Report No. 5066-IND ( . Indonesia Policies and Prospects for Economic Growth and Transformation Part I-Recent Economic Performance and Medium-Term Perspectives Part Il-Selected Issues of Regional and Urban Development April 26, 1984 East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY U Document of the World Bank 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. CURRENCY EQUIVALENTS Before November 15, 1978 US$1.00 = RI) 415 Annual Averages 1979-83 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 /1 April 26, 1984 US$1.00 = Rp 1,004 FISCAL YEAR Government April 1 to March 31 Bank Indonesia April 1 to March 31 State Banks January 1 to December 31 /1 On March 30, 1983 the Rupiah was devalued from US$1.00 = Rp 703 to US$1.00 = Rp 970. I FOR OFFICIAL USE ONLY TITLE : INDONESIA: POLICIES AND PROSPECTS FOR ECONOMIC GROWTH AND TRANSFORMATION COUNTRY : INDONESIA REGION : EAST ASIA AND PACIFIC SECTOR : COUNTRY ECONOMIC REPORT TYPE CLASSIFICATION MM/YY LANGUAGE 5066-IND CEM Official Use 04/84 English PUBDATE April 1984 ABSTRACT Part I of this report undertakes a preliminary assessment of the initial impact of the policy measures that the Government adopted in early 1983 in response to the deteriorating external payments position of the country and the need for diversifying the sources of growth and export earnings; it also examines the main issues facing Indonesia in the years ahead and assesses the country's medium-term prospects. Part II discusses some of the main fea- tures of regional and urban development in Indonesia during the 1970s, and reviews, on a selective basis, some of the related issues of urbanization and the provision of urban services. 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. INDONESIA POLICIES AND PROSPECTS FOR ECONOMIC GROWTH AND TRANSFORMATION Table of Contents Page No. SUMMARY AND CONCLUSIONS ....................... vii to xxiii PART I - RECENT ECONOMIC PERFORMANCE AND MEDIUM-TERM PERSPECTIVES ......................... 1 CHAPTER 1 - RECENT TRENDS IN ECONOMIC PERFORMANCE AND POLICIES ..................................... 2 A. The Onset of Recession and Policy Responses ... 2 Introduction . . 2 The Setback ................................ 3 The Adjustment Response: 1983 . . 3 B. Progress in Macroeconomic Adjustment A Preliminary Assessment ...................... 5 Progress Towards External Equilibrium ...... 6 Restraining Investment Expenditures ........ 9 Changes in the Government's Financial Position ....................... 11 The 1984/85 Budget ......................... 14 The Impact of Changing Subsidy Policies.... 15 Financial Reforms and Resource Mobilization in the Private Sector ....... 18 C. Growth, Incomes and Inflation ................. 22 GDP Growth and Developments in Selected Sectors .............................. 23 Inflation, Incomes and Employment ............. 25 CHAPTER 2 - ADJUSTMENT AND TRANSFORMATION: THE MACROECONOMIC FRAMEWORK ...................................... 29 A. The External Economic Setting ................. 29 This report was prepared by a team comprised of Javad Khalilzadeh-Shirazi (team leader), Frederick Kilby, Daniel Morrow, Vikram Nehru, P. Suriyaarachchi, and Hafez Ghanem. Andrew Hamer and Ho-Shik Kim also contributed. A draft of the report was discussed with the Government in April 1984. - ii - Page No. B. Macroeconomic Framework for Restoring Growth with External Payments Stability .......... 32 Economic Management in the Short Run .. 33 Highlights of Macroeconomic Projections - The Base Case ............................. 35 Uncertainties in the Prospects . . 38 C. Impact on Employment and Income ................... 41 D. Management of the Investment Program ............. 44 The Import Intensity of Investment . . 46 Sectoral Priorities in the Investment Program .......................... 50 Coping with Uncertainties in the Investment Program . . 53 Improving Project Implementation Performance.. 56 The Role of the Private Sector and Deregulation ............................ 58 CHAPTER 3 - DOMESTIC RESOURCE MOBILIZATION: SELECTED ISSUES AND PROSPECTS .................................... 62 A. Public Finance: The Challenge of Increasing Public Savings ................................ 62 Measures to Raise Tax Revenues ............. 63 Restraining Current Expenditures ........... 69 Financing Government Investment ............ 70 Selected Issues in Financing of Public Enterprises ....................... 71 Cost Recovery .............................. 73 B. The Changing Role of the Financial Sector ..... 75 Monetary Control and Management . . 75 Resource Mobilization and Financial Intermediation ................. 77 Cost and Allocation of Credit . . 80 CHAPTER 4 - EXTERNAL TRADE AND CAPITAL REQUIREMENTS ....... ... 85 A. Export Policies and Prospects .................. 85 The Oil and LNG Sector ...................... 86 Policies Influencing Non-Oil Export Performance ........................ 87 Prospects for Non-Oil Export Receipts ...... 92 B. Import Policies and Requirements .............. 98 The Continuing Problem of Protectionism .... 98 The Future Capacity to Import ............ .. 102 -iii - Page No. C. External Financing Requirements and Borrowing Strategy ............................ 104 External Financing Requirements, 1984/85-1986/87 .......................... 104 External Borrowing Strategy ................ 107 Projections of Debt and Debt Service .......... 111 PART II - SELECTED ISSUES OF REGIONAL AND URBAN DEVELOPMENT 116 OVERVIEW .. ......................................... 116 CHAPTER 5 - KEY FEATURES OF SPATIAL DEVELOPMENT IN INDONESIA 1970-80 .............................. 118 A. Introduction .................................. 118 B. Regional Variations in Economic Structure ..... 119 C. Population Growth and Labor Mobility .......... 123 D. Spatial Dimensions of Income and Poverty ...... 127 E. Spatial Variations in Government Spending and Services ................................ 132 CHAPTER 6 - URBANIZATION AND SPATIAL DEVELOPMENT POLICY ...... 137 A. Introduction .................................. 137 B. Trends in Urban Development and Concentration 138 C. Urbanization and Employment ................... 145 D. Spatial Development Policy Issues ............. 148 CHAPTER 7 - URBANIZATION - FINANCIAL AND ADMINISTRATIVE ISSUES 158 A. Introduction .................................. 158 B. Expenditures on Urban Services ................ 159 C. Financing Urban Services ...................... 162 D. Central and Local Administration .............. 167 APPENDIX TABLES TO PART II ........................................... 174 ST N A D T B E ................................................. . . 17 STANDAIRD TABLES.178 ANNEXES I. Analysis and Projection Tables ............................... 182 II. Historical Economic Data ..................................... 191 MAP - iv - Text Tables Table No. Page No. 1.1 GDP Growth: A Comparative Perspective .. 2 1.2 Key Variables Affecting the Current Account Balance, 1978/79 - 1983/84..................................... 4 1.3 Summary of Balance Payments, 1981/82 - 1983/84........ ...... 6 1.4 Non-Oil Export Performance, 1982/83 - 1983/84........ ..... 8 1.5 Non-Oil Imports, 1982/83 - 1983/84 ............................. 9 1.6 Public Sector Investment 1974/75 - 1983/84......... ..... ....... 10 1.7 The 1983/84 Budget Outturn ..................................... 13 1.8 The 1984/85 Budget .............................................. 14 1.9 Development Expenditures by Sector ....................... ...... 15 1.10 Domestic Oil Prices, 1981 - 1984....................... . 16 1.11 The Burden of Oil Price Increases - Sectoral Shares . .17 1.12 Public Expenditures per Capita in Social Sectors, 1980/81 - 1984/85.................................. 17 1.13 Interest Rates of Commercial Banks, 1979 - 1983....... ....... 20 1.14 Bank Deposits and Money Supply, 1980 - 1983......... ..... . 21 1.15 Time Deposits with State Banks, 1979 - 1983......... .......... 21 1.16 Growth in Sectoral Value Added, 1981 - 1983......... ....... 23 1.17 Rates of Inflation ..26 2.1 Selected Indicators of International Economic Activity 1983-90............................................ 31 2.2 Growth and Composition of GDP, 1976-90.................. 36 2.3 Growth in GDP by Expenditure Category, 1976-80.............. 37 2.4 Selected Economic Indicators under the Alternate Scenario ...... 39 2.5 Projections of GDP, GDI and Imports of Capital Goods, 1983/84 - 1990/91 ................ , . .......... 45 2.6 Impact of Large Industrial Projects on Import Intensity of Investment, 1981/82 - 1983/84.......................... 47 2.7 Import Content of Sectoral Programs and Sectoral Composition of Public Sector Development Expenditures .................... 48 2.8 GDI, Imports of Capital Goods and Import-Intensity of Investment; 1983/84 - 1990/91 ................................ 49 3.1 Consolidated Statement of Government Finance 1978/79 - 1990/91 63 3.2 Tax Revenue by Type of Tax ..64 3.3 Non-Oil Taxes - Buoyancy Assumptions ..66 3.4 Oil and Energy Revenues in the Medium Term . .67 3.5 The Changing Structure of Government Revenues, 1972/73 - 1990/91 ............................................ 68 3.6 Summary of Public Sector Investment and Finance ................ 70 3.7 Indicative Cost of State Banks' Funds .. 81 4.1 Projections of Exports of Goods by Major Categories, 1984/85 - 1990/91..................................... 86 4.2 Export Projections for Timber Products, 1984/85 - 1990/91 . 92 4.3 Projections of Rubber Production and Exports, 1984/85 - 1990/91 94 4.4 Composition of Exports of Manufactures, 1982/83 - 1990/91 96 4.5 Exports of Developing Countries, 1980-95 .97 v Text Tables Table No. Page No. 4.6 The Implicit Costs of Protection for Selected Products, 1983... 101 4.7 Projections of Imports by Major Category, 1985/86 - 1990/91.... 103 4.8 Summary Balance of Payments, 1982/83 - 1986/87 ................. 105 4.9 Summary of External Capital Requirements and Sources, 1984/85 - 1986/87 ............................................ 106 4.10 Historical Commitments of Public Debt and Grants, 1979-83 ...... 107 4.11 Projected Commitments of External Public Debt and Grants, 1984/85 - 1986/87 ............................................ 108 4.12 Growth and Composition of Debt, 1973-83 ........................ 112 4.13 International Comparisons of Selected Debt Indicators - 1982... 113 4.14 Disbursed and Outstanding Medium and Long Term Debt, 1981-90... 114 5.1 Regional Economic Indicators, 1980 ............................. 120 5.2 Regional Development Indicators, 1971-79 ....................... 122 5.3 Estimates of Net Migration and Natural Increases Components of Population Change in Provinces, 1971-80 ...................... 124 5.4 Indicators of Urbanization - International Comparisons ......... 125 5.5 Total and Urban Population, September 1980, and Growth by Province, 1971-80 .126 5.6 Regional Variations in per Capita Output and Consumption, 1980 128 5.7 Regional Variations in Poverty Incidence, 1970-80 .130 5.8 Provinces where the Incidence of Deprivation Exceeded 10% in 1980 .131 5.9 Per Capita Budgetary Transfers and Central Government Direct Development Expenditures 1980/81 .133 5.10 Indonesia - Selected Social Indicators, 1971-1980 .136 6.1 Urbanization in Indonesia, 1961-80 .139 6.2 Regional Urbanization Trends, 1971-2000 .140 6.3 Size Distribution of Indonesia's Cities and Towns, September 1980 .142 6.4 Indicators of Urban Concentration - Selected Countries .143 6.5 Growth Rates of Urban Centers and Projected Population Distribution by City Size .144 6.6 Structure and Growth of Employment in Rural and Urban Areas, 1971-1980 .146 6.7 Distribution of Rural and Urban Labor Force, 1970-80, and Projections to 2000.. 147 6.8 Regional Trends in Manufacturing Output and Employment Growth, 1970-80 .151 6.9 Implications of New Transmigration Program Targets for Population Distribution, 1980-2000 .156 7.1 Total Annual Spending on Urban Services by Central and Local Authorities - Average 1979/80 - 1982/83 .160 7.2 Estimated Financial Requirements for Investment in Urban Services during REPELITA IV .162 7.3 Annual Sources of Spending for Selected Urban Services 1970/80 - 1982/83... 163 - vi - Text Tables Table No. Page No. APPENDIX TO PART II Table 1 Regional Economic Indicators, 1980 ........................... 174 Table 2 Regional Development Indicators, 1971-1979 ................... 175 Table 3 Sectoral Growth Trends by Province, 1971-1979 ................. 176 Table 4 People in Poverty and Incidence of Poverty by Provinces, 1980 .......................................... 177 Figures Figure 1.1 Central Government Revenues in Real Terms . . 11 Figure 1.2 Real Domestic Savings ..12 Figure 1.3 Smallholder Coffee and Rubber Producers: Terms of Trade . .27 Figure 1.4 INPRES - Real Expenditures ..28 Figure 4.1 Real and Nominal Effective Exchange Rates . .89 - vii - SUMMARY AND CONCLUSIONS Recent Trends In Economic Performance and Policies i. After a period of sustained economic growth and development in the 1970s, Indonesia suffered major economic setbacks in 1982 and early 1983; the deterioration in the international economy, which began in 1980, adversely affected Indonesia initially through the fall in the demand for and prices of the country's traditional exports (primary agricultural commodities); and subsequently, and more dramatically, via depressed oil demand and the fall in oil prices. The adverse external economic developments, which led to heavy pressures on the Rupiah and the country's reserve position, prompted the Government to take decisive actions to deal with the immediate balance of payment difficulties facing the country and to lay the foundation for pursuing a sustainable growth path in a less favorable international environment. The more fundamental measures included the adoption of an austere budget for 1983/84; reduction in subsidies on petroleum products; devaluation of the Rupiah by 28%; rephasing public investment projects; liberalization of the financial sector; and the adoption of a far-reaching tax reform to increase and diversify government revenues in the longer term. ii. The range of measures adopted and, equally importantly, the speed of the Government's response to the deterioration in internal and external financial stability, were indeed impressive. These measures have been rewarded with considerable success in alleviating the external payments imbalance, through a combination of increased non-oil export receipts and substantial cutbacks in imports. For 1983/84 the current account deficit is estimated at about $4.2 billion (equivalent to 6% of GNP), compared with $7.3 billion (8.4% of GNP) in the previous year. The devaluation, which helped to restore confidence in the Rupiah, and the increase in domestic interest rates following the June financial reforms, also led to a reflow of foreign exchange to both the commercial banking system as a whole and to official reserves. As a result, Indonesia's net foreign exchange reserves (official and those of commercial banks) rose by about $2.0 billion to $8.4 billion at end 1983/84. iii. Given the heavy dependence of government revenues on oil export receipts, the weakening of the international oil market in late 1982 and early 1983 had a severe impact on the budget. However, the measures subsequently adopted by the Government, particularly the devaluation, rephasing of the public investment program, and further restraint on current expenditures, have contributed to an emerging healthy public finance outcome. The performance of non-oil taxation has been particularly noteworthy, partly due to the effect of the devaluation, and partly to renewed vigour in collection efforts. The Government has also been very successful in restraining current expenditures. Together with the restraint on public investment, this has led to an increase in government savings with the banking system. - viii - iv. An important aspect of the Government's economic management over the last three years has been the reduction of subsidies for domestic oil consumption and food. As a consequence, budgetary subsidies are estimated to have fallen, in nominal terms, by 40% between 1981/82 and 1983/84. Domestic oil prices have been raised three years in succession. The latest round of increases would generate public savings equivalent to about 1.8% of projected GDP in 1984. Food subsidies were largely eliminated in 1982 following an increase in the price of rice and favorable price developments abroad. The reduction in subsidies has undoubtedly had an adverse impact on the welfare of consumers at a time when incomes were depressed. By skillful economic management, however, the Government has succeeded in mitigating part of this loss by spreading its effect over as large a proportion of the population as possible while simultaneously increasing expenditure allocations to the social sectors. v. In order to encourage the mobilization of domestic savings and to reduce the dependence of the financial system on liquidity credits from Bank Indonesia, the Government introduced major reforms in the financial sector in June 1983. These measures have led to some noteworthy changes over the past few months. Deposit rates of state banks have increased sharply along with their lending rates. The increase in deposit rates has had a favourable impact on deposit mobilization with time deposits having risen by about 50% by end December. The increase in time deposits has, however, been accompanied by a shortening of maturity structure of the deposits, which, together with the reduced availability of Bank Indonesia liquidity credits, is giving rise to a mismatch between the term structures of deposits and loans. Higher lending rates have also increased cost of credit to borrowers. vi. GDP growth in 1983 is estimated to have been about 4.5% (in 1981 prices). This represents a significant improvement over the performance in 1982 when GDP growth was essentially flat. This growth was largely attributable to a rebound in oil and LNG production, but nevertheless demonstrates the resilience of the economy. Output of oil (including condensates) is estimated to have grown by about 6%, compared with a decline of 12% in 1982, and there was a significant increase in LNG production due to the early completion of two additional trains at Bontang. Preliminary data suggest that non-oil/LNG GDP increased by about 4%. Agricultural growth is estimated at 3%, compared to 1.8% in 1982. According to World Bank Atlas methodology, Indonesia's GNP per capita in 1983 is provisionally estimated at $560. Domestic inflation, as measured by the consumer price index (CPI) for 17 cities, registered a 12% increase in 1983 compared to 10% the previous year. This was a remarkable performance given the cost-push shocks to the economy, particularly those related to the rise in the prices of domestic oil products and the devaluation. Adjustment and Transformation: The Macroeconomic Framework vii. Short-Term Economic Management. The success achieved in short-term adjustment has inevitably entailed some costs in terms of growth, incomes, investment and employment during 1982-83. The question now is whether Indonesia in the year ahead will be able to restore its growth rates to at least 5% as called for in the REPELITA IV Plan. This report takes the - ix - position that it can. The recovery in GDP growth would be led by increased domestic consumer demand that should follow the rebound in agricultural production and the continued stimulus provided by the rapid expansion of non-oil exports. In addition, the recent increase in civil servants' salaries will also help boost aggregate demand, although some of the income gains of this group will be offset by higher energy and transport costs. Investment demand cannot be expected to lead a recovery, except in highly selective areas. For reasons set out below, the recovery in investment expenditures will have to be managed very carefully to avoid creating new pressures on the balance of payments. On balance, non-oil GDP is projected to expand by about 4% in real terms in 1984, and when the large increases in LNG exports are also taken into account, GDP growth will, in all likelihood, be around 5.5% in 1984. Indonesia's GNP per capita may well exceed $600 in 1984 (at current prices). viii. Notwithstanding the favorable prospects for the current year, and given the very success of the short-term adjustment program and understandable objective of restoring the momentum of economic growth, there may be a desire to stimulate recovery further by some combination of expansionary monetary policy and increasing investment outlays of the central government and public enterprises through additional foreign borrowing. The Government is correct in continuing to exercise caution, although there is a strong case for expanding certain kinds of public investment outlays which have a low import content (such as housing and INPRES programs) to facilitate a broad-based recovery and to expand job opportunities. But the expansion would have to be carefully managed and quite selective to avoid creating new pressures on the balance of payments, which could in turn undermine the hard-won gains of the past year. At the outset, it must be recognized that a stronger growth in the non-oil economy will result in increased demand for raw materials and intermediate goods - a demand that should be accommodated and not restricted by resorting to additional import controls that will lead to greater distortions in the economy and take the Government even further from its stated objectives of improving industrial efficiency and lowering costs of production. To accomodate these additional imports, while at the same time ensuring a further reduction of the current account deficit, the increase in imports of capital goods, and hence expenditures on import-intensive investment programs and projects, would have to be managed very carefully. ix. The Medium-Term Macroeconomic Framework. Indonesia's growth prospects in the medium-term depend to a significant degree on the developments in the international economy. While it is possible that economic performance in the industrial economies will be sluggish in the second half of this decade, in this report a medium-term scenario similar to the "Central case" of the World Development Report 1983 is adopted for the international economic outlook. The evolution of the world oil market remains crucial to Indonesia and is particularly difficult to predict. By 1990, Indonesian crude oil output (including condensates) is projected to reach about 1.8 mbd. Regarding the world price level, it is assumed that the nominal oil price will remain at $29 per barrel through the end of 1985. Beyond 1985, the price of oil is projected to increase at about 2% p.a. (in real terms). As a result of a gradual improvement in commodity prices from their historically low level of 1982, Indonesia's overall terms of trade are expected to improve by about 9% during 1985-90. -x - x. The base case scenario presents the likely prospects for the Indonesian economy, on certain assumptions about the rate of growth of the industrialized countries and, more importantly, on the behaviour of the oil markets. During the second half of the decade, overall GDP growth is projected at 5.0% p.a. and that of non-oil GDP at 5.5% p.a. Investment growth is assumed to average about 4% p.a. in 1984-85 and rise to above 5% p.a. during 1986-90. However, given the constraints on the availability of external resources, the projected growth rates would be feasible only if the import-intensity of investment is reduced from recent levels. After a strong performance in 1984 and 1985, when exports are expected to increase by 5.6% p.a. in real terms, they are then projected to expand by only about 4.4% annually during 1986-90. The main reason for this slower growth is the outlook for oil and LNG exports, which will account for about 70% of projected total export receipts in 1984/85. Non-oil/LNG exports, on the other hand, are projected to continue to perform well, growing by 6% p.a during 1986-90 . Earnings from those exports are thus projected to reach some $13.8 billion by 1990 - an ambitious but extremely important objective for Indonesia. Growth of these exports will depend on appropriate trade policies, which will encourage efficient industries capable of competing in world markets. Thus, reform of the trade regime is a central challenge facing Indonesia at this time. xi. Given the projected growth in export earnings, continued restraint on imports will be required in the next two years to reduce the current account deficit further. This would mean that imports of goods in nominal terms should be held to no more than $19.3 billion in 1984/85 and $20.7 billion in 1985/86, which, in turn, implies no real growth during these two years. The brunt of the restraint must fall on capital goods imports. It is assumed that through careful management of investment demand imports of capital goods would be constrained in real terms to that of 1983/84 for the next three years. xii. Management of the Investment Program. A key element in reducing further the balance of payments current account deficit during the 1980s will be the way in which the investment program is managed. The severity of the import constraint which is in prospect for Indonesia over the next few years will impose serious limitations on the rate at which Indonesia can undertake new investments. The desirability of import-intensive projects will need to be scrutinized carefully in the context of the foreign exchange availabilities from exports and prudent limits on foreign borrowing; clearly there is a need to extend the discipline of careful scrutiny and review of projects initiated last year to the next few years as well. In addition, to the extent that priority could be given to sectors where import coefficients are low, it would be possible for the Government to lower the average import-intensity of a given level of aggregate investment or to sustain a higher level of aggregate investment with a given level of imports. xiii. There are indications that the Government's own priorities are changing in these directions; for example, the preliminary sectoral allocations for the next few years for education, health and family planning and housing are significantly larger than the relative shares of public investment allocated to these sectors under REPELITA III. However, the combined share allocated to power, industry, and mining - the most capital- - xi - and import-intensive sectors - is also higher than that in REPELITA III. This raises a potential dilemma, given the serious import constraint facing Indonesia, since these three sectors may pre-empt an unduly large share of the limited capital goods available for the public sector. If this happens, investments in other sectors such as agriculture, education, health and family planning, housing and regional development, which are essential for sustaining growth momentum with greater regional and social equity, could be reduced. xiv. While the determination of the appropriate scale and mix of public investment will clearly be important, improving the implementation of projects included in the public investment program will be an integral aspect of economic management over the next few years. Implementation delays often increase project costs and the postponement of the benefit stream (in terms of foregone output, incomes and employment) can affect the rates of return and sometimes the economic justification of some projects. As in other countries, a range of economic, financial, technological, social, administrative and institutional factors contribute to implementation delays in Indonesia. The Government has recently established a mechanism for examining a wide range of implementation issues. While this process will take time it may, however, be possible to introduce a number of changes relatively quickly which could help to improve project implementation significantly. xv. As already noted, the ability of the public sector to finance development activity has diminished sharply. The private sector will, therefore, be called upon to play an increasingly important role in capital formation and in execution of projects and programs. The Government is clearly aware that the acceleration of the process of development is closely linked with the extent to which the resources, energies and ingenuity of the broadest possible spectrum of society is harnessed. Accordingly, it is important to ensure that the private sector be given broad scope for economic action and be free of regulations which inhibit initiative, raise the costs of doing business, and thereby undermine competitiveness. The Government is addressing the difficult task of reducing the scope of regulations and simplifying the regulatory framework. At the same time it is encumbent on the private sector to take a long-term view of the investment opportunities and base its decisions on more realistic expectations about pay-back periods. It should also vigorously endeavor to improve the efficiency of its operations and undertake high quality projects. xvi. Impact on Employment and Incomes. There is no doubt that the most pressing development issue facing Indonesia is the need for employment creation. During the 1980s, the labor force is projected to grow at an annual rate of 2.7% compared with 2.2% during the 1970s. And during REPELITA IV at least 1.8 million people will enter the labor force each year. Thus Indonesia will encounter a rise in labor force growth during a period when its overall economic growth is expected to be lower. There is a genuine question as to how such an increase can be absorbed in productive employment, given the projected 5% rate of growth of the economy. In the Indonesian context, this squeeze in the labor market is not expected to lead to a dramatic increase in unemployment, except perhaps amongst educated urban youth. However, there is a serious risk of stagnant or declining returns to labor in both rural areas and in the urban informal sector. This would threaten the past progress made - xii - in poverty reduction. There are three broad areas of policy intervention that can support a more labor-intensive pattern of growth. First, although the relative share of agriculture in employment will decline in the long term, it will continue to be the principal employer and should receive priority in investment and pricing policy. Policies to increase cropping intensities on irrigated areas, and diversify crops and raise yields in rainfed areas will help sustain labor demand on Java. The expansion of treecrop output in the Outer Islands, linked with the transmigration program, can also absorb a significant part of the increase in the Javanese rural labor force. Second, industrial policies that encourage productive efficiency and foreign exchange savings can also support employment creation. Export-oriented industries and certain categories of import-substitution industries are quite labor-intensive; given Indonesia's low cost of labor, they will characteristically be economically attractive. Appropriate trade policy and strict economic evaluation of large-scale, capital-intensive investments in both the public and private sectors are necessary for appropriate investment choices. Third, there is considerable scope for increasing the domestic content of public expenditures, and thereby their direct and indirect employment impact. This can be achieved both by shifting expenditures to areas such as rural infrastructure, social and urban services, and by making appropriately labor-intensive choices within programs, such as land clearing in transmigration sites. xvii. Uncertainties in the Prospects. The base case scenario presents the macroeconomic prospects for Indonesian economy on certain assumptions about domestic efforts and developments in the international economic environment. There are, of course, uncertainties over these developments, and it is quite possible that the external environment will be less favorable. Indonesia is especially vulnerable to the level of the oil price, and an alternate scenario has been examined in which the real price of oil and LNG is assumed to remain constant in real terms after 1985, as compared with an annual real increase of 2% under the base case. This would reduce net earnings from oil and LNG by about $2 billion by 1990. With vigorous efforts aimed at raising non-oil exports, Indonesia could compenaste partly for this shortfall, assuming lower oil prices are not accompanied by low growth in the industrial economies. Nevertheless, the country's capacity to import would grow by only 4.7% p.a. in the second half of the decade compared with 6.2% p.a. under the base case. xviii. There are two possible policy responses under a such scenario. First, with less favorable international oil prices, for Indonesia to attain the rate of growth and other development objectives envisaged in the base case, it would have to undertake higher external borrowings. By 1990, the current account deficit would widen to about 3.8% of GNP. Financing thisdeficit and the projected repayments of prior debt obligations would require commitments that are clearly higher than in the base case. Indonesia could avoid a sharp increase in its debt service payments in the 1990s if it could receive additional official assistance from donors as an alternative to extra commercial borrowing. However, if all the additional borrowing were to be on commercial terms, Indonesia's debt servicing obligations would rise rapidly in the early 1990s. There would be a strong case for such support from the donors in these circumstances. The second response to lower oil prices would - xiii - be to reduce imports in order to maintain a current account deficit and debt service position comparable to the base case. The cost of such an adjustment would be a reduction in in the growth rate by about 1%, to 4% p.a. during 1986-90. At this rate the difficulties of coping with the growth of the labor force and other development problems would be even more serious than in the base case. The sensitivity analysis highlights the need for implementing medium-term policy reforms which would improve the resilience of the economy to potential future external shocks. Domestic Resource Mobilization and Allocation xix. The sharp decline in oil revenues and the consequent impact on public sector savings require Indonesia to intensify its efforts at domestic resource mobilization so as to be able to finance an adequate level of investment and improve resource allocation. In this context public finance strategy and policies pursued in the financial sector play a critical role. Financing the future public investment program during a period of constrained foreign borrowing will be a major challenge. While taxes from the oil sector will continue to be the cornerstone of government revenues, the performance of public savings depends critically on non-oil tax revenue generation and continued restraint on current expenditure growth. xx. Despite the receding fortunes of the oil sector, oil and LNG taxes will continue to remain important though their share in total domestic revenues (66% in 1983/84) is expected to decline significantly over the remainder of the decade. In real terms, oil and LNG revenues are expected to grow by about 5.1% p.a. between 1985-90 -- far below their performance of 1975-80. The slow growth in both oil production levels and prices and rapidly rising costs of crude production account for this modest projection. Revenues associated with LNG production will also be affected by the development of oil prices and the slow, demand-constrained growth in production after 1984/85. xxi. The 1984/85 budget represents a noteworthy beginning in the direction of improving public savings performance. The budget continues to incorporate important measures to restrain the growth of current expenditures, especially through reductions in subsidies. It also contains major steps aimed at increasing non-oil revenues in the future. In order to increase non-oil tax revenues, the Government has announced major tax reforms designed to broaden the tax base and simplify the tax structure and its administration. The success of the tax reform will, however, depend on the effectiveness of the tax administration that will implement them, and the extent to which the public understands, and identifies with, its aims and objectives. xxii. The restructuring of the taxation system and increased efforts at collection should reverse the declining trend of non-oil taxes in relation to domestic incomes. The buoyancy of non-oil tax revenues to non-oil GDP fell from 1.0 in the period 1968-78 to 0.8 in the post-1979/80 period. The projections in this report assume that non-oil taxes will achieve a buoyancy of 1.5 with respect to non-oil GDP. While this seems high in comparison to the performance of the past decade, it should be attainable provided the new tax law is forcefully implemented. - xiv - xxiii. Increased public savings will require continued restraint on current expenditures. However, the growth of some components of current expenditures is difficult to slow down; and it is important that the public investments over the past decade, particularly in agricultural, irrigation and transport infrastructure, be protected by adequate allocations of funds for their maintenance and operations. The most promising areas for restraining the growth of current expenditures lie in the continued reduction of subsidies. The Government has already discontinued the food subsidies in the 1984/85 budget. Budgetary subsidies for domestic oil in the 1984/85 budget are Rp. 1.1 trillion, despite an average oil price increase of some 35% in January 1984. If domestic oil prices rise on average by 5% p.a. in real terms between 1985 and 1990, and operating efficiency in the sector is improved, the subsidy (1.3% of GDP in 1983/84) can be virtually eliminated by 1990. Budgetary subsidies on fertilizer are assumed to be phased out by 1988/89. It is doubtful that these subsidies are essential for encouraging rice production or other crops. In any event, a gradual increase in producer prices could protect farmer incomes and help maintain production growth. xxiv. Selected Issues in Financing of Public Enterprises. The financing of public enterprises in an environment characterized by public sector resource constraints and a liberalized financial system presents a set of potentially very difficult and complex problems. With the exception of their modest internal savings, all other sources of public enterprise investment financing have, in the past, been subsidized by the Government in various ways. However, given the Government's stringent resource position, Indonesia can no longer afford to subsidize public enterprises. In this context, two very important issues arise: first, what is the scope for increasing profits and retained earnings; second, what is the capacity of these enterprises for additional debt financing in the form of commercial bank loans or bonds. Increased operating surpluses can potentially come from two main sources: through cost reductions due to improved efficiency; and from a careful review of public enterprise pricing policies. There are many areas where the operational efficiency of public enterprises could be improved; for example, in refinery production, in the transport sector, and in port operations (where increased efficiency will also entail considerable gains to the rest of the economy in terms of reduced delays and costs). In regard to price increases there does appear to be scope for improving the financial position of some enterprises and utilities. For example, despite the recent 32% tariff increase, PLN is expected to earn little or no return on investment in 1984; many of the enterprises engaged in sugar production are currently making losses, due to unduly low prices set by the Government. xxv. It is the Government's intention that public enterprises should acquire borrowed funds for investment and working capital at market terms, to supplement internally generated resources. Given the recent sharp increases in interest rates, however, this will worsen the financial situation of public enterprises. Secondly, many public enterprises may find it difficult to obtain funds for long periods at market rates, as banks may view them as poor credit risks. The Government could seek to counterbalance these risks by providing interest rate subsidies (and guarantees) to commercial banks, and by encouraging the latter to lend to enterprises at variable rates. But, in view of the budgetary constraints, the Government may not be able to provide large subsidies to public enterprises without reducing financing for other - xv - investments to be undertaken elsewhere. It is, therefore, important to ensure that the projects which public enterprises seek to finance through bank borrowing are economically and financially viable at market rates of interest. It is also necessary to improve the financial and performance data reporting system of public enterprises. Finally, to the extent that losses of some public enterprises are due to inappropriate investment decisions which cannot be corrected by price adjustments and organizational and efficiency improvements, the Government would need to recognize this problem and take appropriate actions, so as to avoid continued subsidies to such enterprises. This may require decisions to write-off past losses, revalue assets, and restructure the capital base of such enterprises through infusions of new equity. xxvi. Changing Role of The Financial Sector. The liberalization of the financial sector has set the stage for mobilizing greater financial savings, for encouraging higher levels of private savings, and for contributing to a more efficient allocation of funds at a time of resource stringency. Monetary control has become an important area of focus for the monetary authorities in the short term, since Bank Indonesia (BI) no longer fixes interest rates or sets overall and selective credit ceilings. There are several challenges in this area. BI has developed a set of instruments for more effective monetary control. However, refining the process will inevitably take time. In the meantime, to reduce uncertainty in the financial markets, the withdrawal of liquidity credits will need to be managed carefully. xxvii. For the long term the fundamental problem is to ensure that the banking system plays a more effective role in mobilizing domestic resources and resource allocation decisions. Indonesia's domestic savings potential is considerable. A high proportion of these savings, however, is not financialized; a major objective of financial sector policy, therefore, is to ensure that these private savings are channelled into productive investment through the intermediation of the financial system. However, in the short term some potential conflicts between the resource mobilization and credit allocation objectives have arisen. The increase in deposit rates following the recent financial sector reforms, while encouraging resource mobilization, has also led to high real lending rates. A flexible attitude towards interest rate policies aimed at striking an appropriate balance between resource mobilization needs and stimulating investment in the light of the exigencies of the economy will continue to be important. xxviii. Consideration should also be given to the need to encourage the development of a capital market and the relevance of interest rates in this context. The present structure of deposit rates differentiates very little between short-term (3 months) and longer-term (24 months) deposit rates. This has led to the shortening of the deposit structure of banks, and to reduced public willingness to hold bonds. Over the longer term, mobilization of domestic resources could also be enhanced through the expansion of banking network, institutional development and creation of new mechanisms and savings instruments, as well as through higher deposit rates. Access to banking facilities, especially in rural areas, is still very limited. Vigorous efforts by state banks to expand banking facilities in rural areas are thus needed. The private banks could also play an important role in this process. At present the role of private banks is limited; it would be desirable to - xvi - encourage private banks to expand their operations, combined with a policy of encouraging mergers of smaller banks, 'graduating' stronger private banks, and increased banking supervision. External Trade and Capital Requirements xxix. The sharp decline in the price of oil has clearly demonstrated the importance of reducing the economy's heavy dependence on this source of foreign exchange earnings. Accordingly, the Government hopes to more than double nominal earnings from non-oil exports over the next five years. Although this is an ambitious target, it should be attainable, provided that: (i) economic recovery in the industrial economies is sustained; (ii) Indonesia's access to those markets is not hampered by protectionist measures; and (iii) most importantly, Indonesia follows appropriate trade and exchange rate policies. In the short-run there are a number of measures which will be required to promote non-oil exports. These include: maintaining a competitive exchange rate; improving export quality; limiting the use of export controls; and other selected measures, such as refining existing policies for export finance, guarantees and insurance. However, these necessary measures, by themselves, will not be sufficient to ensure the success of Indonesia's export drive. Over the long run a more comprehensive trade reform will be required to stimulate industrial efficiency and improve the compitetiveness of Indonesian producers. xxx. Empirical evidence indicates that Indonesia's non-oil exports and imports are quite sensitive to movements in the real exchange rate. Consequently, a competitive exchange rate is a fundamental element in Indonesia's efforts to expand non-oil exports and to continue to reduce the current account deficit to a sustainable level. It is therefore imperative that the impact of the 1983 devaluation is not eroded. xxxi. Improvements in export quality would also help Indonesia to increase the unit value of exports and penetrate new markets. Such efforts are particularly important in primary exports such as rubber and coffee and in marketing of manufactured goods. The Government recognizes this need and work is underway to set standards for most export products. However, strict measures are needed to ensure implementation of these standards. It is also necessary to limit the use of temporary export controls during periods of domestic shortage. Continued attention also needs to be directed towards more effective implementation of the export promotion package introduced in January 1982. For example, additional efforts are required to build up the newly-created organization which will take over the export guarantee and postshipment insurance schemes, to extend these arrangements to all exporters and to improve the implementation of the duty rebate system. Finally, further efforts are required to establish export estates and export processing zones, to streamline customs administration, and to improve port operations. xxxii. Indonesia's efforts to expand its exports of manufactured goods are hindered by protectionist policies in developed countries. At present, Indonesia faces significant tariff and non-tariff barriers to the export of the two major categories of manufactured exports - textiles and plywood. If the industrial countries penalize Indonesia for success in exporting such - xvii - products, the potential export earnings from these commodities will be lower than projected, and Indonesian producers of other goods will be discouraged from venturing beyond the home market. xxxiii. Import Policies. Indonesia's trade regime has been characterized by a predilection for high tariffs and quantitative restrictions. The difficult external payments situation faced by the country beginning in 1982 has reinforced this tendency. Despite the tight foreign exchange availability in prospect in the coming years, Indonesia must avoid the temptation to continue relying on high tariffs and quantitative restrictions. These policies run counter to Indonesia's goals of stimulating efficiency in the industrial sector and encouraging the growth of non-oil exports, especially manufactured goods. There is little doubt that increased efficiency and, linked to this, reforms in trade policy are the major remaining policy challenges to be tackled by the Government. In this regard there are many aspects of trade policy which require government attention in the coming year or two. A comprehensive program of reform of the trade regime which can be realistically implemented only over a period of years, might include the following elements: (i) rollback of existing import bans; (ii) gradual reduction greater and uniformity in tariff levels; (iii) adjustment assistance to industries affected by import competition; and (iv) anti-dumping legislation to protect domestic industries from unfair foreign competition. External Financing Requirements and Borrowing Strategy xxxiv. By reacting decisively to the deteriorating international economic environment in 1982 and early 1983, Indonesia was able to minimize recourse to excessive external borrowing in its external adjustment process. Nonetheless, substantial levels of borrowings will be required over the coming years to support Indonesia's efforts aimed at resuming growth and the restructuring of its economic base away from dependence on oil. xxxv. Based on the macroeconomic and policy framework outlined in this report, the current account deficit is expected to fall from an estimated $4.2 billion (6.0% of GNP) in 1983/84 to $3.5 billion (3.6% of GNP) by 1986/87. Over the three year period, the cumulative current account deficit would be $11.2 billion, of which $5.0 billion comprises interest payments on public sector medium and long-term debt. With a projected $6.8 billion in amortization of public sector debt and an addition of $300 million to reserves, the total foreign exchange requirements between 1983/84 and 1986/87 will amount to $18.3 billion. About $15.6 billion of these requirements will continue to be met by gross disbursements of public medium and long-term debt. Some $9 billion will be available from disbursements from previously contracted debt while the remainder would need to be met from new commitments. Total reserves are projected to rise marginally to $8.7 billion by 1986/87; this level of reserves will provide 4.5 months of import coverage. Given the potential volatility of export receipts and to protect the free convertibility of the rupiah, maintaining a comfortable reserve position is clearly an important aspect of Indonesia's external account management. - xviii - xxxvi. External Borrowing Strategy. In order to generate $6.6 billion in disbursements from new commitments over the next few years, Indonesia will need to borrow about $4.5 billion annually. Official assistance, primarily composed of concessional bilateral loans and grants and multilateral loans and grants from IGGI members, has been the most important source of funds for Indonesia. Official assistance commitments in 1983 amounted to about $2.4 billion. This source is of particular importance to Indonesia for supporting its adjustment efforts because of its more favorable terms and associated technical assistance. Larger borrowing on harder terms would be inadvisable in terms of future debt servicing capacity. Consequently, it is recommended that the level of the IGGI commitments to Indonesia for 1984/85 be at least $2.4 billion. xxxvii. Import-related credits, consisting of bilateral non-concessional loans, buyers' and suppliers' credits, are an important source of foreign financing for Indonesia. By 1982, this source financed almost 21% of the country's capital goods imports. However, with $4.0 billion of import-related credits still in the pipeline and more modest levels of public investment, the Government should aim to reduce the commitment level of imiport-related credits to about $1.2 billion annually in the next three years. i[ndonesia's requirements for commercial borrowing in the coming years will be substantially less than the commitments in 1983/84. However, access to the international capital markets will continue to be required. An appropriate level of untied borrowing might be of the order of $1 billion annually over the next three years. The implied increase in private banks' exposure to Indonesia evisaged in this scenario would not be excessive given current bank exposure levels. xxxviii. With the high levels of domestic interest rates, there could be substantial demand on the part of the private sector for external borrowing without government guarantees, particularly when investment activity picks up. As part of the overall debt management strategy, it is important that such private borrowing be for projects that clearly contribute to strengthening the country's balance of payments and that the amounts remain within prudent limits. After all, private debt obligations are an integral part of the overall claims on the country's foreign exchange earnings. xxxix. Debt and Debt Service. Indonesia has been following a very prudent borrowing strategy despite substantial improvements in its creditworthiness, and the overall debt structure remains sound. Apart from working balances of public enterprises, for which information is not readily available, the public sector holds no short-term external debt. The total level of disbursed and outstanding medium and long term external public debt at end December 1983 was $23.7 billion. The average maturity of MLT debt is estimated at 14 years. The share of official assistance in total disbursed and outstanding public debt was 47% at end-1983, while debt at variable interest rates accounted for only 22%. xl. The public sector borrowing program outlined above implies a growth of about 12% p.a. in nominal terms in outstanding public MLT external debt during 1984/85 and 1986/87. Private MLT external debt is expected to grow more slowly at about 9% p.a. With the projected levels and composition of - xix - borrowings and export earnings, the public debt service ratio, based on net exports, would rise from an estimated 23% in 1983 to about 28% in 1985 and then gradually decline to about 23% by the end of the decade. With private MLT included, the ratio of debt service payments to gross exports would average about 22% during 1985-88 and decline to 20% in 1990. While debt management would require careful attention in the coming years, the projected debt service payments are not excessive by international standards. With a continued prudent borrowing policy, maintenance of a comfortable level of external reserves to guard against temporary strains on liquidity, concerted efforts at export promotion, and discipline in the public investment program, Indonesia should be able to retain its present high standing in international capital markets. Selected Issues of Regional and Urban Development xli. Part II of the present report provides a discussion of some of the main features of regional and urban development in Indonesia during the 1970s, and the issues they raise for the future. The coverage of these issues is, however, highly selective. The problems of spatial development are amongst the most complex facing any country, and the existing body of knowledge on this aspect of Indonesia's development is still very limited. Nevertheless, it is clear that at the local level Indonesia is undergoing tremendous economic and social change, and that it is becoming increasingly important to monitor these trends in conjunction with macroeconomic developments. Accordingly, the World Bank is devoting more attention to the analysis of spatial development processes and policies in Indonesia. At this stage the findings of this research are fairly preliminary. Consequently, the main aim of Part II is to highlight a number of important questions which merit further investigation, rather than to present definite answers. xlii. Indonesia is a country of tremendous diversity in terms of geography, culture and economic structure. Its 13,677 islands form a land area of 1.9 million sq. km., but its total surface area including the seas within its boundaries is over 4.8 million sq. km., an area roughly the same size as the continental United States. Straddling the equator, it extends 5,110 km from Northwest Sumatra to Irian Jaya on its southeastern border. As a result, it possesses a number of distinct equatorial and monsoonal climatic zones, which, together with variations in soil and topography, have shaped the development of its agriculture and the distribution of its population. As a nation of island peoples, today's Indonesia is rooted in a rich and varied cultural tradition. Its 147 million population is drawn from over 50 ethnic groups with several hundred recognized languages and dialects. This diversity poses tremendous challenges for the Indonesian authorities, both in terms of promoting efficient growth and ensuring that the benefits of economic growth are distributed equitably amongst different groups in society. xliii. Indonesia's physical, human and economic resources are very unevenly distributed among its main regions. Java, for example, accounts for almost one-half of Indonesia's GDP, 62% of its population, but only 7% of its land area. This uneven pattern of distribution means that there are profound differences in the economic problems faced by different parts of the country. Chapter 5 reviews the economic performance of the main regions during the 1970s and the progress of social development. One of the most notable aspects - xx - of Indonesia's economic performance was that, despite these differences, all five of Indonesia's main regions experienced rapid per capita growth in the 1970s. Per capita growth rates ranged between 4.0% (Sumatra) and 11.7% (Kalimantan). To a large extent these differences were associated with the performance of the mineral sector, particularly petroleum. In the non-mining sector the variations in output were much less pronounced. Generally, the regions with higher output in 1971 experienced the fastest rates of economic growth in the 1970s. xliv. Two important processes are at work in Indonesia which enable the benefits of growth to be more evenly spread. The first of these is migration. Between 1971 and 1980, 4.3 million Indonesians (or 16% of the natural increase in population) resettled permanently in provinces outside those of their birth. Approximately 1.7 million people moved from Java to the Outer Islands. Of these, 1 million were resettled through the official transmigration program. There has also been substantial rural-urban migration both between and within provinces. This migration has largely taken place in response to the perception of migrants that they can improve their economic and social conditions by moving. Rural-urban migration accounted for slightly more than half of the 9.6 million increase in Indonesia's urban population. The second process is the redistribution of incomes through the government budget. Regional variations in per capita consumption are much less pronounced than differences in per capita output. This is largely due to the impact of taxation on the oil sector. xlv. From the point of view of spatial development policy, one of the most important features of Indonesia's development is that rural-urban differences in consumption within regions appear to be greater than differences among regions. An analysis of household expenditures indicates that Indonesia's rapid economic development has been accompanied by significant progress in reducing poverty. Between 1970 and 1980, the proportion of the population living in poverty declined from 57% to 40%. This was a remarkable achievement. The reduction in poverty was particularly rapid in the Outer Islands, where poverty incidence was reduced from 43% to 28%. On Java there was also a marked reduction in poverty incidence from 65% to 47%. Between 1970 and 1980 there was a very sharp reduction in urban poverty from 51% to 20%. xlvi. As in any country there is considerable scope for redistributing incomes and for alleviating regional social disparities through differential levels of public spending. This is a particularly important policy option for Indonesia to explore, since central government expenditures have a marked impact on the economic and social development of the regions. On average, government spending on the regions was equivalent to 13% of provincial non-mining RDGP in 1980. The three poorest provinces, as well as some of the important transmigration provinces, received much higher levels of support. Government spending on the social services has increased at an annual rate of 21% in real terms since 1974/75. The Government has attached high priority to the development of primary school education facilities across the country. The success of this program is evident from the fact that compulsory primary education will commence in Indonesia on June 15. However, there are significant variations among provinces in higher education participation rates, access to safe water, and health service coverage. In general the - xxi - level of services provided is higher in urban areas than in rural areas. Thus a major challenge which lies ahead is to expand the coverage of services to rural areas whilst meeting the growing needs of the urban population. xlvii. Urbanization in Indonesia has been accelerating. During 1971-80 the urban population rose by 4% per annum compared with 2.6% during 1961-71. Similarly, the share of the urban population in total population, which increased from 15% in 1961 to 19% in 1971, jumped to 22% in 1980. A major factor underpinning this growth has been an increase in rural-urban migration. During the 1960s migration accounted for 32% of the increase in the urban population, but between 1971 and 1980 it accounted for 52% of the urban population increase. This migration is closely linked to the dynamic performance of the cities in generating new employment and to the generally better level of social services such as educational and health facilities available in urban areas. Between 1971 and 1980 urban employment increased at an annual rate of 5.7% per annum compared with a rate of only 1.6% in rural areas. Even though in 1971 the urban areas accounted for only 13% of total employment, they generated 41% of all new jobs created in the 1970s. About one-third of this increase was in the manufacturing sector while almost two-thirds of the growth in urban employment occurred in services. In the rural areas the most striking development was the stagnation of agricultural employment in Java, despite the rapid increase in food output achieved. Thus, the 1.6% increase in rural employment was accounted for by increases in non-farm employment on Java and increases in rural employment on the Outer Islands. This trend has important policy implications, since it suggests that Java's rural population will become increasingly dependent on the development of non-agricultural activities for employment. Consequently, urban areas are likely to face a continued influx of migrants from rural areas. Thus it is fairly safe to assume that Indonesia's urban areas will increase in size by at least the present rate of 4% per annum. At this pace, Indonesia's urban population will more than double from its 1980 level of 33 million to 72 million by 2000. xlviii. One of the major spatial policy concerns of the authorities has been whether the pattern of urbanization has been unbalanced in favor of the growth of large cities, particularly Jakarta. While it is true that the large cities have grown at a slightly faster pace than the medium size and smaller cities, Chapter 6 suggests that it is difficult to argue on the basis of these growth rates that urban growth is excessively concentrated in the large cities. There are a number of factors which are likely to favor the growth of large cities in Indonesia. These include the advantages of locating new investments in close proximity to the major centers of demand and to the ports. In general, it is in the interest of the economy to support investment/location decisions made on this basis, since they lead to lower production costs. However, in addition, there may be certain aspects of the urban policy framework which create biases in favor of large centers and perhaps discriminate against smaller towns and cities. It may be argued that past policies of concentrating public urban economic and social infrastructure investments in the large urban centers and the greater availability of subsidized public services have created a bias in favor of the large centers. It is enormously difficult to quantify the impact of such policies on the rate of growth of different urban centers. Nevertheless, more attention needs to be paid to this particular aspect of government policy. - xxii - xlix. It is suggested that there are strong arguments for shifting the emphasis of present urban policies away from administrative restrictions on industrial location decisions. Studies from other countries suggest that the benefits which may be obtained by spreading industry more evenly across the country through administrative controls can frequently be outweighed by additional costs to the economy in terms of reduced efficiency. Although initially more complicated, a better strategy is to ensure that businessmen pay the true costs of operating in particular cities through appropriate tax and user charge regimes. In addition, better transportation links, especially in terms of improving efficiency in the ports, have a crucial role to play in increasing the access of producers in smaller towns and cities to the national market. This would greatly improve the competitiveness of these producers. 1. Although the main emphasis of Chapter 6 is on the pattern of urbanization and urbanization policies, it is important to stress the close linkage between the rate of rural-urban migration and the relative levels of economic and social development in urban and rural areas. More than two-thirds of the rural population will continue to live in rural areas until the end of the century. Any widening of rural-urban disparities could lead to a heavy additional influx of migrants to the urban centers, placing further strains on urban growth. Consequently, Indonesia's urbanization strategy can only be truly effective if it is complemented by policies to improve economic and social conditions in rural areas, both in areas of rural outmigration on Java as well as on the Outer Islands, which possess enormous potential for additional rural employment generation. li. Based on the analysis undertaken in Chapter 6, it is estimated that while urban areas currently account for only about one quarter of the total population, they will absorb the equivalent of one-half of the increase in Indonesia's population in the 1980's and fully two-thirds of the increase in the 1990's. Consequently, a major effort will be required to finance the projected demand for urban services, given the overall budgetary constraints facing the authorities noted in Part I. Against this background Chapter 7 looks at some of the options the Indonesian authorities may wish to explore to finance these services, and at the managerial and administrative issues posed by Indonesia's rapid urban growth. lii. During REPELITA III more than two-thirds of urban services were financed by the central government directly, the remaining one-third was financed by local government and central government INPRES programs. Thus it is clear that the urban governments have been heavily dependent on the central government to finance urban services. During REPELITA IV expenditures are expected to more than double in real terms on the basis of current proposals. Chapter 7 argues that there is a strong case for raising the contribution of local governments. Firstly, local government taxation and cost recovery levels are low by international standards, and the further provision of subsidized urban services would tend to exacerbate urban-rural inequalities further. Secondly, urban dwellers are better off than rural dwellers and so are in a better position to contribute toward the cost of meeting such services. Thirdly, increasing the contribution of urban governments would help release central government resources for the rural sector. - xxiii - liii. Given the expected growth in urban services program, the rewards of better management can be very substantial. The authorities are well aware of the benefits of improved administrative efficiency, and the central government has increasingly emphasized the need to increase the capability of local governments in planning and implementing urban investments. However, these arrangements have resulted in new difficulties, since they have tended to lead to a complex system of administration with overlapping responsibilities, multiple funding channels and weak coordination between different central and local agencies. This is a particularly important issue for the urban sector, because so many activities are interrelated. Tremendous economies can be achieved when land area plans and the provision of road, sewerage, water and electrical supplies are coordinated, for example. For the future, there is considerable scope for gradual change in the management of the urban services program, while preserving the fundamental framework of close cooperation and involvement between central and urban governments. PART I - RECENT ECONOMIC PERFORMANCE AND MEDIUM-TERM PERSPECTIVES The sharp decline in the price of oil in March 1983 and the international recession that preceded it seriously endangered Indonesia's external payments stability. The country was faced with a potential current account deficit in excess of 10% of GNP in 1983. Beginning in mid 1982, but particularly in 1983, the Government took a series of bold policy measures in part aimed at dealing with the immediate balance of payments problem. Recognizing, however, that the principal external shock -- i.e., the decline in oil demand and price -- was not of a transient nature, the authorities included in the policy package initiatives designed to increase economic efficiency and to effect structural transformation -- i.e., diversification of the economy's productive structure and sources of foreign exchange earnings and budgetary revenues. Part I of this report undertakes a preliminary evaluation of the progress made in short-term stabilization and assesses the economy's medium-term prospects for growth and structural transformation, given certain assumptions about the future course of the external environment and further policy initiatives on the domestic front. Chapter 1 examines the recent trends in economic performance and policies, with particular reference to the measures introduced in 1983. Chapter 2 outlines the macroeconomic framework underpinning the assessment of the medium-term prospects along with an analysis of certain aspects of the management of the investment program. Selected issues and prospects related to the role of public finance and the financial sector in domestic resource mobilization and allocation are analyzed in Chapter 3. Chapter 4 first examines the details of the external trade projections and the related policy issues in the sector; it then discusses Indonesia's external capital requirements over the next few years and presents recommendations on external borrowing and debt management strategy. CHAPTER 1 RECENT TRENDS IN ECONOMIC PERFORMANCE AND POLICIES A. The Onset of Recession and Policy Responses Introduction 1.1 Indonesia experienced a period of sustained rapid growth in the 1970s during which GDP expanded at an average annual rate of 7.6%. Not only in absolute terms, but also in comparison to the performance of different groups of countries, Indonesia's record is impressive (Table 1.1). The net impact of the disturbances in the international economic environment during the 1970s on Indonesia was favorable by virtue of the country's position as a significant exporter of oil. The successive oil price rises in the past decade sharply boosted Indonesia's export earnings - from less than 17% of GDP in 1972 to over 30% in 1980. The country's terms of trade improved by more than 200% between 1973 and 1980, and investment expenditures increased at an average rate of about 13% p.a. in real terms during that period, with the public sector being the leading force behind this rapid growth. Table 1.1: GDP GROWTH - A COMPARATIVE PERSPECTDIE (Percent per annum; at constant prices) Country Group 1970-79 1980 1981 1982 1983 1981-83 Average Est. Average Industrial countries 3.2 1.3 1.3 -0.5 2.3 1.0 Developing countries 4.7 3.0 2.7 1.8 1.6 2.0 Low income 4.7 6.1 4.9 4.2 6.1 5.1 Middle-income oil importers 5.5 4.2 0.8 '0.7 0.3 0.6 Middle-income oil exporters 5.5 -1.3 4.3 1.6 -0.9 1.6 Indonesia /a 7.6 9.9 7.9 2.3 4.0 /b 4.7 / At constant 1973 prices. See Table 1.16 for the estimates of growth at constant 1981 prices. /b World Bank staff estimate. Preliminary official data indicate a growth of 3.1%. Source: World Development Reports and World Bank staff estimates. 1.2 The improvement in Indonesia's resource position induced by the oil price rises of 1979-80 was particularly significant. The terms of trade improved by 100% between 1978 and 1980. Export earnings from oil and LNG (whicb was being exported in substantial volumes by the end of the decade) surged by 135% in a span of two years. More significantly, the country's - 3 - capacity to import (i.e., export earnings adjusted for the increase in import prices) rose by about 85% between 1978 and 1980, after more than doubling in the preceding five years. The balance of payments current account shifted from a deficit of $1.1 billion in 1978/79 to a surplus of more than $2 billion in both 1979/80 and 1980/81, despite a drop in non-oil export earnings in the latter year. Gross official reserves reached an all time high of nearly $8 billion by end 1980. The ratio of wexternal resources' (defined as net oil and LNG export earnings plus net capital inflows) to GDP reached about 15% in 1980, compared with 10% in 1978. The Setback 1.3 The deterioration in the international economic environment which began in 1980 started to take its toll on Indonesia early in 1982. The recession in the industrial countries affected Indonesia adversely in two major ways: initially through the fall in the demand for and prices of the country's traditional exports (primary agricultural commodities); and subsequently, and more dramatically, via the depressed oil demand and the fall in oil prices. The terms of trade for the country's non-oil exports declined by about 12% between 1979/80 and 1982/83. Non-oil export earnings declined from a peak of $6.2 billion in 1979/80 to $3.9 billion three years later. 1.4 Despite a decline in its non-oil export earnings and a slower growth in net export revenues from the petroleum sector in 1980/81, Indonesia was able to increase substantially its imports with only a slight decline in its current account surplus. In 1981/82, however, circumstances deteriorated sharply: the growth of net oil and LNG export receipts came to a virtual halt; earnings from non-oil exports declined substantially and yet imports continued to grow. The net result was a swing in the current account deficit of about $5 billion compared to the previous year (Table 1.2). A further deterioration occurred in 1982/83 with an actual decline - $3.5 billion - in net oil and LNG export revenues and a (much smaller) drop - $276 million - in other export receipts. Thus, despite the sharp reduction in the growth of non-oil imports, the current account deficit had widened to 8.4% of GNP by 1982/83. There was no doubt left that the external payments position of the country called for prompt and decisive action. The impact of external shocks on the Indonesian economy was aggravated by the drought in 1982, resulting in a sharp reduction in the GDP growth rate (from 7.9% in 1981 to 2.2% in 1982). /1 The weakening of the international oil market resulting in the price reduction and quota decisions by OPEC in March 1983, coupled with heavy pressure on the rupiah and the country's reserve position provided further impetus - if any were needed - for Indonesia to act swiftly to prevent an external payments crisis. The Adjustment Response: 1983 1.5 The decline in the export volume and price of oil meant that Indonesia faced the prospect of a current account deficit of at least $10 billion in 1983/84 unless decisive actions were taken. The Government recognized that such a deficit would create severe problems. A series of initiatives were adopted to deal with the immediate balance of payment difficulties facing the country and to lay the foundation for pursuing a / At constant 1973 prices. - 4 - Table 1.2: KEY VARIABLES AFFECTING THE CURRENT ACCOUNT BALANCE, 1978/79-1983/84 ($ million; at current prices) 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 Est. Level Change in level from previous year Current account balance -1,109 3,361 -67 -5,084 -4,350 3,075 Net oil and LNG exports 4,010 5,390 3,850 170 -3,476 -111 Non-oil exports 3,979 2,192 -584 -1,417 -276 1,276 Non-oil imports /a -8,129 -2,136 -3,274 -3,627 -374 2,295 Net factor services lb -969 -2,085 -59 -210 -224 -385 Memo items Current account balance as % of GNP 4.3 4.6 3.2 -3.6 -8.4 -6.0 Terms of trade (% change) 72.0 12.8 3.1 -3.6 -4.4 -2.8 /a Including net non-factor services. /b Including net transfers. Source: World Bank staff estimates based on official data.. sustainable growth path in a less favorable international environment. While the adjustment policies began in 1982, the more fundamental measures were introduced during 1983. They consisted of: - Adoption of an austere budget for 1983/84; current expenditures were expected to slow down by 10% in real terms; - Reduction in subsidies on petroleum products, food and fertilizer. For the third consecutive year, petroleum prices were increased by a substantial margin (34% in January 1983); - Devaluation of the rupiah by 28% (to Rp 970 per US dollar on March 30); - Rephasing of public investment projects with a budgeted foreign exchange expenditure of some $21 billion; the anticipated foreign exchange savings resulting from the cancellation/postponement of the projects involved were estimated by the Government to be of the order of $10 billion (May); - Liberalization of the financial sector, which freed up deposit and lending rates for State Banks, abolished credit ceiling and signalled the Government's intention to reduce liquidity credits (June). This was preceded by a significant tightening of domestic credit; -5- Announcement of intention to reduce and simplify the regulations governing economic activity, particularly in the private sector (August); and Adoption of a far-reaching tax reform aimed at increasing government revenues by broadening the tax base and simplifying the underlying structure and rates (December). 1.6 The range of measures -- and, equally importantly, the speed with which the Government responded to the deterioration in the internal and external financial stability -- was indeed impressive. It demonstrated quite clearly the Government's awareness that the emergence of a severe imbalance in the external sector was not due to merely transitory factors such as the historically low prices of primary commodities. It also recognized that the main source of the shock -- the sharp reduction in the demand for and the price of oil -- was unlikely to be of a transitory nature and self-correcting. Given the immediate problem, the policy package adopted rightly emphasized aggregate demand restraint through a combination of sharp cutbacks in the public investment program, and measures aimed at restricting credit expansion. The devaluation and import controls were also intended in part to reduce the current account deficit. 1.7 The Government, however, recognizing the structural nature of the problem, blended its short-term stabilization program with attention to longer-term supply-oriented policies. From a longer-term perspective, it is the latter that are critical to success in effecting structural transformation, i.e., diversifying the productive structure of the economy and its sources of foreign exchange earnings; reducing the heavy budgetary and public savings dependence on oil revenues; and improving the efficiency of investment and lowering its import intensity, so as to generate the needed growth and employment opportunities. 1.8 The remaining sections of this chapter are devoted to a review of the immediate impact of these stabilization measures, and recent economic developments. The evaluation of the effects of the policies pursued is necessarily of a preliminary nature given the short time elapsed and incomplete data. Chapters 2-4 will assess the economy's medium-term prospects, after taking account of the 1983 reforms, and discuss the policy issues that remain to be addressed for a continued successful transformation of the economy. B. Progress in Macroeconomic Adjustment: A Preliminary Assessment 1.9 This section first highlights the impressive success achieved in alleviating the external payments imbalance, through a combination of increased non-oil export receipts and major cutbacks in imports, and in restraining investment expenditures. It then examines selected fiscal developments. The section subsequently describes the financial sector reforms and their impact on resource mobilization in the private sector. - 6- Progress Towards External Equilibrium 1.10 The Current Account Balance. With respect to the external sector, a major objective of the Government since early 1983 has been to reduce the current account deficit, which had reached the unprecedented and unsustainable level of $7.3 billion (8.4% of GNP) in 1982/83. As illustrated by Table 1.3, there has been very considerable progress on this front. For 1983/84 the estimated deficit is $4.2 billion (6% of GNP). Several factors have contributed to this impressive progress in restoring external balance. The main ones have been the measures taken in 1983 to reduce aggregate demand and Table 1.3: SUMMARY OF BALANCE PAYMENTS, 1981/82 - 1983/84 ($ billion; at current prices) Actual Estimated 1981/82 1982/83 1983/84 Exports of goods 23.0 18.6 19.8 Oil and LNG 18.8 14.7 14.6 Non-oil/LNG 4.2 3.9 5.2 Imports of goods (cif) -20.0 -20.6 -18.5 Oil and LNG sector -5.4 -4.8 -4.7 Non-oil -14.6 -15.8 -13.8 Trade balance 3.0 -2.0 1.3 Non-factor services (net) -2.6 -1.7 -1.4 Resource balance 0.4 -3.7 -0.1 Net factor services -3.4 -3.6 -4.1 Current account balance -3.0 -7.3 -4.2 Net disbursement of public MLT loans 2.2 3.1 3.5 Net other capital /a -0.2 0.8 2.4 Change in official reserves (- increase) 1.0 3.4 -1.7 Memo item Official reserves 6.4 3.0 /b 4.7 /c /a Includes estimates of oil and LNG export credits, all debt transactions associated with LNG expansion, direct foreign investment, all private capital flows, and errors and omissions. l Net of a drawing of $70 million from the IMF's Buffer Stock Facility (BSF). /c Net of a drawing of $70 million from the IMF's BSF and $390 million from the Compensatory Financing Facility. These are treated as current external liabilities. Source: Bank Indonesia and World Bank staff estimates. - 7 - thereby imports, the recovery in the industrial countries, particularly the U.S., and government efforts to promote non-oil exports and improved profitability of export activities. 1.11 Recovery in Exports. Promotion of exports - particularly non-oil exports - has been a major concern of the authorities in the past two years. Results so far are very encouraging. The nascent OECD recovery has had a favorable impact on the prices of commodity exports which are important to Indonesia. The prices of most non-oil export commodities have recovered strongly from the record low levels of 1982. The World Bank index of 33 selected commodities (excluding oil) rose by about 14% in 1983. Nominal prices for rubber, coffee and palm oil have increased by 30%, 24% and 84%, respectively, from their lowest levels in 1982. Prices of metals and minerals of interest to Indonesia have also increased somewhat (tin 4%, aluminium 62% and nickel 21%). Prices for timber and its products, however, fell during the first half of 1983 and have only recently recovered to their 1982 levels. In the world oil market, prices have stabilized at the level of about $29 per barrel for the Saudi marker crude agreed by OPEC in March 1983. With respect to import prices, the appreciation of the U.S. dollar vis-a-vis the currencies of other industrial countries has lowered the dollar index of the price of manufactured imports by developing countries. Taking all of these factors together, Indonesia's overall terms-of-trade declined by about 3% between 1982 and 1983, largely reflecting the lower oil and LNG prices. However, the non-oil terms of trade improved by 9%. 1.12 These developments in the international economy - complemented by the Government's policies to promote non-oil exports (see Chapter 4) - made it possible for Indonesia to enjoy a substantial increase (about 33% in nominal terms) in its non-oil export earnings in 1983/84. This increase far exceeded the small decline in the combined oil and LNG export revenues (less than 2%). The damage caused by the April 1983 explosion at the LNG facility at Bontang, East Kalimantan was quickly repaired, resulting in only a 9% decline in LNG export receipts in 1983/84 compared to the previous year's level. Oil export revenues virtually matched their 1982/83 level. The surge in non-oil export earnings is particularly impressive. The details of the non-oil export performance are given in Table 1.4 and in Annex 1, Table 1. The underlying factors contributing to the substantial rise in non-oil export earnings vary among the major commodities. In some cases, earlier investments paid off handsomely (e.g. palm oil plantations and new fertilizer plants). There is evidence that even in the case of some traditional primary exports, the devaluation has been effective. For example, it is believed that the increased output of rubber - probably largely due to higher levels of tapping by smallholders - has been in response to the higher international prices and the devaluation. The 52% increase in nominal receipts from textile exports is particularly impressive evidence of the impact of the devaluation. It also tends to suggest the Government's attention to non-oil export promotion (see Chapter 4) has begun to yield results. 1.13 Restraining Imports. In combination with export promotion, government policy has been to restrain imports through cutbacks in the investment program, devaluation, and import controls (see Chapter 4). Non-oil/LNG imports are estimated to have declined by about 13% in nominal terms in 1983/84. Although it is not possible to determine the separate effects of the policies aimed at curbing imports, the decline in non-oil imports was broad-based, affecting most of the major import categories, though in varying degrees (see Table 1.5). - 8 - Table 1.4: NON-OIL EXPORT PERFORMANCE, 1982/83 AND 1983/84 1982/83 1983/84 /a % change, 1983/84 over 1982/83 /a ($ million; at Volume Value current prices) Timber 559 514 -9.0 -8.1 Rubber 615 829 8.7 34.8 Coffee 363 496 22.5 36.6 Palm oil 103 146 37.5 41.7 Tea 116 148 20.6 27.6 Plywood 324 574 62.9 77.2 Textiles 156 237 - 51.9 Fertilizers 18 61 - 238.9 Electrical appliances 112 168 - 50.0 Handicrafts 23 48 - 108.6 Tin 349 331 -6.6 -5.2 Others 1,156 2,118 - 83.2 Total 3,894 5.170 32.8 /a Estimates. Source: Bank Indonesia and World Bank staff estimates. In absolute terms, the decline in capital goods imports was the largest - about $1.6 billion, compared to a $2.0 billion reduction in all non-oil imports. Similarly, imports of intermediate goods fell in the first quarter of 1983/84 by 40% from the quarter before the devaluation and 17% from the average of the previous five quarters. In the first quarter following the devaluation on March 30, 1983, imports of consumer goods fell by 34% from the previous quarter and by 20% from the average of the previous five quarters. 1.14 Access to Capital Markets and Reserve Management. Indonesia's foreign exchange reserve position improved significantly during 1983/84. Following a loss of some $3.4 billion during 1982/83, official reserves increased by about $1.7 billion in 1983/84 (net of a CFF drawing of $390 million from the IMF). After the heavy outflow of funds in late 1982 and early 1983, renewed confidence in the rupiah following the March 1983 devaluation and the increase in domestic interest rates following the June financial reforms (paras 1.35-43) led to a reflow of foreign exchange to both the commercial banking system as a whole and to official reserves of an estimated $1 billion. Including the net foreign exchange holdings of commercial banks, total reserves amounted to $8.4 billion at end 1983/84, an increase of $2.0 billion compared with end 1982/83. -9- Table 1.5: NON-OIL IMPORTS, 1982/83 - 1983/84 (F billion; at current prices) 1982/83 1983/84 /a % Change, constant 1981 prices /a Consumer goods 2.4 2.0 -17.9 (Food) (1.3) (1.4) 5.3 (Non-food) (1.1) (0.6) -49.0 Intermediate goods 5.2 5.2 3.8 Capital goods 8.2 6.6 -16.2 Non-oil imports 15.8 13.8 -10.0 /a Estimate. Source: World Bank staff estimates. 1.15 The country was able to take advantage of its continued access to international capital markets, obtaining additional commitments of about $1.7 billion of commercial financing during 1983/84. The response to a syndicated loan in early 1984 was so favorable that its size was raised from $500 million initially to $750 million. New commitments of development assistance -- of about $2.4 billion -- and import-related credits of about $1.7 billion brought total commitments of external public debt and grants to about $6.0 billion during the year. Disbursements, net of amortization payments on public debt, totalled $3.5 billion in 1983/84. Finally, Indonesia qualified for a drawing of $390 million from the IMF's Compensatory Financing Facility, due to the shortfall in its non-oil export earnings in 1982/83. Restraining Investment Expenditures 1.16 As noted above, a major factor in improving the current account deficit has been the reduction in capital goods imports. This in turn has been the result of restraint in investment activity. The rephasing exercise in particular resulted in sharp cutbacks in public investment expenditures. 1.17 The growth of public sector investment has closely followed the cycle of oil price increases. Between 1974/75 and 1978/79, the real average annual growth rate of public sector investment was only 4.3% (Table 1.6).LI Both direct government investment and public enterprise investment grew very rapidly after the 1979/80 oil price increase. The real growth in public /I But this masks a sharp rise in 1975 and 1976 - the years of rapid growth in Pertamina's investments. In fact the average real growth of public enterprise investment during the period 1974/75 - 1978/79 was negative reflecting the caution exercised by the Government in managing public sector investment expenditures during the aftermath of the Pertamina crisis. - 10 - Table 1.6: PUBLIC SECTOR INVESTMENT 1974/75 - 1983/84 Average Annual As % of GDP Real Growth /a 1974/75 1978/79 1982/83 1974/75- 1978/79- 1982/83- 1978/79 1982/83 1983/84 Est. Direct government 4.3 5.7 8.0 15.9 18.3 Public enterprises 7.2 4.4 7.4 -5.2 24.5 - Total 11.5 10.1 15.4 4.3 21.1 -17.0 Memo item As share of GDI (%) 68.2 49.7 68.6 /a Using the GDI deflator from the national accounts. Source: Annex I, Table 8. enterprise investment of almost 25% per year during the period was financed largely from sharp increases in the foreign exchange earnings of the Government and disbursements of public sector external debt. 1.18 Direct government investment has focused on agriculture, infrastructure and human resource development. In particular, investment in the social sectors (education, health, housing, and water supply) grew rapidly, roughly 15% per year in real terms during the period 1975/76 to 1982/83. Amongst infrastructural investments, manpower and transmigration expenditures grew fastest. A large part of the sharp increase in public sector investment since 1979/80 has stemmed from the outlays by public enterprises for major projects in power generation, industry and mining. Public sector industrial investment focused on the development of heavy producer goods industries, such as cement, steel, fertilizer, paper and engineering goods. The Government's intention to continue using the public sector as a spearhead in industrial development was articulated in the August 1982 State Address by the President when 52 key industrial projects were identified for implementation during REPELITA IV. These included 18 projects in the engineering sub-sector, 27 in basic chemicals and 7 in light manufacturing. The total cost was estimated at S11.8 billion Zi, but did not include Pertamina-related projects of the Balikpapan, Cilacap and Dumai refineries, methanol and the LNG expansion with an estimated total cost of $4.5 billion. /1 At 1980 prices. - 11 - 1.19 The rapid deterioration of the current account and the sharp change in medium-term external resource prospects precipitated a drastic revision in these plans. In May 1983 the Government initially announced postponement in the implementation of four large Pertamina-related projects, and then reviewed 125 major public sector projects across all the major sectors with a total foreign exchange content of $21 billion. Altogether 45 projects were eventually affected by this revision process. At the time, foreign exchange expenditures on these projects was expected to fall to $11.0 billion. Of the total planned net reduction in foreign exchange expenditures amounting to $10 billion, over $3 billion was in the first year alone. There is evidence that even direct government investment in infrastructure and social sector investments slowed down in 1983/84. The combined effects of the rephasing of public sector projects and the slowdown in infrastructural investments are estimated to have resulted in about a 17% decline in real terms in public investment outlays in 1983/84 compared to 1982/83. The downward adjustment of the public sector investment program has meant a more acceptable level of shortfall in domestic revenues in relation to total government expenditures in 1983/84. Nevertheless, despite these measures, the budget's foreign exchange surplus (i.e., oil and LNG tax revenues less government expenditures denominated in foreign exchange) was still the lowest since 1975/76. 1.20 If these adjustments had not been undertaken, the public sector capital account would have had an overall shortfall equivalent to 13.7% of GDP, resulting in excessive external borrowing and effectively eliminating the Government's savings with the banking system. The Government's foreign exchange balance would have turned to a deficit for the first time, thereby placing the onus on the private sector to be a net foreign exchange earner. Changes in the Government's Financial Position 1.21 Given the heavy dependence of government revenues on oil export receipts, the weakening of the international oil market in late 1982 and early 1983 had a severe impact on the budget. There was a 12.8% reduction in real terms in Indonesia's oil tax receipts in 1982/83 and, despite an impressive real growth in non-oil tax receipts of 8.7%, overall central government resources declined substantially (Figure 1.1). Figure 1.1 Central Government Revenues in Real Terms (At Constant 1974 Prces) 6,000 - 5,000 - z 4,000 - TOTAL X 3,000 - OIL 2,000 - 1,000 NO-OL 0 ' 1 I I II 1974 '75 '76 '77 '78 '79 '80 '81 '82 '83 FISCAL YEARS - 12 - 1.22 Notwithstanding the revenue decline in 1982/83, real public domestic savings remained stable, a result of the Government's ability to keep current expenditures in check (Figure 1.2). However, even with some scaling back from budgeted levels of development expenditures, the excess of the Government's expenditures over revenues (excluding project and program aid) rose to 6% of GDP for the first time since 1975/76. This was financed by drawing down accumulated savings with the banking system of about 1.3% of GDP and (net) disbursements of project and program aid equivalent to about 4.7% of GDP. Project and program aid amounting to 3.2% of GDP was channelled through the budget. The remaining 1.5% comprised off-budget transfers to public enterprises. Figure 1.2 Real Public Domestic Savings (At Constant 1974 Prces) 3,000 2,000 - z 0 1,000 1974 '75 '76 '77 '78 '79 '80 '81 '82 FISCAL YEARS 1.23 In response to the deteriorating international economic situation, the President introduced an austere 1983/84 budget to Parliament in January 1983. Current expenditures were again to be kept in strict check (civil service emoluments were frozen for a second consecutive year), and incremental oil revenues were to finance development expenditures. As part of the budget package, domestic oil prices were raised in an effort to reduce subsidies and hence current expenditures. 1.24 As 1983/84 unfolded, even this austere budget appeared optimistic. However, the devaluation, rephasing of the public investment program, and further restraint on current expenditures contributed to a healthy public finance outcome. Total receipts were Rp 18.3 trillion for the fiscal year, about Rp 1.7 trillion above the budgeted level (Table 1.7). This was partly explained by the devaluation, which significantly affected the rupiah value of both oil and LNG taxes and project and program aid. The performance of non-oil taxation, however, was particularly noteworthy. Bolstered partly by the effect of the devaluation on non-oil corporate tax collections, but also in large part due to a renewed vigour in collection efforts, overall budget targets for non-oil taxes were reached. The Government was also very successful in restraining current expenditures despite higher than expected oil subsidies and external debt servicing (both due to the devaluation), and a - 13 - thirteenth month bonus to civil servants as compensation for the expected rise in prices because of devaluation. This impressive performance in restraining current expenditures was in line with the President's directive that rupiah expenditures be held within budgeted levels. However, this directive also had its effect on the pace of development expenditures which, despite the devaluation, were kept to only 6.5% above budgeted levels. The restraint on development expenditures, however, was not evident in all sectors (see table 1.9).. While expenditures in the agricultural sector fell by 31% in comparison with the previous year, expenditures in the industry and mining sectors rose by 135%. The sharp increase in the latter reflected large investments in refineries and petroleum-related downstream production units which were almost entirely financed by project and program aid. Expenditures in the remaining sectors either kept within budgeted limits or registered modest increases over budgeted levels. Table 1.7: THE 1983/84 BUDGET OUTTURN (Rp trillion; at current prices) 1982/83 1983/84 1983/84 Actual Budget Actual Domestic revenues 12.4 13.9 14.4 Oil and LNG 8.2 8.9 9.5 Non-oil taxes 3.8 4.5 4.4 Non-tax revenues 0.4 0.5 0.5 Project and program aid 1.9 2.7 3.9 Total receipts 14.3 16.6 18.3 Routine expenditures 7.0 7.3 8.4 Personnel & materials 3.4 3.7 3.8 Debt service 1.2 1.4 2.1 Subsidies 2.4 2.2 2.5 Development expenditures 7.3 9.3 9.9 Departments 3.3 3.7 3.2 Other (including INPRES) 2.1 2.9 2.8 Project aid 1.9 2.7 3.9 Total expenditures 14.3 16.6 18.3 Memo item Change in government assets with the banking system (- = increase) 0.7 -1.3 /1 /1 Preliminary estimate. Source: Nota Keuangan, BI Financial Statistics, and World Bank staff estimates. - 14 - 1.25 The overall impact of government revenues and expenditures on economic activity has been contractionary in 1983/84. The domestic deficit (i.e. all rupiah-denominated revenues less rupiah-denominated expenditures) fell to about 5% of GDP, well below historical levels. The foreign surplus also fell, despite the rephasing of public sector projects, from about 4% of GDP in 1982/83 to about 2% of GDP in 1983/84. The Government's efforts in containing the public investment program to save foreign exchange inevitably affected its rupiah expenditures in the domestic economy. In order to counteract this effect during 1983/84, the Government's intention was to substantially increase expenditures on labor-intensive projects with a low foreign exchange content. Unfortunately, such expenditures in fact fell below budgeted levels; INPRES expenditures, for example, fell 7% short of the annual budgeted target. The 1984/85 Budget 1.26 The 1984/85 budget represents a noteworthy beginning in the direction of improving public savings performance. The budget continues to incorporate important measures to restrain the growth of current expenditures, especially through reductions in subsidies. It also contains major steps (e.g. greater tax effort) aimed at increasing non-oil revenues in the future. Consequently, public savings are expected to show an improvement, rising to 7.8% of GDP in 1984/85 from an estimated 7.5% in 1983/84 (Table 1.8). Table 1.8: THE 1984/85 BUDGET Rp trillion; at current prices 1983/84-1984/85 1982/83 1983/84 1983/84 1984/85 Nominal Real Actual Budget Est. Budget Growth Growth Total government receipts 14.3 16.6 18.3 20.5 12.0 - Oil and LNG 8.2 8.9 9.5 10.4 8.4 -3.2 Non-Oil revenues 4.2 5.0 4.9 5.8 18.4 5.7 Development funds 1.9 2.7 3.9 4.3 10.3 1.6 Total government expenditures 14.3 16.6 18.3 20.5 12.0 - Routine expenditures 7.0 7.3 8.4 10.1 20.2 7.4 Development expenditures 7.3 9.3 9.9 10.4 5.1 6.2 Source: The Budget; Nota Keuangan; and World Bank staff estimates. 1.27 The budget was formulated and approved at a time when Indonesia's foreign exchange reserves had improved substantially, the international recovery had strengthened and the world oil market had stabilized. There was, therefore, a tempting opportunity to significantly increase public expenditures, particularly by reintroducing some of the rephased projects. The Government has, however, allowed only a modest increase in total government spending, in line with the expected growth in resources. Although revenues from oil and LNG taxes will decline in real terms, a sharp increase in non-oil taxes and projected disbursements of external assistance will raise - 15 - total Government resources by about 2% in real terms; and the Government's commitment to the principle of balanced budgeting implies that total expenditures will rise by only the same magnitude. This increase will take place in the routine expenditure component of the budget, due to the decision to raise civil servants' salaries by 15% and projected increases in external debt service payments. The growth of material expenditures in the routine budget, however, will be tightly constrained. 1.28 As a result, real development expenditures will decline in comparison with 1983/84 levels. A breakdown of planned development expenditures suggests that agriculture, electric power, housing and water supply, health, and manpower and transmigration will be given additional emphasis and expenditures on industry and mining, and transportation and tourism will be restrained (see Table 1.9). Table 1.9: DEVELOPMENT EXPENDITURES BY SECTOR (Rp billion) 1983/84 - 1984/85 1982/83 1983/84 1984/85 Nominal Real Actual Actual Budget Growth Growth Agriculture and irrigation 931 913 1,402 53.6 37.1 Industry & mining 914 2,153 925 -57.0 -61.6 Electric power 758 660 1,025 55.3 38.7 Transportation & tourism 876 1,527 1,392 -8.8 -18.6 manpower & transmigration 436 456 675 48.0 32.2 Regional development 712 749 810 8.1 -3.4 Education 703 1,335 1,502 12.5 0.5 Health 260 278 408 46.8 31.0 Housing & water supply 151 221 433 95.9 74.9 General public services 719 899 940 4.6 -6.6 Government capital participation 281 234 227 -3.0 -13.4 Others 619 474 720 51.9 35.6 Total 7,360 9,899 10,459 5.7 -5.7 Source: Nota Keuangan; Budget Data; and World Bank staff estimates. The Impact of Changing Subsidy Policies 1.29 An important aspect of the Government's economic management over the last three years has been the reduction of subsidies for domestic oil consumption and food. As a consequence, budgetary subsidies are estimated to have fallen, in nominal terms, by over 40% between 1981/82 and 1983/84 from Rp 1.5 trillion to Rp 0.9 trillion. The most prominent area of subsidy reduction has been that of domestic oil consumption. For three years in succession, the Government raised by significant amounts the domestic prices - 16 - of petroleum products (Table 1.10). In the aggregate, the latest round of domestic oil price increases raised public savings by about 20% or 1.8% of the projected GDP in 1984. Table 1.10: DOMESTIC OIL PRICES, 1981-1984 (Rp/liter) Increase January January January January 1981-84 1981 1982 1983 1984 (%) Aviation fuels 150 240 300 300 100 Super gasoline 220 360 400 400 82 Regular gasoline 150 240 320 350 133 Kerosene 38 60 100 150 300 Automotive diesel oil 53 85 145 220 320 Industrial diesel oil 45 75 125 200 344 Fuel oil 45 75 125 200 344 Weighted average 66 103 160 219 232 % increase over previous year - 56 55 37 - Source: MIGAS. 1.30 The four direct sectoral consumers of oil products are households, industry, transport and electricity. /1 If the total additional burden of each round of domestic oil prices increases is given an index of 100, indicative sectoral shares of this burden are illustrated in Table 1.11. 2 The household sector has clearly borne the main brunt of the oil price increases every year through higher prices for kerosene. However, both the transport and the industrial sector have also been affected significantly. The ultimate distributional effects would, of course, depend on the extent to which increased costs in these sectors are passed on to consumers. 1.31 The food subsidy, comprising budgetary allocations for financing BULOG's trading activities, reached an all-time high of Rp 280 billion in 1980/81. It was a quick and demonstrable means of distributing the oil surplus and containing inflation. A subsequent increase in the price of rice in 1982 and favourable price developments abroad effectively eliminated the /1 Both PLN and privately owned captive power plants. /2 Calculated by normalizing the multiplicand of the ex-ante consumption shares of each product by sector and the price increase of each product. - 17 - Table 1.11: THE BURDEN OF OIL PRICE INCREASES - SECTORAL SHARES (Percentage distribution) January January January Average 1982 1983 1984 1982-84 Transport 32.4 26.8 20.3 26.5 Households 33.3 35.6 34.7 34.5 Industry 24.2 25.2 29.7 26.4 Electricity 10.1 12.4 15.3 12.6 All Sectors 100.0 100.0 100.0 100.0 Source: The Budget; MIGAS; and World Bank staff estimates. subsidy. In November 1982 the Government announced an increase in BULOG's floor price for rice and in fertilizer prices, designed to both reduce fertilizer subsidies and maintain production incentives. However, active and timely intervention by BULOG in the domestic market has softened the effect of this measure on consumers. 1.32 The reduction in subsidies has undoubtedly had an adverse impact on the welfare of consumers at a time when incomes were depressed. By skillful economic management, however, the Government has succeeded in mitigating part of this loss by spreading its effect over as large a proportion of the population as possible while simultaneously increasing expenditure allocations to the social sectors. At a time of severe resource constraints the Government not only maintained but also, in some cases, increased expenditures in social sectors directly affecting the poor (Table 1.12). In particular, the rapid expansion of education expenditures has made the important landmark of universal primary education a reality. Expenditures on housing and water supply have been given prominence in the 1984/85 budget. This will help alleviate, to some extent, the welfare costs of the subsidy reductions. Table 1.12: PUBLIC EXPENDITURES PER CAPITA IN SOCIAL SECTORS, 1980/81-1984/85 (Rp thousand; at 1981/82 prices) 1980/81 1981/82 1982/83 1983/84 1984/85 Budget Education 4.2 4.9 4.2 7.0 6.9 Health 1.6 1.9 1.5 1.5 1.9 Housing and Water Supply 1.4 1.1 0.9 1.1 2.0 Total 7.2 7.9 6.6 9.6 10.8 Source: The Budget; Biro Pusat Statistik. - 18 - Financial Reforms and Resource Mobilization in the Private Sector 1.33 Until recently, large oil profits and budgetary surpluses enabled the Government to pursue a multiplicity of goals in the financial sector /1, by channelling these surpluses to the banking system through liquidity credits by Bank Indonesia at low interest rates /2. At the same time, Bank Indonesia also regulated the volume, cost and direction of credit through credit ceilings, direct controls on interest rates and the liquidity credit mechanism. 1.34 This system worked quite well in providing increased credit to the economy, channelling resources to priority sectors and programs, and sustaining high levels of domestic production and economic growth. However, several major weaknesses in the banking system began to emerge: (a) the financial system's dependence on substantial infusions of oil profits eroded incentives for state banks to mobilize private financial savings, (state banks largely functioned as conduits for cheap funds provided by the public sector); (b) mandated low interest rates discouraged savings and together with capital-intensity of investment contributed to the misallocation of resources; and (c) as oil prices weakened sharply in 1982, given the free foreign exchange regime and a somewhat over-valued rupiah, an outflow of capital occured, creating considerable pressure on official reserves. 1.35 Financial Reforms. With the erosion of oil revenues, the Government's policy of supporting the banking system with budgetary surpluses became unsustainable. The tight external constraint also necessitated measures to mobilize more domestic savings in order to sustain investment levels. 1.36 Between August 1982 and June 1983 the Government, therefore, adopted a series of new policy measures intended to reduce the dependence of the financial system on liquidity credits, promote greater mobilization of financial savings and financial intermediation, provide greater operational flexibility to commercial banks, and increase the efficiency of resource use. In August 1982, Bank Indonesia withdrew some of the refinancing facilities provided to commercial banks for relatively low priority purposes /3; and in April 1983, state banks' interest rates on six month deposits were freed from BI regulation (state banks were technically free to set rates on deposits of three months or less from 1978 onwards). However, since lending rates of state banks remained fixed, this partial liberalization of deposit rates had little immediate effect. /1 Given the relatively early stage of development of the Indonesian financial system, the Government through this mechanism endeavoured to: increase availability of credit, especially for investment and for Upriority' purposes; support weaker economic groups; strengthen the institutional structure; and augment financial resources for development, while maintaining price stability. 2 Liquidity credits and public sector deposits together provided over 40% of resources of deposit money banks in December 1982, and over half of their incremental resources between 1979 and 1982. /3 Refinancing facilities for working capital loans were withdrawn. - 19 - 1.37 In June 1983, the Government announced further major reforms which included a further liberalization of interest rates of state banks, a significant reduction in the scope of liquidity credits/rediscounting facilities, abolition of overall and selective domestic credit ceilings, and the opening of the domestic financial system to market forces. Firstly, the state banks were allowed to set their own deposit rates on 12 and 24 month deposits (placing them on much the same footing as private and foreign banks in this regard), and to offer bearer certificates of deposits, while the limitations on the acceptance of foreign currency deposits and the 20% withholding tax on domestic dollar deposits were withdrawn in order to encourage the repatriation of funds held abroad. Secondly, lending rates of state banks except those on "priority" programs were liberalized. Thirdly, the scope of liquidity credits was restricted to 14 upriorityw programs; 75-100% of loans granted under these priority programs are still eligible for rediscounting at the rate of 3% per annum, but the prescribed lending rates of such programs were raised from 10.5% to 12% earlier to a uniform rate of 12% (with the exception of export credits which will be charged at 9% and student loans at 6%). Finally, all credit ceilings were abolished. 1.38 The Impact on Deposit Mobilization and Interest Rates. During the first 6 months following these reforms, several noteworthy changes in the operations of the banking system have taken place. Firstly, deposit rates of state banks have increased sharply from a range of 6-12% p.a. earlier to 15-18% p.a. (Table 1.13), largely due to aggressive bidding for deposits by state banks. As a result, deposit rates of state banks are now comparable to those of private banks. Secondly, the rise in deposit rates has increased the costs of funds of banks; the average costs of funds will increase further as outstanding liquidity credits are retired by BI, and given the changing mix of banks' deposits (para 3.48). Consequently, state banks have raised their lending rates from around 13% p.a. on average earlier to about 18% for term lending and from 15-21% to 21-24% for working capital loans. Thirdly, the increase in deposit rates has had a favorable impact on deposit mobilization; between May and December 1983 time deposits with all commercial banks increased by about 51% 11 (Table 1.14). Finally, the higher deposit rates together with the devaluation have also encouraged sizeable capital inflows, resulting in a significant improvement in the foreign exchange reserves of the banking system. 1.39 Not all of this increase in time deposits of commercial banks represents a genuine increase in financial savings. Evidently some shift in the pattern of holding financial assets took place. For instance, until September 1982, demand deposits were the fastest growing component of banks' deposit liabilities and the money supply; in late 1982 a substantial decline in demand deposits took place, coinciding with a flight of capital from Indonesia before the March 1983 devaluation. Although, as noted earlier, a significant repatriation of foreign assets is believed to have taken place after the devaluation, demand deposits at end 1983 were well below their September 1982 level (Table 1.14), and the influx of funds has presumably gone /1 Time deposits with state banks (including inter bank deposits) increased more rapidly, rising by 95% over the same period. Private banks and development banks deposit their surplus funds with state banks, so that the deposit liabilities of the latter have continued to rise far more rapidly than consolidated deposits of deposit money banks. - 20 - into time deposits. There is also evidence of increased preference of the public at the margin for time deposits vis-a-vis currency holdings; the currency component of the money supply has remained more or less unchanged (around Rp. 3.3 trillion) since June 1983. High time deposit rates, which are now close to or above bond yields, have also eroded incentives to hold bonds and some shift frco such assets to time deposits also probably occurred. Table 1.13: INTEREST RATES OF COMMERCIAL BANKS, 1979-1983 (In percent per annum) 1979 1981 1982 1983 1983 1983 December December December March June December Deposit rates Cetificates of deposits 9.8 10.9 12.5 12.5 14.5 15.4 Time deposits - state banks 3 months 14.8 15.0 10.0 9.6 16.5 16.5 6 months 6.0 6.0 6.0 6.0 17.0 17.3 12 months 9.0 9.0 9.0 9.0 18.0 18.5 24 months /a 15.0-12.0 15.0-12.0 15.0-12.0 15.0-12.0 17.0 18.3 - private banks 3 months 16.7 17.4 17.1 17.4 17.4 17.4 6 months 18.3 17.9 18.5 18.6 18.8 18.8 12 months 19.6 19.4 19.3 19.3 19.5 19.7 24 months 19.6 19.0 18.8 19.0 18.8 19.7 State banks lending rates Priority programs 10.5-12.0 10.5-12.0 12.0 12.0 Investment credits 13.5 13.5 16.5-18.0 16.5-18.0 Working capital 15.0-21.0 15.0-21.0 16.0-24.0 16.0-24.0 /a Earlier, 15% up to Rp 2,500,000 and 12% over Rp 2,500,000; after June 1, 1983, minimum rate was set at 12%. Source: Bank Indonesia. 1.40 The increase in time deposits, especially of state banks, has been accompanied by a change in the maturity structure of deposits; while 3, 6 and 12 month deposits have increased sharply, 24 month deposits have declined in absolute terms; the latter which accounted for 57% of time deposits of state banks in May, 1983 now amounts to only 20% (Table 1.15). This shift in the composition of deposits probably reflects the substantial narrowing of rate differentials between short-term and long-term deposits and the consequent attractiveness to depositors of short-term deposits given preferences for liquidity and uncertainties with regard to future price and exchange rate movements. Nevertheless, it has created a mismatch between the structure of deposits and loans, which could give rise to portfolio problems for banks in lending long-term. It is also likely that, given banks' costs of funds, they would be reticent to contribute a significant share for 'priority' lending at the rate of 12% p.a. as fixed by the Government. - 21 - Table 1.14: BANK DEPOSITS AND MONEY SUPPLY, 1980-1983 (Rp. billion ) 1980 1981 1982 1982 1983 1983 Dec. Dec. Sep. Dec. May Dec. Deposits of commercial banks Demand deposits 2,795 3,847 4,705 4,134 4,131 4,177 Time & savings deposits 1,481 2,033 2,391 2,491 3,103 4,694 Foreign currency deposits 1,174 1,094 1,237 1,406 2,098 / 2,290 Total deposits 5,450 6,974 8,333 8,031 9,332 11,161 Money supply 4,995 6,486 7,593 7,121 7,265 7,569 Demand deposits 2,842 3,929 4,767 4,187 4,196 4,236 Currency 2,153 2,557 2,826 2,934 3,069 3,333 Changes in factors affecting the money supply b Foreign assets (net) +3,101 +236 -1,051 -478 +271 +531 Domestic credit -252 +1,823 +3,015 +466 +506 +290 Time & savings deposits -859 -534 -437 -287 -739 -974 Other items (net) -380 -34 -420 -173 +106 +6 Money supply +1,610 +1,491 +1,107 -472 +144 -147 / Deposits denominated in foreign currency; following the devaluation, the rupiah value of these deposits increased by Rp 620 billion, due to valuation adjustment. /b Sign indicates effect on money supply. Source: Bank Indonesia. Table 1.15: TIME DEPOSITS WITH STATE BANKS /a, 1979-1983 (In Rp. billion) 3 months 6 months 12 months 24 months Others Total and less 1979 Dec. 7 78 34 589 67 775 1981 Dec. 48 107 82 748 107 1,093 1982 Dec. 45 122 79 849 136 1,231 1983 May 202 188 95 831 133 1,449 1983 Sep. 428 409 483 657 284 2,262 1983 Dec. 679 549 886 566 150 2,831 / Includes inter-bank deposits. Source: Bank Indonesia. - 22 - 1.41 Higher lending rates have also increased the cost of credit to borrowers. The increased cost of credit is a cause for concern, especially since banks, faced with a changing maturity structure of deposits (para 1.40) and uncertainties with regard to future trends in interest rates and the availability of liquidity credits (para 1.42), seem less willing to provide term financing. As noted in para 3.43, however, the scope for reducing interest rates through official actions seems to be limited in the short term; but it may be possible to reduce the cost of credit somewhat in the longer term by lowering the intermediation costs of banks. The uncertainties (para 3.37) faced by banks have also led to a continued preference for excess reserves by banks; the ratio of liquid assets to deposit liabilities stood at 19% at the end of January, 1984. This in turn has somewhat complicated the task of short-term monetary control and management (paras. 3.32-3.37). BI introduced, as of February 1, 1984, its own certificates of indebtedness (SBIs) in part designed as a tool for liquidity management. BI also introduced some further measures (including a reduction in its discount rate) in April which appear to have been aimed at softening the tight money market and encouraging banks to readjust interest rates somewhat. 1.42 A somewhat puzzling short-term phenomenon is the continued high level of short-term deposit rates, given the sharply higher growth of deposits and comfortable liquidity position of banks. This is due to several reasons: Firstly, a large part of outstanding liquidity credits extended by BI earlier for non-"priority" purposes will fall due for repayment over the next 1 to 3 years; and these repayments could be substantial in relation to banks' deposits. Secondly, following the June 1983 reforms banks have to be much more self-reliant; and have maintained excess reserves to guard against temporary liquidity shortages. Thirdly, given the oligopolistic structure of the banking system /1 and the perceived need to repay liquidity credits, individual banks have been unwilling to lower deposit rates for fear of losing deposits/customers to competitors. 1.43 In short, the recent reforms represent a major change in the Government's approach to the management of the financial sector and a further major step forward in the deregulation of economic activity. As noted above, the initial responses to these reforms have been in many respects favorable. However, given the extent and rapidity of the reform process, the transition from a highly controlled to a liberal financial environment has given rise to some uncertainties. The monetary authorities have been actively tackling these issues with the objective of evolving a financial system which can make a significant contribution to the process of structural transformation of the economy. The steps taken by the monetary authorities in recent months are discussed in Chapter 3. C. Growth, Incomes and inflation 1.44 The preceding sections have highlighted the Government's success in moving towards external financial stability through a combination of external and domestic policy measures. These have, inevitably, adversely affected growth, incomes and employment in both 1982 and 1983. This section briefly reviews the recent developments in these areas and with respect to inflation. /j The five state banks account for about 80% of the gross assets of deposit money banks. - 23 - GDP Growth and Developments in Selected Sectors 1.45 Following the economy's strong performance in 1981 (6.6% GDP growth), GDP declined by about 0.1% in 1982 while non-oil/LNG GDP increased by about 3.5% (Table 1.16). Given preliminary national accountss data for 1983, the GDP growth rate for 1983 is estimated at about 4.5% and that of non-oil/LNG GDP at about 4.0%. Sectoral growth rates in recent years, and estimates for 1983, are given in Table 1.16. It can be observed that given the substantial adjustment efforts, the adverse impact on growth of non-oil/LNG GDP has been relatively modest over the past two years. According to World Bank Atlas methodology, Indonesia's GNP per capita in 1983 is provisionally estimated at $560. j Table 1.16: GROWTH IN SECTORAL VALUE ADDED, 1981-1983 (In percent p.a.; at 1981 prices) Sectoral shares 1981 1982 /a 1983/b in 1981 (%) Agriculture 3.5 1.8 3.0 25.3 mining and quarrying 1.6 -12.1 5.9 24.0 Oil -0.3 -15.7 6.0 (21.2) Non-oil 18.4 3.5 5.0 (2.8) Manufacturing 14.2 1.2 5.0 10.8 LNG 22.1 3.4 7.5 (3.5) Other 11.1 0.2 3.9 (7.3) Construction 9.7 5.2 5.5 5.8 Services 9.8 5.5 4.3 34.2 Gross Domestic Product 6.6 -0.1 4.5 100.0 Non-oil/LNG GDP 8.6 3.5 4.0 75.3 MIemo item GDP growth rate at constant 1973 prices /c 7.9 2.3 4.0 /a Based on BPS preliminary estimates. lb World Bank staff estimates in part based on BPS preliminary data. /c Official statistics use 1973 as the base year for real GDP growth calculations. The most important difference is the relative weight attached to the oil sector, which is much higher in 1981 than in 1973. As a consequence, changes in the level of output of oil have a larger influence on overall growth at 1981 prices. Source: Biro Pusat Statistik and World Bank staff estimates. /1 This methodology uses average prices and exchange rates for a three-year period to smooth out effects of changes in exchange rates. - 24 - 1.46 Despite the lingering effects of the drought, agricultural sector growth in 1983 is provisionally estimated to have been 3%, compared to a 1982 rate of 1.8%. This improved performance largely reflects a better than expected level of rice production. Average rice yields in irrigated areas continued to show improvements, and the reduction in rice crop acreage in non-irrigated areas was compensated for by increases in secondary crop planting. As a result, secondary food crops, notably corni and cassava, also did well. The rainy season began on schedule in much of Java in late 1983, promising a further increase in food production. Rubber output in 1983 rose significantly due to the stimulus of the devaluation. There was also a strong surge in other non-food exports with rubber, coffee, tea and palm oil, all recording significant increases in both volume and value. This is confirmed by provisional production estimates which indicate significant increases in estate and smallholder production of tea, palm oil and sugar. 1.47 Oil production, which contributes about 21% to aggregate GDP, is estimated to have grown by about 6% in 1983. Despite the explosion in March 1983 which temporarily shut down one LNG train at Bontang, East salimantan, LNG production in 1983 increased about 7.5% due to the early completion of two additional trains at Bontang. 1.48 In the manufacturing sector (excluding LNG) there appears to have been a significant recovery from the recession of 1982. The quarterly index of industrial production for selected industries at the end of the third quarter in 1983 was up 3.2% over the end-1982 level. However, this recovery has been quite uneven among the major industries. Production levels in plywood, tire, glass and vehicle assembly have shown healthy increases of 24%, 25%, 18% and 19% respectively, but footwear, batik, yarn, thread and basic chemicals remain weak (Annex II, Table 8.1). 1.49 There is little concrete information about the performance of the construction and service sectors, but their growth has probably been in line with the performance of the commodity producing sectors. Growth in the construction sector appears to have held up rather well in the face of cutbacks in public investment and higher interest rates. The service sectors benefited from the nascent recovery in most other sectors. In particular, the modern service sector comprising trade, transport and communications, banking and public administration, performed well. The traditional service sector, which employs the core of Indonesia's urban and rural poor, probably also experienced some growth owing to the improved performance of agriculture, and higher private consumption expenditures. 1.50 Patterns of Expenditure. These output trends have been accompanied by striking changes in the pattern of expenditures in recent years. During the period 1979-81, when the Indonesian economy was adjusting to the two and a half fold increase in the real international price of oil, aggregate demand growth lagged behind income growth, generating a substantial trade surplus. This was entirely appropriate in light of the absorptive capacity of the economy. Between 1978 and 1982, the pattern of expenditures perceptibly changed, with significant increases in the shares of private consumption and public investment. The overall pattern of resource availability and use, however, changed dramatically in 1982. Net imports, which had been negative in the previous four years, turned positive - a mirror image of the emerging trade deficit. The sharp increase in the share of private consumption stemmed partly from adjustments to accumulated savings after the oil shock, while the rise in the share of public investment growth reflected public sector - 25 - involvement in large industrial sector projects /1. Government consumption expenditures were kept in check during the entire 1979-82 period, though most noticeably in the last year when the salaries of civil servants were frozen; private sector investment, which had grown more or less in line with GDP expansion in earlier years, is thought to have declined sharply in 1982 with the onset of the recession. 1.51 Gross national savings declined substantially in 1981-82 and the gap between gross domestic investment and national savings (about 3% and 8% in 1981 and 1982, respectively) was covered by large inflows of foreign savings, primarily in the form of increased public sector medium and long term borrowing, and drawing down reserves. As noted earlier, the deteriorating external payments position of the country led the authorities to rephase the public investment program. Private investment activity has inevitably been adversely affected by the cutback in public investment. The rising real rates of interest are also likely to have dampened private investment decisions. These developments were, of course, inevitable in the process of adjusting to a more sustainable current account deficit. 1.52 Since expenditure data are as yet unavailable for 1983, it is difficult to assess the impact of the sequence of government policies on the pattern of expenditure, but the share of the private sector in total expenditure has almost certainly risen. This represents a departure from the trend in recent years. The rephasing of the public investment program altered the balance between public and private investment in GDI, and the restraint on government consumption has similarly increased the share of private consumption in total consumption. Aggregate demand itself has fallen in relation to GDP, as evidenced by a lower import bill. However, given higher growth in 1983, real private expenditure per capita probably rose, though gross national savings as a share of GNP is estimated also to have increased slightly. Inflation, Incomes and Employment 1.53 Domestic inflation, as measured by the consumer price index (CPI) for 17 cities, registered a 12% increase in 1983 compared to 10% the previous year (Table 1.17). This was a remarkable performance given the cost-push shocks to the economy resulting from the January rise in the price of domestic oil products, the March devaluation and the substantial rise in the nominal interest rates following the financial sector reforms in June 1983. These measures, however, were also contractionary in nature and contributed to dampening domestic demand and levels of economic activity, which 'in turn undoubtedly influenced secondary price responses. Other contractionary forces included tight monetary and fiscal policies, which have been discussed earlier. Zl A word of caution about these trends is in order. The national accounts methodology adopted by the Central Bureau of Statistics estimates investment on the basis of capital goods flows. Therefore, changes in stocks, excluded by this definition, is captured by the consumption estimate which is derived as a residual. Since the 1982 recession affected the Indonesian manufacturing sector particularly hard and resulted in large inventory accumulation, private investment may be substantially underestimated, and correspondingly, the estimate for consumption overestimated. - 26 - 1.54 Over a third of the rise in the price index stemned from higher domestic oil prices, which increased transport and electricity costs, and slightly less than a quarter is estimated to have been a consequence of the devaluation. Both these events were in the earlier part of the year; inflation in the second semester was running at the rate of only 4% p.a. Low growth in prices for paddy, fresh fish, vegetables, and textiles helped reduce the overall rate of inflation, but the shortage of cooking oil and spices gave rise to a 10% increase in the index of food prices. 1.55 Conpared to the CPI, the wholesale price index (WPI) was affected considerably more by the devaluation. During 1983 the WPI had increased by 18.7 percent. The difference in the overall WPI and the CPI movements largely reflects differential coverage, but also may indicate the extent to which the devaluation effect on consumer prices was absorbed at the wholesale stage of distribution in the form of lower trading margins. 1.56 The rural economy seems to have suffered least from the inflationary developments in 1983. The index of prices for nine essential commodities in Java and in the Outer Islands increased by 7% and 10% respectively. A closer inspection of the figures reveals that steadily declining rice prices heavily influenced this index. This is consistent with lower paddy receipts by farmers in West and Central Java. The decline in the overall index occurred despite a sharp rise in coconut cooking oil prices, particularly in rural Java (51.2%), and, of course, significantly higher kerosene prices. Table 1.17: RATES OF INFLATION (In percent) /A /b AS /d CPI WPI Rural Jakarta 17 Agri- Manufac- General Java & Outer cities culture turing Excl. Madura Islands Exports 1979 22.3 21.8 33.1 31.5 34.7 21.4 21.1 1980 11.3 16.0 24.4 20.8 21.8 18.1 18.9 1981 5.8 7.1 7.9 0.9 -3.3 15.3 17.8 1982 8.7 9.7 11.3 9.8 9.0 12.2 13.5 1983 11.1 12.0 15.0 16.4 18.7 7.1 9.2 la Consumer Price Index. /b Wholesale Price Index. /C Estimated. d Based on the combined index of nine essential commodities. Source: Biro Pusat Statistik. - 27 - 1.57 Aggregate income (GNP adjusted for the terms of trade) barely rose in 1983 after suffering a fall of 3.2% in 1982 /1. Most sectors of the economy were affected, but some more than others. In the absence of the relevant data, only qualitative inferences can be advanced in most respects. Fixed income earners and unskilled labourers outside the organized manufacturing sector are likely to have been most adversely affected. The budgetary freeze on civil servants' salaries meant declines in their real incomes by 9.1% in 1982 and 8.3% in 1983 /2. In the organized and small-scale manufacturing sector profits were reduced considerably as substantial excess capacity prevailed in most industries and prices could not be raised to fully compensate for higher energy and imported input costs. 1.58 The poor performance in agriculture in 1982 probably led to stagnant real wages following the significant gains experienced in 1980-81, particularly in rural Java. Despite an improved agricultural performance in 1983, real agricultural wages probably did not rise. However, BULOG sales in rural areas helped keep rice prices low, and stocks were replenished by increased imports. The devaluation and subsequent increases in international commodity prices brought mixed results for agriculture. Some relief was provided to many smallholder coffee and rubber producers, largely situated in Kalimantan, Sumatera and some parts of Java. Their terms of trade, as measured by the ratio of the price indices of rubber and coffee respectively and the price index of nine essential commodities in rural areas improved to historical levels (see Figure 1.3). The implementation of the log export ban is likely to have continued to affect incomes adversely in Kalimantan, Jambi and Maluku, though here again, the devaluation softened the impact of the reduction in production. Figure 1.3 Smaiholder Coffee and Rubber Producers Terms of Trade (1971=100) 200 - 180 _ 160 - 140 - 120 17 80 60- 40- 20 1977 '78 '79 '80 '81 '82 '83 FISCAL YEARS /I National income growth was worse than that of GDP because of large net outflows of factor incomes and declining terms of trade. 2 Figures from Nota Keuangan, the budget document. - 28 - 1.59 Given the paucity of recent employment data, it is impossible to provide quantitative estimates of the impact on employment in various sectors. Nevertheless, it is almost certain that the employment picture worsened considerably in 1982, and remained bleak in 1983. There is increasing evidence to suggest that the agricultural sector's capacity to absorb additional labor is limited. This trend was compounded by the drought in widespread areas of Java in 1982 and 1983. In the organized manufacturing sector, widespread lay-offs were prevented through active government intervention, but it is also unlikely that there was much additional hiring during the period in review. Open unemployment in Indonesia, though rising, continues to be low as most unemployed individuals gravitate to the traditional service sector. This suggests worsening conditions in a sector already characterised by low productivity and low incomes. 1.60 The effect of the Government's INPRES programs on rural incomes and employment appears to have diminished in 1983. In prior years, INPRES programs had grown very fast and contributed significantly to employment generation and capital formation in rural areas. Generating an estimated quarter of a million man-years /1 in 1970, the program had created, directly and indirectly, roughly one and a half million man-years of employment by 1981/82, (or 2.7% of the entire labor force) Z2. However, the pace of implementation appears to have slowed down, and this will have repercussions on rural wages and incomes (see Figure 1-4). Assuming that INPRES will retain its capacity to generate the same amount of employment per unit of real expenditure as it has in the past, the reduction in real terms in 1983/84 implies one-third less employment generation than in 1981/82. The budgeted real reduction for INPRES in 1984/85, following the completion of the primary school building program, will further diminish its impact on income and employment in rural areas. Figure 1.4 INPRES - Real Expenditures (At Constant 1974 Prices) 500 - 400 - ~~~~~~~~~~~~EST. EST. o200 100 0 1975 '76 '77 '78 '79 '80 '81 '82 '83 '84 FISCAL YEARS /I This excludes INPRES desa and INPRES forestry for which data was not available. Figures taken from an unpublished World Bank working paper "INPRES Programs - Their Impact and Prospects". 2 Assumes 300 days employment per annum. - 29 - CHAPTER 2 ADJUSTMENT AND TRANSFORMATION: THE MACROECONOMIC FRAMEWORK 2.1 This chapter presents the main elements of the macroeconomic framework developed in this report for assessing Indonesia's short and medium- term prospects. The analysis begins in Section A with a discussion of the outlook for the external economic environment. Section B first reviews the key economic management issues facing Indonesia in the short run and then outlines the salient features of the medium-term macroeconomic projections. Section C contains a brief discussion of the impact of the prospective macroeconomic situation on employment and incomes of the poorer segments of the population. The chapter concludes with an analysis of selected issues related to the investment program - a key dimension of short-term adjustment and longer term structural transformation. A. The External Economic Setting 2.2 The discussion in Chapter 1 underscored the impact of recent international economic developments - both favorable and unfavorable - on Indonesia. Economic interdependence, which manifests itself in a variety of ways, but most prominently through trade and capital flows, has been playing an increasingly important role in shaping the fortunes of different countries. Both the near term and longer term prospects of the industrial economies will continue to have a critical bearing on Indonesia's economic performance. The demand for oil and its price are the most important elements in the external economic scene which are of interest to Indonesia. Prospects for trade expansion in primary commodities and manufactures, as well as the availability of external capital and the level of real interest rates in the international market, are among the other major considerations impinging on Indonesia's ability to regain some of the development momentum that was eroded in the past two years. The remainder of this section, therefore, outlines the outlook and key assumptions on the international economy in the near- and medium-term as a prelude to an analysis of Indonesia's economic prospects. 2.3 The U.S. economy experienced a healthy recovery in 1983, despite a slowdown in the pace of growth in the fourth quarter of the year. Its GNP increased by 3.3% in 1983 and a growth rate of about 5% is forecast for 1984. /1 Japan's GNP growth rate is also expected to be higher in 1984 than in the previous year (4% vs. 3%). Growth in Europe in 1984, though improving, is forecast to be at a considerably lower level than those of the two leading OECD economies. For the OECD economies as a group, growth is currently projected at about 4% in 1984. The international economic outlook for 1985 is less certain. In the absence of a reduction in real interest rates, the pace of recovery may slow down towards the end of this year and in 1985. Based on /1 OECD Economic Outlook, December 1983. - 30 - the present policy stances, the OECD has forecast that the U.S. GNP growth rate will slow down to about 3% in the first half of 1985 (from 3.5% in the previous two quarters). But for the OECD group as a whole, performance in early 1985 is expected to be about the same as in the second half of 1984. While it is not possible to be very precise in this area, it is quite likely that the OECD economies could experience a lower growth of output in 1985 than that currently forecast for 1984. 2.4 Turning to the medium term, the precise course of growth in the international economy depends primarily on the economic policies of the principal OECD countries. The course of these policies is obviously difficult to predict with any precision. However, the continuation of growth at reasonable rates in the U.S. and Japan and its strengthening in Europe are essential for a variety of reasons, not the least of which is the prevention of rising unemployment in these economies and the preservation of international financial order by enabling developing countries to service their debts through greater export earnings. While it is possible that economic performance in the industrial economies will be sluggish in the second half of this decade, in this report a medium-term scenario similar to the "Central case" of the World Development Report 1983 is adopted for the international economic outlook. Thus, it is assumed that the industrial economies' GDP growth will average 3.4% p.a. during 1986-90. Under this growth scenario, world trade is projected to expand at about 5% p.a. in the second half of this decade. Exports of manufactures from developing countries are assumed to grow at 9% annually. Table 2.1 summarizes the key assumptions about the world economy underlying the projections for Indonesia. 2.5 The evolution of the world oil market remains crucial to Indonesia and is particularly difficult to predict. Despite the stability of the world price around the OPEC marker price since February 1983, this report adopts a somewhat more conservative view than last year with respect to developments over the next few years. It is expected that OPEC production will increase from an estimated level of 18.5 mbd in 1983 to 19.8 mbd in 1984 but then rise only marginally in 1985 and 1986. Indonesia can expect to at least maintain its share of total OPEC production of crude (7.43% of the March 1983 quota of 17.5 mbd); however, its output of condensates will increase with the recent completion of two new LNG trains at Arun. By 1990, Indonesian crude oil and condensate output is projected at about 1.8 mbd, which is 0.1 mbd less than predicted last year. Regarding the world price level, it is assumed that the nominal oil price will remain at $29/bbl through the end of 1985. However, because it is now expected that the U.S. dollar will depreciate against other major currencies less rapidly than previously projected (reflecting in part continued high interest rates in the United States), the real price of oil (which reflects its value relative to the price of manufactured imports /Z during 1984 and 1985 is expected to be higher than estimated last year. Beyond 1985, the price of oil is projected to increase at about 2% p.a. (in /1 Throughout this report nominal prices are converted to real prices by deflating by the World Bank's index of manufactured unit values (MUV), which is a weighted average of the price of manufactured experts from the industrialized to developing countries. The MW is projected to increase by about 8% p.a. during the second half of this decade. - 31 - Table 2.1: SELECTED INDICATORS OF INTERNATIONAL ECONOMIC ACTIVITY, 1983-90 1983 1984-85 1986-90 Estimate Projected Growth and trade OECD growth (% p.a.) 2.3 3.5 3.4 World trade (% p.a.) /a 2.0 5.0 5.0 1983 1984 1985 1986 1990 Oil prices Index of 33 commodities (excluding energy) in constant dollars (1981 = 100) /b 91.4 93.5 95.7 97.4 104.3 Indonesia's non-oil terms of trade (1981 = 100) 102.4 102.5 101.5 101.8 105.0 Index of manufactured unit values (1981 = 100) 94.9 98.2 106.0 115.6 156.5 The oil market World demand for oil (mbd) /c /d 45.6 46.7 47.7 48.8 53.4 OPEC output (mbd) /d 18.5 19.8 20.2 20.7 25.5 Indonesian output /d 1.42 1.47 1.52 1.57 1.79 International oil price ($/bbl) /e Base case - at 1981 prices 30.5 29.7 27.6 28.1 31.3 - at current prices 29.0 29.0 29.0 32.2 48.9 /a Total exports of goods and non-factor services are used as a proxy for world trade. /b Nominal price index deflated by the manufactured goods unit value (MUV) index. /c Excluding centrally planned economies and China. /d Includes natural gas liquids and condensates. /e OPEC sales weighted by member country output; the average Indonesian export price is $0.50 higher. Source: World Bank staff estimates and projections. - 32 - real terms) to $31/bl in 1990. Taking into account the eventual depreciation of the U.S. dollar and OECD inflation, the nominal oil price is projected to be $49 in 1990. /1 2.6 A gradual improvement in other commodity prices from their historically low level of 1982 is expected. The World Bank's index of prices of 33 selected commodities (excluding energy) is forecast to rise by about 13% in real terms between 1985 and 1990. Indonesia would particularly benefit from the forecast price increases for palm oil, rubber, tin and copper. Indonesia's overall terms of trade are expected to improve by about 9% during 1985-90. This would reverse the trend in the first half of the decade. 2.7 The healthy growth forecast for the OECD economies in 1984 implies that Indonesia will enjoy a more favorable external environment in the current year than it did in 1983, thus assisting domestic recovery. A modest slowdown of growth in the OECD economies in 1985 need not significantly affect Indonesia's economic performance in that year unless, of course, the lower growth is translated into a substantial reduction in the demand for oil and its price. B. Macroeconomic Framework for Restoring Growth with External Payments Stability 2.8 Pursuit of Indonesia's expressed development objectives of growth and equity will require particular attention during the next several years in two, potentially complementary areas. First, in order to provide employment opportunities for its rapidly expanding labor force, Indonesia will need to raise substantially its domestic growth rate from the sluggish level experienced in 1982-1983. The Government's own target for the REPELITA IV period (1984/85 - 1988/89) is 5% p.a. in real terms. But the pattern of growth over the coming years will be at least as important as its level. It will be essential not only to continue to move toward a more balanced economic structure which is less dependent on the primary sectors of agriculture and natural resource extraction, but also to raise labor absorption capacities in key sectors like industry. Second, in order to ensure external stability in the medium- to long-run, it will be necessary to continue to make progress toward reducing the current account deficit so that future debt service obligations remain manageable. Judging from the experiences of many other countries which rely heavily on commercial loans, this means reducing the current account deficit to the equivalent of about 3% of GNP within the next three to four years and holding it below that level thereafter. Thus, the major challenge for Indonesia will be to continue to strike a balance between adequate growth to improve incomes and job opportunities on the one hand, and the maintenance of internal and external financial stability on the other. /1 Many other public and private organizations have made forecasts of future oil prices, and there are very large differences among these forecasts, reflecting the major uncertainties about the development of world energy markets. The Bank's forecasts are in the middle of the range of these forecasts and are consistent with the majority view that the price of oil in real terms in 1990 will be somewhat above its 1980 level. - 33 - 2.9 This will not be an easy task. But it should be possible to meet the foregoing objectives, provided good progress is made on four related fronts. First, there would need to be much greater emphasis on economic efficiency. Given the scarcity of investment funds, the existing and future productive capacity of the economy should be utilized fully and more efficiently. Second, the pattern of future investment will need to become more labor-intensive and less dependent on capital goods imports. Indonesia must, therefore, continue to restrain capital-intensive investments which are heavily dependent on imports. This in turn implies continued discipline in the public investment program. Third, rapid progress in the expansion of non-oil/LNG exports is crucial. The manufacturing sector offers the best prospects in this context. A high rate of expansion of output in the industrial sector with an export-oriented pattern of growth will be required. Trade policy has a central role in influencing progress in the foregoing three fronts (see Chapter 4 for a discussion of trade policy). Fourth, in order to achieve the required rate of investment and growth, domestic resource mobilization through increased public and private savings should continue to receive high priority so that domestic savings can increasingly replace foreign borrowing as the source of investment funds. Economic Management in the Short Run 2.10 Chapter 1 presented a preliminary assessment of the policy package pursued by the Government in 1983 in response to the international recession and the sharp fall in the country's oil export revenues. It concluded that the policy measures have been highly successful in reducing Indonesia's external payments imbalance and laying the foundation for structural transformation in the longer term. The success achieved in short-term adjustment has inevitably entailed some costs, in terms of growth, investment, incomes and employment. The question now is whether Indonesia in the year ahead will be able to restore its growth rates to about 5%, as called for in the REPELITA IV Plan. This report takes the position that it can. The recovery in GDP growth would be led by the increase in domestic demand that should follow the projected rebound in agricultural production and the continued stimulus provided by the rapid expansion of non-oil exports. In addition, the recent increase in civil servants' salaries will help boost aggregate demand, although some of the income gains of this group will be offset by higher energy and transport costs. The other element in demand management - investment activity - will require careful attention along the lines discussed below. On balance, non-oil GDP is projected to expand by about 4% in real terms in 1984, and, when the large increases in LNG exports are also taken into account, total GDP will, in all likelihood, rise by about 5.5% in 1984. 2.11 Notwithstanding the favorable prospects for 1984-85 and given the very success of the short-term adjustment program and the understandable objective of restoring the momentum of economic growth, there may be a desire to stimulate recovery further by some combination of expansionary monetary policy and increasing investment outlays of the central government and public enterprises through additional foreign borrowing. As the subsequent discussion indicates, there is a case for expanding certain kinds of public investment outlays to facilitate a broad-based recovery in growth and to expand job opportunities. But the expansion would have to be carefully managed and quite selective to avoid creating new pressures on the balance of - 34 - payments, which would undermine the hard-won gains of the past year. At the outset, it must be recognized that a stronger growth in the non-oil economy will result in increased demand for raw materials and intermediate goods - a demand that should be accommodated and not restricted by resorting to additional import controls that would lead to further distortions in the economy and take the Government even further from its stated objective of improving industrial efficiency and lowering costs of production. To accommodate these additional imports, while at the same time ensuring a further reduction of the current account deficit, imports of capital goods would have to be restrained. 2.12 The level of public investment spending could be raised somewhat by eliminating the fiscal surplus (estimated to have been Rp 1.2 trillion in 1983/84) and possibly drawing down the Government's substantial holdings with the banking sector. However, to safeguard the fragile balance of payments position, the composition of public investment would need to favor expenditures with minimal import requirements. In this context, the public housing and INPRES programs could be expanded significantly. These would bolster purchasing power (particularly in the depressed rural areas in the case of the INPRES) and contribute significantly to employment creation. It is often argued that the absorptive capacity constraints at the regional and local government levels impose a major obstacle to the expansion of such programs. However, a recent study of the managerial capacity of provincial and Tingkat II governments in 21 of Indonesia's 27 provinces based on observations over the past four years indicates that in recent years the quality of professional manpower in local government has improved considerably, and there is growing evidence that these ceLpacities are underutilized. ZI This would tend to suggest that with flexibility and appropriate support from the Central Government, the INPPES programs can be utilized as a means of injecting purchasing power on a broad geographical basis. 2.13 What should be avoided at this time is a sharp expansion of expenditures on import-intensive public investments financed by increased foreign borrowing from commercial sources. As discussed later in this chapter (Section D), for balance of payments and external debt management reasons, the scope for expanding public investment in the medium term is likely to be somewhat limited, and substantial longer-term commitments to large capital-intensive projects would inevitably pre-empt other necessary investments elsewhere in the economy. Even in the near term, continued discipline in terms of both the level and the composition of the public investment program will be required in the light of the projected resource availabilities over the rest of this decade. 2.14 Another aspect of managing the recovery of the economy in this year ahead concerns interest rates. Given the intricate interplay between the exchange rate and domestic inflationary expectations on the one hand, and the international interest rates on the other, it is unlikely that the present relatively high real domestic interest rates could be lowered to any Zl K. Davey, G. Glenworth, and P. Mawhood: 'Education and Training for Government in the Provinces"; background paper for Indonesia - Management Education Study (World Bank, forthcoming). - 35 - significant degree for the time being. Moreover, the transition problems stemming from the June 1983 financial reforms will take time to be resolved. In the same vein, the development of a well-functioning capital market, necessary for providing term lending on reasonable terms, is a longer term process. A principal focus of financial policy measures would need to be on these longer term issues, as discussed in Chapter 3. This is not to minimize the dilemma between the need to stimulate private investment and prevent a deterioration of the financial position of business entities resulting from high real interest rates and the sluggishness of aggregate demand on the one hand, and the necessity of preventing capital outflows on the other. It is merely to point out that for the time being economic management policies would need to continue to place emphasis on balance of payments considerations, given the near-term outlook for the international oil market and the relatively low base of non-oil export revenues. Perhaps the best means of effecting a reduction in real interest rates lies in lowering inflationary expectations through continued restraint in government expenditures and by further strengthening the country's balance of payments position along the lines mentioned above so as to reduce speculative foreign currency transactions. In this context, the maintenance of the present healthy external reserves position of some $8.4 billion is of paramount importance. 2.15 Finally, there is a need to create a stable policy environment for private investment activity. While policy reform is a dynamic process, it is important to carefully phase the introduction of major initiatives affecting economic decision-making by the household and business sectors. Moreover, it is highly desirable that the content of policy changes be unambiguously announced with a timetable well in advance of their implementation. There are, for example, still a number of uncertainties concerning the content and implementation of the new tax laws. It would be advisable to move swiftly to clarify the precise intentions and the implementation procedures of this important economic reform. Rapid implementation of the announced policy of reducing the scope of economic regulations as well as their simplification (Section D), would also contribute to reducing uncertainty in the private sector. Highlights of Macroeconomic Projections -- The Base Case 2.16 Tables 2.2 and 2.3 summarize the rate and pattern of growth which appear feasible in the near term and during the second half of the decade. During the second half of the decade, overall GDP growth is projected at 5% p.a. and that of non-oil GDP at 5.5% p.a. In the agriculture sector, it is still considered likely that rice production will grow at an average rate of 3.5% over the remainder of the decade, permitting Indonesia to maintain virtual self-sufficiency in rice during years of trend-level production. For the tree crops and highly-income elastic products (such as poultry, fish and horticultural products), somewhat higher growth rates can be expected. In this report it is assumed that agricultural growth rate will be 3.7% p.a. in the remainder of this decade. A growth rate of this magnitude will be important not only for the sake of minimizing net food imports but also for generating employment, improving purchasing power, and reducing rural poverty. In the manufacturing sector, an average growth rate of about 8% should be regarded as a minimum target because of the importance of expanding manufactured exports and helping with labor absorption. Non-LNG manufacturing - 36 - should grow by over 10% p.a., with its share, in GDP rising from about 7% at the start of the decade to 10% by 1990. In the construction and service sectors, performance will be largely determined by the growth rates in investment demand and the commodity-producing sectors. I:t is assumed that the growth of the services sector will be in line with the growth of gross national income. Growth prospects for the oil, LNG, and other mining sectors are discussed in the context of export projections in ChaLpter 4. 2.17 The projected growth rates by expenditure category are set out in Table 2.3. Investment growth is assumed to be at a rate of 4% p.a. in 1984-85 and accelerate somewhat in subsequent years. However, given the constraints on the availability of external resources, the projected growth rates would be feasible only if the import-intensity of investment is reduced from recent levels (see Section D). Table 2.2: GROWTH AND COMPOSITION OF GDP, 1976-90 (In percent; at 1981 prices) Real annual growth rates Shares in GDP 1976-81 1982-83 1984-85 1986-90 1981 1990 Actual Est. --- Projected -- Actual Proj. Agriculture 3.8 2.4 3.6 3.7 25.2 23.3 Mining 5.4 -4.2 4.0 3.1 24.0 18.5 Oil n.a (-4.9) 3.9 (3.3) (21.2) (16.1) Non-oil n.a. (4.3) 4.5 (1.1) (2.8) (2.4) Manufacturing 15.5 3.1 14.2 8.2 10.8 15.0 LNG n.a. (5.5) (27.3) (3.3) i'3.5) (5.1) Other 13.4 (2.0) (7.0) (10.8) (7.3) (9.9) Construction 12.7 5.4 5.0 6.0 5.8 6.5 Services 9.9 4.9 4.5 5.5 34.2 36.7 GDP 8.0 2.5 5.1 5.0 100.0 100.0 Memo item Non-oil/LNG GDP 8.8 3.9 4.5 5.5 75.3 78.8 Source: 1976-82 Biro Pusat Statistik; 1983-90 World Bank staff estimates and projections. - 37 - Table 2.3: GROWTH IN GDP BY EXPENDITURE CATEGORY, 1976-90 1976-81 1982-83 1984-85 1986-90 Actual Est. ---- Projected ---- A. Real growth rates (% p.a. at 1981 prices) Consumption 11.3 1.8 3.5 4.7 Investment 12.0 3.4 4.0 5.4 Exports /a -0.3 0.0 5.6 4.4 Imports /a 16.0 -2.4 -0.6. 4.1 GDP 8.0 2.0 5.1 5.0 Non-oil/LNG GDP 8.6 3.8 4.5 5.5 GNP 7.1 1.3 5.2 5.1 GDY 9.3 0.9 4.1 4.0 Shares of GDP 1982 1983 1985 1990 (% at current prices) Gross domestic investment 24.3 22.0 21.5 22.0 Financed by Gross domestic savings n.a. 16.2 17.6 19.8 Foreign savings n.a. 5.8 3.9 1.2 Memo item Current account deficit as % of GNP 7.8 6.0 4.5 1.8 /a Includes goods and nonfactor services. Source: Based on national accounts statistics from Biro Pusat Statistik for historical data, and World Bank staff projections. 2.18 After a strong performance in 1984 and 1985, when exports are expected to increase by 5.6% in real terms p.a., they are then projected to expand by only 4.4% annually during 1986-90. a1 However, this low average increase conceals two separate trends. After the initial build-up during 1984 and 1985 associated with the rapid increase in LNG exports, real earnings from oil and LNG are projected to grow by about 3.5% p.a. over the rest of the decade (see Chapter 4, Table 4.1). Non-oil/LNG exports, on the other hand, are projected to continue to perform well, growing by 6% p. a. Growth of these exports will depend not only on trends in world prices and demand but also on appropriate policies to promote them and to encourage efficient industries which can compete in world markets. The projected levels of manufactured exports would require concerted efforts (Chapter 4). If non-oil/LNG exports expand as projected, their share in total exports of goods will increase from 18% in 1981 to over 30% in 1990. This would represent significant progress in reducing Indonesia's excessive dependence on petroleum-based exports. However,it seems clear that it will only be in the /I Details of the export and import projections are contained in Chapter 4. - 38 - 1990s that Indonesia will have diversified its export base sufficiently away from oil and oil-related products. 2.19 On the import side, given the projected growth in export earnings described above, continued restraint will be required to reduce the current account deficits. To ensure continued reduction in the current account deficit, imports in nominal terms should be held to no more than $18.7 billion in 1984/85 and $20.5 billion in 1985/86. This would imply virtually no real growth during these two years. Under this scenario, different strategies for the various categories of imports will need to be pursued (see Chapter 4). 2.20 Under the foregoing scenario, the current account deficit is projected to decline to 2.9% of GNP by 1987/88 and further to 1.8% by 1990/91. The details of the balance of payments projections as well as the external borrowing requirements and debt servicing are discussed in Chapter 4. Uncertainties in the Prospects 2.21 The base case scenario presents the macroeconomic prospects for Indonesia on the assumptions outlined above about the rate of growth of the industrial economies, the expansion of world trade, international inflation and, more importantly, on the behavior of the oil markets. It is possible that the external economic environment during the latter half of this decade will be less favorable than assumed in the base case. In particular, the growth of the OECD countries and oil prices may turn out to be lower than those used in the foregoing analysis. Lower growth of the industrial economies would adversely affect Indonesia's ability to increase its non-oil export earnings. However, Indonesia's economic prospects are especially vulnerable to fluctuations in the oil demand and prices. In view of the dominant influence of the behavior of the oil markets on Indonesia's export earnings, an alternative scenario using lower oil prices than those assumed in the base case is examined here for purposes of sensitivity analysis. 2.22 This alternate case assumes that the real price of oil (and LNG) will remain constant after 1985 as compared to a 2% p.a. real increase projected in the base case. Table 2.4 highlights some of the main implications of such a development under two different policy responses. Alternate A shows the outcome for the balance of payments and debt position, ifE the Government were to compensate for the shortfall in export earnings largely through additional external borrowing, so as to allow the economy to grow at the same rate as in the base case. Alternate B, on the other hand, assumes that the Government will aim at preserving approximately the same debt service ratios as in the base case. The implications of these alternative policy responses are explored below. - 39 - Table 2.4: SELECTED ECONOMIC INDICATORS UNDER ALTERNATE SCENARIOS Average Real Growth 1986-90 (% per annum) Base Case Lower Oil Prices Alternate A Alternate B GDP 5.0 5.0 4.0 Consumption 4.7 4.6 3.3 Investment 5.4 5.4 3.5 Exports goods and non-factor services 4.4 4.7 4.7 Imports goods and non-factor services 4.1 4.1 2.7 Selected ratios ------------- 1990 ------------ Terms of trade (1981 = 100) 92.8 85.2 85.2 Debt service ratio (%) - Public net /a 23.1 28.3 24.7 - Gross /b 19.8 23.3 21.1 Current account deficit (as % GNP) 1.8 3.8 1.6 Total net foreign asets - as months of imports of goods 3.0 2.8 2.8 /a The ratio of public debt service to net exports, i.e., total exports of goods and services less imports of goods and services of the oil sector. b The ratio of total debt service to gross exports of goods and services. Source: World Bank staff projections. 2.23 A constant real price of oil after 1985 would reduce Indonesia's projected annual net export earnings from oil and LNG by $2 billion in relation to the base case by 1990. Assuming that lower oil prices are not accompanied by low growth in the OECD economies, the latter's capacity for non-oil imports would increase in relation to its total import bill /1. Thus, with vigorous efforts to promote non-oil exports, Indonesia should be able to increase further its non-oil exports, and partially compensate for lower oil revenues. However, as a result of the deterioration in its terms of trade, Indonesia's capacity to import (export earnings expressed in relation to the cost of its imports) would grow by only 4.7% per year compared with 6.2% under the base case. a1 However, if lower oil prices were associated with recession in the industrial economies, the demand for exports from developing countries would be depressed and Indonesia could also suffer on this account. - 40 - 2.24 For Indonesia to attain the rate of growth and other development objectives envisaged in the base case in the face of less favorable international oil prices, it would have to undertake higher borrowings than required under the base case. By 1990, the current account deficit would widen to about 3.8% of GNP (Alternate A). Financing this deficit and the projected repayments of prior debt obligations would require commitments that are clearly higher than in the base case. MLT debt outstanding and disbursed would reach about $51 billion by 1990 as compared with $43 billion under the base case. Indonesia could avoid a sharp increase in its debt servicing payments in the 1990s if it could receive additional official assistance from the members of the Inter-Governmental Group on Indonesia (IGGI) as an alternative to extra commercial borrowing. Combined with stepped up efforts to improve non-oil export performance, the country's ability to maintain the debt service ratio at prudent levels would then be enhanced. However, if all the additional borrowings were to be on commercial terms, Indonesia's debt servicing obligations would rise rapidly in the early 1990s. 2.25 Under Alternate B, in order to maintain its debt service ratios at approximately the levels envisaged under the base case, external borrowing would need to be reduced. This in turn implies lower imports, a further curb in investment growth and somewhat lower economic growth. Given import growth of about 2.7%, which would be consistent with the lower borrowings and export revenues projected under Alternate B, the GDP growth rate would decline to 4.0% p.a. during 1986-90. At this rate the difficulties of coping with the growth of the labor force and other development problems would be even more serious than under the base case. 2.26 The possibility of slower growth in oil revenues and less favorable external economic environment than projected in the base case cannot be ruled out. In the face of lower oil prices, Indonesia would need to exert ever greater efforts to expand non-oil exports, undertake further domestic adjustments and gain access to additional borrowing on suitably concessional terms to avoid a further reduction in the growth of output, incomes and employment. The foregoing sensitivity analysis highlights the need spelled out in the base case for implementing medium-term policy reforms which would improve the resilience of the economy to potential future external shocks and would provide a strong case for extending to Indonesia increased levels of official assistance. - 41 - C. Impact on Employment and Incomes 2.27 The creation of adequate employment opportunities is the most pressing development issue now faced by Indonesia. The level and distribution of labor incomes are the principal determinants of the welfare of the poor. In the 1980s, the labor force is projected to grow at an annual rate of about 2.7% compared with 2.2% during 1970s. /1 During REPELITA IV there will be of the order of 1.8 million new entrants to the labor force each year. Thus Indonesia will encounter a rise in labor force growth during a period in which the country's resource situation is expected to be much less favorable than in the past. The development of an employment-oriented growth strategy is essential if the past progress in reduction in poverty is to be sustained. 2.28 The past pattern of employment growth is important to understanding the nature of the current problem. During the 1970s growth in employment in agriculture accounted for well under 10% of the total increase in employment, although it remained the predominant employer in the economy, accounting for 56% of the total in 1980. The main sources of employment growth were services, especially trade, transport and public services, that accounted for 60% of the total number of new jobs, and industry, that provided 33% of the total. This occurred against the background of a rapid process of modernization cf the economy, in the form of a very substantial increase in the flow of goods and services through the country, and associated high rates of growth in the output of services, 9% p.a., and industry 11% p.a., in the period. Although there is no evidence of any rise in real wages up to about 1978-79, by the end of the decade there were some quite favorable indicators of improved labor market conditions. In 1979-81 there is widespread evidence of a rise in wages in rice cultivation, apparently associated with the emergence of labor shortages at critical periods in the crop cycle. There is also evidence of relatively high returns to labor for rural households in non-farm activities, often associated with temporary migration to urban areas. This supports the view that in this period the overall pattern of growth led to improvements in income earning opportunities for the bulk of laboring households; this is consistent with the evidence of declining poverty incidence shown in Chapter 6. 2.29 There are, however, a number of reasons for being less than sanguine over the current situation. First, although open unemployment is very low, less than 2% according to the 1980 Population Census, underemployment was significant. On the basis of the Government's definition, which defines underemployment as working for two-thirds or less of normal working hours, /1 These rates of growth are World Bank staff projections derived from analysis of the 1971 and 1980 Population Censuses, and are consistent with the analysis of the rural and urban labor force in Chapter 6. The Central Bureau of Statistics has recently produced labor force projections that use the higher labor force participation rates obtained from the labor force surveys - see Biro Pusat Statistik, Proyeksi Angkatan Kerja Indonesia, 1983-2001, December 1983. The difference in interpretation of the data makes no difference to the analysis of the employment problem. - 42 - 27% of the labor force were underemployed in rural areas and 17% in urban areas in 1980. /1 Second, agricultural wages appear to have stagnated in the past two years, suggesting that the previous increases represented a temporary adjustment rather than a permanent change in labor market conditions. Indeed analysis of the historical experience of other East Asian rice economies suggest that Indonesia is still a long way from the "turning point' of sustained increases in agricultural wages. /2 Third, if the past pattern of growth in labor productivity growth in agriculture and industry is repeated in the future, then these two sectors will provide employment for only a fraction of new entrants to the labor force. With slower growth in direct government employment, great pressure would then be placed on labor market conditions in the rural non-farm and urban informal sectors. This would open up the prospect of a worsening in income earning opportunities for laboring households dependent on these sectors. 2.30. What policy options does the Government have to improve the employment situation in a period of reduced resource availabilities? The understanding of the relationship between government policy and labor market conditions is still weak, but there are a number of areas in which the general direction of desirable policy is clear. 2.31 The first concerns agriculture. Although in the long term the structural shift in employment away from agriculture should continue, this sector will continue to account for a half or more of total employment, and relatively small shifts in labor demand can have a major impact on the labor market in other sectors. There are several issues. First, an appropriate policy on agricultural mechanization should be maintained. There have already been important technological changes in rice production, notably the substitution of rice mills for hand pounding and the use of the sickle in the place of the ani-ani in harvesting, that have sharply reduced labor use. Hand tractors and mechanical threshers are also beginning to spread in Java. Such innovations may make economic sense and substitute for low-return employment. However, it is essential that the purchase of the equipment should be at economic prices, and in particular that funds from low-interest special programs, such as KIK, not be available for such investments. Also, where such mechanization is economically justified as a consequence of labor shortages at seasonal peaks in labor demand, there is a risk that households that depend primarily on labor incomes will suffer a decline in year-round access to employment. The encouragement of temporary migration between rural areas, through better provision of information on areas of labor shortage, may be an alternative to mechanization under these circumstances. This leads to the second area, of policies that contribute to the spreading of labor demand throughout the agricultural year. There still appears to be considerable scope for increasing cropping intensities on Java through improved water resource development and management. The irrigation sector should continue to /1 Normal' working hours are given by the sectoral average of 36 hours per week in agriculture, and 48 hours per week in non-agriculture. Definitions of underemployment are quite problematic, since individuals may choose to have less than full participation in economic acticities, owing to commitments to household or other activities. /2 For an analysis of this issue see Wages and Employment in Indonesia, World Bank Report No. 3586-IND. - 43 - receive priority in the allocation of government resources, with an increased emphasis on the operation and maintenance of existing systems. There is also scope for increased production of dryland crops, both for export and to substitute for imports. Many of these, including maize, groundnuts, fruits and vegetables and cassava require labor inputs comparable to or higher than in rice cultivation. Third, investment in agriculture in the Outer Islands will support the transmigration program, which could provide employment for a significant fraction of the underlying increase in the rural labor force on Java. The labor requirements of the principal crops, palm oil, coconut and rubber, are much less than for annual crops on Java, but the potential production increases are large. Moreover a high return to smallholder production of such crops in the Outer Islands, which is the other side of a low employment content, is essential to the success of the transmigration program. Finally, it should be emphasized that there are important multiplier effects from growth in agricultural incomes. The experience of other countries suggests that the growth in employment and incomes in rural non-farm activities is intimately associated with growth in agriculture. /1 It is important that the overall support for growth in incomes in this sector be maintained, and in particular that domestic pricing policy does not lead to a shift in the terms of trade against agriculture. 2.32 The second broad area concerns the pattern of industrial growth. The manufacturing sector only accounts for a small fraction of jobs now, and its primary role in the next decade will not be the direct provision of employment but the earning or saving of foreign exchange to finance the overall growth of the economy. For this, as argued elsewhere, considerations of economic efficiency should be paramount. However, within this general framework, alternative strategies can make greater or lesser contributions to labor absorption. Two general points are important here. First, because of the pattern of import substitution in relatively labor-intensive activities in the past (notably in consumer goods) industries in export-oriented sectors are now characteristically more labor-intensive than in areas of potential import substitution. Examples of products with relatively high employment coefficients and good export potential are plywood, textiles and simple electronics products. Second, there are alternative ways of saving foreign exchange through import substitution: some sectors have a relatively high employment content and larger backward linkages to other sectors of the economy. Some examples, in areas where imports are still quite large, are spinning, food products, textiles and transport equipment. In view of Indonesia's comparative advantage in labor, investments in these areas will characteristically also be relatively attractive economic choices. However private investors now face a distorted pattern of incentives, and analysis of the impact of the current trade regime indicates that it is the relatively capital-intensive sectors that enjoy a higher degree of protection. Reform of the trade regime is needed on employment as well as efficiency grounds. As argued below, in the case of large-scale investments the problems of distorted incentives can be tackled by proper economic evaluation of the projects in both the public and private sectors. /1 An example of analysis of a South East Asian economy is provided in Thailand: Rural Growth and Employment, World Bank, 1983. - 44 - 2.33 The third broad area of policy intervention concerns the level and composition of public expenditures. The buoyant overall growth in public expenditure led to major direct increases in employment in the past decade. The direct and indirect effects of the development budget alone probably now account for almost 5 million jobs in the economy, about 9% of total employment. The pattern of expenditure growth also appears to have had significant effects on the process of growth in the past. The Government maintained a pattern of expenditure that was highly diversified across sectors and dispersed over space. The combination of widespread improvements in rural and urban infrastructure and multiplier effects from the domestic component of public spending made an important contribution to the process of modernization and employment growth. The INPRES programs, that took place almost entirely in rural areas or small towns, are particularly good examples. To sustain the process of growth, it is essential to maintain a reasonable rate of real growth of this type of program. Of course this has to be done in the context of the overall resource constraints on public spending. However, it is these categories of expenditures that characteristically have a low import content and so a relatively small impact on the primary constraint, the availability of foreign exchange. This is the main topic of the next section. D. Management of the Investment Proiram 2.34 The preceeding discussion has highlighted the tight constraints the country will face with respect to the availability of foreign exchange and has stressed the importance of caution and careful management of the investment program, and related to that, capital goods imports. The purpose of this section is to explore the options available to Indonesia in somewhat greater detail. 2.35 The need for raising investment levels in the Indonesian economy over the medium term is beyond question; changing the structure of the Indonesian economy, reducing its dependence on oil, promoting non-oil exports and revamping the industrial structure will inevitably call for considerable additional investment both to set up new capacity and to rehabilitate and modernize existing capacity. Substantial additional investments are also required to improve and expand social and economic infrastructure in such areas as power, transport, education, health, manpower and rural development, while the objectives of urban and regional development are important by themselves and for a variety of social and political reasons (Chapter 5). Finally, the maintenance of an appropriate structure of public investment expenditures is essential to both the direct provision of jobs and to supporting the process of income and employment growth in other sectors of the economy. 2.36 There is little doubt about the economic rationale for a very broad range of such investment outlays. The real issue, however, is how much investment can Indonesia afford to undertake in the next few years, given the severity of the resource constraint which is in prospect. The tight balance of payments outlook and the need for continued prudence in external borrowing will make it difficult for Indonesia to increase imports of capital goods, which are necessary to sustain investment levels, except at a moderate rate; as Table 2.5 indicates, imports of capital goods can grow only by about 2.2% - 45 - per annum over the 1983/84-1990/91 period. The implications of such a small real rate of growth of capital goods imports for investment levels are serious; unless the import-intensity of investment can be significantly reduced, total investment in the economy can also grow at only a modest rate, and the investment/GDP ratio is likely to fall significantly over the next few years. Consequently, the Government's objectives with respect to income and employment geheration, and access to social services may well be compromised. Thus, the principal challenge facing the authorities with respect to the public investment program is how to strike a balance in its sectoral and project composition so as to ensure that the various development objectives are met. Table 2.5: PROJECTIONS OF GDP, GDI AND IMPORTS OF CAPITAL GOODS, 1983/84 - 1990/91 (At constant 1981 prices) Growth Rate (% p.a.) 1983/84 1984/85 1990/91 1983/84- Est. ---- Projected ---- 1990/91 In Rp trillion /a 1. GDP at market prices 54.0 59.3 79.0 5.0 2. Gross domestic investment /b 12.4 12.9 17.4 5.0 3. Capital goods imports (US$ billion) 7.0 7.0 8.1 2.2 4. Capital goods imports /c 4.4 4.4 5.1 2.2 In percent 5. Capital goods imports/ investment 35.9 34.5 29.6 6. Investment/GDP 22.0 21.7 22.0 /a Except line 3 which is US$ billion. b Assuming some reduction in import intensity of investment as in line 5. Zc Converted from line 3 into constant (1981/82) Rupiah trillions, using a 1981/82 exchange rate of US$=Rp 633. Source: World Bank staff estimates and projections. - 46 - The Import Intensity of Investment 2.37 Thus, one major problem the Government will have to face in managing the investment program is how to sustain investment levels in the face of import constraints. The import intensity of overall investment has risen quite sharply in recent years from about 31% in late 1970's to about 40% in the 1981/82-1982/83 period; this is believed to have subsequently declined to about 36% in 1983/84 (see below). This rise in import intensity partly reflects the increasing capital and import intensity of public investment (the import intensity of public investment rose from about 35% in late Seventies to about 44% in 1983/84), and partly the effects of the devaluation of the rupiah. The Government's investment strategy in the public sector in the recent past has aimed at encouraging the development of natural resource - based heavy industries, and several large capital-intensive projects were undertaken especially in the industry and mining sectors where import intensity on average has been very high (Table 2.6). If such projects are excluded, however, the underlying trend in the import intensity of investment in Indonesia would not be unduly high. For example, if the six largest projects implemented in the industry and mining sector over the past 2-3 years (i.e. Balikpapan, Cilacap and Dumai refineries, Asahan Aluminium and Arun and Badak LNG projects) /1 are excluded, import intensity of aggregate investment over the 1981/82-1983/84 period would be only about 34% (as compared to about 36% when these projects are included), and of public investment about 41% (44% when these projects are included). However, a number of these lumpy projects (such as oil refineries and LNG plants) have been completed. As discussed in Chapter 1, the rephasing exercise undertaken last year has led to the revision and postponement of several capital-intensive projects which were either planned or in very early stages of implementation and has also contributed to the reduction in import intensity of investment in 1983/84 noted above. 2.38 Nevertheless, as Table 2.7 indicates, the import intensity of investment does vary significantly across sectors. For example, import coefficients are as high as 0.62-0.66 in the case of investments in power and industry while they are about 0.20-0.35 in the case of education, health, housing, agriculture etc. In order to reduce the overall import intensity of investment, therefore, it will be necessary to give somewhat lower priority to import-intensive sectors such as industry, mining and power, and place greater emphasis on such sectors as agriculture, education, health, housing, regional development etc. By redirecting expenditures to sectors with high local content, such a strategy would help sustain a higher level of aggregate investment with a given level of imports; and also reinforce the Government's short-term economic management objectives. tj This is not to say that all capital-intensive projects are undesirable; clearly those projects which are net foreign exchange earners (e.g., LNG projects) deserve high priority. - 47 - Table 2.6: IMPACT OF LARGE INDUSTRIAL PROJECTS ON IMPORT INTENSITY OF INVESTMENT, 1981/82-1983/84 (Rp billion; at 1981 prices and exchange rates) 1981/82 1982/83 1983/84 Est. Gross domestic investment 11,553 13,056 12,357 of which import content 4,556 5,290 4,430 Public investment 6,591 8,282 6,572 of which import content n.a. n.a. 2,880 Investment in large industrial projects /a 1,325 1,897 1,056 of which import content 1,049 1,183 610 GDI excluding large industrial projects 10,228 11,159 11,301 of which import content 3,507 4,107 3,820 Public investment excl. large industrial projects 5,266 6,385 5,516 of which import content n.a. n.a. 2,270 Import intensity of investment (in percent) Total investment 39.4 40.5 35.9 Public investment n.a. n.a. 43.8 Large industrial projects 79.2 62.4 57.8 GDI excl. large industrial projects 34.3 36.8 33.8 Public investment excl. industrial n.a. n.a. 41.2 projects / Balikpapan, Cilacap and Dumai Refineries, Asahan Aluminium and Arun and Badak LNG projects. Source: World Bank staff estimates. - 48 - Table 2.7: IMPORT CONTENT OF SECTORAL PROGRAMS AND, SECTORAL COMPOSITION OF PUBLIC SECTOR DEVELOPMENT EXPENDITURES Import Sectoral Share in Percent Content REPELITA Suggested Sector In III Composition for Percent / 1984/85-1990/91 Agriculture & irrigation 30 14.3 14.0 Industry & mining /a 66 12.1 10.0 Electric power 62 10.0 10.0 Transportation & tourism 43 12.9 10.5 Manpower & transmigration 35 6.1 7.0 Regional development 20 8.5 8.0 Education 20 12.3 14.5 Health, family planning 20 3.8 5.0 Housing & water supply 35 3.0 5.0 Defense and security 42 6.7 6.0 Others /b 20 10.3 10.0 Total development expenditures 100.0 100.0 /a Including "Government Capital Participation". /l Trade and cooperatives, religion, information, science, law and government apparatus. From 1979/80 includes natural resource development and environment. Source: World Bank staff estimates and projections. 2.39 The need to reduce the relative proportions of public investment allocated to highly import-intensive sectors (such as power, industry and mining) emerges clearly in Table 2.8 below, which sets out the levels of capital goods imports (at 1981/82 prices) likely to be available over the next few years, gross domestic investment levels as projected in the macro-economic scenario in Table 2.3, and overall import intensity of investment consistent with these aggregates. As is evident from Table 2.8, even on the assumptions that: (a) the aggregate share of industry and power sectors in total public investment will be limited to about 20%; and that (b) import intensity of industrial, mining and power investment will be reduced over time to about 60%, these sectors will pre-empt about 36% of capital goods available to the public sector. Under these somewhat optimistic assumptions, and given the projections of aggregate domestic savings and capital goods imports, the import intensity of investment in all "other" sectors together will need to decline from about 33% in 1984/85 to about 28% by 1990/91 (Table 2.8). The pattern of expenditures suggested in Table 2.7 would be roughly consistent with this decline. On the other hand, if industry and power sectors were to be allocated about 24% of total public investment, and if their import intensities remained unchanged (at 1983/84 levels), then these two sectors will absorb about 46% of public sector capital goods imports; imports of - 49 - capital goods which would be available for all mother sectors' will then be sharply reduced. To then maintain the same aggregate level of investment in these sectors would imply that the import content would decline to as low as 25% by 1990/91. Such a decline will be clearly hard to achieve. But, if such a reduction in import intensities in "othern sectors and in industry and power sectors were not achieved, it may prove impossible to increase investment at a rate of 5.0% p.a. as assumed in Table 2.5 above. Table 2.8: GDI, IMPORTS OF CAPITAL GOODS AND IMPORT INTENSITY OF INVESTMENT; 1983/84-1990/91 (Rp billion; at 1981 prices) 1983/84 1984/85 1990/91 Est. --- Projected --- GDI 12,357 12,852 17,402 Private 5,785 6,154 8,478 Public 6,572 6,698 8,924 Capital goods imports 4,430 4,431 5,154 Private 1,550 1,650 2,062 Public 2,880 2,781 3,092 Import intensity of investment (%) GDI 35.9 34.5 29.6 Private 26.8 26.8 24.3 Public 43.8 41.5 31.3 Public investment Imports of capital goods Industry, mining & power /a 1,444 878 1,124 Other 1,436 1,672 1,968 Import intensity of investment Industry, mining & power /a 66.3 69.0 60.0 Other 32.7 33.3 27.9 / Assuming that the combined share of industry, mining and power in public investment will be reduced to 23% in 1984/85 and 20$ in 1990/91; similarly, import-content of investment in industry and power is assumed to decline to 60% in 1984/85 and thereafter. Source: World Bank staff estimates and projections. 2.40 There appears to be substantial scope for reducing the overall import-intensity of public investment by changing its sectoral composition. The Government would need to continue to exercise restraint on the aggregate amount of investment (and associated foreign borrowing with or without public guarantees) in large, capital- and import-intensive projects that are started in any one year. It would need to scrutinize very carefully for example, the - 50 - projected net contributions (including capital goods imports, their financing, and subsequent debt servicing obligations) of large industrial projects to the balance of payments. The main conflicts are likely to arise over the size and allocations between the power and industrial sectors. Undoubtedly the Government will have to continue to make very difficult choices in these sectors as to how much can be afforded from the viewpoint of balance of payments and debt management. Given the overall import constraint, and high import coefficients of investments in both sectors, it is unlikely that equally high priority can be given to both sectors at the same time. For example, a major expansion in power sector investment could probably only proceed if there were reductions in industrial sector investments. The corallary to restraint on import intensive projects is, of course, greater emphasis on sectors where investments have a relatively low import content. As the subsequent discussion of sectoral priorities indicates, there is a wide range of investments in less import-intensive projects and programs which have high priority and have the added advantage of being able to make large contribution to employment creation. The objectives of minimizing the impact of investments on the import bill, and maximizing the direct and indirect impact on the process of generation of domestic incomes and employment are directly complementary to each other. Sectoral Priorities in the Investment Program 2.41 The foregoing discussion emphasized the need to reduce import-intensity of public investment in order to sustain investment levels in the face of severe import constraints. It argued that such a reduction could be brought about by reducing the relative shares in public investment of highly import-intensive sectors such as industry and power, and by giving higher priority to less import-dependent sectors. A feasible pattern of sectoral allocations of public investment for the rest of the decade which is consistent with the projected availability of capital goods imports is likely to be similar to that suggested in Table 2.7. 2.42 The need for changing sectoral priorities of public investment could also be justified on other grounds. The development of an efficient import-competitive industrial structure in Indonesia will require that the present inward-looking industrial strategy based on excessive protection be changed; in particular, the past heavy emphasis on import substitution in the production of capital goods regardless of economic costs needs to be changed. As regards the power sector, the need for significantly higher levels of investment could be justified on economic grounds, given the low levels of per capita power consumption in Indonesia and the long lead tLmes and the lumpiness of power projects. Quite clearly, supply capacity will be the main constraint to increasing power sales and consumption over the next few years; however, given the resource constraints, it may not be possible to expand power generation capacity as rapidly as may be desirable in order to satisfy fully anticipated growth in demand. In this context, the desirability of stretching out the planned build-up of generation capacity will need to be explored. It is also important to ensure that due consideration is given to efficiency (in terms of least cost) criteria in the choice of investment projects. - 51 - 2.43 On the other hand, the need to increase investment in sectors with high local expenditure content, such as agriculture, education and manpower development, health and family planning, housing, sanitation and water supply can be justified not only on economic social and humanitarian grounds, but also on the ground that the development of human resources is fundamental to Indonesia's economic prospects in the next decade. Agriculture, the key sector in the economy, will need to receive continued high priority within the public sector investment program, in order that the 3.7% p.a. growth in output is assured. Increasing agricultural production is obviously important for a variety of reasons, including foodgrain self-sufficiency, alleviating balance of payments pressures, and improving income, employment and nutrition levels etc. The inter-sectoral priorities within the agriculture sector, however, will need to be reviewed in view of the import constraint. Import intensity in the agricultural sector does vary substantially among different types of investments; for example, import intensity is highest in respect of multi-purpose dams and new-system construction, while it is the lowest in the case of tertiary construction and rehabilitation and upgrading. The output benefits of these different types of investments are also dissimilar. Rehabilitation and tertiary construction investments also yield benefits in a shorter time and are labor-intensive. The scope for redirecting expenditures from heavily import and capital-intensive irrigation investments to tertiary construction and rehabilitation investments over the next few years should be explored; it should be noted, however, that such investments alone cannot provide the 3.7% p.a. growth in agricultural output and that output gains especially beyond REPELITA IV will require construction of new irrigation systems. Within the agriculture sector, attention should also be given to the tree crop development and transmigration programs, as these are also important for meeting the Government's export targets and employment and regional development objectives over the present and the next decade. 2.44 Experience in other countries which have progressed further along on the path of economic development clearly demonstrates that the returns to increased expenditures on the development of human capital, in terms of increasing literacy, productivity, the quality of the work force, responsiveness to innovations and technical change etc. can indeed be very high in the longer term. In Indonesia's context, the need to sustain economic development with continued political and social harmony, by reducing the large disparities which exist between regions and between different social groups in regard to incomes, employment opportunities and access to basic facilities such as education, health, etc., provides another important dimension to this question (see Chapter 7). The Government recognizes this need and has embarked on a substantial expansion of programs for human resource development over the past few years./l However, government expenditures in Indonesia in the areas of education, health and family planning, sanitation etc. are still substantially below the international norms which are considered adequate for these sectors, particularly since the initial level of services provided in /1 See Indonesia: Financial Resources and Human Development in the Eighties, World Bank Report No. 3795-IND. - 52 - these areas is relatively low in Indonesia. There is, therefore, a continued need to support expenditures (both current and capital) in these sectors. Given the financing constraints, however, there are a number of crucial questions concerning policy and investment strategy in these sectors which need to be addressed, if the momentum of recent progress in these areas is to be continued (see below). 2.45 In the past decade Indonesia has made impressive gains in expanding access to education and improving the skills of the labor force; in particular, the Government's objective of universal access to primary education has been virtually realized. However, enrolment at the secondary school level is still very modest and the capacity of the tertiary system is somewhat difficient, in relation to Indonesia's needs for technically-trained manpower. There are also considerable regional disparities in regard to access to educational opportunies (Chapter 5). 2.46 Since the need for new primary school facilities will gradually decline, the important question now is whether future investment in the education sector should be mainly directed towards the general upgrading of the entire educational system, or to raising comparatively low enrollment rates at the secondary level and to expand technical and tertiary education in a substantial, though selective manner. At the primary school level the main task over the present decade should be to improve quality and reduce drop-out rates through increased attention to teacher training, curriculum development, and the provision of textbooks and teaching aids. At the secondary level, a major increase in investment could be justified on both social and economic grounds. The major issues which need to be addressed in this area are the availability of sufficient numbers of well-trained teachers, the expansion of administrative and planning capacity needed to implement a larger program, and the regional dispersal of secondary education facilities. In tertiary education, an expansion of facilities will need to be supported by improvements in the presently poor quality of programs, inadequate management, low internal efficiency of the university system and staffing. There is also a clear need for expanding vocational training programs. Although the Government has ambitious plans in this area, they are presently held back by the lack of teachers with sufficient industrial and commercial experience, and by the lack of close linkages with prospective employers. Finally, as noted elsewhere, the creation of new facilities at all levels will need to be supported by the adequate provision of recurrent expenditures to provide adequate teacher salaries, equipment and other operating and maintenance expenditures. 2.47 As in education, the basic question with regard to future investment in health is whether priority should be given to further service expansion or to improvements in quality and utilization of health facilities. Continuous Government efforts to systematically build-up health services in recent years have led to dramatic improvements in health care facilities. Notwithstanding these improvements, indicators of health care development (in terms of life expectancy, infant mortality etc.) are less satisfactory than in countries with similar income levels. Similarly, expenditures (both public and private) on health services in Indonesia are less than those in comparable countries. Despite recent rapid expansion, the coverage of health services remains low by international standards; efforts to provide wider coverage of health services - 53 - at both the urban and rural level therefore are warranted (see Part II). A particular concern should be to strengthen primary health care and prevention services and the referral system, and to improve co-ordination with other programs such as population, nutrition and income generation activities; and to increase participation of the general population in health programs. Priority should also be given to increasing utilization of existing facilities and to improving their quality. Many of the existing facilities at the kabupaten and village levels remain underutilized due to the low quality of service and lack of supporting staff; efforts should also be made to increase the supply of trained staff, especially health workers, primary health care nurses etc. This should be accompanied by improved maintenance of existing facilities and increased emphasis on immunization, and epidemic and disease control programs. Attention should also be given to improving health service support system such as drugs supply, in-service training and technical and administrative supervision. 2.48 A strong case can be made for increased investment in housing by both the public and private sectors. (Despite the significant expansion of housing finance and construction in recent years the coverage of existing formal programs in the public and private sectors remains quite limited; and given continuing rapid urbanization, the need for adequate housing particularly in urban areas is becoming increasingly acute.) Such investment could also be justified in terms of high employment impact and high domestic content of housing expenditures. 2.49 Given the resource constraints and especially the tight availability of budgetary funds and liquidity credits, however, the likely allocations for the housing sector, (even allowing for increased allocations assumed in Table 2.7) will fall far short housing needs. Efforts should therefore be made to increase the effectiveness of limited public sector allocations by giving continuing priority to sites and services as opposed to full construction of housing units; since site development (including minimum partial construction of dwelling units) on average costs only about 50% of fully completed units, such an approach will help to maximise the number of beneficiaries from limited public expenditures. Secondly, priority should also be given to low-income housing; at present very little of the houses built by PERUMNAS is available to the lower 40% of the population, and housing construction by the private sector caters mainly to the upper income groups. Therefore, in addition to increased emphasis by PERUMNAS on low-income houses, encouragement should also be given to the private sector to build more low-income housing by removing regulations which discourage the construction of such units and by providing assistance and credit to smaller developers. Thirdly, equitable access must be provided to all income groups to institutional credit, while subsidies in the housing sector should be reduced and redirected to the lower income groups who could least afford to pay market interest rates. At present, housing subsidies benefit mainly the upper income groups. Coping with Uncertainties in the Investment Program 2.50 It is essential that mechanisms be set in place which would enable the authorities to cope with the uncertainties inherent in managing the investment program, thereby allowing the authorities to adjust the program in a reasonably timely and orderly fashion. The uncertainties which must be - 54 - coped with generally arise from two counts: (i) year-to-year uncertainties with regard to resource availabilities, and therefore with regard to the amounts of investment which could be financed in a particular year; and (ii) uncertainties associated with implementation capabilities and the availability of suitable projects in various sectors. 2.51 There are obviously many ways of dealing with uncertainties in financial availabilities; for example, it is often possible to make annual adjustments to the public investment program through the annual development budget process. It is also possible to deal with more difficult and precipitate circumstances by introducing across-the-board cuts in the development program. While both these expedients are often resorted to, they are, however, unsatisfactory for a variety of reasons. Across-the-board cuts do not often differentiate between more important and less important projects, with the result that all projects are equally affected. Secondly, the stop-go approach exacerbates project implementation delays. In the case of Indonesia, given the need to improve project implementation performance in order to mobilize more official development assistance on relatively favorable terms and to reduce presently somewhat high ICORs, such a situation would be particularly undesirable. Selective adjustments through the annual budget, though somewhat better than across-the- board cuts, also have their own pitfalls. The scope for annual adjustments might become limited particularly in a situation where the Government is committed to several large multi-year projects at the same time. Once under way, such projects may be difficult to cut back and consequently will pre-empt the bulk of public resources for several years; as a result other equally desirable projects and sectors with relatively short gestation periods (e.g., INPRES programs) may have to bear a disproportionate share of the required adjustments, while new initiatives in other desirable areas may also be severely hampered. 2.52 It is therefore important that other mechanisms are put in place to ensure that the adjustments to the public investment program are not excessively disruptive. The experience of other countries with such mechanisms have been favorable. For example, it would be extremely useful to prepare multi-year expenditure plans at least for the larger projects. Such an exercise would help to clarify the expenditure commitments {both foreign exchange and domestic currency) on major ongoing projects for two-to-three years at a time; it would also provide guidance to policy makers on the extent to which new project starts could be initiated later, adjustments that will have to be made in other sectoral programs, and if unduly large cuts are to be avoided in these programs, the adjustments which might be required in the larger projects in terms of revisions, rephasing, modifications of projects etc., well ahead of the normal annual budget cycle. In the past year there has been some progress on this front in the course of preparing REPELITA IV. But more work is needed in key sectors, such as industry, power, telecommunications, tree crops, etc. The Government's efforts in this direction will be facilitated if external donors could provide aid indications for more than one year at a time. A second, and even more effective device is that of establishing a core program of high priority projects within a larger development plan. For example, such a core program could be limited to 75-80% of funding that may be available in a particular year and include all high priority projects in all sectors which the Government will want to protect from resource shortfalls and implementation delays. In the event of resource - 55 - shortfalls, or during the preparation of the annual budget, these core projects would be protected; and the brunt of adjustment borne by (by definition) less important projects. It is, however, important that such a core program should not include only large indivisible projects in a few sectors. It would represent the sectoral and project mix of investment which the Government would want to undertake if the resource availabilities were to be significantly reduced. If resources were to be significantly more than expectations, or fall below the annual budget targets, the Government could adjust expenditures on non-core projects and programs in the required direction. The Government is already moving in this direction with the first application being in the power sector. Such devices are only some of many possible schemes. Governments have resorted to various budgetary devices to achieve similar objectives: e.g., supplementary budgets, block allocations, and special funds for high priority projects. The essential point is that priorities be established and that high priority projects be assured of financing. 2.53 Another important issue is related to development budget preparation. The programming of the development budget could be considerably facilitated by the inclusion of carry-over allocations from previous budgets in the annual development budget for each year; in fact, the process of effecting orderly adjustments to the public investment program through the mechanisms discussed above would be very difficult to achieve if the authorities have little flexibility to control/regulate carry-over expenditures. At present, financial control is achieved largely by slowing down disbursements from the current year's development budget, so that actual expenditures, including carry-over expenditures, are in line with realized revenues; inevitably this will affect the intra-sectoral priorities set out in the development budget for a particular year, to the extent that the proportion of carry-over expenditures varies among sectors. 2.54 The other important source of uncertainty in the investment program is associated with the pace of project implementation and the adequacy and the degree of preparation of the project pipeline by line ministries and public enterprises. For the reasons discussed above, it is desirable to give increased priority to less import-intensive sectors such as agriculture, education, health, housing, regional development, etc. However, it is important to recognize that progress might be hampered by more limited project and program preparation and implementation capacities in these sectors, as compared to sectors such as power and industry. To that extent, it may be the case that even if larger allocations are made to less import-intensive sectors such as education, health, etc., the pace of utilization/implementation may be slower than hoped for; in such an eventuality the Government may be inclined to increase allocations to, or fund additional new projects, in the power and industry sectors in order to compensate for possible implementation shortfalls elsewhere. In so doing, the overall constraint on capital goods imports is likely to emerge more quickly; and the investment/GDP ratio will decline, as noted in para. 2.31. The important point, however, is that such decisions should be made on a flexible basis, and only after ensuring that implementation in less import-intensive sectors cannot proceed more rapidly because of constraints of administrative capacity, project preparation, etc. It is essential that close attention be given to project preparation and implementation capacities in these less import-intensice sectors. This brings us to the issue of project implementation discussed below. - 56 - Improving Project Implementation Performance 2.55 While the determination of the appropriate scale and mix of public investment will clearly be important, improving the implementation of projects included in the public investment program will be an integral aspect of economic management over the next few years. The need to improve project implementation performance can be an important objective by itself; implementation delays often increase project costs and the postponement of the benefit stream (in terms foregone output, incomes and employment) can affect the rates of return and sometimes the economic justification of some projects. This objective is likely to become even more important in Indonesia's present context; given the financial stringency now in prospect and the limitations on Indonesia's capacity to significantly increase investment levels over the next few years, it will be essential to ensure that expensive capital and foreign exchange are not tied up unproductively in slow-moving projects. Accelerated project implementation will also help Indonesia to increase disbursements from the existing project aid pipeline, to induce external donors to augment their future commitments of external assistance to Indonesia by enhancing the confidence of such donors in her implementation capacity, and to generally accelerate the growth process and development momentum. 2.56 Recent experience with World Bank-financed projects suggests that Indonesia's project implementation performance has improved significantly over the past few years. However, despite this noteworthy improvement in recent years, a number of problems remain. As in other countries, a wide range of economic, financial, technological, social, administrative and institutional factors contribute to implementation delays in Indonesia; while a catalogue of all these contributory factors is bound to be voluminous, the experience with World Bank projects in Indonesia indicates that project implementation is hampered by problems in six broad areas: procurement, land acquisition, consultant recruitment, budgetary and financial procedures, the construction industry, and institutional and management framework. Since Bank-financed projects largely follow government procedures in these areas, the problems identified and possible solutions are likely to have a broader relevance beyond Bank-financed projects to those financed by other aid agencies and donors and by the Government itself. 2.57 Delays in procurement are most serious with larger (over Rp 500 million) equipment and civil works contracts which account for the greater part of the development budget outlays. On average the procurement process (from prequalification to contract signature and completion of all necessary reviews) takes 18-20 months for larger civil works contracts procured by international competitive bidding (ICB) and as much as 24-32 months for larger equipment contracts procured by ICB. The present delays with regard to procurement emanate from many sources : lack of standardization with regard to prequalification and contract documentation, delays in initiating the procurement process sufficiently early (agencies are sometimes reluctant to prepare tender documents and to solicit bids before financing is approved), complicated bidding and bid-evaluation procedures, sometimes insufficient awareness on the part of agencies of the procedures to be followed, etc. (see below). - 57 - 2.58 Land Acquisition Problems. Projects in virtually all sectors require the acquisition by the Government of land and its transfer to project agencies. In many cases, particularly those in Java and in or around major towns, this proves to be a difficult and time-consuming process. The Government does not have the right of eminent domain in Indonesia, so that land acquisition is in fact an unduly time-consuming process. Even if the Government had the right of eminent domain, land acquisition would be hampered by the fact that there are: (a) cumbersome administrative procedures; (b) deficiencies in land records; (c) delays in mapping, surveying and delineating rights of way; and (d) difficulties with regard to price negotiations. 2.59 Budgeting and Finance Procedures. The level of knowledge in Government agencies about the details of Government budgeting and finance procedures is uneven. This is partly because there is no one document which gathers together all of the information on these matters that project staff need to know, and because of insufficient communication between Ministry of Finance and project agencies. For example, many agencies are reluctant to enter into multi-year contracts or to initiate the procurement process early before DIP allocations are finalized, even though this is permitted by Ministry of Finance procedures. Secondly, despite recent improvements, the procedure for DIP revision is still quite complex; consequently funds are not received by some agencies till late in the financial year; departments also have little flexibility for shifting funds from one project to another within broadly defined categories. In a number of projects (such as the World Bank-financed Smallholder Rubber Development Project, urban development projects) the financing plans and procedures for release of funds are very complex, with financing coming from several sources, each with its own set of procedures. In yet others, project implementation is delayed by the fact that the opening of Letters of Credit (L/Cs) for the import of equipment often takes six months or even longer due to the long chain of approvals needed. There are also chronic delays in the initiation of reimbursement applications for those items which have been prefinanced by the Government. 2.60 Consultant Services. Delays in negotiating and approving consultant contracts are a major cause of slow project implementation. Under Bank-financed projects consultants contract procedures (from the initial terms of reference to contract signing) often takes from six months to a year; if anything, this interval seems to be increasing. While the Government is rightly encouraging the development of local consultant capacity and has been urging public sector and non-governmental institutions to increase the role of domestic consultants in implementing the development program, some agencies have proposed roles for Indonesian firms that are inappropriate in relation to the level of experience of such firms. Some agencies are also reluctant to hire foreign consultants except through local firms. There is no doubt that foreign aided projects should seek to support Government efforts to develop domestic consultant industry skills. But a reasonable balance must be struck between the development of the industry and ensuring satisfactory work. The choice of unqualified local firms may only lead to the need to re-do work and hence needless delays in project implementation. In finalizing consultant contracts, BI's guidelines for billing rates for consultants would also need to be interpreted flexibly, taking into account the nature of consultancy services and the degree of specialization required. Finally, the present government contract review procedures are cumbersome. This process could be simplified. - 58 - 2.61 Institutional and Management Issues. A broad range of problems which adversely affect project implementation is subsumed under this category; many of these problems are project-specific, (for example, weaknesses in project design or in co-ordinating mechanisms), while others (such as deficiencies in sectoral planning, over-burdening of implementing agencies) are of a sectoral nature. There are, nevertheless, a number of project- and sector-specific problems which cut across sectors and projects. For exarnple, the implementation of a number of projects is hampered because of difficulties in attracting, retaining and motivating suficient numbers of qualified and experienced staff, particularly due to low salaries. In many sectors including irrigation, highways and the social sectors, there is also a need for progressive delegation of implementation and expenditure authority to provincial or kabupaten-level agencies, together with a significant strengthening of manpower resources. Thirdly, the ability of agencies to address and resolve problems affecting implementation varies widely from sector to sector; and there is a continued need for builcling up the agencies' capacity to design, manage and implement their overall programs. This should also include continued training of staff, particularly in the areas of procurement and disbursement, methods of consultant recruitment, the minimization of delay in consultants' work, and finance and budget procedures. 2.62 The problems and issues raised above differ greatly in their complexity and in the ease with which they can be addressed by the Government; some could be remedied relatively easily. For example, in regard to procurement, the early initiation of the procurement process, standardization of prequalification and contract documents, simplification of bidding requirements and bid-evaluation procedures and liberalizing the use of multi-year contracts, among other steps, would help to reduce the considerable time lags in procurement. Similarly, the issuance of comprehensive guidelines on finance and budgetary procedures, simplification of procedures for the opening of Letters of Credit, greater interaction between Ministry of Finance and agencies with regard to fund release procedures and the establishment of a system of quarterly monitoring of the release of DIP funds to project agencies would help to improve project implementation. On the other hand, others will require considerable analysis and discussion before solutions could be finalized. The Government has established five working committees to examine these issues, and to make recommendations on how the Government should proceed, and is already taking action in a member of areas, such as the standardisation of procurement documents. While this process will take time it may, however, be possible to introduce a number of changes relatively quickly which could help significantly to improve project implementation. The Role of the Private Sector and Deregulation 2.63 As discussed elsewhere in the report, the ability of the public sector to finance development activity has diminished somewhat. Government savings are expected to increase gradually through continued discipline in restraining current expenditures and rising tax revenues, resulting from the effective implementation of the new tax laws. Nevertheless, the private sector will be called upon to play an increasingly importeLnt role in undertaking investment. The Government is clearly aware that the acceleration of the process of development is closely linked with the extent to which the resources, energies and ingenuity of the broadest possible spectrum of society is harnessed. - 59 - 2.64 Accordingly, it is important to ensure that the private sector be given broad scope for economic action and be free of regulations which inhibit initiative and are of dubious social value. The demarcation of areas for investment by the public and private sectors will need to be reviewed carefully in this light. As a matter of strategy, it may be desirable to provide as much flexibility to the private sector to choose where it wants to invest, without delineating specific areas for private (or public) investment; to the extent that such projects are economically efficient and conform to national priorities they should be allowed to proceed. There are, of course, areas where private investment will not be expected to take place - e.g., large indivisible projects requiring very heavy commitments of resources, infrastructure investments which may be socially desirable but may not be financially profitable for the private sector and so on. While such areas are candidates for public investment, the division between public and private sectors in other less obvious areas will need to be made on a flexible and pragmatic basis. 2.65 In addition, the Government will need to take certain steps to encourage and facilitate private investment. The first is the evolution of a pragmatic policy for the further development of the financial sector (Chapter 3). Private investment in the medium term will depend critically on the adequate availability of credit, both working capital and particularly longer-term credit for financing investment. Insufficient access to and high real cost of long-term credit could become serious impediments to private investment, given the difficulties being currently experienced with regard to term-transformation of funds through the banking system and the high lending rates in prospect for the next few years (paras. 3.47-3.48); and mechanisms will need to be worked out to overcome these problems. 2.66 The second and even more important aspect of fostering an environment conducive to greater private investment activity is the simplification of the regulatory framework. Up to now, extensive and often confusing licensing and regulatory requirements have impeded private sector development, especially in the manufacturing sector. Manufacturing enterprises are subject to a large number of regulations and licensing requirements covering the different stages of their operations - for example, approval of original investment, expansion of capacity, production levels, ownership arrangements, location, imports, exports, transport and marketing, labor, wages, foreign staffing, funding arrangements, etc. Moreover, these licensing and regulatory requirements are imposed at different levels (national, provincial, municipal, local, etc.) and by different agencies. Coordination among agencies is often poor and the procedures for obtaining licences are complex, cumbersome, and usually subject to considerable delays. 2.67 While this complex regulatory system has been inspired by several policy-objectives (for example, by the desire to prevent excess capacity, direct investments into preferred areas, promote regional development and weaker economic groups, etc.), it is not at all certain that these objectives have in fact been realized. What is clear is that these regulations have led to many adverse economic consequences: for example, detailed licensing has failed to prevent the emergence of excess capacity in many industries; the licencing system which provides protection to the early entrants to the industrial sector does not necessarily encourage the establishment of the most - 60 - economically efficient units. Furthermore, such a system discriminates against later entrants and particularly smaller firms, and facilitates monopoly situations and exploitation of consumers; and despite the various incentives provided, it has not led to any significant regional dispersion of industry outside Java. On the other hand, import controls, quotas and tariff restrictions which have also formed part of the regulatory framework, have led to the growth of a highly inward-looking inefficient industrial structure, as noted elesewhere in this report. On the whole, the regulatory system is perceived as substantially increasing the operating costs to enterprises in particular, and as Table 4.6 (Chapter 4) indicates so clearly, to society in general. 2.68 The Government is fully aware of the difficulties inherent in the present regulatory system and is engaged in a major effort to reform the system. The BKPM has been reorganized several times (including its conversion to a 'one-stop' agency) to improve its efficiency. However, quantitative restrictions, including the excessive licencing of importers, have proliferated in the last two years, complicating the task of promoting efficiency in domestic industries. As noted in Chapter 1, the Government has recently announced its intentions to simplify the regulatory framework and to effect significant reduction and simplification in the licensing requirements by the beginning of the REPELITA IV period. Among the measures already introduced or being contemplated by the Government are: the establishment of a clear framework for government licenses, simplification of the number of licenses and licensing procedures, greater uniformity in the period of validity of licenses, the abolition of trade licenses over imports and exports, and streamlining the issue of licenses in the provinces by converting the Regional Investment Co-ordinating Boards (BKPMDs) into one-stop offices. It would be unrealistic to expect such a major overhaul to have an immediate impact in the short-run. It will necessarily take time. It is therefore essential that the Government maintain its commitment to deregulation and that mechanisms are put in place to prevent retrogression in areas in which deregulation is carried out. The simplification of the licensing requirements and procedures, however, will not be easy as it will call for modifications to existing laws, and as many of licenses provide sources of incomes for government agencies and provincial governments. Notwithstanding these difficulties, substantial early progress in improving the regulatory framework, in addition to the reduction in quantitative restrictions and tariffs, will be essential for harnessing the resources, financial and entrepreneurial, of the private sector in order that it p:Lay a more active role in the country's development over the coming years. 2.69 At the same time it is incumbent on the private sector to provide an appropriate response to the Government's efforts to improve the climate for private investment by increasing the level of private investment, and even more importantly, by improving the efficiency and quality of private investment projects. In this context it is essential that the private sector take a long-term view of the opportunities for and risks of investment in Indonesia, so that investment decisions are based on more rational and realistic expectations. For example, if the private sector were to continue to expect extremely low pay-back periods (i.e., very high financial rates of returns), the Government's efforts to increase private investment would be of little avail. It is also important that future private investments are efficient, export-oriented, competitive by international standards, and that they do not rely on continued high protection through tariffs and quantitative restrictions. It should be recognized that if such investments cannot compete - 61 - effectively in export markets or domestically with potential imports without excessive protection, they will contribute very little to economic growth or to ameliorating the balance of payments. Indeed, as noted in Chapter 4 below, to the extent that private investment projects are not competitive and require high levels of protection and external financing, they could exacerbate Indonesia's balance of payments situation, and make the transformation process much more difficult. - 62 - Chapter 3 DOMESTIC RESOURCE MOBILIZATION: SELECTED ISSUES AND PROSPECTS 3.1 The sharp decline in oil revenues and the consequent impact on public sector savings described in Chapter 1 clearly demonstrated how important it is for Indonesia to intensify its efforts at domestic resource mobilization so as to be able to continue to finance an adequate level of investment. The macroeconomic projections presented in Chapter 2 (Table 2.3) indicate that, given the external resource constraint, in order to increase real investment by around 5% p.a. over the present decade, domestic savings must rise from around 16% of GDP in 1983 to about 20% by 1990. Policy measures aimed at generating the modest GDP growth of 5% p.a. in the medium term must, therefore, address not only the foreign exchange constraint through increasing emphasis on non-oil exports, but also alleviate the domestic savings constraint and improve resource allocation. In this context public finance strategy and policies pursued in the financial sector play a critical role. Policies to be implemented in these areas are not only mulually reinforcing but also very much complementary to those needed for addressing the foreign exchange constraint. This chapter outlines and assesses some of the key issues and prospects related to (i) Government revenues and expenditures, particularly in connection with generating greater public savings; and (ii) the role of the financial sector in private savings mobilization and allocation. A. Public Finance: The Challenge of Increasing Public Savings 3.2 The challenge of financing the public investment program in the future during a period of constrained foreign borrowing lies in the success of public sector resource mobilization efforts. A principal feature of the domestic resource mobilization effort is the future performance of public sector savings. High international oil prices and continued robust international demand for oil in 1980-81 raised total government revenues in relation to GDP from 18.8% in 1978/79 to 22.6% in 1981/82 (Table 3.1). By 1983/84 this ratio had, however, declined to 19.7%. Even with considerable restraint in current expenditures, government savings declined from 8.1% of GDP in 1981/82 to 7.7% in 1982/83. While taxes from the oil sector will continue to be the cornerstone of government revenues, the performance of public savings depends critically on non-oil tax revenue generation and continued restraint on current expenditure growth. - 63 - Table 3.1: CONSOLIDATED STATEMENT OF GOVERNMENT FINANCE, 1978/79-1990/91 (% of GDP at current prices) Annual Esti- Real Actual mate Projected Growth 1978/79 1981/82 1982/83 1983/84 1984/85 1990/91 1985-90 Total revenues 18.8 22.6 20.8 19.7 20.2 22.1 8.0 Non-oil taxes 7.8 6.0 6.4 6.0 6.0 7.5 8.0 Non-tax revenues 0.8 0.6 0.7 0.7 0.7 0.7 4.6 Oil and LNG taxes 10.2 16.0 13.7 13.0 13.5 13.9 8.2 Current expenditures -12.2 -14.5 -13.1 -12.2 -12.5 -12.8 5.6 (of which: domestic oil subsidy) (-0.9) (-2.4) (-1.6) (-1.3) (-1.3) (-) (-32.9) Government savings /a 6.6 8.1 7.7 7.5 7.8 9.3 12.2 Government investment 5.7 7.0 8.0 6.5 7.3 7.5 Financing requirement -0.9 -1.1 0.3 -1.0 -0.5 -1.8 Memo item Gross domestic investment 20.5 21.4 22.6 22.0 21.7 22.0 5.3 /a Excludes savings by public enterprises. Source: Biro Pusat Statistik; Budget; BI; World Bank staff estimates. Measures to Raise Tax Revenues 3.3 As noted in Chapter 1, the Government is taking steps to increase non-oil tax revenues through the reform of the tax laws. The potential for non-oil tax revenue mobilization in Indonesia can be illustrated by comparing its performance with other countries. A cross-country comparison of tax revenues by type of tax indicates that Indonesia compares favourably with many developing countries in terms of total tax revenues as a share of GDP (Table 3.2). However, when taxes on oil are excluded, the ratio of non-oil taxes to GDP (5.9% in 1981/82), is low compared to those for Thailand (13.4%), Philippines (12.3%), Pakistan (14.5%), India (14.1%) and Sri Lanka (22.2%). The average individual income tax between 1978 and 1980 was only 0.4% of GDP for Indonesia, which is the lowest in the sample, except for Brazil (which depends heavily on indirect taxes) and Nigeria (which, other than oil taxes, also collects sizable trade taxes). Indeed it is lower than the average for a sample of 21 countries with a per capita GNP of below $300 per year. Similarly, non-oil corporate taxes in Indonesia were only 0.9% of GDP in 1979 compared to the average of low income countries of 1.5% and middle income countries of 3.0%. Table 3.2: TAX REVENUE BY TYPE OF TAX (% of GDP) Domestic Taxes on Wealth and Income Tax Goods and Services Foreign Trade Property Year GNP per Total Tndividual Corporate Sales/VAT Excises Import Export capita (1979) Taxes D,uties Duties India 1978-1980 210 14.05 1.19 1.26 0.12 5.39 2.46 0.12 0.19 Srilanka 1978-1980 230 22.19 0.74 2.03 2.49 3.63 4.06 8.15 0.13 Pakistan 1978-1980 270 14.53 0.94 1.07 0.97 4.20 4.93 0.18 0.09 Kenya 1978-1980 390 20.87 n.a. n.a. 5.22 2.24 4.72 0.28 0.19 Egypt 1977-1979 400 27.90 1.58 2.96 - 1.91 7.44 0.34 0.58 Thailand 1979-1981 600 13.44 1.12 1.54 2.74 2.88 2.96 0.48 0.12 Philippines 1978-1980 640 12.30 1.74 1.19 1.88 2.67 2.84 0.25 0.67 Nigeria 1975-1977 910 20.61 0.03 16.77 - 0.42 3.36 0.01 - Korea 1978-1980 1,510 17.05 2.37 2.19 3.84 2.80 3.11 - 0.49 Brazil 1978-1980 1,770 23.19 0.18 1.02 6.79 4.39 0.63 0.34 0.43 a Mexico 1978-1980 1,880 13.92 2.53 3.13 2.44 1.77 0.92 1.73 0.02 Venezuela 1978-1980 3g440 19.99 0.72 14.46 - 0.92 n.a. n.a. 0.07 Indonesia 1978-1980 370 18.74 0.42 13.02 1.09 0.95 1.01 0.8 0.32 Average of low income countries /1 206 13.23 1.22 1.54 1.71 1.63 4.15 1.62 0.26 Average of middle income countries L2 510 18.55 1.90 3.02 1.54 2.05 5.80 1.15 0.37 /1 Sample of 21 countries with GNP per capita of less than $300 per year. a2 Sample of 43 countries with GNP per capita of between $300 and $650 per year. Source: IMP, Fiscal Affairs Department, 'Quantitative Characteristics of the Tax System of Developing Countries' DM/83/79. - 65 - 3.4 Non-oil Taxes. Before discussing the prospects for non-oil tax revenues, it would be useful to describe briefly the principal features of the newly enacted tax reform. The reform is designed to generate greater non-oil revenues by broadening the tax base and simplifying the tax structure and its administration. The principal components of the new system comprise a new structure of direct taxes, the introduction of a value-added tax and a new set of simplified procedures. 3.5 The New Income Tax Law (Pajak Penghasilan) combines four separate taxes under the old system - the individual income tax (PPd), the corporate income tax (PPs), the withholding tax on interest, dividends and royalties (PBDR) and the withholding tax (MPO). Only three tax rates now apply - 15%, 25%, and 35% - in place of several rates prevailing up to now. The threshold level for individual income tax has been doubled to Rp 3 million per year for a family of five; the tax authorities estimate that 10-15% of the population will qualify as taxpayers. Under the new law, virtually all special tax incentives (such as tax holidays) for investment have been eliminated. The relatively low maximum rate of 35% is, however, a signal to foreign investors of a favourable tax climate. With respect to interest income from time deposits the Government has, for the time being, waived taxation so as to avoid any decline in the level of time deposits held in the country. 3.6 The Value-Added Tax Law (V.A.T.) replaces the former sales tax (PPn), a complicated turnover tax with seven different tax rates. Instead, a flat 10% tax on value added will be charged. The new tax will initially be restricted to the construction sector, manufacturers, and importers of manufactured goods. Unprocessed items will not be taxable and other exemptions include rice, prescription medicines, textbooks, and non-mechanized agricultural equipment. In addition, small firms (to be defined later by Ministerial Decree) will be exempt from this tax. V.A.T. has the potential of increasing revenues significantly, though its effective implementation will take time and considerable effort. In addition to V.A.T., a one-stage luxury surcharge tax (identical to an excise tax), consisting of two rates - 10% and 20% - will be levied either at the time of sale by the manufacturing firm or at the time of importation. Luxury items liable to this tax will include, inter alia, all household electrical appliances, cars, videos, jewellery, and sailboats. 3.7 Finally, the New Procedural Law incorporates the procedures for self- assessment, enforcement, and redress. Full responsibility for filing tax returns and paying taxes will rest with the taxpayer backed by selective audit. The new procedural law also consolidates previously scattered references to enforcement procedures in the statutes for each tax. The authorities have tried to strike a balance between consideration for the taxpayer and collection enforcement. To encourage compliance, mechanisms for redress, appeal and payment of refunds (with time limits for each) have been incorporated into the law. - 66 - 3.8 The tax reform laws have been long in the making, and the deliberations of the Government are reflected in a well designed package of new taxes and schedules. The success or failure of the new tax system, however, depends on the effectiveness of its implementation, and the extent to which the public understands, and identifies with, its aims and objectives. Preparations have already begun to both educate the public through various forums and to streamline procedures and organizations related to the new system. It must be recognized, however, that the gains (both fiscal and efficiency) from the new tax system will inevitably take time to be fully realized. Table 3.3: NON-OIL TAXES - BUOYANCY ASSUMPTIONS Assumed Historical Estimates /a Buoyancy Base Used 1968-78 /b 1979-82 /c 1984-90 Taxes on income Income tax Non-oil GDP 1.0 1.0 ) 1.3 Corporate tax GDP 1.3 1.3 Withholding tax Non-oil GDP 1.3 1.2 IPEDA GDP 0.9 0.6 1.0 Other GDP 1.2 1.1 1.1 Taxes on domestic consumption Sales tax Private consumption 1.0 1.1 ) 1.2 /e Import sales tax Imports 0.9 0.9 Excise Domestic private consumption 1.0 0.8 1.0 e Miscellaneous levies GDP - 1.2 1.2 Taxes on international trade Import duties imports 0.9 0.9 0.9 Export tax exports 1.0 3.5 d 1.0 Non-oil tax revenue Non-oil GDP 1.0 0.8 1.5 /a Using log-linear regression estimation procedures. /b IMF Staff Working Paper 1978. /c World Bank Staff Estimates. d Due to falling log exports during a period of decline in, nominal export value. e With respect to manufacturing growth. Source: World Bank staff estimates and projections. 3.9 Turning now to the medium-term prospects for non-oil tax revenues, the restructuring of the taxation system and increased efforts at collection should reverse the declining trend of non-oil taxes in relation to domestic incomes. The buoyancy of non-oil tax revenues to non-oil GDP in fact fell from 1.0 in the period 1968-78 to 0.8 in the post-1979/80 period (Table 3.3). - 67 - The latter period corresponds to the years of rapidly rising oil revenues and it is conceivable that the reduced tax effort may have been one way of redistributing the oil income to the private sector. The projections in this report assume that non-oil taxes will achieve a buoyancy of 1.5 with respect to non-oil GDP (Table 3.3). While the overall assumed buoyancy is high in comparison to the performance of the past decade, it should be attainable providing the new tax law is forcefully implemented. 5 3.10 Oil and LNG Revenues. In real terms oil and LNG revenues are expected to grow about 5.1% p.a. on average between 1985-90, far below the performance of 1975-80 (Table 3.4). The slow growth in both oil production levels and prices and rapidly rising costs of crude production account for this modest projection. Revenues associated with LNG production will also be affected by the development of oil prices and the slow demand-constrained growth in production after 1984/85. Table 3.4: OIL AND LNG REVENUES IN THE MEDIUM TERM ($ Billion) Annual Annual Nominal Real Growth Growth 1983/84 1984/85 1990/91 1985-90 1985-90 Oil revenues Crude production (mby) /a 504 508 627 - - Crude price ($/bbl) Lb 29.5 29.5 49.4 10.9 2.3 Net operating income 11.7 11.6 21.4 14.0 5.1 Budgetary revenues 8.5 9.9 17.5 13.9 5.1 LNG revenues Production (million MMBTU) 500 750 943 - - Budgetary revenues 1.0 1.6 3.5 14.1 5.1 Total oil and LNG revenues 9.7 11.5 21.0 13.9 5,1 Memo item: Budgetary subsidy (Rp trillion) 0.9 1.1 0.1 - - /a Excludes Pertamina. /b International price of oil plus $0.50 premium for Indonesia's crude. Source: World Bank staff estimates. 3.11 Projection of budgetary oil revenues are sensitive to the assumptions about the costs of crude production. The average costs of producing crude in Indonesia is expected to rise rapidly for two reasons: first, as production rises and old fields are depleted, more expensive methods of extraction will /1 Countries such as Malaysia and Kenya have achieved tax buoyancy ratios of the order of 1.4-1.5 over relatively long periods. - 68 - be employed, and smaller fields will be brought on stream; and second, the share of Caltex's low cost fields in total production, particularly MINAS, is anticipated to fall and be replaced by relatively high cost crude from other production-sharing contractors. As a consequence of these factors, the average cost of crude is expected to rise by about 8% per year in real terms over the rest of this decade. Finally, with the projected increase in exports of LNG (from 500 million MMBTU presently to about 950 million MMBTU by the end of the decade - see Chapter 4), government revenues are expected to rise by about 14% p.a. in nominal terms between 1985 and 1990. 3.12 Historical and illustrative projections for the composition of Government revenues are presented in Table 3.5. Oil and LNG taxes rose from 33.8% of total domestic revenues, in 1972/73 to 70.7% in 1981/82 and subsequently fell to 66.0% in 1983/84. Despite the receding fortunes of the oil sector, oil and LNG taxes will continue to remain important though their share in total domestic revenues is expected to decline somewhat over the remainder of the decade. The share of non-oil taxes, which fell during the Seventies and early Eighties, should rise again by the end of the decade. Table 3.5: THE CHANGING STRUCTURE OF GOVERNMENT REVENUES, 1972/73-1990/91 (In percent) 1972/73 1975/76 1978/79 1981/82 1983/84 1984/85 1990/91 ----------- Actual ------------ Est. -- Projected -- Oil and LNG taxes 33.8 53.8 54.1 70.7 66.0 66.7 63.5 Direct taxes 17.6 14.2 14.7 11.3 13.3 14.2 14.7 Individual income tax 4.4 2.9 2.9 1.7 2.8 Corporate tax 5.2 5.9 5.3 4.6 5.3 Other 8.0 5.4 6.5 5.0 5.2 Indirect taxes 11.3 8.8 8.1 4.3 5.8 5.6 7.1 Sales tax 6.2 5.5 5.2 2.5 4.0 Import sales tax 5.1 3.3 2.9 1.8 1.8 Trade taxes 19.0 10.5 10.8 5.5 4.6 4.7 4.8 Import duties 13.1 7.8 6.9 4.4 3.9 4.0 3.9 Export tax 5.9 2.7 3.9 1.1 0.7 0.7 0.9 Other 15.4 8.3 7.8 5.4 6.7 5.2 6.6 Excises 8.0 4.4 5.9 4.5 5.4 4.2 5.6 IPEDA 2.6 1.6 1.5 0.8 0.9 0.9 0.8 Other 4.8 2.3 0.4 0.1 0.4 0.1 0.2 Non-tax revenue 2.9 4.4 4.5 2.8 3.6 3.6 3.3 Total domestic revenue 100.0 100.0 100.0 100.0 100.0 100.0 Source: Budget Data and World Bank staff estimates. - 69 - Restraining Current Expenditures 3.13 Increased public savings will also require continued restraint in current expenditures. However, the growth of some components of current expenditures is of a structural nature and difficult to slow down. For example, interest payments on foreign debt will double in nominal terms between 1984/85 and the end of the decade. Personnel expenditures, too, are difficult to contain given, for example, the continued emphasis on the expansion in secondary education. Further, as noted in Chapter 2, it is important that the existing stock of public capital, particularly in agricultural, irrigation and transport infrastructure, is well maintained by adequate allocations of funds for their upkeep. Such expenditures often yield higher rates of return than new investments. Moreover, they are generally labor-intensive and have a low import content. Thus, it would appear that the most promising areas for restraining the growth of current expenditures lie in the continued reduction of subsidies. 3.14 Budgetary Subsidies. Budgetary subsidies for domestic oil consumption amounted to 1.6% of GDP in 1982/83. In comparison with an estimated subsidy of Rp 0.9 trillion in 1983/84, the 1984/85 budget has allocated Rp 1.1 trillion for domestic oil subsidies despite an average oil price increase of some 35% in January 1984. The ex-refinery prices of petroleum products in Indonesia exceed the average ex-refinery prices in Singapore. /1 However, it is not clear what other components of Pertamina's expenses are included in the calculation of the budgetary subsidy. Further reductions in the subsidy would require either higher prices or greater operating efficiency in the sector, or both. If domestic oil prices are raised on average by 5% p.a. in real terms between 1985 and 1990, the subsidy can be reduced from 1.4% of GDP in 1983/84 to less than 0.1% by 1990. However, there is scope for improving efficiency in the sector (e.g. by reducing refinery and other losses) thereby moderating the need for future price increases. Of course, higher prices for selected products will not only encourage conservation but also substitution by less expensive energy supplies. 3.15 Turning to other subsidies, the Government has already discontinued food subsidies /2 in the 1984/85 budget. Budgetary subsidies on fertilizer /3 are assumed to be to be reduced overtime. Present subsidies are probably higher than necessary to encourage optimal use of fertilizers; as the subsidies are reduced, the impact on application rates, rice production, and farmer income can be assessed. /1 The Indonesian average ex-refinery price is estimated at Rp 239.5 per liter compared to the average Singapore ex-refinery price of Rp 209.0 per liter (as of December 22, 1983). /2 Bulog will, however, continue to be subsidized through below market interest rates on loans from state banks. /3 In addition to a direct budgetary subsidy, gas is sold to the fertilizer industry at a fraction of its oil-equivalent international price. However, the issue of the pricing of gas for domestic use is a complex one and is not dealt with in this report. - 70 - Financing Government Investment 3.16 Over the past five years, the structure of finance supporting the growing level of public investment has changed significantly. The share of total public sector investment financed from government savings rose from about 55% in 1978/79 to 68% in 1981/82. During this period, the Government ran a resource surplus, with government savings always being in excess of direct government investment. In contrast, the public enterprise sector continued to incur resource deficits, which were financed from government savings, on-lent disbursements of external public debt, and domestic borrowing from the banking system. In 1982/83, government savings fell below the level of direct government investment for the first time due to the fall in corporate oil taxes. This fall was compensated, in part, by drawdowns in accumulated government savings with the banking system and higher disbursements of external public debt. In 1983/84 government savings were once again in excess of government investment and in addition the rephasing of public enterprise investment helped maintain the public sector borrowing requirements within reasonable levels. Table 3.6 summarizes expenditure and resource projections for the public sector. Government savings, which fell from 8.1% of GDP in 1981/82 to 7.5% of GDP in 1983/84 are expected to rise to 9.3% of GDP by the end of the decade. This increased level of government savings should cover direct government investment and, in addition, partly compensate for the continued reduction in net disbursemen,ts of external debt. This is predicated on the projection that direct government investment gradually increases its share of GDP from 6.5% in 1983/84 to 7.5% in 1990/91 and is consistent with the analysis of the public investment program in Chapter 2, Section D. Table 3.6: SUMMARY OF PUBLIC SECTOR INVESTMEN'T AND FINANCE (% of GDP) 1978/79 1981/82 1982/83 1983/84 1984/85 1990/91 ------ Actual ------ Est. -- Projected -- Public sector investment 10.1 12.2 15.4 11.7 11.3 11.3 Government 5.7 7.0 8.0 6.5 7.3 7.5 Public enterprise 4.4 5,2 7.4 5.2 4.0 3.8 Public sector savings 7.9 8.7 8.2 8.0 8.3 9.8 Government 6.6 8.1 7.7 7.5 7.8 9.3 Public enterprise 1.3 0.6 0.5 0.5 0.5 0.5 Financing requirement 2.2 3.5 7.2 3.7 3.0 1.5 Domestic borrowing (net) -0.4 0.5 2.3 -1.6 -0.3 0.6 - Government (net) 1.3 -0.2 1.3 *-1.6 -0.8 - - Public enterprises (net) 0.4 0.7 1.0 - 0.5 0.6 External borrowing (net) /a 3.1 3.0 4.9 5.3 3.3 0.9 /a Excludes borrowing for balance of payments support. Source: World Bank staff estimates. - 71 - Selected Issues in Financing of Public Enterprises 3.17 As the analysis in Table 3.6 indicates, investments by public enterprises are likely to be equivalent to about 3% of GDP in the latter half of the 1980s. Yet their own savings would only be equivalent to about 0.5% of GDP - that is, own savings would only finance about 20% of public enterprise investment. The balance of the financing would have to come from budgetary transfers (via injections of equity), and domestic and foreign borrowing. The prospect of substantial financial deficits in the public enterprise sector raises two very important issues: first, what is the scope for increasing the profits and hence retained earnings of enterprises; secondly, what is the capacity of these enterprises for additional debt financing either from abroad (on-lent by the central government) or from the domestic market in the form of bank loans or bonds. 3.18 While detailed information about the performance of public enterprises is not readily available /1, it does appear that there is scope for increased profitability and hence for enhanced capacity to finance ambitious investment programs from internally generated funds. Increased operating surpluses can potentially come from two main sources: one is through cost reductions due to improved efficiency; and the other is from a careful review of public enterprise pricing policies. 3.19 Indeed, part of the adjustment process towards a more diversified and efficient production structure depends on the extent to which the public enterprise sector can become more efficient. The Government is fully cognizant of the crucial importance of improving public enterprise efficiency. How other countries have managed public enterprises could prove a useful guide in designing policies towards this end. Drawing on cross-country experience, World Development Report 1983 indicates five important elements of the policy environment which are essential for generating efficient performance of public enterprises: (a) policymakers should set clear and attainable objectives for public enterprises; (b) there should be no undue interference in public enterprise operations; (c) management should be held accountable for results; (d) there should be an appropriate framework of managerial incentives; and (e) stress should be laid on developing a team of managers with appropriate skills. /2 3.20 There are many areas where the operational efficiency of public enterprises could be improved. One example is refinery production referred to in para 3.14 above; another is the case of the transport sector and the ports where increased efficiency would not only improve profitablity of public agencies in these areas, but also entail considerable gains to the rest of the economy in terms of reduced delays and attendant costs. The multiplicity of objectives set for some public enterprises contributes to conflicting signals and sometimes undersirable operational results. The emphasis on employment, for example, should not be allowed to lead to overmanning and excessive wage /j Data available are for capital financial accounts of public enterprises for the years 1974-77 only. /2 World Bank, World Development Report 1983, Chapter 8. - 72 - bills, with adverse consequences for public enterprises' financial performance. Where non-commercial objectives are expected of public enterprises, the Government could make these explicit, siD that the benefits and costs of such objectives could be evaluated more clearly. It is also important to design a management system that holds managers responsible for operational results while giving them the means to achievie the desired objectives. 3.21 As far as the question of product prices is concerned, there does appear to be scope for some changes in the pricing policy for public enterprises. For example, in the case of the electricity authority (PLN), the Government has recently increased tariffs by an average of 32%. Despite this increase, however, PLN is expected to show little or no return on investment in 1984; and there is clearly scope (and need) to increase rates of return further. Similarly, many of the estate enterprises engaged in sugar production are currently making losses, largely because of unduly low retail prices set by the Government. In this context, the need for public enterprises to set prices that fully reflect their econormic costs cannot be overstressed. In a quite contrary case, the control over the floor price for cement could be relaxed somewhat, partly to encourage greater efficiency of public sector cement companies and partly to reduce the implicit subsidies accruing to the private sector. In such cases, it would be more appropriate to allow a greater role for market forces in encouraging operational efficiency and economically viable investments. 3.22 It is the Government's intention that public enterprises should acquire borrowed funds for investment and working capital at market terms. Given the recent sharp increases in interest rates, however, public enterprises will now have to pay around 18% p.a. on their borrowings, as compared to about 13% p.a. earlier; the proportion of debt, to be financed at such high rates, may also rise to the extent that government equity contributions and subsidized credit are reduced, and internal generation of funds by public enterprises is affected. Indeed, higher cost of credit itself will contribute to a worsening of the financial performance of public enterprises; many enterprises are already facing cash-flow problems, while some of them are incurring losses. Thus, if the increased costs are not matched by corresponding increases in output prices and improvements in efficiency, the implications for the internal generation of funds and debt-equity ratios will need to be reviewed carefully. Indeed the debt-equity ratios of some enterprises may not be appropriate to permit substantial recourse by such enterprises to bank borrowing at market rates. 3.23 This is important because commercial banks, in the wake of the financial reforms, now have considerable autonomy in regard to their portfolio decisions; as noted elsewhere, given the shortening of their deposit structure, they have also become reluctant to provide term-financing. For many public enterprises, therefore, to obtain funds for long periods at market rates may become increasingly difficult as banks may view them as poor credit risks. - 73 - 3.24 These credit risks may be primarily of two kinds: risks associated with the servicing of debt at high interest rates and those associated with the economic and financial feasibility of the projects themselves. Indeed projects which might have been financially sound at 13% p.a. interest rate may not be sound at 18% p.a. The Government could seek to counterbalance these risks by providing interest rate subsidies and guarantees to commercial banks, and by encouraging the latter to lend to enterprises at variable rates (so that lending rates of banks fully cover their costs of funds). The budgetary costs of such subsidies and the commitments by way of guarantees may need to be evaluated carefully. To the extent that the Government itself is constrained by financial scarcities, it may not be possible to provide large subsidies to public enterprises without reducing financing for other investments to be undertaken elsewhere; while guarantees against defaults could be justified only in instances where the project itself is intrinsically sound, but cannot be financed without such government support. On the other hand, commercial banks should not be asked to finance unviable projects, since it would undermine the financial sector reforms and endanger the viability of the banks themselves. 3.25 It is therefore important to ensure that the projects which public enterprises seek to finance through bank borrowing are economically and financially viable at market rates of interest. To the extent there are viable priority projects, the Government may have to be prepared to assist the enterprises through interest subsidies and guarantees to secure bank financing. In this regard the Government also will need to take steps to strengthen the financial management of public enterprises. At present the lack of adequate financial information on public enterprises is a cause for concern. Such enterprises should be required to provide basic financial data in regard to current performance and detailed programs for financing project outlays, including estimates of internal generation of funds, before they receive commitments from the Government for budgetary funds and guarantees. 3.26 A distinction should also be made between financing problems of public enterprises associated with their projects at current market rates and financial difficulties arising from inappropriate investment decisions in the past. To the extent that these past mistakes cannot be corrected by price adjustments and organizational and efficiency improvements, the Government must recognize this problem and take appropriate actions so as to avoid continued subsidies to such enterprises. This may require decisions to write off past losses, revalue assets, and restructure the capital base of such enterprises through infusions of new equity. Cost Recovery 3.27 The need for continued emphasis on social and infrastructural investment, both as a direct instrument of econonic development and as a necessary pre-requisite for private sector development, was discussed in Chapter 2. Social investments such as in education, health and family planning and investments in physical infrastructure such as roads, bridges, electric power, kampung improvements and port development, would have to be largely undertaken by the Government due to their long gestation periods, - 74 - large resource requirements and considerable divergence between social and private profitability. But the burden of these expenditures on the Government can be lightened by appropriate cost recovery efforts, provided that they are progressive in character. Increased cost recovery, by facilitating improved 0 & M expenditures and further investment, will also help to improve the quality of services being provided by public entities; and, by increasing the revenues of public entities, increase the degree of financial self-reliance of such agencies. 3.28 Thus, decisions by the Government in regard to user charges over the next few years can make an important contribution to public savings and sustaining public investment levels. As noted in last year's report /1, there are a number of areas where cost recovery could be significantly improved by levying higher charges on beneficiaries from public services and investments. Some examples are: education, health and urban services, electric power, transport, and agriculture. 3.29 There is at present virtually no direct cost recovery for capital investment in urban services in Indonesia. But it should be possible to recover part of these costs from the beneficiaries of such investments through increased betterment taxes and water rates. Betterment taxes in particular are desirable on both economic and social grounds. Currently upper income urban landowners not only enjoy the improved facilities from public investment in infrastructure, but can make substantial capital gains when selling land; betterment taxes can prevent these disproportionate gains from accruing to the better off. Similarly, education fees can be increased at the secondary and university levels particularly as the principal beneficiaries are from high income households. In the case of electric power, although tariffs, as already noted, have been increased significantly in both 1983 and 1984, they are still significantly below the latest estimates of long-run marginal cost; further tariff increases in the medium term can be justified on both efficiency and fiscal grounds. Although such increases will impose additional burdens to consumers, this should not be serious as expenditures on electricity account for a very small part of househould budgets, and consumption is concentrated among high-income urban houselholds. There is also considerable potential in the transport sector for increasing revenue through improved collection of existing fixed ownership taxes on vehicles and other road subsector taxes. In the agriculture sector, there has been very little cost recovery from public investment in irrigation while substantial subsidies are being provided on fertilizer and other inputs. As noted in para 3.15, fertilizer subsidies could be reduced gradually and the impact an application rates, rice production and farmer incomes be continually assessed. The scope for recovery of costs of inputs provided to smallholders for Nestatew crops, and for providing loans at subsidized rates (as discussed in Section B below) will need to be reviewed. /1 World Bank Report No. 4279-IND, Indonesia: Policies for Growth with Lower Oil Prices, May 12, 1983, pp. 64-73. - 75 - B. The Changing Role of the Financial Sector 3.30 The preceding section of this chapter underlined the critical role of fiscal performance in increasing domestic savings over the coming years. Another important aspect of resource mobilization and allocation efforts relates to the role of the financial sector. The liberalization of the financial sector has set the stage for mobilizing greater financial savings, for encouraging higher levels of private savings, and for contributing to a more efficient allocation of investible funds at a time of resource stringency. Development of the financial sector is a key instrument, not only for influencing the level and composition of savings decisions but, equally importantly, for improved resource allocation both in the private sector and in public sector enterprises. This section addresses some of the near and longer-term issues with respect to the financial sector and the contribution it could make in facilitating the required adjustments in the production structure of the economy. 3.31 The issues involved in managing the transition to a more liberal financial environment are principally two-fold: (a) short-run problems of monetary control and management, and (b) more fundamental problems of a longer term nature, such as resource mobilization and financial intermediation, credit allocation and the role of commercial banks especially in financing special programs of the Government, and the management of interest rate policy in an environment characterized by a liberal foreign exchange regime on the one hand and high protection to domestic industry on the other. Monetary Control and Management 3.32 The issue of monetary control has become an important area of focus for the monetary authorities in the short term, in an environment where Bank Indonesia (BI) no longer fixes interest rates or sets overall and selective credit ceilings. Following the abolition of these direct controls, BI now has to resort to traditional indirect mechanisms, such as reserve requirements, discount rate policy and open market operations, to regulate the volume of bank lending. 3.33 BI has recently taken some important steps to expand and strengthen its repertoire of tools for conducting monetary policy: (a) establishment of a traditional discount window, and (b) the introduction of BI's own certificates (SBIs) in the form of 1 month and 3 month deposit certificates in Rp 50 million, Rp 250 million and Rp 1 billion denominations. These certificates, will carry interest rates determined by a weekly auction system. The SBIs are intended for open market operations . More recently in April BI also reduced the discount rates somewhat on refinance facilities provided to private banks and development banks, slightly reduced the interest rates it pays on SBIs, extended the period of maturity on interbank call money from a maximum of seven days to ninety days, and postponed the withdrawal of maturing liquidity credits from private banks until January 1985 and from development banks until April 1985. These measures have been aimed at softening the tight money market and developing mechanisms for transmitting BI's policy signals to the market. - 76 - 3.34 There are, however, several potential issues which need to be resolved before traditional instruments can be utilized effectively for purposes of monetary control. The efficacy of some of these instruments in regulating the supply of reserve money available to banks and the cost of credit will be limited by certain special characteristics of the Indonesian monetary and foreign exchange regime. Given the absence of a market for government paper, the scope for conventional open market operations appears to be limited in the short term. BI, as discussed above, is now endeavouring to overcome this handicap by popularizing its own instruments (SBIs) as an alternative to government paper for conducting open market operations. However, government deposits with the banking system are a potential source of providing liquidity to the banking system; but this will require close coordination between fiscal and monetary policies pursued by the authorities. Secondly, given the free foreign exchange regime, a rise in domestic interest rates is likely to induce capital inflows which the banks could then monetize. (However, the access to external financial markets is somewhat limited; generally only larger borrowers or those with overseas connections enjoy such access; BI could also dissuade domestic banks from attempting to circumvent its open-market and discount rate operations through moral suasion). Finally, even when the authorities are able to regulate excess liquidity of banks and the supply of reserve money, their ability to control the supply of money will be somewhat constrained by the fact that at present a uniform reserve requirement ratio does not exist /L, and, therefore, the money multiplier could vary within significant limits depending on the mix of banks' deposit liabilities. 3.35 Continued priority, therefore, will need to be given tc the difficult technical challenges to maintaining monetary control. BI continues to maintain such control through monetary programming and regulating the supply of reserve money. This process involves the prediction of the demand for money, which together with targets for GDP growth and domestic inflation, will determine the targets for money supply and liquidity. This is not normally a difficult problem, but following the recent liberalization of the financial system, there is evidence of a significant shift in the money demand function, with time deposits with banks growing rapidly; this shift will need to be monitored carefully in programming monetary policy. 3.36 Secondly, it would be desirable to make the money multiplier, i.e. the relationship between the monetary base (bank reserves plus currency in circulation) and the supply of money as predictable as possible; as noted earlier, given the different reserve requirements now in force, the relationship between deposits and banks' reserve assets (i.e., the deposit multiplier) is somewhat indeterminate (i.e., the multiplier would vary between /1 For example, the reserve requirement is 15% of demand deposits of all banks, 15% on two-thirds of time and savings deposits of state and foreign banks, and 15% of one-third of time and savings deposits of private and regional development banks; effectively, therefore, there are three reserve ratios - 15%, 10% and 5%. - 77 - banks and over time according to the deposit mix of banks). To that extent the establishment of a uniform reserve requirement will considerably facilitate the task of monetary regulation by the authorities. Altering the reserve requirements should be a powerful instrument in the hands of the monetary authorities to regulate the reserve position and liquidity of banks and the money supply. Moreover, reserve requirements could be varied in either direction according to changing needs over time, although care should be taken to not to vary them too frequently. 3.37 To the extent that BI may prefer the present pattern of the distribution of reserves, however, there remains a conflict between this objective and acquiring a firmer grip on the reserve base. Although the liquidity position of banks seems to be comfortable, they continue to offer high deposit rates and compete for deposits. This paradoxical phenomenon, to a large extent, could be ascribed to the uncertainties which the financial sector is currently facing. The financial system over the past year has been exposed to several shocks - liberalization of the banking system, tax reform, uncertainties with regard to interest rates abroad, etc. Since about half of outstanding liquidity credits are, under present policy, recallable by BI over the next one to three years, commercial banks must mobilize additional deposits to replace these liquidity credits; and this may explain the banks' present behaviour with regard to liquidity preference and deposit interest rates. Thus, the withdrawal of liquidity credits would need to be carefully programmed to minimize disruptions in the financial markets. Resource Mobilization and Financial Intermediation 3.38 The establishment of effective monetary control is essential to the stability of the financial system. In addition, there are several issues which need to be resolved to ensure that the objectives of the financial sector reforms are realized. The banking system clearly will have to play an increasingly important role in mobilizing domestic resources in Indonesia. The role of the banking system, however, will need to be significantly different from the past when it served primarily as a conduit for channelling surplus Government funds into the economy; given the tight budgetary outlook and the reduced availability of liquidity credits through Bank Indonesia, the banking system will have to be considerably more self-reliant in generating financial resources for the economy. 3.39 As noted in para. 3.1 above, intensified efforts to increase domestic savings are essential in order to increase real investment by about 5% p.a. over the next few years. Measures to raise public savings from about 7.5% of GNP in 1983/84 to about 9.3% by 1990/91 (as discussed in paras. 3.1-3.15 above) should be an important element of the Government's strategy for increasing national savings; but at the same time private savings also will need to rise from about 7% of GNP to about 10% over this period. The banking system clearly will need to play an important role in this process by encouraging greater financialization of private savings (para. 3.40). This will be particularly important because the Government expects the banking system to play a larger role than earlier in providing for the credit needs of - 78 - public enterprises and the private sector, which in turn is expected to play a more dynamic role in economic activity. In order to meet these credit needs without exacerbating inflationary pressures in the economy it will be essential for the banking system to significantly increase its resource mobilization efforts. 3.40 Indonesia's domestic savings potential is considerable; for example, household expenditure survey data suggest that the average propensity to save in rural areas is fairly high. A high proportion of these savings, however, is not financialized; households often hold their savings; in non-financial assets. /I A major objective of financial sector policy, therefore, is to ensure that these private savings are channelled into productive investment through the intermediation of the financial system. 3.41 Such an objective is compatible with that of ensuring sufficient bank credit for the private sector and public enterprises and for financing the Government's special programs. Financialization of private savings will enable banks to expand credit in a non-inflationary manner, and still maintain domestic price, exchange rate and interest rate stability. However, in the short term some potential conflicts between these objectives have arisen. The increase in deposit rates following the recent financial sector reforms, while encouraging resource mobilization, has also led to high lending rates; these together with the sluggishness of the economy during most of the past year have had some dampening effects on investment and credit demand during 1983 (see Chapter 1). Indeed, there is evidence to show that borrowers in both public and private sectors now find that bank credit has become both more expensive and difficult to obtain; this is because, given the increased debt servicing liabilities of potential borrowers, banks prefer to lend to borrowers with more favorable debt-equity ratios, and therefore require borrowers to come up with proportionately more equity than before. 3.42 An important issue therefore is what an appropriatte level of interest rates should be which would both help to increase financizal savings and encourage investment. There is clearly no unequivocal answer to this question; while the level (and structure) of interest rates should vary according to market conditions, it is important to ensure, to the extent possible, that domestic interest rates are not too high as to discourage investment and hamper economic recovery. Domestic real interest rates are now clearly positive (around 6-9% per annum). Such high rates will undoubtedly encourage financialization of savings; but, if banks cannot find quality assets/borrowers at appropriately high lending rates, they will endeavour, to the extent possible, to invest surplus funds abroad (thereby exacerbating potential monetary control problems referred to earlier) or to slow-down their deposit mobilization efforts. Li The proportion of bank deposits (both demand and time and savings) held by individuals was only 27% in August 1983. - 79 - 3.43 Although the present levels of real interest rates are likely to have a dampening effect on investment activity, the scope for reducing interest rates in the short term is limited as discussed in Chapter 1. Over the longer term, however, the increased resource needs of public enterprises and the private sector can only be financed, given the changed external environment and budgetary outlook, by mobilizing substantial domestic resources. A flexible attitude towards interest rate policies aimed at evolving a more appropriate balance between resource mobilization needs and stimulating investment in the light of the exigencies of the economy is, therefore, needed within the limits set by the close links between domestic and external interest rates. 3.44 Consideration should also be given to the need to encourage the development of a capital market and the relevance of interest rates in this context. The structure of deposit rates now is such that there is very little difference between short-term (3 month) and longer-term (24 month) deposit rates; deposit rates are also well above bond rates (16%). Another consequence of this rate structure, in addition to the shortening of the deposit structure of banks, is to reduce the public's willingness to hold bonds; bond prices have fallen sharply in the past few months and planned bond issues by several companies have been deferred. It is, therefore, important to ensure that the structure of deposit rates does not erode the incentives to hold longer-term financial assets; this would call for a greater differentiation between short- and long-term rates, presumably by some reduction of short-term rates. High interest rates also contribute to corporate distress given the high gearing ratios of many companies (this is likely to be the case particularly in the public sector, although some private companies will also be affected); to that extent, this will affect the growth of a high quality portfolio of semi-public and private debt and the development of a capital market. 3.45 Over the longer term, mobilization of domestic resources could be increased through expansion of the banking network, institutional development and creation of new mechanisms and savings instruments, as well as through higher deposit rates. Access to banking facilities, especially in rural areas is still very low, although the savings potential in these areas is quite high. Increased monetization of the rural economy will also help to improve the deposit mix of banks and keep down the cost of funds. It is, therefore, desirable to focus attention on ways and means of tapping rural savings. An aggressive approach by state banks to expand banking facilities in rural areas is thus needed. At the same time efforts should be made to provide new savings instruments which will increase the inducements to save for individuals and households; some examples are savings schemes which are linked to housing construction/ownership, or those which enable savers to borrow from banks for productive purposes. 3.46 The private banks could also play an important role in this process. At present the role of private banks is restricted by their weak capital structure. Except for a dozen or so of the larger private banks, the capital and total assets of most of the private banks are very small. In addition, the monetary control system which existed until the June reforms also discouraged competition (since credit ceilings limited the scope for - 80 - individual banks to increase their market shares) and reduced incentives for banks to merge and become stronger. Admittedly, given their relatively small size and capital resources, many of the private banks are not yet ready for a major expansion of their operations; indeed, much closer supervision of such banks by BI will be needed now, given their increased exposure to competition. Nevertheless, it may be desirable to encourage private banks to expand their operations, combined with a policy of encouraging mergers of smaller banks, 'graduating" stronger private banks, and increased banking supervision. Cost and Allocation of Credit 3.47 Perhaps the thorniest set of operational issues which have arisen are those relating to the cost and allocation of credit. The recent reforms have sustantially increased the cost of funds and altered the deposit mix of banks. The resulting increase in lending rates has created serious problems for financing investment in general and the Government's special programs in particular. Secondly, the changing mix of deposits, given the increasing mismatch between the sources of and demand for funds, has exacerbated the problem of term transformation. 3.48 Until recently, the main source of funds of state banks had been zero or low interest-bearing demand deposits, government deposits and liquidity credits from Bank Indonesia. /1 Given the changed balance of payments and budgetary outlook, government deposits are now expected to increase only slowly, while the amount of liquidity credits outstanding is likely to be in fact reduced. A substantial proportion (about half) of outstanding liquidity credits carry maturities below three years, and these will fall due for repayment beginning in early 1984. As a result, incremental resources of state banks will be primarily from relatively high-cost time and savings deposits /2, demand deposits and foreign currency deposits/foreign liabilities. Z3 Consequently, incremental costs of resources to state banks on average are unlikely to be less than 11-12% p.a. /4; and since 5-15% of such deposits will need to be kept with BI as reserve requirements (on which no interest is earned), the effective cost of incremental deposits is likely to ZI As of September 1982 these sources provided 78% of state banks' resources, while time deposits constituted only 11%. Liquidity credits also ensured state banks a predictable source of longer-term funds for financing their term lending operations. Z Given the high deposit rates, the mix of potential deposits between demand and time deposits is likely to be weighted significantly in favor of the latter. 3 Given their high liquidity and substantial holdings of assets abroad, banks also have the option of converting foreign assets into rupiah. Z4 As a result of these changes the average costs of funds to banks (as opposed to incremental costs) will also increase; average cost of funds in fact increased from 3.8% in September 1982 to 7.0% in September 1983). - 81 - be around 13-14%. Allowing for banks' overheads, lending rates for investment purposes thus may remain at around 18-19%. As for "priority" /1 programs, given the higher risks of these programs, the costs of lending to banks may range from about 12-17% p.a. depending on the mix of incremental deposits and the amount of liquidity credits provided by Bank of Indonesia for such programs (Table 3.7). Table 3.7: INDICATIVE COST OF STATE BANKS' FUNDS Sources of Funds Average Ratio of incremental DDs:TDs Interest 50:50 40:60 33:67 Rate Demand deposits 3.8% 1.90 1.52 1.25 Time & savings deposits 17.0% 8.50 10.20 11.39 Average incremental cost of funds 10.40% 11.72% 12.64% Effective cost of loanable funds / 11.83% 13.24% 14.22% Costs of lending to "priority" programs /b Cost of funds, assuming: 75% of funds from BI & 25% from banks 5.20 5.56 5.81 60% of funds from BI & 40% from banks 6.53 7.10 7.49 50% of funds from BI & 50% from banks 7.42 8.12 8.61 Administrative costs and risks 7-8% 7-8% 7-8% (Overheads 5%; risk 1-2%; insurance 1%) Projected costs of lending to 12.20- 12.56- 12.81- "priority" programs 15.42% 16.12% 16.61% /a 15% of deposits kept with BI as reserve requirements, on which no interest is paid. Funds available for lending 85% of deposits. lb Assuming varying proportions of liquidity credits from BI, as indicated. Sources: World Bank staff estimates. /I There are at present 14 "priority" programs under which credit is made available to eligible borrowers at below market rates, ranging from 6% to 12% per annum. These programs are subsidised mainly through liquidity credits provided by BI to handling banks at 3% p.a. The main objectives of these programs are to provide financing to weaker economic groups and for "priority" purposes (export production and trade, small enterprise investment, fertilizer, etc.) at concessional rates. - 82 - 3.49 The Government thus will need to give attention to two important issues: the first relates to term lending in general; and the second to the provision of credit for priority programs and sectors. While banks will need to charge high lending rates to cover the increased costs of funds, the impact of such rates on borrowers and the economy will need to be reviewed. If term lending rates remain at their present high real levels, increasing private investment to support structural change and expand employment opportunities may be harder to achieve. 3.50 On the other hand, the problems with some of the priority programs stem from the fact that lending rates for these programs have been set at levels that are too low (12% p.a.). The latter will have several consequences. Firstly, it increases the risks of misallocation of funds, given the fungibility of money and the lack of adequate supervision capability of handling banks. Secondly, given the high incremental costs of funds to banks, there is little incentive for banks to commit own funds (i.e. other than those derived from BI's liquidity credits) to 'priority' purposes or for other term-lending, away from traditional relatively less-risky short term financing. Thirdly, given the limited exposure of handling banks, as is the case at present with many priority programs /1, there is little reason for banks to improve their collection performance, reduce arrears and bring down administrative costs and risk margins. Finally, to the extent banks are deterred, because of insufficient margins, from lending to priority (as well as other) sectors, it will discourage the mobilization of additional financial savings which, as noted earlier, is one of the major macro-economic justifications for the recent reforms. 3.51 The fundamental issue with regard to priority lending, therefore, is to devise appropriate mechanisms which will help provide funds for such programs at desired interest rates and still cover the ciDsts of handling banks so that it will facilitate institutional development and encourage banks to assume greater responsibility for term lending and for the Government's special programs. This is particularly important because Bank Indonesia has indicated that the Government's policy is to progressively reduce the reliance on liquidity credits for funding such programs. The role of special programs, financing arrangements, and the need, if any, for subsidies for such programs, therefore will have to be examined carefully given the market-oriented interest rates elsewhere in the economy. 3.52 There are several options which merit the Government's consideration in this regard. One option is to encourage lenders to lend to priority sectors at market rates which fully reflect the costs and risks of lending to such sectors, while the Government could subsidize borrowers directly to keep their weffectiveu borrowing costs below market rates. This in turn implies /I For instance, liquidity credit finance over 75% of priority lending under several programs; handling banks are also covered by insurance against risks of loss and default up to 75% of loans under sane programs. - 83 - that it may not be necessary or desirable to have a single uniform rate of lending to priority sectors. This will however require new administrative arrangements which might create some difficulties. Alternatively, the Government could maintain interest rates to borrowers at reasonably low levels and fully compensate lenders by way of interest rate subsidies provided through liquidity credits and budgetary allocations. While this would provide incentives for lenders to mobilize resources and commit them to priority lending, liquidity credits could be reduced over time so that handling banks assume an increasing share of such lending and the burden shared between banks and the budget. A policy of subsidizing interest rates through the budget will also have the advantage that the costs of such subsidies will become more apparent. At the same time, it will be necessary to review present credit insurance arrangements and increase the exposure of lenders (while providing adequate returns to cover the lending risks) in order to bring pressure on handling banks to improve their supervision and loan recovery performance. Finally, it may be desirable to raise priority lending rates, at least for some programs, over time, so as to progressively reduce the budgetary burden of subsidies, as well as to minimize the risks of leakages of funds arising from the wide disparity between priority lending and market rates. 3.53 The choices between these alternative approaches will need to be made carefully, in the light of several considerations. Given the tight budgetary outlook, liquidity credits can increase only modestly in the future, even if the other components of 'free money' available to BI to expand liquidity credits were to increase sharply. /1 To the extent that liquidity credits falling due are in fact repaid by banks they could also be used to finance special programs. But, if BI were to inject increasing amounts of liquidity credits for special programs at a time when it is trying to mop up excess liquidity through the issuance of SBIs, the task of establishing short-run monetary control discussed earlier would become more difficult. Such action will also have adverse effects on BI's profitability, since liquidity credits are now made at interest rates of 3% p.a., while BI has to pay 14-15% on its SBIs. Liquidity credits also seem to be less efficient than interest rate subsidies provided through budgetary allocations in leveraging commercial bank funds to priority lending; for example, the liquidity credit approach requires much larger commitment of public funds to induce commercial banks to participate in priority programs, as compared to budgetary subsidies. There are, however, areas (for example involving lending for very long periods) where liquidity credits may be essential to encourage commercial bank participation, especially through risk-sharing; it is important, however, that such areas are chosen carefully and liquidity credits are used on a selective basis. aI For example, if consolidated bank deposits (and "bankers deposits with BI on which no interest is paid) increase at an annual rate of 30%, but government deposits with BI do not increase, 'free money" available to provide liquidity credits will increase at an annual rate of only 7-8% as compared to nearly 25% in the past. - 84 - 3.54 The provision of interest rate subsidies for priority programs through the budget may present considerable difficulties, especially given the tight budgetary outlook; it will inevitably pre-empt funds which might be allocated for other purposes. The case for providing subsidies to particular programs, therefore, will need to be evaluated carefully by the Government, in the light of the objectives of such subsidies, past experience and the Government's policy of moving towards a market-oriented financial system. In some priority programs, for instance in housing, there is evidence to show that subsidies accrue mainly to upper income groups, who have the capacity to pay higher interest rates than are presently charged. 'rt is also important to ensure equitable treatment in terms of the relative capacity to pay as between different groups of borrowers in determining interest rates and subsidy levels for particular programs; for instance, it would seem that borrowers in the small enterprise sector who generally enjoy somewhat higher net incomes than small farmers in the agricultural sector could afford somewhat higher interest rates than those paid by small farmers. it is therefore important that the Government initiate a study to assess the capacity to pay of different groups of borrowers under the various priority programs as a part of its overall review of such programs. The objective of such a review thus should be to (a) reduce the scope and number of priority programs by removing from the "priority" category, those whose borrowers are able to bear market rates and (b) and among the remaining ones, reduce the extent of subsidies over time by raising interest rates from their present levels. - 85 - CHAPTER 4 EXTERNAL TRADE AND CAPITAL REQUIREMENTS 4.1 While greater domestic savings and improved resource allocation are critical to Indonesia's success in structural transformation, availability of adequate amounts of foreign exchange from both export receipts and external loans will also continue to be of particular importance. The sharp decline in the price of oil has clearly demonstrated the importance of reducing the economy's heavy dependence on a single source of foreign exchange earnings. Increasingly economic policy makers and the public in Indonesia are, as evidenced by an ongoing active debate, recognizing the importance of diversifying the country's sources of foreign exchange earnings away from the petroleum sector. The rapid expansion of non-oil exports is essential to finance the import requirements of the projected investment and GDP growth targets. There is also a clear awareness of the need to economize on the use of scarce foreign exchange. This chapter first examines the trade projections and the key policies underpinning the macroeconomic framework presented in Chapter 2. It then discusses Indonesia's external capital requirements and outlines the principal elements of the recommended external borrowing strategy in the medium term. A. Export Policies and Prospects 4.2 Indonesia's merchandise exports are dominated by oil and LNG earnings; together these commodities accounted for 74% of estimated export earnings in 1983/84. While export prospects will remain heavily dependent on price and volume developments in these commodities, over the longer term one of the most important challenges facing the economy is to diversify its export base. As Table 4.1 shows, real earnings from oil and related products are projected to remain flat in the next 2 years and to grow only by 2.5% p.a. during the rest of the decade. And, while LNG will provide a substantial boost to export revenues in the near term, the longer term prospects are similar to these for oil. The medium-term prospects for agricultural products appear to be quite favorable. But particular attention needs to be devoted to the promotion of manufactured exports which, with appropriate policies, could become an important source of earnings in the longer term. This task is important not only for reducing the vulnerability of the economy to fluctuations in demand for energy products, but also to enable Indonesia to finance its future import requirements and to service its external debts. Moreover, it is the growth of export earnings from manufactures which will be a key benchmark for assessing the success of Indonesia's broader industrialization effort. - 86 - Table 4.1: PROJECTIONS OF EXPORTS OF GOODS BY MAJOR CATEGORIES, 1984/85-1990/91 ($ billion; at current prices) Growth Rate (% p.a.; 1981 prices) 1983/84 1984/85 1985/86 1990/91 1983/84- 1985/86- Est. ------- Projected -------- 1985/86 1990/91 Oil and products 12.3 12.2 12.3 23.9 1.0 3.6 LNG 2.2 3.2 3.6 7.1 27.3 3.3 Non-Oil/LNG Products Agricultural products 2.4 2.4 2.7 5.0 -2.0 4.6 (of which marine products) (0.3) (0.3) (0.4) (0.5) (12.0) (12.0) Wood products 1.1 1.1 1.1 2.3 0.0 5.1 Minerals and Metals ta 0.8 1.1 1.2 2.5 9.3 4.2 Manufactured Goods /b 0.9 1.2 1.8 4.0 36.5 8.4 Subtotal 5.2 5.8 6.8 13.8 8.2 6.0 Total 19.8 21.2 22.7 4_8 5.3 4.1 Za Includes alumninium. Lh Excludes plywood. Source: World Bank staff projections. The Oil and LNG Sector 4.3 The key assumptions about the international oil market were outlined in Chapter 2 (Table 2.1). It is assumed that Indonesia will maintain its present share of the OPEC production quota through 1985/86. Thereafter crude production will be constrained (in the short term because of the OPEC quota and in the medium term due to Indonesia's own production capacity) to increases of about 0.4 to 0.5 mbd each year to reach the Government's estimate of potential capacity of 1.8 mbd by 1990. Continued exploration and development investments are critical for attaining this level cf output. Output of condensates (natural gas liquids) will increase in 1984/85 when the two new LNG trains come on stream at Arun in north Sumatra and again in 1986/87 - 1987/88 when the sixth train is constructed at Arun (para 4.5). 4.4 Assuming continued domestic price increases for petroleum products and greater efficiency in the sector, with the dual objectives of eliminating the budget subsidies for these products and inducing further conservation and substitution (particularly in the case of power generation), domestic consumption of fuels is projected to increase by about 2.3% p.a. between 1983/84 and 1986/87 and at 3.5% p.a. thereafter. /1 The importance of 5 No growth in consumption of petroleum products is assumied for 1984 due to the large price increases for kerosene and diesel fuel in January. - 87 - achieving this relatively low rate of growth in domestic consumption cannot be overstated, given the critical need to increase the exportable surplus as the world demand continues to pick up. Given the projected growth of domestic demand for refined products and with the completion of the new refinery capacity at Cilacap, Balikpapan, and Dumai, domestic refinery output will be adequate to satisfy domestic demand for all major products through the end of REPELITA IV, and hence there will be virtually no product imports, except for jet fuel, during this period. With the completion of the hydrocrackers at Balikpapan and Dumai, low-sulphur waxy residues (LSWR), which have constituted the bulk of product exports in the past, will be processed domestically to yield distillates for the domestic market. Exports of LSWR are assumed to fall to zero by 1986/87. However, under the 1983 contract between Pertamina and Japanese companies, output of LPG from the new refineries (equivalent to about 5 million barrels per year) will be exported to Japan under a ten-year contract. It is, therefore, estimated that product exports, including LPG as well as naphtha and other refinery outputs, will average about 10 million barrels per year during 1986/87 - 1990/91 (See Annex 1, Table 4 for further details). 4.5 The contribution of LNG to Indonesia's export earnings will continue to grow rapidly. Two new trains were completed at Bontang, East Kalimantan, in 1983, doubling the LNG output from the Badak field. Two new trains at Arun in North Sumatra have recently been completed. Assuming that the export volume will remain only at contracted levels rather than the maximum capacity of the plants, production and export of LNG in 1984/85 should reach 720 million MMBTU Zl, which would be about 45% above the 1983/84 level. In 1986/87 a sixth train at Arun is expected to come on stream under a contract between Indonesia and Korea signed in August 1983. This new train will raise total LNG exports to at least 900 million MMBTU through the end of the decade. LNG exports in relation to oil are expected to rise from about 19% in 1983/84 to 30% by 1987/88. Although the production potential of Indonesia's gas fields is immense, further LNG expansion will depend on new commitments by importing countries, and in this report it has been assumed that no additional LNG capacity beyond those noted above will be on stream before 1990/91. Details of the projections for LNG are provided in Annex 1, Table 6. Policies Influencing Non-Oil Export Performance 4.6 As noted in Chapter 1, non-oil exports in 1983/84 recovered at an impressive rate of 32% in nominal terms from their depressed level in the previous year. Recognizing their key role in generating foreign exchange earnings in the face of the outlook for the oil sector, the Government hopes to reach a level of $10.8 billion for non-oil exports by 1988/89. Provided that (i) economic recovery in the industrial economies along the lines discussed in Chapter 2 is sustained; (ii) Indonesia's access to those markets is not hampered by protectionist measures; and (iii) most importantly, Indonesia follows appropriate trade and exchange rate policies, the Government's target,while optimistic, should be attainable. /1 1 MMBTU = 52.67 metric tons. - 88 - 4.7 In the short run, continued attention will be required in a number of areas: maintaining a competitive exchange rate; improvinc; export quality; limiting the use of export controls; and other selected measures, particularly refining existing policies for export finance, guarantees and insurance. These near-term measures can help in paving the way for a much needed more comprehensive trade reform in the future. 4.8 Exchange Rate Policies. A competitive exchange rate is a fundamental element in Indonesia's efforts to expand non-oil exports and to continue to reduce the current account deficit to a sustainable level. There is empirical evidence indicating that Indonesia's non-oil exports and imports are sensitive to relative price changes, implying that changes in the real exchange rate have an important impact on the non-oil trade account./l Of particular interest is the question of which export commodities are especially sensitive to exchange rate movements. Analysis suggests that while the exports of most primary commodities are not greatly affected in the short run by changes in the real exchange rate, manufactured goods exports are quite sensitive to movements in the real exchange rate. 4.9 Prior to the March 1983 devaluation, Indonesia's competitiveness had been progressively eroded. Figure 4.1 indicates that from the fourth quarter of 1978 (immediately following the 1978 devaluation) until the first quarter of 1983 (immediately before the latest devaluation), the rupiah's nominal effective exchange rate was fluctuating slightly around its post-devaluation level of 1978. Yet, the real exchange rate was on an appreciating trend throughout this period. This indicates that the pre-1983 loss of the competitiveness of the traded goods sector, as measured by the appreciation of the real exchange rate, was mainly due to the high rates of domestic inflation prevailing during that period rather than to any nominal appreciation of the rupiah. The inflation rate in Indonesia was about 22% in 1979 and 16% in 1980. While the inflation rate declined substantially in 1981-82, it exceeded the international inflation rate by about 8 percentage points annually during the period 1980-82. Thus, the impact of the 1978 devaluation, as measured by changes in the real exchange rate, had been fully eroded by end 1982. The March 1983 devaluation restored the competitiveness of the traded goods sectors as the index of the real effective exchange rate returned to roughly the same level as that immediately following the 1978 devaluation. For the future, it is imperative to maintain a competitive exchange rate. 4.10 Improving Export Quality. It is well known that an improvement in quality would lead to an increase in the unit value of exports and probably would enable Indonesian producers to penetrate new markets as well as to increase their shares of existing ones. In the primary goods sector, coffee and rubber exports face important quality problems. As a result of low quality, Indonesian rubber is sold at a discount on the world market. One of the main causes of this problem is the inadequacy of the present grading system. Because of the deficiencies in the grading system which leads to /1 See Kincaid, G.R. *The Impact of the 1978 Exchange Rate Adjustment in Indonesia on the Non-Oil Trade Account" IMF mimeo, 1983. The import demand function was calculated to have a short-run relative price elasticity of -0.2 and a long-run elasticity of -0.3, while the short and long-run elasticities of export supply with respect to relative prices were 0.6 and 6.0 respectively. - 89 - uncertainty concerning the exact quality of the good being traded, buyers demand and receive a price discount. Inadequate safeguards in the grading system also reduces smallholders' incentive for improving the quality of their products. Government officials estimate that an improvement of quality control measures could result in a 9% increase in the value of rubber exports. As a result of poor quality, coffee is also being sold at a discount on the world markets. Although currently Indonesia's share of the international coffee market is supported by the ICO quota system, in the long run, when those quotas are relaxed, its share may decrease as buyers replace low quality Indonesian coffee with higher quality coffee from other sources. Figure 4.1 Real and Nominal Effective Exchange Rates (1975 (2 QTR.) 100) 300 _ 280 260 - 240 - NOMINAL 220 - W 0 200 - 180 - 160- 140 - 120- I . . 1, I ., X * *, I *, * 1,* _ 1978 '79 '80 '81 '82 '83 '84 FISCAL YEARS 4.11 Quality plays an even more important role in the marketing of manufactured goods, where Indonesian exporters need to penetrate new markets and are facing competition from many established producers. There are numerous examples in manufacturing industry where the domestic inputs available to final producers are not of a sufficient quality to permit successful exporting, yet exporters are continually denied access to imported inputs of appropriate standards. In other cases, domestic inputs are competitive in terms of quality; but limited quantities constitute a bottleneck to a successful export drive. In the manufacturing sector, the success in increasing plywood exports is noteworthy. There are indications that there has been some improvement in the quality of those exports (para 4.21). As a result, Indonesian producers have been able to penetrate new markets, most notably in the United States. The continued success of this industry will depend upon the producers' ability to maintain high standards of quality, as well as upon their success in diversifying their product mix to meet the specific demands of individual markets. 4.12 The Government recognizes the importance of this issue. The Directorate of Standardization and Normalization at the Ministry of Trade has already set standards that should be met by 23 export commodities, and work is - 90 - underway to set standards for an additional 70 commodities. However, after setting standards, strict measures to ensure their implementation will be needed. Presently, the Ministry of Trade has centers throughout the country, which are responsible for testing goods and issuing quality certificates. It is necessary to study measures that would enhance those centers' ability to enforce quality standards. Also, one of the main reasons for the low quality of exports is that many of the producers of new export commodities are not familiar with the export markets and therefore tend to underestimate the impact of quality on the value of their products. The National Agency for Export Development (NAFED) is attempting to address this problem by organizing seminars that supply firms with information concerning the requirements of foreign markets. 4.13 Limiting Use of Export Controls. In some commodity markets the Government has pursued a policy of ensuring adequate domestic supplies at reasonably stable prices for essential commodities by resorting to quantitative export restrictions and high export duties. Recent: examples of this policy are the cancellation of cement exports in October 1983 and the increase in the export tax on crude palm oil to 37.2% in February 1984. These decisions were taken in response to shortages, and consequently rising prices, in the domestic market. One consequence of this disruption of export markets, particularly stemming from ad hoc policies, is to weaken potential customers perception of the reliability of Indonesian exporters. Recapturing market shares often poses a serious problem and entails a potentially high cost in terms of export promotion objectives. While the availability of adequate domestic supplies of domestic goods is certainly a valid objective, consideration should be given to achieving it without disrupting exports. One approach, which has already been adopted in a number of cases, is to allow imports during periods of domestic shortages, so as to enable exporters to fulfill their contracts. However, for such a policy to work fully, domestic prices need to be at, or near, international prices, and importers must be permitted maximum flexibility to respond quickly to market signals, otherwise import subsidies would be required. In the short run, the foreign exchange cost of this policy would be minimal. The increase in the import bill would be approximately balanced by greater export revenues. The medium and long-term benefits of such a policy by way of establishing Indonesia as a reliable source of supply would certainly outweigh its rather modest costs. A related policy issue is the problem of responding to imbalances in supply and demand across regions. Given the large size of the country, it is not necessarily economical to limit exports to overseas markets from surplus regions so as to meet local shortages in distant domestic markets. The authorities have recognized the need for greater flexibility in this area by allowing simultaneous exports and imports in different parts oL the country. This trend should be encouraged so as to enable Indonesia to ben(efit fully from its comparative advantage. 4.14 Other Measures to Promote Exports. To complement the policies discussed above, continued attention needs to be directed towards more effective implementation of the export promotion package introduced in January 1982. The preshipment finance and guarantee scheme has improved the access of exporters to working capital. The Government has prepared well-conceived implementation guidelines, but additional efforts are required to achieve the overall objectives of automaticity and coverage of all exporters (including small firms and indirect exporters, i.e. suppliers of inputs to exporting firms). For the export guarantee scheme and postshipment insurance (through which exporters insure themselves against non-payment by their customer abroad - 91 - and thereby more easily obtain conventional short-term export credits), the immediate need is to build up the newly-created, specialized organization which will take over these responsibilities from P.T. Askrindo. 4.15 With respect to the duty rebate scheme, the present system of export certificates and prior exemption from duties continues to experience technical and implementation difficulties. They are not yet fully effective in rebating all duties, and many exporters (including indirect exporters) are inadequately covered or not covered at all. Remedying these remaining deficiencies deserves high priority. 4.16 Finally, continuing efforts are required to establish export estates and export processing zones, to streamline customs administration, and to improve port operations. The feasibility studies have been completed for both export estates (EEs) and export processing zones (EPZs). The EEs would provide special facilities for firms which export a minimum specified share of their output and make substantial use of domestic inputs. Although firms in the EEs would not enjoy direct access to duty-free imports, as would be permitted in an EPZ, they could utilize the export certificate scheme to obtain duty rebates and would enjoy simplified import and custom procedures and improved support services. Regarding customs administration, it has long been recognized that very slow and cumbersome customs procedures are a major impediment to internal and external trade. Determined implementation of measures to streamline and improve customs administration is essential to the expansion of Indonesia's international trade. In this connection, technical assistance from the U.S. Customs Service is now being utilized. Similarly, improved port operations are needed to increase efficiency in the trading system. The Government's action during this last year to establish four independent public corporations to operate the wgatewayw ports of Tanjung Priok (Jakarta), Tanjung Perak (Surabaya), Belawan (Medan), and Ujung Pandang is a very important step in this direction. It provides a foundation for efficient management of these ports. Now considerable support is required to build up the managerial, technical, and financial capabilities of these port corporations. 4.17 Access to Markets. Indonesia's efforts to expand its exports of manufactured goods are hindered by protectionist policies among developed countries. At present Indonesia faces significant tariff and non-tariff barriers to the export of the two major categories of manufactured exports - textiles and plywood. The EEC has quotas on Indonesian trousers, blouses, and shirts; the U.S. has placed quotas on shirts, trousers, and coats; Sweden has restrictions on shirts, trousers, T-shirts, underwear, and blouses; and Canada has restrictions on shirts and trousers. In the case of plywood, the major barriers facing Indonesian exports are high tariffs in Japan (15-20%), Australia (35% /1), and, to a lesser extent, the EEC (11% for quantities above the GSP quota /2). Indonesia has a comparative advantage in textiles and plywood. If the industrial countries penalize Indonesia for success in exporting such products, not only will its potential export earnings from these commodities be lower than projected, but it will also deter the Indonesian producers of other goods from venturing beyond the home market. Consequently, Indonesia's capacity to import from the industrial economies will be curtailed. And there will, of course, be adverse effects on domestic growth and employment. /1 This duty is being reduced in stages to 25% in 1986. /2 This duty will be 10% after the full implementation of the Tokyo Round negotiations. - 92 - Prospects for Non-Oil Export Receipts 4.18 The strong performance of non-oil exports in 1983/84 demonstrates the potential for expansion throughout REPELITA IV provided, as discussed earlier, the external conditions and domestic policies are favorable. Given appropriate policies, non-oil exports should well exceed $10 billion by the end of REPELITA IV. Detailed projections are given in Aninex 1, Table 1. 4.19 Forestry Products. The timber industry in Indonesia is currently undergoing a major change. As a result of the Government's policy of phasing out log exports, there has been a massive shift from the production and export of logs to the production of sawnwood, plywood and veneers. The main momentum for the growth of the wood processing sector has come from the plywood industry, with its production growing from 279 thousand cu.m. in 1978 to 2,359 thousand cu.m. in 1982. Currently, there are 72 plywood mills operating in Indonesia with a production capacity of approximately 3.8 million cu.m.; and there are still some 56 more mills under construction. As a result, the value of plywood exports are expected to increase from around $325 million in 1982/83 to over $1.5 billion in 1990/91, amounting to two-thirds of the total value of all timber product exports (Table 4.2). Table 4.2: EXPORT PROJECTIONS FOR TIMBER PRODUCTS, 1984/85-1990/91 1984/85 1985/86 1986/87 1990/91 Logs Volume (million cu.m.) 1.63 - - - Value ($ million) 142 - - - Sawnwood /a Volume (million cu.m.) 1.63 1.97 2.30 2.80 Value ($ million) 304 412 473 783 Plywood /b Volume (million cu.m.) 2.38 2.70 3.06 4.04 Value ($ million) 600 721 889 1,539 Total value ($ million) 1,046 1,133 1,362 2,322 /a Includes residual logs after 1984/85. /b Includes veneers. Source: World Bank staff projections. 4.20 Production of sawnwood has also been growing in the past few years, but at lower rates than plywood. In the period 1977-82, sawnwood production expanded at an average annual rate of approximately 1.5%. As for the production of logs, the increase in plywood production has led to a sharp increase in the domestic demand for logs. In the period 1977-82, domestic consumption of logs rose at an average annual rate of approximately 9.3%, with the sharpest increase occurring after 1980. However, the Government's policy - 93 - has resulted in reduced log exports, which declined from $1,550 million in 1979/80 to $311 million in 1982/83. It is estimated that in the coming years only small quantities of logs which are not suitable for domestic processing will be exported. 4.21 A major obstacle to greater expansion of Indonesian plywood exports has been their relatively low quality. In 1980 around 68% of total plywood exports went to the Middle East and China markets, which have traditionally bought a lower quality, lower priced product. However, in the last two years there seems to have been an improvement in quality. This is evidenced by the fact that the percentage share of exports to the United States, which has traditionally demanded a higher quality product, has risen from 10.7% in 1980 to 21% in 1982 and is expected to be around 30% in 1983. Indonesian producers are now in a position where they can plan to diversify their output away from mainly standard size plywood to meet the specific demands of different markets and to produce goods with a higher value added. 4.22 It must be stressed that the projected increases in plywood exports will depend upon Indonesia's ability to penetrate new markets in the Middle East, Japan and Australia. As discussed earlier, presently Indonesia faces high tariff barriers in Japan and Australia. The removal (or, at least, a reduction) of the tariff bariers would provide a significant boost to Indonesia's plywood industry. Also, exports to the EEC are constrained by the quota set according to the GSP system. An increase in this quota reflecting Indonesia's greater export potential is one of the Indonesian Plywood Association's (APKINDO) major goals. 4.23 Agricultural Products. Due to global excess supply, the value of Indonesian coffee exports has been declining at the rate of 10% p.a. during the period 1979/80 to 1982/83. Indonesian exports are constrained by the International Coffee Organization (ICO) quota which was 142,013 tons for 1983. In addition to exports to quota countries, some 80 to 90 thousand tons are exported annually to non-quota countries at prices substantially lower than the quota price. In order to encourage exports to non-quota countries, the Government has instituted a linkage system according to which companies who sell more in the non-quota market are given a larger share of the quota market. The Government is also attempting to increase export earnings by instituting a new system of quality control. However, in the export projections it is assumed that there will be no increase in non-quota exports due to the low price, which Indonesian producers find unattractive, and that there will be only a slow increase in Indonesian's ICO quota. 4.24 Natural Rubber is Indonesia's largest non-oil export earner after plywood. In 1980, Indonesia's share of global rubber production was approximately 27%. Indonesia ranks as the world's second largest producer of natural rubber after Malaysia. The world demand for natural rubber is expected to grow for the next decade and a half at a faster pace than in the 1960s and 1970s. Moreover, due to increasing labor costs and competition for land from other tree crops, Malaysia's rubber production is expected to stagnate. Thus, Indonesia will have the opportunity to increase its exports and its share of the world market. With this prospect in sight, expansion of supply will be critical. As the gestation period for rubber trees is about 7 years, the prospective output during REPELITA IV has been largely determined by past efforts. The projections shown in Table 4.2 are based on current information about existing trees. But for the years beyond REPELITA IV, increased investments in rubber plantations would contribute significantly to - 94 - export earnings. Special attention should be given to increasing the productivity of smallholder rubber as nearly 75% of Indonesian rubber is produced by smallholders, and productivity in that sector is much lower than productivity on estates. Table 4.3: PROJECTIONS OF RUBBER PRODUCTION AND EXPORTS, 1984/85 - 1990/91 ('000 tons) 1984/85 1985/86 1986/87 1990/91 Production 985 1,004 1,033 1,324 Domestic Consumption 79 85 92 116 Exports 906 919 941 1,208 Value (million USW) 880 962 1,096 2,042 Source: World Bank staff projections. 4.25 Other than increasing rubber production, greater export revenues can be achieved by increasing quality. Currently, Indonesian rubber is sold at prices that are lower than those of the same grade rubber produced by Malaysia. The Government estimates that if quality control measures were improved so that Indonesian export prices become comparable to Malaysia's, the country's export earnings would be 9% higher (based on 1979 prices). It should also be noted that Indonesia mainly produces lower grades of rubber; approximately two-third of exports consist of Standard Indonesian Rubber (SIR) 20 and (SIR) 50. In view of the substantial price differential between the various grades, it may be possible in the long run to increase export revenues by shifting into the production of some of the higher grades. 4.26 In the period 1979/80 to 1981/82, the value of palm oil exports dropped from $257 million to $79 million. This performance resulted from a decline in both the export volume (at an average annual rate of 36%) and the international price (from $654/MT in 1979 to $445/MT in 1982). The dramatic fall in the export volume was caused by rising domestic consumption as palm oil has been increasingly used as a substitute for coconut oil (domestic production of the latter has been contracting because of inadequate rejuvenation). In 1982/83 exports, however, increased to $103 million, and the export value in 1983/84 is estimated to be $146 million. The medium and long-term prospects for palm oil exports are quite encouraging because both domestic production and international prices are expected to increase. It is projected that production will increase from 1.0 million tons in 1988 to 2.4 million tons in 1995. Assuming that domestic consumption will increase at an average annual rate of around 9%, export values are projected to exceed the 1979/80 record by 1989/90. - 95 - 4.27 Minerals and Metals. In 1983/84, export earnings from minerals and metals are estimated to have been about 22% higher than 1982/83, largely due to the increase in aluminum exports. Production from the Asahan project was 140,000 tons in 1983/84, and it is expected that the full capacity of 225,000 tons will be reached next year. According to the agreement with the Japanese companies involved, 25-30% of output could be allocated to the domestic market. Domestic consumption in 1983/84 will be almost 30,000 tons and it is projected to increase at the rate of 9% p.a. The export price is based on a formula which ensures that it will move closely with the international prices. The Asahan Development Authority is currently considering further expansion which seems feasible but could not come on stream until the early 1990s. After the reduction in the real price of nickel since 1979, there was some recovery in 1983. Therefore, prospects for Indonesia's nickel exports in the medium term appear more encouraging than they did a year ago. Accordingly, exports of nickel matte are projected to increase from about 19,000 tons in 1983/84 to 29,000 tons in 1989/90, and exports of nickel ore will also increase from 0.85 million tons in 1983/84 to 2 million tons in 1989/90. Production and exports of ferronickel are expected to remain at the full capacity level of around 5,000 tons. 4.28 As a result of weak demand, tin export earnings declined in nominal terms from $454 million in 1980/81 to $349 million in 1982/83; and due to the slow global recovery and competition from other metals they are not expected to return to their 1980/81 level earlier than 1987/88. Tin production which is estimated to be around 25.5 thousand tons in 1983/84 is projected to reach 31 thousand tons by 1988/89. Domestic consumption of tin is currently around 500 tons/year but is expected to rise to around 1,200 tons a year in 1986/87 when the Cilegon tin plating plant will be completed. Copper concentrate output is expected to remain stable at full capacity; but the copper content is projected to increase from about 35% to around 40%. 4.29 Manufactured Goods. As noted elsewhere, Indonesia's industrial policy during the Seventies emphasized the growth of import-substituting industries, paying little attention to the development of manufactured exports. As a result, although Indonesia's industrial base has expanded significantly and a rapid rate of growth in manufacturing production was achieved during the past decade, the quantum and the rate of growth of manufactured exports (excepting plywood) have remained quite modest. Thus, the share of manufactured exports (excluding plywood) in total non-oil exports presently remains around a meagre 17%. Sustained growth of manufactured exports will be especially important in reaching the projected levels of non-oil export receipts in the coming years. Explicitly, exports of these manufactures will need to rise from a small base by 15% p.a. in real terms during the remainder of this decade to reach their projected level of $4.0 billion in 1990. Presently, the principal products exported, other than plywood, are textiles and electric appliances. The projected growth of these products, fertilizers, for which production capacity is expanding rapidly, and handicrafts are presented in Table 4.4. However, to meet the $4.0 billion target, nearly 60% of the projected increase in total exports of manufactures between 1983/84 and the end of the decade would have to be generated by a broad range of products (the "others' category). - 96 - Table 4.4: COMPOSITION OF EXPORTS OF MANUFACTURES, 1982/83-1990/91 (S million; at current prices) 1982/83 1983/84 1985/86 1990/91 Textiles 156 237 304 758 Electric Appliances 112 168 241 600 Fertilizers 11 61 84 237 Handicrafts 23 48 61 150 Others 256 366 1,138 2,288 Total /a 558 880 1,828 4,033 Memo Item Exports of manufactures as % of total non-oil/LNG exports /a 14.3 17.0 27.1 29.2 /a Excluding plywood. Source: World Bank staff estimates and projections. 4.30 Manufactured export growth of these magnitudes, while ambitious, are attainable given appropriate policies and supporting programs . Certainly, the external environment facing Indonesian manufactured exports is likely to be favorable over the next few years. Recent analysis by World Bank staff suggests that world demand for manufactured exports from developing countries will grow by 9% p.a. in real terms between 1985-95. As indicated in Table 4.5, this is a much faster rate of growth than those anticipated for nonfuel primary products or fuels. Historically several East Asian economies have achieved very rapid growth of manufactured exports, far exceeding these rates.fi Of course, the world economic environment for manufactured exports from developing countries was more favorable during a good part of the last two decades than it is likely to be in the coming decade. Nevertheless, it is reasonable to expect that, given its very low share in world manufactured goods trade at present, Indonesian exports of manufactures can grow at comparable rates to those estimated for developing countries as a whole. For example, during the period 1962-82, Korea's manufactured export growth in real terms, averaged 39% p.a., Thailand's 20% p.a., Singapore's 12% p.a., and Hongkong's 11% p.a. During the more recent period 1977-82 when export markets became more difficult to penetrate, Korea was able to increase her manufactured exports at an average rate of 12% p.a., Thailand by 16% p.a., Singapore by 26% p.a. and Hongkong by 10% p.a. in real terms. - 97 - Table 4.5: EXPORTS OF DEVELOPING COUNTRIES, 1980-95 Average Annual 1980 Value Percentage Growth ($ million) at 1980 prices 1980-85 1985-95 Total Merchandise 434 5.6 5.5 Nonfuel primary products 126 2.1 2.4 Fuels 163 3.8 2.9 Manufactures 130 9.1 8.9 Nonfactor services 78 5.6 5.4 Goods and nonfactor services 512 5.6 5.5 Source: World Bank staff estimates and projections. 4.31 In the rest of this century, the dynamics of regional comparative advantage will offer Indonesia new opportunities for exports. But Indonesia needs to develop a coherent strategy for capitalizing on these opportunities. Given Indonesia's small share in manufactured exports from developing countries, demand conditions will not be the main constraint. Rather the bottleneck is likely to be domestic supplies in the quality, range and quantities needed for a successful export drive. In this respect, the key determinant as to whether supplies will be adequate will depend on the profitability of investment in export oriented industries. This in turn hinges on the policy environment facing potential exporters. A range of factors will influence the attractiveness of exports including the exchange rate, transport costs, regulations and last but by no means least tariff policies and the availability of imported inputs where domestic inputs are not suitable for the needs of export markets. 4.32 Indonesia's key resource is its abundant and low cost labor force -- a labor force which, as experience has demonstrated, is easily trainable and disciplined under proper management. As wage rates rise in countries such as Korea and Hong Kong, Indonesia could develop a competitive edge over them in a broad range of labor-intensive manufactures. It is not difficult to cite possible candidates: garments, electronics, furniture and wood products, and simpler engineering goods. Undoubtedly, other products will emerge, as the natural process of shifting comparative advantage unfolds. 4.33 Exports of Services. An important element in improving Indonesia's current account lies in improving foreign exchange earnings of non-factor and factor services. The most prominent foreign exchange earner among non-factor services is tourism. The results for 1983 indicate Indonesia's potential for tourism. The total number of visitors in 1983 will be somewhat above the record level of about 600,000 in 1981, reflecting in part new government policies, such as increasing the number of international airports (from three to eight) and allowing tourists from 26 countries to enter Indonesia without - 98 - visas for up to two months. For the future Indonesia should be able to continuously expand its earnings from tourism. Substantial expansion of hotel capacity is also underway: Jakarta will have over 5,000 additional rooms and Bali about 2,000 by 1985/86. Given vigorous promotional efforts, foreign exchange earnings from tourism should grow substantially during the decade to about $1.4 billion by 1990/91. In addition to tourism, the maritime transport sector can also significantly improve foreign exchange earnings, if Indonesia shipping can be made more competitive. The Government has already taken some steps in this regard and is pushing ahead with improving the incentive structure for Indonesian shipping companies. The major foreign exchange earnings from factor services is interest on net foreign assets of the banking system. Workers remittances remain a small fraction of factor service receipts. The Government is committed to vigorously supporting the employment of Indonesians aborad with reputable, preferably Indonesian, companies. While the demand for labour in the Middle East will not be as buoyant as in the past, it has hardly been tapped by Indonesia, and significant gains could still be made if it is actively explored. B. Import Policies and Requirements 4.34 Indonesia's trade regime has been characterized by a predilection for high tariffs and quantitative restrictions. The difficult external payments situation faced by the country beginning in 1982 has reinforced this tendency. With the tight foreign exchange availability in prospect in the coming years, the temptation to continue to rely on high tariffs and quantitative restrictions in conducting trade policy is strong. However, there is ample cross-country evidence suggesting that such a strategy entails high costs in terms of economic efficiency, growth and employment. This section begins with a review of the recent developments in import management policies in Indonesia, followed by a discussion of the conflict between the import regime on the one hand, and the objectives of promoting the development of an efficient industrial development and rapid growth of exports of manufactures on the other. The section then offers some recommendations for the reform of the system of tariff and non-tariff barriers and concludes with a brief discussion of the future capacity to import underlying the macroeconomic projections presented in Chapter 2. The Continuing Problem of Protectionism 4.35 The High Cost of Protection. Indonesia's industrialization during the past two decades has taken place behind high protective barriers, both tariffs and quantitative restrictions. Industrial development has been virtually synonymous with import substitution. The incentive system has embodied effective protection rates of generally high levels with wide dispersion, and has strongly favored production for the dlomestic market. The pattern of industrial development has contributed little to employment generation and to saving, on a net basis, foreign exchange.4/ In this regard, the experience of Indonesia bears close resemblance to that of many other developing countries. - 99 - 4.36 The proliferation of protectionist measures throughout the world in recent years, particularly during the international recession of 1980-82, combined with the rapid deterioration in Indonesia's balance of payments position in 1982/83 have increased domestic pressures for additional controls over imports. In late 1982, the Ministry of Trade issued decrees providing general authority to regulate the import of electric and electronic products; chemical products; metal products; automotive spare parts; machinery, machine equipment, and spare parts; textile products; heavy equipment and spare parts; and foods, drinks, and fruits. The expressed purposes of the new policy were threefold: to increase the specialization and hence competence of importing companies; to save foreign exchange; and to encourage domestic industrial production. The initial thrust of the new policy was to limit the number of "registered' importers for each category of goods and improve collection of up-to-date statistics. Special task forces were set up in the Ministry of Trade to oversee implementation. For some product groups (for example, iron and steel, paper, foods, drinks, and fruits, road tires and tubes), subsequent decrees typically appointed two state-owned trading companies as exclusive importers. These firms were required to draw up, in consultation with the Ministry of Trade, annual plans for the procurement and distribution of these products. Based on these plans, the Ministry would determine the quantities of each product to be imported. In some cases, e.g., steel products and newsprint, fixed selling prices were stipulated by decree. In other instances, e.g., electronic and chemical products, a larger number of registered importers, including public and private trading companies and producers, were approved; but the quantities, types, and procedures of imports were still subject to regulation. As late as December 1983, new decrees were issued extending quantitative controls over glass products, hand tractors, rice milling equipment, polymers and polyvinyl chloride, hand sprayers, and cans. In some cases, controls have been used to completely ban imports. 4.37 The import controls imposed during the past two years have undoubtedly contributed to some extent to the reduction in imports during 1983/84 and hence to the improvement of the current account balance. As effective as the restrictions have been in reducing the current account deficit in the past year, they impose important costs on the economy as a whole. If they are retained they will further distort the pattern of industrial growth and reduce the incentives for the creation and expansion of those industries which can efficiently compete with imports or in export markets. By raising domestic prices for certain products, the import restrictions draw new investment into production of these products without regard to the efficiency with which they can be produced in Indonesia. In this respect, quantitative restrictions are more damaging than import tariffs: whereas a tariff establishes a domestic price at a given level above the world price, a quantitative restriction allows the domestic price to rise to whatever level required for domestic industry to cover its costs. By reducing the incentives for efficient growth of domestic industries, these restrictions seriously undermine Indonesia's ability to establish a favorable balance of trade in the medium to long run. / A number of previous World Bank reports have presented empirical evidence on these points. See, for example, Chapter 6 of Indonesia: Policies for Growth with Lower Oil Prices, Report No. 4279-IND. - 100 - 4.38 This inward-looking strategy has two major problems which, if not corrected, will become increasingly severe in the near future. First, high levels of protection have made possible the growth of industries which are relatively inefficient and thus produce goods at higher cost than comparable imports. For some industries, the domestic resource cost of replacing a unit of imports is much higher than the domestic resource cost of either import replacement or additional export earnings in other subsectors. The extra cost to domestic consumers, which amounts to an implicit subsidy to producers in protected industries, is quite high, as indicated by the rough estimates for five selected products presented in Table 4.6. These i:Llustrative broad orders of magnitude indicate that the implicit subsidy per worker (in the form of higher domestic costs in relation to imported costs of comparable items) is as high as $18,200 in the case of cement and $36,300 for steel billets in any given year. These are very high levels of subsidy, and the question must be asked where a country like Indonesia can afford such expensive subsidies over an extended period. The costs of protection may be justified temporarily as a necessary means to promote infant industries which, once well established, would be able to produce efficiently. But continued high levels of protection will not only reduce pressures for improving efficiency among already established industries, but will also increase the likehood that new investments will take place in industries in which Indonesia is not likely to become an efficient producer for the foreseeable future and in which the capital cost per new job created is very high. 4.39 The second major problem with an inward-lookinci strategy is that it severely reduces the potential rate of growth. With the emphasis on import substitution over the past two decades, more than 95% of consumer goods and 65% of producer goods (largely intermediates) now consumed in Indonesia are produced domestically. With the limited scope left for reasonably efficient import substitution, as already is the case with respect to consumer goods, the rate of growth of the manufacturing sector will be limited by the growth in domestic demand - perhaps in the range of 3-7% for many products. Thus, high growth rates in the manufacturing sector - which are necessary to realize structural transformation of the economy in the coming years and to generate employment - will require that Indonesia's industries be able to compete successfully in export markets. It is also important to note that further import substitution will increasingly need to be in areas where economies of scale are important and capital, technological and managerial inputs are high. This increases the likelihood that import substitution will be highly inefficient unless export markets are tapped. For these reasons Indonesia can no longer afford the path it has followed over the past decade or so. It now needs to adopt a trade and industrial strategy which provides equal incentives for production for the domestic market and for exports. * 101 - Table 4.6: THE IMPLICIT COSTS OF PROTECTION FOR SELECTED PRODUCTS, 1983 Portland Television Kraft Synthetic Steel Cement (21"color) Paper Yarn Billets Implicit subsidy to domestic producers Z 156.8 43.6 1.8 24.6 74.8 (in US$ million) Memo Items: Import price (cif) Rp4l,475/bag Rp500,000/set Rp3Ol/kg Rp3,000/kg Rpl66/kg Domestic sales price Rp66,975/bag Rp740,000/set Rp533/kg Rp3,307/kg Rp440/kg Subsidy per worker US$18,200 US$26,900 US$5,600 USV1,020 US$36,300 /a The implicit subsidy to domestic producers is defined as Qd*[(Pd-tiPiAi)-Pml, where Qd = domestic production, Pd = domestic price net of domestic sales tax, and Pm = c.i.f. import price; ti=import tariff and import sales tax on imported inputs; Ai= import content; Pi= Price of imported input. Where import content figures were unavailable, Ai is assumed to be zero. (This imparts an upwards bias of probably a small magnitude to the estimated subsidy.) Source: World Bank staff estimates. 4.40 There is little doubt that increased efficiency and, linked to this, reforms in trade policy are the major remaining policy challenges which remain to be tackled by the Government. In this respect, the goals of stimulating efficiency in the industrial sector and encouraging the growth of non-oil exports, especially manufactured goods, are closely interrelated. Only an efficient industrial sector will be able to compete effectively in export markets. In this regard there are many aspects of trade policy which require government attention in the coming year or two. In some areas, determined implementation of policies already announced is required. However, other policies now in place are not conducive to promoting efficient industrial growth, and these will need careful reconsideration. 4.41 Reform of Tariff and Non-Tariff Policies. The substantial improvement in the current account deficit in the past year does not justify the retention of trade restrictions. The longer the present protective measures remain in place, the greater will be the pressures from the vested interests for their continuation and hence the greater the distortions in resource use and investment patterns. Consequently, the Government should consider a comprehensive program of reform of the trade restrictions. A program of reform might include the following elements: (i) rollback of import bans; (ii) gradual reduction in tariffs; (iii) adjustment assistance to - 102 - industries affected by import competition; and (iv) anti-dumping legislation to protect domestic industries from unfair foreign competition. While this may give rise to some increase in imports of consumer and intermediate goods in the short term, the projections in this report suggest that such an increase can be accomodated given continued success in non-oil export promotion and restraints on import-intensive public investments. Looking beyond the immediate desirability of reducing quantitative restrictions, it is essential to initiate a long-range program of tariff reiEorm to lower the general level of effective protection and reduce the substantial differences in levels of protection afforded various industries. A first step would be to refrain from introducing any further import restrictions and to roll back those currently in place. This should be followed by a reduction of tariff barriers on intermediate and final goods, so as to encourage greater price competition and reduce costs in domestic industries. A number of sub-sectoral studies, currently underway or to be initiated soon, will provide the analytical basis for the preparation of a well-designed programs of adjustment assistance for those industries which will require substantial restructuring as levels of protection are reduced. The formulation of the legal and administrative framework for anti-dumping practices should also move forward expeditiously as an integral part of the proposed trade reform package. 4.42 Considering that a comprehensive trade policy reform zan be realistically implemented only over a period of years, it is essential to prevent the undertaking of investments which are financially attractive given the current levels of protection but are economically unprofitable. Indonesia does not yet have a mechanism for thorough economic evaluation of industrial projects, either public or private, except perhaps for very large public projects. In this context the Government has a heavy responsibility on two counts. First, for obvious reasons, it is in its own interest to undertake projects that are economically viable and to strive to minimize their cost as far as possible. Secondly, it should be able to point to its own procedures as a model for the private sector. Time and money spent wisely on evaluation of large projects is likely to pay off handsomely. There is, therefore, an urgent need to improve the authorities' technical and analytical capability to undertake such evaluations. It is understood that the Government is giving high priority to this matter. The Future Capacity to Import 4.43 As already noted, the short-term adjustment measures implemented in 1983 were highly successful in reducing the real volume of imports in 1983/84. However, as Table 4.7 indicates, given the export projections in Table 4.1 above, and the need to restrain future borrowing, the growth of imports will continue to be severely constrained. For the medium term, growth of about 4% is consistent with the projected growth in GDP of 5% during 1985-90. Indonesia's terms of trade are expected to decline during 1984 and 1985, but will improve in the latter half of the decade, so that by 1990 its terms of trade will recover to its 1983 level. Consequently, during the period 1984-90, an increase in the capacity to import wi:Ll need to come largely from a rise in the volume of exports. - 103 - Table 4.7: PROJECTIONS OF IMPORTS BY MAJOR CATEGORY, 1984/85-1990/91 (f billion; at current prices) Growth Rate (% p.a.; 1981 prices) Est. 1984/85 1985/86 1990/91 1983/84- 1985/86- 1983/84 -------- Projected ------ 1985/86 1990/91 Current Prices Consumer goods 2.0 2.0 2.0 3.0 -8.0 0.3 Food (1.4) (1.4) (1.3) (1.7) Non-food (0.6) (0.6) (0.7) (1.3) Intermediate goods (non-oil) 5.2 5.6 6.3 12.8 4.1 6.6 Capital goods (non-oil) 6.6 6.9 7.4 12.7 0.0 3.1 Oil/LNG sector 4.7 4.9 5.0 9.0 -3.1 4.3 Total 18.5 19.3 20.7 37.5 -0.5 4.2 Memo item Capacity to import /a 21.0 21.7 21.5 28.8 1.2 6.2 /a Exports of goods deflated by the import price index, in 1981 prices. Source: World Bank staff projections. 4.44 Imports of food are expected to decline somewhat in real terms and remain relatively flat in nominal terms as the result of declining imports of rice and sugar. Imports of wheat and other high income-elastic products which cannot be produced economically in Indonesia will continue to grow steadily. Imports of other consumer goods are estimated to grow in real terms at the same rate as private consumption, i.e. about 3% p.a. The volume of imports of intermediate goods is directly related to a large extent to domestic manufacturing output. Based on its historical relationship, the elasticity of the intermediate goods imports with respect to manufactured goods production is projected to be about 0.7. Given a growth rate of about 10% p.a. for the manufacturing sector (excluding LNG), intermediate goods imports in real terms are therefore projected to grow about 6.6% p.a. 4.45 Capital goods imports are linked to the level and composition of domestic investment. As discussed in Chapter 2, further progress in reducing the current account deficit will depend crucially on holding down capital good imports. The projections hold the level of capital goods at their estimated 1983/84 level for the period 1984/85 to 1986/87. This will require, as discussed in Chapter 2 (Section D), careful management of the public investment program. - 104 - 4.46 Imports of Services. Factor and non-factor service payments are significant elements in the balance of payments. Together they represented an outflow of $6.8 billion in 1983/84. Amongst factor service payments, the most important element was $1.5 billion of interest on public and private medium and long-term debt. This is expected to double by 1990. Interest payments on short-term debt are also expected to increase by 50% from about $400 million in 1983/84 to $600 million in 1990. Finally repatriation of interest and profits from direct foreign investments should rise from $700 million to $1.1 billion in line with the growth in the total stock of foreign-owned capital over the same period. 4.47 Taking into account the new production sharing contract with Caltex, the largest oil producer, which reduces Caltex's share to 12% of net operating income, as well as the fact that increasing costs of production will reduce the ratio of net operating income to gross revenues, it is projected that remittance payments for oil and LNG combined will grow from about $2.6 billion in 1983/84 to $3.6 billion in 1988/89. This will however be largely offset by improvements in the position of other non-factor service items. Payments for these items are expected to fall substantially for two reasons. First, Indonesia is making a determined effort to shift international cargoes from foreign to Indonesian vessels, thereby reducing net transport costs on its services account. The 1982 decree requiring all government-owned cargoes to be transported on Indonesian ships is now being enforced fairly rigorously. However, this policy may entail significant costs to the economy if Indonesian vessels operate considerably less efficiently than foreign vessels. In such a case, any savings on the services account could be more than offset by the extra costs entailed. Second, in early 1983 the Government imposed a relatively high exit tax on Indonesian citizens going abroad, and this has significantly reduced the number of Indonesian tourists going abroad. C. External Financing Requirements and Borrowing Strategy External Financing Requirements 4.48 Based on the macroeconomic framework presented in Chapter 2, the details of the projected trends in exports and imports, and the recommended policy measures particularly with respect to the public investment program and the trade regime, Table 4.8 sets out a summary of the projected balance of payments for the next three years. The current account deficit is expected to fall from an estimated $4.2 billion /1 or 6.0% of GNP in 1983/84 to $3.5 billion or 3.6% of GNP by 1986/87. Over the three year period, the cumulative current account deficit would be $11.2 billion of which $5.0 billion comprises interest payments on public sector medium and long-term debt (Table 4.9). With a projected $6.8 billion in amortization of public sector debt and an addition of $300 million to reserves, the total external capital requirements during the three year period 1984/85 - 1986/87 will amount to $18.3 billion. About $15.6 billion of these requirements would need to be met by gross disbursements of public medium and long-term debt. Almost $9 billion will be available from disbursements of previously contracted debt, so the remaining $6.6 billion would need to be met from new commitments. /1 Including net official transfers and interest on priva,te debt. - 105 - Table 4.8: SUMMARY BALANCE OF PAYMENTS, 1962/83-1986/87 (g billion; at current prices) 1982/83 1983/84 1984/85 1985/86 1986/87 Actual Est. Projected ----- Gross merchandise exports 18.6 19.8 21.2 22.7 26.6 Oil and LNG 14.7 14.6 15.4 15.9 18.8 Non-oil 3.9 5.2 5.8 6.8 7.8 Gross imports (cif) and NFS -22.3 -19.9 -20.6 -22.0 -24.6 Oil and LNG -4.8 -4.7 -4.9 -5.0 -5.7 Non-oil -15.8 -13.8 -14.4 -15.7 -17.7 Net non-factor services -1.7 -1.4 -1.3 -1.3 -1.2 Resource balance -3.7 -0.1 0.6 0.7 2.0 Net factor services and transfers -3.6 -4.1 -4.3 -4.7 -5.5 Current account balance / -7.3 -4.2 -3.7 -4.0 -3.5 Net disbursements of public MLT debt 3.1 3.5 3.2 3.0 2.6 Net other capital Zb 0.8 2.4 0.4 1.1 1.2 Change in official reserves /c 3.4 -1.7 0.1 -0.1 -0.3 Memo items Total net foreign assets C 6.4 8.4 8.3 8.4 8.7 - as months of imports of goods 3.7 5.4 5.2 4.9 4.5 Current account deficit as % GNP 8.4 6.0 4.6 4.5 3.6 /a These differ from Bank Indonesia figures which exclude net official transfers and interest on private debt. b Includes estimates of oil and LNG export credits, all debt transactions associated with LNG expansion, direct foreign investment, and all private capital flows; for historical data, it also includes errors and omissions. / Net of a drawing of $ 70 million from the IMF's Buffer Stock Financing Facility and $ 390 million from the Compensatory Financing Facility. These are treated as external current liabilities. Source: Bank Indonesia for 1982/83; World Bank staff estimates and projections. - 106 - Table 4.9: SUMMARY OF EXTERNAL CAPITAL REQUIREMENTS AND SOURCES, 1984/85-1986/87 (S billion; at current prices) 1984/85 - 1986/87 Requirements 18.3 Current account deficit (excluding interest) 6.2 Interest 5.0 Amortization 6.8 Change in official reserves 0.3 Sources 18.3 Direct foreign investment (net) 1L5 Short-term and other capital (net) /a 1.2 Medium and long-term loans (gross) 15.6 Official assistance (6.9) Import-related (4.9) Financial markets (3.8) /a Includes all flows in the oil and LNG capital account, and all net private capital flows. Source: World Bank staff estimates. 4.49 The sharp reduction in the external current accDount balance from $7.3 billion in 1982/83 to an estimated $4.2 billion in 1983/84, through a combination of improvements in non-oil export performance and import reductions, contributed to an increase in total net foreign assets from $6.4 billion at end March 1983 to an estimated $8.4 billion La at end March 1984. The latter provides an import coverage equivalent to 5.4 months of imports of goods. As Table 4.8 indicates, total reserves are expected to rise marginally to $8.7 billion by 1986/87. In terms of import coverage, this represents a reduction to an equivalent of 4.5 months, which would still be adequate. Given the potential volatility of export receipts, and to protect the free convertibility of the rupiah, maintaining a comfortable reserve position is clearly an important aspect of Indonesia's external account management. /a Excluding drawings from the IMF's BSF and CFF (see footnote c to Table 4.1.) - 107 - External Borrowing Strategy 4.50 As noted in para 4.48, Indonesia will require $6.6 billion in disbursements from new commitments, or an average of $2.2 billion a year, over the period 1984/85-1986/87. To generate this level of disbursements and to accomodate its future requirements, Indonesia would need new loan commitments of about $4.5 billion a year during the period. Indonesia has traditionally met its external borrowing requirements from three principal sources - official assistance, import-related credits, and untied borrowings from the international capital markets. Table 4.10 shows the historical patterns of commitments. Table 4.10: HISTORICAL COMMITMENTS OF PUBLIC DEBT AND GRANTS 1979-84 ($ million; at current prices) 1979 1980 1981 1982 1983 1984 1st Qtr. Estimate Official assistance 2,386 2,304 1,805 2,049 2,414 551 Bilateral 1,294 1,234 579 647 728 259 - Grants 144 179 97 110 93 n.a - Concessional loans 1,150 1,055 482 537 635 259 Multilateral 1,092 1,070 1,226 1,402 1,686 292 - Grants 26 51 51 54 50 n.a - Loans 1,066 1,019 1,175 1,348 1,636 292 Import-related on 'commercial' terms 1,147 611 2,769 3,055 1,694 232 Official 87 440 673 706 199 114 Buyers' credits 831 449 874 1,549 559 118 Suppliers' credits 229 122 1,222 800 936 - Untied borrowing 2,192 1,097 746 961 1,941 797 Financial institutions 759 1,052 700 646 1,580 797 Bonds 63 45 46 315 361 - Sub-total grants 170 230 148 164 143 n.a Sub-total loans and credits 5,555 3,782 5,172 5,901 5,906 1,580 To_tal 5,725 4.012 5.320 6.065 6.049 1.580 Source: World Bank's Debtor Reporting System; Bank Indonesia; Bappenas. - 108 - 4.51 Official Assistance. Official assistance, primarily composed of concessional bilateral loans and grants and multilateral loans and grants from members of the Inter-Governmental Group on Indonesia (IGGI), has been the most important source of funds, comprising 36% of debt outstanding at end 1983. Commitments in 1983 amounted to about $2.4 billion, including $143 million in grants (Table 4.10). Bilateral concessional loans accounted for $635 million and multilateral loans for $1,636 million of the IGGI commitments. Commitments of both bilateral and multilateral assistance in 1983 increased sharply over the levels of 1981 and 1982, as donors had pledged at the IGGI to support the Government's determined effort to address the problems of adjusting to lower oil prices. This increased level of support is making an important contribution to the Government's efforts to adjust the economy to the realities of a tighter resource situation. 4.52 It is essential that official assistance from IGGI members continue to provide a substantial part of Indonesia's external financing requirements for some years to come. Such assistance will continue to be of particular importance to Indonesia in supporting the country's adjustment efforts because of its more favorable terms and associated technical assistance. As indicated in Chapter 2, substantially larger borrowing by Indonesia on harder terms would be inadvisable in terms of future debt-servicing capacity. It is recommended that the level of the IGGI assistance to Indonesia for 1984/85 be at least $2.4 billion (see Table 4.11). Table 4.11: PROJECTED COMMITMENTS OF EXTERNAL PUBLIC DEBT AND GRANTS 1984/85 - 1986/87 ($ million) 1984/85 1985/86 1986/87 Official assistance 2,400 2,400 2,500 - Loans 2,300 2,300 2,400 - Grants 100 100 100 Import-related credits 1,200 1,200 1,200 Untied borrowing 1,000 1,000 1,000 Total 4.600 4,600 4,700 Source: World Bank staff estimates. 109 - 4.53 Bilateral and multilateral donors have for some time been partners in development with the Government of Indonesia. They have supported the economic priorities of the Government, and have acquired a stock of knowledge on project design and implementation in Indonesia. In considering future programs donors might want to continue to place emphasis on human resource development through education and training, health, nutrition, water supply and housing projects; infrastructural development, primarily in agriculture and transportation; and programs and projects designed to increase employment. There are some indications that a larger share of some concessional assistance programs is now being offered by donors in conjunction with commercial import financing to finance capital- and import-intensive projects in the industrial and energy sectors in particular. This is an unfortunate trend where such concessional assistance is not additional to that already pledged. It directs scarce concessional funds away from some of the priority areas noted above for which commercial funding is not normally available and into areas where it is a readily available alternative. 4.54 In addition to maintaining their level of commitments, IGGI members can also support the Indonesian development process by exploring means to improve the disbursement rate on their loans. The Government can also help accelerate disbursements considerably by removing bottlenecks hampering the speedy implementation of foreign financed projects (See Chapter 2, Section D). Another possible route to facilitate a more rapid transfer of resources would be to raise the share of domestic costs financed from abroad. 4.55 Last year several IGGI countries responded to the sudden deterioration in Indonesia's external payments position by offering quick disbursing commodity aid. While the need for such assistance is not as pressing as it was last year, it would be desirable that such aid continue to be available in 1984/85 as an important component of IGGI assistance. Commodity aid has the advantage of being fast disbursing, generally includes commodities which are in excess supply in lending countries, is offered at highly concessional rates, and frees the borrower's foreign exchange which can then either be used to finance development, strengthen reserves or reduce foreign borrowing on hard terms. 4.56 Import-Related Credits. Import-related credits, consisting of bilateral non-concessional loans, and fixed interest buyers' and suppliers' credit are an important source of foreign financing for Indonesia. By 1982, this source accounted for almost 21% of the country's capital goods imports. Inevitably, as a consequence of rephasing the public investment program, disbursements of import-related credits fell from $3.1 billion in 1982 to $1.7 billion in 1983. The terms of import-related credits, however, improved markedly as suppliers of capital goods provided more generous grant elements. With $4.0 billion of import-related credits still in the pipeline /1 an additional $1.2 billion of commitments annually is considered sufficient for supporting the reduced public investment program and is consistent with debt management requirements. /1 $1.5 billion from suppliers' credits, $1.1 billion from bilateral non-concessional sources and $1.4 billion from fixed interest buyers' credits from private financial institutions. - 110 - 4.57 Commercial Loans. Traditionally, borrowings from the Eurocurrency markets and private placements were linked to public investment projects for planning purposes, but in 1983 this practice was altered. The level of direct borrowing from international financial markets is now determined by balance of payments considerations so as to close the gap between foreign exchange requirements and what will be available from official assistance and import-related credits. The overall strategy whereby the Government is solely responsible for public sector borrowing /1 allows Indonesia to borrow at the best terms possible and to maintain discipline in external borrowing. In 1983 Indonesia took steps to broaden the range of commercial debt instruments available to the Government. It increased its untied borrowings, with total commitments amounting to $1.9 billion, comprising one large and some small syndications, a floating rate note issue, bankers' acceptance facilities, bond issues and private placements. In early 1984, international banks demonstrated their confidence in Indonesia's economic management policies by offering a $750 million syndication at favorable terms in response to a Government request for $500 million. 4.58 Indonesia's requirements for commercial borrowing in the coming years will require continued access to international capital markets. Partly to compensate for lower commitments from import-related credits, but also for purposes of balance of payments support, an appropriate level of untied borrowing would be of the order of $1.0 billion annually over the next three years. Availability of funds in these amounts and at reasonable terms should not be a problem for Indonesia. Most private banks are relatively underlent to Indonesia, in part owing to debt management policies of the Government. Indonesia has established a reputation for prudent debt management and the range of policy reforms implemented over the past two years provide convincing evidence of the Government's determination to make the necessary, but sometimes painful, adjustments to avoid unsustainable current account deficits and external debt difficulties. 4.59 Borrowing by the Private Sector without Government Guarantee. Partly as a consequence of a free foreign exchange system in Indonesia, information on private non-guaranteed external debt is not readily available. However, based on official data and other sources 2, the stock of disbursed and outstanding private non-guaranteed debt is estimated to have been about $7 billion at end 1982, of which $3.2 billion was medium and long-term debt. The estimated level of short-term debt of $3.9 billion represented an estimated 30% increase over the previous year, probably resulting from liberal access to Bank Indonesia's swap facilities. There are indications that private short-term debt remained essentially unchanged in 1983. The magnitude of short-term debt, mostly trade-related, would appear to be reasonable in relation to the financing requirements of imports. /j Pertamina and Garuda are essentially the only two public sector agencies of any significance which are authorized to borrow abroad directly, with prior Government approval. /2 Bank for International Settlements and the International Monetary Fund. - ill - 4.60 With the high levels of domestic interest rates, there could be substantial demand on the part of the private sector for foreign loans, particularly when investment activity picks up. Leasing companies have already registered rapid increases in financing private sector imports of capital goods. While precise figures are unavailable, it is believed that foreign-currency denominated leases do not exceed $250 million at present. It is assumed that in the future private short-term debt will rise in line with private sector import requirements and private unguaranteed MLT debt will rise such that net transfers (gross disbursements net of debt service) remain negligible. As part of the overall debt management strategy it is important that private external borrowings are monitored. Mechanisms for this purpose are in place. It is also important that the growth of private non-guaranteed debt is kept within reasonable limits and that this debt is used for economically sound projects. The central issue remains that of controlling the overall level of debt. Projections of Debt and Debt Service 4.61 Indonesia has been following a very prudent borrowing strategy despite substantial improvements in its creditworthiness. The rate of growth of debt has been moderate, although the share of borrowing at commercial rates from private financial institutions has risen rapidly in recent years (Table 4.12), albeit from very low levels. Apart from working balances of public enterprises, for which information is not readily available, the public sector holds no short-term external debt. As of end December 1983, the total level of disbursed and outstanding medium and long-term external public debt was $23.7 billion. An additional $11.2 billion of previously committed external public MLT debt remains to be disbursed. The average maturity of public medium and long-term debt at end 1983 is estimated at 14 years. The share of official assistance (bilateral concessional and multilateral concessional and non-concessional) in total disbursed and outstanding public debt was 47% at end 1983, while debt at variable interest rates accounted for only 22%. Table 4.13 presents selected debt indicators for Indonesia and a set of comparator countries. In most respects Indonesia compares well with the countries in the sample. - 112 - Table 4.12: GROWTH AND COMPOSITION OF DEBT, 1973-83 Nominal Growth in Disbursed Debt Composition Level (% p.a.) (%) ($billion) 1973-78 1978-83 1978 1983 1983 Public debt /a Official assistance 14.0 8.1 45 36 11.2 Bilateral concessional 11.0 3.6 38 24 7.6 Multilateral 50.0 24.9 7 12 3.6 Import-related credits 31.0 11.5 18 17 5.4 Bilateral non-concessional 84.0 9.8 4 4 1.1 Suppliers' credits 18.1 5.5 9 6 2.0 Buyers credits 54.0 19.1 5 7 2.2 Untied borrowings 75.2 20.3 12 17 5.3 Commercial credits 73.4 20.5 11 16 5.0 Bonds - 17.9 1 1 0.3 LNG expansion - - - 6 1.8 Sub-total 21.2 14.4 75 76 23.7 Private debt /a Medium and long-term n.a. 1.6 17 12 3.6 Short-term /c n.a. 18.9 8 12 3.7 Sub-total D_a_ 9.4 25 24 7.3 Total debt n.a. 12.5 100 100 31.0 /a Based on BI Statistics and Bank staff estimates. /b This includes any working balances of public enterprises. Source: Debtor Reporting System, BI and World Bank staff estimates. - 113 - Table 4.13: INTERNATIONAL COMPARISONS OF SELECTED DEBT INDICATORS - 1982 Indonesia Korea Thailand Nigeria Brazil Mexico Private creditors/DOD /a (%) 39.7 58.5 31.4 81.2 82.8 85.9 of which, Variable interest loans/DOD (%) (20.4) (40.9) (30.8) (73.7) (70.2) (75.7) Total debt service/gross exports (%) /b 11.3 13.1 8.4 4.7/c 33.4 28.2/c OiEficial reserves/total debt service (%) 197.5 79.3 339.2 143.9 40.4 58.6 Official reserves/DOD (%) 24.4 14.7 43.1 31.7 8.4 11.6/c Memo item Average terms: New commitments of public debt Interest (%) 9.4 11.5 9.5 13.9 13.0 14.8 Maturity (years) 15.1 13.1 19.1 8.9 11.2 6.3 /a Public and publicly guaranteed debt outstanding and disbursed (DOD). /b Total debt service on public and publicly guaranteed debt as percent of exports of goods and all services. /c For 1981. Source: World Bank, World Debt Tables (1983/84); and World Bank staff estimates for Indonesia. 4.62 The public sector borrowing program outlined earlier implies an average annual growth of about 11.6% in outstanding public MLT external debt from 1984/85 to 1986/87. Private MLT external debt is expected to grow more slowly at 9.2%. As a percentage of gross exports, outstanding public debt is expected to fall marginally from about 123% to 117% over the same period. In terms of the composition of MLT, the shares of import-related credits and untied commercial borrowings are expected to remain stable over the next several years (Table 4.14). However, under the borrowing scenario envisaged in the report, a decline in their shares will occur by 1990. - 114 - Table 4.14: DISBURSED AND OUTSTANDING MEDIUM AND LONG-TERM DEBT, 1981-90 ($ Billion, at Current Prices) Total Debt Shares (%) 1981 1983 1985 1990 1981 1983 1985 1990 Public debt Official assistance 9.3 11.2 14.7 23.1 48 41 43 50 Import-related debt on commercial terms 3.3 5.4 7.9 7.8 17 20 21 17 Euro-currency and other untied borrowings 3.1 5.3 6.7 7.1 16 19 19 16 LNG expansion - 1.8 1.7 1.0 - 7 5 2 Sub-total 15.7 23.7 30.1 39.9 81 87 88 85 Private debt 3.6 3.6 4.1 7.9 19 13 12 15 ___tAl 193 27_3 34_. 46.0 J&5 100 100 100 Memo item: Debt service ratios (%) - Public (net) /a 14.2 22.6 28.1 23.4 - Public (gross) /b 7.9 13.3 16.2 14.0 - Total public and private (gross) 10.1 19.2 21.7 19.9 /a The ratio of debt service to net exports, that includes merchandise non-oil exports and net oil and LNG exports (i.e. gross exports less imports of goods and services of the oil sector). lb The ratio of debt service to gross exports of goods and services. Source: World Bank staff projections. 4.63 The Government continues to manage its external debt quite prudently. Until 1982, Indonesia had succeeded in maintaining its public debt service ratio /1 at or below 20%. However, because of the sharp drop in oil export receipts in 1983, the debt service ratio rose to 23% in that year. The debt service ratio, based on the conventional concept of gross exports, was only about 13% in 1983. With private MLT included, the total debt-service ratio was 19% in that year./2 With the projected levels and composition of /1 Defined as public debt-service as a share of net exports. /2 The definition used here is the ratio of public and private debt service to gross exports of goods and services. - 115 - borrowings and export earnings, Indonesia's public debt-service ratio, based on net exports, would rise to about 28% in 1985 and then gradually decline to about 23% by the end of the decade. With private MLT included the total debt-service ratio would average about 22% during 1985-88 and decline to 20% in 1990. While debt management would require careful attention in the coming years, the projected debt service payments are not excessive by international standards. With prudent borrowing policy, maintenance of a comfortable level of external reserves to guard against temporary strains on liquidity and concerted efforts at export promotion and discipline in the public investment program, Indonesia should be able to retain its present high standing in international capital markets. - 116 - PART II - SELECTED ISSUES OF REGIONAL AND URBAN DEVELOPMENT OVERVIEW This part of the present report provides a discussion of some of the main features of regional and urban development in Indonesia during the Seventies, and the issues they raise for the future. The coverage of these issues is, however, highly selective. The problems of spatial development are amongst the most complex facing any country and the existing body of knowledge on this aspect of Indonesia's development is still very limited. Nevertheless, it is clear that at the local level, Indonesia is undergoing tremendous economic and social changes, and that it is becoming increasingly important to understand these trends in conjunction with macroeconomic developments. Accordingly, the World Bank is devoting more attention to the analysis of spatial development processes and policies in Indonesia. At this stage the findings of this research are fairly preliminary. Consequently, the main aim here is to highlight a number of important questions which merit further investigation, rather than to present definitive answers. One of the primary objectives of development policy in Indonesia is to ensure that the benefits of economic and social development are equitably distributed. however, as a nation of geographically scattered Islands with tremendous variations in levels of physical and human resources, Indonesia faces special problems in achieving this goal. Chapter 5 provides an assessment of some of Indonesia's achievements in this area. It suggests that, by and large, most regions can point to significant gains in economic output over the Seventies. Similarly, there have been widespread improvements in social welfare across the country, as a result of substantial increases in government expenditures on education and health-related activities. Nevertheless, progress has been uneven among provinces. Although regions with higher per capita output levels in 1971 grew faster than poorer regions during the Seventies, there were no simple patterns between regional incomes, output growth and changes in social welfare. The most striking spatial pattern which has emerged over the Seventies has been the rapid reduction in urban poverty. This decline has been accompanied by a significant acceleration in Indonesia's urbanization rate. During the Seventies Indonesia's urban population grew more than twice as rapidly as the rural population, largely because of a heavy inflow of migrants from rural to urban areas. - 117 - This rapid urbanization, together with its associated rural urban migration, is one of the key spatial trends in Indonesia's economic and social development. If, as seems likely, Indonesia's urbanization continues at its present rate, the urban population will more than double from its 1980 level of 33 million to 72 million by 2000. One of the major challenges facing Indonesia will be to ensure that this urban growth makes the fullest possible contribution to the overall development of the economy. Accordingly, Chapter 6 examines some of the main policy instruments available to the authorities for influencing the distribution of economic activity among cities. While these policies can only be effective when complemented by appropriate rural development and transmigration policies, the discussion of these elements of spatial policy, lies largely beyond the scope of the present report. Based on the analysis undertaken in Chapter 6, it is estimated that, although urban areas currently account for only about one quarter of the total population, they will absorb the equivalent of one-half of the increase in Indonesia's population in the 1980's and fully two-thirds of the increase in the 1990's. Consequently, a major effort will be required to finance the projected demand for urban services, given the overall budgetary constraints facing the authorities noted in Part I. Against this background Chapter 7 looks at some of the options the Indonesian authorities may wish to explore to finance these services, and at the managerial and administrative issues posed by Indonesia's rapid urban growth. - 118 - CHAPTER 5 KEY FEATURES OF SPATIAL DEVELOPMENT DURING THE SEVENTIES A. Introduction 5.1 Indonesia is a country of tremendous diversity in terms of geography, culture, and economic structure. Its 13,677 islands form a land area of 1.9 million sq. km., but its total surface area including the seas within its boundaries is over 4.8 million sq. km., an area roughly the same size as the continental United States. Straddling the equator, it extends 5,110 km from Northwest Sumatra to Irian Jaya on its southeastern border. As a result, it possesses a number of distinct equatorial and monsoonal climatic zones, which, together with variations in soil and topography, have shaped the development of its agriculture and the distribution of its population. As a nation of island peoples, today's Indonesia is rooted in a rich and varied cultural tradition. Its 147 million population is drawn from over 50 ethnic groups with several hundred recognized languages and dialects. This diversity poses tremendous challenges for the Indonesian authorities, both in terms of promoting efficient growth and ensuring that the benefits of economic growth are distributed equitably amongst different groups in society. /1 5.2 Indonesia's physical, human and economic resources are very unevenly distributed between its main regions. Java, for examples, accounts for almost one-half of Indonesia's GDP, 62% of its population, but only 7% of its land area. This uneven pattern of distribution means that there are profound differences in the economic problems faced by different parts of the country. This chapter reviews the economic performance of the main regions during the Seventies and the progress of social development. One of the most notable aspects of Indonesia's economic performance is that, despite these differences, all five of Indonesia's main regions experienced rapid per capita growth in the past decade. Per capita growth rates ranged between 4.0% (Sumatra) and 11.7% (Kalimantan) in real terms. To a large extent these differences were associated with the performance of the mineral sector, particularly petroleum. In the non-mining sector the variations in output were much less pronounced. Generally, the regions with higher output in 1971 experienced the fastest rates of economic growth in the Seventies. Consequently, regional differences in output tended to widen. However, this chapter argues that, while further work is needed to assess the extent to which regional variations in output growth rates reflect: genuine differences in comparative advantages, the authorities should not be unduly concerned with this trend. 5.3 Two important processes are at work in Indonesia which enable the benefits of growth to be more evenly spread. The first of these is migration. Between 1971 and 1980, 4.3 million Indonesians (or 16% of the /1 The material for this chapter is largely based on Indonesia: Selected Issues in Spatial Development, World Bank Draft Report No. 4476-IND. - 119 - natural increase in population) resettled permanently in provinces outside those of their birth. Approximately 1.7 million people moved from Java to the Outer Islands. Of these, 1 million were resettled through the official transmigration program. By far the most dynamic spatial trend in population distribution has been the acceleration of urbanization. Between 1971 and 1980 the urban population increased at an annual rate of 4% compared with a rate of 2.6% in the Sixties. Rural-urban migration accounted for slightly more than half of the 9.6 million increase in Indonesia's urban population. The second process is the redistribution of incomes through the government budget. Regional variations in per capita consumption are much less pronounced than differences in per capita output. This is largely due to the impact of taxation on the oil sector. 5.4 From the point of view of spatial development policy, one of the most important features of Indonesia's development is that rural-urban differences in consumption within regions appear to be greater than differences among regions. An analysis of household expenditures indicates that Indonesia's rapid economic development has been accompanied by significant progress in reducing poverty. Between 1970 and 1980, the proportion of the population living in poverty declined from 57% to 40%. This was a remarkable achievement. The reduction in poverty was particularly rapid in the Outer Islands, where poverty incidence was reduced from 43% to 28%. On Java there was also a marked reduction in poverty incidence from 65% to 47%. Between 1970 and 1980 there was a very sharp reduction in urban poverty from 51% to 20%. 5.5 As in any country there is considerable scope for redistributing incomes and for alleviating social disparities through differential levels of public spending. This is a particularly important policy option for Indonesia to explore since central government expenditures have a marked impact on the economic and social development of the regions. Average government spending on the regions was equivalent to 13% of provincial non-mining GDP in 1980. The three poorest provinces, as well as some of the important transmigration provinces, received much higher levels of support. However, it does not appear to be the case that public expenditures have had as a significant redistributive impact across regions as taxation. Government spending on the social services has increased at an annual rate of 21% in real terms since 1974/75. The Government has attached high priority to the development of primary school education facilities across the country. The success of this program is evident from the fact that compulsory primary education will commence in Indonesia on June 15. However, there are significant variations among provinces in higher education participation rates, access to piped water, and health service coverage. In general the level of services provided in urban areas is higher than in rural areas. Thus a major challenge which lies ahead is to expand the coverage of services to rural areas whilst meeting the growing needs of the urban population. B. Regional Variations in Economic Structure 5.6 As Table 5.1 indicates, Indonesia's physical, human, and economic resources are very unevenly distributed between its five main regions. Indonesia's average population density is only about 78 persons per sq.km. This is well below the average for Asia and compares with average population densities of 29 for the low income countries and 34 for the lower middle income countries. However, 62% of Indonesia's population lives on Java, - 120 - which accounts for only 7% of the land area. Consequently, Java's population density (at 690 persons per sq.km) is higher than any other country, including Bangladesh (630). In contrast, the island of Kalimantan, which accounts for 28% of Indonesia's land surface, has a population density of only 12 persons per sq.km. These differences in population density have a profound impact on the nature of the development problems of each of the five regions. Java's fundamental development problems center around its high population density, limited prospects for increasing its cultivable land area, and the related problems of landlessness, overcrowding and poverty. In contrast, Kalimantan is sparsely populated, possesses vast areas of unexploited virgin jungle and only a minimal amount of economic infrastructure. While there are notable differences between Kalimantan and the other Outer Islands of Indonesia, they too are for the most part lightly populated and lacking in infrastructure. Table 5.1: REGIONAL ECONOMIC INDICATORS, 1980 (Indonesia = 100) Java Sumatra Kalimantan Sulawesi E.Islands Indonesia and Irian Jaya Land Area 6.9 24.7 28.1 9.8 30.5 100 Population 61.9 19.0 4.6 7.0 7.5 100 Labor Force 64.1 19.9 4.9 7.0 7.1 100 GDP Za 47.1 31.4 10.2 5.3 6.0 100 GDP per capita 75.5 166.7 225.9 74.5 83.3 100 /a 1979 current prices, including mining. Source: Indonesia: Selected Issues in Spatial Development, World Bank Draft Report No. 4476-IND. 5.7 In terms of economic importance, Java generates slightly less than half of Indonesia's GDP. Its fertile soils produce almost 50% of the country's agricultural output, 65% of its domestic food supply, and 62% of its rice. Although it is less well endowed with minerals, particularly oil, and consequently only accounts for 10% of Indonesia's mineral production, Java plays a dominant role in Indonesia's industrial life. In 1979, Java accounted for about 76% value added in manufacturing. Medium and large manufacturing enterprises tend to be even more concentrated in Java (85.5% of value added). However, the distribution of small-scale enterprises, which generally produce less sophisticated products and cater to local markets, follows the pattern of population distribution more closely. T'he production of services is also a relatively higher proportion of regional gross domestic product IRGDP) on Java - 121 - than in the Outer Islands. Services accounted for about 40% of Java's RGDP compared with 27% for the other regions in 1979 . This largely reflects Java's role as the administrative and commercial center of Indonesia and its high share in total population. 5.8 Although Java employs 64% of Indonesia's labor force it accounts for only 47% of its GDP, reflecting lower average output per worker than for the rest of the country. As a result of this lower average output, RGDP per capita on Java is only 76% of the average for Indonesia, even though the labor force participation rate (LFPR) is above the national average. Li A major factor influencing relative levels of RGDP is the distribution of mineral deposits. The bulk of Indonesia's oil and gas production, which is responsible for almost a quarter of the country's GDP, takes place outside of Java. Oil production is highly capital-intensive and characterized by very high output per worker, as reflected by the fact that less than 0.3% of the labor force is employed in this sector. Consequently, RGDP per capita on Sumatra and Kalimantan, where mining accounts for 47% and 42% of RGDP respectively, is considerably greater than the national average. Similarly, oil production in Irian Jaya significantly boosts the average level of RGDP per capita for the Eastern Islands group. A second factor influencing relative RGDP levels is that agricultural labor productivity in the Outer Islands is about 40% higher than on Java. On Kalimantan and Sulawesi, agricultural labor productivity is almost double that of Java. This is a reflection of the higher land-labor ratios found on the Outer Islands and Java's relative concentration on rice production, which is highly labor intensive and requires a substantial seasonal labor input. 5.9 The technological character of the oil sector tends to limit its interaction with the rest of the economy. Therefore, although it has made a substantial contribution to overall GDP growth in Indonesia and has a dramatic impact on the level of output of certain regions and provinces, in terms of regional development policy, it is more useful to examine the performance of the non-oil sector. A second reason for considering the non-oil sector separately from the oil sector is that its direct impact on regional incomes is considerably smaller than its contribution to regional output. In Indonesia the bulk of oil revenues accrue to the Central Government. Local wages form only a small proportion of production costs, and most of the direct expenditures which are associated with oil production (and would benefit the local economies concerned) take place during the initial investment period. Unfortunately, the regional national accounts currently available do not identify the oil sector separately, but the non-mining sector provides a reasonable proxy for the non-oil sector. 2 LI The LFPR is defined as the percentage of the population which is economically active. The LFPR for Java in 1980 is estimated at 36.0 compared with 34.8 for Indonesia as a whole. /2 The non-mining sector excludes oil and gas extraction, but includes refining and processing activities. - 122 - 5.10 As Table 5.2 indicates, Indonesia's non-mining GDP per capita increased at an annual rate of 5.0% in real terms during 1971-79. Ihis campares with a rate of 5.8% for total GDP per capita during the period. Table 5.2: REGIONAL DEVELOPMENT INDICATORS, 1971-79 (At 1973 constant prices) RGDP Non-mining RGDP per capita Non-mining RGDP per capita index growth per capita growth (Indonesia - 100) (% p.a.) (% p.a.) 1971 1979 Java 4.6 4.4 93 89 Sumatra 4.0 5.6 121 127 Kalimantan 11.7 7.7 140 172 Sulawesi 5.7 5.3 98 100 Eastern Islands and Irian Jaya 6.5 5.3 81 82 Indonesia 5.8 5.0 100 100 Source: Indonesia: Selected Issues in Spatial Development, World Bank Draft Report No. 4476-IND. 5.11 As might be expected, given the leading role of the oil sector in the Indonesian economy, regional differences in the growth of non-mining RGDP per capita were far less marked than for total GDP per capita. A second development highlighted in Table 5.2 is that the per capita increases in non-mining RGDP were strongly correlated with absolute differences in non-mining RGDP. Thus while there were very substantial gains in non-mining RGDP throughout Indonesia, the regions with higher non-mining RGDP per capita in 1971 experienced more rapid growth than the regions with lower RGDP per capita. Consequently, regional output disparities tended to widen somewhat. 5.12 The widening disparities in per capita output levels which have emerged during the Seventies are a source of concern for the Government. This spatial dimension of economic growth is important because it is closely linked to political considerations of inter-regional equity, national cohesion and socio-economic integration. However, substantial regiona:L differences in output levels and growth rates are a common feature of many countries. For the most part they reflect the generally low degree of economic integration between different parts of a country. Consequently, the appropriate policy response is to focus on measures to improve the internal mobility of labor and capital and to promote domestic trade. However, in Indonesia these differences are exacerbated by the uneven distribution of natural resources, which in turn influences the location of related processing activities. Further work is needed to identify the impact of this factor in Indonesia. This would enable policymakers to judge the extent to which the output growth differences which have emerged are due to the comparative resource endowments of particular parts of the country. - 123 - 5.13 However, it can be argued that - although there may be some scope for slowing or reducing output disparities - equalising regional per capita output levels is neither a realistic nor an appropriate target for policymakers in Indonesia. Firstly, the uneven distribution of natural resources means that regional output variations are to a large extent inevitable in a country such as Indonesia. Secondly, it is important to draw a distinction between changes in the pattern of output and trends in income distribution. It is the latter which is more relevant to considerations of regional equity. Consequently it is necessary to examine the relationship between output and incomes. This is because productive activities - as in the case of oil - do not always generate corresponding incomes in the region concerned, and because income can be redistributed through taxation. In addition, spatial variations in availability of public services must also be considered, since these form an important component of public welfare. Before turning to these issues, it is necessary to provide a brief overview of the changing pattern of population distribution in Indonesia. This is important for two reasons. Firstly, migration is an important channel for reducing inequality, since the main motive for migration is the opportunity it provides for individuals to improve their incomes and access to public services. Secondly, it serves to highlight a second important dimension of spatial development in Indonesia - the contrast between rural and urban areas. C. Population Growth and Labor Mobility. 5.14 Between 1971 and 1980 Indonesia's population increased at an average annual rate of 2.3% Li. This compares with a 2.1% rate recorded during the period 1961-71. The acceleration in the rate of growth of population in the 1970's was due to declines in mortality which outweighed the effect of the reduction in fertility during this period. 5.15 Interprovincial Movements. Since international migration is insignificant, Indonesia's total population growth rate is determined by the natural increase in population. However, at the regional level population growth is influenced by two factors: the natural rate of increase in population, and interregional population movements. As Table 5.3 indicates, Indonesia's population dynamics are characterized by significant regional variations in demographic trends as a result of these two factors. There are, for example, notable differences between the rate of increase of population on Java and on the Outer Islands. On Java, the population increased at an average rate of 2.0% per annum. On the Outer Islands, regional population growth rates were higher, ranging between 2.2% (Sulawesi) and 3.3% (Sumatra). At the provincial level the variation in the rate of population increase was even greater. On Java the rate of population increase ranged from 1.0% for Yogyakarta to 3.9% for IKI Jakarta. Even greater provincial variations were recorded on the Outer Islands. 5.16 Between 1971 and 1980, 4.3 million Indonesians resettled permanently in provinces outside those of their birth. This total movement was equivalent to about 15.6% of the natural increase in Indonesia's population during this period (27.6 million). Approximately 2.1 million migrants resettled in the Outer Islands. Of these, 1 million were resettled through the official /1 The material for this chapter is based on the 5.0% sample of the 1980 census. Some adjustments may be required to reflect the full census results, as they become available. - 124 - Table 5.3: ESTIMATES OF NET MIGRATION AND NATURAL INCREASE COMPONENTS OF POPULATION CHANGE IN PROVINCES, 1971-80 (in percent per annum) Province Growth rate Net Natural migration increase DKI Jakarta 3.93 1.15 2.78 West Java 2.66 0.03 2.63 Central Java 1.64 -0.57 2.21 D.I. Yogyakarta 1.10 0.15 0.95 East Java 1.49 -0.26 1.75 JAVA 2.04 -0.14 2.18 Aceh 2.93 0.17 2.76 North Sumatra 2.60 -0.22 2.82 West Sumatra 2.21 -0.36 2.57 Riau 3.11 0.37 2.74 Jambi 4.07 0.99 3.08 South Sumatra 3.32 0.37 2.95 Bengkulu 4.39 1.31 3.08 Lampung 5.77 2.04 3.73 SUMATRA 3.34 0.76 2.58 West Kalimantan 2.31 0.07 2.24 Central Kalimantan 3.43 0.68 2.75 South Kalimantan 2.16 0.13 2.03 East Kalimantan 5.73 1.50 4.23 KALIMANTAN 2.99 0.61 2.38 North Sulawesi 2.31 0.06 2.25 Central Sulawesi 3.86 1.10 2.85 South Sulawesi 1.74 -0.30 2.04 South East Sulawesi 3.09 0.42 2.67 SULAWESI 2.20 0.11 2.09 Maluku 2.88 0.24 2.64 Irian Jaya 2.67 0.26 2.41 B a 1 i 1.69 -0.14 1.82 West Nusa Tenggara 2.36 -0.12 2.48 East Nusa Tenggara 1.95 -0.08 2.03 EASTERN ISLANDS 2.05 0.09 1.98 TOTAL INDONESIA 2.33 0.00 2.33 Source: World Bank staff estimates based on the 1980 population census. - 125 - transmigration program, so that spontaneous and official transmigration were about equal in overall importance. However, the net flow from Java to the Outer Islands was only about 1.1 million, once allowance is made for movements from the Outer Islands to Java (0.55 million) and migration between the Outer Islands themselves (0.45 million). 5.17 This migration had an important impact on population growth in some parts of Indonesia. In particular, certain provinces which were important transmigration sites experienced a significant boost to their overall population growth rates, as a result of interprovincial migration. Most notable in this regard were Jambi, Bengkulu and Lampung on Sumatra, Central and East Kalimantan and Central Sulawesi, where population increased by an additional 1% or more per year on account of net migration. Metropolitan Jakarta also recorded a substantial increase in its population on account of net migration. The major outflows of population due to interprovincial migration were from Central and East Java, but there were also overall net migratory losses in some of the provinces of the Outer Islands. Except in the case of Central Java, however, these net outflows did not have a major effect on the rate of growth of the population. Consequently, for most provinces net migration has had very little direct impact on population change. 5.18 Urbanization and Rural-Urban Migration. By far the most dynamic spatial trend in Indonesia has been the rapid spread of urbanization. During the 1970's Indonesia's urban population increased almost twice as fast as its total population. Moreover, the tempo of urbanization has been accelerating. Indonesia's measured urban population increased at an annual rate of 4.0% in the 1970's, compared with a 2.6% rate in the 1960's. Rural-urban migration Table 5.4: INDICATORS OF URBANIZATION-INIERNATIONAL COMPARISONS Urban population Average annual growth of population as % of total (% per annum) 1970-81 population, 1981 Total Urban Rural (Urbanization rate) /a Indonesia 23 2.3 4.0 1.7 (2.3) Middle income countries 45 2.4 4.1 1.0 (3.1) Low income countries 21 1.9 4.4 1.4 (3.0) Comparator countries Philippines 37 2.7 3.7 2.2 (1.5) Malaysia 30 2.5 3.3 2.2 (1.1) Thailand 15 2.5 3.4 2.3 (1.1) India 24 2.1 3.7 1.6 (2.1) Pakistan 29 3.0 4.3 2.5 (1.8) Nigeria 21 2.5 4.8 1.9 (2.9) Egypt 44 2.5 2.9 2.2 (0.7) /a Defined as the difference between urban and rural population growth rates. Source: World Development Report 1982, 1983; World Atlas 1982. - 126 - had a substantial impact on urban growth. Between 1971 and 1980 more than 4.6 million people moved from rural to urban areas, and the children born to these migrants added a further 0.4 million to the urban population. Thus rural-urban migration accounted for about half of the total urban population increase of 9.6 million. 5.19 As Table 5.4 indicates, it is estimated that 23% of Indonesia's 1981 population lived in urban areas. This was a slightly higher proportion than that for the low incone countries (21%), but well below the average for middle income countries (45%). Although Indonesia's urban population is not growing as rapidly as Pakistan's or Nigeria's, for example, it is increasing significantly faster than the other large East Asian countries. Indonesia's urbanization rate - defined as the gap between the rate of growth of the urban population and the rural population - at 2.3%, is now one of the highest in the region. 5.20 Regional data on the distribution of urban population in 1980 and estimated rates of urban growth are shown in Table 5.5. Java accounts for 22.9 million of Indonesia's 32.8 million urban dwellers. Of these 6.1 million live in Jakarta, the capital city. Despite this seeming concentration, the share of the urban population in total population on Java at 25% is only slightly higher than in the major population centers in the Outer Islands, where the share of urban population ranges between 16% and 21%. The Eastern Islands region is significantly less urbanized, but it accounts for only 7% of Indonesia's total population and 4% of the urban population. The Outer Islands are all urbanizing at a faster rate then Java. If the present pattern of urban growth continues, the differences in relative urbanization between Java and the Outer Islands would disappear well before the end of the century. Table 5.5: TOTAL AND URBAN POPULATION, SEPTEMBER 1980, AND GROWTH BY PROVINCE, 1971-80 Average annual growth 1971 - 1980 Total Urban % Total Urban population population Urban population population Java 91,270 22,926 25.1 2.0 3.0 (DKI Jakarta) (6,503) (6,072) (93.4) (3.9) (3.9) Sumatra 28,016 5,481 19.4 3.3 5.1 Kalimantan 6,723 1,441 21.4 3.0 6.4 Sulawesi 10,410 1,654 15.9 2.2 5.1 Eastern Islands and Irian Jaya 10,517 1,341 12.8 2.2 3.6 Total Indonesia 146,935 32,846 22.4 2.3 4.0 Source: World Bank staff estimates. - 127 - 5.21 The rapid pace of urbanization in Indonesia and the associated movement of people from rural to urban areas give rise to a number of important spatial policy issues. Firstly, in view of the substantial contribution of migration to total urban growth it is clearly essential to determine the factors influencing rural-urban and interprovincial migration decisions and their impact on employment. Secondly, if present trends continue, the arithmetic of compound growth implies an increase in the urban population from 32.6 million in 1980 to 71.9 million by 2000. Such a scenario implies that about one half of the increase in the population in the 1980s and fully two-thirds of the increase in the 1990s will take place in urban areas. Policy makers in Indonesia are understandably concerned to ensure that this urbanization process is managed successfully. Consequently it is important to analyse the pattern of urban development and the impact of policies to influence city growth. These issues are discussed in Chapter 6. D. Spatial Dimensions of Income and Poverty 5.22 Spatial Income Disparities. One of the fundamental principles of national income accounting is the identity between production and income , once allowance is made for net balance of payments items. However, as noted above, for individual regions there may be substantial differences between production, income and expenditure levels. There are a number of factors which explain the emergence of these differences between production and income. Firstly, the regional pattern of ownership does not necessarily correspond with the pattern of production, so that the profits from particular activities in a given region may accrue to individuals living in another part of the country. Secondly, there are also large numbers of both permanent and temporary regional migrants in Indonesia who send a part of their income to their families. However, the most important influence on the redistribution of income between regions is central government taxation. 5.23 In the 1982/83 budget, 59% of the Central Government's revenue came from income taxes on oil production. Since Indonesia's oil production is located in only three of five main regions, this fact alone accounts for a major element of income redistribution within the Indonesian economy. 5.24 Unfortunately, it is very difficult to construct regional national accounts which capture the differences between production and income flows successfully. There is no data available on the pattern of regional incomes in Indonesia for example. However, household survey data provide some insight into regional variations in living standards and incomes /1. Some measures of the importance of the difference between regional consumption and production may be ascertained from Table 5.6 which provides indexes of per capita output (including and excluding mining) and consumption. The results of this exercise have to be interpreted with considerable caution, because household survey data tend to under-report the consumption of higher income households. This means that income inequalities are understated. Even allowing for this problem, it seems fairly clear that central government budgetary policies have resulted in a significant reduction in regional income inequality in Indonesia. Average per capita RGDP levels (including mining) range between 226% of the Indonesian average (Kalimantan) and 75% (Sulawesi). The variation /I For a discussion of some of the difficulties associated with such analysis see, for example, G.A. Hughes and I. Islam Inequality in Indonesia: A decomposition analysis, Bulletin of Indonesian Economic Studies (BIES), March 1981. - 128 - in per capita consumption is much smaller, ranging between 77% of the average for Indonesia (Eastern Islands) and 129% (Kalimantan). This redistribution effect is largely associated with oil taxes, but it may also be true for the effect of taxes on the non-mining sector of the economy. This is because the variations in regional consumption levels are also smaller than the variations in non-mining sector output per capita. Table 5.6: REGIONAL VARIATIONS IN PER CAPITA OUTPUT AND CONSUMPTION, 1980 (Index: Indonesia = 100) Per capita Per capita RGDP Per capita consumption (excl. mining) Total Rural Urban Java 76 89 97 66 129 Sumatra 167 127 116 102 138 Kalimantan 226 172 129 118 139 Sulawesi 75 100 87 80 120 Eastern Islands and Irian Jaya 83 82 77 72 98 Indonesia 100 100 1_0 77 129 Source : World Bank staff estimates. 5.25 Overall, the survey data suggest that distribution policies between regions have been successful. Java's average per capita consumption is 97% of the Indonesian average, even though its total and non-mining per capita RGDP levels are only 76% and 89% of the Indonesian average respectively. The level of per capita consumption on Sulawesi and the Eastern Islands is slightly lower than might be expected given their relative non-mining per capita RGDP. However, the differences are fairly small, which suggests that the impact of central government taxation was rather neutral or fairly limited. Sumatra's per capita consumption level corresponds fairly closely with its relative non-oil RGDP. But Kalimantan's per capita consumption is considerably lower, this may be due to the importance of non-oil tax receipts on Kalimantan, such as taxes on its timber reserves. 5.26 Table 5.6 also provides some data on regional consumption standards of rural and urban areas. This data strongly suggests that urban-rural differences in consumption within regions are far more significant than regional differences. On Java, for example, per capita consumption in the rural areas is only one half of the level in the urban areas. Urban-rural differences are less pronounced in the other regions, but it nevertheless remains the case that the urban areas of Indonesia are characterized by considerably higher consumption levels than rural areas. This is an important - 129 - finding since it underscores the importance of monitoring the pattern of development in rural and urban areas, and the need for careful planning at the regional level through the regional BAPPEDAS to take account of these disparities. 5.27 Trends in Poverty Incidence. One of the most fundamental problems facing Indonesia is the question of poverty. Consequently, it is also important to consider the influence of economic growth and income distribution on poverty both at the national and at the local level. Over the course of the 1970s, Indonesia m?de significant progress in tackling its poverty problem. Between 1970 and 1980 the proportion of the population living in poverty declined from 57% to 40% (see Table 5.7) /1. This was a remarkable achievement. Although the paucity of data preclude a detailed analysis of this question, the household survey data suggest that the pattern of growth has resulted in quite significant changes in the spatial dimensions of poverty in Indonesia. First, the reduction in poverty was particularly rapid in the Outer Islands. On the Outer Islands, the proportion of the population living in poverty declined from 43% to 28%; in Java the decline was from 65% to 47% of the population. 5.28 The second important spatial trend in poverty in Indonesia has been rapid reduction in urban poverty incidence during the Seventies. In 1970 the incidence of poverty in urban areas was 51% of the population. The incidence of urban poverty was somewhat lower than in rural areas, where 59% of the population were living in poverty. Between 1970 and 1980 there was a very sharp reduction in urban poverty. The reduction in urban poverty has been more rapid in Java than the Outer Islands, with the result that urban poverty rates are now more uniform across the country. However, improvements in rural poverty have been more difficult to bring about. Nevertheless the high priority attached to rural development has resulted in a substantial reduction in the incidence of rural poverty which was reduced to 52% in Java in 1980 and lowered to 30% on the Outer Islands. /1 The definition of poverty is based on a minimum food expenditure requirement of 17.6 kg of rice per month per capita which is required to provide 2,150 calories and 30 grammes of protein per day. In addition, an allowance is made for non-food basic items such as shelter and clothing, related to the consumption expenditures of households subsisting at the minimum food expenditure level. - 130 - Table 5.7: REGIONAL VARIATIONS IN POVERTY INCIDENCE, 1970-80 (% of Population) 1970 1976 1978 1980 Java Urban 56.3 33.8 27.5 20.9 Rural 67.0 62.7 65.0 52.0 Sub-total 65.0 57.3 57.9 46.9 Outer Islands Urban 40.8 28.0 21.2 17.3 Rural 43.9 39.6 34.3 30.3 Sub-total 43.2 37.3 31.8 28.0 Indonesia Urban 50.7 31.51 25.2 19.7 Rural 58.5 54.5 54.0 44.6 Total 57.1 50.1 48.5 39.8 Source: World Bank staff estimates. 5.29 The survey data suggest that the impact of the overall reduction in poverty incidence in Indonesia has been most notable in the urban areas. Overall, the urban areas can point to a steady reduction in the incidence of poverty both in Java and on the Outer Islands. Despite the rapid rate of urbanization, the numbers of poor people living in urban areas declined from 10.3 million to 5.5 million. The Government has made considerable efforts to promote rural development through agriculture and related investments. In rural Java, the incidence of poverty declined only slightly between 1970 and 1978 and the absolute number of people living in poverty continued to rise. However, after 1978 poverty incidence began to decline significantly and the absolute size of the rural poverty group on Java fell sharply. /1 / On the Outer Islands the reduction in rural poverty was more continuous over the decade. However, despite this relative success there are still marked regional variations in rural poverty incidence on the Outer Islands (see Appendix Table 4). On Sumatra and Kalimantan, rural poverty incidence in 1980 averaged 20% and 12% respectively,, while in Sulawesi and the Eastern Islands the rates were 39% and 47%. - 131 - 5.30 Fortunately, while Indonesia faces an enormous challenge in reducing poverty, the problem of deprivation is less pervasive. The overall incidence of deprivation, which is defined as the proportion of the population whose food needs are not fully satisfied, is only 3.3%. Thus, the overwhelming majority of Indonesia's poverty group is able to satisfy its food needs, but does not earn sufficient income to meet the rest of their non-food basic needs. 5.31 Table 5.8 shows the provinces in Indonesia where the incidence of deprivation exceeded 10% in 1980, i.e. three times the average for Indonesia as a whole. All three of the provinces concerned were in the Eastern Islands region. The level of per capita non-mining RGDP does not appear to explain the high incidence of deprivation in these areas. For example, Maluku's per capita output is 10% higher than the Indonesian average, but the incidence of deprivation is four times higher than in Indonesia as a whole. Equally striking, is the contrast between West and East Nusa Tenggara; both have approximately the same level of per capita output, but the incidence of deprivation in the former province is less than half that of the latter. The absence of any relationship between per capita output and the incidence of deprivation in these provinces suggests that special measures are required to ensure that the development of these regions helps alleviate the plight of the economically deprived and that the food requirements of these groups are adequately met, especially in the rural areas. This might, for example, include a greater emphasis in labor based construction programs, in infrastructural investment such as roads, irrigation and watershed management schemes. In the short term, this would help to generate additional employment opportunities and raise incomes, whilst improving the quality of the infrastructure over the long run, so as to provide a basis for sustainable growth. Table 5.8: PROVINCES WHERE THE INCIDENCE OF DEPRIVATION EXCEEDED 10% in 1980 Non-mining Rural Urban Total per capita deprivation deprivation deprivation Province GDP 1979 incidence (%) incidence (%) incidence (%) West Nusa Tenggara 45.8 23.8 3.4 20.9 East Nusa Tenggara 44.9 47.3 9.2 44.4 Maluku 110.6 14.8 3.2 13.5 Indonesia 100.0 3.8 1.5 3.3 Source: World Bank staff estimates. - 132 - E. Spatial Variations in Government Spending and Services 5.32 The Pattern of Government Expenditures. As noted above, central government taxation has a substantial impact on the spatial pattern of income in Indonesia. While relatively little is known on the spatial dimensions of tax incidence, other than that the oil producing regions make a substantial contribution to the overall budget, rather more information is available on the pattern of public expenditures, particular at the provincial level. This information is of particular importance, since public sector investment and the provision of public services have a profound influence on the pattern of economic and social development in the long run and can play a major role in reducing regional disparities. 5.33 In Indonesia, central government support for local development takes three main forms: budgetary transfers for development expenditures (INPRES grants); subsidies to support routine expenditures of local governments (the central government subsidy or SDO); and development spending of central government departments in the regions. /1 In broad terms, central government support accounts for about 80-90% of development and routine expenditures in the regions. Consequently, the Central Government has a considerable degree of influence on the distribution of public services between provinces and the composition of local services, both in terms of the balance between rural and urban areas and the overall sectoral composition of services. 5.34 Table 5.9 shows the distributions of regionally incurred central government development expenditures, INPRES grants and central government subsidies to the routine budgets of local government. It therefore attempts to draw together all of the available information on the total financial impact of central government expenditures on the position of the individual provinces of Indonesia. In order to bring out the magnitude of this spending in relation to the pattern of per capita output, the provinces of Indonesia have been ranked according to their level of per capita non-mining RGDP in 1980. /4 This category includes most foreign aid. - 133 - Table 5.9: PER CAPITA BUDGETARY TRANSFERS AND CENTRAL GOVERNMENT DIRECT DEVELOPMENT EXPENDITURES 1980/81 Province 1980 non- Inpres Central Central Total mining RGDP grant subsidy development spending per capita Rp/cap Rp/cap expenditure % non-mining Rp '000 Rp/cap RGDP South East Sulawesi 87 13,523 10,177 36,618 72 West Nusa Tenggara 97 5,692 6,536 10,342 23 East Nusa Tenggara 97 5,704 11,406 9,805 27 D.I. Jogyakarta 119 4,697 9,084 10,801 22 Central Java 127 2,830 6,305 4,967 11 West Java 131 3,015 6,353 8,176 13 Lampung 146 4,629 7,038 8,293 13 Jambi 146 9,497 7,541 26,864 30 East Java 147 3,022 5,479 4,902 9 Central Sulawesi 147 10,896 8,973 20,110 27 Bengkulu 148 14,185 8,106 34,319 38 West Sumatra 153 5,653 7,563 17,400 20 Bali 153 6,889 8,220 12,288 18 Aceh 157 6,849 8,069 19,467 22 South Sulawesi 158 4,968 7,045 9,754 14 West Kalimantan 168 8,339 8,267 12,754 17 South Kalimantan 181 7,804 10,266 22,712 23 North Sulawesi 196 7,920 13,609 16,364 19 Irian Jaya 197 11,365 27,197 28,016 34 North Sumatra 205 5,034 8,530 10,908 12 Maluku 223 8,801 8,998 16,275 15 South Sumatra 228 6,507 5,276 18,131 13 Riau 250 7,292 10,187 23,557 16 Central Kalimantan 270 13,075 11,359 21,794 17 DKI Jakarta 448 2,042 6,690 94,031 23 East Kalimantan 740 10,431 10,431 25,354 6 Indonesia 167 4,465 7,111 9,961 /a 13 Source: World Bank staff estimates based on national and provincial budget data. La Excluding DKI Jakarta. The figure including Jakarta is 13,661. The high figure for Jakarta reflects the substantial level of spending on the apparatus of the Central Government rather than on the development of Jakarta itself. - 134 - 5.35 As Table 5.9 indicates, these expenditures are very substantial in relation to the size of the provincial economies. On average total expenditures in 1980/81 amounted to 13% of provincial non-mining RGDP. Expenditures in the three poorest regions in relation to non-mining RGDP were even higher. In South East Sulawesi, West Nusa Tenggara and East Nusa Tenggara expenditures reached 72%, 23% and 27% of non-miLning RGDP respectively. These expenditure levels reflect the Government's commitments to reducing the high level of poverty and deprivation in these regions. 5.36 It could be argued that the arrangements for financing government expenditures could pay more attention to the ability of the regions to contribute toward these costs. There may, for example, be very strong economic arguments for upgrading the infrastructure of an affluent region by building better roads. But this decision can be separated from the decision as to how such improvements should be financed. This would enable the authorities to focus more explicitly on the question of redistributing incomes toward the more needy regions which are less capable of funding their local development efforts. Otherwise, regions with a strong economic base and the greatest potential for rapid development may tend to receive the benefit of better economic and social infrastructure and a disproportionate share of central funds. The authorities are aware of these issues and have begun introducing programs to encourage regional governments to contribute more to their own development, either through increased local taxation, or the greater use of local authority borrowing from the Central Government. The INPRES Pasar program, for example, which covers the development: of wholesale and retail markets is based on loans rather than outright grants to local authorities. Such an approach has much to commend it and could usefully be expanded to other areas. This would enable the authorities to provide more selective support to lower income areas. As noted in Chapter 7, there is considerable scope for shifting towards this pattern in the context of financing urban services. 5.37 Access to Services. The provision of social services, has been accorded high priority by the Indonesian authorities, pa,rticularly since the launching of the 5 Year Plan in 1974/75. Between 1974/75 and 1982/83 spending on the social services climbed from 8.2% to 21.2% of total central government development expenditures. Real expenditures on health (19% p.a.), education (28% p.a.), housing and water supply (38% p.a.), all increased at a fast pace. These expenditures have resulted in profound improvements in the quality of life for the average Indonesian. Compared to their counterparts 10 years ago, today's Indonesians are, for example, better educated, have substantially improved access to public health services, and are far more likely to use piped water for drinking and bathing. 5.38 As a result of the emphasis placed on primary health care and primary education, tremendous strides have been made in providing for basic needs. As Table 5.10 indicates primary education enrollment rates have risen sharply particularly in rural areas. The success of the primary education program is underscored by the fact that progress has been so rapid in the last three years that the remaining differences between rural and urban enrollment rates have been virtually eliminated, so that universal primary education will be introduced on June 15, 1984.. Similarly, there has been a dramatic decline in infant mortality rates across the country in both rural and urban areas. There - 135 - are wide variations among provincial school enrollment rates beyond the primary level, access to safe water, and health service coverage. At present an average urban dweller has far better access to educational services, particularly beyond the primary school level. Among 13-15 years olds, for example, urban school attendance rates are more than 50% higher than in rural areas. There are relatively few junior secondary schools and almost no senior secondary school located in rural areas of Indonesia, either on Java or the Outer Islands. /1 consequently, rural students wishing to have a secondary education are faced with the choice of either commuting daily into towns and cities or migrating. Survey data indicate that more than 30% of senior secondary students actually live away from home. Thus a major challenge which lies ahead will be to improve the educational opportunities of rural youth beyond the primary school level and expanding the coverage of social and public services in rural areas from the present levels whilst meeting the growing needs of urban dwellers. 5.39 These observations are very important from the point of view of spatial policy. As already noted, in rural areas average consumption levels are lower, and poverty incidence is higher than in urban areas. It appears that the distribution of social infrastructure and basic social services also favors urban dwellers. At present many of these services are provided free or well below their economic cost. Thus urban dwellers, who are already better off in terms of income, enjoy disproportionate access to subsidized services. This situation is undesirable not only from the point of view of urban-rural equity, but also from the point of view of spatial efficiency, since the provision of subsidized services creates a bias in favor of rural-urban migration. The future investment requirements of urban areas are very great. But it would appear that considerations of equity and efficiency both call for a greater contribution on the part of urban dwellers toward meeting the costs of the services they will require. This in turn would help release resources for greater investment in rural areas. Consequently, Chapter 7 explores some of the options the central authorities might consider for financing urban services. /1 Indonesia - Secondary Education: Issues and Programs for Action, World Bank, November 1983. - 136 - Table 5.10: INDONESIA-SELECTED SOCIAL INDICATORS, 1971-1980 School enrollment ratios Infant Population 7-12 year 13-15 year mortality per health olds olds rate center Province 1971 1980 1971 1980 1971 1980 ('000) 1980 IKI Jakarta 67 91 56 77 125 81 56 West Java 56 82 37 54 159 131 48 Central Java 58 85 39 57 147 108 36 D.I. Yogyakarta 67 92 58 80 147 63 32 East Java 61 85 44 58 133 113 38 Sub-total Java 59 85 42 59 138 104 41 D.I. Aceh 68 86 60 69 131) 91 16 North Sumatra 68 87 51 68 112 89 37 West Sumatra 68 89 49 71 142 122 28 Riau 51 78 40 64 116 113 24 Jambi 59 79 42 57 157 120 24 South Sumatra 62 83 47 61 153 98 36 Bengkulu 64 82 54 59 148 107 15 Lampung 59 81 40 57 145 98 30 Sub-total Sumatra 64 84 48 64 139 93 28 West Kalimantan 44 67 41 59 138 117 18 Central Kalimantan 65 83 57 66 129 100 10 South Kalimantan 68 85 47 48 14;2 122 16 East Kalimantan 59 79 47 66 118 100 10 Sub-total Kalimantan 60 77 46 61 139 106 14 North Sulawesi 78 89 59 68 112 96 21 Central Sulawesi 73 86 64 66 136 129 14 South Sulawesi 56 79 46 61 154 108 24 South East Sulawesi 59 81 64 64 160 117 19 Sub-total Sulawesi 62 82 52 61 149 108 21 Bali 57 85 35 66 132 89 38 West Nusa Tenggara 42 73 32 43 170 188 34 East Nusa Tenggara 61 76 62 70 136 125 20 Maluku 73 86 69 74 141 125 16 Irian Jaya 84 67 86 58 n.a 125 8 East Timor n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sub-total E. Islands 63 84 50 63 n.a,. n.a. 20 TOTAL INDONESIA 60 84 44 60 J-411 105 31 Indonesia Urban 73 90 63 74 114 87 n.a. Indonesia Rural 58 81 40 48 150 114 n.a. Source: World Bank staff estimates. - 137 - CHAPTER 6 URBANIZATION AND SPATIAL DEVELOPMENT POLICY A. Introduction 6.1 As noted in Chapter 5, urbanization in Indonesia has been accelerating, during 1971-80 the urban population rose by 4% per annum compared with 3.6% during 1961-71. Similarly, the share of the urban population in total population, which increased from 15% in 1961 to 19% in 1971, jumped to 22% in 1980. The present chapter highlights some of the main features of the urbanization process in Indonesia. /1 A major factor underpinning this growth has been an increase in rural-urban migration. During the Sixties migration accounted for 32% of the increase in urban population, but between 1971 and 1980 migration accounted for 52% of the urban population increase. This migration is closely linked to the dynamic performance of the cities in generating new employment and to the generally better level of social services such as educational and health facilities available in urban areas. Between 1971 and 1980 urban employment increased at an annual rate of 5.7% per annum compared with a rate of only 1.6% in rural areas. Even though in 1971 the urban areas accounted for only 13% of total employment, they generated 41% of all new jobs created in the Seventies. About one third of this increase was in the manufacturing sector while almost two-thirds of the growth in urban employment occurred in services. In the rural areas the most striking development was the stagnation of agricultural employment in Java, despite the rapid increase in food output achieved. Thus, the increase in rural employment was accounted for by increases in non farm employment on Java and increases in the Outer Islands. This trend has striking policy implications, since it suggests that Java's rural population will become increasingly dependent on the development of non-agricultural activities for employment. Consequently, urban areas are likely to face a continued influx of migrants from rural areas. Thus it is fairly safe to assume that Indonesia's urban areas will increase in size at least at the present rate of 4% per annum. At this pace, Indonesia's urban population will more than double from its 1980 level of 33 million to 72 million by 2000. 6.2 One of the major spatial policy concerns of the authorities has been whether the pattern of urbanization has been unbalanced in favor of the growth of large cities, particularly Jakarta. While it is true that the large cities have grown at a slightly faster pace than the medium size and smaller cities, the present chapter suggests that it is difficult to argue on the basis of these growth rates that urban growth is excessively concentrated in the large cities. There are a number of factors which are likely to favor the growth of large cities in Indonesia. These include the advantages of locating new investments in close proximity to the major centers of demand and to the ports. In general, it is in the interest of the economy to support investment/location decisions made on this basis, since they lead to lower production costs. However, in addition, there may be certain aspects of the urban policy framework which create biases in favor of large centers and perhaps discriminate against smaller towns and cities. To some extent the /a Much of the material for this chapter is drawn from Indonesia: Urban Services Sector Report, World Bank Report No. 4800-IND. - 138 - past policies of concentrating urban economic an/d social infrastructure in the large urban centers and the greater availability of subsidized public services may have created a bias in favor of the large centers. In addition, the importance of physical proximity to central government officials for obtaining licenses and permits favors a Jakarta location. It is enormously difficult to quantify the impact of such policies on the rate of growth of different urban centers. Nevertheless, more attention needs to be paid to these particular aspects of government policy. 6.3 The present chapter suggests that there are strong arguments for shifting the emphasis of present urban policies away from administrative restrictions on industrial location decisions. Studies from other countries suggest that the benefits which may be obtained by spreading industry more evenly across the country through administrative controls can frequently be outweighed by additional costs to the economy in terms of reduced efficiency /1. Although initially more complicated, a better strategy is to ensure that businessmen pay the true costs of operating in particular cities through appropriate tax and user charge regimes. In addition, better transportation links, especially in terms of improving efficiency in the ports, have a crucial role to play in increasing the access of producers in smaller towns and cities to the national market. This would greatly improve market opportunities for these producers. 6.4 Although the main emphasis of the present chapter is on the pattern of urbanization and urbanization policies, it is important to stress the close linkage between the rate of rural-urban migration and the relative levels of economic and social development in urban and rural areas. More than two-thirds of the rural population will continue to live in rural areas until the end of the century. Any widening of rural-urban disparities could lead to a heavy additional influx of migrants to the urban centers, placing further strains on urban growth. Consequently, Indonesia's urbanization strategy can only be truly effective if it is complemented by policies to improve economLic and social condition in rural areas, both in areas of rural outmigration on Java as well as the Outer Islands, which possess enormous potential for additional rural employment generation. B. Trends in Urban Development and Concentration 6.5 As noted in Chapter 5, the pace of urbanization aLccelerated in Indonesia from an annual rate of about 3.6% in the Sixties to about 4% in the Seventies. As Table 6.1 indicates, this acceleration was more rapid than that for the total population, which grew at an annual rate of 2.3% during the 1970's, compared with 2.1% during the 1960's. It also con,rtrasts markedly with the situation in rural areas, which recorded a slight decline in population growth from 1.8% to 1.7% a year. /1 For example, 'Industrial Location Policy, the Indian Experience", World Bank Staff Working Paper No. 620. - 139 - Table 6.1: URBANIZATION IN INDONESIA, 1961-80 1961-71 1971-80 Population growth rate (% per annum) Urban 3.6 4.0 Rural 1.8 1.7 Total 2.1 2.3 Millions % Millions % Natural increase of existing urban population 4.59 68 4.63 48 Migration 2.17 32 5.0 52 (From other provinces) (n.a) (n.a) (1.6) (17) (From within the province) (n.a) (n.a) (2.92) (30) (Natural increase of migrants) (n.a) (n.a) (0.42) (5) Increase of urban population 6.76 100 9.63 100 Source: World Bank staff estimates. 6.6 This acceleration in urbanization came as a surprise to many analysts. Based on the age and sex structure of the urban population in 1971, the expectation was that the rate of urban population growth would decline. However, the rise in rural-urban migration more than offset the decline in the natural rate of growth of Indonesia's urban population. As a result, rural-urban migration generated 52% of the increase in urban population between 1971 and 1980 compared with only 32% in the 1960s. In absolute terms the number of rural-urban migrants more than doubled, rising from 2.2 million to 5 million. Based on the available evidence, it appears that about one-third of the migrants to urban areas crossed provincial boundaries, while the remainder migrated from rural to urban areas within provinces. 6.7 Based upon probable rates of decline in fertility and mortality, Indonesia's population growth rate is projected to fall from 2.3% in the 1970's to 2.0% in the 1980s and 1.8% in the 1990s. However, it is unlikely that the urban population growth rate will decline below the current 4% rate (see para 6.21). At this rate, the urban population would rise from 32.6 million people in 1980 to almost 49 million people by 1990. Moreover, if the trend continues through the Nineties about 72 million people will be living in urban areas by the year 2000. One of the most significant aspects of such a trend is that the rise in the urban population would be equivalent to 49% of the increase in Indonesia's population during the Eighties and 67% of the increase in the Nineties. - 140 - 6.8 Such a scenario has a number of important policy implications. First of all it implies that there will be a continued heavy flow of migration from rural to urban areas. This flow of migrants can be expected to be a source of significant pressure in the urban labor markets and is likely to limit the growth of real wages in urban areas in many unskilled and semi-skilled occupations. Secondly, it suggests that the future rate of growth of different cities is likely to be strongly influenced by their relative attractiveness to migrants. If, as at present, the availability of subsidized public services remains concentrated in the larger cities, the pattern of urban growth is likely to be skewed toward these centers. Thirdly, it suggests that the incremental demand of cities for investment in economic and social infrastructure is likely to rise sharply in relation to existing levels. Table 6.2: REGIONAL URBANIZATION TRENDS, 1971-2000 (mid-year estimates) Population (millions) Average Annual Growth % 1971 1980 1990 2000 1971-80 1980-90 1990-2000 Urban Java 17.5 22.8 30.6 41.2 3.0 3.0 3.0 Outer Islands 5.4 9.8 18.0 30.7 6.8 6.1 5.5 Sub-total 22.9 32.6 48.6 71.9 4.0 4.0 4.0 Rural Java 58.4 68.0 76.2 82.1 1.7 1.1 0.7 Outer Islands 37.7 45.4 53.9 59.6 2.0 1.7 1.0 Sub-total 96.1 113.4 130.1 141.7 1.8 1.4 0.9 INDONESIA 119. 146.0 178.7 213.6 2.3 2.0 1. Source: World Bank staff estimates and projections, assu,ming inter-provincial and rural-urban migration patterns are unchanged from 1975-80 rates, and that fertility declines, so that Indonesia reaches a stationary population by the year 2025. 6.9 From the point of view of regional development, one of the most interesting aspects of the pattern of urbanization in Indonesia has been the rapid rate of population increase in the urban areas of the Outer Islands. As Table 6.2 indicates, during the 1970's the urban population of the Outer Islands increased at an annual rate of 6.8%, or more than double the 3.0% rate recorded in Java. There is some question as to whether such a rate can be sustained in the future. But even assuming some deceleration in the rate of population increase, if the urban centers on the Outer Islands continue to grow more rapidly than on Java, the overall distribution of population will change markedly during the coming decade. For illustrative purposes Table 6.2 sets out a projection of the distribution of population in Indonesia, assuming - 141 - that the rate of urban population growth in Java and for Indonesia as a whole remains unchanged at 3.0% and 4.0% respectively until 2000 and that interprovincial migration rates continue at their 1975-80 levels /4. Under such a scenario, the urban population in Java would climb from 23 million in 1980 to 41 million by 2000, while the urban population on the Outer Islands would rise from 18 million to 31 million. The rural population on Java would grow more slowly then during the Seventies, but in absolute terms would increase from 68 million in 1980 to 82 million by 2000. Such a projection has to be regarded as highly tentative, since changes in interprovincial migration patterns and rural urban migration trends could radically change the population distribution (para 6.38). It implies a reduction in the rate of urban population increase in the Outer Islands to 6.1 percent in the Eighties and 5.5 percent in the Nineties. Nevertheless, it would lead to a dramatic rise in the share of the Outer Islands in both the urban and total population of Indonesia. 6.10 Although it may be argued that the Outer Islands cannot continue to urbanize at such a rapid pace, the underlying policy message of such a calculation remains valid. That is to say, if urban growth on the Outer Islands can be successfully stimulated, it would greatly reinforce the efforts of the authorities to encourage migration from rural areas in Java to the Outer Islands. The growth of these urban centers would offer two important advantages to the economy. First of all, it would provide an alternative for young people who currently are migrating from the Outer Islands to urban Java. Secondly, it might help to relieve the pressure on the urban areas of Java by diverting rural-urban migration towards the Outer Islands. Many of these rural-urban migrants may not be interested in resettling in rural transmigration sites, but might welcome the opportunity to find urban employment on the Outer Islands. 6.11 A closely related issue in terms of Indonesia's urbanization strategy in whether the past pattern of urbanization has resulted in an excessive concentration of population in the large urban centers of Java, and whether Indonesia should seek to promote smaller urban centers both in Java and the Outer Islands. As Table 6.3 indicates, in 1980 Indonesia had thirty-six medium and large sized cities, with populations in excess of 100,000, and an additional 293 with populations of between 20,000 and 100,000. As a group, these 329 centers included all but 13% of the 33 million urban residents of Indonesia. Five urban centers, four of which are located in Java, had populations in excess of one million and housed 40% of the urban population. DKI Jakarta alone, with 6.4 million residents, accounted for one-fifth of Indonesia's urban population. Thirty-one medium-sized centers (100,000 - 1 million) contained roughly one quarter of the urban population, with the rest found largely in the small cities. /1 On this basis the net outflow of population from Java to the Outer Islands would amount to about 1.7 million in the 1980s and 1.3 million in the 1990s. - 142 - Table 6.3: SIZE DISTRIBUTION OF INDONESIA'S CITIES AND TOMS, SEPTEMBER 1980 Total Inhabitants % of Urban No. of Size of city (million) Population Cities Less than 20,000 4.3 13.:L 369 20,000 - 100,000 6.8 20.7 293 100,000 - 500,000 6.1 18.6 27 500,000 - 1 million 2.5 7.6 4 More than 1 million 13.1 39.9 5 Total 32.8 100.0 670 Source: (a) 1980 Census for population of kotamadya roughly adjusted for the major cities of Jakarta, Bandung, Surabaya, and Surakarta to take account of growth of metropolitan areas outside kotamadya boundaries. (b) 1978 Dalam Negeri wCamat" survey results updated to 1980, assuming 8% cumulative population growth in all cities between 1978 and 1980. 6.12 Policymakers in Indonesia have devoted considerable attention to the question of whether Jakarta has grown excessively in relation to the other urban areas of Indonesia. From these data it does not appear to be the case that Jakarta has reached a size which is detrimental either to the economy as a whole, or to the rest of the urban system. This is not to deny the very substantial challenges facing the authorities in coping with the problems of Jakarta in terms of pollution, congestion and public health. Nevertheless, judged by the standards of other developing countries the share of the Jakarta in the total urban population (19%) is quite low. For the low income countries as a group, the proportion in 1980 was 28%, while for middle income countries the comparable figure was 29%. As Table 6.4 indicates, Jakarta's share in the urban population is also quite low by the standards of other countries in the region, or for example, Mexico, where similar concerns have been voiced. 6.13 Table 6.4 also provides an alternative measure of urban concentration, known as the four-city primacy index. This index is the ratio of the population of the largest city to the next three largest cities. In the case of Indonesia the index is 1.34. This ratio is again much lower than for Mexico, and lies between the indexes for Korea and Malaysia and the index for the Philippines. This reflects the fact that the next 3 largest cities after Jakarta all have populations which are relatively small compared with Jakarta. In the case of the Philippines and Malaysia, the bulk of the urban population in concentrated in the four largest cities yielding a low index number. Indonesia's primacy index is associated with a highly dispersed pattern of urban development. The four largest cities of Indonesia, together account for only 46 percent of the urban population. - 143 - Table 6.4: INDICATORS OF URBAN CONCENTRATION-SELECTED COUNTRIES Share of largest Four-city city in urban primacy population, 1980 index (1976) /a Indonesia 19 1.34 Low income countries 28 n.a. Middle income countries 29 n.a. Mexico 32 2.63 (2.75) Brazil 15 0.81 (1.91) Thailand 69 (n.a) Malaysia 27 0.69 Philippines 30 0.75 Korea 41 1.54 /a The index is the ratio of the largest city over the next 3 largest. The numbers in parentheses give the index for these centers when allowance is made for the spread of their population beyond the legal boundaries of these cities. Source: World Development Report 1983; Bertrand Renaud National Urbanization Policy in Development Countries, Oxford University Press. 6.14 Table 6.5 provides an estimate of the growth of urban centers classified according to city size during the 1960's and 1970's. The data suggest that the acceleration in the growth of population in the 1970s over the 1960s was associated with the growth of large and medium cities. There was a notable acceleration in the growth of medium cities(l00 - 500,000 population), but they accounted for only about 18% of the total growth in the urban population. During the same period the population of the large cities (500,000 and above) increased by 5.2 million. Consequently they accounted for 50% of the total increase in urban population. 6.15 Overall, however, it is important to note that there was very little difference in the growth of rates of the large and medium cities. Even the variation in the growth rates between the medium and large cities and the smaller centers does not seem to be undue cause for concern. Moreover, Jakarta, or even the JABOTABEK region, has not increased its share of the urban population significantly over the past decade. In many ways the variation in urban growth rates between Java and the Outer Islands is far more striking than the variation in city growth rates classified by size. These calculations suggest that the smaller urban centers of Java have not grown as rapidly as in the Outer Islands. However, further research is required to ascertain whether this is a statistical anomaly or whether there have been genuine economic differences in the performance of smaller towns on Java compared to the Outer Islands. - 144 - Table 6.5: GROWTH RATES OF URBAN CENTERS AND PROJECTED POPULATION DISTRIBUTION BY CITY SIZE Average population growth Population % per year (million) Distribution Size of city 1961-1971 1971-1980 1980 2000 1980 2000 Large cities /a 3.5 4.1 15.6 38.9 47.6 53.6 Medium cities /b 2.4 3.8 6.1 12.9 18.6 17.8 Small cities and towns LC 3.0 3.2 11.1 20.8 33.8 28.6 Total 3.2 3.9 32.8 72.6 100.0 100.0 /a Currently over 500,000. /b Currently 100-500,000. / Currently below 100,000. Source: World Bank staff estimates. 6.16 In the final analysis it is difficult to make any assessment of the extent to which the pattern of urban growth has been biased towards any particular urban centers purely on the basis of differences in, urban growth rates. There is no a priori reason for expecting large urban centers to grow more or less rapidly than smaller centers, or for judging whether particular city sizes are optimal. The only way policymakers can be sure that the pattern which does emerge is efficient and is in the best interests of the economy as a whole is by developing an urban policy framework which encourages efficient location decisions on the part of investors and individual urban dwellers. This means that the degree of bias in the pattern of urban growth is dependent on the total impact of public policies with respect to taxation, the provision and pricing of public services, and the regulatory environment. It may be argued that the understandable emphasis on upgrading the economic and social environment of larger cities coupled with low levels of user charges made these centers relatively more attractive to investors and migrants than smaller urban centers. Similarly, the ccuplex and detailed system of industrial regulation pursued by the central government makes it more desirable to locate in the Jakarta region in order to obtain easier access to government officials. But in practice it is aklmost impossible to quantify the impact of these factors on the growth of particular cities. They are, nevertheless, a key aspect of national urbanization strategy. Policymakers will have to devote increasing attention tc) the careful analysis of these issues, as the urban population expands. - 145 - 6.17 If, as seems reasonable, the trends of the past decade are projected forward then, as Table 6.5 indicates, the distribution of urban population will continue to shift in favor of the present medium and large cities, while the proportion of the population living in small cities and towns will decline from about 34% to 30%. A narrowing of urban growth differentials would slow this tendency, but would not affect the most fundamental policy issue facing Indonesia. That is the challenge of absorbing a tremendous increase in the population of its large and medium cities over the remainder of the century. If Indonesia's nine largest cities (those with 1980 populations of more than 500,000) continue to grow at the same rate as during the 1970s, their total population will rise by 23 million to 40 million. Even if there is some slowdown in the growth rates of these centers, the problems of financing and administrating the growth of Indonesia's largest cities would appear to be particularly important, if they are to cope with increases in population of anything approaching this magnitude. Consequently, Chapter 7 focuses on questions of financing urban services and the administrative issues involved in coping with the rapid increase in urban growth. C. Urbanization and Employment 6.18 The surge in rural urban migration which occured during 1971-80 has been associated with dramatic changes in the pattern of employment in the rural areas of Indonesia. In 1971 the agricultural sector accounted for 76% of rural employment; however, as Table 6.6 shows it was responsible for only 8.5% of the net increase in rural employment in the period 1971-80. Consequently, the overall share of agriculture in rural employment declined to 67%. The slow rate of growth of agricultural employment during this period was the result of a decline in agricultural employment in Java, coupled with only modest (1% yearly) growth of agricultural employment on the Outer Islands. Although other figures suggest slightly different agricultural employment growth rates, the overall pattern of declining or at least stagnating agricultural employment in Java is unquestionable. However, it is certainly the case that as a result of improved irrigation and new seed varieties cropping intensity has increased substantially. This has led to a rise in the number of hours worked in agriculture thereby reducing underemployment in the former slack seasons. However, since this work is now more evenly spread over the year it does not appear to have led to an increase in the number of people employed in agriculture. In addition, technical innovations, such as mechanical rice hulling and the use of the sickle in rice harvesting have reduced labor demand. For the future, the introduction of the hand tractor and mechanical reaping and transplanting are likely to limit further the growth of demand for agricultural labor in Java /1. The slow growth of agricultural employment on the Outer Islands is more difficult to explain. It may be the case that in these areas increases in non-agricultural employment opportunities have enabled agricultural households to devote more family labor to off-farm employment. But it may be the case that technical progress in agriculture in the Outer Islands may also be leading to a slowdown in the growth of demand for agricultural labor. Overall, it seems that substantial further research is needed to examine the impact of the changes in agricultural technology on employment and incomes in Indonesia. / For a discussion of these issues, see for example The Impact of Agricultural Mechanization on Production and Employment in Rice Areas of West Java, J. Lingrad and S. Baygo, BIES April 1983. - 146 - 6.19 The sluggish growth of agricultural employment has had a profound impact on the employment situation in Indonesia. During the decade over 6 million young people from agricultural households entered the labor force, but only about 1 in 9 found a regular job in agriculture. Of the remaining 5.4 million about 3.1 million found employment in rural areas. Approximately half of these jobs were in industry and the remainder were in the service sectors. But it is likely that much of this employment involved part time jobs, because about 34% of rural workers in non-agricultural activities work less than 35 hours a week. It is also probable that a number of these workers became seasonal migrants, spending part of their time in urban areas to supplement their rural incomes /1. Even more important, 2.4 million workers were unable to find even part time work in rural areas or decided that permanent urban migration offered better employment opportunities. About 0.4 million of these workers found employment in the industrial sector, but the vast majority worked in the low productivity, low wage service sector. It is the migration of these 2.4 million workers which played a key role in the urbanization process in the Seventies. Table 6.6: STRUCTURE AND GROWTH OF EMPLOYM4ENT IN RURAL AND URBAN AREAS, 1971-1980 Rural Urban % of Increase % of % of Increase % of total 1971-1980 total total 1971-1980 total employment increase employment ('000) increase (1980) ('000) Agriculture, Fores try, Fishing 67.3 458 8.5 9.3 231 6.2 Industry 13.0 2,265 41.8 28.8 1,191 31.9 Manufacturing 7.9 1,062 19.6 14.1 679 18.2 Construction and utilities 2.6 670 12.4 5.9 252 6.7 Other industry / 2.5 533 9.8 8.8 260 7.0 Services 19.7 2,690 49.7 61.9 2,312 61.9 Trade, restaurants, hotels 10.3 1,197 22.1 24.9 859 23.0 Other services 9.4 1,493 27.6 37.0 1,453 38.9 Total 100.0 5,408 100.0 100.0 3,734 100.0 /a Transport, storage and communications. Source: World Bank staff estimates based on data from 1980 Census, seasonally adjusted to mid-year. /1 Although the census material does not capture this circular migration, village level data suggest that at least 25% of rural households in Java have one or more family members working for part of the year in urban areas. See Indonesia: Urban Services Sector Report, World Bank Report No. 4800-IND, for a detailed discussion of these issues. - 147 - 6.20 While the low growth of rural employment has been a major factor in explaining rural-urban migration, especially in Java, it is important to point out that this movement would not have been possible unless urban centers had succeeded in generating new jobs for rural migrants. Few migrants can afford to remain unemployed for more than a brief period. In this respect urban areas have been a remarkable source of employment growth. Although they accounted for only 13% of total employment in 1971 they generated 41% of all new jobs in the Seventies. Employment in urban areas increased at an annual rate of 5.7%, compared with 1.6% in rural areas. In the urban areas, 32% out of all new jobs were generated in industry, and 62% in the service sectors. This growth resulted in a marked shift in the distribution of industrial and service employment toward urban areas. One of the most striking, features of the Indonesian economy has been the success of rural migrants in breaking into the urban job market, despite their limited capital resources and their generally low degree of educational attaintment. Equally noteworthy is the fact that the vast majority of these migrants would not have moved if they did not feel that they would be better off than they would have been were they to have remained in the rural areas. Table 6.7: DISTRIBUTION OF RURAL AND URBAN LABOR FORCE 1970-80, AND PROJECTIONS TO 2000 Total (millions) Average annual increase % 1971 1980 1990 2000 1971-80 1980-90 1990-2000 Urban 5,781 9,519 16,571 24,749 5.7 5.7 4.0 Rural 35,530 40,938 49,291 55,536 1.6 1.9 1.2 Total 41,311 50,458 65,862 80,285 2.2 2.7 2.0 Source: World Bank staff estimates. 6.21 The earlier analysis of population trends argued that the urban population will in all likelihood continue to grow at about 4% yearly during the 1980s and 1990s. The reasons for this view are: the continued disparities in the amount and quality of public services in rural and urban areas; the low rate of agricultural employment growth in the Outer Islands and the decline in agricultural employment in Java; and the strong tendency for new industrial and service sector job creation to be concentrated in urban centers. These trends have considerable implications for the labor market in Indonesia. Table 6.7 sets out a summary of the projected growth of the urban and rural labor force that is consistent with the earlier population projections. During the 1980s the Indonesian labor force is projected to grow at an annual rate of 2.7% compared with 2.2% in the 1970s due to a rise in the working age (15-59 years) population. This acceleration will exert strong pressures on both rural and urban labor markets. The rural areas will - 148 - experience a rise in the rate of labor force growth to 1.9% comipared with 1.6% in the 1980's. Such an acceleration of labor force growth is likely to be a significant source of stress in the overall rural employment situation. As a result, rural wage levels are not likely to increase very rapidly during the coiming decade. In turn this is likely to place a brake on the growth of urban incomes, particularly in unskilled and semi-skilled occupations in both manufacturing and service occupations. During the Nineties, however, this demographic pressure is expected to ease somewhat. D. Spatial Development Policy Issues 6.22 The Government has at its disposal a number of instruments to influence the spatial distribution of population and economic activity. These include various measures such as investment incentives, and infrastructure development to influence the location of new industries, policies governing domestic transport services, the provision of public services and investment in rural development and transportation. The purpose of this section is to review selectively these policies and to assess the extent to which they have, or in the future might, influence the distribution of population among regions or between urban and rural areas within regions. 6.23 Industrial Location Policies. A number of different factors have had an influence on the pattern of industrial location in Indonesia. These include: the location of raw materials for such industries as cement, ore processing, petrochemicals and forest products etc; the degree of urban concentration for consumer goods industries; access to ports for industries based on imported goods, or where exports are an important part of final sales; and specific incentives designed to influence location decisions directly. The latter has been one of the principal policy instruments that Indonesia has employed for influencing the pattern of urbanization. Two main arguments account for this focus on industrial investment. Firstly, industrial investment can have powerful multiplier effects leading to the generation of new jobs in the service sectors of the economy and in related local industries supplying inputs or processing the products of the new industry. Secondly, industrial location decisions can be influenced by economic regulation, since there is generally some degreeb of flexibility in the choice of industrial location. Both of these arguments are justified to a degree. However, their validity varies considerably depending on the specifics of the industry concerned and the existing level of development of the region selected for preferential treatment. At the same time, policymakers have to bear in mind the potential costs of regulating investment activities. Unfortunately, while many of the benefits of a new investment in a particular region are generally readily apparent, the costs associated with influencing such investment decisions are less easily calculated. These include possible losses in operating efficiency, and the choking off of some investments which might make sense in the location preferred by the investor, but are simply unprofitable in the locations selected by the authorities. - 149 - 6.24 In terms of the regulatory environment, the manufacturing sector in Indonesia may be divided into three main categories. Firms falling under the purview of the BKPM, firms subject to BRO regulations, and the unlicensed sector. There are no precise estimates of the distribution of employment or output among these three categories. It is generally believed that virtually all medium and large-scale firms are subject to either EKPM or BRO regulation while small-scale industries are more or less free from official controls. On this basis, the regulatory system probably covers about three-quarters of manufacturing value added, but perhaps as little as 20% of manufacturing employment. This relative balance between high coverage of output but low coverage of employment is important, because it suggests that the primary impact of industrial regulation will be on industrial productivity rather than industrial employment (and by implication urbanization). 6.25 Until December 1983 when the new tax laws were introduced, BKPM regulations covered all manufacturing firms with any degree of foreign equity and all purely domestic firms who wish to obtain tax or investment incentives. Although the impact of the new tax law is unclear, it appears that BKPM still imposes restrictions in industrial locations through an investment priority list known as the DSP. The DSP specifically bans new investment in certain activities, bans other investments from certain areas, and obliges investors in other sectors to locate in prescribed areas. It should be noted, however, that the reasons for such a system are not purely spatial considerations. Other arguments are sometimes advanced for particular sub-sectors such as the need to limit overcapacity or to ensure economies of scale are achieved. In the past 6 years the number of manufacturing activities subject to restriction appears to have increased. In the 1977 list only 21 out of 67 investment fields were subject to location restrictions. In the 1982/83 list the system was changed to one which classifies investments by item rather than fields of activity. This change implies a somewhat more detailed system of regulation, since narrower product ranges are now controlled. Under the new system 250 out of a possible 1877 industrial items were subject to restrictions and 75 items were completely closed to investment in 1982/83. 6.26 As an example, under the 1982/83 list seventeen items in metal products and metal building materials are restricted to locations outside Jakarta; sixteen categories are barred from the JABOTABEK region, including various types of electrical appliances, metal products, and metal building materials. Seventy-four items are forbidden from locating in Java; these run the gamut from printing for cans, printers ink, and plastic bags, to steel bars for concrete, metal desks, ceramics, roofing nails, and gymnastics equipment. 6.27 Companies regulated under the BRO are subject to licensing for both new investments and capacity expansion. Licenses are issued primarily by the Directorate General of Miscellaneous Industries of the Ministry of Industry in Jakarta. Until recently no formal DSP system was used for BRO firms; since 1982 the Department of Industry has introduced investment restrictions. Once - 150 - again, the guiding principle behind such a system is the avoidance of significant excess capacity in industrial subsectors by controlling the degree of competition. Historically, BRO firms have found licenses for new or expanded capacity easier to obtain than BEPM firms /1. 6.28 Although more detailed work is necessary to quantify the impact of such restrictions, studies from other developing countries suggest that they distort efficient location behavior. In general, measures to curb investment in Java probably have similar negative tendencies, since they reduce the access of new investments to plentiful supplies of labor, large nearby potential markets, well developed infrastructure, and abundant natural or semiprocessed resources. Based on the experience of other countries it is reasonable to predict a number of undesirable consequences of such an approach. These include: decreased overall investment, more capital-intensive investment in the face of costlier non-Java labor, reduced export potential given higher costs, and reduced realization of economies of scale. Thus, the use of investment restrictions to encourage decentralized development can tend to reduce the overall efficiency of the national investment effort. 6.29 While it is very difficult to assess the impact of such regulations on regional development, there is little evidence to suggest that it has been successful in influencing the overall pattern of manufacturing output or employment. As Table 6.8 indicates between 1971 and 197'9, there was a very pronounced shift in the share of manufacturing output from Java to Sumatra. However, the bulk of this shift is associated with the development of the petroleum sector, where Sumatra possesses clear locational advantages. It is also interesting to note that Jakarta's manufacturing output growth rate was significantly above the national average, despite the coniscious attempt to discourage further growth in the capital. More importantly, from the point of view of employment policy, there was almost no shift in the regional distribution of manufacturing employment, Java accounted for 78% of total manufacturing employment in 1971 and 77% of manufacturing employment in 1980. It is likely that much of the growth in manufacturing employment occurred in small unregulated enterprises, so it would appear difficult to argue that the regulation system has accomplished very much in the way of directly influencing the broad pattern of urbanization in Indonesia. /1 As in the case of more highly regulated BKPM firms, additional permits are needed; the number varies depending on the location eLnd activity of the enterprises concerned. - 151 - Table 6.8: REGIONAL TRENDS IN MANUFACTURING OUTPUT AND EMPLOYMENT GROWTH, 1970-80 Manufacturing output (1973 constant prices % distribution Manufacturing employment 1970 1979 Annual Growth (%) 1971 1980 Annual Growth (%) Java 75.5 63.6 10.6 77.6 76.8 5.4 (Jakarta) (11.0) (13.5) (15.3) (4.4) (6.7) (10.6) Sumatra 17.1 28.5 19.3 8.4 9.0 6.4 Kalimantan 3.0 3.7 15.4 1.8 2.9 11.3 Sulawesi 3.2 3.0 11.9 5.8 5.9 5.8 Eastern Islands + Irian Jaya 1.2 1.2 12.9 6.3 5.3 3.6 Indonesia 100.0 100.0 12.7 100.0 100.0 5.5 (Urban) (n.a) (n.a) (n.a) (23.4) (30.8) (8.8) (Rural) (n.a) (n.a) (n.a) (76.6) (69.2) (4.4) Source: World Bank staff estimates. 6.30 The apparent lack of influence of industrial regulation on the pattern of spatial development does not imply that regulations should be tightened. Such a move would be contrary to the best interests of the economy. Rather the present system should be streamlined so that only the very largest industrial investments are subjected to spatial restrictions. This would serve several objectives. Firstly, it would enable the authorities to concentrate their attention on the careful analysis of the impact of major investments, so that the merits and costs of alternative locations can be carefully assessed. Secondly, it would oblige investors to examine the market closely and to locate their projects where they make the clearest economic sense. Thirdly, by widening the area of choice it would enable different cities and towns to grow according to their own particular comparative advantages and perhaps reduce the attractiveness of a Jakarta location based in the need to maintain close controls with central government officials. - 152 - 6.31 Transportation. A move toward more decentralized economic decisionmaking will only succeed in promoting an efficient pattern of spatial development if it is complemented by improvements in the transportation network. Good transport links play a vital role in the process of national econanic integration. They lead to deeper trade links between regions and greatly expand the development potential of the areas they serve. In the absence of a well balanced transportation network between urban centers, businesses will inevitably gravitate toward the larger urban areas, so as to have ready access to the largest markets. High transport costs confer a measure of protection on local businesses and limit the role of intra-urban competition in stimulating efficient production practices. This in turn raises costs to domestic consumers and hampers the growth of export oriented industries. For all these reasons Indonesia quite rightly places high priority on the development of a well balanced transportation network. 6.32 In contrast to the concept of optimal city size, it is much more practical to develop an operational concept for coordinated and regionally balanced transport development. This is because it is possible to make a reasonably reliable assessment of the costs and benefits cf various improvements to the transportation network. In Indonesia's case it seems fairly clear that one of the most urgent areas for attention is the ports. It is difficult to develop an accurate picture of the costs of shipping in Indonesia, but a reasonable estimate is that for a typical inter-island freight shipment (i.e. involving two ports) 30% of the direct cost involves land transportation costs, 5% of the cost is in shipping and 65% involves port costs. Detailed studies reveal that various reforms, including improved route allocation procedures, tariff rationalisation and better repair and maintenance could reduce direct port and shipping costs by 50%. In addition, there are indirect costs, involving pilferage, damage and unofficial payments. Sane estimates place these indirect costs at about 100-150% of the direct costs. The Government is aware of these problems and is undertaking a program of action designed to upgrade the ports network and improve managerial practices. Together these measures could have a substantial impact on Indonesia's long-run development by encouraging inter-island trade. /1 While it will be far from easy to implement a coordinated approach to improve port efficiency and curb unofficial payments, it would be sell worth the effort. Together, these two measures could reduce the cost of inter-island freight dramatically. Such a change would make a far greater contribution to Indonesia's efficient spatial development than, for example, attempts to modify industrial location decisions through licensing arrangements. /1 The importance of efficient sea links for the regional development strategy of particular provinces is brought out in a number of studies. See, for example, ODelineation of Planning Regions and Hierarchy of Development Centers", Maluku Regional Planning Project, LTA-72. - 153 - 6.32 The Provision of Public Services. In addition to providing adequate transport links the authorities may also choose to stimulate the growth of particular centers through the provision of public services. This includes both urban economic infrastructure, such as roads and water supply, and improvements in social services, such as education and health facilities. There are a number of reasons for recommending such an approach. Firstly, good infrastructure lowers the costs of doing business for enterprises, even when these services are paid for through local taxation and reasonable user charge regimes. Less apparent is the important role that improvements in infrastructure can play in helping attract and retain highly skilled workers, managers and entrepreneurs. This point has been confirmed by recent work on the United States and Brazil /1. The availability of such a pool of individuals in turn encourages enterprises to locate in these areas. These incentives are likely to be particularly strong in Indonesia since skilled labor shortages are frequently a constraint to the growth of businesses. In addition, as noted in Chapter 5, the availability of public services, particularly educational facilities, appears to be a significant factor in influencing rural-urban migration decisions. In this respect, the Government's policy of expanding such programs as KIP and the IKK water supply schemes, and upgrading educational facilities in smaller cities and towns can be expected to play a constructive role in stimulating their broader economic development. As facilities improve in smaller urban communities, rural-urban migrants would be encouraged to move to such areas rather than other larger centers. 6.33 The Government has also established a number of industrial estates which generally cater to industries producing light manufactures. These industrial estates are generally located in existing well established areas of manufacturing such as Jakarta, Surabaya and Ujung Pandang. Their expansion in selected areas can help ease bottlenecks to the industrial development of existing centers and should be encouraged, since producers in these centers have historically proven capable of paying for the industrial amenities these industrial parks include. However, the Government should proceed cautiously in areas where manufacturing activities are less well established, such as the proposed sites in Lampung and Banjarmasin in Kalimantan. A careful determination is requires to assess whether the availability of such infrastructure is the key constraint to the accelerated development of manufacturing in these centers. Otherwise the Government runs the risk of investing in some infrastructure which may not be fully utilised. A second related approach which requires careful scrutiny on the part of planners is the development of industrial zones. A number of centers around the country have been identified for development, based largely on access to raw materials. These zones are being developed as a part of the planned expansion of Indonesia's basic industries such as metalworking and basic chemicals. They take advantage of the fact that the costs of infrastructure can be shared among a group of large investors. The Government is proceeding with the /I For example, V. Henderson, 'Urban Development in Brazil*, World Bank discussion paper, 1983; V. Henderson, "Population Composition of Cities: Restructuring the Tiebout Model", Working Paper No. 82-16, Brown University, 1982. - 154 - careful planning of the supporting infrastructure for such centers. This cautious approach is well advised, particularly where these zones do not coincide with existing centers of industry. As in the case of industrial estates, the experience of other countries suggests that pioneering sites can sometimes prove to be a costly and ineffective strategy for accelerating the industrialisation of remote or less developed areas. 6.34 Rural Development. As already noted, the main determinant of the future growth of the urban population will be the rate of migration from rural to urban areas. Consequently, a comprehensive urbanization strategy must address the issue of rural development squarely. For the rest of the decade, approximately one million rural people will enter the labor force each year in Java. They basically face three options: either they find employment in rural Java, migrate to urban areas, or move to the Outer Islands. Few will be able to afford the luxury of idleness. Their decision will be based on an assessment of the level of personal incomes and the quality and cost to them of public services which they can expect under each alternative, Thus the outcome of the migration decision will largely depend on the Government's success in fostering economic and social development in rural areas and reducing the gap between economic and social standards in rural and urban areas. In particular it will be crucial to raise rural incomes, so as to generate additional jobs in the non-agricultural sector of the rural economy. While the challenges of rural sector development in Indonesia should not be underestimated, the experience gained over the past decade provides a basis for an accelerated development effort. 6.35 Although technological progress in the food crop sector may tend to dampen the growth of labor demand, a continued emphasis on improving the efficiency of food crop production on Java is one of the keys to a successful rural sector policy. Past investments in irrigation, fertilizer distribution, the introduction of improved rice varieties and extension services have all contributed toward Indonesia's remarkable success in increasing rice output, which increased at a trend rate of 4.5% during 1968-81. Future irrigation investments in rehabilitation, upgrading and tertiary works should continue to provide high economic returns. These investments, together with improvements in extension to assist farmers in adopting more complex cropping patterns, should enable farmers to significantly increase their incomes in the 1980s. This rise in agricultural incomes should, in turn, provide! a sustainable basis for increases in the demand for the goods and services prcduced by the non- agricultural sectors of the rural economy, which have been such a strong source of rural employment growth in the Seventies. As in the case of the urban sector, improved transport links have an important role to play in improving the access of the rural sector to the market, lowering production costs and improving profitability. In this respect, the Government's decision to give greater support to the development of a rural roads network is particularly encouraging. - 155 - 6.36 If the patterns of rural-urban migration and inter-island migration observed during 1975-80 continue, rural Java is likely to experience serious population pressures in the 1980's and 1990's. Given the experience of the Seventies, when increases in the rural population contributed to the problems of shrinking farm sizes, growing landlessness, and to the slow pace of poverty reduction, such a scenario is of considerable concern. Even with a strong expansion in non-farm employment activities, population increases may pose serious strains on the capacity of the rural economy to generate adequate income and employment levels for rural dwellers. 6.37 Against this background, the Government rightly attaches high priority to an increase in the rate of transmigration from Java to the Outer Islands. During REPELITA III important progress has been achieved in terms of the number of families settled, the area of land developed, extensions in the coverage of the program to new donor and recipient regions and the creation of new employment. Compared to a five year target of 0.5 million families for REPELITA III, 0.4 million families were resettled in the first three and one-half years of the plan and about 0.7 million new jobs in agriculture were created /1 These figures represent a more than two-fold increase in the total levels of resettlement and job creation recorded during the preceding two five year plan periods combined. As a result of the crash planning and settling techniques used, most of these migrants achieved only subsistence level agriculture. However, even at this level the general welfare of transmigrants was better then that in their regions of origin, and the transmigration program succeeded in raising the social status of landless farmers to that of full farmers with 2 to 5 ha. of land. 6.38 For REPELITA IV even more ambitious targets have been set. The aim is to resettle 0.8 million families, which given average family sizes of 5 persons implies a total flow of 3.6 million people from Java to the Outer Islands. If REPELITA IV targets are projected forward for the remainder of century, 7 million people would relocate in the 1980s and a further 8 million transmigrants would move during the 1990s. This compares with a gross outflow of 1.7 million people from Java to the Outer Islands during 1971-80. The transmigration targets, if achieved, would therefore result in a dramatic redistribution of Indonesia's population in the years ahead. 6.40 The earlier projections incorporated in Table 6.2 incorporated the assumption that inter-island migration would continue at the same rates as during the 1975-80 period. This would entail a net outflow from Java to the Outer Islands of about 1.7 million in the current decade and 1.3 million in the 1990's. Obviously, if the more ambitious targets of the transmigration program are met, the distribution of population would be dramatically different. As Table 6.9 indicates, the population increase which could be expected on Java on the basis of 1975-80 trends would amount to 16 million each decade. However, a transmigration program of the scale envisaged by the REPELITA IV target would entail an additional outflow of 5.4 million people in the current decade, so that Java's population would increase by only 11.6 million. In the next decade, the target would imply an additional outflow of /1 OMid-Term Review of the Transmigration Program Under REPELITA III", Junior Ministry of Transmigration January 15, 1983. - 156 - 6.7 million people. Also, since most migrant families tend to be young, there are second round effects on population distribution, since more children would be born in the Outer Islands. This factor would reduce Java's population growth by a further 1 million people in the 1990s. Table 6.9: IMPLICATIONS OF NEW TRANSMIGRATION PROGRAM TARGETS FOR POPULATION DISTRIBUTION, 1980-2000 (Millions) Java Outer Islands 1980-90 1990-2000 1980-90 1990-2000 Population growth /a 16.0 16.5 17.9 18.4 Additional outflows (inflows) -5.4 -6.7 (5.4) (6.7) Demographic impact - -1.2 - 1.2 Change in population 11.6 8.6 23.3 26.3 /a Based on 1975-80 trends in inter-island migration and population change. Source: World Bank staff estimates and projections. 6.41 Once allowance is made for urban growth, the transmigration targets imply almost no increase in the rural population on Java during the 1980s and possibly even a decline in the rural population during the 1990s. This would lead to an increase in the average age of the rural population, and possibly a rise in the dependency ratio. Such a shift may have profound effects in the labor markets, and on the pace of mechanization - as well as in the social structure - of rural areas. On the Outer Islands, the changes in population distribution would mirror the pattern on Java. The transmigration targets imply a much more substantial increase in the rate of rural population growth than could be expected in the basis of 1975-80 trends, a potential further acceleration in rural-urban migration within the Outer Islands, or perhaps both. 6.42 The sheer scale of the proposed transmigration program poses a number of interesting longer-term policy questions for Indonesia's future spatial development. An acceleration of the rural outflow from Java to the Outer Islands might, for example, significantly slow the pace of Javanese urbanization. But, a substantial increase in the rural population in the Outer Islands might result, over the longer run, in a further acceleration in the rate of urbanization on the Outer Islands, if the younger members of transmigrant families eventually opt for migration to urban areas. However, if the urban areas of the Outer Islands prove unable to albsorb such an increase, these people might conceivably migrate to urban areas in Java. Thus, the transmigration program must be linked to the broader regional development of the Outer Islands. Otherwise, it might be that the rural transmigration program may only be the first stage of a two-step migration - 157 - process. In the first stage transmigrant families would move from rural Java to the Outer Islands. In the second stage, there would be a reflux of transmigrants to urban Java, as the younger generation of transmigrants enter the labor market. 6.43 The authorities are already devoting some attention to this issue. Proposals are being prepared for the development of some 50 new towns in transmigration areas. These new towns would mainly be established around existing villages, although several would be completely new sites. The new towns would serve as centers for the processing and marketing of the agricultural products of the rural transmigration areas, enabling the transmigrants to move beyond pure subsistence agriculture. In addition, they would provide focal points for the provision of goods and services to the rural hinterland. It is envisaged that new towns could prove capable of supporting populations averaging 20,000 people. Consequently, an additional 1 million transmigrants might be attracted through such a program. Although further work is needed to transform these initial ideas into reality, they mark an important step forward in the evolution of the Government's approach to transmigration. The integrated planning of rural and urban development in the transmigration zones creates a basis for a more broadly based regional development strategy for the Outer Islands than has been achieved heretofore. - 158 - CHAPTER 7 URBANIZATION - FINANCIAL AND ADMINISTRATIVE ISSUES A. Introduction 7.1 Over the past decade, and particularly during REPELITA III, the authorities have achieved many notable successes in expanding the coverage of urban services. However, further challenges lie ahead, both in terms of meeting the existing unsatisfied demand for urban services and providing for the projected more than doubling of the urban population by 2000. The government has expressed a strong commitment to upgrade the level of urban services across the country. Consequently, during REPELITA IV the financial outlays for urban services are expected to rise sharply in relation to those of the past plan period. As noted in Part I of the present report, the Government faces a difficult financial picture in the coming years in view of the outlook for oil revenues. Against this more contrained environment, it would appear that increases in urban investment may call for changes in the approach to financing the urban service program, so as to avoid straining the central government budget. This issue is examined in the first part of the present chapter. The second part of the chapter reviews the role of central and local governments in the provision of urban services. It examines the case for streamlining the present administrative arrangements, so as to give local governments a greater degree of responsibility for the detailed planning and implementation of urban services. /1 7.2 During REPELITA III more than two-thirds of urbam services were financed by the Central Government directly, the remaining one-third was financed by urban government and INPRES grants. Thus it is clear that the urban governments have been heavily dependent on the Central Government to finance urban services. During REPELITA IV expenditures are expected to more than double in real terms. The present chapter argues that there is a strong case for raising the financial contribution of urban governments. Firstly, urban government taxation and cost recovery levels are low by international standards, and the further provision of subsidised urban services would tend to exacerbate urban-rural inequalities further. Secondly, urban dwellers are better off then rural dwellers and so are in a better position to contribute toward the cost of meeting such services. Thirdly, increatsing the contribution of urban governments would help release central government resources for the further development of rural areas. 7.3 Given the expected growth in the urban services program the rewards of better management can be very substantial. The authorities are well aware of the benefits of improved administrative efficiency and the Central Government has increasingly emphasised the need to increase the capability of /1 The material for this chapter is drawn from Indonesia: Urban Services Sector Report, World Bank Report Nc. 4800-IND. - 159 - urban governments in planning and implementing urban investments. However, these arrangements have resulted in new difficulties, since they have tended to lead to a complex system of administration, with overlapping responsibilities, multiple funding channels and poor coordination between different central and local agencies. This is a particularly important issue for the urban sector, because so many activities are interrelated. Tremendous economies can be achieved when land area plans and the provision of road, sewerage, water and electrical supplies are coordinated, for example. For the future, there is considerable scope for gradual change in the management of the urban service program while preserving the fundamental framework of close cooperation and involvement between central and urban government. B. Expenditures on Urban Services 7.4 Table 7.1 presents estimates of average annual spending on major urban services in the first few years of REPELITA III by all levels of Government. This includes estimates for water supply, drainage, sanitation, roads and footpaths and urban transport. Housing is excluded, but it is believed that public housing accounted for less than one-tenth of all new urban dwellings during REPELITA III. Also excluded are expenditures on items such as health and education. It would be very useful if the authorities were to undertake the collection of such data for policy and planning purposes. Based on the evidence of service provision it would appear that urban areas account for a high proportion of total expenditures in those sectors. As Table 7.1 indicates, total investment in major urban services averaged Rp. 263 billion during this period - the equivalent of about 0.6% of GDP or 2.5% of gross fixed investment in the economy. 7.5 Of the total amounts involved, water supply absorbed about 29% and drainage and sanitation about 13% of total spending. Progress in ensuring access to safe water has been particularly noteworthy. Water production capacity has increased from 20,000 litres per second at the end of REPELITA II to 33,000 litres per second at the end of REPELITA III. This production level is sufficient to provide 60% of the urban population with piped drinking water, although only about 30% of the urban population is actually served, because the distribution network is lagging behind production facilities. Nevertheless, this is a major step forward compared to the position in 1980, when only a quarter of the urban population had access to piped water. Budgetary allocations for drainage and sanitation have been relatively small as the primary government effort has been concentrated on water supply. This emphasis has been correct, however, since without adequate supplies of good quality water, the impact of investment in sanitation facilities on health tends to be limited. In spite of the lower priority accorded to drainage rehabilitation and solid waste disposal, programs implemented during REPELITA III have improved conditions for 1.6 million and 3 million urban residents respectively. - 160 - Table 7.1: TOTAL ANNUAL SPENDING ON URBAN SERVICES BY CENTRAL AND LOCAL AUTHORITIES - AVERZAGE 1979/80 - 1982/83 /a (Rp. billion; at current prices) Central Local Total Percent Percent Government authorities /b of total of GDP Water supply 72.2 4.0 76.2 29.0 0.16 Drainage and sanitation /c 18.2 16.5 34.7 13.2 0.07 Kampung improvement (KIP) 11.9 6.0 17.9 6.8 0.04 Urban roads 17.5 40.0 57.5 21.9 0.12 Traffic management 2.8 1.4 4.2 1.6 0.01 Public transport 40.0 1.6 41.6 15.8 0.09 Others /d 3.0 27.9 3n.9 11.7 0.06 Total 165.6 97.4 263.0 100.0 0.55 Routine expenditure n.a. 50 n.a. - 0.11 /a Includes only expenditures actually incurred in urban areas; i.e. excludes central overhead. /b Includes provincial, district (kabupaten/kotamadya) and urban village (kelurahan) spending; includes local spending of central grants to local authorities. /c Includes cleansing services, human and solid waste disposal, drainage and flood prevention; the latter two services accounting for the bulk of central spending. /d Includes markets, fire service, parks, etc. Source: Ministries of Public Works and Finance and a sample survey of 27 kabupaten/kotamadya accounts. 7.6 The Kampung Improvement Program accounts for about 7% of expenditures on urban services. The program was initially launched in Jakarta in 1969 to upgrade services in the densely populated low income areas of the city where environmental conditions were worst. The success of this effort has led to its rapid growth in Jakarta and is widespread introduction in other cities and towns. Jakarta has now upgraded all of its worst kampungs, covering 3 million people; Surabaya is about halfway through its program, which will ultimately benefit about 0.8 million people; and good progress is being made in the other major cities in Indonesia. The Central Government has also introduced a "perintis" (stimulus) program to service the needs of both large cities and smaller cities and towns. It is estimated that over the course of REPELITA III, this program led to the upgrading of more than 11,000 ha of urban kampungs covering some 2.5 million individuals in over 200 towns. - 161 - 7.7 Urban roads and public transport account for about one-third of expenditures on urban services. Despite this effort, the urban road system is coming under increasing strain as a result of the rapid growth in traffic. Over the last decade, the number of passenger vehicles has increased at an annual rate of 15%, with most of this growth concentrated in and around major population centers. As a result, traffic conditions have detiorated, particularly in metropolitan areas. A recent study by Bina Marga has concluded that 17% of existing road services in urban areas need to be replaced over the next five years due to structural deficiencies, while 32% are inadequate to cope with the expected traffic volume. The public transport system also faces serious problems. As a result of controlled fares, a large number of private bus companies have been unable to operate satisfactorily and have been nationalized at their own request. In turn, the Government has been obliged to subsidize the operating costs of these companies and finance capital expenditures. The budgetary implications of this move toward greater public ownership have been substantial. Even though nationalised bus companies operate in only 6 cities they account for 15% of total spending on urban services, or more than double the amount spent on the Kampung Improvement Program. 7.8 It is clear that the level of spending on urban services will rise sharply during REPELITA IV to meet the needs of both the existing urban dwellers and the expected 1.6 million annual increase in the urban population In the context of the UN's Water Supply and Sanitation Decade, the Government has set the goals of increasing the access of the urban population to safe drinking water to 75% and to sanitation facilities to 60% by 1990. This compares with estimated 1984 access levels of about 50% and 30%, respectively. The Kampung Improvment Program is expected to continue to expand into unimproved areas at about the present rate (3,000 ha per annum), but upgrading already improved areas will require additional funding. In the case of urban roads there has been a significant deterioration in conditions caused by the pressures of increased traffic. The costs of urban roads are so great that it would not be feasible to reverse this trend over the coming REPELITA, given the likely level of available funds. However, even a more modest target would imply a substantial rise in spending. The costs of meeting the required increase in urban transport services are more difficult to predict. These will depend critically on government decisions on the blend of private and public transport supplies and whether to shift from road to rail in Jakarta. However, even without major new initiatives, urban transport expenditures are expected to rise substantially during REPELITA IV. 7.9 Based on the main objectives set for the REPELITA plan, the initial spending targets proposed by the individual line agencies would involve an average annual increase of about 18% in real terms. However, as pointed out by a recent Bank study, with selective cuts in the investment plan, it should be possible to meet the government's principal objectives and especially the high priority investments in water supply and investment with an increase of about 13% in real terms. /1 This would imply a rise in spending from an average level of Rp. 285 million during REPELITA III to Rp. 529 during REPELITA IV (at constant 1982 prices). The details of the spending requirements for individual programs are shown in Table 7.2. /1 Indonesia: Urban Services Sector Report, World Bank Report No. 4800-IND. - 162 - Table 7.2: ESTIMATED FINANCIAL REQUIREMENTS FOR INVESTMENT IN URBAN SERVICES DURING REPELITA IV (Rp billion; at constant 1982 prices) 1979/80 - 1982/83 1L984/85 - 1988/89 Required Average Average average annual real annual Shares annual Shares growth expenditure /a (%) expenditure /a (%) (%) Water supply 82 29 220 42 19 Drainage and sanitation 38 13 96 18 13 Kampung improvement 19 6 38 7 13 Urban transport Urban roads 62 22 100 19 12 Traffic management 5 2 13 2 17 Public transport 45 16 20 4 -15 Others /b 34 12 42 8 4 Total 285 100 529 100 13 /a Development expenditure by all levels of government. Routine expenditures would be over and above the indicated levels, and would amount to about Rp 145 billion per year. /b Assumed to grow in line with urban population growth. Source: World Bank staff estimates. C. Financing Urban Services 7.10 During REPELITA III urban services accounted for about 3.5% of the central government development budget. Assuming an increase of about 5% in real terms in the central government development budget, the share of urban services would rise to 5.1% under such a revised program. Given the need to maintain the momentum of development in other sectors, it may be difficult to increase the share of urban services to such an extent. Although there may be scope for some increase in the share of urban services, at the margin the authorities face a trade off between increasing the contribution of local governments to the funding of urban services, or cutting the urban services program back further than assumed in Table 7.2. 7.11 At present, as Table 7.3 shows, local governments contribute only about one-third toward the costs of spending on urban services. However, the proportions vary greatly. Local governments fund only about 5% of the costs of the water supply program, but they finance two-third of the costs of urban roads and traffic management. A reasonable target might be to increase the share of local government from 36% to 56%. This would be feasible through a blend of increased local taxes and charges, higher levels of cost recovery and a greater reliance on borrowing from the central government, as outlined below. - 163 - Table 7.3: ANNUAL SOURCES OF SPENDING FOR SELECTED URBAN SERVICES, 1979/80 - 1982/83 Percent distribution Central Local govt. Item Percent of Govt. authorities total overall total /a spending Water supply 95 5 100 29 Sanitation and drainage 52 48 100 13 Kampung improvement 66 34 100 7 Urban roads and traffic management 33 67 100 23 Public transport 96 4 100 16 Others 10 90 100 12 Total 64 36 100 100 /a Includes local borrowing from the Central Government, and local spending of some central government grants. Source: Table 7.1. 7.12 Local Taxes and Revenues. Using data on the kotamadya as examples of urban local revenue sources, one finds that 45% of average receipts are composed of taxes, with the remainder being charges. Of the taxes raised, on average half are IPEDA land and property taxes. /1 The IPEDA property tax is the most widely collected direct tax in Indonesia, and its rolls include 3.5 million registered urban payers. Unfortunately, this type of tax is poorly exploited. There are various reasons for the poor performance of the property tax. Firstly, the tax rates are very low, both absolutely and relatively to rates prevailing in other countries. Secondly, the tax rolls are incomplete and a severe problem of under-registration appears to exist. Thirdly, a large number of assessments on low value properties are not cost-effective, since the collection costs are higher than the associated revenues. In addition the taxes on higher-value urban properties tend to be underassessed. As a result this type of taxation, which provides almost 20-50% of revenue for most developed cities in the world, accounts for only 5% or 10% of total revenues in Indonesia's cities. 7.13 The Government is aware of these problems and proposals are under consideration which would result in increases in the IPEDA tax rate on urban properties. The scope for increased tax effort is illustrated by the fact /1 Since DKI Jakarta is a province, the proportions there are different; taxes account for the bulk (83%) of per capita revenues. Property tax yields, in turn, are equal to only 9% of local tax receipts. - 164 - that many cities in developing countries have tax levels of 1% of market value, whereas in Indonesia it is estimated that urban IPEDA averages about 0.1% of market value. A ten-fold increase in the property tax efforts would be a major undertaking, but one which could be achieved over, say, a ten-year period. During that period, tax rates could be raised, assessments could be brought closer in line with market valuations; and collection efforts could be redirected to more affluent taxpayers. One way to stimulate the local tax effort might be to link an increasing proportion of central government grants and loans to local authorities on a graduated matching funds basis. Under such a system, the more affluent cities might receive government grants in a certain proportion to their revenue collection rates, whilst less affluent cities would be given higher premiums. This would increaise the incentive for cities to collect taxes, whilst avoiding a widening of differentials between rich and poor cities. 7.14 Other potential sources of local revenues include vehicle taxes, particularly the annual license fees and vehicle transfer fees collected by provinces. There are, in addition, poorly exploited provincial gasoline sales surcharges and kotamadya parking charges. At present, license and transfer fees account for 80% of provincial tax receipts; they are particularly important to DKI Jakarta where 19% of all registrations and 70% of all vehicle transfers occur. /1 Reliance on this source of revenues serves a dual purpose of diversifying the local tax base, earmarking funds for local road improvements, and discouraging the rate of increase in vehicular traffic. The yield from taxes could be increased by dropping current exemptions applicable to government vehicles and by raising fees for trucks and buses to levels comparable to those applicable to cars. At present, the provincial surcharge on gasoline yields no more than 3% of provincial tax receipts and amounts to only Rp. 1.05 per liter. The same rationale presented above could be used to justify higher surcharges; raising the rate to Rp 10 per liter would yield enough revenues to finance half the projected annual urban road programs for REPELITA IV. Together with use of a portion of the license and transfer fees, this would allow all road investment programs to be easily financed. 7.15 Other fiscal measures could also be contemplated which would help to discourage vehicle use, especially in congested city centers. This course of action would be consistent with the philosophy that it is easier to encourage public transportation by penalizing private vehicle use than it is to provide purely positive incentives - such as subsidized fares - for public vehicle use. One simple measure would be to raise parking charges in larger cities. Currently these vary from Rp 50 to Rp 200 (Jakarta only) and are invariant with length of stay. These rates, levied as they are on the affluent, could surely be raised to conform with charges typical in other international centers, eventually reaching levels of Rp 1,000 - Rp 2,000. This would provide an attractive substitute for the more difficult scheme sometime proposed of licensing vehicular access to city centers on a daily, monthly, or yearly basis. /1 The license fee is equivalent to 2-3% of market value. The transfer tax is 10% of assessed value at the time of the first transfer and 5% thereafter. - 165 - 7.16 Less is known about other existing taxes at the local level, especially the reasons for marked variations in receipts per head and in growth rates over time. These taxes are assessed primarily on entertainment, recreation, and economic activity. It would be useful to undertake a set of studies on the procedures involved in assessing, collecting, and accounting for local revenues with a view to improving the efficiency of assessments and collections, and of reducing collection costs . While many uncertainties exist concerning these miscellaneous taxes, the associated receipts per capita are low by international standards. Special consideration should be given to unexploited sources of revenues, such as that which could be derived from extending present kotamadya/kabupaten taxes on economic activity from restaurants and hotels to retailing and manufacturing. Even at a modest rate, such taxes could yield revenues sufficient to finance a significant fraction of new urban services investment over the next decade. 7.17 Cost Recovery. With few exceptions there is virtually no direct cost recovery for capital investments in urban services in Indonesia. The general policy has been that recurrent expenditures should be recovered through user charges, where possible, but that the initial capital investment should be provided to the users in the form of grants. This policy has been based on arguments of affordability, fairness, and externalities. The poor are deemed incapable of paying their way; charging poorer communities for improvements earlier provided freely to more affluent neighborhoods is considered unfair; finally, some services are assumed to benefit the community at large and, it is argued, should be paid by all. In practice these guidelines have not been strictly implemented, and many urban services do not even generate sufficient revenues to cover recurrent expenditures. Unfortunately, in the present environment of fiscal stringency, communities face the choice between either limited, highly subsidized services or more widespread services, based on greater levels of cost recovery. Some of the most promising areas for improved cost recovery are water supply, sanitation and public transportation. In addition the wider use of betterment taxes could considerably raise local government incomes. 7.18 At present, the policy of the Central Government with respect to water tariffs is that they should cover operation, maintenance and depreciation. However, no provision is made for the payment of central government grants. This policy, when applied to forecast investment programs, will finance less than 20% of annual investments by 1991. By contrast a policy of replacing grants with say 20-year, 4% per annum loans would generate, in debt repayments alone, enough to finance nearly 40% of annual investments by 1991. The effects would not be immediately apparent in the first few years, but would yield large benefits within a decade. 7.19 Planned carefully, such improved cost recovery should not unduly burden the poor. A survey undertaken in selected East Java cities in preparation for the World Bank's First East Java Water Supply Project suggests that consumers are willing to pay water tariffs which would be sufficient to cover this level of grant repayment. This would amount to a charge of about 4% of their income for clean water on a regular basis, and up to 7% when they are paying off debts for connection charges. Evidence from other countries also suggests that consumers are willing to pay similar proportions of their income for clean water. An appropriate pricing policy also needs to be - 166 - developed for the poorest 20% of the population that cannot afford house connections. A judicious combination of grants for the provision of standpipes and tariffs paid by a group of families responsible for individual units would allow recovery of operating costs and of some spatial expenses. The same general principles can be applied to sanitation services. If commercial wash-houses/toilets are assigned to small groups of families, who would pay a fixed monthly fee for unlimited use, it should be possible to recover most capital costs in addition to operating and maintenance expenses. For example, for roughly Rp. 2,000 per family per month, 5-7 families can pay for water charges and annual emptying of the pit, and repay an interest-free loan in four years. Only the most destitute households would require other solutions, such as larger, multiple-unit communal facilities. 7.20 An additional area for close scrutiny involves public transportation. As noted above, bus fares are controlled for each type of service, and government owned systems in Jakarta and eight other large cities are explicitly subsidized. Publicly-owned companies receive Rp. 30 billion a year in capital grants, as well as subsidies to cover annual operating subsidies. This is unfortunate from various perspectives. There is little evidence that such subsidies limit the diversion of passengers to private vehicles. Furthermore, the controlled fares system has done widespread damage to private bus companies and obstructed the development of higher quality, higher priced microbus services; this is likely to increase congestion by reducing public transit service. Finally, there is little reason to subsidize a 'basic need' for middle and lower income individuals who happen to live in a handful of large cities. It is precisely by placing the burdens of congestion on all users of roads - private and public vehicles - that a balance is reached between the attractive features of large centers and the disamenities. A doubling of bus fares in January 1983 and the further 25% increases in January 1984 were important contributions to resolving the issues in this field, and point the way to full cost recovery at some point in the future. 7.21 There is one final candidate for cost recovery through user charges: neighborhood improvements whose benefits cannot be allocated to each household by charging specific tariffs. Included among these are road surfacing, drainage, footpaths, and water mains. These investments do have one feature that makes cost recovery possible: they tend to increase land prices in the adjoining areas. In many parts of the world, betterment or "valorization' taxes are able to recoup most or all of the investment costs. Jakarta has the only example of a betterment tax in Indonesia. It is bei.ng used in particular areas of the city on an experimental basis; it allows for the recovery up to 60% of the cost of new or improved infrastructure through the use of a special tax. The tax is calculated and announced before improvements are made; it must be paid within three years after completion of the work, with financial penalties for late payment and denial of building permits until the tax is paid and has been fairly successful in recovering costs. The results of this experiment appear to warrant an extension of this effort, both within Jakarta and to other cities. If project standards are kept moderate, construction takes place in stages and the major burden is placed on middle and upper income beneficiaries, the taxes should be affordable to all income groups, even if the proportion of costs recovered were increased substantially. - 167 - 7.22 Existing legislation in Jakarta also allows for the collection of an "excess" profits tax tied to land value increases in excess of 300% over the first two years following the completion of public works; it would be collected on change of ownership, and would thus be relatively painless. Though this section of the special tax law was never put into effect, it would represent a useful way to recover additional costs while preventing disproportionate windfalls gains from accruing to landowners. It deserves closer scrutiny. 7.23 Local Borrowing as a Tool. In global terms, borrowing by local governments is presently unimportant. It accounts for only 1%-1.5% of local government spending, and 2%-3% of kotamadya/kabupaten spending. Most loans are directed at municipal services, and may account for up to 20% of water supply and kampung improvement activities. It would seem desirable that wealthier local communities be required to finance a higher proportion of their development from loans rather than grants, following the example of Jakarta and Bandung in water supply investment. In order to facilitate this transition consideration should be given to establishing a consolidated fund for lending to municipalities for urban service investments. This fund could bring together various sources of loanable funds from both central government and foreign sources. These funds could then be onlent to local authorities in a consistent manner giving due weight to the capacity of the local authorities to service these debts based on their performance in recovering costs and on local taxation efforts. This approach would greatly increase the incentive for local authorities to generate local revenues to help in financing the provision of urban services. As a starting point it should be possible to expand the existing arrangements by establishing a revolving fund. Such a fund could be capitalized by a corresponding reduction in development expenditures from the levels projected under REPELITA IV, so that there would be no requirement for additional government expenditures under such a scheme. Once these initial contributions have established the fund at an appropriate level, however, the fund would be able to operate on a self-financing basis as repayments of earlier loans could be ploughed back into new investment. Thus over the longer term the Central Government would be able to reduce its contribution to the funding of urban service investments. D. Central and Local Public Administration 7.24 The organization of public administration in Indonesia is highly complex. These arrangements reflect the interplay of historical, technical and philosophical factors. From the historical point of view, Indonesia's need to consolidate its national identity upon independence with an extremely limited cadre of skilled administrators called for a relatively centralized approach to decision making. However, technical factors, including the desire to move fairly quickly on pressing development problems often led to the proliferation of specialized agencies operating with quite different administrative and financial procedures, so that this centralized approach has not created a uniform organizational structure. Finally, the philosophy of government in Indonesia places great importance in the concept that local administrations should be responsible for assisting in the realization of national development goals and objectives, as well as for meeting local needs. This has resulted in the evolution of a complicated institutional relationship between central government departments and local administrations. - 168 - 7.25 As far as the organisation of local government is concerned, Indonesia is divided into 27 provinces for administrative purposes. These 27 provinces are further divided into 301 second level units, which are known as regencies or municipalities. Broadly speaking, the (247) regencies are rural in character, while the 54 municipalities are predominantly urban. There are separate regional administrations at both the provincial aLnd second level of government in Indonesia. Both levels of government have their own legislative and administrative arms. The legislative arms consist mainly of locally elected representatives. The executive arms are headed by nominees of the legislature who are appointed by the central government Department of Home Affairs. These regional executive arms are in turn organized into a number of local departments (the Dinas), which parallel central departments in a number of areas, but are responsible for the provision of local government services. Thus most medium and large size cities have their own legislative and administrative bodies. 7.26 In keeping with the philosophy of Indonesian government, provincial governors and the chief executives of municipalities and regencies exercise a dual role. They are responsible for the administration of local government and are also the local representatives of the President. In this latter role, they are responsible for generally overseeing the work of the central government and for coordinating the work of central and regional government agencies. This means that the central government departments operating at the regional level are subject to the authority of the regional heads of government for coordination purposes, as well as to the central government ministries. Although this structure in theory permits a distinction to be made between central government and regional government activities, in practical terms the division of responsibilities between central and regional government is far from clear cut. The arrangement has two drawbacks. Firstly, the overlapping of central and local government means that it is difficult to avoid some duplication of effort, inconsistencies and ommissions. Secondly, the process of coordination itself can often prove time consuming and inefficient, and it necessarily places considerable demands on the limited administrative resources of both central and regional governments. 7.27 Central government departments play a dominant role in the provision of public services in Indonesia. Responsibility for technical aspects of urban services is vested largely in various departments of the Ministry of Public Works (Pekerjaan Umum, P.U). However, the Ministry of Health (Kesehatan) is also involved in monitoring and improving the quality of water supplies and sanitation facilities; it also constructs small-scale schemes for water supply and human waste disposal in rural areas. The Ministry of Communications (Perhubungan) is responsible for traffic control and public transport. And street lighting is provided through the National Electricity Corporation (PLN). Almost all of these central government departments have established a set of branch offices at the provincial level and frequently central government sub-branches have been set up in individual cities and towns. These local offices are responsible for implementing the development programs of the central departments, as well as administering ongoing programs. The strong vertical relationships within specific departments often mean that coordination between different departments tends to be weak, especially at the local level. This is a particularly serious problem for urban services, because of the need to pursue an integrated approach to the development of densely populated settlements. - 169 - 7.28 As a country of such great size and diversity, Indonesia faces difficult choices in trying to strike a balance in the degree of centralization of the public administration. It is undoubtedly true that as Indonesia develops, more responsibility for the implementation of local services must be devolved to lower levels. However, it is important that central guidance on policy and resource allocation decisions be broadly maintained. 7.29 Managing Urban Services. The case for increased city-wide management of the urban services program is generally agreed by all concerned. Firstly, urban problems, and priorities for infrastructure and services, vary enormously from one place to another. Until now, the fragmentation of responsibilities and the rigidities in central finance, which presently funds the majority of urban services mean that municipal authorities have had little or no influence over the balance of priorities. For example, finance may be available for kampung improvement, when what is needed is city-wide drainage. There is a clear need for flexibility to modify standard solutions and fixed cost allocations, and to allow local discretion on the balance of priorities within the national objective of addressing basic needs. 7.30 Secondly, as the number of sectoral programs in a city grows, it is important that standards and the phasing of investment be coordinated. It is obvious that water supply systems should serve communal toilet and bathing facilities, that water pipes should be laid down before a Kampung Improvement Program footpath is laid over them, and that road and footpath improvements be coordinated. But at present there is insufficient coordination among the various programs. One of the root causes of these difficulties is the fragmentation of authority and finance in the urban services sector. 7.31 In addition, increased responsibility and control is a prerequsite for a "psychology of involvement' at the local level. For example, local governments tend to spend a disproportionate amount of their funds and efforts on those sectors that they feel they have most control over, such as local roe,d works. Few local governments attach a high priority to providing public water standpipes, partly because they regard this as the responsibility of either the water supply program or the national Kampung Improvement Program. Experience suggests that the balance between different programs is likely to be enhanced where overall responsibility for the program lies with the local authorities. 7.32 In many respects, the Government has made substantial progress in delegating responsibility to local governments. The rapid expansion of the INPRES program, the creation and strengthening of the BAPPEDAs, and the introduction of 'perintis" or "stimulus" programs in kampung improvement and solid waste, are important elements of this effort. While there is no question about whether this process of decentralization should continue - it is universally agreed that it must - there is considerable debate over the appropriate speed of the process. 7.33 One problem which limits the scope for devolution is that the technical and managerial strength of local governments, both at the province and at the municipal level varies greatly. Some of the larger provinces (which are bigger than most countries in the world) have fairly soiphisticated - 170 - administrative apparatuses, and a relatively high level of technical competence, and the same is true of some of the major municipalities. Other provinces and many regency administrations need to be considerably strengthened before they will be able to take on additional responsibilities. This is a crucial area where more investigation into staffing characteristics is needed to provide a basis for manpower projections and training programs. 7.34 On the technical side, delegation must clearly be very selective. Few municipalities have the capacity to design or construct water treatment works or even large drainage pipes and canals. However, the general success of the INPRES programs suggests that, with support from provincial agencies, the second level governments have a substantial capacity for design and supervision in small projects. On the managerial side given the variability of local capacities, a flexible approach is necessary. But there has often been an understandable reluctance to grant a level of autonomy at one province or municipality that cannot be granted to all. /1 This reluctance appears to be breaking down, and this is an important development. /2 To the extent that central authorities are able to selectively devolve responsibility to the stronger provinces and in turn to the stronger Level II authorities, more central time and manpower may be concentrated on assisting the weaker local agencies. It must be acknowledged that in the early stage of any process of delegation, the effort may appear to be more trouble than it is worth. But, over the longer term, the advantages of improved local coordination are likely to outweigh the costs of these initial difficulties. 7.35 Questions of manpower are central to the success of the expanded urban services program in the coming years; the lack of sufficiently qualified staff is already a constraint to effective implementation. An analysis of the manpower situation in the sector reveals three general points. First, while the average level of formal education of technical and managerial staff at the central government level appears adequate, the number of staff is insufficient even for the present investment program, let alone for the expanded REPELITA IV program. With this small number of staff, the chief role of the central government agencies must increasingly be to advise and guide local staff rather than to be directly involved in designing and approving contracts. Second, technical staffing at the kotamadya/kabupaten level is probably adequate in terms of numbers, but seriously deficient in terms of formal education: it is these staff who must be the primary target for training and upgrading programs and who must take primary responsibility for the success of the REPELITA IV program. Third, the local planning and coordinating units, the BAPPEDAs, are now fairly well stocked with relatively well educated staff. Nevertheless, as cities continue to grow and the number of projects rises, it is essential that greater emphasis be given to raising the ability, experience, and authority of the planning and coordinating bodies (the BAPPEDAs) at the city level. /3 /1 The exception to this is Jakarta, which has always assumed much greater local management than have other cities. /2 For example, under the World Bank's upcoming Fifth Urban Project, the Government is introducing a management structure unique to the four cities concerned (Surabaya, Surakarta, Semarang and Ujung Pandang). /3 USAID is playing an active role in the development of programs to strengthen the local BAPPEDAs in Indonesia. - 171 - 7.36 Recognizing the shortage of skills in the implementation of its investments, the Government has embarked upon a major expansion in training and manpower development. The Ministries of Public Works and Home Affairs both have large programs, and the Ministries of Finance and Communications and BAPPENAS also organize relevant courses. While there is still scope for making courses more relevant and less traditionally "classroom" in approach, these programs are now making a substantial contribution. Some sectors are much better organized than others. For example, in water supply, an impressive training and upgrading program is well underway, in conjunction with detailed manpower planning exercises. In marked contrast, there has been virtually no manpower planning or in-service training for the various sanitation programs. 7.37 In view of the acute scarcity of well-qualified staff, it is obviously essential that the most efficient use be made of available skills. In particular, it is important that higher-skilled staff be protected from routine duties that could be delegated to lower levels. In this regard there is scope for considerable improvement in almost all urban services. For example, much skilled manpower at the Ministry of Public Works is spent in contract administration that could probably be undertaken effectively at the local and provincial levels. This would leave more time for central government staff to develop, train staff, and establish effective guidance and monitoring. Similar improvements in efficiency could also be made at lower levels, freeing up the provincial staff for supervision and quality control. 7.38 In some cases, where local authorities are particularly weak, it may be possible to involve the private sector. Experimentation is underway to hire private companies for solid waste disposal and for emptying septic tanks, although there have been some difficulties in ensuring a good quality of service. One possibility worth consideration on a pilot basis, perhaps in the Outer Islands, is the granting of a water supply concession to a private company. The concessionaire would construct the water supply works with funds suplied by GOI to standards defined by Cipta Karya and would contract to operate the system for an agreed period at tariff levels and operating practices agreed with GOI, and possibly remit an agreed fee to the kabupaten/kotamadya. Such an approach, which is commonly used in West Africa and in France, would further test and utilize the capacity of the private sector to assist in the delivery of public services. 7.39 In terms of coordination of the various sectoral programs, there is certainly greater scope for a local role than at present. Interviews with Level II BAPPEDAs usually indicate a lack of an overall view of the development effort, due to the many programs and budgets over which local authorities have no control and sometimes little knowledge. Most local authorities do not produce consolidated statements of all that is spent on various sectors within the locality, so it is not surprising that there is not as much complementarity among programs as there should be. This is due to a combination of two related factors; lack of prior information of sectoral programs plans, and a lack of time to spend on coordination - due to the burden of excessive administrative paperwork associated with the various programs and budgets. The Government is aware of these difficulties and is - 172 - gradually addressing them within existing legal and political constraints. For example, under the upcoming Fifth Urban Development Project, supported by the World Bank, the government intends to consolidate all central level budgets for K:[P into one, and to strengthen the role of the local agencies; this will signiificantly improve the scope for local coordination. 7.40 The Administrative Framework. The above considerations suggest that over the coming years some important changes must take place in the way the urban services program is administered. Some of these changes are already being considered, while some may not be possible for several years. Two areas are particularly important: coordination at the central level and coordlination at the city level. 7.41 As in all governments, there is a split in Ministerial responsibilities between "technical" matters which are the responsibility of sectoral ministries (Public Works being the most prominent), "administrative" matters which are the concern of Home Affairs, 'resource allocation" (BAPPENAS), and "financial" control (Ministry of Finance,l. At the local level, the provision of urban services is, of course, a synthesis between technical (planning and design), administrative (staff, land acquisition and tenure, user charges) and financial matters (funds, auditing, taxation measures). Because these functions and their reporting, accounting and evaluation are segmented into ministerial responsibilities which extend vertically into the various Dinas of the local government, there is often a problem of mismatches in timing between these various aspects of development. As the management of the overall program is progressively delegated to the Level II authorities, a more formal mechanism for coordinating central agencies may be required. For example, a major function of the Central Government under any new system might be the broad assessment of the overall financial, technical and manpower needs of particular cities, but not necessarily deciding the precise sectoral allocation of investments. No single central agency can currently take this broad overall view. One possibility would be strengthening the existing coordination mechanisms to address such issues as overall policies and funding allocations for the urban sector, and coordination external financial assistance and supervision of technical assistance. It might also play a central role in the coordination of services across province boundaries, such as water systems. Many countries have some type of urban services board usually in conjunction with an urban development fund for making loans to municipalities. 7.42 For Jakarta and some of the larger municipalities, the Government is encouraging the development of a system of financial and physical planning that brings together spending plans from all central sectoral departments. In Jakarta and Surabaya, three-year rolling plans are being introduced. In Surabaya the rolling plans are based upon an established Program Planning and Budgeting System (PPBS), specially modified for the Indonesian context. /1 Plans are underway to extend this system to four more large cities over the next two years. /1 See for example Cipta Karya: Financial Planning and Control in DKI, Jabotabek I'eam, Report No. I/26, September 1982; and M. Page: The Design and Implementaion of a System of Resources Planning, Programming and Budgetting for the Kotamadya Surabaya, April 1982. - 173 - 7.43 For medium and smaller cities a simpler approach is needed. A simple spatial planning process is available which could be undertaken by local staff under joint guidance and short training from the Directorates of City and Regional Planning. The main features are: (a) use of aerial photographs generated by the large program of urban aerial photography mapping now under way; (b) carefully defining priorities (c) development of action plans for each area of special focus, based on the budgetary allocations indicated by central and provincial governments. This process could be incorporated in and perhaps be a principal focus of the local five-year plans. But, in addition, it is desirable that such plans be regularly updated based on annual reviews of a three-year rolling plan. This would help overcome a serious weakness of the present local plans, which is that they are usually drawn up without reference to the likely level of financial resources available from higher levels of government, and therefore become quickly out of date. 7.44 While major changes in the administration of urban services may not be possible immediately, a number of measures and studies might be undertaken in the near future to improve the efficiency of program implementation within the existing administrative framework itself. These include: (a) Designing an information system on urban services and finance. Currently key data on urban conditions, existing levels of service, consolidated expenditures on services by different agencies and local staffing levels and skills are not available in a form that is required by central decision makers to make policy judgments on overall priorities among cities and sectors. Since the information is essential to several agencies, a joint committee of the Ministries of Home Affairs, Public Works and Finance, and BAPPENAS might prove best suited to directing this work. (b) Studying options for restructuring grant and loan allocations and the establishment of an urban development fund. In many aspects the authorities have already taken a number of steps in this direction. The study would review the potential for building on this mechanism and the feasibility of consolidating various fund sources and augmenting them for the expansion of urban services, reviewing the system of internal and external sources of loans with a view to providing a consistent grant/loan system for local governments which would respond to local variations in need and provide incentives for performance. (c) Preparing a pilot urban management project, in which one province and several municipalities would be given additional responsibilities for management and coordination of block grants from the central government. The project would have training and technical assistance components and would be carefully monitored for potential replication. (d) Studying staffing levels and variations in technical and administrative capacities of key agencies at the province and Level II. This would provide a basis for formulating training programs that are more responsive to the major deficiencies among the various local governments. - 174 - Appendix Table 1 PROVINCIAL ECONOMIC INDICATORS, 1981) (Indonesia = 100) Land area Population Labor GDP /a GDP /a force per capita DKI Jakarta 0.03 4.4 3.9 9.0 204.0 West Java 2.4 18.6 16.6 13.1 70.2 Central Java 1.8 17.2 19.2 10.2 59.3 D.I. Yogyakarta 0.2 1.9 2.4 1.0 55.7 East Java 2.5 19.8 22.2 13.6 68.7 JAVA: Sub-total 6.9 61.9 64.1 47.1 75.8 D.I. Aceh 2.9 1.8 1.61 3.4 192.5 North Sumatra 3.7 5.7 5.7 6.0 105.8 West Sumatra 2.6 2.3 2.1 1.6 70.7 Riau 4.9 1.5 1.3 11.6 790.4 Jambi 2.4 1.0 0.9 0.9 89.2 South Sumatra 5.4 3.1 3.1 5.4 170.7 Bengkulu 1.7 0.5 0.5 0.4 67.4 Lampung 1.1 3.1 2.9 2.1 65.3 SUMATRA: Sub-total 24.7 19.0 19.9 31.4 164.7 West Kalirnantan 7.6 1.7 1.9 1.3 77.8 Central Kalimantan 8.0 0.7 0.7 0.8 124.4 South Kalimantan 2.0 1.4 1.4 1.2 84.0 East Kalimaantan 10.0 0.8 0.7 7.0 837.1 KALIMANTAN: Sub--total 28.1 4.6 4.9 10.2 224.0 North Sulawesi 1.0 1.4 1.3 1.3 92.3 Central Sulawesi 3.6 0.9 0.8 0.6 67.3 South Sulawesi 3.8 4.1 3.2 23.0 73.8 South East Sulawesi 1.4 0.6 0.5 0.3 49.1 SULAWESI: Sub-tc,tal 9.8 7.0 7.0 5.3 74.5 Bali 0.3 1.7 1.9 1.3 74.5 West Nusa Tenggara 1.0 1.9 1.7 0.8 45.8 East Nusa Tenggara 2.5 1.8 2.0 0.8 44.9 Maluku 3.9 0.9 0.8 1.1 110.2 Irian Jaya 22.0 0.8 0.7 2.0 255.9 East Timor 0.8 0.4 - - - OTHERS: Sub-total 30.5 7.5 7.1 6.0 84.0 INDONESIA: TOTAL 100.0 100.0 100.0 100L.0 100.0 /a 1979 cirrent prices. Source: Central Bureau of Statistics; and World Bank staff estimates. - 175 - Appendix Table 2 PROVINCIAL DEVELOPMENT INDICATORS, 1971-1979 Population Non mining Non mining Non mining growth RGDP per RGDP per RGDP per capita growth capita index capita index (1973 constant (1973 constant (current prices) prices) prices) 1971 1979 1971 1979 DKI Jakarta 4.0 6.6 207.4 235.2 236.5 263.2 West Java 2.7 3.7 97.4 88.4 87.5 77.9 Central Java 1.7 4.1 77.5 72.9 76.9 76.3 D.I. Yogyakarta 1.1 9.7 37.1 53.1 68.5 71.7 East Java 1.5 3.1 86.5 75.2 89.9 88.3 JAVA: Sub-total 2.0 4.4 92.7 89.3 93.6 93.8 D.I. Aceh 2.9 2.8 107.5 91.2 103.6 92.5 North Sumatra 2.6 5.0 141.4 141.9 136.0 122.0 West Sumatra 2.2 5.5 96.6 100.9 92.5 91.0 Riau 3.1 12.1 54.9 93.5 136.9 148.2 Jambi 4.1 4.4 160.5 153.9 148.9 108.8 South Sumatra 3.3 6.8 165.3 190.6 178.6 134.7 Bengkulu 4.4 3.8 106.3 97.3 91.2 86.1 Lampung 5.8 1.0 102.4 75.4 95.7 85.1 SUMATRA: Sub-total 3.3 5.0 124.1 124.9 128.3 111.7 West 'Kalimantan 2.3 4.2 108.1 102.4 106.4 100.1 Central Kalimantan 3.5 7.5 124.9 151.3 117.1 160.0 South Kalimantan 2.2 6.3 124.6 138.6 107.9 108.0 East Kalimantars 5.8 7.0 295.9 347.2 245.1 427.3 KALIMANTAN: Sub-total 3.0 6.8 142.6 164.8 128.1 170.3 North Sulawesi 3.9 5.7 177.3 126.4 132.9 117.3 Central Sulawesi 2.2 6.0 72.6 79.2 61.1 86.2 South Sulawesi 1.7 7.7 80.3 99.1 82.4 94.6 South East Sulawesi 3.1 2.2 73.7 59.8 68.3 51.6 SULAWESI: Sub-total 2.2 4.9 98.5 99.5 89.1 94.3 Bali 1.7 5.5 99.2 104.0 111.8 95.4 West Nusa Tenggara 2.4 5.9 48.5 52.4 54.9 58.1 East Nusa Tenggara 1.9 4.7 60.5 59.5 50.7 57.8 Maluku 2.9 3.2 122.3 107.3 116.5 132.4 Irian Jaya 2.4 8.0 133.5 168.4 116.9 117.1 East Timor n.a n.a n.a n.a n.a n.a OTHERS: Sub-total 2.8 5.5 82.7 86.5 82.4 83.2 INDONESIA: TOTAL 2.3 4.9 100.0 Q100. 0 100.0 Source: Central Bureau of Statistics; and World Bank staff estimates. - 176 - Appendix Table 3 SECTORAL GROWTH TRENDS BY PROVINCE 1971-1979 (in constant 1973 prices) Agriculture Mining Manufacturing Construction Service Total DKI Jakarta --1.4 - 15.0 14.0 9.0 10.0 West Java 2.6 5.9 11.7 21.2 7.7 6.8 Central Java 0.6 -0.9 9.7 11.0 11.0 6.0 D.I. Yogyakarta 8.6 14.0 10.8 16.4 12.2 11.1 East Java 2.9 10.3 7.2 4.5 6.4 4.8 JAVA: Sub-total 2.2 5.6 10.6 14.7 8.4 6.6 D.I. Aceh 3.6 - 12.2 9.9 9.5 13.6 North Sumatra 5.4 6.1 14.6 27.0 7.7 8.0 West Sumatra 3.7 -0.6 7.4 27.2 11.0 8.1 Riau 3.1 2.6 32.7 2.6 18.6 4.3 Jambi 6.8 -4.2 4.3 59.3 7.7 8.8 South Sumatra 3.0 1.8 26.7 4.3 9.5 9.5 Bengkulu 3.3 21.8 8.2 31.2 14.3 9.3 Lampung 4.2 - 13.4 0.4 12.5 7.6 SUMATRA: Sub-total 4.5 4.8 20.1 20.1 9.8 7.8 West Kalimantan 2.9 15.2 18.6 17.6 10.0 6.9 Central Kalimantan 3.5 - 26.3 31.0 13.9 11.6 South Kalimantan 5.6 2.2 5.9 28.1 13.2 8.8 East Kalimantan 3.5 47.2 12.0 14.6 18.9 22.5 KALIMANTAN: Sub-total 5.9 43.1 15.3 20.6 15.3 14.4 North Sulawesi 0.9 112.6 12.0 3.3 4.1 3.8 Central Sulawesi 8.7 42.2 28.1 15.7 14.2 10.8 South Sulawesi 9.3 30.9 11.1 16.2 9.5 10.3 South East Sulawesi 2.4 0.6 6.6 4.3 13.0 4.8 SULAWESI: Sub-total 6.5 18.9 11.7 12.1 7.9 7.9 Bali 3.5 21.5 20.3 11.2 9.5 7.2 West Nusa Tenggara 5.3 32.6 5.4 22.0 13.9 8.9 East Nusa Tenggara 4.3 - 13.8 5.6 14.0 6.9 Maluku 1.3 16.9 16.0 40.0 12.7 6.7 Irian Jaya 12.0 64.6 7.5 6.9 9.6 18.0 East Timor n.a n.a n.a n.a n.a n.a OTHERS: Sub-total 5.3 53.3 15.5 13.8 11.4 9.8 INDONESIA: TOTAL 3.7 9.6 .9 16.0 7.8 Source: Central Bureau of Statistics and World Bank staff estimates. - 177 - Appendix Table 4 PEOPLE IN POVERTY AND INCIDENCE OF POVERTY, BY PROVINCE, 1980 Total People in Incidence Population in Incidence of population poverty of poverty deprivation deprivation Province ('000) ('000) (%) ('000) (%) DKI Jakarta 6,320.8 1,066.5 16.9 40.1 0.6 West Java 26,983.7 8,810.7 32.7 81.0 0.3 Central Java 25,092.1 14,529.8 57.9 178.4 0.7 D.I. Yogyakarta 2,729.3 1,634.1 59.9 97.4 3.6 East Java 28,879.9 15,847.8 54.9 210.9 0.7 Total Java 90,005.8 41,888.9 46.5 607.8 0.7 D.I. Aceh 2,561.0 224.9 8.8 42.1 1.6 North Sumatra 8,204.0 1,676.2 20.4 215.9 2.6 West Sumatra 3,359.3 470.1 14.0 110.9 3.3 Riau 2,131.1 284.0 13.3 143.5 6.7 Jambi 1,409.6 111.5 7.9 33.6 2.4 South Sumatra 4,532.5 617.1 13.6 173.0 3.8 Bengkulu 754.8 158.3 21.0 67.3 8.9 Lampung 4,494.6 2,043.6 45.5 228.7 5.1 Total Sumatra 27,446.9 5,585.7 20.4 1,015.0 3.7 West Kalimantan 2,447.0 229.5 9.4 129.5 5.3 Central Kalimantan 934.3 115.0 12.3 /a /a South Kalimantan 2,032.3 253.4 12.5 17.6 0.9 East Kalimantan 1,181.3 158.3 13.4 104.2 8.8 Total Kalimantan 6,594.9 756.2 11.5 251.3 2.6 North Sulawesi 2,081.6 680.9 32.7 13.6 0.6 Central Sulawesi 1,256.4 362.2 28.8 52.1 4.1 South Sulawesi 5,976.1 2,525.4 42.3 253.8 4.2 South East Sulawesi 919.3 451.5 49.1 48.4 5.3 Total Sulawesi 10,223.4 4,020.0 39.3 367.9 3.6 B a 1 i 2,440.3 934.9 38.3 n.a. n.a. West Nusa Tenggara 2,686.0 1,343.1 50.0 561.9 20.9 East Nusa Tenggara 2,696.5 1,527.0 56.6 1,198.5 44.4 Maluku 1,378.6 537.5 39.0 186.4 13.5 Irian Jaya 219.8 17.2 7.8 12.9 5.9 East Timor n.a n.a n.a n.a n.a Total E. Islands 9,421.6 4,399.7 46.7 2,461.8 26.1 TOTAL INDONESIA 144,102.2 56,650.5 39.3 4,703.8 3.3 /a Insignificant. Source: Central Bureau of Statistics; and World Bank staff estimates. - 178 - STANDARD TABLES The following three tables have been prepared according to standardized World Bank concepts and definitions to facilitate cross-country comparisons and aggregations. These data may not always agree with similar data in the main statistical appendix. - 179 - Standard Table 1: INDONESIA NATIONAL ACCOUNTS SUMMARY (Rp. billionsi at current prices) 1978 1979 1980 1981 1982 1. Gross Domestic Product 22,746 32,027 45,446 54,027 59,633 2. Resourcc Gap (m-x) -607 -2,807 -4,565 -2,712 923 3. Imports (g+nfs) 4,342 6,781 9,226 12,297 14,258 4. Exports (g+nfs) 4,950 9,587 13,791 15,009 13,336 5. Total Expenditures 22,139 29,220 40,881 51,315 60,556 6. Consumption 17,234 22,181 30,922 38,592 46,415 7. Government 2,659 3,733 4,688 5,788 6,247 8. Private 14,575 18,448 26,234 32,804 40,168 9. Investment 4,905 7,039 9,959 12,723 14,140 10. Fixed Investment 4,671 6,704 9,485 12,117 13,467 11. Changes in Stocks 234 335 474 606 673 12. Domestic Savings 5,512 9,846 14,524 15,435 13,218 13. Net Factor Income -1,242 -2,217 -2,806 -3,258 -3,117 14. Current Transfers - - - - - 15. National Savings 4,270 7,629 11,718 12,177 10,100 Average Exchange Rates 16. Rupiah per US$ 442 623 627 632 661 17. Rupiah per SDR 814 826 799 750 764 The national accounts data in current rupiah are World Bank estimates, based on data published by the Central Bureau of Statistics. The published statistics have been modified to include estimates of changes in stocks. Imports and exports of goods and non-factor services are taken from dollar valuesreported in Table 3 and converted at the period average rupiah/dollar exchange rate. - 180 - Standard Table 2: INDONESIA NATIONAL ACCOUNTS SUMMARY ($ millions; at constant 1980 prices) 1978 1979 1980 1981 1982 1. Gross Domestic Product 62,085 65,970 72,482 78,231 79,984 2. Terms of Trade Effect -11,755 -5,906 134 -82 3. Gross Domestic Income 50,330 60,065 72,482 78,365 79,902 4. Resource Gap -1,434 -5,093 -7,280 -3,940 1,277 5. Imports (g+nfs) 10,252 12,305 14,715 17,865 19,730 6. Capacity to Import 11,685 17,398 21,995 21,805 18,453 7. (Exports (g+nfs)) (23,440) (23,304) (21,995) (21,671) (18,535) 8. Total Expenditures 48,897 54,971 65,202 74,426 81,179 9. Consumption 35,976 41,480 49,318 55,734 61,036 10. Government 6,463 6,749 7,477 8,235 8,149 11. Private 29,512 34,731 41,841 47,499 52,886 12. Investment 12,921 13,491 15,884 18,692 20,143 13. Fixed Investment 12,306 12,849 15,128 17,802 19,184 14. Changes in Stocks 615 642 756 890 959 15. Domestic Saving 14,355 18,585 23,164 22,632 18,866 16. Net Factor Income -2,743 -4,171 -4,475 -4,725 -4,179 17. Current Transfers - - - - - 18. National Saving 11,612 14,413 18,689 17,906 14,687 Rupiah Deflators 1980=100 19. Gross Domestic Product 0.5843 0.7743 1.0000 1.1014 1.1891 20. Imports (g+nfs) 0.6755 0.8789 1.0000 1.0949 1.1526 21. Exports (g+nfs) 0.3368 0.6561 1.0000 1.1046 1.1475 22. Total Expenditures 0.7221 0.8478 1.0000 1.0997 1.1897 23. Government Consumption 0.6561 0.8821 1.0000 1.1210 1.2226 24. Private Consumption 0.7877 0.8472 1.0000 1.1015 1.2114 25. Fixed Investment 0.6054 0.8321 1.0000 1.0856 1.1196 26. Changes in Stocks 0.6054 0.8321 1.0000 1.0856 1.1196 27. Exchange rate index 1.4186 1.0064 1.0000 0.9921 0.9486 - 181 - Standard Table 3: INDONESIA BALANCE OF PAYMENTS ($ millions; -it current prices) 1978 1979 1980 1981 1982 1. Exports (g+nfs) 11,198 15,389 21,995 23,749 20,175 2. Merchandise (fob) 11,019 15,138 21,762 24,387 19,711 3. Non-factor services 179 251 233 362 464 4. Imports (g+nfs) -9,824 -10,884 -14,715 -19,458 -21,571 5. Merchandise (fob) -8,382 -9,240 -12,599 -16,605 -18,354 6. Non-factor services -1,442 -1,644 -2,116 -2,853 -3,217 7. Resource Balance 1,374 4,505 7,280 4,291 -1,396 8. Net Factor Income -2,810 -3,559 -4,475 -5,155 -4,716 9. Factor receipts 111 147 213 1,177 1,039 10. Factor payments -2,921 -3,706 -4,688 -6,332 -5,755 11. (M< interest on public debt) (-485) (-635) (-724) (-978) (-1,161) 12. Net Current Transfers - - - - - 13. Transfer receipts - - - - - 14. Transfer payments - - - - - 15. Current Balance -1,436 946 2,805 -864 -6,112 M< Capital Inflow 859 1,117 2,077 2,901 4,233 16. Direct investment 279 226 134 133 226 17. Official grant aid 14 30 55 250 163 18. Net public M< loans 661 604 1,877 2,202 3,029 19. Disbursements (1,638) (1,939) (2,864) (3,203) (4,176) 20. Repayments (-977) (-1,335) (-987) (-1,001)(-1,146) 21. Other M< (net) -95 257 -39 316 815 22. Net Credit from IMF - - - - - 23. Disbursements - - - - - 24. Repayments - - - - - 25. Net Short-Term Capital 121 -451 -823 -288 506 26. Capital Flows NEI -214 -125 -177 491 234 27. Errors and Omissions 607 -107 -1,570 -2,122 -472 28. Changes in Net Reserves 63 -1,380 -2,312 -118 1,611 (- indicates increase) As official balance of payments data published by Bank Indonesia are on a fiscal year basis, the above table was based on calendar year data in Balance of Payments Statistics published by the IMF. Flows in public medium and long-term external debt are based on the World Bank's Debtor Reporting System. - 182 - INDONESIA COUNTRY ECONOMIC MEMORANDUM ANNEX I: ANALYSIS AND PROJECTIONS TABLES List of Tables 1. Exports by Commodity, 1974-75 - 1990/91 2. Imports by Category, 1975-90 3. Balance of Payments, 1973-90 4. Oil Sector Projection, 1983-90 5. Projection of Domestic Refining Capacity, 1980-90 6. LNG Current Account, 1981-90 7. Terms of Trade Index, 1973-90 8. The Public Sector Capital Account 1 183 - ANNEX I Table .1 INDONESIA COUNTRY ECONOMIC MEhORANDUM Exports by Commodity, 1974-75 - 1990/91 (US$ million) Est i- Actual mate Projected 1974/75 1975/76 1976/77 1977,78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1988/89 1990/91 Export values at current prices Timber /a 615 527 885 S43 1,130 2,166 1,672 752 559 514 446 412 473 621 783 Rubber 425 381 577 (08 774 1,101 1,078 770 614 829 880 962 1,096 1,498 2,042 Coffee 92 112 330 f.26 508 715 588 343 364 496 449 476 515 599 b74 Other agricultural exports Palm oil 184 142 147 .02 221 257 178 79 103 146 189 186 232 292 381 Tea 50 50 64 120 98 91 97 94 116 148 130 150 161 192 250 Tobacco 36 40 41 59 58 60 69 49 37 72 74 81 81 92 120 Pepper 22 25 55 62 66 46 51 49 41 66 45 50 55 66 86 Others 199 195 248 278 344 679 540 595 502 618 620 674 796 1,064 1,392 Subtotal agriculture 1,623 1,472 2,347 2,898 3,199 5,115 4,273 2,731 2,336 2,889 2,833 2,991 3,409 4,424 5,728 Tin 166 158 181 253 324 388 454 437 349 331 325 377 42b 552 715 Otber metals and minerals Nickel - - - - 95 165 145 139 174 224 268 325 493 696 Aluminum - - - - 48 173 288 306 328 376 531 Copper 102 74 95 74 64 95 115 133 115 89 115 127 146 190 2b8 Others 28 25 44 36 49 31 40 41 25 60 119 137 157 209 294 Subtotal metals and minerals 296 257 320 363 437 609 774 756 676 827 1,071 1,215 1,382 1,820 2,504 a Lfactures Plywood - - - - - - - 199 324 574 600 722 889 1,147 1,539 Others 114 144 196 245 360 447 540 484 558 880 1,312 1,828 2,087 3,007 4,033 Subtotal manufactures 114 144 196 245 360 447 540 683 882 1,454 1,912 2,550 2,976 4,154 5,572 Total non-oil eXports 2,033 1,873 2,863 3,507 3,979 6,171 5,587 4,170 3,894 5,170 5,816 6,756 7,767 10.398 13,804 Oil and products 4,548 5,410 6,350 7,192 6,858 10,995 15,187 16,482 12,282 12,330 12,210 12,329 14,623 19,299 23,937 LNG - - - 162 516 1,345 2,111 2,342 2,461 2,230 3,211 3,613 4,152 5,682 7,092 Total oil and LNG 4,548 5,410 6,350 7,354 7,374 12,340 17,298 18,824 14,743 14,560 15,422 15,942 18,775 24,981 31,029 Total exports 6,581 7,283 9,213 10,861 11,353 18,510 '22,885 22,994 18,637 19,730 21,238 22,698 26,542 35,379 44,833 Price indices (1981/82 . 100) Timber 39 49 55 62 63 111 134 100 98 95 98 -106 115 137 158 Rubber 59 53 70 74 89 114 130 100 80 104 111 119 132 162 191 Coffee 57 51 112 187 129 135 121 100 97 121 125 131 140 158 174 Other agriculture 89 72 80 97 90 101 117 100 84 90 96 100 109 130 154 Tin 45 49 53 76 91 109 119 100 91 87 90 101 112 137 161 Other metals and minerals 88 76 74 76 77 99 111 100 92 92 95 103 115 143 176 Manufactures 59 67 68 74 87 97 105 100 98 95 98 106 115 137 156 Oil and products 25 34 36 38 38 64 93 100 93 83 83 83 96 118 136 LNG - - - 38 38 64 93 100 101 87 87 87 100 123 146 EAport values at constant prices (1981/82 = 100) Timber 1,577 1,076 1,609 1,521 1,794 1,951 1,248 752 570 542 455 389 411 453 495 Rubber 720 719 824 822 870 966 829 770 768 799 793 808 830 929 1,060 Coffee 161 220 295 335 394 530 486 343 375 411 359 363 368 378 384 Other agriculture 552 628 694 743 874 1,122 799 866 1161 1167 1,102 1,141 1,215 1,319 1,448 Tin 369 322 342 333 356 356 382 437 381 381 361 373 380 404 439 Other metals and minerals 148 130 188 145 147 223 288 319 383 549 785 814 831 889 1,013 Manufactures 193 215 288 331 414 461 514 683 872 1,530 1,951 2,407 2,583 3,031 3,567 Total non-oil exports 3,720 3,310 4,240 4,230 4,849 5,609 4,546 4,170 4,306 5,379 5,806 6,295 6,618 7,403 8,406 Oil and products 18,192 15,912 17,639 18,926 18,047 18,742 18,600 16,481 13,227 14,800 14,657 14,799 15,274 16,364 17,626 LNG - - - 426 1,358 2,102 2,269 2,343 2,442 2,555 3,679 4,139 4,136 4,601 4,858 Total oil and LNG 18,192 15,912 17,639 19,352 19,405 20,884 20,869 18,824 15,669 17,355 18,336 18,938 19,410 20,965 22,484 Total exports 21,912 19,222 21,879 23,582 24,254 26,453 25,415 22,994 19,975 22,734 24,142 25,233 26,028 28,368 30.890 / Includes plywood up to 1980/81. Source: World Bank staff estimates. INDONESIA COUNTRY ECONOMIC MEMORANDUM Imports by Category, 1975-90 (US$ million) Esti- Actual mate Projected 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1988/89 1990/91 Current Prices Food 565 693 1,106 946 1,393 1,485 1,637 1,296 1,419 1,357 1,328 1,374 1,351 1,721 Other consumer goods 200 260 281 344 365 540 743 1,146 566 604 658 772 1,016 1,290 Intermediate goods 1,869 1,867 2,275 2,561 3,501 4,274 4,983 5,192 5,218 5,563 6,310 7,456 9,751 12,793 Capital goods 2,456 3,347 3,579 3,692 3,769 5,538 7,198 8,190 6,640 6,860 7,408 8,075 10,333 12,716 Total non-oil imports 5,090 6,167 7,241 7,543 9,028 11,837 14,561 15,824 13,843 14,384 15,704 17,677 22,451 28,520 Oil sector 2,2b2 2,640 2,909 3,364 2,940 4,050 5,407 4,802 4,730 4,876 4,961 5,657 7,023 9,035 Non-factor services (net) 345 490 536 586 1,237 1,702 2,604 1,715 1,400 1,409 1,292 1,247 1,418 1,559 Imports and NPS 7,707 9,297 10,686 11,493 13,205 17,589 22,572 22,341 19,973 20,669 21,957 24,581 30,892 39,114 Price Index Food 74 52 55 75 68 90 100 83 86 96 105 115 135 159 Other goods 60 62 66 77 87 98 100 98 95 98 106 115 137 156 Total non-oil imports 61 61 64 77 87 99 100 97 94 98 106 115 137 156 oil sector 48 49 53 60 74 93 100 98 95 98 106 115 137 156 Non-factor services (net) 61 62 67 77 88 97 100 98 95 98 106 115 137 156 Imports and NFS 56 58 61 71 84 97 100 97 95 98 106 115 137 156 Constant 1981 Prices Food 764 1,333 2,011 1,261 2,048 1,650 1,637 1,567 1,650 1,420 1,260 1,200 1,000 1,080 Other consumer goods 333 419 426 447 419 551 743 1,170 597 617 623 669 741 826 Intermediate goods 3,115 3,011 3,447 3,326 4,024 4,361 4,983 5,298 5,500 5,677 5,962 6,463 7,114 8,191 Capital goods 4,093 5,398 5,423 4,795 4,332 5,651 7,198 8,357 7,000 7,000 7,000 7,000 7,539 8,142 Total non-oil imports 8,305 10,161 11,307 9,829 10,377 11,947 14,561 16,392 14,747 14,714 14,485 15,332 16,394 18,239 Oil sector 4,733 5,388 5,489 5,607 3,973 4,355 5,407 4,899 4,986 4,975 4,687 4,904 5,124 5,785 Non-factor services (net) 566 790 800 761 1,406 1,755 2,667 1,750 1,487 1,440 1,220 1,081 1,035 1,348 Imports and NFS 13,604 16,339 17,596 16,197 15,756 18,057 22,635 23,041 21,220 21,129 20,752 21,317 22,553 25,372 Source: World Bank staff estimates. A) z cr Z s z 1NIXONESIA COUNTRY ECONOMIC MEMORANDUn Balance of Payments, 1973-90 (US$ million) Esti- Actual mate Projected 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1988/89 1990/91 Summary of balance of payments 1. Exports 3,010 6,581 7,283 9,213 10,861 11,353 18,510 22,885 22,994 18,637 19,730 21,238 22,698 26,542 35,379 44,832 (a) Oil and LNG (gross) 1,105 4,548 5,410 6,350 7,354 7,374 12,340 17,298 18,824 14,743 14,560 15,422 15,942 18,775 24,981 31,028 (b) Non-oil 1,905 2,033 1,873 2,863 3,507 3,979 6,171 5,587 4,170 3,894 5,170 5,816 6,756 7,768 10,398 13,804 2. Imports (including net NFS) -3,592 -6,514 -7,707 -9,297 -10,686 -11,493 -13,205 -17,589 -22,572 -22,341 -19,973 -20,669 -21,957 -24,581 -30,892 -39,114 (a) Oil sector / -460 -1,910 -2,272 -2,640 -2,909 -3,364 -2,940 -4,050 -5,407 -4,802 -4,730 -4,876 -4,801 -5,657 -7,023 -9,035 (b) Non-oil imports -2,938 -4,341 -5,090 -6,167 -7,241 -7,543 -9,028 -11,837 -14,561 -15,824 -13,843 -14,384 -15,865 -17,677 -22,451 -28,520 (c) NFS (net) -194 -263 -345 -490 -536 -586 -1,237 -1,702 -2,604 -1,715 -1,400 -1,409 -1,291 -1,247 -1,418 -1,559 3. Resource balance -582 67 -424 -84 175 -140 5,305 5,296 422 -3,703 -243 569 741 1,961 4,487 6,718 4. Factor services -170 -205 -430 -718 -865 -1,015 -3,106 -3,165 -3,442 -3,705 -4,080 -4,360 -4,823 -5,544 -6,997 -8,408 (a) Interest public debt b -62 -80 -165 -318 -441 -485 -635 -724 -977 -1,161 -1,179 -1,432 -1,664 -1,882 -2,212 -2,398 (b) Other (net) / -108 -125 -265 -400 -424 -530 -2,471 -2,441 -2,465 -2,543 -2,894 -2,932 -3,164 -3,667 -4,791 -6,016 5. Net transfers 50 75 75 61 66 46 52 76 67 105 95 100 110 120 130 150 6. Balance on current account -702 -63 -779 -741 -624 -1,109 2,251 2,207 -2,953 -7,303 -4,228 -3,691 -3,972 -3,463 -2,380 -2,540 7. Direct foreign investment 331 538 454 287 285 271 217 140 142 311 234 400 500 550 650 800 8. Public N & LT loans b (a) Disbursement 909 1,120 2,152 2,332 1,956 1,638 1,939 2,864 2,566 4,250 4,991 5,108 5,186 5,224 5,143 6,120 (b) Amortization -149 -212 -352 -437 -825 -977 -1,335 -987 -1,001 -1,148 -1,541 -1,937 -2,231 -2,671 -3,812 -4,234 (c) Net disbursements 760 908 1,800 1,895 1,131 660 604 1,877 1,565 3,102 3,450 3,171 2,955 2,553 1,331 1,886 9. Other capital (net) -25 -1,392 -1,839 -440 -141 886 -1,382 -1,488 258 540 2,223 -49 638 654 484 521 10. Change in reserves (- increase) -364 9 364 -1,001 -651 -708 -1,690 -2,736 988 3,350 -1,679 71 -121 -294 -85 -667 11. Net official reserves 929 920 556 1,557 2,208 2,916 4,606 7,342 6,354 3,004 4,683 4,612 4,733 5,027 4,973 5,640 Reserves in months of non-oil imports + NFS 3.5 2.4 1.2 2.8 3.4 4.3 5.6 6.5 4.4 2.1 3.7 3.5 3.3 3.2 2.5 2.3 Public debt services as % of exports Zd 8.3 6.3 10.3 11.7 15.9 18.4 16.0 11.5 13.2 20.9 21.8 26.4 27.6 27.4 26.7 23.1 nemorandum item Total net foreign assets /e 6,321 8,355 8,284 8,405 8,698 8,746 9,312 In months of imports of goods 3.7 5.4 5.2 4.9 4.5 3.6 3.0 Current account deficit as t of GNP 8.4 6.0 4.6 4.5 3.6 2.0 1.8 (Dm /a See Table 4 of this Appendix. L - b Based on IBRD external debt data. a After 1980/81 includes estimated interest on private short-term debt. d Oil exports on net basis. e Includes net foreign assets of deposit money banks in addition to ofticial reserves. Source: World Bank staff estimates. INDONESIA COUNTRY ECONOMIC MEMORANDUM Oil Sector Projection, 1983-90 (Volumes in million barrels per year; values in US$ million) 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 Prices ($ per barrel) Crude 29.50 29.50 29.50 33.90 37.62 41.76 45.72 49.38 Products (exports) 26.50 31.27 31.27 35.94 39.88 44.26 48.47 52.34 Products (imports) 36.88 36.88 36.88 42.38 47.03 52.20 57.15 61.72 1. Crude production (volume) /a 535 538 558 577 595 620 639 657 2. Refining inputs (volume) 193 192 209 193 199 205 212 219 A. Crude donestic (volume) 157 156 174 159 165 172 179 186 B. Crude imports (volume) 36 36 36 36 36 36 36 36 (value) 1,077 1,077 1,077 1,237 1,373 1,524 1,669 1,802 3. Domestic consumption (volume) 157 160 163 168 174 180 186 193 A. Danestic refineries (volume) 133 148 163 168 174 180 186 193 o B. Imports (volume) 24 12 0 0 0 0 0 0 (value) 885 442 0 0 0 0 0 0 4. Gross eNports (value) 12,330 12,210 12,329 14,622 16,675 19,299 21,654 23,936 A. Crude (volume) 378 382 386 421 433 451 463 474 (value) 11,153 11,272 11,391 14,263 16,276 18,856 21,169 23,413 B. Products (volume) 44 30 30 10 10 10 10 10 (value) 1,177 938 938 359 399 443 485 523 5. Crude and product imports (2B t 3B) (volume) 1,962 1,519 1,077 1,237 1,373 1,524 1,669 1,802 6. A. Production-related imports 2,565 3,091 3,634 4,148 4,604 5,175 6,051 6,866 B. Non-factor service imports 387 415 457 515 579 658 728 794 C. Factor service payments 1,398 1,159 1,206 1,410 1,584 1,819 2,027 2,237 7. Oil current account (4-5-6) 6,018 6,026 5,955 7,312 8,535 10,123 11,179 12,237 Memorandum items Domestic processing capacity 140 240 260 260 260 260 260 260 Costs of production per barrel 5.78 6.67 7.41 8.43 9.59 10.95 12.43 13.69 . s Source: World Bank staff estimates. La Includes condensates. INDONESIA COUNTRY ECONOMIC MEMORANDUM Projection of Domestic Refining Capacity, 1980-90 (million barrels per year) 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1988/89 1990/91 Refining Capacity /a EXis-nr ti(nine refinpries! 140 140 140 140 140 140 140 140 140 New refineries Balikpapan 50 60 60 60 60 Cilacap 50 60 60 60 60 Subtotal 100 120 120 120 120 Total Domestic 140 140 140 140 240 260 260 260 260 X /a Capacity for input of crude. This does not include new hydrocracker at Dumai, which will process LSWR (31 m. bbl. per year), not crude. This does not include the proposed but indefinite Sorong/Jakarta/Batam Island refinery that would come on stream in the late 1980s or early 1990s. Source: Ministry of Mining and Energy. t-z U w INDONESIA COUNTRY ECONOMIC MEMORANDUM LNG Current Account, 1981-90 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1988/89 1990/91 - Actual ----- - Est.- -------------------- Projected -------------------- Export volume (MMBTU) 458.0 477.8 500 720 810 810 900 950 of Vhich Existing plants /a (458.0) (477.8) (500) (720) (810) (810) (810) (810) New plants /b - - - - - - (100) (140) Price ($/MMBTU) /c 5.11 5.15 4.46 4.46 4.46 5.13 6.31 7.46 Gross export value (s million) 2,340 2,461 2,230 3,211 3,613 4,152 5,682 7,092 Imports, of goods and services /d 960 1,081 946 1,316 1,407 1,631 2,117 2,640 Net foreign exchange earnings on current account 1,382 1,379 1,283 1,895 2,206 2,521 3,565 4,452 o /a Includes 5 trains at Arun and 4 trains at Bontang. Assumes that exports in 1984/85 are limited to minimum volumes under contract. /b Assumes that additional train for export to Korea comes on stream in 1987/88 and that a further expansion of about 50 MMBTU (1 m. tons) is on stream in 1990/91. /c FOB basis; price movements after 1983/84 are assumed to be same in percentage terms as for crude oil. /A Includes factor service payments (contractors! shares for LNG-plants and cost of gas recovery). Source: Bank Indonesia and World Bank staff estimates. A z Ur z * I-w n X es - 189 - ANNEX I Table 7 INDONESIA cOUNTRY ECONOMIC MEMORANDUM Terms of Trade Index, 1973-90 (1981/82 = 100) Non--oil exports: /a Total exports: /b Non-oil imports (including NFS) Total imports (including NFS) 1973/74 96.0 50.0 1974/75 90.0 60.0 1975/76 76.0 62.0 1976/77 9)5.0 70.0 1977/78 107.0 72.0 1978/79 107.0 50.0 1979/80 120.0 86.0 1980/81 108.0 97.0 1981/82 100.0 100.0 1982/83 93.5 96.3 1983/84 102.4 92.2 1984/85 1102.5 89.9 1985/86 101.5 85.0 1990/91 105.0 92.8 /a Based on price indices of non-oil exports (Table 1) and non-oil imports, including net NFS (Table 2). /b Based on price indices of total exports (Table 1) and imports, including net NFS (Table 2). Source: World Bank staff estimates. INDONESIL COUNTRY ECONOMIC MEMORANDUM The Public Sector Capital Account (Rp billion; at current prices) 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 Est. Government Sources 928 1,512 1,581 1,589 1,965 2,117 3,513 5,968 8,375 9,032 Public national savings /a 451 659 1,059 1,239 1,581 2,440 3,986 4,562 4,905 5,950 Net foreign savings /b 429 830 865 701 677 895 1,275 1,543 2,639 4,382 Government borrowing /c 48 3 -343 -351 -293 -1,210 -1,740 -137 831 -1,300 Uses 928 1,51 1,581 1,589 1,965 2,117 3,513 5,968 8,375 9,032 Rupiah transfers to public enterprises /d 136 186 329 270 199 322 909 949 891 814 Foreign exchange transfers to public enterprises /e 334 556 698 298 440 303 586 1,182 2,674 3,642 Direct government investment /f 458 770 754 1,021 1,326 1,450 2,018 3,837 4,810 4,576 Public Enterprise Sources 768 1,321 1,146 749 997 667 2,093 2,750 4,426 4,798 Net foreign savings /a 384 556 498 290 440 345 586 1,102 2,674 3,642 Transfers from central ° government /h 136 186 329 270 199 322 909 949 891 814 Interest savings /i 198 217 196 227 250 275 300 312 365 400 Domestic borrowing La 100 262 123 -46 100 -275 298 287 496 -58 Uses - Public enterprise investment 768 1,321 1,146 749 937 567 2.093 2.750 4.426 4,7U8 /a Total government revenues (including regional governments) less current expenditures. /b Gross disbursements of public debt less amortization payments. Lc Net changes in government savings with the financial system. /d From the budget. /e Includes budget and off-budget transfers to public enterprises. /f Calculated as a residual. /g Foreign exchange transfers from central government. /h Rupiah transfers from central government. /i Estimate based on 1974-77 public enterprise capital account survey, BPS. /i Excludes Bulog, also excludes Pertamina until 1978/79. Source: Budget Data; BI Financial Statistics; DRS. c o I- LN ax CO H- - 191 - INDONESIA COUNTRY ECONOMIC MEMORANDUM Alnex II: Historical Data - List of Tables Population and Employment 1.1 Population 1930, 1961, 1971, 1980: Average Annual Growth Rates, 1930-80 and Population Density, by Region and Province 1.2 Distribution of Population by Age Group and Sex National Income Accounts 2.1 Gross Domestic Product by Industrial Origin at Current Market Prices, 1967-82 2.2 Percentage Distribution of GDP at Current Market Prices, 1971-82 2.3 Gross Domestic Product by Industrial Origin at Constant 1973 Market Prices, 1971-82 2.4 Percentage Distribution of GDP at Constant Market Prices, 1971-82 2.5 Expenditures on GDP at Current Market Prices, 1971-82 2.6 Expenditures on GDP at Constant 1973 Market Prices, 1971-82 2.7 Estimates of the Terms of Trade Effects, 1972-82 2.8 Average Growth Rates and Selected Economic Indicators, 1960-81 International Trade and Balance of Payments 3.1 Balance of Payments, 1973/74 - 1982/83 3.2 Non-oil Exports, 1971/72 - 1982/83 3.3 Export Values by Country of Destination, 1971-83 3.4 Import Values by Country of Origin, 1971-83 3.5 Oil Balance of Payments, 1976/77 - 1982/83 3.6 LNG Balance of Payments, 1977/78 - 1982/83 External Debt 4.1 External Public Debt Outstanding Including Undisbursed as of December 31, 1982 4.2 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt 4.3 External Debt by Country and Type of Creditor as of December 31, 1982 4.4 External Public Debt as of December 31, 1982, by Major Currencies and Countries 4.5 Loan Commitments by Country, 1975-82 4.6 IGGI and Non-IGGI Disbursements and Net Resource Transfers, 1975-82 4.7 Summary External Debt Data, 1975-82 4.8 Selected Debt Indicators, 1974-82 - 192 - Public Finance 5.1 Central Government Budget Summary, 1973/74 - 1984/85 5.2 Central Government Receipts, 1973/74 - 1984/85 5.3 Central Government Expenditures, 1973/74 -1984/85 5.4 Development Expenditures, 1973/74 - 1984/85 5.5 Development Expenditures by Sector, 1975/76 -- 1984/85 5.6 Project Aid by Sector, 1975/76 - 1984/85 Monetary Statistics 6.1 Money Supply, 1971-83 6.2 Changes in Factors Affecting Money Supply, 1972-83 6.3 Consolidated Balance Sheet of Monetary System, 1974-83 6.4 Consolidted Balance Sheet of Monetary Authorities, 1974-83 6.5 Banking System Credits by Economic Sectory 1974-83 6.6 Banking System Credits by Type of Bank, 1974-83 6.7 Small-scale Investment Credits and Permanent Working Capital Credits 1974-83 6.8 Medium-term Investment Credits by Economic Sector, 1973-83 6.9 Time Deposits with State Banks, 1971-83 6.10.1 State Bank Lending Rates and Rediscount Rates and Percentage of Refinancing Facilities Provided by Bank Indonesia, 1976-82 6.10.2 State Bank Lending Rates and Rediscount Rates and Percentage of Refinancing Facilities Provided by Bank Indonesia since June 1, 1983. 6.11 Interest Rates on Deposits at Commercial Banks, 1978-83 Agricultural Statistics 7.1 Principal Agriculture Products by Subsectors, 1968-82 7.2 Agricultural Production of Major Crops by Type of Product, 1970-82 7.3 Rice - Area Harvested, Production and Yield, 1969-82 7.4 BULOG Rice Program - 1978/79-1984/85 7.5 Area Covered Under Rice Intensification Programs, 1969-82 Other Sectors 8.1 Production of Selected Industrial Goods, 1979-82 8.2 Production of Minerals, 1973-82 8.3 Crude Oil Production by Company, 1969-1983 (March) 8.4 Petroleum Products - Supply and Demand, 1970-82 8.5 Domestic Sales of Petroleum Products, 1971-82 Prices 9.1 Cost of Living Index in Jakarta, 1970-79 9.2.1 Jakarta Consumer Price Index 9.2.2 Indonesia Consumer Price Index 9.3.1 Wholesale Price Indices in Indonesia, 1972-81 9.3.2 Wholesale Price Indices in Indonesia, 1975-83 9.4 Domestic Price of Petroleum Products, 1972-84 - 193 - Investment 10.1 Approved Foreign Investment by Sector, 1967-82 10.2 Implementation of Foreign Investment by Sector, 1967-82 10.3 Approved Domestic Investment by Sector, 1968-82 ANNEX 2 - 194 - Table 1.1 INDONESIA COUNTRY ECONOMIC MEMORANDUM Population 1930, 1961, 1971 1980: Average Annual Growth Rates, 1930-80 and Population Density, by Region and Province ('000) Density Census Growth rate (%) (persons/sq km) Region 1930 1961/a 1971/a 1980 1930-61 1961-71 1971-80 1971 1980 Java 41.718 62993 76,103 91,282 1.3 1.9 2.0 576 691 D9I Jakarta 811 2,907 4,576 6,506 4.2 4.6 4.0 7,756 11,027 West Java 10,586 17,615 21,633 27,490 1.7 2.1 2.7 467 593 Central Java 13,706 18,407 21,877 25,365 1.0 1.7 1.7 640 742 DI Jogjakarta 1,559 2,241 2,490 2,745 1.2 1.1 1.1 786 866 East Java 15,056 21,823 25,527 29,175 1.2 1.6 1.5 533 609 Sumatra 8,255 15,743 20,813 27,980 2.1 2.8 3.3 44 59 Lampung 361 1,668 2,777 4,622 5.1 5.2 5.8 83 138 Bengkulu 323 406 519 768 0.7 2.5 4.4 25 37 South Sumatra 1,378 2,773 3,444 4,621 2.3 2.2 3.3 33 44 Riau 493 1,235 1,642 2,163 3.0 2.9 3.1 17 22 Jambi 245 744 1,006 1,440 3.6 3.1 4.1 22 32 West Sumatra 1,910 2,319 2,793 3,402 0.6 1,.9 2.2 56 68 North Sumatra 2,541 4,969 6,623 8,357 2.2 2,.9 2.6 94 119 Aceh 1,003 1,629 2,009 2,608 1.6 2,1 2.9 36 47 Kalimantan 2,169 4,102 5,153 6,721 2.1 2.3 3.0 10 13 West Kalimantan 802 1,581 2,020 2,483 2.2 2.5 2.3 14 17 Central Kalimantan 203 497 700 350 2.9 3.5 3.5 5 7 South Kalimantan 836 1,473 1,699 2,069 1.8 1.4 2.2 45 55 East Kalimantan 329 551 734 1,219 1.7 2.9 5.8 4 7 Sulawesi 4 7,079 8,535 10.377 1.9 1.9 2.2 45 55 Central Sulawesi 390 652 914 1,289 1.7 3.4 3.9 13 18 North Sulawesi 748 1,351 1,718 2,091 1.9 2.4 2.2 90 110 South Sulawesi 2,657 4,517 5,189 6,054 1.7 1.4 1.7 71 83 Southeast Sulawesi 436 559 714 943 0.8 2.5 3.1 26 34 Bali 1,101 1,783 2,210 2,470 1.6 1.8 1.7 381 426 West Nusa Tenggara 1,016 1,808 2,202 2,724 1.9 2.0 2.4 109 135 East Nusa Tenggara 1,343 1,967 2,295 2,722 1.2 1.6 1.9 48 57 Maluku 579 790 1,089 1,407 1.0 3.3 2.9 15 19 Irian Jaya 179 758 923 1,146 4.8 2.0 2.4 2 3 East Timor n.a. n.a. n.a. 553 n.a. n.a. n.a. n.a. n.a. Total Indonesia 60,593 97,019 119,233 147,383 1.5 2.1 2.3 63 78 n.a. - not available. /a Includes adjustment for the exclusion of rural Irian Jaya. Sources: Population Census Reports, 1961 and 1971, Preliminary Results, 1980 Census; and Statistical Pocketbook 1979/80. - 195 - ANNEX 2 Table 1.2 INDONESIA COUNTRY ECONOMIC MEMORANDUM Distribution of Population by Age Group and Sex 1961 1971 1980 Age group Males Females Total Males Females Total Males Females Total 0-4 8,524 8,644 17,168 9,716 9,571 19,287 10,865 10,307 21,172 5-9 7,741 7,696 15,437 9,641 9,357 18,998 10,905 10,379 21,284 10-14 4,345 3,888 8,237 7,374 6,946 14,320 9,916 8,463 17,659 15-19 3,861 3,901 7,762 5,678 5,784 11,462 7,678 7,851 15,529 20-24 3,476 4,369 7,845 3,577 4,433 8,010 5,973 6,976 12,949 25-34 7,386 8,604 15,991 77,47 9,300 16,047 9,529 9,867 19,396 35-44 5,762 5-403 11,164 7,069 7,134 14,203 7,779 8,173 15,952 45-54 3,586 3,509 7,095 4,315 4,223 8,538 5,699 5,938 11,637 55-64 1,912 1,864 3,776 2,122 2,265 4,387 3,292 3,449 6,741 65+ 1,182 1,245 2,427 1,415 1,557 2,971 2,281 2,705 4,986 Unkown 60 57 118 4 4 8 34 44 78 Total 47,838 49,181 97,019 58,658 60,575 119,233 73,231 74,152 147,383 ------------------------ Percentage distribution -------------------- - 0-4 17.8 17.6 17.7 16.6 15.8 16.2 14.8 13.9 14.4 5-9 16.2 15.6 15.9 16.4 15.4 15.9 14.9 14.0 14.4 10-14 9.1 7.9 8.5 12.6 11.5 12.0 12.6 11.4 12.0 15-19 8.1 7.9 8.0 9.7 9.5 9.6 10.5 10.6 10.5 20-24 7.3 8.9 8.1 6.1 7.3 6.7 8.2 9.4 8.8 25-34 15.4 17.5 16.5 13.2 15.4 14.3 13.0 13.3 13.2 35-44 12.0 11.0 11.5 12.1 11.8 11.9 10.6 11.0 10.8 45-54 7.5 7.1 7.3 7.4 7.0 7.2 7.8 8.0 7.9 55-64 4.0 3.8 3.9 3.6 3.7 3.7 4.5 4.7 4.6 65+ 2.5 2.5 2.5 2.4 2.6 2.5 3.1 3.6 3.4 Unknown 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: 1961, 1971 and 1980 censuses. INDONESIA COUNTRY ECONOMIC MEMORANDUM Gross Domestic Product by Industrial Origin at Current Market Prices, 1967-82 (Rp billion) 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982/a Agriculture 457 1,069 1,339 1,575 1,646 1,837 2,710 3,497 4,003 4,812 5,906 6,706 8,996 11,290 13,643 15,668 Farm food crops 301 726 823 962 961 1,071 1,573 2,096 2,555 3,044 3,660 3,991 4,892 6,358 8,102 9,961 Farm nonfood crops 46 133 199 214 196 226 323 386 358 481 762 801 1,201 1,305 1,327 1,227 Estate crops 19 47 69 83 107 118 152 191 184 213 326 404 590 693 904 1,026 Livestock products 33 53 89 103 124 135 173 223 303 346 305 462 690 991 1,258 1,418 Forestry 6 35 59 102 142 173 355 423 413 513 525 653 1,048 1,142. 1,140 983 H Fishery 54 75 101 112 116 114 134 179 191 215 328 393 575 803 912 1,053 o Mining & quarrying 23 87 129 173 294 491 831 2,374 2,485 2,930 3,600 4,358 6,980 11,673 12,971 11,708 Manufacturing 62 179 251 312 307 448 650 890 1,124 1,453 1,817 2,420 3,311 5,288 5,822 7,681 Electricity, gas & water 3 9 13 15 18 20 30 52 70 98 106 118 149 225 288 380 Construction 14 45 75 100 128 174 262 406 590 813 1,023 1,242 1,790 2,524 3,118 3,507 Commerce, hotels, etc. 149 356 476 619 592 769 1,118 1,775 2,104 2,552 2,959 3,450 4,725 6,391 7,966 8,865 Transport & coununications 19 57 77 96 162 182 257 442 521 663 843 1,032 1,422 1,965 2,352 2,795 Banking, etc. 4 12 22 33 45 53 83 113 151 207 236 396 655 752 1,404 1,604 Ownership of dwelling 17 41 53 66 85 103 143 194 258 319 542 671 914 1,200 1,439 1,703 Public administration & defense 41 116 136 183 214 290 405 585 864 1,074 1,394 1,685 2,200 3,142 3,905 4,429 Other services 59 125 147 169 181 197 264 380 473 547 607 668 835 996 1,119 1,293 Gross Domestic Product 848 2.097 2,718 3,340 3,672 4,564 6,753 10,708 12,64 19,033 22,746 32,027 45,446 54,027 59,633 /a Preliminary estimates Note: Totals do not add due to rounding. - Source: WPS. INDONESIA COUNTRY ECONOMIC MEMORANDUM Percentage Distribution of GDP at Current Market Prices, 1971-82 (%) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Economic Sectors Agriculture, forestry, fishery 44.8 40.3 40.1 32.7 31.7 31.1 31.0 29.5 28.1 24.9 25.3 26.3 Mining 8.0 10.8 12.3 22.2 19.7 18.9 18.9 19.2 21.8 25.7 24.0 19.6 Manufacturing 8.4 9.8 9.6 8.3 8.9 9.4 9.6 10.6 10.3 11.6 10.8 12.9 Electricity, gas & water 0.5 0.4 0.5 0.5 0.6 0.6 0.6 0.5 0.5 0.5 0.5 0.6 Construction 3.5 3.8 3.9 3.8 4.7 5.3 5.4 5.5 5.6 5.6 5.8 5.9 Transport & communications 4.4 4.0 3.8 4.1 4.1 4.3 4.3 4.5 4.4 4.3 4.4 4.7 Other services 30.4 30.9 29.8 28.4 30.3 30.4 30.1 30.2 29.3 27.4 29.2 30.0 Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Expenditure Categories Private consumption 77.6 72.5 71.1 68.6 69.1 68.4 65.6 66.8 60.9 60.5 64.8 70.9 Government consumption 9.3 9.1 10.6 7.8 9.9 10.3 10.9 11.7 11.7 10.3 10.7 10.5 Gross domestic investment 15.8 18.8 17.9 16.8 20.3 20.7 20.1 20.5 20.9 20.9 22.4 22.6 Exports, net -2.7 -0.4 0.4 6.8 0.7 0.6 3.4 1.0 6.5 8.3 2.1 -4.0 Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Based on BPS data (Tables 2.1 and 2.5). & z INDONESIA COUNTRY ECONOMIC MEMORANDUM Gross Domestic Product by Industrial Origin at Constant 1973 Market Prices, 1971-82 (Rp billion) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982/a Agriculture 2,441 7 2,9,710 2,811 2,944 2,981 3,135 3,256 3,425 3,594 3,670 Farm food crops 1,436 1,415 1,573 1,681 1,696 1,756 1,734 1,836 1,909 2,073 2,261 2,294 Farm nonfood crops 302 329 323 307 312 325 392 388 402 417 430 459 Estate crops 154 160 152 174 183 188 201 210 231 233 244 285 Livestock products 160 169 173 186 202 216 177 184 202 212 220 230 t Forestry 258 276 355 325 274 310 318 352 338 308 246 196 ~ Fishery 131 130 134 138 144 150 159 166 174 182 194 204 c Mining & quarrying 551 674 831 859 828 952 1,070 1,049 1,047 1,035 1,069 940 Manufacturing 490 564 650 755 848 930 1,058 1,236 1,395 1,750 1,878 1,901 Electricity, gas & water 25 26 30 37 41 46 49 57 69 78 90. 106 Construction 171 222 262 320 365 385 464 529 562 639 720 758 Commerce, hotels, etc. 924 1,028 1,118 1,224 1,294 1,351 1,438 1,530 1,681 1,852 2,043 2,159 Transport & communications 210 229 257 288 303 343 439 514 560 609 677 717 Banking, etc. 64 75 83 88 102 117 151 165 180 208 231 258 Ownership of dwelling 93 121 143 174 198 209 252 288 306 336 359 377 Public administration & defense 326 393 405 443 564 596 689 768 805 972 1,076 1,115 Other services 250 256 264 270 277 284 280 297 304 311 319 326 Gross Domestic Product 5,545 6,73 7,269 8,156 8,882 9,567 10,165 11,169 12,055 12,325 /a Preliminary estimates. Note: Totals do not add due to rounding. Source: BPS. INDONESIA COUNTRY ECONOMIC MEMORANDUM Percentage Distribution of GDP at Constant Market Prices, 1971-82 (x) M~~~~~~~~~~~~~~ 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Economic Sectors Agriculture, forestry, fishery 44.0 40.8 40.1 38.7 36.8 36.1 33.6 32.8 32.0 30.7 29.8 29.8 Mining 9.9 11.1 12.3 11.8 10.9 11.7 12.1 11.0 10.3 9.3 8.9 7.6 Manufacturing 8.8 9.3 9.6 10.4 11.1 11.4 11.9 12.9 13.7 15.3 15.6 15.4 Electricity, gas & water 0.4 0.4 0.5 0.5 0.5 0.6 0.6 0.6 0.7 0.7 0.7 0.9 t Construction 3.0 3.7 3.9 4.4 4.8 4.7 5.2 5.5 5.5 5.7 6.0 6.2 Transport & communications 3.8 3.8 3.8 4.0 4.0 4.2 4.9 5.4 5.5 5.4 5.6 5.8 Other services 30.1 30.9 29.8 30.2 31.9 31.3 31.7 31.8 32.3 32.9 33.4 34.3 Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Expenditure Categories Private consumption 73.7 71.3 71.1 75.7 74.7 75.5 72.0 71.9 77.4 80.0 84.6 88.0 Government consumption 9.3 9.2 10.6 8.8 11.0 11.0 11.8 12.8 13.2 13.3 13.6 13.2 Gross domestic investment 15.7 17.0 17.9 19.8 21.6 21.4 22..9 24.4 24.0 25.7 28.0 29.5 Exports, net 1.3 2.5 0.4 -4.3 -7.3 -7.9 -6.7 -9.1 -14.6 -19.0 -26.2 -30.7 Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Based on BPS data (Tables 2.3 and 2.6). m1 INDONESIA COUNTRY ECONOMIC MEMORANDUM Expenditures on GDP at Current Market Prices, 1971-82 (Rp billion) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982/b Private consump- tion /a 2,848 3,309 4,804 7,348 8,732 10,572 12,481 15,185 19,514 27,477 34,996 42,255 Gov't consumption 341 414 716 841 1,254 1,591 2,077 2,659 3,733 4,688 5,788 6,247 Gross domestic investment 580 857 1,208 1,797 2,572 3,205 3,826 4,671 6,704 9,485 12,117 13,467 Export of goods & non- factor services 527 762 ,356 3,045 2,897 3,621 4,513 4,947 9,628 13,844 14,928 13,345 o Less import of goods & nonfactor services 624 778 1,331 2,318 2,812 3,522 3,865 4,742 7,555 10,048 13,802 15,681 Gross Domestic Product 3,672 4,564 6,753 10,708 12,643 15,467 19,033 22,746 32,025 45,446 54,027 59,633 Net factor income abroad -68 -144 -245 -499 -557 -483 -678 -867 -1,484 -2,029 -1,925 -1,958 GNP 3,604 4,420 6,508 10,209 12,086 14,984 18,355 21,879 30,541 43,417 51,102 57,675 GDS 483 841 1,233 2,519 2,657 3,304 4,475 4,902 8,778 13,281 12,679 11,131 GNS 415 697 988 2,020 2,100 2,821 3,797 .4,035 7;294 11j252 11,318 9,173 GDI/GDP (%) 15.8 18.8 17.9 16.8 20.3 20.7 20.1 20.5 20.9 20.9 22.4 22.6 GDS/GDP (%) 13.2 18.4 18.3 23.5 21.0 21.4 23.5 21.6 27.4 29.2 23.5 18.7 GNS/GNP (X) 11.5 15.8 15.2 19.8 17.4 18.8 20.7 18.4 23.9 25.9 21.0 15.4 /a Residual. /b Preliminary estimates. Mote: Totals do not add due to rounding. tource: BPS. INDONESIA COUNTRY ECONOMIC MEMORANDUM Expenditures on GDP at Constant 1973 Market Prices, 1971-82 (Rp billion) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982/b Private consumption /a 4,088 4,324 4,804 5,502 5,699 6,154 6,400 6,880 7,866 8,927 10,193 10,849 Government consumption 518 561 716 641 836 897 1,044 1,288 1,345 1,490 1,641 1,624 Gross domestic investment 867 1,032 1,208 1,440 1,650 1,749 2,028 2,333 2,436 2,868 3,375 3,637 Export of goods & nonfactor services 943 1,143 1,356 1,445 1,410 1,650 1,806- 1,824 1,822 1,719 1,678 1,444 o Less import of goods & nonfactor services 871 993 1,331 1,759 1,964 2,293 2,395 2,698 3,304 3,862 4,832 5,229 Gross Domestic Product 5,545 6,067 6753 7,631 8,156 8,871 9,567 10,165 11,169 12,055 12,325 Net factor income abroad -95 -184 -245 -378 -389 -314 -420 -493 -649 -780 -674 -652 Terms of trade effect -211 -312 0 862 616 748 997 688 2,382 3,606 3,542 3,004 GDY 5,334 5,443 6,753 8,131 8,247 8,904 9,901 10,255 12,547 14,775 15,597 15,329 GNP 5,450 5,883 6,508 6,891 7,242 7,842 8,451 9,074 9,516 10,389 11,381 11,673 GNY 5,239 5,259 6,508 7,754 7,858 8,590 9,481 9,762 11,898 13,995 14,923 14,677 GDS 728 870 1,233 1,989 1,737 1,853 2,424 2,147 3,336 4,358 3,763 2,856 GNS 633 686 988 1,611 1,348 1,539 2,004 1,654 2,687 3,578 3,089 2,204 GDI/GDP (%) 15.6 17.0 17.9 19.8 21.6 21.4 22.9 24.4 24.0 25.7 28.00 29.51 GDS/GDY (%) 13.6 16.0 18.3 24.5 20.1 20.8 24.5 20.9 26.6 29.5 24.1 18.6 GNS/GNY (%) 12.1 13.1 15.2 20.8 17.2 17.9 21.1 16.9 22.6 25.6 20.7 15.0 /a Residual. /b Preliminary estimates. Note: Totals do not add due to rounding. Source: BPS. INDONESIA COUNTRY ECONOMIC MEMORANDUM Estimate of the Terms of Trade Effects, 1972-82 (Rp billion) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982/a Exports in current prices 762 1,356 3,045 2,897 3,621 4,513 4,974 9,628 13,849 14,928 13,345 Exports in 1973 prices 1,143 1,356 1,445 1,410 1,650 1,806 1,824 1,822 1,719 1,678 1,444 Export price index 67 100 211 205 219 250 273 528 806 890 924 Imports in current prices 778 1,331 2,318 2,812 3,522 3,865 4,742 7,555 10,080 13,802 15,681 Imports in 1973 prices 993 1,331 1,759 1,964 2,293 2,395 2,698 3,304 3,803 4,832 5,229 Import price index 78 100 132 143 151 161 176 -229 265 286 300 Exports (import capacity) 977 1,356 2,307 2,026 2,398 2,803 2,512 4,204 5,226 5,220 4,448 Terms of trade effect -166 - 862 616 748 997 688 2,382 3,507 3,542 3,004 Terms of trade index 86 100 160 143 145 155 138 231 310 311 308 Net factor income from abroad in current prices -144 -245 -499 -557 -483 -678 -867 -1,484 -2,011 -1,925 -1,958 Net factor income from abroad in 1973 prices -185 -245 -378 -389 -314 -420 -493 -649 -759 -674 - -652 /a Preliminary estimate. X Note: Totals do not add due to rounding. Source: Based on BPS data (Tables 2.5 and 2.6). - 203 - ANNEX 2 Table 2.8 INDONESIA COUNTRY ECONOMIC MEMORANDUM Average Growth Rates and Selected Economic Indicators, 1966-81 1966-71 1971-76 1976-81 (% p.a.) (% p.a.) (% p.a.) Agriculture 5.0 3.9 4.1 Industry 14.1 12.9 10.2 Mining - 11.6 2.3 Manufacturing - 13.7 15.1 Electricity, gas, water - 12.9 14.4 Construction - 17.6 13.3 Services 10.5 9.2 10.2 GDP 8.6 8.0 8.1 Private consumption 8.0 8.5 10.6 Government consumption 6.5 11.6 12.8 Total consumption 7.5 8.9 10.9 GDI 18.6 15.7 14.1 Exports 12.2 10.5 0.3 Imports 17.9 22.7 16.1 GDY - 10.8 12.0 Factor payments - 27.0 16.5 GNP 8.7 7.4 7.7 GNY - 10.4 11.7 GDS 20.5 15.2 GNS - 19.4 15.0 Economic indicators Constant prices Current prices 1966-71 1971-76 1976-81 /a 1976-81 /a ICOR /b 1.4 2.4 2.9 - GDI/GDP - 19.5 25.0 21.2 Average domestic savings rate 6.7 19.9 25.1 25.0 Marginal domestic savings rate - 43.1 49.0 24.3 Average national savings rate - 16.8 21.4 21.7 Marginal national savings rate - 27.0 24.6 22.0 Imports/GDP - 22.8 32.9 23.1 Exports/GDP - 19.5 17.1 27.6 Import elasticity 2.1 2.8 2.0 1.1 /a Average values are based on the five years 1977 to 1981, and marginal values on changes between 1976 and 1981; similarly earlier periods. /b GDI 1976-80: GDP 1976-81. Source: Based on BPS data, Tables 2.1-2.7. ANNEX 2 - 204 - Table 3.1 INDONESIA COUNTRY ECONOMIC MEMORANDUM Balance of Payments, 1973/74 - 1982/83 (US$ million) 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/8 1980/81 1981/82 1982/83 1. Net oil Ia 641 2,638 3,138 3,710 4,352 3,785 6,308 9,345 8,379 5,788 2. Net LNG /a - - - - 93 225 667 1,256 1,382 1,378 3. Nonoil (net) -1,397 -2,776 -3,992 -4,512 -5,135 -5,165 -4,777 -8,470 -12,551 -14,239 Exports, f.o.b. 1,905 2,033 1,873 2,863 3,507 3,979 6,171 5,587 4,170 3,894 Imports, c.i.f. -2,938 -4,341 -5,090 -6,167 -7,241 -7,543 -9,028 -11,837 -14,561 -15,824 Service (nonfreight) -364 -468 -755 -1,208 -1,401 -1,601 -1,920 -2,220 -2,160 2,309 4. Current account (1+2+3) -756 -138 -854 -802 -690 -1,155 2,198 2,131 -2,790 -7,073 5. SDRs - - - - - 64 65 62 - - 6. Official transfer & capital 643 660 1,995 1,823 2,106 2,101 2,690 2,684 3,521 5,011 IGGI 556 513 945 1,596 1,694 1,625 2,237 2,406 2,415 2,905 Program aid 281 180 74 147 157 94 239 118 50 21 Project aid 275 333 871 1,449 1,537 1,531 1,998 2,288 2,365 2,884 ODA (275) (333) (482) (513) (661) (814) (1,106) (1,299) (996) (1,356) Non-ODA (-) (-) (389) (936) (876) (659) (892) (989) (1,369) (1,528) Non-IGGI 87 147 1 227 412 534 453 278 1,106 2,106 Cash loan - - 1,049 - - - - - - - 7. Debt repayment (principal) -81 -89 -77 -166 -761 -632 -692 -615 -809 -926 8. Miscellaneous capital 549 -131 -1,075 38 176 392 -1,315 -361 1,140 1,795 Direct investment 331 538 454 287 285 271 217 140 142 311 Oil sector 18 13 14 -32 -50 75 -1,240 -685 791 1,322 Others 200 -682 -1,543 -217 -59 196 -292 184 207 162 9. Total (4 through 8) 355 302 -11 893 831 770 2,946 3,901 1,062 -1,193 10. Errors & omissions 5 -311 -353 108 -180 -62 -1,256 -1,165 -2,050 -2,087 11. Monetary movements -360 9 364 -1,001 -651 -708 -1,690 -2,736 988 3,280 /a Gross exports of products less imports of goods and services of the oil and LNG sectors respectively. Source: Bank Indonesia. -205 - ANNEX 2 iT a-eT. 2 INDONESIA COUNTRY ECONOMIC MEMORANDUM Nonoil Exports, 1971/72 - 1982/83 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 /a Timber Value 170 275 720 615 527 885 943 1,130 2,166 1,672 952 883 Volume 8,840 12,701 15,704 12,434 11,335 15,770 15,717 16,141 16,259 11,642 5,960 4,960 Price 19 22 46 49 46 56 60 70 133 144 160 178 Rubber Value 215 211 483 425 381 577 608 774 1,101 1,078 770 614 Volume 809 826 902 843 846 892 873 928 1,015 954 881 877 Price 266 255 535 505 450 647 697 834 1,084 1,130 874 701 Palm Oil V-alu-e 45 42 89 184 142 147 202 221 257 178 79 103 Volume 212 245 279 303 417 415 438 415 440 376 182 315 Price 212 171 319 607 341 354 461 533 584 473 433 327 Coffee Value 54 83 79 92 112 330 626 508 715 588 343 368 Volume 72 111 96 105 142 143 179 232 238 232 218 238 Price 750 748 823 876 789 2,308 3,496 2,190 3,004 2,534 1,573 1,521 Tea Value 31 31 31 50 50 64 120 98 91 97 94 116 Volume 46 46 46 51 61 64 60 65 69 77 88 68 Price 674 674 674 980 820 996 2,007 1,508 1,319 1,260 1,075 1,714 Tobacco Value 20 32 46 36 40 41 59 58 60 69 49 37 Volume 19 27 35 26 23 21 27 27 24 31 26 19 Price 1,053 1,185 1,314 1,385 1,756 1,954 2,194 2,130 2,500 2,226 1,856 1,947 Pp er VWalue 21 21 31 22 25 55 62 66 46 51 49 40 Volume 24 24 25 14 17 33 31 38 24 32 38 34 Price 875 875 1,240 1,571 1,454 1,668 2,012 1,729 1,917 1,594 1,291 1,200 Palm Kernel V-alu-e 5 4 6 8 4 4 5 2 12 7 4 1 Volume 59 51 37 30 41 30 25 6 33 30 21 5 Price 85 78 162 267 98 140 218 333 364 233 195 189 Co pra Va!Wlue 8 6 3 - - - - - 13 - - - Volume 67 61 21 - - - - - 27 - - - Price 119 98 143 - - - - - 481 - - - Capra Cake Value 12 14 19 22 29 36 33 34 52 46 32 38 Volume 236 303 224 236 363 375 301 323 354 390 300 367 Price 51 46 85 93 80 96 111 105 146 118 108 104 Ta iouca 14 12 7 30 17 10 13 28 59 36 20 9 Volume 434 304 117 455 234 133 184 435 545 334 266 107 Price 32 39 60 66 73 75 68 64 108 108 76 86 Other Food Stuff Value 28 26 49 47 37 52 48 65 79 99 71 50 Animal Products Value 23 42 90 92 105 146 179 214 255 224 213 243 Tin Value 64 70 98 166 158 181 253 324 388 454 437 349 Volume 20 21 22 24 22 27 25 26 27 30 31 27 Price 3,200 3,333 4,455 6,917 7,541 6,707 10,110 12,454 14,370 15,133 14,037 12,836 Coper Value - 13 56 102 74 95 74 64 95 115 120 115 Volume - 28 126 222 189 230 188 168 187 117 214 209 Price - 464 444 459 392 413 395 382 508 650 561 550 Other Minerals Value- a18 19 21 28 25 44 36 49 126 205 187 212 Miscellaneous Value 56 76 77 114 144 196 245 361 656 668 750 716 Total Value 784 977 1,905 2,033 1.873 2,863 3,506 3,996 6,171 5,587 4,170 3,894 /a Preliminary estimnate. Value: In US$ million Volume: In thousands of tons Price: US$/ton Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC MEMORANDUM Export Values by Country of Destination, 1971-83 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983/a Japan 44.6 50.7 53.2 53.5 44.1 41.7 40.2 39.2 46.1 49.3 47.6 50.2 44.9 ASEAN 17.7 9.7 11.7 8.6 10.3 8.9 10.6 12.7 14.3 12.6 13.6 15.7 16.8 Malaysia 2.5 1.7 1.0 1.0 0.9 0.3 0.2 0.2 0.4 0.3 0.3 0.3 0.3 Philippines 2.1 0.5 - - 0.5 1.1 1.2 1.7 1.1 0.8 1.6 1.3 1.2 Singapore 13.0 7.5 10.6 7.5 8.9 7.5 9.2 10.7 12.6 11.3 11.5 14.0 15.2 Thailand - - - 0.1 - - - 0.1 0.2 0.2 0.1 0.1 0.2 Other Asia 3.6 4.7 5.4 3.8 4.3 4.3 5.8 5.8 5.9 4.3 3.7 5.4 4.4 D USA 15.6 14.9 14.5 21.3 26.3 28.7 27.8 25.4 20.3 19.6 19.3 15.9 20.4 Other America 0.5 4.2 2.1 6.0 8.3 7.6 5.3 6.9 3.0 4.5 7.9 4.2 5.1 EEC 13.6 11.9 8.8 4.9 5.6 7.2 8.5 7.5 7.6 6.3 4.2 3.9 4.5 France 0.6 0.6 0.5 0.3 0.2 0.4 0.6 0.5 0.5 0.5 0.2 0.2 0.3 West Germany 5.0 3.7 3.7 2.2 1.9 2.4 2.2 1.9 2.2 1.8 1.0 1.1 1.1 Netherlands 5.8 4.4 3.1 1.9 2.5 2.7 3.4 3.0 2.6 1.9 1.4 1.2 1.4 United Kingdom 1.0 1.3 1.0 0.3 0.4 0.5 0.6 0.5 0.6 0.6 0.5 0.6 0.9 Other EEC 1.2 1.9 0.5 0.1 0.6 1.2 1.7 1.6 1.7 1.5 1.1 0.8 0.8 Other Europe 2.3 2.7 2.4 1.4 0.7 1.0 1.0 1.2 1.1 1.0 1.1 0.6 0.9 Australia 2.0 0.8 1.7 0.3 0.3 0.4 0.5 0.9 1.2 1.5 1.8 3.0 1.2 Other Oceania - 0.1 - - - - 0.1 0.3 0.5 0.8 1.2 1.4 Africa 0.1 0.3 0.2 0.2 0.1 0.2 0.3 0.3 0.2 0.3 0.2 0.3 0.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 /a January to August. Source: Indikator Ekonomi (BPS). w INDONESIA COUNTRY ECONOMIC MEMORANDUM Import Values by Country of Origin, 1971-83 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983/a Japan 32.8 34.0 29.3 29.4 30.9 26.2 27.1 30.1 29.2 31.5 30.1 25.4 22.2 ASEAN 7.7 9.3 8.7 9.3 8.6 14.0 14.3 9.7 11.7 12.5 12.8 19.6 25.2 Malaysia 0.4 0.5 0.5 0.3 0.4 0.4 0.3 0.3 0.5 0.3 0.4 0.3 0.4 Philippines 0.2 0.3 0.5 0.3 0.3 0.3 0.3 1.1 0.7 0.8 1.9 1.4 1.5 Singapore 6.3 6.5 4,9 6.5 7.2 9.7 8.6 6.8 7.5 8.6 9.4 16.7 22.0 Thailand 0.8 2.0 2.8 2.2 0.7 3.6 5.1 1.5 3.0 2.7 1.1 1.2 1.4 Other Asia 11.7 11.8 17.3 16.5 14.3 12.8 16.9 17.0 18.7 19.6 15.5 15.0 15.3 USA 15.8 15.6 18.8 15.9 14.1 17.4 12.4 12.4 14.3 13.0 13.5 14.3 14.6 Other America 0.5 0.7 0.9 1.4 1.8 1.2 2.3 2.4 1.8 1.9 2.8 1.8 2.0 EEC 20.3 17.8 16.5 17.7 18.6 21.2 20.8 19.0 14.9 13.3 16.6 15.8 13.2 France 1.5 1.3 1.7 1.9 1.9 3.5 3.0 2.5 2.0 2.2 2.6 3.4 3.6 West Germany 9.5 7.5 7.2 8.2 7.6 8.6 7.8 8.9 6.4 6.3 6.8 7.1 4.3 Netherlands 4.6 4.3 3.3 2.7 2.8 3.0 4.2 2.2 1.7 1.1 1.5 1.1 1.6 United Kingdom 4.2 4.1 3.8 3.8 3.5 3.1 3.8 3.1 2.7 2.4 4.1 2.6 1.9 Other EEC 0.5 0.6 0.5 1.1 2.8 3.0 2.0 2.3 2.1 1.3 1.6 1.6 1.8 Other Europe 5.3 3.7 3.2 5.4 5.8 2.4 2.2 4.5 3.9 2.7 3.4 4.2 4.2 Australia 2.9 3.3 3.5 3.4 3.3 3.4 3.0 3.3 3.1 3.5 2.7 2.2 2.3 Other Oceania 0.1 0.3 0.2 0.4 0.3 0.4 0.5 0.6 0.6 0.7 0.7 0.6 0.4 Africa 2.9 3.5 1.6 0.6 2.3 1.0 0.5 1.0 1.8 1.2 1.9 1.2 0.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 /a January to August. Source: Indikator Ekonomi (BPS). X 208 - AN~~~~~~~~~MNEX 2 Table 3.5 INDONESIA COUNTRY ECONOMIC MEMORANDUM Oil Balance of Payments, 1976/77 - 1982183 (US$. million) 1976/77 1977/78 1978/79 1979/80 1980/8]. 1981/82 1982/83 1. Exports, FOB 6,349.7 7,191.7 6,857.9 10,994.5 15,186.6 16,481.5 12,283.1 C.O.W. 2,880.5 2,776.2 2,628.2 3,330.2 4,843.9 5,329.3 3,691.2 Prod. sharing 1,561.8 1,750.8 1,755.2 2,210.7 3,049.5 3,674.3 3,775.5 In kind (COW + PS) 1,221.7 1,703.3 1,594.5 2,670.5 3,707.4 3,333.2 2,507.7 Pertamina 685.7 961.4 880.0 2,783.1 3,585.8 4,054.7 2,308.7 2. Imports -1,948.0 -1,640.0 -1,829.4 -2,844.8 -3,913.2 -5,278.0 -4,645.2 C.O.W. -111.0 -138.9 -111.9 -146.6 -244.2 -222.7 -576.5 Prod. sharing -1,024.6 -720.3 -827.6 -683.0 -1,308.0 -1,486.0 -1,545.0 Pertamina -812.4 -780.8 -889.9 -2,015.2 -2,631.0 -3,569.3 -2,523.7 3. Services -692.1 -1,200.0 -1,243.1 -1,841.9 -1,929.0 -2,824.8 -1,849.7 C.O.W. -438.6 -497.5 -472.2 -663.8 -908.0 -890.0 -621.6 Prod. sharing -92.4 -433.1 -433.3 -807.2 -540.5 -980.0 -850.8 Pertamina -161.1 -269.4 -348.6 -400.9 -480.5 -954.8 -377.3 4. Current account (1+2+3) 3,709.6 4,351.7 3,785.4 6,307.8 9,344.4 8,378.7 5,788.2 C.O.W. 2,330.9 2,139.8 2,044.1 2,577.7 3,691.7 4,216.6 2,493.1 Prod. sharing 444.8 597.4 505.3 692.6 1,471.0 1,298.3 1,379.7 In kind (COW + PS) 1,221.7 1,703.3 1,594.5 2,670.5 3,707.4 3,333.2 2,507.7 Pertamina -287.8 -88.8 -358.5 367.0 474.3 -469.4 -592.3 5. Miscellaneous capital 710.3 -198.4 10.5 -904.3 -659.2 300.1 554.0 Reimbursement LNG 69.3 15.4 - 5.2 - - - Debt repayments -458.8 -278.5 -220.8 -169.3 -151.0 -127.0 -76.4 Short-term (-98.1) (-12.0) (-7.2) (-8.8) (-2.7) (-9.6) - MP/LT borrowing (-145.4) (-106.1) (-92.0) (-82.0) (-60.5) (-22.7) - Special projects (-34.8) (-28.2) (-32.1) (-14.4) (-) (-12.9) _ Crude debt repayments (-207.5) (-132.2) (-89.5) (-64.1) (-87.8) (-81.8) (-76.4) Project prefinancing -59.8 -8.7 -13.6 -3.0 - - - Oil export credit -234.0 -73.4 244.9 -737.2 -508.2 427.1 630.4 Payments due (4,177.5) (5,343.1) (5,179.3) (6,906.7) (10,760.9 (11,401.0) (9,243.2) Receivables (-4,411.5) (-5,269.7) (-4,934.4) (-7,643.9) (-11,269.1) (-10,973.9) (-8,612.8) 6. Total (4+5) 2,999.3 4,153.3 3,795.9 5,403.5 8,685.2 8,678.8 6,342.2 7. Errors and omissions -50.3 15.0 39.2 182.6 -65.6 792.1 254.5 8. Monetary raovements -2,949.0 -4.168.3 -3,835.1 -5,586.1 -8,619.6 -9,470.9 -6,596.7 Source: Bank Indonesia. ANNEX 2 - 209 - Table 3.6 INDONESIA COUNTRY ECONOMIC MEMORANDUM LNG Balance of Payments, 1977/78 - 1982/83 (US$ million) 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1. Exports, FOB 161.7 516.2 1,345.3 2,110.5 2,342.6 2,461.1 C&F 188.9 604.3 1,511.0 2,320.4 2,587.8 2,689.3 MMBTU (million) (71.2) (216.3) (373.1) (424.3) (458.0) (477.8) M/T (million) (1.4) (4.1) (7.3) (8.2) (8.9) (9.3) Price ($/MMBTU) (2.63) (2.79) (4.05) (5.47) (5.65) (5.53) Freight 27.2 88.1 165.7 209.9 245.2 228.2 $/MMBTU (0.42) (0.43) (0.45) (0.49) (0.54) (0.48) 2. Imports, CIF -17.0 -52.8 -95.4 -136.3 -129.1 -156.7 3. Services -52.2 -238.8 -582.7 -718.6 -831.3 -926.9 Cost of recovery -21.8 -222.8 -428.2 -221.3 -216.0 -300.2 Contractor's share -30.4 -15.8 -153.7 -495.6 -613.3 -624.7 Other charges - -0.2 -0.8 -1.7 -2.0 -2.0 4. Current account (1+2+3) 92.5 224.6 667.2 1,255.6 1,382.2 1,377.5 5. Miscellaneous capital -79.0 -146.6 -334.8 -149.6 -190.4 -168.7 Debt repayments (JILCO ex-escrow account) -29.7 -96.7 -140.4 -238.0 -167.1 -172.6 (Net transfer to escrow and special account) -49.3 -49.9 -194.4 88.4 -23.3 3.9 6. Total (4+5) 13.5 78.0 332.4 1,106.0 1,191.8 1,208.8 7. Errors and omissions 13.9 1.5 -23.5 -102.6 -52.6 -49.3 8. Monetary movements -27.4 -79.5 -308.9 -1,003.4 -1,139.2 -1,159.5 BUN -11.9 -28.4 -263.1 -979.2 -1,112.8 -1,130.3 Pertamina -0.8 -2.5 -6.7 -24.2 -26.4 -29.2 Pertamina (straight to BI as debt repayments) -14.7 -48.6 -39.1 - - - Source: Bank Indonesia. ANNEX 2 - 210 - Table 4.1 Page 1 of 2 INDONESIA COUNTRY ECONOMIC MEMORANDUM External Public Debt Outstanding Including Undisbursed as of December 31, 1982 With Major Reported Additions Through December 31, 1983 Debt Repayable in Foreign Currency and Goods (US$'000) Major repor- Type of creditor Debt outstanding ted additions, Creditor country Disbursed Undisbursed Total Jan 1-DeC 31, 1983 Suppliers' Credits Australia 2,127 93 2,220 - France 3,510 16,467 19,977 Germany, Fed. Rep. of 58,937 - 58,937 - Japan 1,524,257 1,338,712 2,862,969 661,626 Korea, Rep. of 94,061 754 94,815 - Netherlands 8,257 - 8,257 - Pakistan - 12,682 12,682 - Switzerland 817 - 817 - Tanzania 513 - 513 - United Kingdom 5,669 11,086 16,755 23,797 United States 2,273 Yugoslavia 55,015 16 55,031 - Total Suppliers' Credits 1,753,163 1,379,810 3,132,973 687,696 Financial Institutions Austria 25,231 1,577 26,808 2,752 Belgium 82,395 21,272 103,667 36,232 Canada 350,000 - 350,000 - France 283,999 838,862 1,122,861 12,411 Germany, Fed. Rep. of 421,194 168,716 589,910 42,078 Hong Kong 706,038 30,000 736,038 - Italy 4,079 2 4,081 - Japan 380,435 124,357 504,792 326,703 Netherlands 193,196 97,675 290,871 194,328 Norway 40,308 19,799 60,107 - Singapore 208,236 275,209 483,445 Sweden 48,577 153,985 202,562 - Switzerland 21,361 106,490 127,851 4,474 United Kingdom 195,291 746,369 941,660 90,586 United States 1,918,055 122,311 2,040,366 1,006,411 Total Financial Institutions 4.878,395 2,706,624 7,585,019 1,715,975 Bonds Germany, Fed. Rep. of 42,079 - 42,07 - Japan 127,650 - 127,650 42,550 Kuwait 20,610 - 20,610 - Netherlands 20,004 - 20,004 38,102 Saudi Arabia 75,000 - 75,000 - Switzerland 236,603 - 236,603 - United Kingdom - - - 250,000 Total Bonds 521.946 - 521,946 330,652 Nationalization Netherlands 143,265 - 143,265 - Total Nationalization 143,265 - 143,265 ANNEX 2 Table 4.1 -211 - Page 2 of 2 Major repor- Type of creditor Debt outstanding ted additions, Creditor country Disbursed Undisbursed Total Jan 1-Dec 31, 1983 Multilateral Loans Asian Development Bank 420,938 1,436,501 1,857,439 88,700 EEC 4,383 1,117 5,500 - IBRD 1,734,578 3,013,719 4,748,297 1,209,900 IDA 707,271 225,891 933,162 - Islamic Development Bank - 8,825 8,825 - Total Multilateral Loans 2,867,170 4,686,053 7,553,223 1,298,600 Bilateral Loans Australia 6,240 3,557 9,797 - Austria 76,632 13,202 89,834 - Belgium 51,954 16,518 68,472 - Bulgaria 1,658 - 1,658 - Canada 185,304 285,371 470,675 16,251 China 55,968 - 55,968 - Czechoslovakia 55,288 - 55,288 - Denmark 64,343 21,457 85,800 - Egypt, Arab Rep. of 2,707 - 2,707 - France 226,751 162,235 388,986 - German Dem. Rep. 45,469 - 45,469 - Germany, Fed. Rep. of 818,454 668,739 1,487,193 176,781 Hungary 13,791 - 13,791 - India 5,259 69,418 74,677 4,567 Iran 94,713 24 94,737 - Italy 38,758 - 38,758 - Japan 2,781,286 1,155,927 3,937,213 - Kuwait 7,021 76,456 83,477 - Netherlands 382,163 178,137 560,300 4,662 New Zealand 2,339 352 2,691 - Pakistan 6,579 - 6,579 - Poland 77,658 - 77,658 - Romania 11,135 - 11,135 - Saudi Arabia 52,890 54,892 107,872 50,072 Spain 209,147 36,553 245,700 - United Arab Emirate 7,761 7,249 15,010 - United Kingdom 8,755 25,186 33,941 51,663 United States 2,109,549 882,507 2,992,056 133,081 USSR 617,330 305 617,635 - Yugoslavia 102,121 4,320 106,441 Multiple lenders 142,588 - 142,588 - Total Bilateral Loans 8,261,611 3,662,495 11,924.106 437,077 Total External Public Debt 18,425,550 12,434,982 30,860,532 4,470,000 Notes: (1) Only debts with an original or extended maturity of over one year are included in this table. (2) Major reported additions to December 31, 1983 converted to US dollars at end-1982 exchange rates. At average 1983 exchange rates, these commit- ments amounted to $4,412 million. Source: IBRD Debtor Reporting System based on data provided by Bank Indonesia. ANNEX 2 - 212 - Table 4.2 INDONESIA COUNTRY ECONOMIC MEMORANDUM Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt /a (US$'000) Debt oustanding at beginning of period Transactions during period Other changes Disbursed Including Commit- Disburse- Service payments Cancel- Adjust- Year only undisbursed ments ments Principal Interest Total lations ment /b Actual 1977 10,001,650 14,534,173 1,720,488 1,956,138 820,999 440,695 1,261,694 14,249 714,419 1978 11,658,326 16,133,832 3,288,390 2,205,368 1,548,319 513,797 2,062,116 40,543 1,113,907 1979 13,107,267 18,947,267 4,196,933 1,865,411 1,328,656 770,911 2,099,567 132,208 -450,013 1980 13,234,366 21,215,677 4,181,794 2,536,401 952,713 819,224 1,771,937 118,261 8,742 1981 14,882,067 24,335,514 5,184,447 2,355,823 1,000,994 972,724 1,973,718 163,286 -1,270,911 1982 15,739,462 27,079,185 5,903,274 4,252,434 1,148,080 1,159,983 2,308,063 9,477 -964,386 1983 18,425,550 30,860,516 Projected 1983 18,425,550 30,860,516 4,470,000 4,971,907 1,544,274 1,228,1216 2,772,400 - 60,702 1984 21,792,433 33,725,540 - 3,944,667 1,908,517 1,449,725 3,358,242 - 32 1985 23,828,606 31,817,055 - 3,007,418 2,206,481 1,597,560 3,804,041 - 14 1986 24,629,553 29,610,588 - 2,163,160 2,150,019 1,640,511 3,790,530 - 8 1987 24,642,707 27,460,577 - 1,456,194 2,356,866 1,628,867 3,985,733 - 21 1988 23,742,043 25,103,732 - 671,196 2,733,359 1,534,0365 4,267,395 - 24 1989 21,679,903 22,370,397 - 341,046 2,707,986 1,361,159 4,069,145 - -5 1990 19,312,964 19,662,406 - 216,368 2,467,019 1,175,775 3,642,794 - 17 1991 17,062,330 17,195,404 - 108,344 2,076,143 1,002,516 3,078,659 - 4 1992 15,094,534 15,119,265 - 22,676 1,956,394 878,230) 2,834,624 - 23 1993 13,160,838 13,162,894 - 1,671 1,724,053 745,647 2,469,700 - -14 1994 11,438,442 11,438,827 - 385 1,307,008 627,744 1,934,752 - 17 1995 10,131,836 10,131,836 - - 1,122,349 549,591] 1,671,940 - 24 1996 9,009,511 9,009,511 - - 1,098,261 481,961 1,580,222 - -10 1997 7,911,240 7,911,240 - - 1,042,189 415,399 1,457,588 - 3 /a Projected based on debt outstanding including undisbursed as of December 31, 1982. Includes only debt committed January 1, 1900 - December 31, 1983. Debt repayable in foreign currency and goods. /b This column shows the amount of arithmetic imbalance in the amount outstanding including undisbursed from one year to the next. The most common causes of imbalances are changes in exchange rates and transfer of debts from one category to another in the table. - 213 - ANNEX 2 Table 4.3 INDONESIA COUNTRY ECONOMIC MEMORANDUM External Debt By Country and Type of Creditor as of December 31, 1982 (US$ million) Bilateral/ multilateral Other /a Total Dis- Incl. Dis- Incl. Dis- Incl. bursed undis- bursed undis- bursed undis- only bursed only bursed only bursed Australia 6 10 2 2 8 12 Austria 77 90 25 27 102 117 Belgium 52 68 82 104 134 172 Canada 185 471 350 350 535 821 France 227 389 287 1,143 514 1,532 Germany, Fed. Rep. of 818 1,487 522 691 1,340 2,178 Italy 39 39 4 4 43 43 Japan 2,781 3,937 2,032 3,495 4,813 7,432 Netherlands 382 560 365 462 747 1,022 New Zealand 2 3 - - 2 3 Switzerland /b - - 259 365 259 365 United Kingdom 9 34 201 958 210 992 United States 2,109 2,992 1,918 2,040 4,027 5,032 Total Bilateral IGGI 6,688 10,080 6,048 9,642 12,736 19,731 Asian Development Bank 420 1,857 - - 420 1,857 IBRD/IDA 2,445 5,686 - - 2,445 5,686 Total Multilateral IGGI 2.867 7,544 - 2,867 7,543 Total IGGI 9,555 17,624 6,048 9,642 15,603 27,266 Non-IGGI 1,573 1,844 1,248 1,741 2,821 3,585 Total 11,128 19,468 7,296 11,383 18,424 30,860 /a Suppliers, financial institutions, bonds, nationalization debt. /b Bilateral debts amounting to about $15 million were cancelled in 1978. Note: Data in this table refer to public sector and medium-term debt with an original maturity of one year or more. Figures rounded to nearest million. Totals may not add due to rounding. Source: IBRD Debtor Reporting System based on data provided by Bank Indonesia. - 214 - ANNEX 2 Table 4.4 INDONESIA COUNTRY ECONOMIC MEMORANDUM External Public Debt as of December 31, 1982, by Major Currencies and Countries Amount ($ billion) Share (%) Disbursed Total Disbursed Total Currency US dollar 7.94 9.96 43 32 Yen 3.86 6.33 21 21 DM 1.52 2.36 8 8 NLG 0.74 1.02 4 3 Ruble 0.62 0.62 3 2 Fr. franc 0.47 1.49 3 5 Other 1.09 2.44 6 8 Multiple 2.18 6.64 12 22 Total 18.42 30.86 100 100 Country Japan 4.81 7.43 26 24 USA 4.03 5.03 22 16 Germany, Fed. Rep. of 1.34 2.18 7 7 Netherlands 0.75 1.02 4 3 France 0.51 1.53 3 5 USSR 0.62 0.62 3 2 Other countries 3.40 5.42 18 18 Multilateral organizations 2.96 7.63 16 25 Total 18.42 30.86 100 100 Source: IBRD Debtor Reporting System based on data provided by Bank Indonesia. INDONESIA COUNTRY ECONOMIC MEMORANDUM Loan Commitments by Country, 1975-82 (U.$ million) Bilateral/m.ultilateral /a Other /b Total 1975 1976 1977 1978 1979 1980 1981 1982 1975 1976 1977 1978 1979 1980 1981 1982 1975 1976 1977 1978 1979 1980 1981 1982 Australia - - - 6 3 2 - 4 - - 6 - - - - - - - 6 6 3 2 - 4 Belgium 9 8 9 10 11 3 9 - 126 - - - 15 31 24 7 135 8 9 10 26 34 33 7 Canada 14 223 5 61 11 - 149 40 - - - 350 - - - - 14 223 5 411 11 - 149 40 France 16 - 76 77 105 123 - 21 331 88 50 132 221 234 579 275 347 88 126 209 326 357 579 296 Germany, Fed. Rep. of 126 13 76 86 240 179 159 381 3 470 - 76 395 177 79 39 129 483 76 162 635 356 238 420 Italy - - - - - - - - - - - - - - - - - - - - - - - - Japan 173 132 419 187 640 505 358 251 213 335 79 212 291 188 1,246 973 386 467 498 399 931 693 1,604 1,224 Netherlands - 89 41 - 55 113 2 95 310 1 - 9 37 6 40 87 310 90 41 9 92 119 42 182 New Zealand 1 1 - - - - - - - - - - - - - - 1 1 - - - - - Switzerland - - - - - - - - - - - 153 45 - 200 - - - - 153 45 - 200' United Kingdom - - - - - _ _ 27 143 50 - 42 47 4 90 826 143 50 - 42 47 4 90 853 United States 143 430 112 389 178 334 43 435 905 249 204 685 425 512 400 316 1,048 679 316 1,074 603 846 443 751 -E Total Bilateral IGGI 482 896 738 816 1,242 1.259 719 1.,253 2.031 1.192 338 1.505 1,585 1.198 2,458 2.723 2,513 2.088 1,076 2,321 2,827 2,457 3.177 3.976 Asian Development bank 78 109 136 199 235 285 338 371 - - - _ 78 109 136 199 235 285 338 371 IBRD/IDA 311 564 406 551 815 734 837 977 - - - _ _ _ _ _ 311 564 406 551 815 734 837 977 Total Multilateral IGGI 389 673 542 750 1.056 1,019 1.175 1.348 - - _ _ - - - - 389 673 542 750 1,050 1.019 1.175 1,348 Total IGGI 871 1,569 1,280 1,566 2.298 2,278 1,894 2.601 2,031 1.192 338 1,505 1,585 1,198 2,458 2,723 2,902 2,761 1,618 3,071 3,877 3,476 4,352 5,324 Non-IGGI 200 128 103 25 38 267 466 33 175 244 - 193 265 440 354 547 375 372 103 218 309 707 820 580 Total 1,071 1.697 1,383 1.591 2.336 2.545 2.360 2.634 2,206 1,436 338 1,698 1,850 1,630 2,812 3,270 3,277 3,133 1,720 3,288 4,186 4,182 5,172 5.903 /a Specific loan and/or project agreements signed including official export credits. Amounts may, therefore, differ from donor's pledge or budget allocation, general agreements, frame agreements, exchange of notes and other forms of bilateral commitment preceding specific commitments. Grants are excluded. /b Suppliers, financial institutions, bonds. Note: Data in this table refer to public sector medius- and long-term loans with a maturity of one year or more. Figures rounded to nearest million. Totals may not add due to rounding. Source: IBRD Debtor Reporting System based on data provided by Bank Indonesia. C- x INDONESIA COUNTRY ECONOMIC MEMORINDUM IGGI and Non-IGGI Disbursements and Net Resource TranLsfers, 1975-82 (US$ million) Bilateral/multilateral /a Others /b Total 1975 1976 1977 1978 1979 1980 1981 1982 1975 1976 1977 1978 1979 1980 1981 1982 1975 1976 1977 1978 1979 1980 1981 1982 Gross Disbursements Bilateral IGGI 390 613 476 575 503 671 772 724 1,526 1,315 988 1,167 826 1,134 777 1,996 1,916 1,928 1,464 1,742 1,329 1,805 1,549 2,720 Multilateral IGGI 184 291 268 216 279 431 476 714 - - - - - - - - 184 291 268 216 279 431 476 714 Total IGGI 574 904 744 791 782 1,102 1,248 1,438 1.526 1,315 988 1,167 826 1,134 777 1,996 2,100 2,219 1,732 1,958 1,608 2,236 2,025 3,434 Non-IGGI 4 16 124 144 44 28 129 389 24 97 101 104 214 272 414 429 28 113 225 248 258 300 543 818 Total Gross Dis- bursements 578 920 868 935 826 1,130 1,377 1,827 1,550 1,412 1,089 1.271 1.040 1,406 1.191 2,425 2,128 2,332 1,9S7 2,206 1,865 2,536 2,569 4,252 Net Disbursements /c Bilateral IGGI 357 560 394 447 332 476 536 448 1,300 1,063 307 (138) (136) 576 182 1,365 1,657 1,623 701 309 196 1,052 718 1,813 °' Multilateral IGGI 184 290 266 208 252 393 419 616 - - - - - - - - 184 290 266 208 252 393 419 616 Total IGGI 541 850 660 655 584 869 955 1.064 1,300 1,063 307 (138) (136) 576 182 1.365 1,841 1,913 967 517 448 1,445 1,137 2,429 Non-IGGI (27) (16) 91 76 (25) (59) 50 295 (35) 2 78 65 114 197 381 379 (62) (14) 169 141 89 138 431 674 Total Net Disburse- sents 514 834 751 731 559 810 1,005 1,359 1,265 1,065 385 (73) (22) 773 563 1,744 1,779 1,898 1135 657 537 1,584 1,568 3.104 Net Resource Transfers /d Bilateral IGGI 290 470 280 303 141 294 351 256 1,198 868 38 (407) (578) 118 (374) 752 1,488 1,338 318 (104) (437) 412 (23) 1,008 Multilateral IGGI 180 282 230 144 167 286 293 457 - - - - - - - - 180 282 230 144 167 286 293 457 Total IGGI 470 752 510 447 308 580 644 713 1,198 868 38 (407) (578) 118 (374) 752 1.668 1.620 548 40 (270) 698 270 1,465 Non-IGGI (28) (19) 81 58 (45) (81) 25 231 (36) (30) 66 46 82 148 297 248 (64) (49) 147 104 37 67 322 479 Total Net Resource Transfers 442 733 591 505 263 499 669 944 1,162 838 104 (362) (496) 266 (77) 1,000 1,604 1,571 694 143 (234) 765 592 1,944 /a Excluding grants. 7i; Suppliers, financial institutions, bonds. 7;W Equals gross disbursements minLus amortization. 71d Equals gross disbursements sinus debt service. Note: Data in this table refer to disbursements and resource transfers of public sector medium- and long-term debt with a maturity of one year or more. Figures rounded to nearest million. Totals may not add due to rounding. Source: IBRD Debtor Reporting System based on data provided by Bank Indonesia. ANNEX 2 - 217 Table 4.7 INDONESIA COUNTRY ECONOMIC MEMORANDUM Summary External Debt Data, 1975-82 /a 1975 1976 1977 1978 1979 1980 1981 1982 External Debt Data (US$ million) Disbursed and Outstanding Debt (DOD) /b 7,994 10,002 11,658 13,107 13,234 14,882 15,739 18,426 Bilateral/multilateral 5,008 5,913 7,075 8,390 8,436 9,400 10,070 11,129 Other /c 2,986 4,089 4,583 4,717 4,798 5,482 5,669 7,297 Total Debt Outstanding, Including Undis- bursed (TDO) /b 11,697 14,534 16,133 18,948 21,215 24,337 27,079 30,861 Bilateral/multilateral 7,121 8,828 10,588 12,751 14,177 16,537 17,850 19,478 Other /c 4,576 5,706 5,545 6,197 7,038 7,800 9,229 11,383 Commitments 3,277 3,133 1,720 3,288 4,196 4,182 5,172 5 903 Bilateral/multilateral 1,071 1,697 1,336 1,550 2,314 2,514 2,360 2,633 Other /c 2,206 1,436 385 1,738 1,882 1,668 2,812 3,270 Gross Disbursements 2,127 2,332 1,956 2,205 1,865 2,53 2,569 4,252 Bilateral/multilateral 578 920 867 935 740 1,087 1,378 1,827 Other /c 1,549 1,412 1,089 1,270 1,126 1,450 1,191 2,425 Net Disbursements 1,779 1,899 1,135 657 537 1,584 1,568 3,104 Bilateral/multilateral 514 834 750 730 484 776 1,005 1,360 Other /c 1,265 1,065 385 (73) 52 808 563 1,744 Net Resource Transfers 1,604 1,572 694 143 (234) 766 592 1,944 Bilateral/multilateral 442 733 591 505 194 474 670 944 Other Ic 1,162 838 104 (362) (428) 292 (78) 1,000 Public Debt Service 523 761 1,262 2,062 2,100 1,771 1 977 2 308 Amortization 348 434 821 1,548 1,329 953 1,001 1,148 Interest 175 327 441 514 771 818 976 1,160 Public Debt Service 523 761 1,262 2,062 2,100 1,771 1,977 2,308 Bilateral/multilateral 136 187 277 429 545 613 708 884 Other /c 388 574 985 1,632 1,554 1,158 1,269 1,424 Disbursement Indicators (%) Undisbursed Debt/TDO /b 32 31 28 31 38 39 42 40 Bilateral/multilateral 30 33 33 34 41 43 44 43 Other /c 35 28 17 24 32 30 39 36 Gross Disbursements/Commitments 65 74 114 67 44 64 50 72 Bilateral/multilateral 54 54 65 60 32 48 58 69 Other /c 70 98 283 73 60 87 42 74 Gross Disbursements/Undisbursed Debt and Commitments /d 36 34 31 28 19 21 18 25 Bilateral/multilateral 21 24 20 18 11 14 14 18 Other /c 48 47 54 47 33 37 23 36 Net Disbursements/Gross Disbursements 84 81 58 30 29 62 61 73 Bilateral/multilateral 89 91 87 78 65 71 73 74 Other /c 82 75 35 - 5 56 47 72 Net Resource Transfers/Gross Disbursements 75 67 35 6 - 30 23 46 Bilateral/multilateral 76 80 68 54 26 44 49 52 Other /c 75 59 10 - - 20 (7) 41 /a Data in this table refer to public sector medium- and long-term loans. Loans with a maturity of less than one year and grants are not included. /b End of year. /c Suppliers, financial institutions, bonds, nationalization debt. /d Gross disbursements as a percent of undisbursed debt (TDO-DOD) at the beginning of the year plus commit- ments during the year. Source: IBRD Debtor Reporting System based on data provided by Bank Indonesia. ANNEX 2 - 218 - Table 4.8 INDONESIA COUNTRY ECONOMIC MEMORANDUM Selected Debt Indicators, 1974-82 /a 1974 1975 1976 1977 1978 1979 1980 1981 1982 Ratio DOD/exports /b 0.80 0.87 0.87 0.92 1.03 0.71 0.58 0.65 0.84 Ratio DOD/GDP 0.25 0.26 0.27 0.25 0.25 0.26 0.20 0.18 0.20 Ratio TDO/exports /b 1.01 1.24 1.27 1.34 1.42 1.02 0.93 1.06 1.45 Ratio TDO/GDP 0.35 0.38 0.39 0.35 0.37 0.41 0.33 0.32 0.34 Debt service/exports (x) 4.42 7.18 8.26 11.62 18.15 11.35 7.73 8.60 12.38 Debt service/GDP (%) 1.13 1.71 2.04 2.75 4.00 4.10 2.44 2.32 2.55 Debt service/government revenue (%) 6.89 9.87 10.98 14.93 23.87 19.61 10.83 10.25 12.31 Interest on DOD/average DOD /c (%) 1.38 2.44 3.63 4.07 4.15 5.85 5.82 6.37 6.79 Total debt service/average DOD /c (%) 5.03 7.29 8.46 11.65 16.65 15.94 12.60 12.91 13.51 Amortization/average TDO /c (%) 2.70 3.36 3.31 5.35 8.83 6.62 4.18 3.89 3.96 Total debt service/gross disbursements (Z) 26 25 33 65 94 113 70 77 54 Gross disbursements/imports (incl. NFS) (x) 17 28 23 17 18 11 12 11 19 Net disbursements/imports (incl. NFS) (%) 14 23 19 10 5 3 8 7 14 Net resource transfers/imports (incl. NFS) (%) 13 21 16 6 1 - 4 3 9 In US$ Billion GDP 25.90 30.50 37.30 45.90 51.60/e51.25/f 72.70 85.36 90.53 Exports /d 6.60 7.28 9.21 10.86 11.36 18.50 22.90 22.99 18.64 Imports +7net NFS /d 6.51 7.70 9.30 10.69 11.49 14.04 18.65 22.57 22.34 Government revenues /d 4.24 5.30 6.93 8.45 8.64/&10.71 16.36 19.29 18.75 /a All ratios involving exports and imports treat trade flows relating to oiL on a gross basis. Values appearing in the 1980 report have been recalculated. Exports include. /b These ratios use a one-year lag on debt data. /c Avaerage of debt outstanding at the beginning and end of the year. /d GOI fiscal year. /e Converted at an average 1978 exchange rate of US$1 Rp 441. /f 1979 and 1980 converted at an exchange rate of US$1 Rp 625. 1981 converted at an exchange rate of US$1 - Rp 637. /j Convered at an average 1978/79 exchange rate of US$1 - Rp 494. Note: DOD - Disbursed and outstanding debt TDO - Total debt outstanding, incl. undisbursed Source: Debt data from Table 4.7; GDP from Table 2.1; exports and imports from Tables 3.1, 3.5, 3.6; Government revenues from Table 5.1 INDONESIA COUNTRY ECONOMIC MEMORANDUM Central Government Budget Summary. 1973/74 - 1984/85 (Rp billion) Actual Budget 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1. Domestic revenue 977.1 1,759.2 2,200.8 2,877.0 3,508.2 4,266.1 6,696.8 10,227.0 12,212.6 12,418.3 13,823.6 16,149.4 2. Routine expenditure /a 704.1 1,000.5 1,246.8 1,610.3 2,120.5 2,743.7 4,061.8 5,800.0 6,978.0 6,996.0 7,275.1 10,101.1 3. Government saving (1-2) 273.0 758.7 954.0 1,266.7 1,387.7 1,522.4 2,635.0 4,427.0 5,235.0 5,422.3 6,548.5 6,048.3 4. Development expenditures 473.7 966.4 1,425.2 2,043.5 2,157.6 2,555.6 4,014.2 5,916.1 6,940.0 7,360.0 9,290.3 10,459.3 5. Balance (3-4) -200.7 -207.7 -471.2 -776.8 -769.9 -1,033-2 -1,379.2 -1,489.1 -1,705.0 -1,937.0 -2,741.8 -4,411.0 Financed by: 6. Counterpart funds /b 93.6 37.6 20.5 10.2 35.8 48.2 64.8 64.1 45.0 15.0 5.0 39.5 7. Project aid 114.1 195.9 471.4 773.6 737.6 987.3 1,316.3 1,429.7 1,664.0 1,925.0 2,736.8 4,371.5 8. Change in balances ( increase) -7.0 -25.8 -20.7 -7.0 -3.5 -2.3 -1.9 -4.8 -4.0 -2.3 - - /a Includes debt service payments. X /b Program aid. u Source: Ministry of Finance. INDONESIA COUNTRY ECONOMIC MEMORANDUM Central Government Receipts, 1973/74 - 1984/85 (Rp billion) Actual BudRet 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 Taxes on Income 511.1 1,234.5 1,558.3 2,029.2 2,515.9 2,996.3 5,129.3 8,230.3 10,100.3 10,009.9 11,605.1 12,968.3 Income tax 33.3 43.4 65.3 87.4 103.0 122.2 148.1 164.2 207.2 288.8 398.8 577.6/e Corporate tax 49.3 100.0 131.3 132.1 176.5 226.5 297.1 447.6 559.1 674.5 757.4 1,873.5 Corporate tax on oil 346.9 973.3/a 1,205.2 1,593.4 1,946.5 2,308.7 4,259.6 7,019.6 8,627.8 8,170.4 9,520.2 10,366.6 Withholding tax 56.5 78.4 97.0 147.0 202.3 232.5 291.3 433.5 513.0 641.9 628.1 - IPEDA 19.5 29.0 35.8 42.6 53.3 63.1 71.4 87.2 94.5 105.2 132.4 150.6 Other 5.2 10.4 23.7 26.7 34.3 43.3 61.8 78.2 98.7 129.1 168.2 - Taxes on Domestic Consumption 168.0 161.0 234.4 322.1 376.2 491.4 537.2 732.9 888.0 1,137.4 1,392.1 1,761.1 Sales tax 55.6 86.3 122.4 164.6 183.8 221.1 192.2 265.6 310.7 476.6 575.2 958.2/f Excises 62.4 76.2 98.5 131.7 180.4 252.9 326.4 437.9 544.2 620.1 773.2 727.5 0 Other oil revenues 37.8 -16.0 -1.3 16.6 -/b -/b -/b -/b -/b -/b - -/b Miscellaneous levies 12.2 15.4 14.8 9.2 12.0 17.4 18.6 29.4 33.1 40.7 41.7 75.4 Taxes on International Trade 253.6 300.7 309.5 421.5 482.7 587.0 843.0 948.1 887.9 835.4 916.5 805.0 Import duties 132.4 160.9 175.1 256.0 286.9 295.3 316.7 448.0 536.2 521.9 557.0 681.4 Sales tax on imports 51.5 69.1 73.4 102.0 115.5 125.5 137.2 195.1 223.3 231.0 255.5 - Export tax 69.7 70.7 61.0 63.5 79.3 166.2 389.1 305.0 128.4 82.5 104.0 123.6 Nontax Receipt 44.4 62.1 98.6 104.2 133.4 191.4 187.3 315.7 336.4 435.6 514.0 615.0 Domestic Revenue 977.1 1,759.2 2,200.8 2,877.0 3,508.2 4,266.1 6,696.8 10,227.0 12.212.0 12,418.3 14,432.7 16,149.4 Development Funds 207.7 233.5 491.9 783.8 773.4 1,035.5 1,381.1 1,493.8 1,709.0 1,940.0 3,882.4 4,411.0 Counterpart funds /c 93.6 37.6 20.5 10.2 35.8 48.2 64.8 64.1 45.1 15.1 14.9 39.5 Project aid /d 114.1 195.9 471.4 773.6 737.6 987.3 1,316.3 1,429.7 1,663.9 1,924.9 3,867.5 4,371.5 Total Revenues 1j184.8 1,992.7 2,692.7 3,660.8 4,281.6 5 j30156 8,077.9 11,720.9 13,921.6 14,358.3 18,315.1 20,560.4 /a Excludes underpayment of revenues, estimated at about Rp 340 billion, due to the Governemnt by Pertamina. N Oil subsidies shown as Government expenditures (see Table 5.3). 7T Program aid. T7 Includes commercial bank and suppliers' credits for development programs/projects. Te Includes withholding tax. , s 7 Includes domestic sales tax, tax sales on imports Source: Ministry of Finance. INDONESIA COUNTRY ECONOMIC MEMORANDUM Central Government Expenditures, 1973/74 - 1984/85 (Rp billion) Actual Bud et 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 9Z 4T85 Personnel Expenditures 258.9 408.0 565.0 639.4 880.8 1,001.6 1,419.9 2,023.3 2,277.0 2,418.1 2,757; 0 3189.5 Wages and salaries 166.5 292.8 386.4 425.8 661.1 760.3 1,053.9 1,482.9 1,660.0 1,749.0 1,496.0 2,307.9 Rice allowance 50.7 60.2 116.5 124.4 125.6 132.8 179.9 252.0 253.0 289.9 346.1 415.7 Food allowance 16.2 26.5 33.1 49.7 50.9 51.2 109.9 193.2 241.0 255.0 261.3 286.6 Other 18.2 17.9 17.5 26.2 28.4 33.6 47.1 61.2 80.0 78.5 87.6 99.9 External 7.3 10.6 11.5 13.5 14.8 23.7 29.1 34.0 43.0 45.7 66.0 79.4 Material Expenditures 109.1 167.0 292.3 325.2 356.5 419.5 569.0 670.6 923.0 1,041.2 1,057.1 1,263.9 Domestic 99.5 155.2 280.1 315.8 346.3 398.4 539.6 637.8 891.0 1,007.4 1,007.0 1,207.8 External 9.6 11.8 12.2 9.4 10.0 21.1 29.4 32.8 32.0 33.8 50.1 56.1 M Subsidies to Regions 113.1 206.9 256.6 311.0 469.9 522.3 669.9 976.1 1,209.0 1,315.4 1,546.9 1,784.6 West Irian Jaya 8.2 13.2 13.4 18.6 18.7 22.1 25.0 33.9 42.0 43.0 41.5 48.2 Other regions 104.9 193.7 243.2 292.4 451.2 500.2 644.9 942.2 1,167.4 1,272.4 1,505.4 1,736.4 Debt Service Payments 73.7 69.2 67.9 180.3 227.6 534.5 684.1 784.8 931.0 1?224.5 2,102.6 2,686.1 Internal 11.1 5.2 2.8 11.3 6.9 8.8 36.5 30.8 16.0 19.8 29.8. 30.0 External 62.6 64.0 65.1 169.0 220.7 525.7 647.6 754.0 915.0 1,204.7 2,072.8 2,656.1 Other Expenditures 149.3 149.4 65.0 154.4 185.9 265.8 718.9 1,345.1 1,638.0 997.1 948.1 1,177.0 Food subsidy - 144.0 50.0 39.1 - 43.5 124.9 281.7 224.0 - - - Oil subsidy - - - 34.5 65.1 197.0 534.9 1,020.0 1,316.0 -/f 928.1 -/f Others 149A3 5z4 15=0 80=8 120R-/a 25 3 59I1/h 43.4/c 98.0/d - 20.0 - Routine Expenditures 704.1 1,000.5 1.246.8 1,610.3 25120.5 2,743.7 4,061.8 5,800.0 6,978.0 6,996.3 8,411.8 10,101.1 Development expendi- tures /e 473.7 966.4 1,425.2 2,043.5 2,157.6 2,556.6 4,014.2 5,916.1 6,940.0 7,359.6 9,899.2 10,459.3 Total Expenditures 1,117.8 1,966.9 2,672.0 3,653.8 4,278.1 5,299.3 8,076.0 11,716.1 13,918.0 14,355.9 18.311.0 20,560.4 /a Includes debt service transfer to Pertamina (Rp 86.4 billion). ^ T7 Includes Pertamina subsidy (Rp 48.1 billion). 7T Includes general election (Rp 16.5 billion). 7W Includes general election (Rp 81.0 billion). e For details, see Tables 5.4 and 5.5. 7 Breakdown not yet available. Source: Ministry of Finance. INDONESIA COUNTRY ECONOMIC MEMORANDUM Development Expenditures, 1973/74 - 1984/85 (Rp billion) Actual Budget 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1. Departments 167.3 221.6 384.9 590.9 744.5 851.0 1,480.3 2,533.2 2,725.0 3,260.9 3,219.5 3,510.0 2. General Inpres programs 48.7 101.3 129.0 143.7 167.7 181.6 218.8 326.8 449.0 535.3 538.7 547.7 Subsidies to provinces 20.8 47.4 54.0 61.5 75.4 86.8 100.7 166.7 215.0 253.0 253.0 253.0 Subsidies to kabupatens 19.2 42.5 59.1 62.4 69.1 70.9 87.1 119.4 163.0 193.9 194.1 201.9 Subsidies to villages 5.7 11.4 15.9 19.8 23.2 23.9 31.0 50.7 71.0 88.4 91.6 92.8 3. Sectoral Inpres programs 19.2 25.0 65.1 94.1 137.0 176.0 252.0 377.3 585.0 444.2 771.2 809.7 Primary schools 17.2 19.7 49.9 57.3 85.0 1111.8 155.8 249.9 375.0 267.4 549.3 580.8 Health - 5.3 15.2 20.8 26.3 26.9 30.0 50.4 78.8 80.3 87.3 98.4 9 Markets - - - - 1.2 1.3 12.4 2.5 6.0 4.5 10.6 10.6 Replanting/afforestation - - - 16.0 24.5 36.0 40.8 48.6 70.4 49.6 59.4 39.8 Roads - - - - - - 13.0 25.9 54.8 42.4 64.6 80.1 4. IPEDA 19.5 28.0 34.6 42.2 52.5 63.1 71.4 87.2 94.0 105.2 182.4 150.6 5. Irian Jaya and East Timor 3.3 4.0 5.5 5.0 9.0 10.3 6.6 6.4 6.8 5.7 5.2 8.5 Subtotal of transfers to lower levels of government (2-5) 85.7 158.3 234.2 285.0 366.2 431.0 548.8 807.7 1,134.8 1,090.4 1,447.5 1.516.5 6. Fertilizer subsidy 33.0 227.2 134.5 107.3 31.8 82.6 125.0 283.6 371.0 420.1 324.2 458.7 7. Government capital participa- tion (PMP) 40.8 91.1 108.7 217.9 166.9 128.5 252.8 476.5 481.0 336.6 591.7 359.6 8. Others 10.0 67.7 64.0 79.8 109.8 75.1 291.0 385.5 565.3 326.7 448.7 243.0 Total (1-8) 336.3 765.9 926.3 1,280.9 1,419.8 1,568.3 2,697.9 4,486.4 5,276.2 5,434.7 6,031.6 6,087.8 9. Project aid 114.1 195.9 471.4 773.6 737.6 987.3 1,316.3 1,429.7 1,663.9 1,924.9 3,867.5 4,371.5 Total (1-9) 450.9 961.8 1,397.7 2,054.5 2,156.8 2 555.6 4.014.2 5,916.1 6,940.1 7,359.6 9,899.2 10,459.3 Source: Ministry of Finance. j| 4' INDONESIA COUNTRY ECONOMIC MEMORANDUM Development Expenditures by Sector, 1975/76 - 1984/85 - ~~~~~~~~~~~~~~~~~~~~~~~Rp billion) Actual Total Actual Bud t 1975/76 1976/77 1977/78 1978/79 Repelita II 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 Sector Amount share Amount share Amount share Amount share Amount share Amount share Amount share Amount share Amount share Amount share Amount share Agriculture 6 irrigation 270 19.0 364 17.8 380 17.6 450 17.6 1,763 19.3 509 12.7 929 15.7 954 13.7 931 12.7 913 9.2 1,402 13.4 (Of which fertilizer subsidy) (134) (9.4) (105) (5.1) (64) (3.0) (83) (3.2) (609) (6.7) (125) (3.2) (284) (4.8) (371) (5.3) (461) (6.3) - - (459) (4.4) Industry & mining 120 8.4 201 9.8 139 6.4 205 8.0 734 8.0 403 10.0 415 7.0 530 7.6 914 12.4 2,153 21.7 926 8.9 Electric power 123 8.6 224 11.0 223 10.3 272 10.6 920 10.1 330 8.2 507 8.6 827 11.9 758 10.3 660 6.7 1,025 9.8 Transportation & tourism 326 22.9 408 20.0 355 16.5 413 16.2 1,627 17.8 485 12.0 780 13.2 808 11.6 876 11.9 1,527 15.4 1,392 13.3 Manpower & transmigration 10 0.7 27 1.3 61 2.8 95 3.7 196 2.1 162 4.0 325 5.5 416 6.0 436 5.9 456 4.6 675 6.5 Regional development 165 11.6 190 9.3 251 11.6 275 10.8 1,019 11.1 336 8.4 482 8.1 616 8.9 712 9.7 749 7.6 810 7.7 Education 114 8.0 136 6.7 211 9.8 251 9.8 763 8.3 362 9.0 575 9.7 726 10.5 703 9.6 1,335 13.5 1,502 14.4 Health 38 2.7 45 2.2 71 3.3 79 -3.1 255 2.8 142 3.5 218 3.7 285 4.1 260 3.5 278 2.8 253 2.4 Housing & water supply 14 1.0 27 1.3 90 4.2 56 2.2 192 2.1 117 2.9 191 3.2 167 2.4 151 2.1 221 2.2 433 4.1 General public servi- ces /s 74 5.2 110 5.4 123 5.7 224 8.8 583 6.4 473 11.8 700 11.8 800 11.5 719 9.8 899 9.1 67 0.6 Government capital parti- cipation 132 9.3 234 11.5 190 8.8 162 6.3 823 9.0 485 12.0 389 6.6 389 3.1 281 3.8 234 2.4 162 1.6 Others /b 39 2.7 79 3.9 65 3.0 73 2.9 274 3.0 250 6.3 405 6.8 422 6.0 619 8.4 474 4.8 1,813 17.3 Total Develomenu Expenditures 1.425 100.0 2,044 100.0 2.157 100.0 2,556 100.0 9.148 100.0 4,054 100.0 5,917 100.0 6,940 100.0 7,360 100.0 9,899 100.0 10,459 100.0 Total (excl. ferti- lizer subsidies) 1,291 1.939 2.093 2.473 8.540 3.929 5,633 6,569 6,899 - 10,000 /a Law and order, defense and security, government apparatus. 79 Trade and cooperatives, religion, information and science. From 1979/80 includes natural resource development and environment. /c At time-weighted average exchange rate for FY78/79 of US$1 - Rp 494. Source: Ministry of Finance. INDONESIA COUNTRY ECONOMIC MEMORANDUM Project Aid by Sector, 1975/76 - 1984/85 (Rp billion) Actual Budget 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 % x % Z % % % -% X Sector Amt. share Amt. share Amt. share Amt. share Amt. share Amt. share Amt. share Amt. share Amt. share Amt. share Agriculture & irri- gation 43 9 116 15 145 20 135 14 155 11.8 223 15.6 230 14.7 101 5.3 155 4.0 530 12.1 Industry & mining 76 16 143 18 95 13 199 20 324 24.6 226 15.8 661 42.4 734 38.1 2 769 17.6 t2,235 57.8 Electric power 90 19 171 22 164 22 208 21 240 18.2 264 18.5 308 18.5 506 26.3 J 730 16.7 Transportation & tourism 227 48 283 37 213 29 250 25 192 14.6 308 21.5 298 19.1 332 17.3 887 22.9 761 17.4 t Manpower & transmi- gration 1 1 . 10 1 12 1 23 1.7 39 2.7 38 2.4 15 0.8 45 1.2 151 3.4 Regional development . . 2 . 8 1 8 1 18 1.4 24 1.7 24 1.5 3 0.2 7 1.2 42 1.0 Education 7 1 5 1 29 4 35 4 43 3.3 50 3.5 43 2.8 24 1.3 211 5.5 285 6.5 Health 7 1 6 1 15 2 22 2 34 2.6 36 2.6 41 2.6 24 1.3 37 1.0 122 2.8 Housing & water supply 3 1 3 . 28 4 18 2 28 2.1 33 2.3 22 1.4 21 1.1 51 1.3 199 4.6 General public services = = - - - - 54 5 175 13.3 154 10.7 145 9.3 83 4.3 152 3.9 322 7.4 Government capital participation 7 1 7 1 8 1 33 3 34 2.6 36 2.5 28 1.8 47 2.4 45 1.2 201 4.6 Others 11 2 37 5 23 3 13 1 50 3.8 37 2.6 30 1.9 35 1.8 42 1.1 261 6.0 Total Project Aid /a 471 100 774 100 738 100 987 100 100 100.0 1,430 100.0 1,561 100.0 1,925 100.0 3.867 100.0 4,372 100.0 /a Includes commercial credits for development programs/projects. Note: . - less than 1. Totals may not add due to rounding. Source: Ministry of Finance. - 225 - ANNEX 2 INDONESIA COUNTRY ECONOMIC MEMORANDUM Money Supply, 1971-83 (Rp billion)F End of Currency Demand deposits period Total Change % Position --7. PositioTn 1971 320.8 +70.5 +28.2 199.4 62 121.4 38 1972 474.6 +153.8 +48.0 271.8 57 202.8 43 1973 669.0 +194.4 +41.0 375.0 56 294.0 44 1974 937.5 +268.5 +40.1 494.2 53 443.3 47 1975 1,250.1 +312.6 +33.3 625.3 50 624.8 50 1976 1,603.0 +407.9 +32.6 781.0 49 822.0 51 1977 2,006.4 +403.4 +25.2 979.1 49 1,027.3 51 1978 +481.9 +24.0 Qtr I 2,110.9 +T04.5 +5.2 1,035.8 49 1,075.1 51 Qtr II 2,240.5 +129.7 +6.1 1,110.1 50 1,130.4 50 Qtr III 2,370.7 +130.2 +5.8 1,155.9 49 1,214.8 51 Qtr IV 2,488.3 +117.6 +5.0 1,239.9 50 1,248.4 50 1979 +890.2 +35.8 qtEr I 2,799.9 T+11. +1Z.5 1,368.7 49 1,431.2 51 Qtr II 3,020.7 +220.8 +7.9 1,508.7 50 1,512.0 50 Qtr III 3,180.0 +159.3 +5.3 1,499.7 47 1,680.3 53 Qtr IV 3,378.5 +198.5 +6.2 1,545.4 46 1,833.1 54 1980 +1,632.8 +48.3 Qtr I 3,759.4 +380.8 +11.T 1,736.2 46 2,023.2 54 Qtr II 4,171.4 +412.0 +11.0 1,947.5 47 2,223.9 53 Qtr III 4,695.3 +523.9 +12.6 2,143.4 46 2,551.9 54 Qtr IV 5,011.3 +316.0 +6.7 2,169.5 43 2,841.8 57 1981 +1,462.7 +29.2 Qtr I 5,214.0 +U2027 +4.0 2,229.0 43 2,985.5 57 Qtr II 5,598.5 +384.5 +7.4 2,364.7 42 3,233.9 58 Qtr III 5,990.0 +391.5 +7.0 2,444.0 41 3,546.0 59 Qtr IV 6,474.0 +484.0 +8.1 2,545.0 39 3,929.0 61 1982 +1 118.0 +17.3 7F r I 6,777.0 +J0.0 +4i7 2,544.0 38 4,233.0 62 Qtr II 7,175.0 +398.0 +5.9 2,648.0 37 4,527.0 63 Qtr III 7,593.0 +448.0 +5.8 2,826.0 37 4,767.0 63 Qtr IV 7,592.0 -1.0 - 2,909.0 38 4,683.0 62 1983 +57.0 +0.8 Qtr I 7,379.0 --213.0 27R 3,000.0 41 4,379.0 59 Qtr II 7,508.0 +129.0 +1.7 3,286.0 44 4,222.0 56 Qtr III 7,716.0 +208.0 +2.8 3,307.0 43 4,409.0 57 Qtr IV 7,649.0 -67.0 -0.9 3,324.0 43 4,325.0 57 Source: Bank Indonesia. -226 - ANNEX 2 Table 6.2 INDONESIA COUNTRY ECONOMIC MEMORANDUM Changes in Factors Affecting Money Supply, 1972-83 (Rp billion) Claims on official Net Net claims entities Claims on Time Net End of foreign on central & public Blocked business & & savings other period assets government enterprises account individuals deposits /a items 1972 212.3 -50.8 -3.0 - 183.4 -72.2 -115.9 1973 75.3 -33.4 -57.8 - 407.6 -98.1 -214.8 1974 364.0 -131.9 294.7 - 146.9 -196.3 -208.9 1975 -588.5 162.0 926.4 -415.0 298.4 -213.3 142.6 1976 345.0 -333.4 449.8 -51.4 356.8 -300.3 -113.7 1977 568.5 -275.0 34.8 67.3 284.2 -96.5 -179.9 1978 718.3 -264.8 973.2 -76.9 587.4 -195.6 -1,259.7 Qtr I 8.1 -12.9 -18.0 81.7 156.0 -39.7 -70.7 Qtr II -40.4 -99.4 189.9 6.7 115.4 -76.6 34.1 Qtr III 134.4 -88.7 134.5 -12.2 82.3 -26.9 -93.3 Qtr IV /b 616.2 -63.8 666.8 -153.1 233.7 -52.4 -1,129.8 1979 1,779.2 -832.6 371.5 84.8 555.5 -516.4 -551.8 Qtr I 245.9 -39.5 55.3 4.1 201.1 -34.8 -120.5 Qtr II 340.0 -208.2 87.5 8.8 202.4 -116.3 -93.5 Qtr III 341.3 -290.9 53.9 42.0 275.6 -234.2 -28.4 Qtr IV 852.0 -294.0 174.7 29.9 -123.6 -131.1 -209.4 1980 3,055.4 -1,891.9 487.8 -5.2 1,178.8 -858.6 -333.6 Qtr 1 1,009.3 -424.8 -66.0 - 203.5 -168.8 -172.2 Qtr II 1,126.7 -841.9 198.5 -2.1 243.4 -302.7 -9.9 Qtr III 687.9 -266.8 210.4 -1.0 388.4 -303.1 -191.9 Qtr IV 231.5 -358.4 144.9 -2.1 343.5 -83.9 40.4 1981 269 -572 594 36 1,755 -535 -68 Qtr I 301 -299 -14 - 321 4 -94 Qtr II -187 -418 72 41 579 -71 368 Qtr III 119 -139 307 -1 493 -356 -31 Qtr IV 36 284 229 -4 362 -112 -311 1982 -653 432 672 107 2,625 -688 -1,377 Qtr I 27 172 141 -4 536 -146 -423 Qtr II -724 -153 325 -2 835 -159 277 Qtr III -287 450 296 80 592 -131 -583 Qtr IV 331 -37 -90 33 662 -252 -648 1983 1,312 -1,245 191 118 1,905 -2,498 875 Qtr I -438 559 -377 - 736 -294 73 Qtr II 429 -348 316 -1 47 -597 280 Qtr III 671 -867 -12 -3 620 -655 457 Qtr IV 596 -494 200 122 502 -1,051 60 /a Includes foreign currencies deposits held by residents. lb Includes foreign exchange valuation adjustment. Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC MEMORANDUM Consolidated Balance Sheet of Monetary System, 1974-83 (Rp billion) End of period 1974 1975 1976 1977 1978 /a 1979 1980 1981 1982 1983/b Assets Foreign Assets (net) 660 72 417 985 1,663 (650) 3,483 6,538 6,807 5,125 7,754 Domestic Credit 1 395 2,366 2,789 2 900 4,046 (474) 4,225 3 979 5 791 9 282 10,006 Claims on Public Sector 317 1 U56 883 1 ,441 (433) 1,065 -360 -304 7 102 Central government -ITT -S -338 -61T3 -878 (46) -1,711 -3 7=T -4 17, -3,75T -4,35ZY Official entities and public enterprises 484 1,411 1,861 1,895 2,756 (551) 3,167 3,655 4,247 4,936 5,009 Government-blocked account - -415 -466 -399 -476 (-164) -391 -396 -360 -252 -362 Claims on Private Sector 1 078 1 376 1 732 2 017 2 605 (41) 3 160 4 339 6 095 8 355 9 904 9 Loans 1,032 1,321 1 65 1939 2,494 T3WT 2,993 4,107 5844 8038 9,474 Other claims 46 55 78 78 111 (7) 167 232 251 317 430 Total Assets/Liabilities 2,055 2,438 3,205 3,885 5,749 (1,124) 7,708 10,517 12,598 14,411 17,760 Liabilities Import deposits 283 79 88 146 174 (58) 213 365 298 300 261 Other items (net) 320 381 486 608 1,726 (983) 2,279 2,461 2,595 3,036 3,663 Money and Quasi-Money 1452 1978 2,631 3,131 3,809 (83) 5 216 7,691 9,705 11 075 13 836 Money 1,201,603 _20006 2,488 3579< 4,995 6 474 7 12 .716 rrency R 6 781 979 1,240 T-7 1,546 2,153 2,934 3,307 Demand deposits 443 625 822 1,027 1,248 (-) 1,833 2,842 3,929 4,187 4,409 Quasi-Money 515 728 1,028 1,125 1,320 (83) 1,837 2,696 3,231 3,954 6,120 /a Includes revaluation of foreign exchange on account of November 15, 1978 devaluation. Amount of adjustments is shown in brackets. /b As of September 1983. Source: Bank Indonesia. X x INDONESIA COUNTRY ECONOMIC MEMORANDUM Consolidated Balance Sheet of Monetary Authorities, 1974-83 (Rp billion) End of period 1974 1975 1976 1977 1978 /a 1979 1980 1981 1982 1983/b Assets Foreign assets 619 253 628 1,057 1,652 (561) 2,626 4,216 4,033 3,667 4,605 Claims on Public Sector 349 1,254 1,448 1,537 2,434 (543) 2,723 3,018 3,444 3,735 2,730 Central Government 122 368 239 312 509 (62) 580 604 860 1,109 461 Official entities and public sector enterprises 227 886 1,209 1,225 1,925 (481) 2,143 2,414 2,584 2,626 2,269 Claims on deposit money banks 294 565 640 682 846 () 1,129 1,722 2,548 3,742 4,309 Other assets 46 80 84 33 74 (2) 158 289 536 2,120 1,763 Total Assets/Liabilities 1,230 2,145 2,801 3,301 5,002(1,106) 6,636 9,245 10,561 13,254 13,406 Liabilities Reserve Money 773 1,038 1,333 1,670 1,847 (-) 2,421 3,258 3,838 3,997 4,713 Currency outside banks and government 494 625 781 979 1,240 (-) 1,545 2,153 2,545 2,934 3,306 Currency and deposits of banks 250 382 523 623 551 (-) 780 1,058 1,199 1,010 1,345 Other deposits 29 31 29 68 56 (-) 96 47 82 53 62 Government deposits 242 704 950 1,154 1,646 (180) 2,362 3,912 4,553 4,566 4,848 Other liabilities 215 403 518 477 1,509 (926) 1,853 2,075 2,169 4,691 3,845 /a Includes revaluation of foreign exchange on account of November 15, 1978 devaluation. Amount of adjustments is shown in brackets. /b As of September 1983. Source: Bank Indonesia. ANNEX 2 - 229 - Table 6.5 INDONES IA COUNTRY ECONOMIC MEMORANDUM Banking System Credits by Economic Sector, 1974-S3 /a (Rp billion) Sectors 1974 1975 1976 1977 1978/b 1979/c 1980 1981 1982 1983 Agriculture /d 116.4 220.2 265.6 270.0 344.8 438.8 526.0 83 1,025 1,258 In rupiah 116.4 211.9 255.4 264.4 344.3 436.7 525.9 813 1,025 1,258 In foreign exchange - 8.3 10.2 5.6 0.5 1.4 0.1 - - - Mining 10.7 741.3 1,035.9 1,061.7 1,699.4 1,892.6 1,865.9 1,693 1,472 800 In rupiah 10.7 88.4 175.6 197.2 230.3 1,892.6 1,865.9 1,693 1,472 800 In foreign exchange /e - 652.9 860.3 864.5 1,469.1 - - - - Manufacturing Industry /d 358.9 718.8 Q90.4 1,156.2 1,624.3 1,933.2 2,563.2 3 4,717 6,035 In rupiah 358.9 508.1 739.4 904.3 1,264.8 1,525.7 2,175.9 2,938 4,221 5,406 In foreign exchange - 210.7 251.0 251.7 359.5 397.5 387.3 386 496 629 Trade /f 626.8 766.3 858.1 911.2 1,113.8 77.9 1,976.7 3,062 4,129 5,319 In rupiah 604.5 741.1 836.7 897.7 1,105.3 1,333.5 1,970.9 3,046 4,009 4,935 In foreign exchange 22.3 25.2 21.4 13.5 8.5 4.4 5.8 16 120 384 Service Rendering Industry 121.7 171.7 260.5 319.1 388.6 422.0 482.4 675 1,046 1,394 In rupiah 121.7 166.2 253.4 310.9 384.9 417.8 475.8 672 1,043 1,385 In foreign exchange - 5.5 7.1 8.2 3.7 4.2 6.6 3 3 9 Others 338.2 132.2 156.0 218.3 223.3 244.0 466.1 592 633 711 In rupiah 173.5 127.3 154.3 217.8 220.4 241.5 464.1 592 631 710 In foreign exchange 164.7/& 4.9 1.7 0.5 2.9 2.5 2.0 - 2 1 Total 1,572.7 2,750.5 3,566.5 3,936.5 5,394.2 6,267.8 7,880.3 10,159 13,022 15,517 In rupiah /h 1,385.7 1,843.0 2,414.8 2,792.5 3,550.0 5,857.3 7,478.5 9,754 12,401 14,494 In foreign exchange 187.0 907.5 1,151.7 1,144.0 1,844.2 410.0 401.8 405 621 1,023 /a Credits outstanding end of period. Includes unpaid interest. Excludes interbEank credits, credits to Government and to nonresidents, special liquidity credits, special credit and foreign exchange component of project aid. /b Includes foreign exchange revaluation (Rp 681.8 billion). /c Includes foreign exchange revaluation (Rp 698.0 billion). /d Processing of agricultural products is classified into manufacturing industry according to International Standard Industrial Classification (ISIC) 1968. /e Includes credits to Pertamina for repayment of foreign borrowing. Since March 1979, credit in foreign exchange to Pertamina has been converted to credits in Rupiah. /f Includes credits for food procurement and hotel projects. /g Includes credits in foreign exchange for all sectors. /h Includes investment credits, small-scale investment credits (KIK) and permanent working capital credits (KMKP). Source: Bank of Indonesia. ANNEX 2 - 230 - Table 6.6 INDONESIA COUNTRY ECONOMIC MEMORANDUM Banking System Credits by Type of Bank, 1974-B3 /a (Rp billion) Sectors 1974 1975 1976 1977 1978/b 1979/c 1980 1981 1982 1983 Bank Indonesia (Direct Credits) /d 230.7 893.6 1,211.6 1,229.3 1,934.9 2,163.1 2,454.1 2,649 2,771 2,357 In rupiah 230.7 244.8 351.3 364.8 465.8 2,163.1 2,454.1 2,649 2,771 2,357 In foreign exchange - 648.9 860.3 864.5 1,469.1 - - - - - State Comnercial Banks/f 1,135.8 1,601.9 2,007.5 2,266.7 2,831.8 3,269.8 4,300.6 5,881 8,031 10,019 In rupiah 1,003.8 1,397.2 1,774.7 2,058.2 2,548.5 2,957.3 3,959.5 5,523 7,474 9,113 In foreign exchange 132.0 204.7 232.8 208.5 283.3 312.5 341.1 358 557 906 National Private Banks 89.1 132.7 197.4 257.0 365.4 493.7 711.2 1,081 1,554 2,272 In rupiah 88.9 131.2 195.8 254.1 359.9 466.2 705.1 1,069 1,534 2,242 In foreign exchange 0.2 1.5 1.6 2.9 5.5 26.9 6.1 12 20 30 Foreign Banks 117.1 122.3 150.0 183.5 262.0 341.8 414.4 548 666 869 In rupiah 62.3 69.8 93.0 115.4 175.7 271.2 359.8 513 622 782 In foreign exchange 54.8 52.5 57.0 68.1 86.3 70.6 54.6 35 44 87 Total 1,572.7 2,750.5 3,566.5 5,394.2 5,467.3 6,267.8 7,880.3 10 159 13,022 15,517 In rupiah j 1,385.7 1,843.0 2,214.8 3,550.0 3,623.0 5,857.8 7,478.5 9,754 12,401 14,494 In foreign exchange 187.0 907.5 1,151.7 1,144.0 1,844.2 410.0 401.8 405 621 1,023 /a Credits outstanding end of period. Includes unpaid interest. Excludes interbank credits, credits to Gov- ernment and to nonresidents, special liquidity credits, special credit and foreign exchange component of project aid. /b Includes foreign exchange revaluation (Rp 681.8 billion). /c Includes foreign exchange revaluation (Rp 698.0 billion). /d Excludes Bank Indonesia credits to banks. /e Includes credits to Pertamina for repayment of foreign borrowing. Since March 1979, credit in foreign exchange to Pertamina has been converted to credits in Rupiah. /f Includes BAPINDO. /g Includes investment credits, small investment credits (KIK) and permanent working capital credits (RYRP). Source: Bank Indonesia. - 231 - ANNEX 2 Table 6.7 INDONESIA COUNTRY ECONOMIC MEMORANDUM Small-Scale Investment Credits and Permanent Working Capital Credits, 1974-83 (Rp billion) Small-scale Permanent working investment credits /a capital credits /a Number of Approved Out- Number of Approved Out- applications value standing applications value standing Year approved -- (Rp billion) -- approved -- (Rp billion) -- ('OOOs) ('OOOs) 1974 10 15 13 15 16 13 1975 17 28 22 24 29 19 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 115 314 210 890 569 321 1981 167 528 353 1,242 1,062 635 1982 Qtr I 176 571 374 1,298 1,178 704 Qtr II 184 608 387 1,342 1,300 770 Qtr III 193 648 400 1,383 1,378 784 Qtr IV 195 659 400 1,392 1,406 795 1983 Qtr I 213 723 414 1,486 1,542 815 Qtr II 218 749 409 1,531 1,627 845 Qtr III 222 778 411 1,553 1,679 872 Qtr IV 223 789 403 1,577 1,761 856 /a Cumulative as of end of period. /b As of November 1983 (provisional figures). Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC MEMORANDUM Medium-Term Investment Credits by Economic Sector, 1973-83 /a (Rp million) 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 /c Credit Approved /b 162,329 196,617 255,066 320,002 352,324 438,353 566,233 879,743 1,238,000 1,866,000 2,989,000 Agriculture 16,291 19,739 34,354 44,434 61,824 80,601 108,750 151,739 212,000 277,000 477,000 Manufacturing I industry 80,952 96,637 108,658 130,264 143,782 154,174 189,132 265,454 431,000 812,000 1,218,000" Mining 495 221 154 5,296 5,296 5,142 5,277 5,245 37,000 40,000 71,000" Communication & tourism 56,812 67,312 96,763 125,465 125,920 177,271 248,320 418,018 503,000 656,000 1,084,000 Others 7,779 12,708 15,137 14,543 15,502 21,149 14,754 39,287 55,000 81,000 139,000 Credit Outstanding 111,083 136,997 177,788 246,156 278,180 332,492 396,987 554,834 816,000 1,227,000 1,640,000 Agriculture 8,044 12,644 26,857 38,922 52,072 67,288 73,179 92,299 148,000 199,000 268,000 Manufacturing industry 59,640 69,331 78,306 94,066 105,754 115,190 140,247 176,889 256,000 505,000 630,000 Mining 161 147 143 4,278 3,277 2,122 1,222 219 25,000 31,000 41,000 Communication & tourism 38,501 45,758 62,222 99,985 106,556 133,630 172,420 257,532 357,000 437,000 628,000 Others 4,737 9,117 10,260 8,905 10,521 14,262 9,919 28,892 36,000 55,000 73,000 /a Excludes small-scale investment credits and permanent working capital credits. 7T Cumulative as of end of period. Excludes repayments. T As of October 1983. < Source: Bank Indonesia. m x 0' ANNEX 2 - 233 - Table 6.9 INDONESIA COUNTRY ECONOMIC MEMORANDUM Time Deposits with State Banks, 1971-83 (Rp million) Non- Interbank resident 3 time time 24 18 12 6 months Total deposits deposits End of: months months months months & less /a /b /b 1971 - - 75,291 15,552 13,591 104,627 14,843 9,308 1972 - 107,576 28,699 9,550 145,825 23,898 20,050 1973 - - 129,382 14,162 5,371 148,215 8,998 7,385 1974 179,934 8,090 37,226 8,298 5,093 238,641 6,983 82 1975 335,476 10,281 27,372 9,212 3,971 386,312 5,065 469 1976 517,568 3,987 48,500 25,082 16,575 611,712 14,466 862 1977 604,825 1,896 33,559 40,967 10,869 691,846 13,480 974 1978 Qtr I 615,913 599 34,621 34,308 1,477 686,918 13,997 486 Qtr II 622,049 45 39,000 44,632 1,865 707,591 13,615 451 Qtr III 623,876 - 39,491 55,700 2,226 721,293 13,306 216 Qtr IV 608,971 - 42,115 51,718 3,808 706,612 12,840 190 1979 Qtr I 608,194 - 36,259 58,304 5,121 707,878 14,479 170 Qtr II 616,609 - 30,191 55,489 5,811 708,101 15,441 156 Qtr III 615,288 - 28,939 64,927 2,768 711,922 15,915 161 Qtr IV 607,017 - 29,871 74,693 3,822 715,403 16,230 1,104 1980 Qtr I 610,360 - 31,726 75,312 7,106 724,504 19,589 1,012 Qtr II 616,849 - 34,086 72,020 2,639 725,594 19,379 628 Qtr III 646,050 - 36,248 64,826 3,724 750,848 20,600 526 Qtr IV 656,215 - 34,447 38,747 4,988 734,447 19,888 559 1981 Qtr I 692,309 - 33,502 24,918 2,918 753,647 16,149 565 Qtr II 720,211 - 37,085 25,237 2,948 785,481 21,572 186 Qtr III 748,100 - 38,900 23,300 3,500 813,800 - - Qtr IV 765,200 - 42,800 18,500 2,700 829,200 - - 1982 Qtr I 777,300 - 40,000 10,000 3,800 831,100 - - Qtr II 811,900 - 36,400 8,000 2,800 859,000 - - Qtr III 819,400 - 38,500 9,100 5,900 872,900 - - Qtr IV 848,700 - 39,300 10,100 5,300 903,400 - - 1983 Qtr I 848,300 - 42,300 11,600 3,600 905,800 - - Qtr II 763,200 - 111,900 119,300 129,600 1,129,000 - - Qtr III 655,800 700 417,000 210,400 297,700 1,581,700 - - Qtr IV 538,700 1,400 837,900 298,600 449,100 2,125,800 - - /a Up to 1974, includes interbank time deposits and nonresident time deposits. Since 1975, based on the decree of the Board of Directors of Bank Indonesia No. 5/16/Kep/DIR, September 20, 1972, excludes interbank time deposits and nonresident time deposits. /b Not published after 1981. Source: Bank Indonesia. ANNEX 2 - 234 - Table 6.10.1 INDON,SIA COUNTRY ECONOMIC MEMORANDUM State Bank Lending Rates and Rediscount Rates and Percent4ge of Refinancing Facilities Provided by Bank Indonesia, 1976-d2 Rank lending rates' a Rediscount Percentage lb Rediscount rates la Effective: 04/01/76 01701/78 oi/18/82/c 04/01/76 01/01/78 01/18/82 04/01/76 01/01/78 01/18/82 Short-Term Credit /d Supply & distribution of rice, paddy & corn by BUUDs/KUDs 9 9 100 100 3 3 BIMAS & INSAS credits for rice & secondary crops 12 12 100 10D 3 3 Collection & distribution of smallholders' salt by BUUDs/KUDs & PN Caras & working capital credits for PN Caram 12 12 80 75 6 4 Operation of wheat flour mills 12 12 70 75 6 4 Export & production of export goods 12 12 70 75 5 4 Preshipment Strong export co-modities 9 60 3 Other co mmodities 6 60 3 Postshipment (all of export commodities) 6 60 3 Production, import & distribution of fertilizer & insecticides for use by smallholders 12 12 85-80 75 6 4 Aid-financed import & distribution of nonfood commodities 12-18 12 100-50 75 6-10 4 Collection & distribution of agricultural produce, animal husbandry & fishery by BUUDs/lKUDs 6 cooperatives 15 12 70 75 10 4 Smallholders' agriculture, handicrafts, animal husbandry, poultry, farming & fishery 15-18 12 50-70 75 10 4 Manufacturing & service-rendering industries Rice mills/hullers & sugar mills 15 l3.5/e 70 70 10 6 Textiles 15 13.577 70 10 10 6 Coconut oil & palm oil, agricultural equipment, paper, cement & printing & publishing 18 13.5/e 50 70 10 6 Public transportation 15 13.57W 70 70 10 6 Tourism 24 13.5 - 70 - 6 Other production activities, import & distribution of supervised goods & domestic trade 18 13.5/e 50 70 10 6 Sugar stock 18 13.57W 75 70 10 6 Contractors of DIP, INPRES & local government-financed & contractors of low-cost housing projects 21 13.5/e 20 70 10 6 Other contractors 21 15 20 60 10 6 Imports & distribution of other import goods 24 18 - 40 - 6 Other credits, n.c.s. 24 21 - 25 - 6 Investment (Ofediuts-Term) Credits by Category /e /f Up to Rp 75 million 12 10.5 80 80 4 3 Above Rp 75 million to Rp 200 million 12 12.0 75 75 4 4 Above Rp 200 million to Rp 500 million 15 13.5 70 70 6 4 Above Rp 500 million to Rp 1,500 million a 15 13.5 65 65 6 4 Small Investment Credits (KIK) Credits of no more than Rp 10 million lh 12 10.5 80 80 4 3 Permanent Working Capital Credits (1qWP) Credits of no more than Rp 10 million /h 15 12 70 75 8 4 +a Annual interest rates in percent. b Percentage of loan refinanced by Bank Indonesia. 7W Except for outstanding credits which will be effective from March 1, 1982. Lending banks will accept an interest compensatiou from the Central Bank at the rate of 3% except credits for strong export commodities in stage of preshipment. /d Category as defined in January 1, 1978 regulations. 7;e Effective October 1, 1982, these loans were no longer eligible for rediscount. 7f Before January 1, 1978, the maximum amount for each category is as follows: Up to Rp 25 million, above Op 25 million to Rp 100 million, above Rp 100 million to Rp 300 million, above Rp 300 million. ft ln June 1980, the aximum amount was increased froml Rp 1,500 to Rp 2,500 million. /h Before February 1977, the maximum amount of KIK and IQIXP was Rp 5 million. Source: Data provided by the Indonesian authorities. 235 - ANNEX 2 Table 6.10.2 INDONESIA COUNTRY ECONOMIC MEMORANDUM State Bank Lending Rates and Rediscount Rates an,i Percentage Refinancing Facilities Provided by Bank Indonesia Since June 1, 1983 (%) Minimum Z of self-financing of customer Liquidity credit Interest to against the Interest customer p.a. total cost need Amount rate p.a. Working Capital Credit BIMAS credit 12 0 100 3 Permanent working capital (KMKP) 12 0 75 3 BIMAS fertilizer and pesticide production, import and distribu- tor credit 12 25 75 3 National privte estate credit (PSN) 12 30 75 3 Credit to cooperatives for the mem- bers thereof and in the framework of procuring the goods of high priority 12 0 95 3 Export credit Stipulated 15 60 3 by the rela- tive bank /a Investment Credit Mini credit 12 0 100 3 Midi credit 12 0 100 3 Small investment credit (KIK) 12 0 80 3 Estate credit Smailholders nucleus estate (PIR) 12 0 80 3 Reji,venation, rehabilitation and expansion of export crops (PRPTE) 12 0 80 3 National private estate (PSN) 12 10 85 3 Rice field plotting lb 12 0 80 3 Investment credit up to Rp 75 mil- lion 12 10 80 3 Credit to cooperatives for the mem- bers thereof and in the framework of procuring the goods of high priority 12 0 90 3 Other Credit /c Housing ownership credit (KPR) 5-9 10-20 80 3 Indonesian students credit (KMI) 6 0 100 3 Students dormitory credit 5 0 80 3 /a If the export has been really realized, the interest rate shall be stipulated at 90% p.a. /b Prior to the credit granting to the farmers, it shall be granted in the form of the direct credit by Bank Indonesia to the Ministry of Agriculture. Ic The former provision shall remain applicable until the further stipulation. Source: Data provided by Indonesian authorities. ANNEX 2 - 236 - Table 6.11 INDONESIA COUNTRY ECONOMIC MEMORANDUM Interest Rates on Deposits at Commercial Banks, 1978-83 (% p.a.) State banks' Private national banks' /a Tabanas Certifi- time deposits time deposits Demand savings Taska cate of Less 6 24 Less depos- depos- savings deposits than 3 mos. 12 mos. than 3 6 12 24 its /b its /c deposits /d 3 mos. mos. /e mos. /f 3 mos. mos. mos. mos. mos. 1978 March 3/1.8 15/6 9 6.1 6 9 15/12 10.5 13.3 16.2 18.6 20.8 June 3/1.8 15/6 9 6.1 6 9 15/12 10.8 13.3 15.8 18.0 21.2 September 3/1.8 1516 9 7.6 6 9 15/12 12.0 13.1 15.2 17.6 21.1 December 3/1.8 15/6 9 7.6 6 9 15/12 12.8 12.5 15.6 17.2 20.7 1979 March 3/1.8 15/6 9 7.6 6 9 15/12 13.9 14.8 16.0 17.2 20.3 June 3/1.8 15/6 9 7.6 6 9 15/12 12.9 15.8 15.9 17.7 19.9 September 3/1.8 15/6 9 9.5 6 9 15/12 13.2 15.1 16.8 18.0 20.5 December 3/1.8 15/6 9 9.8 14.3 14.8 6 9 15/12 16.2 16.7 18.3 19.6 19.6 1980 March 3/1.8 15/6 9 10.0 7.0 8.8 6 9 15/12 14.3 17.2 18.5 19.5 19.8 June 3/1.8 15/6 9 11.6 7.0 8.8 6 9 15/12 14.2 16.1 17.8 20.1 19.3 September 3/1.8 15/6 9 9.3 7.0 8.8 6 9 15/12 14.6 17.6 18.7 20.2 19.5 December 3/1.8 15/6 9 10.2 9.0 15.0 6 9 15/12 14.2 16.1 17.8 20.1 19.3 1981 March 3/1.8 15/6 9 10.4 9.0 12.0 6 9 15/12 15.9 16.8 17.7 20.0 18.9 June 3/1.8 15/6 9 10.9 13.1 15.0 6 9 15/12 16.4 18.0 18.8 20.4 19.4 September 3/1.8 15/6 9 10.9 13.8 15.0 6 9 15/12 16.2 17.2 17.8 19.5 19.4 December 3/1.8 15/6 9 10.9 12.5 15.0 6 9 15/12 15.4 17.4 17.9 19.4 19.0 1982 March 3/1.8 15/6 9 11.3 12.0 12.0 6 9 15/12 15.9 16.8 18.1 19.3 18.6 June 3/1.8 15/6 9 12.5 12.0 10.0 6 9 15/12 16.7 17.4 18.3 19.4 17.9 September 3/1.8 15/6 9 12.5 9.0 9.8 6 9 15/12 16.7 17.7 18.5 19.4 18.8 December 3/1.8 15/6 9 12.5 9.0 10.0 6 9 15/12 16.9 17.1 18.5 19.3 18.8 1983 March 3/1.8 15/6 9 12.5 12.0 9.6 6 9 15/12 17.9 17.4 18.6 19.3 19.0 June 3/1.8 15/12 9 14.5 15.5 16.5 17 18 17/h 16.3 17.4 18.8 19.5 18.8 /a Average rate of interest at selected banks (based on daily averages for the last month of the period through April 1983 for private banks, and May 1983 for state banks; end of period data uLsed thereafter). !b Until February 1978, 4.5% for demand deposits exceeding Rp 50 million, 3% for smaller amounts. From March 1978, 3% for amounts above Rp 50 million, 1.8% for Rp 1-50 million, and individually determined for amounts below Rp 1 million. Ic Fifteen percent up to Rp 200,000, 6% above Rp 200,000. /d Midpoint of range for six month rate. /e Since January 1978, banks are free to set interest rates on deposits three months and less. /f Effective January 1978, 15% for amounts up to Rp 2.5 million and 12% for amounts above Rp 2.5 million. j& Ceiling on the deposit interest rate ceiling at state ceiling removed on June 1, 1983. |h With 12 percent legal minimum rate starting in June 1983. Source: Data provided by the Indonesian authorities. INDONESIA COUNTRY ECONOMIC MEMORANDUM Principal Agricultural Products by Subsectors. 1968-83 ('000 tons) Product 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982/a 1983/a Food Crops Rice 11,667 12,249 13,140 13,724 13,183 14,607 15,276 15,185 15,845 15,876 17,525 17,872 20,163 22,286 22,839 23,961 Corn 3,166 2,292 2,825 2,606 2,254 3,690 3,011 2,909 2,572 3,143 4,029 3,606 3,991 4,509 3,235 5,180 Cassava 11,356 10,917 10,478 10,690 10,385 1,186 13,031 12,546 12,191 12,488 12,902 13,751 13,726 13,301 12,988 13,219 Sweet potato 2,364 2,260 2,175 2,211 2,066 2,387 2,469 2,433 2,381 2,460 2,083 2,194 2,079 2,094 1,676 3,231 Soya beans (shelled) 420 389 498 516 518 541 589 590 522 523 617 680 653 704 521 580 Groundnuts (shelled) 287 267 281 284 282 290 307 380 341 409 446 424 470 475 437 477 Fishery Saltwater fish 723 785 807 820 836 889 949 997 1,082 1,158 1,227 1,318 1,395 1,408 1,490 1,577 Freshwater fish 423 429 421 424 433 389 388 393 401 414 420 430 455 506 530 522 t Meat and Poultry Meat 305 309 314 332 366 379 403 435 449 468 475 486 506 596 629 - Eggs 51 58 59 68 78 81 98 112 116 131 151 164 173 275 297 - Milk (mln liters) 29 29 29 36 38 35 57 51 57 61 62 72 78 86 117 - Cash Crops Rubber 735 777 802 804 804 844 817 782 857 844 884 898 1,002 1,046 861 1,017 Palm oil 181 189 217 248 269 290 348 397 431 473 532 642 701 748 873 972 Coconut/copra 1,133 1,221 1,208 1,149 1,311 1,237 1,341 1,375 1,532 1,518 1,575 1,582 1,764 1,812 1,736 1,628 Coffee 150 175 186 196 214 150 149 160 193 194 222 228 285 295 266 234 Tea 73 62 64 71 51 67 64 69 73 79 88 125 106 110 92 111 Cloves 17 11 15 14 15 22 15 15 20 41 22 35 39 40 31 32 Pepper 47 17 17 26 13 29 27 23 37 43 46 47 37 39 37 32 Tobacco 54 84 78 76 79 80 79 82 89 84 81 87 118 118 117 122 Cane sugar 752 922 873 1,041 1,133 1,009 1,237 1,227 1,321 1,438 1,616 1,601 1,832 1,700 1,862 2,164 Cotton - 3 .3 2 1 1 3 2 1 1 1 1 1 10 18 - Forestry ('000 cu m) Teakwood 468 520 568 770 597 676 620 595 480 573 475 575 500 3,955 6,046 - Other timber 4,783 7,587 11,856 12,968 17,120 25j124 22,660 15;701 20.947 22,939 30,619 25.852 21,240 15,954 13,015 - /a Preliminary figures. 3 Source: Supplement to the President's Report to Parliament, August 1983. @| - 238- ANNEX 2 Table 7.2 INDONESIA COUNTRY ECONOMIC MEMORANDUM Agricultural Production of Major Crops by Type of Product, 1908 ('000 tons) Product 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982/a Smallholders Rubber 571 572 559 599 571 536 610 584 612 616 705 740 549 Coconut/copra 1,198 1,147 1,308 1,233 1,335 1,370 1,527 1,513 1,554 1,561 1,737 1,789 1,713 Coffee 170 178 196 140 132 144 178 181 206 209 266 276 246 Cloves 15 14 13 22 15 15 17 37 21 35 39 40 31 Tea 21 24 7 14 15 14 13 14 17 17 21 22 18 Sugar 196 211 247 199 250 223 267 352 485 498 749 1,364 1,505 Tobacco 69 69 74 69 69 74 76 72 68 73 101 103 106 Pepper 17 24 18 29 27 23 37 43 46 47 37 39 37 Cotton 3.0 2.0 2.0 1.1 2.9 2.4 0.9 0.9 1.0 1.0 6.0 10.0 18.0 Palm oil - - - - - - - _- - - - - Palm kernel - - - - - - - - - - - - - Private Estates Rubber 113 114 128 109 108 109 104 107 110 112 111 114 122 Coconut/copra 2 2 3 4 6 5 5 6 21 21 22 23 23 Coffee 6 7 6 4 7 6 6 6 7 8 6 6 7 Cloves .. .. .. 0.1 0.2 0.1 0.2 1.6 0.2 0.2 0.2 0.2 - Tea 9 10 7 10 11 10 11 11 15 16 17 18 10 Sugar 74 122 130 118 127 126 152 162 71 73 114 116 112 Tobacco - - - - - - - - - - - - - Pepper Cotton - - - - - - - - - - - - - Palm oil 70 79 81 82 104 126 145 147 165 168 202 206 279 Palm kernel 15 18 17 18 21 24 27 29 22 23 36 37 43 Government Estates Rubber 118 118 121 137 138 137 142 147 162 170 186 192 190 Coconut/copra - - - - - - - - - - - - - Coffee 9 11 12 6 10 10 10 10 10 11 13 13 13 Cloves - - - - - - - - - - - - - Tea 34 37 37 43 40 46 49 51 59 92 68 70 64 Sugar 603 708 756 693 860 878 902 924 960 1,030 968 220 245 Tobacco 9 7 5 11 8 8 11 12 13 14 15 15 11 Pepper - - - - - - - - - - - - - Cotton - - - - - - - - - - - - - Palm oil 147 170 189 207 244 271 286 338 367 474 499 542 594 Palm kernel 33 39 42 46 52 57 56 64 72 85 90 98 104 Total Rubber 802 804 808 845 818 782 856 838 884 898 1,002 1,046 861 Coconut/copra 1,200 1,149 1,311 1,237 1,341 1,375 1,532 1,518 1,575 1,582 1,759 1,812 1,736 Coffee 185 196 214 150 149 160 194 197 223 228 285 295 266 Cloves 15 14 13 22 15 15 20 39 21 35 39.2 40 31 Tea 64 71 51 67 65 70 73 76 91 125 106 110 92 Sugar 873 1,041 1,133 1,009 1,237 1,227 1,321 1,438 1,516 1,601 1,831 1,700 1,862 Tobacco 78 76 79 80 77 82 87 84 81 87 116 118 117 Pepper 17 24 18 29 27 23 37, 43 46 47 37 39 37 Cotton 3 2 2 3 3 2 3 2 1 1 6 10 18 Palm oil 217 249 270 289 348 397 431 483 532 642 701 748 873 Palm kernel 48 57 59 64 73 81 83 93 94 108 126 135 147 - Not available. i/a Preliminary figures. Sources: Department of Agriculture; the Supplement to the President's Report to Plarliament, August 1983; and Nota Keuangan 1983/84. -239 -ANNEX 2 - 239 - ~~~~~Table 7.3 INDONESIA COUNTRY ECONOMIC MEMORANDUM Rice - Area Harvested, Production and Yield, 1968-83 Area Average Paddy /a Rice Year harvested yield output output ('000 ha) (tons/ha) ('000 tons) ('000 tons) 1968 8,021 2.80 22,435 11,667 1969 8,014 2.94 23,556 12,249 1970 8,135 3.11 25,26-9 13,140 1971 8,324 3.17 26,392 13,724 1972 7,987 3.17 25,351 13,183 1973 8,403 3.34 28,091 14,607 1974 8,509 3.45 29,376 15,276 1975 8,495 3.44 29,202 15,185 1976 8,368 3.64 30,470 15,845 1977 8,360 3.65 30,531 15,876 1978 8,929 3.77 33,702 17,525 1979 8,850 3.90 34,369 17,872 1980 9,005 4.31 38,775 20,163 1981 9,382 4.57 42,861 22,286 1982/b 8,988 4.89 43,917 22,837 1983/b 9,102 5.06 46,079 23,961 /a Dry stalk paddy. /b Preliminary figures. Source: Supplement to the President's Report to Parli,ament, August 1983. -240 - ANNEX 2 Table 7.4 INDONESIA COUNTRY ECONOMIC MEMORANDUM BULOG Rice Program, 1978/79 - 1984/85 (In thousand ton) /c /d 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 Beginning stock 459 708 886 1,242 1,591 1,013 1,293 Domestic procurement 881 431 1,635 1,952 1,933 1,082 1,600 Import: 1,268 2,580 1,213 437 506 1,120 500 PL-480 (304) (353) (101) (46) (-) (65) (45) Other food (15) (327) (198) (48) (-) (140) (-! Commercial (949) (1,900) (914) (343) (506) (915) (455) Total availability 2,608 3,719 3,734 3,631 4,030 3,215 3,893 Distribution 1,858 2,834 2,480 2,014 2,972/a 1,894 2,350 Government (608) (666) (649) (806) (1,320) (1,409) (1,400) State enterprises (106) (90) (89) (95) (105) (84) (100) Market operations (1,032) (2,036) (1,628) (1,033) (1,517) (375) (750) Other (106) (42) (114) (80) (29) (26) (100) Losses 46 8 12 26 45 28 35 End stock 708 886 1,242 1,591 1,013 1,293 1,008 Memorandum item: Rice production /b 17,325 17,872 20,163 22,286 22,837 23,961 24,723 /a Since January 1982, all regions have received rice in kind; formerly, surplus regions received food allowance. /b On calendar year basis. /c Preliminary as of March 7, 1984. Th Official estimate. Source: Data provided by the Indonesian authorities. - 241~ - ANNEX 2 Table 7.5 INDONESIA COUNTRY ECONOMIC MEMORANDUM Area Covered Under Rice Intensification Programs, 1969-82 ('000 ha) Of which Of which Year Bimas Insus Inmas Insus Total 1969 1,309 - 821 - 2,130 1970 1,248 - 845 - 2,093 1971 1,396 - 1,393 - 2,789 1972 1,203 - 1,966 - 3,169 1973 1,832 - 2,156 - 3,988 1974 2,676 - 1,048 - 3,724 1975 2,683 - 1,957 - 3,640 1976 2,424 - 1,189 - 3,613 1977 2,059 - 2,181 - 4,240 1978 1,960 - 2,888 - 4,848 1979 1,571 - 3,452 - 5,023 1980 1,374 420 4,142 640 5,516 1981 1,267 587 4,658 1,119 5,925 1982 /a 1,707 857 5,293 2,315 7,000 /a Preliminary figures. Source: Supplement to the President's Report to Parliament, August 1983. ANNEX 2 - 242 - Table 8.1 INDONESIA COUNTRY ECONOMIC MEMORANDUM Quarterly Index of Manufacturing Production From Selected Industrial Groups /a (Quarterly average 1975 - 100) Ainual Average 1982 (by quarter) 1983 /b (by quarter) Description 1979 1980 1981 I II III IV I II III Manufacture of condensed and dried milk, creamery and processed butter, fresh and preserved cream (4) 201 234 235 197 229 282 247 244 277 281 Manufacture of malt liquors and malt (4) 118 129 147 180 149 175 177 188 186 193 Manufacture of clove cigarettes (20) 120 151 180 163 187 193 206 175 196 207 Cigarettes manufacturing (13) 131 130 124 117 117 114 112 114 122 122 Yarn and thread manufacturing (20) 111 118 126 129 124 113 118 117 113 112 Weaving mills except jute-weaving products (193) 122 126 138 137 133 123 128 118 118 118 Manufacturing of batik (10) 117 117 99 106 115 111 107 104 102 102 Knitting mills (32) 77 88 89 85 82 78 79 77 82 83 Manufacture of footwear (14) 112 130 123 124 127 122 122 124 125 126 Plywood manufacturing (6) 220 392 471 447 471 374 404 446 439 452 Manufacture of paper (all kinds) (8) 151 153 152 156 148 148 154 137 154 160 Manufacture of basic chemicals except fertilizer (13) 124 128 127 121 126 129 143 132 131 134 Manufacture of fertilizer (3) 336 466 492 510 482 501 489 554 564 571 Manufacture of paint, varnisher, lacquers (7) 98 115 159 168 164 166 172 132 130 140 Manufacture of matches (7) 139 179 189 194 215 232 278 324 302 326 Manufacture of tires and tubes (12) 227 257 301 342 288 256 288 305 311 319 Manufacture of glass and glass products (17) 171 208 257 234 225 189 188 223 223 223 Manufacture of cement (7) 314 367 395 407 421 421 429 387 420 442 Iron and steel basic industries (15) 443 1,034 1,248 1,031 947 784 1,118 1,127 1,119 1,137 Manufacture of structural metal products (24) 154 172 188 183 198 207 196 208 195 205 Manufacture of dry-cell batteries (12) 180 228 231 236 247 255 331 344 353 362 Manufacture of radio, TV, cassette and other commu- nication equipment and apparatus (16) 230 340 348 344 336 306 345 338 370 370 Motor vehicles assembling and manufacturing (17) 117 194 256 262 228 190 233 206 207 225 Motorcycles and three-wheel motor vehicles assembling and manufacturing (5) 75 114 161 184 159 187 219 197 126 140 General Index 158 194 214 213 211 210 220 215 220 227 /a Based on Laspeyres formula. 7T Preliminary estimate. Note: Figures within brackets ( ) under column "Description" indicate the number of establishments covered in that group. INDONESIA COUNTRY ECONOMIC MEMORANDUM Production of Minerals, 1973-82 Tin Copper ore Nickel Iron sand Natural Year Petroleum concentrate concentrate ore Baucite Coal concentrate Gold Silver gas (mln bbls) ------------------ ('000 tons) ------------------------- (kg) (kg) (mcf) 1973 489 22.6 125.9 867.3 1,229.4 148.8 280.9 352.1 9,371.9 186.1 1974 502 25.7 212.6 878.9 1,290.1 156.2 365.2 265.3 6,464.6 202.2 1975 477 25.3 201.3 801.0 992.6 206.4 353.0 330.7 4,754.7 222.2 1976 550- 23.4 223.3 1,102.0 940.3 182.9 292.3 355.2 3,397.5 312.1 1977 615 25.9 189.1 1,302.5 1,301.4 230.6 311.5 255.9 2,831.9 542.8 1978 597 27.4 180.9 1,256.5 1,007.7 264.2 233.3 253.9 2,506.4 820.1 1979 580 29.4 188.8 1,552.7 1,051.9 278.6 79.9 170.0 1,644.6 998.4 1980 577 32.5 186.9 1,537.6 1,249.1 304.0 74.7 256.1 2,354.6 1,045.7 1981 585 35.4 188.5 1,543.2 1,203.4 350.4 86.6 183.1 2,000.2 1,123.7 1982 488 33.8 223.7 1,640.9 700.2 481.0 144.5 222.7 3,057.9 1,111.9 Source: Department of Mines and Energy. (bX4 - 244 - ANNEX 2 Table 8.3 INDONESIA COUNTRY ECONOMIC MEMORANDUM Crude Oil Production by Company ('000 barrels) Production Output Contract of work sharing daily Pertamina Lemigas Caltex C&T Stanvac Subtotal contract Total average 1969 35,298 376 217,912 - 17,365 235,277 - 270,951 742 1970 35,535 465 257,877 - 17,674 275,551 - 311,552 854 1971 34,776 575 262,846 - 22,951 285,979 4,524 325,673 892 1972 37,697 369 303,826 - 27,173 330,999 26,516 395,581 1,081 1973 38,543 431 351,528 1,035 22,768 375,331 74,231 488,536 1,339 1974 40,143 362 329,907 1,959 16,626 348,492 112,840 501,838 1,375 1975 32,590 306 300,879 1,944 13,889 316,712 127,247 476,855 1,306 1976 31,333 268 304,616 1,803 12,787 319,206 199,512 ''550,319 1,508 1977 30,706 285 292,950 2,459 11,974 307,383 277,812 616,186 1,688 1978 31,273 195 275,349 2,266 11,853 289,468 275,762 596,698 1,635 1979 30,316 213 266,048 1,856 10,811 278,715 271,203 580,447 1,590 1980 29,891 205 258,325 2,046 11,577 271,948 274,971 577,015 1,577 1981 29,515 176 255,515 1,799 13,141 270,454 284,694 584,839 1,600 1982 Jan 2,443 15 19,554 177 1,081 20,812 22,836 46,105 1,487 Feb 2,123 12 15,247 160 1,011 16,418 21,823 40,375 1,442 Mar 2,356 15 18,115 152 1,135 19,402 23,827 45,600 1,471 Apr 2,306 16 13,091 159 1,105 14,355 20,400 37,078 1,236 May 2,335 15 12,461 149 1,159 13,769 22,610 38,728 1,249 Jun 2,239 14 13,666 106 1,090 14,862 22,367 39,483 1,316 Jul 2,314 17 13,025 101 1,331 14,457 23,679 40,267 1,299 Aug 2,295 18 12,398 84 1,125 13,607 23,964 39,885 1,287 Sep 2,206 18 12,528 91 1,090 13,709 21,398 37,330 1,244 Oct 2,248 17 14,821 92 1,124 16,038 22,501. 40,803 1,316 Nov 2,215 18 15,940 79 1,074 17,090 21,229 40,555 1,355 Dec 2,273 21 15,081 72 1,091 16,242 23,421. 41,960 1,360 1983 Jan 2,306 21 12,376 65 1,064 13,505 22,089 37,521 1,223 Feb 2,052 19 7,136 66 952 8,154 18,225 28,451 - Mar 2,285 22 13,711 80 1,083 14,874 19,367 36,548 - Source: Central Statistics Bureau. INDONESIA COUNTRY ECONOMIC MEMORANDUM Petroleum Products - Supply and Demand, 1970-82 (Million bbl) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Production of crude 311.6 325.6 395.6 488.5 501.8 476.9 550.3 615.1 596.8 580.4 577.0 584.8 488.2 Crude imports 0.8 2.8 2.7 1.9 2.7 2.6 7.7 29.7 31.1 30.5 32.9 37.0 40.1 Subtotal 312.4 328.4 398.3 490.4 504.5 479.5 558.0 644.8 627.8 610.9 609.9 621.8 528.3 Crude exports 228.1 239.6 299.1 269.5 378.9 363.1 449.5 485.3 472.0 410.8 378.8 383.4 320.9 Crude available for refineries 84.3 88.8 96.2 120.9 125.6 116.4 108.5 159.5 155.8 200.2 231.2 238.4 207.4 Changes in crude stocks (decrease = -) 0.6 -1.2 -4.3 1.6 0.7 2.9 -4.8 7.3 -5.0 14.2 38.3 44.7 24.8 Refinery Inputs (including swaps) 83.7 90.0 100.5 119.3 124.9 113.4 113.7 153.8 159.5 186.0 192.9 193.7 182.6 Refinery consumption 7.5 7.6 7.7 8.0 7.7 6.7 6.4 11.2 9.4 8.0 8.0 6.5 6.5 Refinery Output 76.2 82.4 92.8 111.8 117.7 106.7 107.3 142.6 150.1 178.0 184.9 187.2 176.1 Export of Refined Products 36.3 33.6 46.0 56.5 45.1 36.6 36.3 51.4 40.3 49.4 53.4 49.9 39.0 Waxy residues 27.2 32.5 39.7 53.8 41.3 32.6 35.2 42.1 36.3 48.9 51.0 47.9 33.7 Bunker fuel, avtur, etc. 9.1 1.1 6.4 2.7 3.8 4.1 6.6 9.3 4.0 0.4 2.4 2.0 5.3 Available for Domestic Consumption 39.9 48.8 46.8 55.3 72.6 70.1 71.5 91.2 109.8 123.7 126.0 137.3 137.1 Product import 2.1 4.2 8.6 11.9 12.8. 15. 030.4 18.3 16.9 15.3 21.1 42.7 39.8 Total Supply 42.0 53.0 55.6 67.2 85.4 85.1 101.9 109.5 126.7 138.7 147.1 180.0 176.9 Domestic Consumption 39.2 44.2 50.7 58.6 67.9 77.5 87.7 98.5 113.0 124.8 139.6 154.0 159.1 Changes in refined stocks 2.4 8.8 4.9 8.6 17.5 7.6 14.2 11.0 13.7 13.9 7.5 26.0 17.8 Source: Migas. H INDONESIA COUNTRY ECONOMIC MEMORANDUM Domestic Sales of Petroleum Products, 1971-82 /a (In '000 bbl) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Aviation gas 144 118 123 139 139 143 128 134 126 130 110 102 Aviation turbo 961 1,200 1,658 2,150 2,579 2,758 2,913 3,494 3,665 4,356 4,869 4,894 Z' Premium gasoline 100 201 359 496 661 706 710 728 618 466 391 239 Regular gasoline 10,409 10,779 11,757 12,787 14,284 15,606 17,356 19,608 21,294 23,323 25,650 25,770 Kerosene 18,927 20,697 23,146 26,769 30,623 33,259 36,880 41,717 45,457 48,979 52,501 51,843 Motor diesel 6,895 9,027 11,838 14,524 18,023 22,749 27,041 31,709 34,542 40,118 44,747 49,291 Industrial diesel 2,364 2,676 3,488 4,022 4,673 5,429 6,239 6,744 7,333 7,829 9,410 9,383 Fuel oil 4.095 5,379 7,924 8R755 7R844 8,222 10,296 11,061 11,894 15,470 17,570 19,303 Total 43,895 50,077 60,293 69,642 78,826 88,872 101,563 115,195 124,929 140,671 155,248 160,825 /a Excluding lubricating oil and other products. Source: Department of Mines and Energy. | r - 247 - ANNEX 2 Table 9.1 INDONESIA COUNTRY ECONOMIC MEMORANDUM Cost of Living Index in Jakarta, 1970-79 (Index: April 1977/March 1978 = 100) Period average End of Food- Change Hous- Cloth- Gene- Change General Change period stuffs (%) ing ing Other ral (%) index (%) 1970 26.2 +1.3 38.5 43.3 38.5 30.8 +8.9 30.1 +12.3 1971 26.8 +2.2 38.9 44.4 39.9 31.,6 +2.6 31.4 +4.4 1972 38.7 +44.6 39.4 44.2 41.3 39.7 +25.7 33.4 +6.4 1973 49.7 +28.4 45.3 58.3 52.4 50.,6 +27.4 43.8 +31.0 1974 65.7 +32.2 55.6 77.7 74.0 67.4 +33.3 6L.6 +40.6 1975 81.1 +23.4 73.6 84.9 80.1 80.6 +19.7 73.4 +19.1 1976 91.8 +13.2 90.9 94.9 92.3 92.1 +14.2 87.9 +19.8 1977 +12.4 +11.8 97.6 +11.0 Qtr I 94.1 +2.5 94.8 95.9 93.7 94.2 +2.3 Qtr II 96.3 +2.3 96.4 97.4 97.0 96.5 +2.4 Qtr III 100.2 +4.0 99.3 101.3 100.5 100.3 +3.9 Qtr IV 103.2 +3.0 102.8 101.8 102.6 103.0 +2.7 1978 +4.4 +6.7 105.5 +8.1 Qtr I 104.1 +0.8 104.1 102.1 103.0 103.7 +0.7 Qtr II 103.5 -0.6 105.3 103.3 104.0 103.7 - Qtr III 104.3 +0.8 105.3 105.2 109.7 105.4 +1.7 Qtr IV 107.8 +3.4 105.7 110.4 118.8 109.9 +0.7 1979 +27.1 +24.6 127.0 +20.4 Qtr I 114.7 +6.4 107.3 118.4 123.2 116.0 +5.6 Qtr II /a 127.2 +10.9 122.2 125.9 131.3 127.8 +10.2 Qtr III 137.8 +8.3 124.8 140.4 137.8 135.7 +6.2 Qtr IV 137.0 -0.6 125.1 147.0 139.1 136.9 +0.9 /a As of April 1979, the Cost of Living Index was replaced by the Jakarta Con- sumer Price Index (Table 9.2). ANNEX 2 248 - Table 9.2.1 INDONESIA COUNTRY ECONOMIC MEMORANDUM Jakarta Consumer Price Index (Index: April 1977/March 1978 - 100) Index % change Food Housing Clothing Other General Food Housing Clothing Other General Weight (40) (28) (10) (22) (100) 1979 March 114.8 118.5 135.7 117.0 118.4 - - - - - April 117.3 122.5 136.7 122.6 121.9 2.1 3.4 0.7 4.8 2.0 May 122.4 134.1 139.9 123.0 127.6 4.3 9.4 2.3 0.4 4.7 June 127.3 135.0 144.3 124.7 130.6 4.0 0.6 3.2 1.4 2.4 July 130.0 134.8 151.2 127.7 133.0 2.1 (0.1) 4.8 2.4 1.8 August 137.6 135.1 155.9 129.5 136.9 5.8 0.3 3.1 1.4 3.0 September 137.9 137.8 160.9 130.9 138.6 0.2 2.0 3.2 1.1 1.2 October 136.4 138.3 163.4 131.5 138.6 (2.4) 0.4 1.9 0.5 - November 136.7 138.6 163.0 132.1 138.8 0.2 0.2 (0.6) 0.4 0.1 December 137.2 138.1 168.5 132.1 139.9 0.4 (0.3) 3.4 0.7 0.7 1980 January 138.2 141.2 169.8 131.2 140.6 0.7 2.2 0.8 0.7 0.6 February 141.1 142.0 176.1 131.3 142.7 2.2 0.6 3.7 0.1 1.5 March 139.2 144.0 178.1 132.8 143.0 (1.4) 1.4 1.1 1.2 0.2 April 138.1 147.3 176.1 133.5 143.8 (0.8) 2.3 (1.1) 0.5 0.6 May 141.7 154.0 178.2 141.1 148.7 2.6 4.6 1.1 5.7 3.4 June 144.1 158.8 178.8 142.7 151.4 1.7 3.1 0.4 1.1 1.8 Juiy 144.2 158.7 180.2 143.6 151.7 0.1 (0.1) 0.8 0.6 0.2 August 148.4 157.4 183.4 144.7 153.6 2.9 (0.8) 1.7 0.8 1.2 September 145.5 160.2 184.0 144.8 153.3 (2.0) 1.8 0.3 0.1 (0.2) October 148.7 160.9 184.2 144.9 154.8 2.2 0.4 0.1 0.1 1.0 November 154.0 161.5 184.5 144.4 157.0 3.6 0.4 0.2 (0.3) 1.4 December 152.7 160.8 184.5 144.9 156.4 (0.8) (0.4) 0.0 0.3 (0.6) Total 11.3 16.4 9.5 9.7 11.8 1981 January 155.1 162.4 184.7 145.2 157.9 1.6 1.0 0.1 0.2 1.0 February 157.6 162.6 184.9 145.8 159.1 1.6 0.1 0.1 0.4 0.8 March 160.2 164.6 185.1 145.9 160.8 1.7 1.2 0.1 0.1 1.1 April 160.5 168.3 185.3 146.2 162.0 0.2 2.2 0.1 0.2 0.8 May 160.8 168.3 185.4 146.7 162.2 0.2 - 0.1 0.3 0.1 June 161.5 169.9 185.5 146.8 163.0 0.4 1.0 0.1 0.1 0.5 July 162.8 169.4 185.5 146.9 163.4 0.8 (0.3) - 0.1 0.2 August 164.0 168.3 185.6 147.5 163.7 0.7 (0.6) - 0.4 0.2 September 162.0 168.3 185.7 148.4 163.1 (1.2) - 0.1 0.6 (0.4) October 165.0 171.1 185.7 149.2 165.3 1.9 1.7 - 0.5 1.3 November 162.7 172.0 186.1 149.2 164.6 (1.4) 0.5 0.2 - (0.4) December 163.0 175.4 186.2 149.2 165.7 0.2 2.0 - - 0.7 Total 6.7 9.1 0.9 3.0 5.9 1982 January 168.1 188.4 186.8 159.7 173.8 3.1 7.4 0.3 7.0 4.9 February 167.1 191.9 186.8 161.4 174.7 (0.6) 1.8 - 1.1 0.5 March 168.5 194.3 186.8 161.4 176.0 0.8 1.3 - - 0.7 April 168.4 194.3 186.8 161.4 176.0 (0.1) - - - May 169.6 194.6 186.6 161.5 176.5 0.7 0.5 (0.1) 0.1 0.3 June 168.6 195.6 187.9 161.6 176.6 (0.5) 0.5 0.7 0.1 0.1 July 171.8 195.7 189.0 161.8 178.0 1.8 - 0.6 0.1 0.8 August 168.2 196.2 188.9 163.3 177.0 (2.1) 0.3 (0.1) 0.9 (0.6) September 167.8 198.0 188.9 163.3 177.4 (0.2) 0.9 - - 0.2 October 169.8 201.5 189.2 164.9 179.5 1.2 1.8 0.2 1.0 1.2 November 170.2 202.2 189.2 164.9 179.9 0.2 0.3 - - 0.2 December 171.5 202.9 189.2 164.9 180.6 0.8 0.3 - - 0.4 Total 5.2 15.7 1.6 1.5 9.0 1983 January 173.5 213.2 189.2 190.0 189.9 1.2 5.1 0.0 15.2 5.1 February 170.7 219.6 189.2 192.1 191.0 -1.6 3.0 0.0 1.1 0.6 March 167.9 219.5 189.2 192.1 189.8 -1.6 0.0 0.0 0.0 -0.6 April 172.0 222.4 189.2 192.1 193.4 2.4 1.3 0.0 0.0 1.9 May 173.5 223.6 189.2 197.3 194.3 0.9 0.5 0.0 2.7 0.5 June 180.7 224.2 189.2 197.4 197.4 4.1 0.3 0.0 0.1 1.6 July 183.9 224.0 189.2 197.4 198.6 1.8 -0.1 0.0 0.0 0.6 August 185.1 223.1 189.2 199.7 199.4 0.7 -0.4 0.0 1.2 0.4 September 186.6 223.6 189.2 199.7 200.1 0.8 0.2 0.0 0.0 0.4 October 184.9 223.9 189.2 199.9 199.5 -0.9 0.1 0.0 0.1 -0.3 November 184.6 225.4 189.5 201.0 200.1 -0.2 0.7 0.0 0.6 0.3 December 186.4 224.6 189.5 201.1 200.6 1.0 -0.4 0.0 0.0 0.2 Total 8.7 10.7 0.2 22.0 11.1 Source: BPS. ANNEX 2 - 249 - Table 9.2.2 INDONESIA COUNTRY ECONOMIC MEMORANDUM Indonesia Consumer Price Index (Index: April 1977/March 1978 - 100) Index Z change Food Rousing Clothing Other General Food Housinag Clothing Other General Weight /a (46) (24) (11) (19) (100) 1979 March 120.5 120.9 134.7 119.1 121.8 - - - - April 122.5 125.0 137.4 126.1 125.5 1.7 3.4 2.0 5.9 3.0 May 126.4 131.6 140.0 126.7 129.3 3.2 5.3 1.9 0.5 3.0 June 130.7 133.4 144.6 127.9 132.3 3.4 1.4 3.3 0.9 2.3 July 134.2 134.5 150.4 132.2 135.6 2.7 0.8 4.0 3.4 2.5 August 139.1 135.7 155.1 134.2 138.8 3.6 0.9 3.1 1.5 2.3 September 138.9 137.4 159.1 135.3 139.8 (0.1) 1.1 2.6 0.9 0.7 October 138.5 139.9 163.4 137.0 141.0 (0.3) 1.8 2.7 1.2 0.9 November 139.9 140.2 163.5 137.6 141.8 1.0 0.2 - 0.4 0.6 December 141.1 140.9 168.2 137.7 143.1 0.9 0.5 2.9 0.1 0.9 1980 January 143.0 143.4 169.8 137.9 144.8 1.3 1.8 1.0 0.1 1.2 February 146.0 144.8 173.3 138.4 146.8 2.1 0.9 2.1 0.3 1.4 March 144.8 146.7 173.8 139.6 147.1 (0.8) 1.3 0.3 0.9 0.2 April 144.9 149.9 174.1 142.5 148.7 0.1 2.2 0.1 2.1 1.0 May 149.3 157.4 176.4 150.1 154.3 3.0 4.9 1.3 5.3 3.8 June 151.3 161.1 178.8 151.3 156.6 1.3 2.4 1.4 0.8 1.5 July 152.6 162.1 180.8 154.5 158.3 0.9 0.6 1.1 2.1 1.1 August 155.9 162.0 184.9 155.1 160.2 2.2 (0.1) 2.3 0.4 1.2 September 155.1 164.2 185.5 156.2 160.8 (0.5) 1.4 0.3 0.7 0.4 October 159.2 165.6 188.4 158.0 163.5 2.6 0.9 1.6 1.2 1.7 November 165.6 167.7 190.3 158.7 167.1 4.0 1.3 1.0 0.4 2.2 December 165.7 168.7 190.8 159.1 167.6 0.1 0.6 0.3 0.3 0.3 Total 17.4 19.7 13.4 15.5 17.1 1981 January 169.1 169.6 191.8 160.8 169.8 2.1 0.5 0.5 1.1 1.3 February 171.0 170.4 192.4 161.5 170.9 1.1 0.5 0.3 0.4 0.6 March 172.6 171.8 192.8 161.9 172.1 0.9 0.9 0.2 0.2 0.7 April 173.6 175.0 193.4 163.0 173.7 0.6 1.9 0.3 0.7 0.9 May 173.7 175.5 193.7 163.3 174.0 0.1 0.3 0.1 0.2 0.2 June 174.4 176.9 194.4 163.5 174.7 0.4 0.8 0.4 0.1 0.4 July 177.0 178.3 196.9 165.2 176.8 1.5 0.8 1.3 1.0 1.2 August 178.4 178.3 197.2 166.4 177.7 0.8 - 0.2 0.7 0.5 September 177.4 178.3 197.3 166.7 177.4 (0.6) - - 0.2 (0.2) October 180.3 179.7 198.3 168.3 179.5 1.6 0.8 0.5 1.0 1.2 November 178.5 180.3 198.4 168.7 178.9 (1.0) 0.3 - 0.2 (0.3) December 179.3 182.3 198.2 168.8 179.8 0.4 1.1 (0.1) - 0.5 Total 8.2 8.1 3.9 6.1 7.3 1982 January 184.5 194.9 199.9 181.9 188.3 2.9 6.9 0.9 7.8 4.7 February 183.7 198.4 200.2 183.7 189.3 (0.4) 1.8 0.2 1.0 0.5 March 183.4 200.1 200.3 183.9 189.6 (0.2) 0.9 0.1 0.1 0.2 April 182.4 200.7 200.4 184.6 189.5 (0.5) 0.3 0.1 0.4 - May 182.8 201.3 200.9 184.8 189.9 0.2 0.3 0.2 0.1 0.2 June 183.4 202.0 202.0 184.9 190.5 0.3 0.4 0.5 - 0.3 July 186.5 203.0 204.1 186.4 192.6 1.7 0.5 1.0 0.8 1.1 August 183.8 203.2 203.8 187.5 191.7 (1.4) 0.1 (0.2) 0.6 (0.5) September 186.3 205.0 204.5 187.1 193.4 1.4 0.9 0.3 (0.2) 0.9 October 189.2 208.0 204.8 189.0 195.8 1.6 1.5 0.1 1.0 1.2 November 190.4 208.9 205.1 189.3 196.7 0.6 0.4 0.1 0.2 0.5 December 192.7 209.8 205.8 189.3 197.8 1.2 0.4 (0.1) - 0.6 Total 7.5 15.1 3.4 12.1 10.0 1983 January 195.6 223.2 205.3 209.4 206.9 1.5 6.4 -0.2 10.6 4.6 February 192.1 229.7 204.9 210.3 207.2 -1.8 2.9 -0.2 0.4 0.1 March 189.7 228.8 204.6 210.6 206.0 -1.2 -0.4 -0.1 0.1 -0.6 April 194.8 233.2 207.8 216.6 211.0 2.7 1.9 1.6 2.8 2.4 May 197.9 234.4 209.2 216.9 212.8 1.6 0.5 0.7 0.1 0.9 June 205.2 234.9 210.2 217.2 216.2 3.7 0.2 0.5 0.1 1.6 July 208.2 235.3 212.1 217.7 217.9 1.5 0.2 0.9 0.2 0.8 August 207.2 235.4 212.4 219.4 217.8 -0.5 0.0 0.1 0.8 - September 210.5 236.4 213.0 219.5 219.6 1.6 0.4 0.3 0.0 0.8 October 209.7 237.1 213.2 220.1 219.6 -0.4 0.3 0.1 0.3 - November 209.7 238.0 213.7 221.4 220.2 0.0 0.4 0.2 0.6 0.3 December 212.7 238.1 214.0 221.5 221.5 1.4 0.0 0.1 0.0 0.6 Total 10.4 13.5 4.0 17.0 12.0 /a Arithmetic average of weights for 17 cities. Source: BPS. -250 - ANNEX 2 Table 9.3.1 INDONESIA COUNTRY ECONOMIC MEMORANDUM Wholesale Price Indices in Indonesia, 1972-81 /a (1971 = 100) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 /b /b Agriculture 118 159 218 256 321 392 430 571 712 821 911 Food crops 126 162 194 230 296 343 368 488 619 732 864 Commercial crops 91 148 225 182 265 411 451 604 632 674 690 Livestock 118 156 218 255 293 349 394 522 706 830 877 Mining & quarrying 113 125 164 195 210 237 262 343 433 528 609 Manufacturing 110 154 189 202 238 265 294 388 469 525 574 Imports 110 140 184 200 215 225 244 346 402 432 453 Exports 119 179 377 368 393 447 488 969 1,437 1,586 1,632 Nonoil exports 105 166 219 182 226 290 329 653 768 757 776 General index excluding exports 112 151 196 217 256 292 320 430 523 583 633 General index 114 157 232 247 283 323 354 538 706 784 831 /a Average index for each year. The publication of this series stopped in 1982. See Table 9.3.2 for new series based on 1975 = 100. /b For 1981 and 1982, the series has been extended by use of the 1975 index. Source: Indikator Ekonomi (BPS). - 251 - ANNEX 2 Table 9.3.2 INDONESIA COUNTRY ECONOMIC MEMORANDUM Wholesale Price Indices in Indonesia, 1975-83 /a (1975 = 100) 1975 1976 1977 1978 1979 1980 1981 1982 1983/b Agriculture 100 123 144 162 213 262 302 336 375 Food crops 100 125 142 154 201 257 304 359 - Commercial crops 100 130 167 195 251 268 286 293 - Livestoclk 100 115 133 152 201 268 315 383 - Mining & quarrying 100 113 130 144 175 218 266 311 334 Manufacturing 100 115 128 139 178 210 235 257 298 Imports 100 103 108 118 153 174 191 201 232 Exports 100 103 116 127 246 375 414 430 498 Nonoil exports 100 117 148 171 303 365 360 370 478 General index 100 110 122 134 195 254 282 302 348 General index excluding exports of petroleum 100 113 124 136 176 208 243 263 288 /a Average for year. /b Average index January-November. Source: Indikator Ekonomi (BPS). INDONESIA COUNTRY ECONOMIC MEMORANDUM Domestic Price of Petroleum Products, 1972-84 (Rp/liter) /a /b /b /b 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 Aviation gas 35 40 50 62 70 70 70 100 150 150 240 300 300 Aviation turbo 30 40 50 62 70 70 70 100 150 150 240 300 300 Premium gasoline 40 45 55 67 90 90 90 140 220 220 360 400 400 1 t'3l Regular gasoline 35 41 46 57 70 70 70 100 150 150 240 320 350 9 Kerosene 10 11.5 13 16 18 18 18 25 37.5 37.5 60 100 150 Motor diesel (solar) 14 16 19 22 25 25 25 35 52.5 52.5 85 145 220 Industrial diesel 8 5 9 13 19 22 22 22 30 45 45 75 125 200 Fuel oil 6.5 7.5 12 19 22 22 22 30 45 45 75 125 200 /a From May 1980. /b Prices increased in January. Source: Migas. ANNEX 2 - 253 - Table 10.1 INDONESIA COUNTRY ECONOMIC MEMORANDUM Approved Foreign Investment by Sector, 1967-83 /a (US$ million) Total Sector 1967-76 1977 1978 1979 1980 1981 1982 1983/b 1967-83 Agriculture 84.4 21.4 3.1 22.2 50.2 25.0 15.9 - 222.2 Forestry 147.3 28.5 38.6 39.7 38.6 157.6 63.3 - 513.6 Fishery 45.3 2.7 16.6 38.4 2.9 21.6 6.2 - 133.7 Mining & quarrying 1,057.4 0.5 38.1 350.0 3.0 17.0 226.4 19.0 1,711.4 Manufacturing 2,819.6 245.0 280.8 1,516.2 708.9 854.4 1,245.9 1D751-6 9,422-4 Food 175.4 7.3 5.5 63.5 14.2 40.5 6.4 - 312.8 Textiles & leather 842.6 68.9 113.8 91.4 77.4 138.6 46.9 11.9 1,391.5 Wood & wood products 22.3 - 1.0 6.0 11.2 123.6 15.5 12.9 192.5 Paper & paper products 85.7 9.7 0.5 10.4 2.3 48.5 - 628.9 786.0 Chemicals & rubber 308.6 50.3 25.4 380.2 282.2 255.3 351.5 125.2 1,778.7 Nonmetallic miaerals 310.9 18.3 19.7 76.7 222.1 20.1 62.5 11.9 742.2 Ferrous metals 820.4 18.4 9.9 843.5 - 84.8 3.6 819.2 2,599.8 Metal products 248.7 72.1 98.1 44.5 98.8 143.0 759.5 141.6 1,606.3 Other 5.0 - 6.9 - 0.7 - - - 12.6 Construction 62.4 2.5 5.4 0.5 7.7 48.8 30.9 1.5 159.7 Trade & Wholesale 167.8 7.0 9.7 3.0 38.6 - 19.2 25.0 270.3 Wholesale trade 11.7 - - - - - 2.2 - 13.9 Hotels 156.1 7.0 9.7 3.0 38.6 - 17.0 25.0 256.4 Transport & Communication 44.6 - - 0.2 31.6 - 17.8 - 94.2 Transport 44.6 - - 0.2 31.6 - 17.8 - 94.2 Communication - _- - - - - - Real estate & business services 234.8 20.2 4.4 45.2 - 23.4 204.9 92.6 625.6 Other services 14.7 - - - 2.0 - - - - Total 4,663.6 327.9 396.7 2,015.4 881.5 1,147.8 1,830.5 1,889.7 13,153.1 /a Intended Capital Investment. Amounts represent original approval plus approved expansion minus cancella- tion. /b Preliminary estimates. Source: Investment Board. ANNEX 2 Table 10.2 INDONESIA COUNTRY ECONOMIC MEMORANDUM Implementation of Foreign Investment by Sector, 1967-83 (US$ million) Total Sector 1967-76 1977 1978 1979 1980 1981 1982 1983/a_1967-8T Agriculture 40.2 12.5 10.1 4.3 14.5 13.0 5.8 2.3 102.7 Forestry 260.3 22.1 15.0 19.2 26.2 34.9 11.0 2.6 391.3 Fishery 67.8 2.8 13.5 10.5 7.9 0.4 9.0 - 111.9 Mining & quarrying 299.2 20.1 57.3 47.5 49.4 70.0 32.2 17.7 593.4 Manufacturing 1,726.6 186.2 267.0 192.0 235.4 243.5 378.9 220.3 3,449.9 Food 136.4 11.9 14.9 7.1 7.4 15.8 7.1 1.2 201.8 Textiles & leather 716.9 27.9 31.4 41.7 78.7 102.5 69.7 14.1 1,082.9 Wood & wood products 20.7 1.4 0.4 0.1 2.3 2.2 23.9 8.6 60.6 Paper & paper products 17.9 9.6 11.8 1.4 6.1 2.5 1.6 - 50.9 Chemicals & rubber 237.9 28.0 71.7 44.8 32.0 44.5 164.9 110.5 734.4 Nonmetallic minerals 210.8 42.9 9.0 3.2 30.0 30.9 49.4 15.9 392.1 Ferrous metals 111.8 27.8 37.8 47.5 23.9 7.9 28.5 54.0 339.2 Metal products 263.4 35.4 89.9 36.0 52.0 35.3 33.8 15.8 561.6 Others 10.8 1.3 0.1 10.2 2.0 1.9 - 0.2 26.5 Construction 34.5 3.0 1.4 12.0 0.8 0.6 6.9 - 59.2 Trade & Hotels 79.8 6.2 17.2 4.3 0.4 2.9 - 0.2 111.0 Wholesale trade 10.1 - 0.7 - - 2.5 - 0.2 13.5 Hotels 69.7 6.2 16.5 4.3 0.4 0.4 - - 97.5 Transport & Communication 16.3 2.0 4.7 21.9 4.8 1.3 - - 51.0 Transport 9.7 1.8 1.3 0.1 2.1 0.2 - - 15.2 Communication 6.6 0.2 3.4 21.8 2.7 1.1 - - 35.8 Real estate & business services 76.5 3.8 14.0 6.9 7.2 12.4 6.1 3.8 130.7 Others 109.5 0.1 5.0 - - - - - 114.6 Total 2,710.7 258.8 405.2 318.6 346.6 379.0 449.9 246.9 5,115.7 /a Preliminary estimates. Source: Bank Indonesia. ANNEX 2 Table 10.3 INDONESIA COUNTRY ECONOMIC MEMORANDUM Approved Domestic Investment /a by Sector, 1968-82 (Rp billion) Sector 1968-75 1976 1977 1978 1979 1980 1981 1982/b Agriculture, fisheries & livestock 89.6 42.3 49.4 100.4 36.4 126.9 192.0 511.0 Forestry 178.7 35.1 64.0 58.5 81.8 397.6 313.0 182.0 Mining 50.0 - - 18.3 32.9 37.1 13.5 453.0 Manufacturing 1,125.3 174.6 401.4 531.2 502.3 861.5 1,791.0 2,096.0 Textile 405.5 42.5 75.0 167.6 41.8 143.6 96.0 77.0 Chemicals 178.8 -2.2 98.7 103.0 142.0 431.6 893.0 542.0 Electric manufacturing 24.2 - - - - - - - Other manufacturing 516.8 134.3 227.7 260.6 318.5 286.3 802.0 1,477.0 Construction 14.2 -1.2 - 2.6 2.1 1.5 15.1 16.0 Hotel 79.7 6.8 4.1 11.6 12.4 1.0 52.6 70.0 Real estate 92.4 41.3 35.2 15.0 3.8 24.0 -12.5 71.0 Others 111.7 7.4 19.9 24.2 16.9 53.9 61.0 461.0 Total 1,741.6 276.3 574.5 761.8 688.6 1,503.6 2,426.0 3,860.0 /a Intended capital investment. Figures represent original approvals plus approved expan- sions minus cancellations. /b Preliminary estimate. Source: Investment Coordinating Board. a' / "C-~~~~~~~~~~~~~~C o' >,',-", z - > r -8~~~~~~~~~ , o S 'o 2 j: B& § k ' 4 S~~~~~~~~2 - p'l~ ~ ~~~' PAPUA NEW GN Ki - ; i 9 t 5 >' "/"'// - ; > CD 5;&i2 w \ H~~~~~~~~~~~~" C 8 8 ' . i vX '> X t ' s 6/f$K)K 7 1 o ' ,,, : o.' n