropriate reforms aimed at improving their performance. 4.73 Broadly, the Government strategy would be to divest itself of those firms which produce goods and services that can be efficiently produced and allocated by the private sector (private goods). Where such firms are already performing well, their divestiture could take place in the short term. For others, some adjustments may be needed to make them attractive to private owners. Where such firms are insolvent, they may have to be liquidated. At the same time, the Government would need to take measures to improve the performance of the few enterprises that will remain under government control or ownership, chiefly those producing public goods at natural monopolies. 4.74 Divestiture. The Government is tentatively planning the partial divestiture of over 52 firms through the sale of stock as part of the restructuring plan (see para. 4.66). This is an important signal about government intentions and will foster the continued expansion of the capital market. However, it may have limited effect on the operations of public enterprises in the near future. The rights of minority private shareholders and the determination of share issue prices are critical issues both for the impact of the sales of shares on PE performance and the impact on the capital markets, respectively. The benefits of private ownership for the performance of the enterprise might be few since the Government effectively retains majority control of these enterprises. As with any large public offering it is important that it be properly priced to avoid unnecessary price variations which reduce investor confidence. The chief short-term gains are the improvement in debt to equity ratios for the PEs and the financial disclosure that would accompany public stock issuance. 4.75 A difficulty with partial divestiture using public stock offerings will arise if the enterprises prove unprofitable or unable to pay adequate dividends. Some of the PEs identified as suitable for going public are not yet financially sound. It is likely that divestiture through the capital - 105 - markets will be possible for only a smaller number of the soundest PEs, and, even then, orly after some adjustments to their present operations, so that they can meet the private profitability test. The ability of the stock market to absorb new issues is another reasons to employ this method of divestiture gradually. Also, for these PEs to be effectively subject to market discipline, the Government would need to more clearly define minority shareholder rights and responsibilities. Altogether, these factors imply that divestiture of minority holdings through the stock market is likely to be a gradual process whose main benefits will emerge only slowly. 4.76 In some cases more rapid benefits could be realized by relying on other divestiture options, such as management contracts, joint ventures and assets sales, all which are outlined in Decree 740. Some 20 firms are slated for actions of this kind. Proceeding with implementation of these options will be a more important part of the reform process than divestiture through the capital markets. 4.77 Liquidation. There are currently plans to liquidate three firms, although there are many more PEs whose financial performance remains unsound. Following appropriate analysis, liquidation of non-viable PEs would have substantial benefits for the economy. 4.78 Coe_E. For the small number of Perums and Perjans, which are mostly natural monoRolies and utilities in basic infrastructure areas, the principal objective is to ensure greater economic efficiency. Even in such cases Government ownership or management may not necessarily be the best option; leasing, management contracts, regulation, etc. may achieve the same objectives. Nonetheless, some of these PEs might have to be retained in the public fold as a core group because of difficulties in structuring incentives such that the private sector would provide these services efficiently. The remaining Perums and Perjans should be transferred to the Persero category and handled (see para. 4.73). This process has begur with the Government planning to convert the two Perjans, the railway and pawn brokering business into Perums. The financial costs of social objectives for the core PEs can be explicitly calculated and progressively financed from the Budget; where they are not essential, such social subsidies should be eliminated. 4.79 Imlementatio. The effort required to deal with all 189 PEs and work out detailed options for each is a herculean task. Major gains might, therefore, be achieved by initially concentrating efforts on the options for reforming or restructuring a smaller number of the PEs most important in terms of their size and role in the economy. Stocks sales, joint ventures, management contracts, liquidatio.s, etc. carried out at first could serve as prototypes for extending the restructuring program more widely. 4.80 Institutional framework. autonomy. and accountability. The institutional framework connecting the PE managers, the line ministries, and MOF is another key element of the overall policy framework. Regulation No. 3 of 1983 was designed to rationalize the structure of PE administration. There is, however, further scope to improve the institutional framework for enterprises that will remain in the public domain. 4.81 Decree 741/1989 partly responds to this need. The corporate 5 year and annual planning exercises set up in the decree could provide an excellent - 106 - vehicle to define and operationalize a new set of relationships. This approach could provide more elaboration on the relative roles of each party to increase the autonomy and accountability for PEs. The 5-year plans would provide a means for the Government to set and agree on the objectives for particular enterprises, and then grant much greater autonomy to the Boards of Directors to meet these objectives and hold them accountable for performance. This would entail more streamlined procedures for routine budgetary approvals, larger scope for financing investments and setting tariffs, and generally less intervention by technicai ministries. The other actors could concentrate on monitoring and evaluating the results, at progressively higher levels: Boards of Supervisors could perform the individual PE annual monitoring ax.4 evaluation role, the technical Ministry could monitor the attainment of sector policy objectives, and MOP could manage the portfolio of all PEs (including tracking of key macroeconomic variables for the PE sector as a whole, such as profits, investment, foreign borrowing, and transfers). A key ingredient for the smooth operation of the new institutional framework would be the definition of a few critical but simple performance indicators. 4.82 This new framework of management autonomy would need to be complemented with a system of management performance measurement and accountability. A system of rewards and sanctions would need to be put into place to elicit efficiency in management. Weaknesses in management lie behind many of the performance problems of PEs. Treating management problems also requires giving attention to training programs, and corporate planning. The renewed importance given corporate planning in the June 1989 decrees provides a starting point for dealing with this last issue. - 107 - Annex 1 Page 1 RCENT ECONOMIC DEIELOPMENTS Economic Activity 1. Preliminary estimates indicate that Gross Domestic Product (GDP) grew sharply, by about 7.4% in real terms in 1989, fueled by strong growth in the non-oil sector and a recovery in the oil sector (Table 1). Manufacturing, mining, construction, and other services all grew faster than GDP as a whole. The agriculture sector registered impressive gains for the second straight year. Table 1: GROWTH IN SECTORAL VALUE ADDED, 1975-1989 Lg (% p.a. at 1983 prices) Sector Shares Average in 1989 1975-83 1984-85 1986 1987 1988 1989 (% of GDP) OIL/LNG Sectors 2.5 4-9 J_ -0 4.3 18.8 Oil & gas 0.3 -2.0 5.0 -0.1 -3.5 4.0 14.3 LNG & refined oil 14.9 28.5 4.5 8.3 9.7 5.0 4.5 Non-Oil Sectors 7.0 5.2 6.2 5.8 7.3 8 1 81.2 Agriculture 3.5 4.2 2.5 2.2 4.3 4.4 20.5 Mining 6.8 -1.8 10.7 7.0 4.8 11.0 1.2 Manufacturing 10.6 12.7 11.1 11.4 13.5 12.2 14.3 Construction 10.8 -1.0 2.2 4.2 8.9 10.0 5.4 Other services 8.6 4.9 7.4 6.3 6.7 8.4 39.8 Gross Domestic Product (GDP) 6.5 5.9 5.0 5.6 _.4 100.0 La In 1989, CBS released new GDP estimates for the years 1983-1988 (see Annex 2). The series prior to 1983 has not been revised, however, so the average growth rate for the 1975-83 period is derived using the 1983 production level from the old series, which is at constant 1973 prices. Source: Central Bureau of Statistics (CBS) and World Bank staff estimates. 2. The oil/LNG sector grew by over 4% in 1989, following a slight contraction in 1988 and slow growth in 1987. This growth was fueled largely by a 4% increase in crude oil production, due largely to the start of production at several new oil fields, which offset production declines at older fields. Indonesia's OPEC quota was also increased 15% during the year. Production of natural gas was up by over 6%, reflecting buoyant domestic demand. There was no increase in LNG output, but there was a major increase in LPG production and refinery output. - 108 - Annex 1 Page 2 3. The expansion of the non-oil sector accelerated to over 8% in 1989, with all subsectors registering high growth by historical standards. Growth in aggcultuakodctio (4,4%) continued strong for the second straight year, following slow growth in 1986 and in 1987 due primarily to bad weather. Within the food subsector, rice growth was very high (5.5%) as a result of several factors: good prices and rainfall, an increase (3% or over 300,000 ha.) in area planted, and a 2.3% increase in yields. The increase in area resulted partly from a shift out of corn and soybeans due to farmers' perceptions of relative profitability. It also reflected the Government's decision to allow 40,000-50,000 hectares of previously designated sugar area to revert to riceland. The loss of area in corn led to a 7% fall in production, while the loss in soybean area was compensated for by rising yields so that production remained unchanged over 1988 levels. 4. The fishery subsector expanded by nearly 6%, following robust growth in both freshwater and saltwater fish production. The animal husbandry subsector grew by 5%, with rapid growth (15%) in both eggs and milk. The non-food crop subsectors as a whole (smallholders and estates combined) grew at over 4.5%. This average masks importaitt differences between major crops, however. Production of palm oil increased by over 25%, as large areas planted in the mid-1980s came into bearing. Production of tea and cocoa was also up strongly--by 15% and 20% respectively. Coffee production grew by 6% to record levels in response to both good weather and the removal of export quotas. Rubber production, which is by far the largest contributor to non-food crop GDF, grew by less than 2%, however, due partly to the age structure of the tree stock and partly to lower prices. 5. Real growth in the non-oil manufacturing sector continued strong at over 12% during 1989. Manufacturing now accounts for over 14% of GDP. This growth has been spread across both intermediate and consumer goods. Non- traditional manufacturing goods are playing an increasingly important role in the economy and in non-oil exports, with production growth rates above 40% recorded in subsectors such as: footwear, paint, glass, radios and television sets, motorcycles, batteries and structural metal products. This strong manufacturing sector performance is being supported by an acceleration of foreign and domestic private investment, and the present outlook is that the expansion of the manufacturing sector will remain strong over the medium term. 6. The construction sector also grew rapidly for the second straight year in 1989, recording an increase of 10%, far above the 1984-87 average of only 1%. Construction now accounts for over 5% of GDP. The improved performance of the construction sector reflected the higher demand from the surge in private investment. Other services grew by over 8% in 1989, maintaining the strong performance in the previous year. The banking sub- sector, responding to deregulation measures in the financial sector, grew by 13%. The transport and communications sub-sector also expanded strongly (at over 9%). 7. Income and exNenditure. Preliminary figures indicate that Indonesia's Gross National Income (GNY) rose by nearly 8% in 1989, supported by an acceleration in GDP and higher oil prices (Table 2). This allowed substantial increases in both consumption and investment. Due mainly to the pay raise granted civil servants during the year, Government consumption rose by near'y 7%, as compared to well under 3% in 1988 and minimal or negative - 109 - Annex X Page 3 growth in 1986-87. Growth in private consumption rose from 4% in 1988 to over 6% in 1989. Total fixed investment rose dramatically. The recovery in oil prices enabled Government to expand its investment program by 6%, and private investment rose by nearly 18%, much of which was directed toward increasing export capacity. lable 2: INCOME AND EXPENDITURE, 1975-1989 (at 1983 prices) Growth rates (% p.a.) 1989 Average Average Share in 1975-83 / 1984-85 1986 1987 1988 1989 /c GDP (%) Consumption 3 7 4.9 3. 6.5 69.3l - Public 8.5 5.4 0.1 -3.7 2.4 6.7 8.8 - Private 11.9 3.5 5.7 4.7 4.2 6.5 60.5 Fixed investment 10.7 /b -5.8 -5.5 2. 10.3 13.0 19.5 - Public 12.6 _b -2.9 -19.1 -4.5 10.2 6.2 7.4 - Private 9.1 Lb -8.6 8.7 8.1 10.4 17.7 12.1 GDP 4.6 5.9 5.0 5.6 7.4 100.0 GNP 6.4 4.6 7.1 5.1 5.9 7.4 96.2 GNY 8.5 3.8 0.1 5.7 6.0 7.8 89.5 /a 1975-83 average is at 1973 prices /k These fixed investment averages are for the period 1978-82 only, and are at 1983 prices. L_ Preliminary. Source: World Bank staff estimates. The Balance of Payments 8. The strong growth performance of the economy also influenced developments in the balance of payments during 1989/90 (Table 3). Net oil/LNG exports rose by US$1.2 billion, reflecting increased production and an 18.5% increase in the price of oil. Non-oil exports also continued to grow rapidly, increasing by 15.6% to an estimated US$14.1 billion. As in the past several years, the primary impetus to this growth was from a broad range of manufacturing goods. In response to trade deregulation and buoyant economic growth, non-oil imports surged in 1989/90, after several years of very slow growth. This demonstrates the strength of the private sector's response to deregulation, with private sector capital and intermediate good imports accounting for the largest share of import growth. Capital good imports by the public sector also increased from the depressed levels of the past several years, as a result of the continued recovery in public investment during 1989/90. Monetary policy appeared to accommodate this rise in imports. - 110 - Annex I Page 4 jWgj: BALANCE OF PAYMENTS, 1981/82-1989/90 (US$ billion at current prices) ctuals Eatited 1982/83 1985/86 1986/87 1987/88 1988/89 1989/90 Merchandise exports (fob) 18.6 18.5 1L3 1. 1. 23.4 Oil & LNG 14.7 12.3 7.0 8.6 7.6 9.3 Non-oil 3.9 6.2 6.7 9.5 12.2 14.1 Merchandise imnorts (cif) -20.6 -14.4 -12.7 -14.2 -15.7 -19.0 Oil & LNG -4.8 -3.2 -2.3 -2.4 -2.1 -2.6 Non-oil -15.8 -11.2 -10.4 -11.8 -13.6 -16.4 Trade balance -2.0 4.1 1.Q LI 41 4.4 Non-factor services (net) -1.7 -1.8 -1.5 -1.2 -1.2 -0.9 Interest payments (MLT) -1.5 -2.2 -2.5 -2.8 -3.0 -3.1 Other factor services and transfers (net) -2.1 -2.2 -1.2 -1.6 -1.7 -2.1 Current account balance -7.3 -2.1 -4.2 -1.7 -1.8 L1.7 Public MLT loans (net) 4.0 1.3 2.7 1.9 21. - Disbursements 5.1 3.8 5.2 6.1 7.3 6.1 - Principal repayments La -1.1 -2.5 -2.5 -4.2 -4.4 -4.5 Other capital (net) 0.0 1.7 -1.5 1.0 -1.3 -1.0 Use of net foreign assets 3.3 -0.9 3.0 -1.2 0.2 1.1 Memo items: Net official reserves ak 3.0 5.8 5.0 6.0 5.4 5.7 - Months of imports La (2.0) (5.5) (4.3) (4.6) (3.4) (3.2) Total net foreign assets 7.5 12.6 9.6 10.8/d 10.6 9.5 Current account/GNP (%) -7.8 -2.6 -5.8 -2.3 -2.2 -1.9 Non-interest current account balance (S of GDP) -6.0 0.7 -1.7 2.4 2.3 2.4 MLT debt service/ exports (%) A 16.8 25.1 38.0 35.5 36.1 32.1 /a Includes prepayments of US$420 million in 1985/86, US$626 million in 1987/88, US$341 million in 1988/89 and US$300 million in 1989/90. kb Net official reserves are defined as gross official reserves minus outstanding liabilities to the IMF and other short term liabilities. /c Net official reserves in months of next year's expected imports (oil/LNG and non-oil) of goods. 1d Excludes US$326 million of prepayments, committed during the year but not completed until June 1988. ¢t Debt service on public and private debt, excluding prepayments; denominiator is gross exports of goods and services. Source: Bank Indonesia and World Bank staff estimates. - 111 -Annex 1 Page 5 9. The overall effect of these developments was that the current acco-unt deficit declined slightly from US$1.8 billion (2.2% of GNP) in 1988/89 to US$1.7 billion (1.9t) in 1989/90. The net outcome, therefore, was that the balance of payments remained comfortable; this is also reflected in the maintenance of a significant surplus in the non-interest current balance (2.4t of GNP). ;7evertheless, given that the level of non-oil exports still remains significantly below the level of non-oil imports, and the uncertainties surrounding oil prices, more rapid expansion of non-oil imports relative to non-oil exports will be difficult to sustain. A continued cautious management of the balance of payments, based on prudent macroeconomic policies and sustained rapid growth of non-oil exports, will be essential. Regarding the financing of the current account deficit, total capital flows registered a decline in 1989/90 compared with 1988/89. Public MLT disbursements fell by US$1.2 billion as a result of declines in disbursements from all financing sources. 10. Exports. Crude oil prices rose significantly, reaching an average price of US$17.9/barrel for 1989/90 compared with US$15.1/barrel for 1988/89. The main factors underlying stronger prices were buoyant world demand, especially in developing countries, and supply constraints in non-OPEC countries (US, UK, and USSR), which offset the fact that OPEC production exceeded quota. For 1989/90, Indonesian exports increased by about 6% in volume terms over 1988/89 to reach 365 million barrels. Similarly, higher export volumes of LNG and LPG in 1989/90 were accompanied by higher prices. As a result, the value of LNG/LPG exports are estimated at about US$2.8 billion in 1989/90, compared to US$2.4 billion in 1988/89. Total gross earnings from oil and LNG exports are estimated to reach US$9.3 billion in 1989/90, an increase of 22% over the preceding year. 11. Non-oil exports expanded about 16%, from US$12.2 billion in 1988/89 to an estimated US$14.1 billion in 1989/90 (Table 4). Export volumes also grew by about 16%. This growth exceeded the projections made in last year's Economic Report and is largely attributable to continued rapid expansion in manufactured goods exports which contributed almost 90% of the increase in non-oil export earnings. Within manufacturing, almost two-thirds of the growth was contributed by the diversified group of commodities grouped together in "other" manufactured goods (Table 5). Exports of this group of commodities are estimated to have more than doubled since 1987/88 to reach US$3.2 billion in 1989/90. The continued strong expansion of this group of commodities reflects the increased foreign and domestic investment that has occurred in manufacturing in response ; trade reform and private enterprise deregulation. A number of commodity <- ,cports within the 'other" category have expanded at over 100% p.a. since 1985, and now make a substantial contribution to exports, though they started from a very small base. Of particular note is the strong performance of ceramics, plastics, shoes, furniture and other articles of basic metals. 12. Even though the volume of agricultural exports was up 5%, export values rose only 1.5% in 1988/89 because prices of many commodities fell. Palm oil export volumes grew by 25%, due to large recent new investments coming to maturity, but export values rose by only 5% because of sharply lower edible oil prices. Increased domestic and foreign investment in shrimp production has supported the continued rapid growth in shrimp exports with value and volume growing at 18% and 14%, respectively. The 11% increase in - 112 - Annex I Page 6 lable 4: NON-OIL MERCHANDISE EXPORTS, 1982/83-1988/89 Value at current prices Growth in volume terms (USS million) (S p.a.) _ ~~Actual Estimate 1983/84 1987/88 1988/89 1989/90 1983/84- 1988/89 1989/90 1987/88 Agricultural commodities 3,.084 3.885 4.742 4.813 4.1 _1 5 Timber products 582 627 810 827 -2.6 15.1 -17.9 Rubber 984 1,055 1,236 1,185 1.1 1.8 5.2 Coffee 506 497 572 423 -2.1 16.8 10.6 Palm oil 92 214 313 329 26.0 14.6 25.4 Tea 156 119 134 156 3.6 10.2 3.7 Shrimp 206 368 537 632 19.9 4.4 13.7 Rattan 87 162 37 43 13.0 -77.8 5.0 Others 471 844 1,103 1,219 7.1 30.9 7.7 Minerals & metals 800 1.080 1,444 1.596 8.0 1.9 12. Tin 309 143 165 207 -2.6 7.3 23.4 Gold 0 308 309 322 - 3.2 3.3 Aluminum 165 245 308 382 7.9 -16.4 24.4 Copper 89 186 238 258 11.0 9.7 6.9 Nickel (total) 170 146 357 349 -12.9 20.6 -0.6 Others 68 52 67 72 -9.6 -12.6 13.3 Manufactured goods 1.484 4.537 5.998 7.621 26.Z 23I. 25.L Textiles 365 1,283 1,815 2,184 31.1 33.5 17.9 Plywood/ panel products 579 1,834 2,069 2,288 24.2 12.3 6.7 Others 540 1,420 2,114 3,219 26.2 25.9 49.2 Total non-oil exports 5.368 9.502 12.184 14j100 .3 14. 15.9 Source: Bank Indonesia and World Bank staff estimates. coffee export volume suggests that coffee exports had been significantly constrained by the previous export quotas, but the collapse of the International Coffee Agreement caused world prices to plunge, and export values fell by over 25%. The imposition of a prohibitive export tax on sawn timber led to an 18% decline in export volumes of timber products, but higher prices meant that export values actually increased slightly. Rubber export volumes increased 5%, but export values fell by 4% because of the decline in natural rubber prices during 1989, which was caused by a slowdown in the US automobile industry. - 113 - AnngxA Page 7 13. The volume of metals and minerals export earnings recovered significantly during 1989/90 and grew by almost 13%. Aluminum exports rebounded in 1989/90, growing by 24% in both vrolume and value terms. Likewise, tin production continues to expand due to higher quote allocations from the Association of Tin Producing Countries (ATPC), with both volumes and values increasing by 25%. The slower growth in nickel represents a plateau in capacity reached after the reopening of a ferronickel plant during 1988/89. Table 5: MAJOR ITEMS WITHIN "OTHER" MANUFACTURED EXPORTS (USS million at current prices) Average Annual Actual Estimatg Growth Rate Products 1985 1986 1987 1988 1989 1985-89 (%) Ceramics 0.5 1.2 4.5 14.1 27.8 178.8 Plastics 1.5 12.5 24.7 56.1 72.1 162.5 Sandal, Shoes 8.2 8.8 23.5 82.6 186.9 118.7 Furniture 7.1 9.2 27.2 69.7 154.7 116.0 Other articles of basic metal 5.4 7.6 17.4 56.9 89.0 101.9 Iron/steel 34.2 69.5 196.0 296.2 464.0 91.9 Glass & its product 8.3 12.7 30.7 93.7 94.5 83.7 Rubber products 7.5 11.3 24.2 48.8 75.9 78.3 Paper & its products 20.9 31.8 95.8 138.2 170.0 68.8 Cements 21.5 39.8 56.1 75.6 126.8 55.9 Processed food 56.7 81.5 105.9 139.2 228.4 41.7 other 93.8 122.7 91.9 240.7 356.8 39.7 Matting 13.3 19.4 47.2 76.4 48.1 38.0 Leather & its product 37.5 43.9 53.8 77.6 76.4 19.5 Fertilizer 80.0 127.3 86.0 134.1 152.0 17.4 Animal feed 90.8 97.8 113.2 147.5 126.6 8.7 Pharmaceutical products 6.5 7.0 9.4 15.4 7.4 3.3 Total 493.5 703.2 1Q07-7 1762.6 2457.4 49. Source: Central Bureau of Statistics and World Bank staff estimates. 14. Imports. For much of the 1980s, non-oil import levels were compressed as a result of the Government's efforts to address external and internal imbalances to stabilize the economy (Table 6). The compression was achieved through depreciation of the real exchange rate, rephasing and cutbacks in real capital spending, and strict limits on non-concessional external borrowing. In the early phase of the adjustment period, non-tariff barriers were also used to limit imports. The effect of these policies is shown by the decline in import volumes of about 4% p.a. over the period 1983/84 to 1987/88. However, as the economy has moved from stabilization towards adjustment and sustained growth, imports have expanded significantly. Very buoyant private sector activity resulted in about an 18% increase in non- oil import volumes in 1989/90. - 114 - Annex 1 Page 8 15. The strength of the private sector response is shown by the surge in capital good import volumes, which grew at 38% in 1989/90 and accounted for about 41% of the increase in total imports. These imports are the result of the large increase in investment that has taken place. Imports of intermediate products grew more slowly, but from a larger base so that they accounted for about half of the increase in total imports. Imports of consumer goods were up 38% in volume terms, but contributed relatively little to overall import growth, as consumer goods only account for about 5% of total imports. Most of the growth in this category has been from non-food consumer goods. Sable 6: NON-OIL MD3EKCBBDISE IMPORTS, 1983184-1989190 Value at current prices Growth in volumes X Share (USS million) (U n.a.) in 1989190 Actual Nticate 1983184- 1988/89 1989190 Volume 1983184 1987/88 1988189 igagigo 1987188 Growth Consumer goods 730.5 398.5 563.6 785.8 -9.7 20.9 37.4 8 Iatermediate 8,146.8 8,513.4 9,856.0 11,218.7 -3.2 9.2 11.6 31 Capital goods 2,592.3 2,545.0 2,717.5 3,827.9 -4.7 0.7 38.1 41 Total 11.469.6 11,456.9 13.137.1 15JE82.4 -3.9 8.0 18.5 U Source: Central Bureau of Statistics and World Bank staff estimates. 16. Capital flows and debt. In aggregate, public MLT disbursements declined by US$1.2 billion, resulting from lower disbursements of special assistance (about US$0.3 billion), a decline in project disbursements from official donors (about US$0.2 billion), L/ a slowdown in import-related credits (roughly US$0.4 billion), a reduction in the use of untied commercial credits (about US$0.1 billion), and a decline in financing for LNG/LPG projects (about US$0.2 billion). While disbursements declined, repayment of principal increased by about US$0.1 billion. Thus, net inflows from public MLT declined by US$1.3 billion. Other capital outflows continued to be positive in 1989/89, although the level of outflows was smaller than in 1988/89. The total debt service ratio fell to 32.1% in 1989/90, compared to 36.1% in 1988/89, reflecting highar total export earnings and nearly constant debt service payments. 17. Disbursements of Droject aid, primarily from the IGGI, declined by about US$0.2 billion to US$2.3 billion in 1989/90 but still accounted for about one third of public MLT disbursements. To some extent, this decline in project disbursements reflects a diminished pipeline, as new commitments of project assistance have fallen in recent years due to the rise in commitments of special assistance. In addition, in some cases the processing of disbursement applications may have encountered bottlenecks during 1989/90, and L/ This was caused partly by the shift in the composition of donor's commitments towards special assistance in the past several years, which has reduced the pipeline of project aid. - 115 - io.1 Page 9 the pace of project implementation may have slowed slightly. As commitments of special assistance are phased out, project commitments are expected to rise over the medium term, dnd( it will thus be important to ensure that project implementation proceeds smoothly. 18. The provision of special-assistance, in the form of fast-disbursing program aid and local-cost financing, again made a significant contribution to financing the current account deficit. While a total of US$1.8 billion in special assistance was pledged at the 1989 IGGI meeting, actual commitments amounted to US$1.6 billion. Total disbursements of special assistance during the 1989/90 fiscal year, however, are estimated at about US$1.7 billion, reflecting carry-overs from commitments made in previous years. This brings total disbursements of special assistance over the past three years to US$5.4 billion. In 1989/90, special assistance continued to play a valuable role in helping the Government push ahead with its trade deregulation measures and in facilitating the recovery of private investment and economic activity. It has also enabled Indonesia to improve the term structure of its external debt, while maintaining confidence in financial markets about the viability of the Government', adjustment program. 19. There has been a steady decline in the use of imgort-related credits in recent years, with disbursements falling from a peak of US$2.1 billion in 1983/84 to about US$650 million in 1989/90. This trend reflects the Government's decision to reduce public investment in large capital-intensive projects and to place strict limits on the use of non-concessional financing under Presidential Instruction No.8 of 1984. Disbursements of untia commercial credits totalled US$1.2 billion in 1989/90, about a US$O.1 billion decline from 1988/89. However, only about US$0.9 billion were used in the balance of payments, as US$0.3 billion were drawn from an expired line of credit to prepay two unexpired lines of credit. The pipeline of undisbursed commercial credits totalled about US$1.8 billion at the end of March 1990. 20. Other caoital flows 2/ were significantly negative. While direct foreign investment increased, private capital outflows have remained strong. Unlike the past year, however, these outflows do not appear to be speculative in nature. Indeed, activity at the bourse was normal. One important factor underlying these outflows appears to be the very large unwinding of swap transactions with Bank Indonesia. The combination of a lower net inflow of capital from public sources and a continued net outflow from private sources caused total net capital inflows to fall below the level of the current account deficit. This shortfall resulted in a decline in total net foreign assets by US$1.1 billion; Bank Indonesia's reserves rose by US$0.3 billion, however, while net foreign assets of commercial bandcs declined by US$1.4 billion. Bank Indonesia's reserve position was further strengthened by a substantial reduction in swaps outstanding during the year. 21. Indonesia's stock of public and private MLT external debt outstanding rose slightly during calendar year 1989, from US$47.7 billion to an estimated US$48.3 billion. Of this amount, US$43.7 billion was public debt, including S/ As defined in Table 3, other capital flows are a residual item, including direct foreign investment, oil/LNG export credits, all private capital flows, valuation adjustments, and errors and omissions. - 116 - Annex I Page 10 US$24.8 billion of assistance from the IGGI. In contrast to earlier years, the debt burden in US dollars was reduced by exchange rate movements over the past year. As a result, total MLT debt paymen> declined slightly from US$8.8 billion in 1988 to US$8.5 billion in 1989. In combination with higher non-oil export earnings, the debt service ratio declined from 36.1% in 1988 to 32.1% in 1989. As discussed in Chapter 2, the debt service ratio and other debt indicators are projected to decline in future years. Budgetarv Developments 22. The Central Govea.ument Budget for 1989/90 cautiously assumed an average oil price of US$14.0/barrel, lower than the average price for 1988/89 of US$15.1/barrel. To offset the loss of oil/LNG revenues, the Budget projected a 25% increase in non-oil taxes. As shown in Table 7, the stronger non-oil tax effort was budgeted to allow the Government to finance a higher level of total expenditure while reducing the budget deficit, from 3.1% of GDP in 1988/89 to 2.4% in 1989/90. The actual outcome is likely to be much better than expected, however, primarily because of higher oil revenues but also because non-oil tax revenues were higher than budgeted. Despite lower aid disbursements, this additional revenue enabled the Government t& undertake a sizeable expansion in the level of spending while reducing the ceficit more than originally budgeted. Thus, the budget deficit declined to 1.4% and the primary balance (net of external interest payments) registered a surplus of 1.3% of GDP. 23. Revenues. Oil/LNG revenues in 1989/90 exceeded the Budget target by 42% (Rp.3.4 trillion), largely because of much higher world oil prices (averaging around US$17.9/barrel). Non-oil taxes were also higher than expected (Rp.0.5 trillion over Budget) mainly because of the large increase in income taxes. This reflected the effects of the automatic revenue response to GDP growth, the full impact of the withholding tax on interest earnings from time deposits introduced in November 1988, and improvements in tax administration. Higher income taxes offset the slightly lower-than-budgeted performance of the VAT, despite the extension of the VAT to wholesale activities. The property tax also failed to reach its ambitious budget target, and its yield remains well below potential. 24. Exnenditures. Central Government current expenditures in 1989/90 are estimated to have grown by 18% over the previous year, mainly because of the 15% structural pay increase awarded to Government employees in the 1989/90 budget and the additional increase of 10% announced in the 1990/91 budget that became effective in January 1990. The budgetary burden of subsidies also remained large and well in excess of the Budget targets. The fertilizer subsidy, despite an increase in retail prices implemented in October 1989, remained near 1988/89 levels because of increased fertilizer consumption. The projected oil surplus from domestic sales turned out to be a subsidy because domestic prices were not increased in line with world prices. 25. The level of capital expenditure in 1989/90 was much higher than budgeted. This was made possible by the higher level of government savings, whicn offset the large decline in net external loans disbursements. As a result, capital spending rose by 5% in real terms over the previous year. However, this was still lower (in real terms) than the capital expenditure level achieved in 1985/86. - 117 - hnnx1.I Page 11 table 7: CENTRAL GOVERNMENT BUDGET, 1987/88-1990/91 (Rp. trillion at current prices) 1982/88 1288/89 1989/90 1990291 Actual Budget Estimate Budget Revenues and grants 21.8 25.3 . Oil/LNG 10.4 9.2 7.9 11.3 10.8 Non-oil taxes 9.0 11.9 14.9 15.4 18.2 Non-tax revenue /a 2.0 1.6 2.4 2.1 2.6 Grants 0.4 0.5 0.1 0.7 0.0 Current expenditures 15.5 16. 1la. 1L.92 2.LI External interest 3.8 4.3 4.8 4.5 5.2 Subsidies 1.4 1.0 0.2 1.5 0.8 Other 10.3 11.5 13.5 13.9 15.7 Government savinzs 6.3 64 6.8 9.6 . CaRital expenditure 8.9 10.8 12.0 Budget balance -2.6 A.4 -4.0 Financed by: External loans (net) Z2. 4.5 4. 2 Li Disbursements 8.9 11.6 11.3 10.2 11.3 - Project aid aE (5.5) (5.9) (7.2) (5.6) (7.3) - Other Ac (3.4) (5.6) (4.1) (4.6) (4.0) Amortization 6.4 7.1 7.3 7.5 7.6 Asset drawdown 1 -.1 Q.DA -.3 0.O Memo items (as % of GDP) Revenues and grants 17.0 15.7 15.3 17.3 16.9 Non-oil taxes id 8.8 10.1 11.0 11.3 11.8 Government savings 4.9 4.4 4.1 5.6 5.2 Budget balance -2.0 -3.0 -2.4 -1.4 -2.0 Total expenditure 19.0 18.7 17.7 18.7 18.9 Net domestic expenditure Le 3.5 2.8 0.4 2.4 1.3 Primary balance it 1.1 0.0 0.5 1.3 0.9 La Includes domestic oil surplus in 1989/90 (Budget). 1k Includes import-related credits. La Includes program loans, rupiah support and commercial borrowing. Ld As % of non-oil GDP. it Domestic content of expenditure less non-oil revenues. Li Budget balance net of external interest payments. Source: Ministry of Finance and World Bank staff estimates. - 11$ - Annex 1 Page 12 26. The bU_dg&ot r190/9. In January, the Government announced its Budget for 1990/91. Overall, the new Budget reflects the Government's continuing effort to achieve a macroeconomic balance consistent with sustainable growth and poverty alleviation. Recognizing the uncertainties associated with the international oil market, the Budget assumed an average oil price of US$16.5/barrel, around US$1.4 lower than was realized during 1989/90 (but consistent with World Bank projections). In order to offset the projected loss of oil/LNG revenues, the Government intends to maintain its emphasis on non-oil revenue mobilization. Together with a level of net foreign assistance higher than was realized in 1989/90 (but about the same as was budgeted in 1989/90), these revenue targets would allow the Government to finance an additional 10% structural increase in the pay of Government employees, and also to support economic growth and poverty alleviation by raising the level of capital spending. Based on these assumptions, the budget deficit would rise to 2.0% of GDP (from 1.4% of GDP in 1989/90). Nevertheless, the overall fiscal stance would remain prudent, as net domestic expenditure is projected to decline to 1.3% of GDP (from 2.4% in 1989/90), while the primary balance is projected to remain in surplus at 0.9% of GDP. 27. Achieving the Budget's non-oil tax targets will require continuing improvements in tax administration. A key step in meeting this challenge will be to continue to increase the scope and effectiveness of tax audits. The level of subsidies on fertilizer and petroleum products however, are likely to be substantially larger than budgeted in the absence of an increase in domestic sales prices. Rapid progress on reducing these subsidies will be necessary to sustain expenditure on infrastructure and basic services while maintaining fiscal discipline. 28. As noted, oil/LNG revenue projections in the Budget were based on an average oil price of US$16.5/barrel, and this Report's projections in Chapter 2 use the same figure. This is a prudent planning assumption, but since the Budget was prepared, oil price developments have tended to be more favorable, and the current average market price for Indonesia's crude is about US$17.5/barrel. In the event that Indonesia gains another revenue windfall from higher than budgeted oil prices during 1990/91, one policy option would be to improve the fiscal balance by using some of the revenue gains to reduce dependence on net external borrowing instead of using the resources to increase domestic public expenditure. It will also be necessary to ensure that the oil revenue windfall does not compromise the non-oil resource mobilization effort. Money and Prices 29. Monetary policy. The goal of monetary policy in 1989 continued to be control of inflationary pressures and the maintenance of an adequate level of international reserves. Bank Indonesia (BI) also was concerned over the level of interest rates in tie face of persistent commercial bank excess reserves. Inflationary pressures abated during the year, benefiting from positive output supply developments, low international inflation and no abrupt movements in the exchange rate. Neanwhile, net foreign assets of the monetary system changed little in rupiah terms between December 1988 and December 1989, despite an unexpectedly high oil price. - 119 - Annex I Page 13 Tahblei: FACTORS APm CTIUN MOMEY SUPPLY AND LIQUIDITY, 1985-89 (Billion of Rupish) Cha*ue in Yeaxr Fd Stockg lb I Chance in Stocks lb Changes in 1985 1986 L& 1987 1988 1989 1986 is 1987 1 1988 1989 Net foreign assets 2,182 1,850 2,452 -549 409 -29.8 15.3 -3.0 2.3 Use of Government deposits -626 470 1,529 -248 -1,153 24.9 -2.2 -3.3 -16.1 Credit to public enterprises 421 22? 729 659 1,444 6.8 12.2 9.8 19.6 Credit to private sector 3,333 4,547 6,245 11,069 20,097 19.3 28.1 38.9 50.1 Net other assets -94 -2,586 -4,731 -3,314 -4,458 -30.1 -39.7 -27.0 -28.5 Broad money (M2) 5,216 4,508 6,224 8,113 16,048 15.0 22.5 23.9 38.2 Narrow money (Ml) 1,523 1,573 1,008 1,707 5,686 17.5 8.6 13.5 39.5 - Currency 728 898 444 464 1,182 20.2 8.3 8.0 18.9 - Demant deposits 795 675 564 1,243 4,504 15.3 8.9 18.0 55.3 Time & saving deposits (QM) 3,693 2,935 5,216 6,406 10,362 13.0 32.6 30.2 37.5 Rupiah liquidity 4,883 3,180 5,883 6,416 14,643 18.9 25.5 22.2 41.4 Reserve money 1,020 1,373 858 -490 1,909 24.2 11.0 -6.0 23.3 Memo items: M2IGDP ratio 24.5 28.3 29.6 31.8 34.9 QMIGDP ratio 13.8 16.4 18.5 20.9 22.8 la Includes effect of exchange rate adjustment on September 12, 1986. lb December vs. previous December. LS Excludes valuation changes resulting from the September 12 devaluation. /t Excludes recording adjustment on unused commercial loans amounting to ip. 1,725 billion, vhich were previously shown as net governennt deposits" but since September 1987 shown as Bank Indonesia assets and moved to "net other assets". Le Excludes foreign currency deposits. Source: bank Indonasia 30. Unlike the last few years, reserve money, the monetary aggregate most subject to BI control, expanded sharply in 1989, rising 23.3% overall, with the bulk of the expansion in the last quarter. The expansion was due to a 38S increase in commercial bank reserves held at BI, reflecting strong growth in M2. However, of the total of Rp.2.5 trillion in reserves, some Rp.1.5 trillion were excess reserves kept idle at BI. SBI operations could, in principle, have mopped up these excess reserves, though during the year BI actually released a small amount of liquidity into the system with SBIs. 31. Credit and interest rates. Both the expansion in base money and the moderate use of SBIs were designed to lower domestic interest rates. Rates did decline by about 3 percentage points over the year. Part of the fall occurred in the early part of 1990 when, encouraged by BI, state banks lowered their prime lending rates by 3 percentage points to 16% and their deposit rates to 15.25S. However, given Indonesia's open capital account, these rates have a floor determined by international rates and expectations of depreciation and inflation. Consequently, a sustained adjustment in interest rates requires changes in these variables. This can best be achieved by continued stable macroeconomic management, which will enhance confidence in the Rupiah and in the economy in general. Improved efficiency in the financial system can reduce spreads and lower lending rates. Credit expansion is unlikely to have more than a limited temporary effect on interest rates. - 120 - Annex I Page 14 Table 9: INTEREST RATES OF COMMERCIAL BANKS, 1985-89 LA December Sept. Dec. Feb. 1985 1986 1987 1988 1989 1989Lg 199OLg Nominal deposit rates a State banks 16.0 14.7 17.3 18.4 17.7 16.0 15.2 Private banks 17.8 16.2 1943 20.3 19.5 17.6 17.2 Real deposit rates Lc State banks 9.6 6.9 11.2 10.1 10.0 9.2 8.4 Frivate banks 11.4 8.4 13.2 12.0 11.8 10.8 10.4 Nominal lending rates Ld State banks 15.3 18.5 20.0 20.2 19.9 19.7 16.0 Private FX banka 24.2 23.0 23.6 23.8 22.7 21.7 n.a. All deposit money banks n.a. n.a. 22.1 22.3 21.6 21.0 n.a. Real lending rates /c State banks 8.9 10.7 13.9 11.9 12.2 12.9 9.2 Private FX banks 17.8 15.2 17.5 15.5 15.0 14.9 n.a. All deposit money banks 16.0 14.0 13.9 14.2 n.a. Memo items 1985 1986 1987 I98 1989 LIBOR A 8.6 6.9 7.3 8.1 9.3 Inflation differential between Indonesia 1.0 3.8 6.2 5.3 1.4 and USA /f /a For Rupiah transactions, excluding liquidity credit program. 1k Unweighted average rates on six-month time deposits. LI Ex-post rate calculated using actual CPI movement in the period. a Average nominal rates on working capital. it London Interbank offered rate on six month US Dollar deposits. /f US WPI, Indonesian adjusted CPI. 4g Unweighted average rate. Source: Bank Indonesia and IMF International Financial Statistics. 32. Both narrow and broad money continued to show very robust growth in 1989, spurred by high interest rates and income growth. Narrow money, in particular, expanded almost 40% during the year. Both growth rates are in excess of base money growth, implying a growing money multiplier. Much of this expansion was absorbed by rising demand for financial assets as a result of the deregulation policies. The pace of growth, however, calls for careful monitoring by BI to ensure that future expansion does not undermine inflation or international reserve targets, particularly given lower levels of deposit rates. Net foreign assets of commercial banks rose in dollar terms by about US$0.2 billion during calendar year 1989. They are likely, however, to end the fiscal year some US$1.4 billion (see para. 20) lower than March 1989, - 121 - &=m I Page 15 reflecting in part the strong build-up in net foreign assets during January- March 1989, a change in regulations governing banks' net open positions in foreign exchange, and the pace of monetary expansion during the latter part of the year. 33. The asset counterpart of the expansion in base money by BI was growing domestic credit to the banking system. Liquidity credits, which expanded by Rp.2.7 trillion through December to reach Rp.16.2 trillion, were chiefly responsible for the expansion; they represented 92% of the expansion of domestic credit by BI and 13% of net domestic credit from the banking system. The January announcement of the phasing out of liquidity credits means, however, that in the coming year the decline in liquidity credits will serve to contract base money. Net foreign assets at BI, after falling through the first two quarters of the year, were bolstered by disbursements of special assistance, ending the fiscal year up US$0.3 billion. 34. The 50% expansion of domestic credit to the private sector shows that the financial system is contributing on a greater scale to the economy's credit needs, particularly for investment. While the bulk of the increase in credit was supplied to the private sector, there was a strong expansion in lending to public enterprises, which if continued, could be inconsistent with overall policies in that sector and thus requires close monitoring. The continued rapid pace of overall credit expansion also means that the quality of the new loans being made needs to be carefully monitored (see section D of Chapter 3 on financial sector for a broader discussion). Domestic Inflation 35. For the second year in a row inflation fell. Urban consumer price inflation decreased by 3 percentage points, to 6.3%, as measured by the 17- city index (see Table 10). The decline was due in large measure to the leveling off of rice prices after a good 1989 harvest. The CPI rate of inflation may be an under-estimation of the general rate, as both the non-oil GDP deflator and the wholesale price index showed higher rates of increase, although each declined compared to the previous year. This may reflect the lower weight of price-controlled items and different commodity mixes. The import price index increased by 9.0% in 1989, due to further Rupiah depreciation. The inflation rate of non-traded goods continued to be lower than that of export goods, implying that by this measure exports remain competitive. Since import price increases exceeded those of non-traded and export goods, the import-competing sector has seen the largest gain in competitiveness in 1989. 36. The impact of inflation on the poor may have lessened during the last year in comparison to other groups and previous years. The nine essential commodities index shows an inflation rate of only 5% for both urban and rural areas. Rice prices in urban areas increased by less than 1%. The farmer's consumption basket increased at a rate greater than the 17-city CPI, but it was still below last year's increase. i/ i/ This index was rebased to 1983, causing large changes in the historical inflation trends. - 122 - Ann-ex I Page 16 Table 10: DOMESTIC INFLATION INDICATORS, 1985-89 (% change in yearly average) 1985 1986 1987 1988 1989 General Indlcators CPI-17 cities i 4.7 5.8 9.5 9.3 6.3 WPI fb 5.4 8.5 18.5 10.0 Lc 8.0 Non-oil GDP deflator 6.6 7.1 9.8 9.5 7.9 Specific Indicators CPI-Jakarta / 4.9 5.5 9.6 8.0 6.5 KFM-K3 a 4.2 -2.0 10.6 3.9 -1.9 Nine essential commodities - Urban /e 2.4 5.4 6.7 13.4 5.0 - Rural Lf -1.1 11.8 12.9 17.1 5.0 LZ Farmers household consumption Li 0.6 9.2 12.3 12.0 7.2 Proximate Indicators Import goods prices Li 5.3 8.4 22.7 11.5 Lc 9.4 Non-oil export goods prices Li 1.0 13.0 30.5 8.0 6.1 Urban rice prices Li 2.6 -10.6 11.8 36.4 0.9 Non-traded goods prices /k 7.0 3.7 6.4 4.7 5.2 La Revised estimates from 1987-89 reflecting adjusted rice prices for Jakarta. ii Excluding exports of oil and gas. L& Revised estimate reflecting adjusted import prices. Ad Physical Minimum Requirements index for 3-child family; weighted average for 26 province (excluding East Timor). /a Component of CPI-17 cities index. ,' Unweighted average of Java and Madura and Outer Island. ig Rate through October. Lh Component of Farmers' Terms of Trade index rebased last year to 1983 - 100; weighted average for Yogyakarta and West, Central and East Java. Li Component of WPI. Li Weighted average of urban medium-quality rice prices in 14 provincial capitals. L1 Constructed from components of the CPI. Source: Central Bureau of Statistics and World Bank staff estimates. - 123 - Annex 2 Page 1 NOTE ON REVISIONS TO GDP SERIES 1. In mid-1989, Government released a revised production series for the period 1983-1988 (Annex 2 Table 1). The main adjustments were due to: (a) a new census of manufacturing enterprises, which revealed the number of manufacturing enterprises to be far higher than previously estimated, and (b) new data on oil production. As a result of these (and other smaller) changes, the revised series showed a higher base year (1983) GDP level than the earlier series (Rp. 77.7 trillion vs Rp. 73.7 trillion), as well as higher real growth for the years 1984-1988 (5.1% vs 4.1% p.a.). For the oil/LNG subsector, the base year value added was increased 13% in the revised series, primarily due to an increase in reported oil production, which contributes over 90% of oil/LNG GDP. The average growth for oil/LNG over the period was revised substantially downward, however, from 3.4% p.a. to 2.1% p.a. The base year value for refineries (which contributes less than 10% of oil/LNG GDP) was raised by over 175%, due to changes in the calculotion of value added, but the growth rate was lowered substantially, so that by 1988 the value added was nearly the same in the two series. As a consequence of these adjustments, the share of oil/LNG in total GDP over the period fell substantially in the revised series, from 22.3% to 19.3%, while it fell only slightly in the earlier series, from 20.8% to 20.1%. 2. In the non-oil subsector, the base year value added was increased by only 3%, but the growth rate was increased from 4.2% p.a. to 5.9% p.a. These changes were driven largely by manufacturing, where the base value was increased by 23% and the growth rate was revised from 6.1% p.a. to 12.4% p.a. (This had the effect of increasing manufacturing's share of 1988 GDP from 9.3% in the earlier series to 13.8% in the revised series.) Other major changes were in 'other services' (trade, banking, ownership of dwellings, public administration and defense, and other services) and mining. The base year value for lother services" (which contribute over 40% of non-oil GDP) was not significantly altered, but the growth rate was increased from 4.3% in the earlier series to 6.1% in the revised series. The base year for the mining sector (which contributes only about 1% of non-oil GDP) was increased by over 60%, and the growth rate was increased from 3.9% to 4.4%. Overall, the share of non-oil value added in total GDP rose from 77.7% to 80.7% in the revised series, as compared to a smaller increase, from 79.2% to 79.9%, in the earlier series. 3. In conjunction with the revision in the production series, Government also released a preliminary revision to the expenditure series (Statistical Annex, Tables 2.3-2.6). Government is currently undertaking a systematic review of these estimates. Pending the results of this review, the expenditure series used in this report (text and Annex 1) is a Bank staff estimate that attempts to maintain consistency with the consumption and investment trends implied by the earlier expenditure series. - 124 - A:nnex 2 Page 2 Annex 2 Table 1: CDP SERIES -- REVISED VS. PREVIOUS ]A V.A. (RD. B. 19831 Averae Grovth Sectoral Share 1983 1988 1984-1988 1983 1988 --revised 17,333 19,273 2.1X 22.3X 19.32 --previous 15,347 18,106 3.4X 20.82 20.12 Oil 6 Gas --revised 15,103 14,691 -0.62 19.41 14.71 --previous 13,346 13,528 0.32 18.12 15.02 LNG/Refinerv --revised 2,230 4,582 15.52 2.92 4.62 --previous 2,001 4,57U 18.02 2.72 5.12 PONi-OIL --revised 60,343 80,457 5.9X 77.7X 80.7X --previous 58,351 71,840 4.2S 79.22 79.91 Aarihultur --revised 17,696 21,010 3.52 22.8Z 21.12 --previous 17,696 20,975 3.52 24.01 23.32 ManufacturiNa -revised 7,666 13,758 12.41 9.9S 13.82 --previous 6,211 8,363 6.1S 8.41 9.32 --revised 1,004 1,243 4.42 1.32 1.22 --previous 622 754 3.9X 0.8S 0.82 31ectricitv --revised 314 548 11.82 0.42 0.52 --Previous 524 883 11.02 0.7X 1.02 TransportiCommunications --revised 4,098 5,224 5.02 5.32 5.22 --previous 3,978 5,039 4.82 5.4X 5.62 Construction --revised 4,597 5,151 2.32 5.9X 5.2Z --previous 4,597 5,276 2.82 6.22 5.92 Other Services lb --revised 24,967 33,524 6.12 32.12 33.6S --previous 24,723 30,550 4.32 33.5S 34.02 TOTAL CDP --revised 77.676 99.729 5XOOZ 1OOS --previous 73.698 89.946 4.1X 100O LS Previous series vas published only through 1987: 1988 figures in previous series were preliminary estimates only. lb Includes trade, bankLig, ownership dwellings, public administration and defense, end other services. Source; BPS and World tank etaff estimates. - 125 - INDONESIA COUNTRY ECONOMIC REPORT STATISTICAL ANNEX a List of Tables Ponulation and Emplovment 1.1 Population and Growth Rates by Province, 1930-1985 1.2 Distribution of Population by Age Group and Sex, 1961-1985 1.3 Employment by Main Industry, 1971-1985 National Income Accounts 2.1 Gross Domestic Product by Industrial Origin at Current Market Prices, 1978-1988 2.2 Gross Domestic Product by Industrial Origin at Constant 1983 Market Prices, 1978-1988 2.3 Expenditure on GDP at Current Market Prices, 1978-1988 2.4 Expenditure on GDP at Constant 1983 Market Prices, 1978-1988 2.5 Distribution of GDP at Current Market Prices, 1978-1988 2.6 Distribution of GDP at Constant 1983 Market Prices, 1978-1988 International Trade & Balance of Payments 3.1 Balance of Payments, 1978/79-1988/89 3.2 Non-oil Exports, 1981/82-1988/89 3.3 Value of Exports by Principal Country of Destination, 1978-1989 3.4 Value of Imports by Principal Country of Origin, 1978-1989 External Debt 4.1 Summary of External Debt, 1979-1989 4.2 External Public Debt Outstanding as of December 31, 1989 4.3 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt, 1979-1996 Public Finance 5.1 Central Government Budget Summary, 1978/79-1990/91 5.2 Central Government Receipts, 1978/79-1990/91 5.3 Central Government Expenditures, 1978/79-1990/91 5.4 Development Expenditures, 1978/79-1990/91. 5.5 Development Expenditures by Sector, 1978/79-1990/91 5.6 Project Aid by Sector, 1978/79-1990/91 /a With the exception of the tables on External Debt, the Statistical Annex is a compilation of official data from Government sources. In some instances, these data may differ from data in the main text and Annex 1 due to different Bank definitions and methodologies in constructing the statistical series. - 126 - Monetary Statistics 6.1 Money Supply, 1974-1988 6.2 Changes in Factors Affecting Reserve Money Supply, 1974-1988 6.3 Consolidated Balance Sheet of the Monetary System, 1978-1988 6.4 Banking System Credits by Economic Sector, 1978-1988 6.5 Banking Credits Outstanding in Rupiah and Foreign Exchange by Group of Banks, 1978-1988 6.6 Small-Scale Investment Credits and Permanent Working Capital Credits, 1974-1988 6.7 Investment Credits by Economic Sector, 1980-1988 6.8 Time Deposits with State Banks, 1981-1988 6.9 Interest Rates on Deposits at Commercial Banks, 1978-1989 Agricultural Statistics 7.1 Principal Agricultural Products by Subsectors, 1978-1988 7.2 Production of Major Crops by Type of Estate, 1978-1988 7.3 Rice-Area Harvested, Production and Yield, 1974-1988 7.4 BULOG Rice Program, 1978/79-1990/91 7.5 Area Covered Under Rice Intensification Prigrams, 1974-1988 Industrial Statistics 8.1 Index of Manufacturing Production by Selected Industry Group, 1986-1989 8.2 Production of Minerals, 1974-1988 8.3 Crude Oil Production by Company, 1974-1989 8.4 Petroleum Product Supply and Demand, 1978-1989 8.5 Domestic Sales of Petroleum Products, 1978-1989 Prices 9.1 Consumer Price Index, 1979-1989 9.2 Indonesia Wholesale Price Index, 1983-1989 9.3 Domestic Prices of Petroleum Products, 1978-1989 Investment Statistics 10.1 Approved Foreign Investment by Sector, 1977-1989 10.2 Approved Domestic Investment by Sector, 1977-1989 - 127 - Statistical Annex Table 1.1 INDONESLA COUNTRY ECONOMIC REPORT Popultogn And Growth Rates by Provnce, 103019861 Region PopulatonOO) Avarae grwth as p.a.) 1930 1961 a 1971/a 1980 1985 19301 1961-71 197140 198045 Java 41.718 63.059 7hO86 91.270 52 1.3 L9 240 L8 D1 4 Jakata 611 2,973 4,79 6503 7S5 43 4.4 4.0 39 West Jama 10,86 17,615 2L624 27.454 3080 7 2.1 17 2.3 Cental Jwa 13,706 16,407 21,877 25,373 26,945 L0 1. 17 L2 Di YogJakata 1,SS9 2,21 2,489 2,751 2,930 L2 Li Li L3 Ea Jaa 15,056 21,623 25,517 29,189 31,262 12 L6 15 L4 Sumara 8S2 15.139 20 09 28.017 32S 2 1 A &4 3.1 Lampung 361 1,668 2,M 4,62S 5,905 S.1 5.2 S 5.0 sengkulu 323 406 519 768 943 0.7 2.5 4.5 4.2 South Sumata 1,378 Zm 3,441 4,630 S,3 2.3 2.2 3A 3.0 Riau 493 1235 1,642 2,1 248 3.0 2.9 31 33 Jambl 245 744 1,006 1,446 1.745 3.6 3.1 4.1 3.8 We Sumtea 1,910 2,319 2,793 3,407 3,698 0.6 L9 2.2 L7 North Sumatra 2,542 4,96S 6,622 8,361 9,422 2.2 2.9 2.6 2.4 Ateh 1,003 1,629 2,009 2611 2,972 L6 1 30 2.6 Ka1ina 2.170 4102Q S.ISS 6.723 . 2.1 24 3 2.8 WestKaM nan 802 1,581 2,0 2,486 2,819 2.2 2.5 2.3 2S Central Kalimantan 203 497 702 954 1,118 2.9 3.5 3.5 3.2 South Kaimnantan 836 1.473 1,699 2,065 2,273 18 14 22 L9 East Kalmann 329 S51 734 1,218 1.S12 1.7 2.9 S.8 4.4 Sulawesi 2 7Q09 8 S2 10.409 flS54 1.7 JI 22 2. CenMtal Sulawe9i 390 693 914 1,290 1.Sl L9 28 3.9 3.2 North Sutawesi 748 1,310 1,719 2,115 2313 18 2.8 2.3 1.8 South Sulaweul 2,657 4,517 5,181 6,062 6,610 L7 L4 1.8 1.7 Southeast Sulawel 436 559 714 942 1,120 0.8 2.5 3.1 3.5 Ofther 1Isands 4.219 7.106 8.630 11.071 t2.31 1.7 20 2.8 22 8adl 1,101 1,783 2,120 2470 2,649 L6 1.7 1.7 1.4 West NusaTenggaa 1,016 1,808 2,203 2,725 99S 19 2.0 2.4 1.9 East Nusa Tenggara 1,344 1,967 229 2,737 3,061 12 1.6 2.0 2.3 Maluku 579 790 1,089 1,410 1,609 LO 3.3 2.9 27 Irian Jaya 179 758 923 1,174 1,371 4.8 2.0 2.7 3.2 East TTkor D.a na .a 555 631 3a DI n.a 2.6 Total Indonesia 605 97.085 119208 147.490 164.067 1.5 2.1 24 2 /a Includes adjustnent for the ealusbon of rural Irian Jaya. Soure: Central Bureau of Statstcs, Populton Census Reports, 1961, 1971, and 1980; Staistca Yearbook Of Indonesia, 1984; and SUPAS 1985. INDONESIA COUNTRY ECONOMIC REPORT Distrbution d Popuiation by Ag Group and Sex. 1961-1 ('000) 1961 1971 1980 198S Age Group Males Females Total Males Females Total Males Females Total Males Females ToW 0-4 8,S29 8,649 17,178 9,67S 951) 19,S 10,872 10.422 212 lip8 104 21,5S1 59 7.744 7.701 IS,44S 9,593 902 18is9 1089 10,446 21,3 I39 t1,739 23.118 10-14 4,353 3.892 8,24S 7,406 6,87S 14K21 9,179 8,2 17,704 10,783 10,113 2086 1S-19 3,865 3,905 7,770 S527 S,779 212406 752 706 IS358 8.33S 23 16.567 20.24 3,480 4,373 7,853 3,627 4,461 8,088 6,010 7,SS 13,06S 6,8 70 1428 25-34 7393 8,610 1612 7,722 92 10648 9.5 9,920 19,605 12,6 12,442 24,48 35.44 S,76S S,406 11,171 7,062 7.119 14,181 7.876 8,172 16,8 8,538 8,485 17X2 4S-S4 3,587 3,511 7,096 4,360 4,213 8,S73 S,761 S,8S6 11,617 6,418 6,S14 1932 5564 1,913 1,865 3,778 2,224 2,373 4,597 3,297 3,3S4 6,651 4,150 4.474 8,624 1 65+ 1,183 1,245 2,428 1,450 1,539 2,989 2,200 2,93 4.793 2,619 2,9S4 S,573 Unkaow 60 57 117 7 8 1S 11 9 20 4 3 7 0 latat 47&87I 9214 97p8S ai. 6Q455 112.M 73 74S1S 147.490 8164S 82A0 164A47 PEnowedisUdbuionk 0-4 17.8 17A 17.7 16.5 1S.8 161 14.8 14.1 14.4 13.S 128 13.1 5-9 16.2 IS.6 IS.9 16.3 ISA IS.9 14.8 14.1 145 139 13.0 13.S 10-14 9.1 7.9 8.5 12.6 IIA 12.0 125 115 12.0 13.2 123 12.7 IS-19 8.1 7.9 8.0 9. 9 9.6 103 10.5 10.4 10.2 10.0 10.1 20.24 73 8.9 8.1 6.2 7.4 6.8 8.2 9.5 8.9 7.8 9.6 8.7 2534 IS.4 175 165 13.1 153 14.2 13.2 13.4 13.3 14.7 IS.1 14.9 3544 12.0 11.0 115 12.0 11.8 11.9 10.7 11.0 10.9 105 10.3 10.4 u 45S4 7.5 7.1 7.3 7.4 7.0 7.2 79 7.9 77 7.9 79 7.9 cr 564 4.0 3.8 3.9 3.8 3.9 3.9 4.5 4.5 4.5 S.1 5.4 S.3 * p 6S+ 2.5 25 25 25 25 2.S 3.0 35 3.2 3.2 3. 3.4 . Unnown 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0 0. 0. 0 TotaStts mo 16 0 0 lao 1988 Ioo tercensOa Populato lSreyo 19 Soure : Central Bureau of ttstefl8ct. Census Reports, 1961, 4971, 1980 and 1985; IntercensM Population Suivey, 1985. - 129 - Statistical Annex Table 1.3 | i tXo""°^~~~i0 R i | xsc-e °- j | >°N t-O : t j o00l0ME@4 f6 it}dt 1i - 130 - Statistical Annex Table 2.1 COUNIR ECONmgC REPORT Gnu NOW04 Pro4y Jg hWfushvIai OriQin at CUrret MA.t Priess, 1976.1968 /a (Rp. bi@n) 1978 079 1980 108l 1082 1 1083 1084 1085 108 1087 108 9b Asricriture 0.780 9.S J1J70 Isess ISM2 I I7.S6 20.s34 S2.414 24.751 29.016 s3.sts Farm food cops 2,92 4,774 6.103 7,a2e 9,162 1 11,057 I2,60 13,761 14.065 17,387 20,681 Farm non-food crops 1.104 1.614 1,924 2,048 1,015 I 2,295 2.739 2.979 3s534 4,140 4.403 Estate crops 175 273 308 204 270 I 375 53 715 6090 978 1,01' Uvesock products 537 80s 1,101 1,478 1,611 I 1,754 2,004 2,427 2,840 3,015 3,545 Foresty 816 1,292 1,412 1,077 000 I 094 030 038 1,001 1,247 1,370 Fshery 456 62s 703 076 1,114 I 1,220 1,373 1,505 1,921 2,249 2,580 milndu and 4s34.26s e LM 13.218 12.153 I 16.107 I.sa38 13.571 1i.s0 17.267 16.185 Ol & natural gas 4,08I 6,541 10,610 12,673 11,648 15,103 15,917 12.584 10,502 15,979 14,442 other 182 334 628 544 505 I 1,004 1,021 987 1,001 1,287 1,743 M301_ri1Ii LUS_ CO 6.353 7.067 7.4S2 I k 13.113 IS.53 17iLi 21,140 25.821 -7lery oil 115 07 94 IS0 155 I s35 1,013 1,864 1.915 1,820 1,824 LNG 20 582 1,108 1,262 1,615 I 1,871 2,707 2,424 1,969 2,097 2,587 Oher 2so1 3,324 5,061 5,005 5,712 I 7,6W 0,304 11,216 13,301 17,223 21,410 Eeidtri.latm& WSr 130 231 292 341 I 314 354 o 647 757 S37 Construction n1371 IA4 5 3.500 32.7s 1 4.597 4.757 5.302 5314 S .oa7 6.s8s trade LS0 i,. 7tssa 8.781 9.947 I 11.541 13.383 15.355 17.083 20.870 24,167 Betai & wholesale trade 2,893 4,s0 6,314 7,586 8,567 I 0,933 11,300 2,900 14,116 17,383 20,144 noteb & resta_at 687 no 1,009 1,104 1,380 I 1,608 2.068 2,455 2,067 3,487 4,023 Trasrort & c a 1.234 1.081 2.211 2.3M 3.164 40 5_05l 6.100 6.407 7.414 8.059 Traport 1,187 1,568 2,060 2,182 2,042 I 3,6094 4,611 5,s53 5,770 6,60m 7,237 Commuhetana 87 113 150 188 222 I 404 440 562 637 775 822 ,e Ym em 470 60O 024 1.46 1.783 1 !.. 3.0P0 . 3.511 I 4.824 5.268 ownoshi or dwellt m 703 6 0 L22 1 .404 1.731 2.35S 2.s7a tm 2 970 a34L a73s Publi adam. & defene L _ 209 Ia 4 a 470 I L7 0.470 70925 8307 8.912 9.446 Other services 1.180 Le I7 2.0009 2s3s t 3.01 3.718 s.00s 4.315 4.903 5.351 Gree Domestid Poc 4246Sa _ 48.9U 58.127 62S478 9e.860 102.546 124.530 137.452 /a In 1080, Govramen reed a revised national aeo meeie for the perlod 1983-1988. Since the 1976-1982 seres ha not yet be revled it is not directly cmparble with the 103-1098 sries. /b Prelmina SCures. Source: Ceatrel BesuofStisti. - 131 - Statistical Annex Table 2.2 COUNIT ECONOMIC REMm a rm 3 M t i byv . Co n 197M-1988 LA .~~~~~op boo") 1978 1979 198 l981 1982 1183 1s984 1985 19o 1981 19M/b 1 14.a34 15.249 10.S01 17M170 17.407 2 17.00 18.431 1.209 19.0 201 1 Yarm feod crop .400 8.838 9.661 10,039 10.736 1 11,057 11.589 11,895 12.186 12.506 12,797 Farm DOnA-food top 1,051 1,860 S,050 2.219 2,274 1 2.283 2.349 2.570 2.581 2,603 2a,8s Estate opa 207 SSO 317 343 363 I 375 440 511 562 565 577 Uveaock prodcts 1.215 1.414 1.588 1034 1,703 I 1.754 18so 2,037 2.054 2,111 2.212 Foregi 1,818 1,790 1,62 1.20 115 I 9 894 851 889 98 1,013 FleheY 983 1.041 1,116 1.139 .167 1 1,220 1.253 1.341 1,418 1,494 1.576 Mnidg di n 10.s34 IO3 1078 1.340 )SALT I 16.107 17.120 15480 toxg 16,s 15.934 Onl i mtal so 15.2 15,590 15.525 15,767 13.249 2 15,103 10.187 14.513 15,237 15,219 14,091 Oher 441 502 ass 573 627 1 1,004 o33 968 1.072 1,148 1,243 5.108 sssJ UK 7U? 7.973 7 7.s7 12.079 13.431 14.79 16.23 18.340 aenery on 148 173 186 170 142 1 as3 626 707 927 938 go8 -11 725 1,230 l.672 1.712 1,782 1 1,871 2,790 2.919 2.2 3.233 3,601 Other 4,235 4,549 5.447 5,97 6,049 1 7.60 8,663 0,746 10,828 12,064 13.758 lectricity. and wat r $1 s2 361 422 I 314 =j 4 j 430 495 548 C"r 902o n %.4 4 308 4.4e I 4.57 4.3a4 4 4.S 4so 5.119 IrMAG, 8.210 S 0 I0.SS 10.98 11.00S I 11.541 11.793 12.389 140 14.3 15.661 Retai & wholesel te 68 7.520 8819 9,436 10,057 1 0,933 10,010 10,402 11,229 12007 12.900 ctl d retmianta Is344 1,367 1,484 1.532 I"5 I 1.608 I.783 1987 2,221 2.351 2,04 tuort & 2oso 2.870 SZ.911 3.309 L54_0 1 4.0s 44.4 4,4E jsa7 4 M5S Trsport 2. 2.513 2.72a1 3.083 3,S76 I 3,60 4,008 4.032 4,178 4,394 4.6ss Commutations 140 157 198 226 263 1 404 435 455 490 544 588 Soddm otc. Li. I.5lD 1.10 1.782 2 I 2.359 3M2 2.909 3.51 .5a7 ownitDotdwoUbm 1.462 I.M! 1683 I.823 s2s L 2.350 2.412 2.461 2a 256M 2.762 Pbc adm & e 3e 3.397 3.787 4,053 4,82 5,329 1 5,712 .997 6,455 6,.82 7,30 703 OUm S"u 0L4!I .501 11.0S 2.792 2.8S1I 30 01 s17 2.80 3.109 af23 3570 SIom DOmestiell"C Product l 0 710 .55 71.381 I 77.87 SW P.M,, 904 2 07 Aa In 10 Government relened a revised national asomt seri#s for the peried 198310898. Since the 1978-1982 salas ha lt t been rlied, It s vAo fetl cmparae wth the 19 s1988erie /b P ,_liIr figur. Scuae: Centra hiest of stow". W4ONWfA COUNTY ECONOMIC IU [xMdtu. an GMP at Cumno Mc"tt Pricm. t97-1t988 /a (Rp. W8on) 1978 1979 1980 1981 1982 I 1983 1984 1985 191987 1988 /b Priate consumption 15,125 19,516 26,695 32,294 37,924 1 47,063 64,067 57,201 63,355 71,989 80,996 Gowrnment consumption 2,557 3,277 5,148 6,452 7,229 1 8,077 9,122 10,893 11,329 11,764 12,756 Gross fixed investmnt 5,494 7,668 10,550 14,135 15,822 I 19,468 20,136 22,387 24,782 30,980 33,907 Changes in stock /c 574 2,166 1,345 3,189 1,584 1 2,847 3,272 4,690 4,106 7,851 8,181 Exports of goods and I nonfactor services 5,241 10,003 16,162 16,177 15,103 1 19,846 22,999 21,534 20,010 29,895 34,622 Les: Imports of goods and I nonfactor services 4,745 7,791 9,886 14,119 16,186 1 19,626 19,846 19,836 21,036 27,939 31,009 Gross >Domesdc Product 24246 34.840 48.914 68.127 62476 I 77.676 89.750 9 102.646 124.639 139.462 /a In 1989, Government reeased a rvised national account series for the period 1983-1988. Since the 1978-1982 serbs has not yet been revised, it is not directly comparable with the 1983-1988 series. /b PreliminarY fus. /c Residual. Source: Central Bureau of Statistics. et ' F . I-, aX MG)ONESIA COUNllY ECONOMIC REORT Exn.ndliue on GMP at Condtart 1983 Market Prim, 1978 - 1988 la Rp. b.lion) 1978 1979 1980 1981 1982 1 1983 1984 1985 1986 1987 1988 b PrivtMe cmuapion 29,848 32,491 88,037 39,699 42,172 1 47,063 48,942 49,448 50,530 52,200 54,212 I Government consumpolon 5,139 5,767 6,801 7,567 8,291 1 8,077 8,353 8,991 9,241 9,226 9,924 Grasfed hw mt 11,289 12,382 15,646 i7,659 18,740 1 19,468 18,297 19,616 21,422 22,597 23,246 1 Change in seock c 181 27 (3,077) 5,475 3,239 I 2,847 4,325 6,519 6,266 4,836 2,750 Bqpods of goods and nodacor setvkes 23,907 24,458 26,182 21,163 19,242 1 19,846 21,145 19,495 22,460 25,743 25,98 LM :pos oaf goods end nonfador seWOc 12,231 13,626 14,866 20,010 20,323 I 19,625 18,151 19,109 19,906 20,299 16,418 a Grs Domesi Produc 68.13S 0 66.723 71.63 71.361 1 77.676 82.911 84.989 90.014 94.302 99.697 /a In 1989, Government released a revised nional acou seies for the period 1983-1988. ShIe the 1978-1982 seies has not yet been evid, it is nd directy comparable with the 1983-1988 sefes. /b Prelhmbiy figures /c Reidual. Source: Central Bueau of Statistic. 0 INDONESIA COUNTRY ECONOMIC REPORT Distribuo of GDP at Current Market Prices, 1978-1988 /a (96) 1978 1979 1980 1981 1982 1 1983 1984 1986 1986 1987 1988 /b Economic sectors I Agriculture, forestiy, I fshery and livesiock 28.0 26.9 24.0 23.6 24.1 1 22.8 22.7 23.1 24.1 23.3 24.1 Mining & quariying 17.6 19.7 23.0 22.7 19.5 1 20.7 18.9 14.0 11.2 13.9 11.6 Manutacturing 11.6 11.5 13.0 12.2 12.0 1 12.7 14.6 16.0 16.8 17.0 18.5 Electricity, gos and water 0.5 0.4 0.5 0.5 0.5 1 0.4 0.4 0.4 0.6 0.6 0.6 Construction 5.7 5.6 6.3 6.0 6.0 1 6.9 5.3 5.5 5.2 4.9 5.0 Transport & communications 5.1 4.8 4.5 4.1 5.1 1 5.3 5.6 6.3 6.2 6.0 5.8 COher services 31.6 31.1 29.8 30.9 32.8 1 32.1 32.5 34.7 35.8 34.4 34.4 Gross Domestfc Produc 00.0 Lo°- 100.0 100.0 100.0 I 1OO.0 0oo.0 o oo.o loo.o 100.0 10.0£ Expendiure c I Privae consumrpion 62.4 56.0 52.3 55.6 60.7 1 60.6 60.2 69.1 61.8 57.8 68.0 Government consumpflon 10.5 9.4 10.5 11.1 11.6 1 10.4 10.2 11.2 11.0 9.4 9.1 Gross domesic investment 25.0 282 24.3 29.8 27.9 1 28.7 26.1 27.9 28.2 31.2 30.2 Net exports 2.0 6.4 12.8 3.5 -0.1 1 0.3 3.5 1.8 -1.0 1.8 2.6 Gsg Domestic Prod 100 0.0 I 100.0 100.0 100.0 100.0 100.0 LOO.0 /a In 1989, Goernment released a revised national account series for the period 1983-1988. Since the 1978-1982 series has not yet been revised, it is not directy comparable with the 1983-1988 series. (D . /b Preliminaty fgures. Source: Tables 2.1 and 2.3. x COUNR ECONOMIC Dblstlo of GOP * Con_t 1983 Mod p . 1978. 1988 la (%) 1978 1979 1980 1981 1982 1 1983 1984 1986 1986 1987 1988/b Emk Sedn Ag,u. i huwny and lvesock 24.7 24.8 24.4 24.1 24.4 I 22.8 22.2 22.6 21.9 21A 21.1 Mbnhg & quanyng 28.1 26.2 24.1 22.8 19A I 20.7 20.6 18.2 18.1 17.4 16.0 Manu6dwing 8.8 9.7 10.9 11.0 11.2 1 12.7 14.6 15.8 16.3 17.2 18.4 Edeidy,l gas and ew 0.4 OA 0.6 0.5 0.6 1 6.4 0.4 OA 0.5 0.5 0.5 Cornaudlon 5.0 6.3 5.8 6.1 6.2 1 5.9 5.3 6.3 5.1 5.1 5.1 Tanspoet & ommunmations 4.3 4.3 4.4 4.6 6.0 1 6.3 5.4 5.3 5.2 5.2 6.2 Othe swrvic 28.7 29.3 29.9 30.8 33.3 1 32.1 31.5 32.3 329 33.2 33.6 G Dk P 100.0 ,100.0 100.0 100.0 100.0 1 100.0 100.0 100.0 100.0 100.0 100.0 P*ua cownsmplon 51.3 52.8 54.0 56.5 59.1 1 60.0 59.0 582 56.1 55.4 54.4 G _wenment cnmption 8.8 9.4 10.2 10.0 11.B I IOA 10.1 10.6 10.3 9.8 10.0 Grs &omesk bhWesm 19.7 20.2 18.8 32.3 30.8 1 28.7 27.3 30.8 30.8 29.1 26.1 Not .qtport 20.1 17.6 17.0 1.6 -1.5 I 0.3 3.6 0.5 2.8 6.8 9.6 GiMa PK"* Pxdw M-0- o 1 100. 00 100.0 100.0 I 100.0 100.0 100.0 100.0 1.0 100.0 I fS-1P ~rt oa In 1989, Government miusemd a vbWe naona accoun wies for he pedd 1983-1988. SIe de 1978.1982 smie e ts ha not yet been evsed, it is n dredly eonabe wh the t983.1988 sie I h Prelmltnor fgureL .rt 1' Sowca: Tables 2.2 end 2.4. I I. INDONESIA COUNTRY ECONOMIC REPORT Balance of Payments. 197879 - 1988/89 (USS million) 1978179 I;17.M0 19801 t981/82 1962183 1963184 1984/18 19SS/86 1986187 1967188 198189 1. Net oilH esprt Ia 3,78S 6.30 9,34S 8,379 5.788 6,016 S,845 4,ao4 1,426 2334 1.535 2. NetILNOcya 22S 667 1,256 1,382 1,378 1,355 1,971 2,11 1.15, 1,426 1.525 3. Non-itleaps(nct) -S165 4777 4470 -12551 -14205 -IIS22 -74 -79SS -663S -s467 -4919 EWxor, fob 3.979 6,171 $,57 4,170 3,928 5.367 5,907 6,17S 6.731 9,502 2I184 Impo cif -7543 -9028 -11837 -14561 -IS824 -14346 -12921 411186 -1038S -11763 .13S86 Srvces (noalelgt) -1601 -1920 -2220 -2160 -2309 -2543 -2770 -2944 -2981 -3206 -3517 4. Currentaccownt(1+24-3) -IISS 2,198 2,131 -2790 -7039 4151 -1968 -1832 4051 -1707 -1859 5. SDR* 6. Official capital dbbwmeuen 2.101 2.690 2,684 3,521 S,011 5,793 3,519 3,432 5.472 4.57S 45881 IOOI 1,S67 2.237 2,406 2,415 2,905 4,25 3,1S9 2,751 3,978 4,368 S,468 Propapmaid 94 239 118 S0 21 84 52 38 48 30 23 w Project aid 1,473 1,998 2,288 236 2,684 4,171 3,137 2,713 3,930 4,338 5,445 ODA 814 1,106 1.299 996 1,3I6 1,902 1.442 1,332 1,932 2807 3,973 NonDODA 659 892 969 1769 1,528 2,269 1,69S 1,381 1,998 1,531 1,472 Non-Ml S34 453 278 1,106 2,106 1,538 330 681 1,494 207 1.120 Ch loan 0 0 0 0 0 0 0 0 0 0 0 7. Amoratlion -*632 -692 4*15 -09 -926 -1010 -1292 *1644 -2129 -3049 -3763 & Other capital (nt) 542 -1312 -361 1,140 t,795 1.191 499 s7 1,232 1.709 -211 Directlnvestment 271 217 140 142 311 193 245 299 252 S44 585 oin ctor 7S -1237 *685 791 1,322 n.a n.a n na na na Otben 196 -292 184 207 162 998 254 273 980 1165 -796 0t a.E 9. Tol (4 though 8) S6 2,884 3,839 1,062 -1159 1,823 7S8 S28 S24 1,S28 7SS , X 10M .roandomission -62 -1256 -1165 -2050 -2121 247 -91 498 -1262 S7 -1432 * I1. Monetay mowutents /b -794 -1628 -2674 988 3,280 270 -667 -30 738 -1565 677 & Grs zlport AesI imports of goods and ervics of the ol and LNG sector respectiey. lk A seative amount refes to an accumulation a & Peminfgue Soume: Bank Indosia. COUNTRY ECONOMIC R Non -1 o lIo fet 1911B2 - MOM Vaue (us $ m nVme cm tW) 1981/82 lSo4am lo9am/4 1964/83 Is - eSUJss 18/ 1 8 1o"8 /& 19881/82 I9824 108144 1/9854 186WS I8 1987/88198ss8/a AgriculA !M2ss L2 a2 3863 8.78 4419 5.719 .811 Thmbr 952 68s 1,161 1,17 1.217 1.502 2,402 2,879 5,936 5,101 5.643 5.201 4670 5,5A 6.718 7?.4 altog 504 S10 267 iss 2 3 3 5 4,212 2,785 2.536 1,223 79 le 146 t95 b. Plywood 199 324 579 697 648 1.156 1.34 2,069 591 o76 1,6a8 2,105 2.495 2,949 3.820 Z,290 c. Sam amber 244 256 302 320 349 408 540 676 1.100 1,365 1,620 1.789 2.017 2,267 2.473 2,704 d,Olher 4 10 Is to 18 25 85 129 35 75 74 84 79 125 279 385 Rubber 770 01s 084 86 714 752 1.055 1,236 s8s 877 1.145 1,042 1,082 1.003 1.108 1.219 Palm el 79 1O3 92 95 170 119 214 318 183 315 27 175 54 569 704 007 Cofee 343 363 56e 568 059 753 497 572 219 239 298 308 294 310 274 320 Tea 94 le 156 211 134 106 119 134 80 so 85 91 101 93 98 1ag Tobcc 49 37 50 U 55 78 65 73 26 19 28 23 21 27 30 33 Peppet 49 41 5e so 82 152 158 144 38 34 51 34 25 33 3s 53 Coprcaeab 33 38 33 18 35 34 41 38 301 307 338 213 433 348 384 306 Tapioca 20 9 33 31 42 52 93 154 267 107 299 418 534 439 S3U 1.362 Ratoan 83 82 87 96 so 99 168 37 S4 Be as 101 92 116 135 so Hdes 32 25 27 40 37 45 59 68 6 6 6 2 8 10 6 4 I Othr foodshf 71 50 101 0s 122 64 102 6e6 704 492 900 748 885 542 1,490 1.097 Animaproduc 213 251 276 219 274 S 466 783 105 109 194 87 109 128 183 225 165 204 206 is8 228 317 6a8 537 a9 3 44 U 50 5s 91 95 Oth0 140 93 98 153 I6O 175 228 216 U.s uA ns AA u. MAs ANneral 756 076 800 775 80 7 1.080 .5 rm 437 349 30s 252 248 15i 143 165 31 27 24 22 23 24 22 24 Copper 133 is 809 132 133 I le 238 210 217 191 242 279 271 290 SI3 Ncel 145 139 170 121 140 112 146 357 1.174 922 721 955 943 1,288 1.455 1.585 Aluminum na 48 165 208 223 201 245 308 n.s 32 112 ISS 219 177 152 127 GrnIte 6 5 13 9 8 8 6 0 933 670 169 1300 1,194 1,272 8a8 860 Olhews 36 20 54 s3 49 104 353 370 n.s MA n n. na na An .s AAonuotured 33 530 005 1.469 1.595 157 2.70S ssI T"Ies 129 158 290 418 577 632 990 1,371 n.a na nL na nu na u. u. ILrs Handkbaft It 23 75 116 187 142 287 445 na na . u ua na .a na s u sD rt Ebedicol app. 72 112 130 134 45 40 55 105 Ma na ua. nua na u.a nau Cement 23 9 11 14 23 47 54 as 471 230 300 510 9S5 2,012 2,316 3,316 W . FerIlizer it 21 so 31 109 97 117 135 41 103 377 208 1,047 1,212 1,272 908 N Olhuu 80 207 349 757 655 623 1,194 1,789 na na. Ma n. na na u.s nau Unclassibed 1s5 0 0 0 0 0 0 0 nus 0 0 0 0 0 0 0 Total Non-ol ExLorls 4.170 3.928 5._67 5.907 6.175 6.731 9.502 12.185 X /a Preliminoty figures. Source: Bank Indonesia (bsed on PEB Expod Dedarotion Form). - 138 - Statistical Annex Table 3.3 - 5~~~~~~t ~~~ oq.~~~~~~o 2 ' - a a - 333@ | U>tiS t i 3[g 5 tj S $e6£i@ Oa 'U 31 ! U8| X2r aa g8 1 S0I " F o ~ ~ 9 .i 0; 1 ;t - e i ~ ~ ~ 3j SZ t7to2* tw§ - 89 *45 @ 3fl0§ °°iF g ;~ 8E S* It -E ° t-iS ttS !8 10S°°°°°XS | 333 N ~ -l | aut~~o ° - I *9 '9iS Sl]1Mtf]g #3 - 139 - Statistical Annex Table 3.4 a 4 t4 - t i ffi 8S gB 2 >s g g ;X};tgnZnZe- 4,- -. 44. 4;*n :a3Bszeo; IN Zi 1111ii. 11 X ]§']i}#| l1 l g ]XiXiX} ] g wt - 140 - Statistical Annex Table 4.1 INDONESIA COUNTER ECONOMIC REPORT Summa= of Extenal Debt Date, 1979-1989 /a 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 External debt data (US S million) Disbursed and outatandlnt debt (QQO k /b 13.377 150 15.903 18.52t 21.611 22.2 26.842 32959 4112 417 41.026 BilateraVmultilateral 8,608 9,557 10.092 11,118 11,957 12,24S 15,171 18,760 25.020 26,692 27,924 Other/c 4,169 5,464 5.811 7,403 9,6S4 10,032 11,671 14,199 16,392 14,686 13,102 Total debt outandin. includin undisbursed TO11) Z130 24. 27243 32.234 35.485 MM 42,6 SO338 60063 60.309 59.29 Bilateramultilateral 14300 16,727 17,999 19,56 20,770 21.669 25,503 29,720 37,522 39,127 40,90S Other/c 7,002 7,775 9,244 12.666 14,716 14,831 17,363 20,618 23,161 21,182 18,385 Commitments 4.101 4X7 S.627 7.074 5.9 4,0 45 4 t?6 5.945 6.034 6.377 BilateraUmultilateral 2,251 2,639 2,833 2,610 2,310 2,737 2,406 2,098 4,743 4,781 5,020 Other/c 1,850 1,638 2,795 4,464 3,379 2,068 2.180 2,178 1,202 1,253 1,357 Gros disburwements IM7 2,SSI 2.62 4.191 4.932 3 3.615 4.55 55330 6.407 6.047 BilateraUmultiDateral 826 1,131 1,363 1.835 1,712 1,867 1,692 1,981 3,718 4,241 3.780 Other/c 1,062 1,420 1,309 2,356 3,220 1,939 1,923 2,275 1.812 2,166 Z,267 Net dibunements SS 1.611 1.619 IM 3.643 2.194 1.268 1,5 2,146 2.875 5229 Bilateral/multilatl SSS 807 986 1,367 1,162 1,285 1,OS9 1,065 2537 2,875 2.373 Other/c .1 804 632 1,721 2,481 910 210 785 -391 -1,247 2855 Net resourc transfes -216 788 624 1942 2 5 -373 -199 -276 -906 *739 BilateraUmultilateral 259 496 651 959 690 704 354 IIS 1,439 1.553 966 Otherkc *475 292 -27 983 1,698 *137 -727 -314 -1664 -2460 -1705 Public debt service 2.103 1.762 2.048 2.25 2544 3.239 3 87 445 5S.7S 7.313 6.787 Amortization 1,329 937 1,054 1,103 1,289 1,612 2,346 2,406 3,384 4,779 4,262 Interest 774 825 994 1,146 1.255 1,627 1,641 2,049 2,372 2,534 2,525 Public debt sevice &W 1.762 2048 225 2544 3239 3.987 4.455 5.755 7.313 6.787 Bilateralmultilateral 567 635 712 877 1,022 1,163 1,338 1,866 2,279 2,688 2.814 Othert/c 1,536 1,128 1,336 1,373 1,522 2,076 2,650 2,589 3,476 4,625 3,972 Disbursement indicaton (%) UndisburseddebtVTDOib 37 _ 42 43 39 9 37 35 32 31 31 BilateraVmultDateral 40 43 44 43 42 43 41 37 33 32 32 Other/c 32 30 37 42 34 32 33 31 29 31 29 Grossdisbursements/commit. 46 60 47 59 87 79 79 100 93 106 95 BilateraUmultDateral 37 43 48 70 74 68 70 94 78 89 75 Other/c 57 87 47 53 9S 94 88 104 151 173 167 Gross disbunements/undsbursed debtandcommitments /d 19 21 18 23 25 20 19 21 24 25 24 Bilateral/maltilateral 12 14 14 17. 16 16 14 16 24 25 22 Otherkc 32 37 26 30 37 27 28 29 24 27 29 Net diabuzmentWgdssdisbh. _ 63 61 74 74 _8 35 43 39 45 86 BilateraUmultiateral 67 71 72 74 68 69 63 54 68 68 63 Other/c O 57 48 73 77 47 11 35 -22 0 126 Netresourcetransfens/arossdisb. 11 31 23 46 48 15 -10 5 -4 -14 -12 BDateral/multilatael 31 44 48 52 40 38 21 6 39 37 26 Other/c *45 21 -2 42 53 -7 -38 -14 -92 -114 .75 La Data in this sector rer to publi sector medium and ong term loans. Loans vsith a maturity of less than one year. credits for LNG cxpansion, LPG and paraxyene prvjets, and grants are not Wnaded. Lb End o year. IC Supplis crt, loans from inana i institutions, eport credits, bonds and nationalization only. /d Gros disburements a peeage of undsbused debt (TDO-DOD) at beginning of year plus commitments during the year. Source: IBRD Debtor Repotfng Stem, based an data provded by Bank Indonesia. - 141 - Statistical Annex Table 4.2 INDONESIA Page 1 of 2 COUNTRY ECONOMIC REPORT Extemr Public Debt Ou_Wffl9W as t December 31. 1989 (UJS$ '000) Type ocreditor/ Debt outstandina Major reported creditor country Disbused Undisbused Total new commitments Jan I-Dec 31 1989 Suonlier' Credits i inland 8,337 4,071 12.408 0 France 33 33 0 Japan 3,007,189 1,981,866 4,989,057 63,641 Korea, Repubtic of 19,397 - 19,397 0 Pakistan 6,341 6,341 0 Switzedand 1,054 - 1,054 0 United States 457 457 0 Yugaslavia 7,710 7,710 0 Total suppliers credit 3050.518 1.985S939 5.036AS7 63.641 Financial Institutions France 133,542 87,233 220,775 0 Germany, Fed. Rep. of 9,178 1,078 10,26 0 Hongkong 1,014,775 863,987 1,878,762 500,000 Italy 2,640 2,640 0 Japan 3,328,038 739,864 4,067,902 376,802 Multiple Lender 468,750 468,750 0 Netheriands 4,219 4,219 0 Singapore 210,855 210,855 0 United Kingdom 362,566 160,550 523,116 0 Undted States 963,672 180,000 1,143,v72 0 Total financial institutions 6.498.235 2,032,713 8.530.949 876 Bonds Germany, Fed. Rep. of 176,699 - 176,699 0 Japan 48,797 48,797 0 Kuwait 6,877 6,877 0 Netherlands 20,882 - 20,882 0 Saudi Arabia 75,000 7S,000 0 Switzerdand 82,500 - 82,500 0 United Kingdom 103,600 - 103,600 0 United States 300,000 - 300,000 0 Total bonds 814.356 8S4356 Q Nationalization Netherands 127,591 127,591 0 Total nationalization 127.591 - 127591 Multilateral Loans Asian Dev. Bank 2,427,596 2,261,483 4,689,078 597,541 EEC 4,351 4,351 0 IBRD 8,542,224 3,943,326 12,485,550 2,007,400 IDA 8S3,598 842 854,440 0 Intl Fund Agr Dev (IFAD) 30,920 83,281 114,201 0 Isamic Dcv. Bank 710 9,114 9,824 0 Nordic Invest Bank 26,000 38,500 64,500 0 Total multilateral loans lA85.398 63.545 18.221.943 24.941 - 142 - Statistical Annex INDONESI Table 4.2 COUNTRYECONOMIC EtO Page 2 of 2 Extena Public DOWt Ckutamnding as of December 31.1698 Type ocreditor/ Debt ousnding Major rpted creditorcuy Disbursed Undisbursed TOal newomtments Jan I-Dec 31 1969 Australia 148,774 132,407 281,181 85,620 Austul 64,023 25,680 89,703 0 el4ium 9O093 1,193 92,086 0 Bred 100000 -100,000 0 Buuais 1,078 1,078 0 Canaa 324,708 120,937 445,645 0 OCina 69,447 - 69,447 0 Czechoslovakia 35,937 35,937 0 Denmark 33,331 1,655 34,986 0 Egpt, Arab RepubUcof 1,592 1,S92 0 Frane 514,123 361,435 87S,558 167,1S7 Gan Dan Rep 29,555 - 29,55S 0 German, Fed. Rep. of 1.864,611 609,711 2,474,322 296,107 Hungary 8,965 8,965 0 India 23,935 4,880 298815 0 Italy 47,544 40,216 87,760 40,180 Japan 8,3S4,285 4,104,862 12,4S9,147 1,479,836 Katea, RepubL;c of - 13,156 13,156 13,315 Kuwait 90,430 59,206 149,638 0 Multiple Lenders 17,818 17,818 0 Netherlands 911,056 212,1S0 1,123,206 128,692 NewZealand 1,179 1,179 0 Other 20,000 20,000 0 Pakistan 3870 3,870 0 Ploand 50,478 50,478 0 Romanra 7,237 7,237 0 Saudi Arabia 47,711 114,8S3 162,564 0 Spain 145,937 145,937 0 Switzerland - 32,978 32,978 0 United Arab Emirates 6,050 1,713 7,763 0 United Kingdom 40,662 61,719 102,381 0 United States 2,432,282 745,795 3,178,077 204,248 USSR 490,264 490,264 0 Yugoslavia 60,503 60,503 0 Total bilateral km 16.038279 644.47 2262,826 2.415.155 Export Credits Austia 101,442 36,521 139,963 5,676 Belgium 105,868 122,920 228,788 50,751 France 663,078 755,617 1,418,695 219,717 Gemany, Fed. Rep. of 222,912 54,505 277,417 27,687 Japan 182,182 11,244 193,426 0 Nethedands 284,398 IS4,590 438,988 13,46S Netay 9,767 - 9,767 0 Singapore 7,902 - 7,902 0 Sweden 170,226 8,745 178,971 8,500 Swtzerland 56,028 25,395 81,423 0 United Kngdom 807,954 146,214 954,168 90,317 Ttalexog t credits 2611.757 1317.750 3.92950J7 416.113 2 dll .L2JM 21Z42= Va32 Sourc9 IBRD Debtw Rqpting Stem, based on data provided by Bank Indonesa. INDONESIA COUNTRY ECONOMIC REPORT Service Payments. Commitments. Disbursements and Outstanding Amounts of Extemal Pubilc Debt (USS '000) Debt outstanding at Transactions during period Other Changes end of period _ _ Disbursed Including Commit- Disburse- Serice Payments Cancel- Adjust- only Undisbursed ments ments Principal Interest Total lations ment /a 1979 13,377,200 21,301,762 4,101,016 1,887,246 1,332,396 770,904 2,103,300 128,422 .446,710 1980 15,021,487 24,502,044 4M,373 2,5ss,505 939,185 823,138 1,762,324 118,261 -19,644 1981 15,903)27 27,243,376 5,627,466 2,672,429 1,033,805 994,324 208,129 163,286 -1,669,042 1982 18,521,744 32,234,475 7,073,633 4,191t377 1,103,446 1,146,392 2,249,838 7043 -972044 1983 21,611,250 35,485,484 5,688,551 4,932,075 1,288 1,255,10D 2,543,95 191969 -956767 1984 22,277,161 36,500,824 4,805,789 3,806,370 1,612,123 1626,636 3,238,758 25,234 -2,153,767 1983 26,841,8 42,5,748 4869 3,614,549 2,36,227 1,641,46 387,473 516,776 4642,07 1986 32,958,834 50,337,81 4,276,117 4,255,390 2,405,671 2,0481 4,454,631 187, 5,789,575 1987 41,412,488 60,683274 5,944,558 5,529$52 3,83,619 2,371,0 5,755,458 6732 ,45216 1988 41,7,385 600738 6,033,56 6,406,08 4,77W91 2,534,349 7,31300 4923 -1,36 1989 41,026,133 59,343,629 6,367,52 6,047,241 4,229 2,524,532 47861 363,061 -2,716,671 1990 40,228,162 52,779,119 - 3,747,842 4,474,821 2,623,799 798620 2,018,697 -70,9 1991 3960,322 48,427,740 - 3,773,538 4,351,378 2,513,860 6,5,238 1992 38,463,773 44,011,6 3,229,616 4,416,164 2,408, 6,825,041 - 0 1993 36,234,352 39,375,495 - 2,406,683 4,636,103 2,258,938 6,895,041 - 22 c 1994 33,861,52 35,520,349 - 1.482,804 3,85204 2,047,99 5,902,303 - S8 1995 31,035X889 31,937,510 - 756,822 3,5v82 l855,A3 5,438,38 - 46 1996 28,,372 28,805,011 * 446,983 3,12,5 1A582 4,790,725 - 2 . /a This column shovs the amount of arithmetic imbalancss in the amount outanding, inluding undisbursed, from one ear to the next 'e most common causes of imbalances are changes in exhange mtes and tinsfers of debts from one category to another in the table. Source: IBRD Debtor Reporing System, based on data provided by Bank Indonesia - 144 -Statistical Annex Table 5.1 ~i aX! l 8 _ ~ ~ ~ _ _ a er g :1 3 j i a tN j | | u | S--~ I i-- i a _9 > ^ S.it e 0a COUNTItY ECONOMI OT C*nW vamI Re ft p111 199901 M 91 Actu _ 17s97s 197940 l9O,Is 1 lts82 s1024 1BU44 198485 is985se 196BS7 I974/8 109/90 16940 1esQZs Tal an incm a9 5.129 8230 10.10 lo.Olo 11.605 12,847 12625 8798 I2jS 13. sL 1.4S0 17.29 ibnome t 122 148 164 207 289 S99 451 675 2,271 2,663 s,94 4,48 6.516 C trp et kD /a 227 297 448 559 075 757 1,670 I,638 Coport kax on ol /6 2,309 4.260 7,020 s.629 8,170 9.520 10.430 11.144 6,338 10,047 9.527 .000 10.783 WdhoWding tK /c 233 201 48 s51 642 628 IPEDA/papety tak /d as 71 87 95 105 132 157 le 190 27 424 6a9 620 O*len /e 43 62 78 09 129 1S8 138 low on domk _ n 491 537 733 M 1.137 1 .S92 1.510 3.479 5.560 4.719 0.1It 8.135 %902. SaW /vdw o kdaud 2EWWO i221 192 260 311 477 575 637 2,327 2.900 3.390 4.505 56 31 6.825 253 326 430 544 620 773 873 944 1.05 1.106 1.300 1.487 1,911 O9w oil evenues /fl0 0 0 0 0 0 0 0 1,010 0 0 393 0 MAsCDaneOPA 6405 17 19 29 33 41 44 0 208 190 223 292 425 289 Tax an _eno r 5s7 843 948 888 635 916e 82 656 1.039 1.122 t.4 t.S 2,s Import d.iles 295 317 448 s53 522 s57 530 607 060 938 1.192 1.421 1,92 u Soe taxonblmpats/g 120 IS7 195 223 231 255 241 a 6 poe t 166 389 305 128 83 104 91 51 79 184 15 160 108 Nontax recip 191 187 316 33s 436 520 687 1.492 1.147 1.977 MI!59 2.04L L.E0 Domesik vemiue 406 6.697 10.227 12.213 12,418 14.433 15s906 .0.2s3 16.141 20.803 2ae0t 250s 3t.584 De4eEphn 1,03 1.391 1.709 1.940 3s82 3.47s 3.573 5.752 6e8 9.991 .32 1.290 ProMTm o48 6s 64 45 15 15 69 69 1,958 728 2.041 t.799 2.685 Proed aid /A 987 1,316 1,430 1.864 1,925 3,68e 3,409 3,503 3,795 5.430 7,950 9.520 8.404 Total rsnues s.s e2 0 .78 721 13.922 14.358 19.384 22.825 21.893 26.061 3 365375 3s m /a Sice 1986/87 icnuded in Inme tax. /b For 1974/75, excludes underpaymen of revenues, estied at about Rp. 340 billion, due to Govereme from Pettamina. /c Since 1984/85, witi4ding tx elmiawted as seprate cotegory and combined wih Income tax. /d Snce Jawm y 1986, Ipeda repaced by poey tatx /e Classicati dwged to ohe ka Wuded in miscelaneou levies wih cons of other xes and stamp duty). . AOl subs hown as Government expendium 6om 1977/78 (see Table 5.3). t Sfc 1984/85 assifIatIon cho tod b value-added tax and kx on luwy goods. lucl conw ialb OM wpe acredits for development proedts. Source: Ainlfy ofFlInce. X INDONESIA COUNTRY ECONONMC REPORT Cen#ral Goveneo txeendlt . 1978/79 - 1990/91 (Rp. bIion) Atual Budget 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/8s 1985/86 1988/87 1987/88 1988/89 1989/90 1990/91 P eMW e _wakm 1.002 1.420 2,023 2.278 2.418 2.757 9.D47 4018 4.311 4.617 4"8 6597 6 0 Wage" ad saa 760 1,0O4 1,483 1,660 1,749 1,996 2,207 3,073 3,330 3,561 3,833 4,808 5,487 Riced -once 133 180 252 253 290 346 407 402 406 451 518 818 636 Food llowanoe 51 110 193 241 265 261 271 300 288 299 327 371 381 Oder 34 47 61 80 79 88 90 1lf 177 178 185 207 216 6xera 24 29 34 43 46 68 72 82 110 130 135 166 190 Motedcd 04__20 569 671 922 1.041 1.057 1.183 1,387 1.366 1.329 1.492 1A477 1.721 lasik 398 640 638 891 1,007 1,007 1,134 1,310 1,294 1,239 1,378 1,345 1,568 Edernal 21 29 33 32 34 50 49 58 73 90 114 132 163 Subuidle retaon /a 522 67o 976 1.209 1.31S 1547 1.883 2.489 2.650 2.816 .038 3.594 4.227 rie Jaya 22 25 34 42 43 42 0 0 0 0 0 0 0 Other rglon 500 645 942 1,167 1,272 1,505 1,883 2,489 2,650 2,816 3,038 3,594 4,227 Debt evce pa6 684 785 931 1.225 2.103 2.777 3.323 5.058 8.205 10.940 12.237 12.984 Internal 9 37 31 16 20 30 39 20 0 39 78 149 246 Exeral 526 648 754 915 1,205 2,073 2,737 3,303 6,058 8,168 10,863 12,088 12,739 0Sw e#endittm" 266 719 1.346 1.637 997 948 540 764 174 515 271 171 807 Food sV.idy 44 125 282 224 1 0 0 0 29 0 0 0 0 01 subidAy 197 636 1,022 1,316 962 928 507 374 0 0 0 0 627 .Othn s/b 25 59 42 97 34 20 33 380 145 515 271 171 180 Rouline 0qm end_ 2.744 4.062 6.800 6.978 6.996 8.412 9,429 11.962 13.559 17.482 20.739 23.445 26.648 Devepm t ependtures /c 2.566 4.014 5.918 6.940 7.360 9.899 995.9 10.873 8.332 9.477 12.251 13.130 16.225 CAb Total exoelditures 5.299 8.076 11.71 13.918 14.36 18.311 19.381 22.825 21.891 26.959 2990 36.575 42.873 1- /a SiKe 1984/85, h tm is sb."Mded ito wae/saeay and non wage/sakoy ependitU with kdent ons. /b Ths Ihe sodws e seke hxumz to PERTAMINA (1 976/77- Rp. 31 bilion, 1977/78 . Rp. 86,4 bilion, PERTTAMNA subsidy (1979/80 - Rp. 81.0 billion) and ependite an the genwa elion (1976/77 - Rp. 37.0 billion, 1981/82 - Rp. 81.0 bllion, 1985/86 - Rp. 40 billion). /e For details see Taobs 5.4 and 5.5. x Soe: Minishy of Finance. - 147 - Statistical Annex Table 5. 4 1 § {fi" $88fk | >N I =}||t! |";>!iga I N g |~ t ll E&'e i~ |::~u ' tllXSS ! $f | !litS If2S I .XS E "S;a 0gAI ' ii| - 148 - Statistical Annex Tsble 5. 5 | :if .§RX {Ft fig B f f @-R!5gg t I f X V.Rtane i 2 t e | g t 11I i i@ R e i | | a g | g § R 0 a ff ^ f § ii 01! i | gtaf6gRliD I 81 | |§R I Iiii Iii II i llR . COUNTR ECONOMIC RPORT PtE Ad by Setor. 197/79 - 1990/91 (Rp. bMiNoe) Actual Budget 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/88 1986/87 1987/88 1988/89 1989/90 1990/91 AgIdculture and irrigation 13S 156 223 138 101 155 472 180 237 576 1,087 1,675 1,758 Industry and minin 199 307 228 581 734 1,051 671 868 632 267 327 492 654 Eectric power 208 257 265 308 608 1,182 663 1,172 791 789 1,783 1,400 1,384 Transportation and tourism 250 192 308 264 332 889 601 688 729 846 1,424 2,003 1,376 Manpower and transmigration 12 23 31 31 15 45 76 38 123 82 98 174 63 1 Regional development 8 18 24 17 3 7 1 8 26 4 46 308 245 Education 35 43 50 37 24 211 180 59 346 718 1,238 1,303 992 Population & lealtit 22 34 38 34 24 37 78 65 100 38 99 143 61 Housing and water supply 18 28 33 22 21 51 84 77 139 273 400 560 612 Generl public services 54 175 154 180 83 162 255 188 257 350 382 641 734 Goverment capital participation 33 34 38 28 47 46 160 203 185 188 213 280 128 cft Others /a 14 s0 46 29 35 42 179 171 231 355 855 649 589 b Total Drolect aMd /b 987 1.31f 1.430 1.664 1926 3.887 3.409 3.603 3.795 4.423 7.960 9.526 8.404 -n rt 0' A /a Since 1979/80 Icudes natural resources development and enviroiament. /b Includes commercal credits for development programs/projects. Souree Ministry of F5nance. X - 150 - Statistical Annex Table 6.1 INDONESIA COUNTRY ECONOMIC REPORT Money Supply, 1974 - 1988 (Rp. billion) End of Total Currency Demand deposits Change over period Amount (%) Amount (%) Amount (Y) 1974 937 494 53 443 47 268 40 1975 1,250 625 50 625 50 313 33 1976 1,603 781 49 822 I1 353 28 1977 2,006 979 49 1,027 51 403 25 1978 2,488 1,240 50 1,248 50 482 24 1979 3,385 1,552 46 1,833 54 897 36 1980 4,995 2153 43 2,842 57 1,610 48 1981 6,486 2,557 39 3,929 61 1,491 30 1982 7,121 2,934 41 4,187 59 635 10 1983 7,569 3,333 44 4,236 56 448 6 1984 8,581 3,712 43 4,869 57 1,012 13 1985 10,104 4,440 44 5,664 56 1,523 17 1986 11,677 5,338 46 6,339 54 1,573 16 1987 12,685 5,782 46 6,903 54 1,008 9 1988 14,392 6,246 43 8,146 57 1,707 14 Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Chanaes In Factors AfectUng Respvey Money Supply. 1974-198 (Rp. bflhlon) Claims Net claims on offic Told change In Net on cftitia Blocked Claims on TImC Net Mmoey Suppy Fadof foreign Cental & pblic acooust businss & & savins odher Amount PereotWge paw assets Goveunet entexpica /a Indidalsb deposI /b items (%) 1974 364 -132 294 147 -196 .209 268 40 197S -S88 162 926 41S 298 -213 143 313 33 1976 34S -333 449 -S1 356 .300 4113 353 28 1977 S68 -27S 35 67 284 -96 -180 403 25 1978kc 50 -311 349 88 546 -112 -128 482 24 1979 1,788 1,779 371 85 SS7 -S16 *436 897 36 1980 3,040 .1,868 489 -S 1,178 *89 -36S 1,610 48 1981 149 *S91 S93 36 1,756 -S35 83 1.491 30 1982 -1,237 129 689 109 2,260 -724 -S91 635 10 u- 19831d 1,180 -1,286 -42 118 2,183 -2520 81S 448 6 1984 3W31 -3,3S9 190 124 3,646 -2,262 882 1.012 13 196S 1,7S1 -278 511 64 3,333 -3,693 -11S 1.23 17 1986h 1,870 496 252 -29 4.547 -2,935 -2496 1.573 16 1987 2,444 1,S41 720 -3 6,24S -S,216 4710 1,008 9 1988 -549 229 659 18 11.069 -6,406 -3053 1,707 14 /a Refe( to govenmet account bocked for special pupoe /b Inluds foeign auencydepoxW hld by sident. Ic Does not include vauoD a4ustment to fordp ae8e balances reuting from the plah devauation of November 1S, 197. The a4ustments asmnt to Rp, 650 biIonIn ne foreign as sets Rp. 46 bMillo net aims on Cntral gvernment; Rp SS1 billion dn claim on otficial entitles; Rp6 164 llin k ed account Rp, 41 billion cldaim on bDnes ad individuals; Rp.83blionItinmeand gdepositsandRp.1,041 blionIndnetother Items a rt Id Does not include ralution_ austmentto foreign echan balace sutf m the rupiah devalution of MrCD 30,1983 The adjustmnt amonDt to Rp. 1,962 blUion in net foreign as; Rp 131 billion In et caims on Centra government; Rp. 146 billion in cldaims on official entities and publc enteaprse; Rp. 106 billon in blocked account; Rp. 148 bMio in claims on businesse and hdiidlub; Rp. 620 bllion in time and savin depoits; and Rpi 1,399 bllon in nat other items. /e Inludes revuation adjustment due to devaluation on September 12,1986. Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Consolidated Balance Sheet of the Monetary System. 1978-1988 (Rp. billion) Bad ofpedod 1978 1979 1980 1981 1982 19831b 1984 1985 1986/c 1987 1988 Netfo-efgi8aas L663 3.318 6.419 6.811 SS65 8837 12- 14.11 15989 L8.433 17J4 Domokcct4.4 40.6 3979 S.651 29.744 10.34S AM7S 1924S 27.75 3S Cental g_amet 878 1,703 -3,619 4,330 4,193 -5,739 -9,098 -9,376 4878 -7,337 -7,108 on offi ent and publ enterpises /a 2,796 3,167 3,655 4,247 4,979 5,040 5,2 5,741 5,993 6,722 7,81 Oovanmetb*ked acount -476 -391 -396 -360 -252 -240 -116 -52 *81 -84 -66 andh d s M1L59 4339 64 094z 10.683 1433 11.2 2AM 2a4s4 39.523 Lois 72,493 2,993 4,107 5,844 7,99S 10,184 13,550 16,392 20,409 26,072 36,502 @ Olberdaims 111 166 232 250 317 499 779 1,270 1,800 2,382 3,021 Ameta -abIitIes 5,709 7,550 10,398 12,462 14,411 18,581 22,713 28,094 3S,234 46,188 57,614 Importdepdsts 174 213 365 298 300 242 218 268 402 424 684 Net othrItems 1,726 2,114 2342 2,448 3,036 3,676 4,S58 4,60 7,169 11879 14,932 Monev wnd9ussimoney 3849 S.223 7.61 9.716 lQ7S 14.663 7.937 21I3 27.661 M 418 Mon 2,488 3,36 4,995 6,485 7,121 7,569 8,581 10,104 11,677 2,685 14,392 Ck1Tmncy 1,240 1,552 2,153 2,S57 2,934 3,333 3,712 4,440 S,338 5,782 6,246 CA Demad deposits 1,248 1,834 2j842 3,928 4,187 4,23 4,869 5,664 6,339 6,903 8,146 Qoas moy/dM 1,321 1,837 2,696 3,231 3,9S4 7,094 9,356 13,049 15,984 21,200 27,606 /a For 1979, Incs dange resuldg hfm the ehg rate adjustment on November 15, 1978 fmm Rp. 415 to Rp. 625 per US$. W /b Inludes chans reulting from the echange te adjustmt of March 30, 1983 f(m Rp. 702.50 to Rp. 970 per USS. A /c Incudes chang rslting fm th excage rmae adjustt on September 12, 1986 ftrm Rp 1,134 to Rp 1,644 per US $. Id For 1979, ulu evaluation of forign exchange deposits amounting to Rp. 99 blion. SoumJ Bank Iwdoneia. COUNTY ECONOMIC REI onidna Syshm Croith by Enoml Sodor, 1978-1988 /a Sedtous 1978/b 1979 I 198o 1981 19o2 19SA 4 1985 l9s / 1A7 196 845 438 59 813 1.025 1.22L 1.318 3I65 2007 2.!!W 3O.0 n mpbh s244 436 539 s83 1,025 1,2 1,338 1,656 2,007 2.630 3,572 In foregn exchnge 1 2 0 0 0 0 0 0 0 26 38 Widng Xd Ij199 18a03 LW.7 1.6e3 1.472 6oN 84 258 394 3s8 44 In mpich 23D 3 ,693 1,867 1,693 1,472 6o 384 25s 394 372 424 In folgen e2aage 1,489 0 0 0 0 0 0 0 0 13 20 M wwboft byLkf 0 /a.624 1.9L3 2.21S 2.782 3923 5,207 e-6.7 7.592 9,05 10,917 14.93s In nJpbh 1,265 1,536 1,826 2,376 3.429 4,595 6,205 7,069 8,39 10,508 13994 In J6eign exdK S5 397 387 3a6 494 612 462 523 166 409 962 Tradef 1.114 33s I 3976 a0o2 4129 5.132 e344 7.255 kJ9 10247 13i.m In uplah 1,105 1,334 1,970 3,040 4,009 4,781 6,209 7,214 8.329 10.065 13,6 in foeign exhnge 9 4 6 16 120 a51 45 41 70 182 206 Sericex igjf r j /a 3s 422 940 L.3 1.8W7 2.277 3.1. 4.183 4.845 .00 7.332 L In lupbh 385 418 939 1,382 1.860 2,253 3,088 4,047 4.130 5,151 6,017 In fomgn xchange 4 4 7 3 7 24 81 136 215 309 405 Othe 223 244 333 444 606 651 931 1.213 2.162 3.187 3.721 In ruplah 221 241 331 444 606 6st 922 1,210 2,186 3,142 3,607 Infoeign exan8e Jh 2 3 2 0 0 0 2 3 6 44 54 Total 5.394 6.2e8 7.874 10s159 13.022 15.299 18.13 22.157 26.402 32ss2 44.001 In rupioh 3.550 5,858 7,472 9,754 12,401 14,312 18,223 21,454 25,945 31,869 42,256 In foreign acxne 1,844 410 402 405 621 987 590 703 457 983 1,745 /a cedits outandng end of petiod. Includes inestment aedih, KIK and KWW. Excludes bchk credits, credis to ceral gowrnm t and to nonresidents, and foreign exhange compont of proect aid. /b Includes foein eange rvaluaton an to Rp. 681.8 blIon. /c Includes forein achnge revaliom amounting to Rp. 698.0 bilion. 0 d. /d Indudes aedih to PERTAMINA for epayment ot foreign browirng. Since March 1979, aedit in foreign exchange to c% u PERTAMINA has been comveied to npiah credits. /e Processing of agricultural products is casffied under manufacturing industry according to Ineratinl Standard J Indurial Claissiication (IS 1968). Shrt 1980. credhs for eorutdion which were previously included in mrnufoKtwng indusy ore now included in service-rendering Indusoty. /f Includes credits for fod procurement and o el projeds. / Credit for elediy, gos and water are inuded in se vlce.rendering industry sedor. ( /h 1974 figure refers to credits foreign ez nge given to all sedors, exce trade. z /1 Includes foreign exchange revaluation amounting to Rp. 251 billion. /j Includes revluation adjustment due to he devaluation of September 12, 1986. Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Banking Credits Outtg In Rupbh n Foreian E ae by Group of Barks, 1978-1988 /a (Rp. bWton) 1978 /b 1979 /c 1980 1981 1982 1983 /d 1984 1985 198f /e 1987 1988 Bank Indonesia dirsd creditsJf 1.986 2.183 2.454 2.649 2.771 2.356 870 964 1.144 1.347 1.647 In rupioh 466 2,183 2,454 2,649 2,771 2,386 870 964 1,144 1,347 1,547 In feign exchange 1,469 0 0 0 0 0 0 0 0 0 0 Sae commercial banks Ig 2.832 3.270 4.295 5,881 8.031 9.787 13,346 156374 17,782 21.676 28.631 In rupiah 2,549 2,958 3,904 5,623 7,474 8,910 12,959 14,925 17,711 21,225 27,614 In forein exchange 283 312 341 368 557 877 386 449 71 451 1,017 National Privcae Banks Ab 380 493 711 1.081 IAMS. 2.294 3.552 4746 0.272 8.423 11.910 F In rupbh 360 466 706 1,069 1,534 2,279 3,480 4,831 6,061 8,175 11,636 In foeign exchange 6 27 6 12 20 15 72 115 211 248 374 ForeinBanks Ba22 342 414 648 6 862 1.046 1.073 1,204 14QL 1.913 In rupiah 176 271 359 513 622 767 914 934 1,029 1,122 1,559 In foreign exchange 86 71 55 35 44 95 132 139 176 284 354 6.394 6.268 7.874 10.159 13.022 15.299 18.813 22.167 26.402 32.852 44"01 In rupiah 3,650 5,868 7,472 9,754 12,401 14,312 18,223 21,454 25,945 31,8609 42,266 In foreign exchange 1,844 410 402 405 621 987 690 703 457 983 1,745 /a Credts outstanding at end of period. Includes investment credits, KIK and KMP. Excludes interbank credits, credits to rt Central Govemment and to non-residents, and foreign exchange component of project aid. /b Includes foreign exchange revaluation amounting to Rp. 681.8 billion. 0 rv /c Includes foreign exchange revoluation amounting to Rp. 698.0 billion. /d Includes foreign exchange revaluation amounting to Rp. 251.0 billion. /e Indudes revalution adjustment due to devoluation on September 12, 1986. /f Excludes lid credits, ines s credits to Pertamina for repayment for foreign borrowing. /a Incudes state develpment bank and liquidity credits. x /I (ncludes liqubdity credits. National private banks refer to national privote commercial banks and regional development banks. Source: Bank Indonesia. - 155 - Statistical Annex Table 6.6 INDONESIA COUNTRY ECONOMIC REPOR snan-sCat. Invesmen Cmd ats.ndf Workg Capl Ceits, 1974-1988 Small-Scale Investment Credits /a Permanent Working Capial Credts /a Number of Approved Out- Number of Apraed~ Out- applications value standing applications value standing approved appro ('OOOs) --(Rp. billion)- 'OOOs) (Rp. billion)- 1974 10 15 13 15 16 13 1975 17 28 22 24 29 18 1976 28 50 36 166 67 41 1977 40 74 50 322 115 62 1978 55 106 65 420 177 84 1979 72 163 99 644 305 154 1980 119 321 210 905 602 312 1981 173 540 380 1,272 1,124 647 1982 207 669 407 1,462 1,536 803 1983 231 812 393 1,633 1,884 856 1984 250 921 366 1,809 2,309 928 1985 266 1,015 328 1,996 2,768 885 1988 283 1,135 305 2,147 3,241 878 1987 295 1,269 297 2,278 3,781 903 1988 311 1,429 394 2,347 4,310 1,025 /a Cumulative as at end of period. Source: Bank Indonesha COUNT ECONOMr hWltvnwnt Credis by Econon*I Sedor, 19801988 N (Rp. bioo) End aopeiod 1980 1981 1982 1983 1984 1985 1986 1987 1988 Cmd! gomlbA d 1.675 1.906 2.679 3.900 4.609 6.898 7.966 9.814 13,600 Aiuhnu 277 340 467 734 809 1,402 2,274 2,684 3,393 Minng 5 40 54 57 179 229 363 382 495 Manuactuing knduty 911 911 1,369 1,983 2,374 2,766 3,263 3,540 5,182 Trade 53 87 134 129 237 277 369 365 636 SerWworendeidng Ixndry 422 516 641 986 866 1,173 1,638 2,900 3,788 OChen 7 12 14 11 44 52 69 B3 106 Credsk ndlna /b 1.296 1.436 2.099 2.861 3.802 4.802 6.167 7.338 9.770 Aqiculte 137 202 322 477 565 877 1,233 1,644 2,193 Minig 2 26 34 49 178 224 367 342 363 Manuctg imdusy 820 741 1,095 1,635 2,102 2,423 3,061 3,631 4,683 LA Trade 41 73 120 115 168 281 332 326 478 SeWAMrenkednglbwty 289 390 519 576 770 975 1,108 1,460 1,993 Olhen 7 4 9 9 29 22 66 36 62 /o Exdlue wtent credits 6on Bank donesia; incde sade Developmnt Bank and Locl Development Ban Datdo wih e same classhcat pror to 1980 are not available. /b Eudes Sma Scale vments Cred, intment credis to Ie Central Govewnn ond okreign exchnge component of project id. Sorc: Bank ndonesia. ft ICArt * ,.J 0%f * . COUINTY ECONOMIC REPOIT Thim Csibts wthh Sthde Sees. 1961-1988 (Rp. hflflo) 1981 1982 1983 1984 1986 1986 1987 1088 24 nxxd6 748 849 568 280 411 619 786 1,909 12 mantl 82 70 886 1,721 2,795 3,867 4,213 4,555 6 mante /a 107 122 649 721 726 950 716 1,531 3 ntles or kms 42 46 679 673 1,307 1,323 3,496 3,621 Matured 103 126 143 10 11 13 14 14 Othen 11 11 8 92 88 58 59 305 TiOW 10-.93 1.231 2.831 3.497 5.337 6.730 283 11.83ILS /a Idue saome 9 month deposh dubng 1984. /A Indudes nteba time depotnd dets 0me deposi. Souxe: Bank hxdneia. ort P" rt c t OD0 I- I. COUNIW ECONOWO| ReN9Kl Inweres Ratso on Demoolts at Commwrod m*nk. 175-ISSt la oP-8 Time Dvmb. TA? S TASKA Cmti8. wadd D_tmd S_AP SsVlp wet ofae b rks HNsdula3 Is Peeed D"eb D_ab D_psz osit Lthlm 3 6 12 24 Lthbs 3 6 12 24 tb is Id /le 3Sm am am am so 3maN ma N am m t1 iIS3 64-S 9.0 ?6 O A 6. 9.0 124 I. 15 15 17.2 20.7 197 LB-3 6t15 9.A 9.8 I6 5. 6.0 9.0 12.15 1t.2 16.7 103 19. 19A 1911 tB-3 6S 9A.0 102 72 82 6. 9.0 12t15 14.2 16.1 17 20.1 19. 19S1 1t3 6.15 9.0 10.9 12.1 tO02 6.0 9.0 12.1S 1SA 17.4 17.9 19.4 19.0 19OU 1.83 6t5 90A 1s 7.7 8* 6A 9.0 1-5 16.9 17.1 185 13 1 MA8i 1.3 12-U1 9.0 1SA 144 148 13.1 t7.5 12. a7 17.4 18 19.7 19.3 1964 US 12-i 90 1o 15.1 17.1 172 17 17.2 19.8 27 20.7 20.4 2L0 Un 19115 US 12Ut5 9.0 14.5 13.4 14* 16.0 17.8 183 14" 19 1J 19.8 21 I 190 1U.3 12-15 9.0 14.0 14.2 14.7 12 1.0 14. 1.5 141 1.3 20.1 17 U3 1#.0 9O tSA tS.S 7. 73 17.0 17.4 17.3 I" 193 9.1 1.9 1968 U3 15.0 9.0 15.9 15 18 184 1. 16. 20.2 20. 20.3 2. 209 H199 a.. n.e n. 16.3 15. 142 17.2 18.1 18 17.0 I80 18. 19.7 2745 h. Wld~bed avrg raeat iunt a_ eltd . hb F. Numb 1963. 3P* taramammwabmwp. Sm Ua. 1.850* taRp. I co98mIDlae. aedinIelduaI0dawmle foresmma le *amRp. 1 mIlls /c rARANAS ar..a..em Pm..... .N..r (N ttp D"e _ 5 ^ 4) a aeabDmb I.l *bt Tamgaa Nosm Mm SVIq Bach) ed offard by1dsaeowed and.s. prme ouinal commaca bo aid pm tb> F affim ti2 a3z 25IIJ 1 et1 15 m r at ma _ 0Rp.Mor km 6* 20D , 00. Fn- 3m 196 15S for p 1I _m o or km 2% li awmor V. I mdit Fro.w 3 t7S oe u t t9B: t5ew S dlor T Mt to at dn /d cASKAor Tbn A sl ea * t t(ImaTim De i)ban timdeposit baa yed brcdak Tebm Xagmod offaerd by te am akima dated in (a) IbD e( I_ /S Effectv Jmy29y 197ik It% r Rp. 2.5 mb or axI 12% far ma th5 lopr mk- 1er24 meats Ste Bae& ti deposL lb Cdia am deposit ltr i at owe bob removd an Jam. 1. 1963. 12* la mnimm "to a hin km 93 far 24 mon State Ba e dqpoit ac: W* Imdon' INDONESIA COUNTRY ECONOMIC REPORT Pdncipal Aridoultural Producto by Subeectora. 1978-1988 (000 tons) Produt 1978 1979 1950 1981 1982 I963 1984 1965 1986 1987 1986h Ebd Rkeib 1752S 17.72 20,163 2,286 22837 35.32 36134 39,033 39.72 40,078 41.769 Cam 4,029 3,606 3,991 4,509 323S 5,087 S,36 430 5,920 5,155 606 Cauva 12,902 13,751 13,726 13,01 1298 12,103 14,167 14,037 13A12 1435 15,280 Sweet potato 2083 2,194 2,079 2,094 1,676 2,213 2,156 2,161 2,091 2,013 2.066 Soa bea (sheled) 617 680 653 704 521 S36 769 870 1,227 1,161 1,S4 Oondut (she ) 446 424 470 475 437 460 535 528 642 533 S65 Pkerin Sawater fih 1,227 1,318 1,395 1,408 1,490 1,682 1,713 1,822 1,923 ,017 2166 Freshwater sh 420 430 4S5 506 S24 533 548 m7 607 653 715 Meat andda Meat 475 466 571 596 629 650 742 808 60 89 928 Eggs I15 164 259 27S 297 319 3SS 370 432 452 46S Mgk/c 62 72 78 86 117 143 179 192 220 235 262 C ah Rubber 884 896 1,020 963 900 1,007 1,033 10SS 1,109 1,130 1.170 palm ea 532 642 701 748 S84 979 1,147 1,243 1,350 1.506 1,690 COce/COPa 1,575 1582 1,759 1,812 1,718 1,604 1,750 1,920 Z114 2075 210S coffee 223 228 28S 295 281 30S 315 311 339 380 398 Tea 91 125 106 110 94 110 126 127 136 126 156 Clves 22 35 39 40 32 41 49 42 SS S8 60 Fewer 46 47 37 39 34 46 46 41 40 49 52 Tobabco 81 87 116 118 106 109 108 161 164 113 119 Cane sgar 1,516 1,601 1,831 1,700 1,627 1,628 1,810 1,899 1,84 2,176 2,2 Coto I 1 6 10 13 14 12 4S 53 48 78 Teakwood 475 495 613 m 692 718 758 m 798 689 725 Other t rb 26,256 25,520 21,702 14,024 13,236 24,180 27,716 24,277 27,403 2S,2S 22,860 * I.' /a Plinaaygurs rb Paddy prdction sarting 1983. Ic Ialn itasmllll /d n '0=0 cubic metems. Source: Supplement to the Pridenes Report to Paliament, Agust 16, 1989. - 160 - Statistical Annex Table 7.2 COUNlRY ECONOMIC REPORT pmdklees of Motor Cropb T . of E13 , 1978-19 Product 1978 1979 i198 1981 1982 i198 1984 1985 1986 1987 1988 /a Small1laen Rubwer 612 8le 705 740 588 873 704 720 763 795 8as Coconut/copro 1,554 1,581 1,737 1,789 1,707 1,590 1,737 1.905 2,08 2,055 2.083 Coffee 208 209 26 278 262 287 291 2s8 318 359 375 Cloves 21 35 as 40 32 40 48 41 53 57 59 Tea 17 17 21 22 17 23 24 so 31 25 32 Sugar 4485 498 749 1.384 I1a73 1,249 1,397 1.450 1,417 1.744 1,743 Tobcco as 73 101 103 97 100 104 156 159 110 1le Pepper 46 47 37 s3 34 46 48 41 40 49 52 Colton I 1 6 10 1s 14 12 45 53 48 78 Palm oil 0 0 0 0 0 0 0 0 0 0 0 Palr-i 6mel 0 0 0 0 0 0 0 0 0 0 0 Privte estates RUbber 110 112 Ill 114 125 Is3 121 t24 150 135 1s5 CoconuL/Copr 21 21 22 23 11 14 13 15 18 20 22 Coffee 7 8 8 s 8 8 9 10 10 8 1o Cloves 0 0 0 0 0 1 1 1 2 1 1 Tea 15 IS 17 IS 1e 17 18 17 18 21 40 Sugar 71 73 114 II 72 s8 83 106 108 109 112 Tobacco 0 0 0 0 0 0 0 0 0 0 0 Pepper 0 0 0 0 0 0 0 0 0 0 0 Cotorn 0 0 0 0 0 0 0 0 0 0 0 Palm oil 165 188 202 208 285 269 329 339 385 352 382 Palm k1nel 22 23 30 37 47 68 69 71 73 78 77 Goenmn estates 162 170 1SO 192 1S9 201 208 211 19 200 200 Coconut/copra 0 0 0 0 0 0 0 0 0 0 0 Coge"e 10 11 13 IS 13 10 15 13 13 IS 13 Cloves 0 0 0 0 0 0 0 0 0 0 0 Too 59 92 68 70 81 70 84 so 87 80 84 Sugar o90 1,030 9s8 220 182 291 330 343 371 323 347 Tobacco 13 14 15 is 9 9 4 5 5 a 3 Pepper 0 0 0 0 0 0 0 0 0 0 0 Colton 0 0 0 0 0 0 0 0 0 0 0 Palm oil 387 474 499 542 599 713 81S 904 965 1,154 1,328 Palm kenl 72 85 90 98 110 98 178 187 193 243 279 Total 6ber 884 S98 1,002 1,048 9O0 1,007 l,o03 1,055 1,109 1,130 1,170 Coconut/copro 1,575 1,582 1,759 1,812 1,718 1,S04 1,750 1,920 2,114 2.075 2,105 coffee 223 228 285 295 2S1 305 315 311 339 380 398 Cloves 21 35 S9 40 32 41 49 42 55 58 s0 Tea 91 125 108 110 110 12S 127 138 128 158 Sugar 1,516 1,601 1,831 1,7I0 1,027 1,828 1,810 A,899 1,894 2.176 2,202 Tobacco 81 87 le 118 10 109 108 le1 164 113 119 Pepper 40 47 37 39 34 46 40 41 40 49 52 Cofton 1 1 6 10 13 14 12 45 53 48 78 Palm ol 532 842 701 748 8a4 982 1,147 1,243 1,350 1,506 1,690 Palm kemel 94 10 128 135 157 106 247 258 266 319 356 /a Prelimi gumG Soe: Supplement to Prsdes Report to Parlimnt, Augut 16, 1989. - 161 - Statistical Annex Table 7.3 INDONESIA COUNTRY ECONOMIC REPORT Rice - Area Harvested, Production and Yield. 1974-1988 Area Average Paddy Rice Year harvested yield output output /a ('000 ha) (tons/ha) ('000 tons) ('000 tons) 1974 8,509 2.64 22,464 15,276 1975 8,495 2.63 22,331 15,185 1976 8,368 2.78 23,301 15,845 1977 8,360 2.79 23,347 15,876 1978 8,929 2.89 25,772 17,525 1979 8,850 2.97 26,283 17,872 1980 9,005 3.29 29,652 20,163 1981 9,382 3.49 32,774 22,286 1982 8,988 3.74 33,584 22,837 1983 9,162 3.85 35,302 24,006 1984 9,764 3.91 38,134 25,933 1985 9,902 3.97 39,033 26,542 1986 9,988 4.00 39,726 26,784 1987 9,92.3 4.04 40,078 27,253 1988 10,090 4.14 41,769 28,403 /a Estimatec on the basis of a conversion factor of 0.68 from paddy into rice. /b Preliminary figures. Source: Centrl Bureau of Statistics. INDONESIA COUNTRY ECONOMIC REPORT BULOG Ricm Program. 19779 - 1990191 (000 tons) 1978179 197980 1980/81 1981/82 1962483 1983/84 19B485 1985/86 1986/87 1967/88 198/89 1989/9O/a 1990/91 /b Beginning stock 459 708 886 1,242 1,623 1,04S 1,M4 2,432 2,172 1,867 7SS 1,086 1,576 Domestic procurement a81 431 1,635 1,9S2 1,933 1,195 2,362 1,953 1,647 1,21S 1,801 2,243 2,0oo Imort: 126B 2M L213 432 SC6 LU= 17 Q 1 79 31S ISO _ PL-480 304 353 101 46 0 65 54 0 0 0 0 0 0 Otherfoodlc 1s 327 198 48 0 140 0 0 41 79 31S. IS0 0 Commercial 949 1,900 914 343 506 910 133 0 0 0 0 0 0 Total avualebilftv 3&-M 3n s 3.631 4.0626 SS AM 438 5 3 3. 1m 61 z 2 A79 3 DsItdbution Id 1.S 2 2.480 2.014 297 L87 1.612 2.186 1.967 23 1 . 1.7S I"9 Govermment 608 666 649 806 1,320 1,373 13 1,414 1,498 1S2S 1,512 1,S42 15601 State enterptises 106 90 89 9S 105 89 S9 77 94 97 106 100 114 A Market operationsl. 1,032 2,036 1,628 1,033 If,l8 399 69 277 175 640 142 60 2C0 Other/f 106 42 114 80 29 11 116 418 200 110 8 173 24 Losses 46 8 12 26 45 28 22 27 26 34 17 28 28 End stock 708 806 1,242 I,591 1,04S 1,455 2,432 2,172 1867 755 1,086 1,S76 1650 Memorandum item: Rice production /g 17,S 17,872 20,163 22286 22,837 24,006 25,933 2642 27,014 2723 28.340 29,106 28,902 /a Provisional figures. /b Estimates. Ic In 1987J88, the figure shows repayment of rice loans. I- A /d Since June 1982, all regions have received rice In kind; formerly, surplus regions received food allowances In money. /e Includes special sales at reduced prices of submarket standard rice of 130,000 tons In 1985/86 and 150,000 tons In 1986187. nf Includes export of 95,000 tons In 1984/85 and 400,000 tons In 1985/86,173,750 tons In 1986/87 and 100,000 tons In 1987/88. /g On calendar year basis. Source: BULOG (Badan Urusan Logistic/State Logistic Board). - 163 - Statistical Annex Table'7.5 INDONESIA COUNTRY ECONOMIC REPORT Area Covered Under Rice Intensification Programs. 1974-1988 ('000 ha) Year BIMAS INMAS Total Of which /a /c INSUS /b 1974 2,676 1,048 3,724 0 1975 2,683 1,957 3,640 0 1976 2,424 1,189 3,613 0 1977 2.059 2,181 4,240 0 1978 1,905 2,888 4,848 0 1979 1,571 3,452 5j023 0 1980 1,374 4,142 5,516 1,060 1981 1,384 4,802 6,186 1,706 1982 1,296 5,047 6,343 2,945 1983 1,38 5,387 6,695 3,477 1984 434 6,936 7,369 3,806 1985 200 7,461 7,661 4,100 1986 258 7,533 7,791 4,480 1987 na na 8,035 4,922 1988 n.a nA 8,114 4,971 /a BDMAS 8 Bimnbingan masl (Mas rike planting guidance progrm). /b INSUS Intensifikasi khusu (Special intensification program). /c INMAS -ntensifkMasina (Mass intensification program). Source: Supplement to the Presliaent's Report to Parliament, August 16,1989. - 164 - Statistical Annex Table 8.1 INRONES COUNTRY ECONOMIC REPORT Index of ManuActurwn Produdion by Seleftd Industry Group. 1986-1989 /a 11983 100) Code of Industry Description /b 1986 1987 1988 1989 /c Group 31121 Condensed and dried milk, creamery and procesed butter, fresh and preserved cream (6) 87.5 94.0 123.3 119.0 31330 Malt liquor and malt (5) 94.4 113.2 116.4 111.9 31420 Clove cigarettes (80) 147.4 166.5 177.7 195.9 31430 Other cigarettes (13) 78.8 81.9 79.2 82.1 32111 Yarn and thread (53) 129.9 130.5 6.0 187.8 32112 Weaving mfils (except jut? weaving products (409) 130.7 144.3 172.9 189.8 32114 Batik (66) 95.8 81.8 83.9 117.6 32130 Knitting mills (73) 219.2 233.3 239.8 338.8 32400 Footwear (32) 113.1 91.5 111.2 185.9 33113 Plywood (40) 139.3 192.7 242.1 273.3 34111 Paper manufacure (all kdnds) (23) 159.2 159.7 242.0 246.6 35110 Basic chemicals (except fertilzer) (50) 119.0 156.4 139.0 152.6 35120 Fertilizer (10) 166.0 121.8 129.7 135.7 35210 Paint, vanish, and lacquers (25) 135.6 126.5 91.2 152.3 35232 Matehes (8) 108.7 142.3 175.6 143.7 35510 Tyres and tubes (22) 109.5 79.2 109.7 157.7 36210 Glass and glass products (21) 178.0 149.3 124.6 148.4 36310 Cement (7) 144A 160.9 149.8 187.5 37100 Basic iron and steel industries (16) 154.9 147.1 184.8 217.4 38130 Structural metal products (59) 110.2 118.7 125.7 175.8 38312 Drycell batteries (7) 123.9 115.6 158.6 202.2 38320 Radio, TVs, cassettes, other communication equipment and apparatus (23) 90.6 86.9 118.1 166.7 38430 Motor vehides assembly and manufacture (23) 114.7 126.8 115.9 104.2 38440 Motor cycles and three wheel motor vehicles, assembly and manufacture (11) 98.0 81.3 76.8 106.0 General index 127.0 146.4 169.0 187.2 /a The annual fues shown here are calculated as the averge of quarterly indices. /b Figures In brackets '0 indicate the number of establishments covered in that group. /c Average of thre quarters. Source: Central Bureau of statistics. bQDONWA COUNTRY ECONOMIC REPORT Produdbqn of Minerals, 1974.1988 rin Copper ore Nkckl Iron ad N"ual Year Petroum concentrate concenrate ore Bauxdte Coal concentrate Gold /a Sver /a gas (minbbls) ('000 tows) (g) () (md) 1974 502.0 26.7 212.6 878.9 1290.1 156.2 365.2 265.3 6464.6 202.2 1975 477.0 25.3 201.3 801.1 992.6 206.4 353.0 330.7 4754.7 222.2 1976 550.0 23.4 223.3 1102.0 940.3 182.9 292.3 355.2 3397.5 312.1 1977 6150 25.9 189.1 1302.5 1301A 230.6 311.5 255.9 2831.9 542.8 1978 597.0 27.4 180.9 12S6.5 1007.7 264.2 233.3 253.9 i506.4 820.1 1979 580.0 29.4 188.8 1551.9 1061.9 278.6 79.9 170.0 1644.6 998.4 1980 577.0 32.5 186.1 1537A 1249.1 338.0 62.9 247.9 2196.0 1045.7 1981 584.8 35A 188.5 1543.2 1203A 392.8 86.6 183.1 2000.2 1123.8 1982 488.2 33.8 223.7 1640.9 700.2 588.0 144.5 222.7 3067.9 1111.9 1983 490.5 26.6 205.0 1278.0 777.9 648.2 132.9 2391.5 35473.1 1186.4 1984 516.5 23.2 190.3 1066.8 1003.2 1468.2 83.0 2247.1 38794.7 1606.7 1985 483.8 21.8 223.4 961.9 830.5 1491.7 130.9 2619.4 38327.3 1580.0 1988 607.2 24.0 251.2 1533.1 648.8 1725.4 152.3 3303.6 46696.0 1628.9 ga. Go n 1987 479.0 26.1 259.8 1825.7 635.3 1887.0 194.0 3752.8 50485.4 1731.1 P 1988 484.7 30.6 294.7 1733.2 505.8 2854.5 202.8 4730.9 61538.0 1882.6 /a Since 1983, production of gold and silver Icluding private enterprises. X Source: Central Bureau of Statistics. COUWN ECONOMIC RtPOI Cuo ONl Produdion by Comp. 1974-1989 ('000 als Pmodudfion Am PERTAYN4A UEMUhAS Cakac C&T Stonnc Subtot Co~tr TOa outWpu 1974 40,143 362 329,907 1,959 16,626 348,492 112,840 501,837 1,376 1975 32,590 306 300,879 1,944 13,889 316,712 127,247 476,865 1,306 1976 31,333 268 304,616 1,803 12,787 319,206 199,512 650,319 1,504 1977 30,706 285 292,950 2,459 11,974 307,383 276,749 615,123 1,885 1978 31,271 195 275,349 2,266 11,863 289,468 275,763 596,697 1,635 1979 30,316 213 266,048 1,856 10,811 278,715 271,203 580,447 1,690 0% 1980 29,891 205 268,325 2,046 11,578 271,949 274,971 577,016 1,677 1981 29,516 175 255,515 1,799 13,141 270,456 284,693 584,838 1,602 1982 27,376 195 175,928 1,422 13,214 190,564 270,055 488,189 1,338 1983 /a 28,947 233 191,307 1,411 11,768 204,484 286,384 518,048 1,419 1984 31,002 203 - 1,533 4,372 6,905 513,652 560,762 1,505 1986 30,071 170 - 1,358 5,130 6,488 453,190 489,919 1,342 1986 29,328 193 - 1,228 6,085 7,313 478,078 514,912 1,411 ,- c 1987 26,775 210 - 1,236 8,364 9,690 475,854 512,429 1,404 1988 24,789 /b - 1,368 13,413 14,781 451,941 491,511 1,343 00 It 1989 25567 /b - 2,044 13,233 15,277 473,341 514,186 1,409 /a Since May 1983, contrac of work data have been consolidated. /b Since 1988, Lemngas data have been included In Pertamina. Source: Ministry of Mines and Energy, Directorate General Oil & Gas. COUNItY ECONOMIC REPOgj PerO6m PM" ft* nd Demoan. 1978- I8 1978 1979 1980 1981 1982 1983 1984 1985 1988 1987 1988 1989 POdKcion of cude 696.7 580.4 677.0 584.8 488.2 518.0 550.8 489.9 514.9 512.4 491.6 614.2 crude bmxotsh 31.1 30.5 32.9 37.0 22.0 26.7 34.2 32.1 27.7 30.2 31.2 28.1 ______ 627.8 610.9 600.9 621.8 610.2 643.7 585.0 622.0 542.6 642.6 622.7 542.3 Cnod. aqosw 472.0 410.8 378.8 383.4 320.9 336.2 364.6 296.1 327.4 291.9 276.6 291.5 Cud. avaiabl for renrs 165.8 200.1 231.1 238.4 189.3 207.5 230.4 226.9 215.2 260.7 246.1 260.8 Chgnes In aude dos (deease -.) -3.7 14.1 38.2 44.7 6.7 23.5 39.7 27.1 -2.3 16.9 0.3 3.2 Reer qpd (Indi swapd 169.5 186.0 192.9 193.7 182.6 184.0 190.7 199.8 217.5 233.8 245.8 247.6 Refne conosw n 9.4 13.0 13.6 6.5 6.5 7.2 9.2 13.1 13.3 13.0 13.0 14.3 Behntyx.mins 150.1 173.0 171j4 187.2 176.1 176.8 181.6 186.7 204.2 220.8 232.8 233,3 Expai1s of rfned 40.3 49.3 53.4 49.9 39.0 43.3 66.0 47.3 56.2 62.4 63.7 56.4 waxy rode 36.3 48.9 51.0 47.9 33.7 40.6 49.9 32.1 34.9 42 45.3 40.6 Bunker Fh, AVTUR, etc. 4.0 0.4 2.4 2.0 5.3 2.8 16.1 15.2 20.3 20.4 18.4 14.8 Asllable for domeik onsumpi 109.8 123.7 126.0 137.3 137.1 133.6 116.5 139.4 149.0 158.4 169.1 177.9 Prou mpat 16.9 15.0 22.0 42.6 28.0 23.5 6.0 2.7 6.4 10.3 13.3 21.3 Lam-"* 126.7 138.7 148.0 179.9 165.1 167.0 120.8 142.1 154.4 168.7 182A4 199.2 r Donmet conpum 113.0 134.3 141.8 156.0 181.1 165.6 167.6 165.3 162.8 162.9 171.3 183.6 Chan" in rfned tlo 13.7 4.4 6.2 23.9 4.0 1.5 -37.1 -13.2 1.6 6.8 11.1 16.61 SorCe: Mnsy of Mie and erwy, Didarde Genera Oil & Ga. x INDONES COUNTRY ECONOMIC REPORT Domsic Soal of Petrolum Prduct. 1978-19, /a rOOo bs) 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Avkon go 134 134 130 110 103 83 73 66 63 66 60 60 Moon kurbo 3,494 3,656 4,355 4,869 4,899 3,686 4,374 4,442 3,806 4,199 4,446 4,2t6 Prum golIn 728 618 468 392 238 247 523 738 1,024 1,431 1,838 2,451 Regulor 9asolre 19,608 21.295 23,321 25,648 25,709 24,380 24,909 25,206 27,083 29,048 30,865 33,199 Keroen 41,717 45,457 48,975 52,497 51,778 48,224 45,213 43,954 43,618 43,352 44,664 46,601 Motor del 31,709 34,695 40,116 44,737 48,918 49,790 48,567 47,682 47,421 64,075 59,143 64,508 1 knowl deel 6,744 7,681 7,829 9,391 9,311 9,978 10,28S 10,329 8,855 8,319 8,809 9,515 Fuel ad 11,061 13,626 15,739 17,587 19,341 21,149 23,625 22,863 18,004 19,054 18,097 18,329 1 T*W 116.195 126.962 140.931 165.231 160.297 167.537 157.S69 1655280 149.874 159.534 167.911 178.949 /a Ecdlng lu6ba ol an similar producs. Sur: Ni of Mns and Ene, Dreod G a Oil and Goa. 0-c Co ft > rn U' 0 I.- x - 169 - Statistical Annex Table 9.1 OUJN ECONOJmC Rom R Csommn Pwic. htlex, 1979 - 1989/. (Apul 1977 -M.wch 1978 100) 46 En of Foo&hA Housing detmg Othe Total ChWgw ( 1979 141.1 140.9 168.2 137.7 143.1 21.8 /b 19S0 165.6 168.7 190.8 159.1 167.6 16.0 1981 179.3 182.3 198.2 168.8 179.8 7.1 1982 192.7 209.8 205.0 189.3 197.9 9.7 193 212.' 238.1 214.0 221.5 221.5 11.5 1t8 226.4 270.0 220.6 246.5 241.6 8.8 1985 230.9 289.4 228.0 259.7 252.2 4.3 19S 263.9 302.9 250.4 275.0 275.3 9.2 1987 :96.1 321.4 270.4 297.9 300.8 9.3 198o 820.1 335.4 280.0 307.4 317.0 5.6 im 342.0 356.5 293.5 321.9 337.0 6.1 /a ThM conar price indx for Indos ha been used commencikg Malrh 1979 to repl the Jskata cost of living index. /b Perentae darpe of CPI for twe period Jaury through December 1979 qug the rate of nrefthe of karsa cost f living ix for period Januamy trough Iarch 199. Source: Centrl Dreau of Statistia. INDONESIA COUNRY ECONOMIC REPORT h!!osla tY', es@k Price Inde 1983-1989 /L (1983 = 100) Sedtors /b 98 1984 1985 1988 1987 1988 1989 Agruture (44) 100 113 118 128 145 163 178 NWning & quarrying (6) 100 109 117 126 132 143 156 Manufacturing (140) 100 103 11S 123 143 158 186 I Imports (53) 100 113 119 129 168 164 178 9gpgj# (381 100 111 112 85 118 125 130 Excuding petroleum (34) 100 114 115 130 170 183 194 Petroleum (4) 100 112 113 73 103 108 118 General index l281) 100 111 116 116 142 151 161l General inclex excluding exports (243) 100 111 117 127 149 160 172 General index exduding it expors of petroleum (224) 100 110 116 125 148 101 171 /a This new index replaces the previous WPI based on 1975. I- Figures show the average for yecr. /b Figures within brackets "0" indicate the number oi items represented in that sector. x Source: Central Bureau of statistics. INDONESIA COUNTRY ECONOMIC REPORT Domestc Preces of Petroleum Producht 1978-1989 (Rp./liter) 1978 1979 1980 /a 1981 1982 /b 1983 /c 1984 /d 1985 /e 1986 1987 1988 1989 Aviation gas 70 100 150 ;50 240 300 300 330 250 250 250 250 Avicaion turbo 70 100 150 150 240 300 300 330- 250 250 250 250 Premium gasoline 90 140 220 220 360 400 400 440 440 440 440 440 Regulor gosoline 70 100 150 150 240 320 350 385 385 385 385 385 Kerosene 18 25 38 38 60 100 150 165 165 165 165 165 Motordiesel 25 35 53 53 85 145 220 242 200 200 200 200 Industrial diesel 22 30 45 45 75 125 200 220 200 200 200 200 Fueloil 22 30 45 45 75 125 200 220 200 200 200 200 /a From May 1980. /b Price increased on January 1. n /c Price increased on January 7. /d Price increosed on January 12. /e Price increased on April 1, due to the application of 1 0%o VAT. Source: Ministry of Mines and Energy, Directorate General Oil and Gas. INDONESI COUNTRY ECONOMIC REPORT A~R.#vd PerOn Inveumen by Sctr, 1977-1989 /a (USS milion) Setor 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 Agrdcuhe 21 3 16 56 25 9 10 0 9 126 117 8 122 fre"ty 29 39 12 8 115 32 7 0 0 0 5 26 4 fisbmy 3 23 21 3 22 3 21 0 11 4 12 46 47 Ming & quoryig 201 38 66 3 29 0 0 0 0 0 0 0 0 MM629yduans 327 276 1158 771 834 1.120 2.616 1.002 687 537 882 3.828 4.246 Food 8 6 61 14 41 6 83 77 6 34 54 231 223 ltledh & Loher 71 116 34 76 139 26 12 1 7 9 118 213 681 I VVood & wood poducs 0 1 6 11 124 S 13 0 0 32 45 104 106 Pcaper & paper products 10 0 11 2 49 0 722 0 25 47 109 1,606 211 Chemkals & rubber 49 26 364 282 236 317 183 96 338 294 209 1,544 2,512 Namedck mwersd 98 20 77 222 20 57 s0 0 3 0 251 30 184 Bosk mefols 18 10 561 0 85 3 836 609 65 39 ^ 7 61 106 Meko products 73 92 45 163 141 708 716 210 244 82 57 129 292 Others 0 7 0 1 0 0 1 9 0 0 3 10 30 Conunsicon 1 5 1 8 49 11 44 17 122 6S 42 2 16 Troe & hdhk 7 10 3 39 0 17 78 84 0 0 196 405 98 Wholealetrode 0 O 0 0 0 0 0 0 0 0 0 0 0 Hotel 7 10 3 39 0 17 78 84 0 0 196 405 98 Transport&communkcoti 0 0 0 25 0 0 0 4 0 70 213 3 5 3 E Real edse and buinesss ea# 20 4 44 0 18 204 108 0 29 26 20 117 181 * $.U 02 Total 609 397 1.320 912 1.091 1.397 2.882 1.107 859 826 1.457 4.435 4.719 O * C) /a hended Capitol Investmet. Amout rpesent orina approvals pus epoloa minus concellotions. Souce: Bank Indonesia and Invesmerd Coordinating Board (BKP. INDONESIA COUNTRY ECONOIWC REPORT ARoRio Domestk hwetmeut by Sedor. 19770199 /a (Mp bilon) sedor 1977 1978 1979 1980 1981 1982 1983 1984 1986 1986 1987 1988 1989 Agrtckubre fiheries and Ivetock 49 100 39 30 60 62 681 277 899 1,879 2.885 2,698 3,418 Foresty 64 59 80 115 175 93 149 19 37 21 640 487 252 Mining 0 18 33 55 13 62 678 8 38 89 290 111 94 MAnuacin 401 531 580 1.093 1.306 1.419 3.792 1.332 1.632 1.842 6.618 9.747 12.931 Tetles 75 168 61 162 195 110 104 127 97 263 1,289 2,309 3,563 Chemicals 99 103 141 57 193 205 766 272 928 773 2,047 3,039 4,078 1 Eecricrl goods 0 0 0 0 0 0 0 0 0 0 0 0 0 Other mahdrwung 228 261 378 874 918 1,104 2,922 933 607 806 2,183 4,399 5,29t Construction 0 3 5 4 8 16 195 67 270 74 s0 31 146 1 Hotels 4 12 13 10 64 76 255 214 312 17 139 537 1,265 Real este 35 15 6 16 5 74 204 31 267 169 174 846 936 ONh"s /b 20 24 18 35 70 157 1,151 1 296 325 569 460 551 Total 574 762 774 1.358 1.69 1.949 71005 1.949 3.750 4.417 10,265 14.916 19.694 /a Figue refer to ifntend capital Investments, and represent original approvls plus approved eponslon minus concelations. /b Includes transpofttfion sector. o . Source: lnvetment Coordinating Board. .P tD ISRD 205141 rd9; THAILAND ido 1i4o 1iso 120' 1i2S 140' 2Band. AcehSW PHIUPPINCS , 13 MALAYSIA BRUNEI e \ J 0; / ~~~~~~~~~~~~~~~~~~~~~~~~9- \ ~~~~~~~~~I N D O N E S I A 12 / MALAYSIA / Ho dcrt 17~~~~~~~1 , ,SltJG^lnORE \'\ /'t y >f M8noe.d - Pb6,0 Bocdee _JP>nbn6 40 _ 4X1 HALMAHERA - h,t,6oo oaIcedo4e. 9,i, A ,- 14 18 pl J 1410 -\,VGlA 2 15 2ANLA 25 1 DOK ! JAKARTA RA SUAWESI 08! 2 JAWA BARAT 20 4 0.1. VOGYAKARTA 86618 ,, 6) 16 R1 IRlAN JAYA 6 JAWA TIMUR B..)8N ,bo 6 LAMPUNG rUrU Arbo 26 7 BENGKULU 6 6 6' a SUMATERASELATAN 'o R IAU a S ii ,o JAMBI TdIOs s UJunW40MOI 11 SUMATERABARAT A \ RI 12 SUMATERA UTARA 14 KALIMANTAN BARAT 15 KALIMANTAN TENGAH 3 MAIX.RA le KAL:MANTAN SELATAN 241S6 7 KALIMANTANTIMUR V (ii 6SULA STS A 2s 5 /A ) A SULAWESI UTARA 28kft -U ) JNBAWA 20 SULAWESI SELATAN 4 / S 21 SULAWESI TENGGARA - i 22 BALi D 6 66 26Soo 40IO0 1'22 NUSATENGGARATBARAT n O ,I2f "2 23 r 74447,0 000 10' 24 NUSA TENGGARA TIMUR 22 23 TMO 25 MALUKU 'oe''.0o..'N SW,A 24 Kn 27 1 w 266a300 400 560 600 700 aco 26 I RIAN JAYA SUMBA f 10be00 w0 4., 5!neb0 asa. 27 TIMOR TIMUR 6mb *LOMETERS 1 _6' 10lr 110' 116' 120' 126F 120 120' 14 19 MAY 1990