Im st- 1OOZ jJq8W9AON £60£Z Report No. 23093-IND Indonesia The Imperative for R efo rm Brieffor the Consultative Group on Indonesia World Bank November 2, 2001 CURRENCY EQUIVALENTS (As of November 2, 2001) Currency Unit = Rupiah (Rp.) US$1 = Rupiah 10,600 FISCAL YEAR: April I-March 31 till 2000 FY 2000 is 9 months, April 1 to December 31 Same as calendar year from 2001 onwards Regional Vice President: Mr. Jemal-ud-din Kassum Country Director: Mr. Mark Baird Chief Economist: Mr. Homi Kharas Sector Director: Mr. Homi Kharas Task Team Leader: Mr. Vikram Nehru Acknowledgements This report was written by a team led by Vikram Nehru, and comprising Bert Hofinan, Sarwar Lateef, Yoichiro Ishihara, Magda Adriani, and Mona Haddad. Contributors were Vivi Alatas, Bernard Drum, Michael Edwards, David Hawes, Kai Kaiser, Dara Lengkong, Jeffrey Lewis, William Mako, Stephen Mink, Menno Pradhan, Megawati Sulistyo, Anthonv Toft and Tom Walton. Peer reviewers were Anggito Abimanyu, Amarendra Bhattacharya, Milan Brahmhbhatt and William Walllace. Helpful c omments were received from Surendra Agarwal, Sandy Lieberman, Jessica Poppele and Mariam Sherman. Staff support was provided by Nina Herawati, Lieke Sastrosatomo and Christina Setiadi. Overall guidance was provided by Mark Baird and Homi Kharas. The report was discussed with government officials on November 1, 2001. ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank JITF Jakarta Initiative Task Force ADF Asian Development Fund JSX Jakarta Stock Exchange AFTA ASEAN Free Trade Area KDP Kecamatan Development Program BAPEPAM Capital Market Supervisory Board K-GRIP Kabupaten Governance Reform BCA Bank Central Asia Initiatives Project BI Bank Indonesia KPPU Commission for Business Competition BIl Bank Internasional Indonesia KTP National Identity Card BIS Bank for International Settlements Kwh Kilowatt hour BPN National Land Agency LAN State Administration Board BNI Bank Negara Indonesia Lol Letter of Intent BKKBN National Family Planning Coordinating MenPAN State Ministry for Administrative Board Reforms BKN Civil Service Agency MIGA Multilateral Investment Guarantee BKPK Coordinating Agency for Poverty Reduction Association BLBI Bank Indonesia Liquidity Support MOF Ministry of Finance BoP Balance of Payments MOHA Ministry of Home Affairs BPK Supreme Audit Board MoU Memorandum of Understanding BPKP Financial & Development Supervisory MPR People's Consultative Assembly Board NBFI Non-Bank Financial Institution BPN National Land Agency NCCG National Committee on Corporate BPR Bank Perkreditan Rakyat Governance BRI Bank Rakyat Indonesia NCCT Non-Cooperative Countries and BTN Bank Tabungan Nasional Territories BULOG State Logistics Agency NFP National Forest Program CBS Central Bureau of Statistics NGO Non Government Organization CEIC CEIC Data Company Ltd. NPPO National Public Procurement Office CGI Consultative Group on Indonesia NTB West Nusa Tenggara CITES Convention on International Trade in OC Oversight Committee Endangered Species OECD Organization for Economic Co- CPI Consumer Price Index operation and Development DAK Special Allocation Fund OPIC Overseas Private Investment DAU General Allocation Fund Corporation DIP Authorization to spend OPK Special Market Operation DPR House of Representatives Perda Regional Regulation FATF Financial Action Task Force Persero State-owned limited liability company FDI Foreign Direct Investment PLN State Electricity Company FITRA Indonesian Forum for Budgetary PP Government Regulation Transparency PROPENAS National Development Program FSPC Financial Sector Policy Committee ROSC Review of Standards and Codes GBHN State Policy Guidelines SGP Scholarships and Grants Program GDP Gross Domestic Product SMEs Small and Medium Enterprises Gol Government of Indonesia SMERU Social Monitoring and Early Response GTZ German Technical Corporation Unit IBRA Indonesian Bank Restructuring Agency SOE State-Owned Enterprises IDA International Development Association SSNAL Social Safety Net Adjustment Loan IDCF Interdepartmental Committee on Forestry SUSENAS National Socio-Economic Survey IFC International Finance Corporation UN United Nations IMF International Monetary Fund UNSFIR United Nations Support Facility for IPO Initial Public Offering Indonesian Recovery IPP Independent Power Producer WTO World Trade Organization Table of contents Page No. Chapter 1: Macroeconomic performance and outlook 1.1 Stability and market sentiment 1.1 The real economy 1.4 Income, wages, and poverty 1.5 International trade and payments 1.5 Fiscal policy 1.6 External financing needs 1.9 The macroeconomic outlook 1.10 Risks 1.12 Fiscal sustainability and debt management 1.12 Conclusion 1.16 Chapter 2: Structural reforms for growth 2.1 Moving public assets to the private sector 2.1 Corporate restructuring 2.3 Reforming the financial sector 2.7 Improving agricultural policy 2.11 Reshaping energy policy 2.13 Revitalizing mining 2.15 Promoting a responsive yet responsible private sector 2.16 Conclusion 2.17 Chapter 3: Improving governance and anti-corruption 3.1 Corruption 3.1 Reducing opportunities for corruption 3.3 Public financial management and procurement systems 3.4 The legal framework 3.5 Legal and justice sector reforms 3.7 Decentralization 3.10 Civil service reforms 3.14 Governance and decentralization - the case of forestry 3.15 Conclusion 3.17 Chapter 4: Toward a strategy for poverty reduction 4.1 Poverty trends 4.1 Government policies and the poor 4.3 Investing in the poor 4.5 Reducing poverty in a decentralized environment 4.7 Empowering the poor 4.8 Mainstreaming poverty reduction 4.9 Conclusion 4.11 Executive Summary Indonesia's recovery was already slowing several Fiscal sustainability and external financing months before the events of September 11. needs. The most immediate priority, then, is to Political instability had raised social tensions and ensure fiscal sustainability - for stability and as a slowed reforms - fueling capital flight, alarming foundation for growth. Implementation of a sound investors, and delaying official external finance budget for 2002 is a step toward this objective. for development. Progress on bank restructuring The budget involves sizable revenue mobilization, had slowed and the debt of financially strapped reduction in fuel subsidies, and asset sales corporates remained largely unresolved. (including - hopefully more successfully than Corruption flourished, unchecked by a justice before - privatization). Gross external financing system that itself was corroded. Regional tensions to meet the budget deficit is estimated to be about increased even as the country embarked upon an US$7 billion. Of this, the CGI disbursement ambitious decentralization program. And, if real pledge being requested is US$3.0-3.5 billion. wages are any indication, progress on poverty reduction - encouraging in 1999 and early 2000 - In previous years, actual disbursements have fallen ground to a halt. short of CGI pledges - particularly for program loans. Indeed, over the past four years, the Markets welcomed the appointment of President shortfall adds up to US$9 billion. Official Megawati Soekarnoputri' in July 2001 with a creditors are becoming increasingly wary of substantial appreciation of the rupiah. The new pledging in support of pblicy reforms when the government quickly reached agreement with the track record gives little cause for comfort. As in IMF on a long-delayed Letter of Intent, and in a previous years, disbursements from ongoing and fresh spirit of cooperation, Parliament approved new program loans pledged in the CGI will be the budget for 2002, autonomy laws for Aceh and conditional on policy performance, so their Papua, and a new Oil and Gas Law. disbursement should not be a foregone conclusion. But in the one hundred days since assuming office, Reform priorities. The events of September 11 the new administration has made little progress on have not altered Indonesia's reform priorities - on structural and governance reforms - renewing the contrary, they have emphatically underscored nervousness in markets and worrying external their urgency. But donors need to be realistic donors and creditors. The events of September 11 about what is feasible, given strong vested and the slowdown in the global economy interests, severe institutional weaknesses, the worsened the investment climate in Indonesia, uncertainties arising from decentralization, and a adding to the government's already formidable turbulent transition to democracy. Progress is most array of challenges. needed in the key areas of structural reforms, good governance, and empowering and investing in the Economic outlook. Indonesia's economy is set poor. Together with fiscal sustainability, they are for slower growth in 2001 and 2002 (3.3 percent consistent with the premise that stability, growth, and 3.5 percent respectively, compared to 4.8 and effective government are the key ingredients percent in 2000). Although seemingly robust in for long-lasting and sustainable poverty reduction. comparison to other crisis countries in East Asia, this growth rate is still too low - because Poverty is the development challenge facing Indonesia's recovery has lagged behind its Indonesia today. The agenda in this report and for neighbors and over half its population vulnerable the CGI is about keeping faith with the millions of to poverty, more than any other crisis country. poor people in Indonesia seeking a better future Moreover, Indonesia's fragile banking and for themselves and for their children. It is corporate sectors, and the precarious state of its important every effort is made to complete this government finances, make the country highly agenda successfully - and that all stakeholders, vulnerable to risks - with immediate implications including the international community, work for fiscal sustainability. jointly for this common purpose. - Page ii - Summary of key recommendations This report contains many policy recommendations for Government and the creditor community. Clearly, they cannot all be implemented at once. Here we list key recommendations and put them in the sequence in which we think they should be implemented - the important and urgent belong at the top of the list. Actions needing completion this year (2001) o Maintain a tight money policy through the rest of the year to bring down inflation. o Privatize BCA, Bank Niaga, and Semen Gresik as planned. o Enact an effective Anti Money Laundering Law that strengthens the legal framework for anti- corruption. o Finalize an action plan to create the right organizational structure of Indonesia's public procurement system. o Adopt a rice policy which balances the needs of farmers and consumers (especially the poor), and which gives BULOG a medium-term, fiscally-sustainable role. Actions for completion next year (2002) For stability: o Meet privatization and IBRA asset recovery targets in the 2002 budget. o Implement reforms that ensure disbursements of pledged program financing from official creditors. For structural reforms: o In consultation with Parliament, prepare a medium-term financial sector reform strategy. o Close or merge banks that fail to meet the central bank's year-end capital adequacy requirements. o In consultation with Parliament, prepare a divestment strategy for state banks. o Consolidate and restructure the Java-based, state-owned, sugar industry. o Complete restructuring of PLN. For good governance: o Establish a credible, independent, anti-corruption commission and fund it adequately. o In consultation with Parliament prepare a comprehensive strategy to reform the justice sector and the civil service. o Enact improved versions of the state finances, state treasury, and state audit laws in cooperation with Parliament. o Establish the organizations to oversee Indonesia's public procurement system. o Adjust the legal and regulatory framework for government procurement to meet WTO and AFTA commitments. For empowering and investing in the poor: o Prepare and present to Parliament a comprehensive poverty reduction strategy based on consultations with key stakeholders. o Ensure general allocation grants are more equalizing across regions. o Allocate budgetary resources specifically for poverty alleviation programs in the regions. Rin2kasan Eksekutif Pemulihan Indonesia telah melambat beberapa pertumbuhan ini masih terlalu rendah - sebab bulan sebelum peristiwa 11 September. pemulihan Indonesia telah tertinggal di belakang Ketidakstabilan politik telah meningkatkan tetangga-tetangganya dan lebih dari separuh ketegangan sosial dan memperlambat penduduknya rentan terhadap kemiskinan, lebih pembaharuan -- sehingga merangsang pelarian dari negara lain manapun yang mengalami krisis. modal, membuat kuatir para investor, dan Lagi pula, sektor perbankan dan perusahaan yang menunda pembiayaan luar negeri yang resmi rapuh di Indonesia, serta keadaan keuangan untuk pembangunan. Kemajuan restrukturisasi pemerintahnya yang genting, membuat negeri ini perbankan telah melambat dan hutang perusahaan- sangat rentan terhadap berbagai risiko - dengan perusahaan yang bermasalah secara keuangan dampak langsung atas keberlanjutan fiskal. tetap tak terselesaikan pada umumnya. Korupsi menjadi subur, tidak dapat dicegah oleh sistem Keberlanjutan fiskal dan kebutuhan peradilan yang juga rapuh. Ketegangan di daerah pembiayaan dari luar negeri. Maka prioritas meningkat bahkan selagi negeri ini memulai yang paling mendesak adalah memastikan program desentralisasinya yang ambisius. Dan, keberlanjutan fiskal - demi kestabilan dan sebagai bila upah nyata bisa menjadi pedoman, kemajuan fondasi bagi pertumbuhan. Implementasi anggaran pengurangan kemiskinan - yang menggembirakan yang sehat untuk tahun 2000 adalah selangkah ke di tahun 1999 dan di awal 2000 - kandas terhenti. arah tujuan ini. Anggaran ini melibatkan mobilisasi pendapatan yang cukup besar, Pasar menyambut pelantikan Presiden Megawati pengurangan subsidi bahan bakar, dan penjualan Soekarnoputri di bulan Juli 2001 dengan apresiasi aset (termasuk privatisasi yang semoga lebih rupiah yang substansial. Pemerintah baru dengan berhasil daripada sebelumnya). Pembiayaan bruto cepat mencapai kesepakatan dengan IMF dari luar negeri untuk memenuhi defisit anggaran mengenai letter of intent yang telah lama tertunda diperkirakan sekitar US$7 milyar. Dari jumlab ini, dan dengan semangat kerja sama yang baru. komitmen pengeluaran dana CGI yang diminta Parlemen menyetujui anggaran untuk tahun 2002, adalah US$3.0-3.5 milyar. Undang-undang Otonomi Khusus untuk Aceh dan Papua, dan Undang-undang Minyak dan Gas yang Pada tahun sebelumnya, pengeluaran dana baru. sesungguhnya telah berkurang dibanding jumlah komitmen CGI - kbususnya untuk pinjaman- Tetapi dalam seratus hari sejak memangku pinjaman program. Sebenamya, selama lebih dari jabatan, pemerintahan baru ini tidak mencapai empat tahun terakhir, kekurangan tersebut banyak kemajuan dalam pembaharuan struktural mencapai US$9 milyar. Para kreditur resmi dan penyelenggaraan pemerintahan - sehingga menjadi semakin hati-hati memberikan komitmen timbul kembali kegugupan di dalam pasar dan dukungan bagi pembaharuan kebijakan bila track membuat kuatir para donor dan kreditur baru. record-nya tidak memberikan banyak alasan untuk Peristiwa-peristiwa 11 September dan merasa nyaman. Seperti di tahun-tahun melambatnya perekonomian global memperburuk sebelumnya, pengeluaran dana dari pinjaman- iklim investasi di Indonesia, sehingga menambah pinjaman program yang berjalan maupun yang deretan tantangan yang sudah cukup hebat bagi baru di CGI akan ditentukan oleh kinerja pemerintah. kebijakan, jadi pengeluaran dana mereka yang sebenarnya belum dapat dipastikan. Prospek ekonomi. Perekonomian Indonesia diperkirakan mengalami pertumbuhan yang lebih Prioritas pembaharuan. Peristiwa-peristiwa 11 lambat di tahun 2001 dan 2002 (masing-masing September belum mengubah prioritas-prioritas 3.3 persen dan 3.5 persen, dibandingkan dengan pembaharuan di Indonesia - sebaliknya, justru 4.8 persen di tahun 2000). Meskipun kelihatannya dengan tegas menggarisbawahi betapa mendesak kokoh dibandingkan negara-negara lain yang pelaksanaannya. Tetapi para donor perlu realistis mengalami krisis di Asia Timur, tingkat mengenai apa yang dapat dicapai, mengingat - Page iv - kuatnya kepentingan-kepentingan pribadi, Kemiskinan justru merupakan tantangan parahnya kelemahan kelembagaan, keticdakpastian pembangunan yang dihadapi oleh Indonesia akibat desentralisasi, dan transisi yang penuh dewasa ini. Agenda dalam laporan ini dan bagi pergolakan menuju demokrasi. Kemajuan paling CGI adalah untuk tetap setia kepada jutaan kaum dibutuhkan dalam bidang-bidang penting yakni miskin di Indonesia yang mencari masa depan pembaharuan struktural, penyelenggaraan yang lebih baik bagi diri mereka dan anak-anak pemerintah yang baik, dan pemberdayaan serta mereka. Penting mengerahkan segala upaya untuk investasi bagi kepentingan kaum miskin. Bersama menyelesaikan agenda ini dengan berhasil - dan dengan keberlanjutan fiskal, prioritas-prioritas ini agar semua stakeholders, termasuk masyarakat sesuai dengan dasar pemikiran bahwa kestabilan, intemasional, bekerja bersama-sama untuk tujuan pertumbuhan, dan pemerintah yang efektif bersama ini. merupakan unsur-unsur penting untuk pengurangan kemiskinan yang bertahan lama dan berkelanjutan. - Page v - Ikhtisar Rekomendasi Utama Laporan ini memuat banyak rekomendasi kebijakan bagi pemerintah dan kalangan kreditur. Tentu, ini semua tidak dapat dilaksanakan sekaligus. Di sini kami mencantumkan rekomendasi utama dan menempatkannya, menurut hemat kami, sesuai dengan urutan pelaksanaannya--yang lebih penting dan mendesak berada di urutan atas pada daftar. Tindakan yang perlu diselesaikan pada tahun 2001 ini o Mempertahankan kebijakan uang ketat sepanjang sisa tahun ini untuk menurunkan inflasi. o Privatisasi BCA, Bank Niaga, dan Semen Gresik seperti yang sudah direncanakan. o Memberlakukan Undang-undang Anti Pencucian Uang yang efektif yang memantapkan kerangka kerja hukum untuk anti-korupsi. o Menyelesaikan rencana pelaksanaan untuk menciptakan struktur organisasi yang tepat dalam sistem pengadaan publik di Indonesia. o Menerima suatu kebijakan beras yang menyeimbangkan kebutuhan petani dan konsumen (terutama kaum miskin), dan yang memberikan kepada BULOG peran fiskal yang berkelanjutan dalam jangka menengah. Tindakan untuk diselesaikan tahun depan (2002) Untuk kestabilan: o Memenuhi target privatisasi dan pemulihan aset BPPN dalam tahun anggaran 2002. o Melaksanakan pembaharuan yang menjamin pengeluaran dana program yang dijanjikan dari kreditur resmi. Untuk pembaharuan struktural: o Berkonsultasi dengan Parlemen, persiapkan suatu strategi pembaharuan sektor keuangan jangka menengah. o Tutup atau adakan merger bagi bank-bank yang gagal memenuhi persyaratan bank sentral untuk kecukupan modal akhir-tahun. o Berkonsultasi dengan Parlemen, persiapkan suatu strategi divestasi bagi bank-bank pemerintah. o Konsolidasi dan restukturisasi industri gula milik-negara yang berbasis di Jawa. o Selesaikan restrukturisasi PLN. Untuk penyelenggaraan pemerintahan yang baik: o Bentuk komisi anti-korupsi independen yang dapat dipercaya, dan biayai secara memadai. o Berkonsultasi dengan Parlemen, persiapkan suatu strategi yang komprehensif untuk memperbaharui sektor peradilan dan dinas pegawai negeri sipil. o Berlakukan versi undang-undang yang telah disempumakan mengenai keuangan negara, perbendaharaan negara, dan audit negara bekerjasama dengan Parlemen. o Bentuk organisasi-organisasi untuk mengawasi sistem pengadaan publik di Indonesia. o Sesuaikan kerangka hukum dan peraturan untuk pengadaan pemerintah agar memenuhi komitmen WTO dan AFTA. Untuk pemberdayaan dan investasi bagi kepentingan kaum miskin o Persiapkan dan sampaikan kepada Parlemen suatu strategi pengurangan kemiskinan yang komprehensif berdasarkan konsultasi dengan para stakeholders utama. o Pastikan dana alokasi umum lebih merata di seluruh daerah. o Alokasikan dana-dana anggaran secara spesifik untuk program-program pengurangan kemiskinan di daerah-daerah. Chapter 1 Macroeconomic Performance and Outlook The sharp deterioration in the global economy Instead, the environment for monetary policy following the terrorist attacks in the United States deteriorated. Early slippages in reforms and an has added another challenge to the already daunting increasingly uncertain political climate raised risk list faced by the new Megawati administration. The premia and contributed to renewed downward new government had inherited a fragile economy, pressure on the rupiah, which fell to about Rp 9,000 amid faltering world trade and global demand. per dollar in the run up to the August 2000 MPR Indonesia's growth slowed and inflation climbed session. Partly as a result, inflationary pressures re- following months of heightened social tensions and emerged in the second half of the year. Bank political uncertainty preceding the special session of Indonesia was somewhat slow to respond to the the Peoples' Consultative Assembly (MPR) in July emerging inflation threat, reflecting concerns about 2001. In the end, presidential power was transferred the effect of higher interest rates on economic smoothly and peacefully and financial markets growth, the banking system, and the budget. heaved a sigh of relief, greeting the event with a sharp appreciation in the rupiah. The new President These pressures continued into late 2000 and early earned general acclaim for her cabinet appointments 2001. After a brief respite, the rupiah came under and her new economic team rapidly came to sustained downward pressure, reaching Rp 12,000 agreement with the IMF on a much-delayed letter of per dollar in April 2001 on growing concerns about intent (Box 1.1). But the honeymoon was short the overall direction of economic policy and lived. Within weeks, the exchange rate started emerging political instability. Bank Indonesia deteriorating pnce again and inflation refused to be continued to raise interest rates during this period, subdued. Moreover, in its first 100 days in office, but its ability to respond more forcefully was the new Government seems to have made little constrained by pressures to change the central bank progress on its immediate policy priorities, which law and remove its senior management. Bank include: maint4ining macroeconomic stability, Indonesia's accommodative monetary stance in this accelerating bank and corporate restructuring, period meant that base money growth accelerated regaining fiscal sustainability, and ensuring sharply in the second half of 2000. Not surprisingly, continued service delivery to the poor while rapidly interest rates climbed in nominal terms, but failed to decentralizing government. As a result, official keep pace with higher inflation; as a result, real program loans supporting policy reformns are likely interest rates fell at a time when risk premia for to disburse only about US$0.9 billion this year out Indonesia were generally on the rise. of a total of US$2.6 billion pledged - adding to concems about the sustainability of government Since mid-2001, monetary conditions have been finances. tightened significantly. This partly reflects further moves by Bank Indonesia to raise its key policy Stability and market sentiment intervention rate in July. In addition, the improvement in market sentiment following the Monetary and exchange rate developments. In change of government contributed to a marked early 2000, the monetary and exchange rate situation recovery in the rupiah, which reached an eleven- was poised to become more supportive of economic month high of about Rp 8,500 per dollar in mid- recovery. The rupiah had strengthened from over August. The stronger rupiah raised expectations for Rp 16,000 per dollar at the peak of the crisis to lower interest rates, as inflationary pressures abated around Rp 7,000. Inflation had been brought firmly and base money was brought back under control. under control, and interest rates had fallen to around Since then, however, the rupiah has come under 12 percent from a peak of nearly 70 percent. Real renewed downward pressure, and inflation has yet to interest rates were still relatively high, but it was show signs of abating (Figure 1.1). These expected that they would begin to decline as reformns developments have reduced the scope for lowering were implemented and risk premia began to narrow. interest rates in the short term. - Page 1.2 - Box 1.1 Selected Government Commitments in the Letter of Intent of August 27, 2001 Macroeconomic Framework and Policies * Maintain a growth target in 2001 of 3-3.5 percent, inflation 9-11 percent. * Reduce base money growth to 12 percent by March 2002. * Review implementation of 2001 budget and framework for 2002 budget in mid-October. * Draft 2002 budget to include a deficit of 2-3 percent of GDP. * Submit to Parliament the draft Sovereign Debt Securities Law. Fiscal Decentralization * Transfer to the regions a total of 2.1 million civil servants by end-2002. * Calculate revenue sharing and General Allocation Fund transfers based on original budget estimate. * Use contingency funds only up to the Rp. 3 trillion allocated in the revised budget. * Finalize modalities to issue bonds in last quarter 2001 to resource surplus regions. * Complete audits of the allocation of the contingency funds by end 2001. * Refine the formula for the General Allocation Fund for use in 2002. Banking System Reforms * Launch Bank Mandiri IPO (up to 30 percent of shares) by end-2001. * Publish key financial data for individual banks by end-2001. * Adopt action plan to improve supervision, regulations, and governance of NBFIs. * Complete by end-2001 all outstanding issues from BI's 1999-2000 audit. * Resolve BLBI credits issue between BI, GOI, and Parliament by end-2001. * Finalize replenishment of Government Guarantee Scheme by first week of September. * Remove BII's impaired assets and replace with government bonds by mid-September. IBRA Asset Recovery and Restructuring * Respond to the OC review of first four large restructurings by mid-September. * Publish next round of ten OC reviews by mid-October. * Launch sale of unrestructured loans by end-2001 using competitive bidding mechanisms. * Discuss with Parliament sale of 51 percent of BCA to a strategic partner. * Sell majority stake in Bank Niaga by end-2001. Corporate Restructuring and Legal Reforms * Restructure a cumulative total of $ 14-15 billion by end-2001. * Refer from FSPC by end-December 2001 cases with a total debt of $10-11 billion. * Submit an amended version of the Bankruptcy Law to Parliament by end-200 1. * The Anti-Corruption Commission to become fully effective in coming months. Public Sector and Other Structural Reforms * BPKP audit of the Reforestation Fund will be completed by end-2001. * Publish audits and announce corrective actions of key SOEs by end-September. * Publish audit of the tax office by end-September and announce corrective actions by mid-October. - Page 1.3 - Figure 1.1 A macroeconomic snapshot, January 2000-October 2001 The rupiah bounced back briefly ... ... a movement mirrored by the stock market. (rupiah per US$, spot rate daily) (Jakarta stock exchange composite index and one month Bank Indonesia certificate rate) 7,000 7,000 JSX index SBI rate (%) 20 Bl's certificate 8,000 > 8,000 "O650 (1 month rate) ,000 961 570 16 530 10,000 10,000 490 14 450 12 11,000 11,000 410 1 0 370 JSX composite indces 12,000 12,000 330 8 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-00 Apr-00 Oct-99 Jan-00 May-00 Aug-00 Nov-00 Mar-01 Jun-01 Sep-01 Source: Bank Indonesia Source: CEIC Inflation rose.... ... and interest rates caught up, but with delay. (12 month percentage change in consumer & food (One month rupiah deposit rate in Indonesia) price index) 14 CPI General 13 1 1: - -87 Domestic Banks 1 10 -2 9 -5. 1 8 1 Foreign Banks -8 7 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Source: CBS Source: CEIC GDP growth remained positive .... ... .driven by domestic demand. (Year on year and quarterlv growth, in percent) (GDP, consumption and investment index, 1998Q Q=10( 10 120 Private --- -- -- --- -- -- GDP 0 ~~~~~~~~~~~~~~100 - -5 ~~~~~~~~~~~~~Quarterly growth 9 4- ~~~~~~~~~80 Year-on-year growth 70 Fie aital -15 o 60 -20 Ql1Q2 Q304 Ql 2 Q30401 Q2 Q3Q41Q04Ql2 3Q 1 02 50 1997 1998 1999 2000 2001 01Q2 0304 QlQ2 03Q4 Ql Q2Q3Q04 Q1Q2 1998 1999 2000* 2001 Source: CBS Source: CBS - Page 1.4 - Market sentiment. Domestic politics and global Second was the Indonesian reaction to the U.S.-led economic developments were not the only factors strike against Taliban forces in Afghanistan. playing on the minds of investors and markets. Two Television images of Indonesian demonstrations other factors were at play in keeping markets jittery. flashed around the world, alarming potential First was the handling of legal disputes in the investors abroad and even stirring disquiet among corporate sector and growing concerns about residents. This further damaged Indonesia's acquiring assets in Indonesia. Prime examples were: reputation as a preferred location for foreign (a) the Manulife case, where a dispute over one investors. small insurance policy with the insurance group led the claimants to initiate bankruptcy proceedings The real economy against the company and its foreign owners (Manulife and IFC); (b) the case of PT Panca in Recovery in the real economy also remains fragile. which unsubstantiated third party creditors voted Despite the fact that the second quarter GDP results against the company's bankruptcy as proposed by were better than expected, results for the first half the original creditors (see Chapter 2); (c) PLN's reveal a marked slowdown-3.4 percent growth in dispute with IPPs where resolution is a pre-requisite GDP compared to 4.7 percent in the first semester for renewed large scale private infrastructure of 2000 (Table 1.1).' Growth in government investment (see Chapter 2); and (d) Govemment's consumption eased because of fiscal strains but difficulties with privatizing BCA, Bank Niaga, and Semen Gresik -- which add to the impression that private consumption growth held up well, despite a aGis sharp decrease in consumer confidence amid acquirlng assets from the Indonesian Goerent political turmoil. And net exports declined difficult and risky. In all these cases, there iS a clear substantially in the wake of the global- slowdown perception that actions by the authorities reflect a sebelo) Bu the big surrie waslfxdcat systmatc bis aains foeigninvstor an an (see below). But the big surprise was fixed capital ssemuatappica gion oforhelawign invesorsof adomea formation which, defying pervasive evidence of unequalbapplicationoofrtheslaw.in favor of domestic investor pessimism, climbed significantly in the first debtors. half of 2001, maintaining a trend that began in early Table 1.1 2000. Part of this could be statistical artifact, owing GDP growth slowed in 2001 to the choice of investment deflator. But it could (Growth in percent compared to same semester the also indicate increased maintenance and previous year) rehabilitation of capital stock as growing 2000 2001 manufacturing and rising capacity utilization have Sem. I Sem. 2 Sem.l exacted a toll on existing plant and machinery. In small and medium enterprises and export industries, GDP growth 4.7 4.8 3.4 it may reflect genuine investment in new capacity as Non-oil GDP 5.1 5.4 3.9 firms responded to high profitability in the wake of By expenditure category depreciation in the currency. And it may arise from Consumption 2.8 5.0 5.4 increased residential construction (which could also Household 2.9 4.3 5.3 Government 1.6 11.9 5.8 explain the growth in cement sales). Despite this, Fixed capital formation 16.8 18.9 17.7 however, investment continues to be below pre- Exports 18.1 14.1 14.4 crisis levels. Imports 4.4 32.0 34.4 By sector of origin Slower GDP growth in 2001 has been the result of a Tradables slowdown in virtually all sectors of the economy - Agriculture -2.5 6.3 1.5 but this was particularly pronounced in some of the Mining & quarrying 1.8 2.8 1.7 Manufacturing 7.7 4.8 4.2 non-tradable subsectors, including construction, Non-tradables transport, and finance. Puzzlingly, other non- Construction 10.6 3.1 0.5 tradable subsectors, such as utilities and retail and Finance 5.5 3.9 2.7 Transport 10.6 8.3 6.7 Utilities 9.8 7.8 8.6 Retail trade etc. 6.0 5.4 5.5 GDP growth for the semester is measured over the same Other 2.3 2.2 1.8 semester the previous year. Source: CBS - Page 1.5 - wholesale trade, continued to perform relatively poverty rate has probably budged little since well, showing few signs of being affected by the rest February 2000, and may even have increased of the economy. The erosion of real electricity marginally.4 Of course, reality is much more tariffs since the onset of the crisis, and the shift to variegated than such an aggregate analysis would more energy-intensive tradable sectors is likely to indicate. For example, in some sub-sectors, notably explain part of the growth in the power sector. hotels, real wages have declined by over 10 percent since early 2000, while in others they have Income. waves, and povertv increased. Also, trends in real wages have differed from region to region: while regions such as North The recovery has been good for the poor. and Central Sulawesi show an improvement in real Preliminary estimates from SUSENAS 2000 show wages (and hence a likely reduction in poverty rates) that poverty declined substantially from its peaks in since 1997, other areas such as Jambi continue to 1999. The headcount poverty index fell from over suffer poverty rates that are still more than double 27 percent in 1999 to 15 percent in February 2000, their pre-crisis level. close to pre-crisis levels (see Chapter 4) 2 Other measures of poverty, using international standard International trade and payments poverty lines, lead to the same conclusion. The largest contributors to this decline were rising wages The combination of a global slowdown and weak and a decline in food prices, notably rice. domestic demand - together with the downward Unfortunately, since February 2000, the rupiah's pressure on the rupiah throughout 2000 and the first depreciation was accompanied by rising food prices, half of 2001 - sharply lowered non-oil exports and while wages for unskilled labor in agriculture barely imports and increased the monthly trade surplus kept up (Figure 1.2).3 This would suggest that the from April2001 onward. Year-on-year export growth has been negative now Figure 1.2 for six months in a row. mirroring the performance Rural real wages did not do well in the second half of of other countries in the region (Figure 1.3). Non-oil 2000 exports for September 2001 were 24.2 percentage points below September 2000. Electrical products oWage for -eeding destined for the United States and Japan have been paddy fields deflated hardest hit. Yet, Indonesia's exports have fared /00 better than those of most countries in the region as only 10 percent of Indonesia's exports depends on the steeply declining data processing and telecommunications sector, compared to 30 percent So Wage, in manufacturing - \ Wags .n 'ndeflated bu CPI in the region as a whole.5 In addition, a shutdown in 70o ' ,.'Aceh's gas production triggered by regional unrest . - - -. affected gas exports, and declining world oil prices 60 dampened oil export revenues. Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 The deceleration in domestic demand and weaker Source: CBS exports meant that imports also declined for the first time in July 2001, followed by a sharp 25.4 percent year-on-year contraction in August followed by an equally worrying 27.9 percent fall in September 2 Currently, only a range estimate can be given, as data are still (Figure 1.3). The slowdown was marked, as one being cleaned up. Moreover, different methodologies give would expect, in imports of intermediate goods different outcomes: SMERU's preliminary estimate suggests a (notably in chemical products), while consumer point estimate of 18 percent, whereas our own preliminary goods imports have remained reasonably steady. calculations suggest 15.24 percent-lower than the 1996 headcount. 3 Indeed, in early 2000, agricultural real wages in Java were 4 This is consistent with our projections in Chapter 4. only 80 percent of their levels of January 1996. 5 Source: TradeCan2000. - Page 1.6 - Figure 1.3 A slowdown in international trade Sluggish non-oil exports .... and plummeting imports $ million Growth rate $ million Growth rate (percent) (percent) 8,000 60 5,500 80 7,000 a40o5,0 Year-on-year t60 6,000 growth rctes 20 4,500 grwth rates 40 9999 99000 000 0 999999990000000034,500 ~~~~~~1 ~u ,50F' 0 4oe0 whrts l exports ex m0 te Iports y20 Bv~~udflL ~~ 2,500ipot 2,000 IU40IU2UUL00UJ 640 2,000 -60 ~~~~~~~ ~~~~~~~1,500 HHLLH-6 Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jot- Sep- Jan- Apr. Jul- Oct- Jan- Apr- Jui- Oct- Ja-Apr- Jul- Sep- 9999999900 0000 0001 0101 08 9999999 o000000000 010101l o Note: Growth rates are based on the level of exports (or imports) in the same month the previous year. Source: CBS. Because of the market slowdown in imports in 2001, prevented. Capital market inflows into Indonesia,6 the current account of the balance of payments is which are particularly sensitive to market sentiment, likely to remain in surplus at US$4.8 billion. slowed to a trickle; in the rest of East Asia, they are However, at 3.2 percent of GDP, this is much lower rebounding smartly from their crisis lows (Table than the 4.8 percent of GDP surplus in 2000. 1.2). Foreign direct investment into Indonesia continued to be dismal as well, although better than External payments and international reserves. the $5.3 billion outflows that official statistics The capital account showed continued large forecast for this year.7 imbalances between private and official capital. Despite large amounts of exceptional financing (a The official capital account continues to be in euphemism for arrears and rescheduling), private significant surplus, thanks in large part to the Paris capital flows continue to be a drain on the balance of Club arrangement. Repayments of loans extended payments. Thanks to official flows, a major drop in during the crisis are on the rise, however, and reserves - or further depreciation of the rupiah - was official foreign exchange reserves drifted down from $29.4 billion in end-2000 to $29.0 billion in end- Table 1.2 September, 2001. No rebound for Indonesia (Gross international capital market inflows Fiscal policy to East Asia, US$ billion) 1997 1999 2000 2001 Fiscal sustainability has become a crucial challenge Jan.-Jul for Indonesia. In this context, the outcome of the annualized 2001 budget and the preparation of the 2002 budget are important first steps in consolidating the Indonesia 20.1 1.7 2.2 0.6 government's fiscal position, and providing a firm basis for further measures in succeeding years. China 24.8 6.9 25.5 13.0 The 2001 budget. The fiscal outlook for 2001 Korea 26.9 14,6 22.7 34.6 continues to be difficult. By mid-year, the Malaysia 10.5 6.0 6.5 8.8 combination of higher interest rates and a weaker Philippines 6.6 7.2 6.4 4.2 Thailand &.5 3.5 3.7 2.2 6 Bank loans, equity, and bonds. Source: World Bank staff estimates from Euromoney, Bondware 7 Indonesia's BOP statistics divert from international practice in and Loanware. that FDI flows include debt transactions with non-parent Note: for Indonesia, BI sources show a higher level of inflows, companies and banks. As a result, FDI outflows are but here internationally comparable data are shown. overestimated. - Page 1.7 - exchange rate had raised the projected deficit from 3.7 percent of GDP to 6.0 percent (Box 1.2). Box 1.3 Parliament approved a package of measures in June Compensatng the poor for fuel price increases to restore the projected deficit to 3.7 percent of GDP The 2001 budget revisions approved by Parliament and included special measures to compensate the in June included some Rp. 2.2 trillion in schemes to poor for increases in fuel prices (Box 1.3). offset the impact of the fuel and electncity price increases on the poor. In all, seven schemes were These revisions notwithstanding, the 2001 fiscal designed These were: the expansion of the OPK outlook remains worrying. The revenue and subsidized rice scheme by 1.215 million households; expenditure outcomes look likely to come close to bus subsidy schemes to avoid increases in bus fares; budgeted levels, but a shortfall looms in available various health initiatives; various education domestic and external financing- for three reasons. programs for the poor; a clean water scheme in 314 locations; a micro-capital scheme through 1,000 * First, as we have already noted, IBRA cash sales institutions; and a coastal community cmpowerment could be below target. scheme. Although delayed, most programs are now * Second, meeting the pfivatization target in these up and running. The bus subsidy scheme, however, last two months of the fiscal year will be was cancelled, because most municipalities approved last two months of the fiscal year will be fare increases that outweighed the cost increases challenging, to say the least. associated with the hike in fuel prices. To what And third, program financing is expected to fall extent the compensation schemes have actually benefited the poor is yet to be determined, and BPKP is set to audit the measures before the end of the Box 1.2 year. New structural underpinnings affecting budget dynamics In earlier years, a depreciating currency and higher oil prices significantly short of budget - because reforms had a positive effect on the budget - and higher domestic supported by these loans have been delayed. interest rates had little effect. Not in 2001. Fiscal The second tranche of the World Bank's Social decentralization and the newly acquired burden of variable Safety Net Adjustment Loan (SSNAL) was interest rate domestic debt changed the structural underpinnings to the budget. cancelled because key actions were not completed. Similarly, other program loans, most * A depreciation in the currency of Rp. 1,000 per dollar from the ADB (with some co-financing from enlarged the deficit by 0.6 percentage points of GDP. Japan), remain undisbursed because of delays in * Similarly, a 10 percent increase in the oil price increased . '. the central government deficit by 0.2 percent of GDP. policy implementation. The key reason is that increased revenues from Unless there is a concerted effort by all branches of depreciation and higher oil prices is shared with the regions, while higher spending on interest and fuel government and Parliament to meet these polcy subsidies is not. conditions, there is a strong likelihood that these * In addition, a 100 basis points rise in interest rates loans will not disburse this year as scheduled. To swelled the deficit by 0.15 percent of GDP, not to balance the budget, the Government will need to mention adding contingent liabilities to the government's implement a package of measures including: getting balance sheet if it also contributes to higher the p atiain og up and runing recapitalization needs in banks. the privatization program up and running; accelerating IBRA asset sales; raising more Unfortunately for Indonesia, movement in all three variables resources, perhaps by increasing bond issues to during 2001 were in the direction of worsening the budget. reluctant regions; cutting unallocated development This year, the government mitigated the damage to some . .' . . extent by fixing transfers to the regions at levels stated in the expenditures while protectig high priorty spendig original budget. on health, education, and basic infrastructure maintenance; and accumulating arrears on Next year, the Government plans to further reduce fuel expenditures already committed. The last measure is subsidies. This will re-introduce a hedge in the budget against very costly and should be avoided to the extent exchange rate movements. A more powerful approach would be an automatic fuel price adjustment mechanism, while a possible - as it will disrupt development projects structural solution would lie in adjusting the regulations that and impose further financial strain on key state guide revenue sharing arrangements with regional enterprises such as PLN and Pertamina. governments. - Page 1.8 - Table 1.3 will fall short in 2001-the former because of Planned central and regional development spending financing constraints (see below) and the latter 2000 and 2001 because of an unexpectedly large wage increase- FY2000 FY2001 which was only partly compensated for by a Rp.3 estimate budget trillion disbursement from the contingency fund. (9 months) Regional development spending' 14.8 29.5 The 2002 budget. The Parliament approved the 40.7 45.5 2002 budget on October 25, 2001. To reflect the Total central development spending changed economic environment, it agreed with Central government implemented 23.9 42.8 Parliament to change the underlying Regionally implemented from 16.8 2.7 macroeconomic assumptions in early October. The central budget final budget incorporates an overall deficit of 2.5 Total development spending '7 percent of GDP, balancing the need for adequate (as a share of GDP) 5.0 5.1 development expenditures while consolidating the Source: MOF, regional budget documents. government's debt position. The budget assumes a 'For 2000, estimated from budgets of 25 provinces and 310 real GDP growth rate of 4 percent in 2002, an districts and provinces. For 2001. regional spending was annual inflation rate of 9 percent, and an exchange estimated by assuming that all regions spend the same share of rate of Rp. 9000 per dollar. Key features of the their reveniues on development as the 145 regions for which budget include: some increases in tax revenues data are available. based on improved tax administration and some changes in excise taxes; a very modest rise in civil So far, implementation of the 2001 development service salaries; a further increase in fuel prices budget has been slower than normnal. One reason (and, thus, lower fuel subsidies); a new formula for was that Parliament almost doubled the domestically allocating central grants to districts to make it more financed component (when it reviewed the draft equalizing;8 a central government development budget in late 2000). As a result, project preparation budget of 3.1 percent of GDP; and, finally, a fell behind schedule in 2001. Moreover, Parliament challenging target for IBRA asset sales and wanted to review individual projects in the privatization receipts. A significant part of the development budget, and as a result authorizations to privatization and asset sales receipts are earmarked spend (DIPs) were not issued before April. Indeed, to repay expensive domestic debt. some implementing agencies had to wait until The budget represents a considered approach to September to obtain their DIPs. gradually bringing the deficit down while keeping An important concern is whether decentralization the government's debt service burden to a minimum Anll imptortan dcincer is whetheropme depentrliztis (under the circumstances). This comes, however, at will~~~~~~~~~~~~ ledt' eln ndveomn xedtrs some cost: the central government's development The concern stems from two factors - whether sm ot h eta oemn' eeomn budget, for example, remains at 3.1 percent of GDP regions have enough resources and whether they will dp i emphasize~~~~~~~~~~~~~ deeomn otesmaxeta h espite having been cut three previous years in a row emphasize development to the same extent as the - the state of Indonesia's infrastructure and center. Revenues have increased significantly for declining quality in social services bear testimony to local governments, but so has recurrent spending as this. Of course, local governments could civil servants were transferred to their payroll.. The compensate by increasing the size of their resource revenue share benefited only some 15 to 20 development budgets (now estimated to be about 2.0 local governments (out of a total of 341), and the percent of GDP), but there is no certainty this will general allocation fund (DAU) did not compensate actually happen, as the regions are free to spend their the remainder adequately. So many local general grant as they see fit. governments-and especially provincial governments-came under budgetary pressures. Despite this, planned development spending by the 8 However, at the time of writing, Parliament has asked the regions was expected to double in 2001 and push Government to "compensate" the rich regions for a projected total development spending to 5 percent of GDP, DAU drop in 2002. The Rp.4T that it would cost to keep these about the same as planned in 2000 (Table 1.3). In regions at the same level would not only strain the central budget, but would further undermine the equalizing properties of actuality, central and regional development spending Indonesia's fiscal system to the detriment of the poor regions. - Page 1.9 - Table 1.4 These directions are consistent with the broad External financing needs and the CGI request objectives - or three pillars - of official financial US$ billions support to Indonesia: assistance in support of .____________________________________________ macroeconomic stability; assistance in support of Budgetdeficit 4.7 structural and governance reforms; and assistance for future development and poverty reduction needs. Domestic finance 2.6 Privatization receipts 0.4 The total budgetary financing needed in 2002 is Asset recovery 2.2 expected to be about US$4.7 billion. Of this, about $2.6 billion will be financed by receipts from Foreign finance 2.1 privatization and asset sales. Net disbursements of foreign finance will therefore need to be about Net disbursements 2.1 US$2.1 billion. Add projected amortization, and the Amortization 4.9 gross external financing need is US$7 billion. About US$3.7 billion is expected to be raised from Total financing needed 7.0 a variety of sources - including export credits and Non-CGI financing a/ 3.7 rescheduling under the auspices of the Paris Club. CGI financing 3.3 That leaves about US$3.3 billion for CGI financing. Total CGI financing requested 3.0-3.5 Given the uncertainty that usually surround these numbers, the amount actually being requested from the CGI is in the range of US$3.0-3.5 billion (Table a/ Includes export credits as well as financing from other 1.) This i reqos UStantilly ow The sources, including Paris Club rescheduling. 1.4). This CGI request IS substantiaJly below the Sources, includiang Ptari Clubreschmatedul. $4.5-5.0 range that was requested to help finance the 2001 budget, reflecting the smaller deficit this year and, hence, the need for less external financing. Maintaining the deficit at 2.5 percent of GDP In previous years, actual disbursements have fallen requires a significant improvement in tax effort. Oil short of CGI pledges - especially from program revenues-which are expected to amount to 6.8 loans (Box 1.4). Official creditors are becoming percent of GDP in 2001, will drop to only 4.4 increasingly wary of lending in support of policy percent of GDP next year because of lower oil prices reforms when the track record gives little cause for and a stronger rupiah. To counter this, the comfort. As in previous years, disbursements from Government plans to increase non-oil tax revenues new program loans pledged in the CGI will be by 2.8 percentage point of GDP to 8.6 percent-a conditional on certain standards of policy plan that will require significant administrative performance by Government. While they will help reforms and reduction in tax exemptions. toward meeting the budget deficit, they will be contingent and cannot be counted upon unless policy External financing needs performance improves. The external financing needs of the budget follow The uses to which the pledged amount is put are as from a broad strategic approach since the crisis of: important as the amount itself. For one, high fiduciary standards in Government will be important * a steadily declining budget deficit as a share of to ensure that these resources reach the project and GDP; program beneficiaries for whom they are intended. For another, these resources need to be used for high * increasing the effort to raise domestic resources priority projects which are judged on their outcomes, to finance the deficit; not just outputs, and which yield the highest * seeking all possible means to lower the debt economic and social returns. For this, projects need service burden including through more to fit within well-designed sector strategies that take concessional external borrowing; and account of the opinion of key stakeholders and recognize the appropriate role for Government in * rescheduling payment streams under existing delivering public goods and services. And this also international rules. requires good coordination among the donor and creditor community, which has been progressing - Page 1.10- Box 1.4 during the crisis, and large creditors, such as the What a difference! World Bank and ADB, have cancelled substantial amounts of undisbursed loans which no longer Over the four year period 1998-2001, delays in policy supported the priorities of an Indonesia in crisis. implementation have cost Indonesia over US$6 billion The result is a substantial decline in the stock of in delayed or cancelled program financing - out of a undisbursed project loans, and hence a decline in the total of about US$13 billion (box table). This does not level of disbursements. Yet, pledged disbursements include delays in project finance amounting to US$3.1 have outstripped actual performance. Part of this billion, and postponements in the IMF program which could be due to unexpected delays in project have cost the county a further US$1 billion in delayed implementation. But the fact that pledged and actual tranche releases.) disbursements appear to be converging is a good Two conclusions can be drawn from this. First, slow sign that donors and creditors are taking a more and halting reforms have cost Indonesia dearly in terms realistic view of the pace of project implementation of resource availability that could have boosted in Indonesia. development spending for the poor. And second, contrary to opinion among some quarters (in Indonesia The macroeconomic outlook and abroad), official creditors have withheld finance when policy performance was slow or below par, Indonesia's economy was already slowing before correctly holding the Government to its commitments. September 11, 2001. The global effects of the Box table terrorist attack will accentuate Indonesia's Disbursements of program and project binance, slowdown, especially if the rest of the world slips pledged and actual into recession, and world trade decelerates markedly (US$ billions) as it threatens to do. 1998/99 1999/00 2000 2001 Total The World Bank projects that world GDP growth Program proj. will slow from over 4 percent in 2000 to around 1.3 Pledged 4.7 3.2 2.7 2.6 13.2 percent in 2001, and only slightly more in 2002, Actual 4.0 1.9 0.2 0.9 7.0 before climbing to 3 percent by 2003. Hopes for Difference 0.7 1.3 2.5 1.7 6.2 recovery in Japan, Indonesia's largest trading partner, have faded and growth in the USA, the Project second largest trading partner, could turn negative Pledged 3.2 2.6 2.9 2.2 10.0 by the end of the year. World trade - which grew Difference 1.7 0.8 0.1 0.5 3.1 over 11 percent in 2000 - is expected to remain .________________________________ _ . .. almost stagnant this year, and grow some 4 percent Source: World Bank staff estimates based on data from the in 2002. Tourism, a sector that contributes some 3.5 Ministry of Finance and Bank Indonesia. percent to Indonesia's GDP, has been hit particularly hard by the September 11 attack. well in recent years, but which nevertheless has trends towards recession will further room for improvement. Moreover, the These globaltrns o-vd ecsinwl Governmntr n eor inrolvemth boeneiiri nth undoubtedly have their impact on commodity onlyvinmthe designtofiprojectsebutnalsoiinitheir prices-which, with the exception of oil, were only inthdsgnofprjctbtlonher already showing a downward path for several years. monitoring and implementation (see Chapter 4 for more on this) l r Oil prices briefly jumped after the attack, but the markets now have decided that the demand effects of Another important feature of CGI meetings in recent a global slowdown will outweigh the supply effects years is the gap between the project finance pledged of any possible disruption, and oil prices could dip and the amount actually disbursed. Although actual below $20 for 2002. While overall international disbursements appear to have held steady, there has interest rates are expected to fall and remain low, been a steady decline in total project finance pledged Indonesia's risk premium in international capital (Table in Box 1.4). The number of projects in markets is more than 500 basis points over US preparation appears to have atrophied gradually Treasuries - reflecting continued negative market sentiment. It is unlikely to decline swiftly, and 9The IMF recently completed its third review when its original could even jump if domestic tensions rise. schedule indicated it should have completed its eighth. -Page 1.11 - Table 1.5 Indonesia's macroeconomic outlook under two scenarios Muddle-through scenario Performance scenario 2000 2001 2002 2003 2001 2002 2003 GDP Growth (percent) 4.8 3.3 3.5 4.0 3.3 4.0 5.0 Inflation (percent change in GDP deflator) 11.3 10 8.5 5.0 10.0 7.5 5.0 Current account balance (percent of GDP) 5.3 3.0 0.9 -0.5 3.2 0.7 -0.2 Total external debt (percent of GDP) 100.2 86.3 75.5 69.5 86.8 75.1 68.5 Source: World Bank staff estimates. Given these global trends, Indonesia's growth is set Surprisingly, even in this "muddle-through" to slow. Exports could hardly be expected to play scenario, Indonesia is expected to grow faster in the role they did last year. So it will need to be the 2002 than the average of the East Asian crisis domestic market that leads the way. Unfortunately, economies (Table 1.6). This is partly explained by the Government's debt situation precludes it from the relatively limited impact of the global hi-tech using the budget to stimulate the economy. The slowdown on Indonesia, and to some extent by the answer will need to come from the private sector. expectation of further catch-up investment necessary to maintain current production levels. Moreover, It is for this reason that the climate for private Indonesia has recovered less sharply from the crisis investment has become so crucial for Indonesia's than other countries, and therefore still has some economic recovery. And this climate will depend way to go to regain its pre-crisis per capita income entirely on the level of security and law and order in levels. the country and the pace of domestic reforms, including progress in bank and corporate There is also the possibility that Indonesia's policy restructuring, fiscal decentralization within a performance may pleasantly surprise. This framework of overall fiscal consolidation, monetary "performance scenario" involves an effective stability, and governance. But these are complex government that stays on track with its reform and far-reaching reforns which require effective program, helps improve investor confidence, and implementation and a sound legal environment - and provides the security and law and order needed to so expectations of progress must be modest. The raise investment rapidly to pre-crisis levels. This new government, in its Letter of Intent to the IMF, scenario could mean a higher GDP growth from committed itself to a realistic and feasible reform 2002 onward. Higher investment demand would program over the next six months. Unfortunately, reduce the surplus on the current account more progress so far has been disappointing, and the markets have shown their displeasure (see above). Tablel.6 Indonesia's growth -- not bad in comparison The Bank therefore places Indonesian squarely in (Real GDP growth; in percent) the "muddle-through" scenario as described in its Projection Country Assistance Strategy. In this scenario, Indonesia maintains a modicum of macroeconomic 1998 199 200 200 200 stability, but implements structural reforms in fits EastIAsia -16.7 6.8 6.9 2.3 3.4 and starts, with some policy reversals. Private Indonesia -13.2 0.8 4.8 3.3 3.5 investment (domestic and foreign) revives barely Korea -6.7 10.9 8.8 2.4 3.4 enough to keep GDP growth at about 3.5 percent in Malaysia 7.4 6.1 8.3 0.9 3.7 2002, and 4 percent beyond that (Table 1.5). In the Philippines -0.6 3.4 4.0 2.5 3.5 absence of decisive policy action, the fiscal position Thailand -10.8 4.2 4.3 1.6 3.0 remains marginally sustainable. The government Source: Authorities' data and staff estimates. debt-GDP ratio and the debt service to fiscal revenues ratio decline gradually, but not by enough rapidly. But a combination of higher growth, lower to reduce the economy's vulnerability to future interest rates (in light of lower inflation and reduced shocks (see below). risk premiums), accelerated asset recovery, and a - Page 1.12 - stable exchange rate will hasten the decline of the dealt with decisively -- perhaps putting international government debt to GDP ratio and the government financial support at risk. Government has taken debt service to fiscal revenue ratio. some measures to reduce regional unrest, including the recent passage of laws on special autonomy for Risks Aceh and Papua. It has also started a process to return East Timorese refugees. And - albeit with Before September 11, the principal risks facing the some delay - it has dealt decisively with extremist Indonesian economy were primarily domestic in groups that have threatened to attack foreigners origin - and these were enough to cause concern. residing and working in the country. But on all But now, there is a significant overlay of global risks these fronts, there is always the risk that unrest and that on their own, and through their interaction with violence could once again arise and put to the test domestic forces, can significantly alter Indonesia's the Government's ability to maintain law and order economic prospects. Domestically, halting and and protect the security of people and property. inadequate reforms, combined with political instability and regional tensions remain the largest External risks. On the external front, further risks. Internationally, the world slowdown could be slowdown in the world economy could hit Indonesia even deeper and more prolonged than the current through additional declines in export earnings and gloomy forecasts predict. And - despite being lower commodity prices. According to the World renowned as a moderate Muslim nation -- Indonesia Bank, an extra 2 percentage point decline in could find it difficult to balance domestic reactions investment in industrial countries costs East Asian to the aftermath of the September 11 attack and its countries on average some 1.5 percentage point of international commitments as required, for example, GDP in growth in the following year. Indonesia by UN Security Council resolutions. All these risks may not be hit as hard as the rest of East Asia on could affect prospects for growth and poverty mapot be hitahr ascthe restoast Aio reducton, anweake fica staniit.. expOrt volumes (simply because its trade to GDP ratio is lower than the regional average). But it will Domestic risks. As in the past, there may continue be hit harder on export prices, because further to be a significant gap between the promise - and weakening is anticipated in already low oil and other the implementation - of reforms. For sure, there are commodities prices. If severe enough, the rupiah some good reasons for this. Gone are the days when could show renewed volatility, interest rates would a few policymakers could make decisions behind rise, and the recovery could slow further. closed doors. A democratic, decentralized Indonesia requires new decision-making procedures that imply Fiscal sustainability and debt management a more complex and demanding environment for policymaking. But these procedures lend The interaction between external and domestic risks transparency and ownership to important economic makes for a potent cocktail - especially for decisions - which the international community Indonesia's fiscal sustainability and debt supports wholeheartedly. management. Further slowdowns in world growth and trade, delayed reforms in bank and enterprise In short, Indonesia's political transition (as well as restructuring, and jittery external financing - all the international environment) require that decisions work in the same direction; they threaten be made better. At the same time, however, Indonesia's fragile fiscal situation, which stems in Indonesia's difficult economic straits demand that large part from an explosive increase in government decisions be made faster. There is an urgency debt. Starting from moderate debt before the crisis attached to decisions on privatization, asset and a widely-acclaimed record of prudent debt recovery, legal reforms, civil service reforms, and management the Govemment is now burdened with several key legislative initiatives. These have managment tex Governent is now b nd with implications for sustaining the recovery and debt that exceeds 90 percent of GDP and debt ensuring fiscal sustainability - arguably the most service payments that siphon about 40 percent of difficult macroeconomic challenges facing the fiscal revenues. country. Most debt crises in emerging markets had their Domestic instability would add to this challenge by origins in rapid accumulation of government and worsening negative investor sentiment, and - if not government-guaranteed external debt. But in the - Page 1.13 - case of Indonesia, while foreign borrowing increased Achieving this outcome will depend on progress in in the early 1990s, the level of the government's three areas: external debt was only moderate in relation to GDP, and the reliance on multilateral and bilateral * Restoring growth. Reducing debt in a low- concessional sources provided extended maturities growth setting is difficult. In a narrow sense, (averaging over 20 years) and concessional interest faster growth increases the denominator of the rates (averaging less than 5 percent) -- which acted debt/GDP metric, reducing the debt burden. But as insulation against shocks. Instead, the sharp rise more broadly, faster growth generates more in Indonesia's indebtedness since 1998 derived resources for the budget and investment largely from the fiscal response to the impact on the opportunities in the economy, facilitating banking system and relates to the issuance of adjustment and restructuring in the private sector domestic debt (mostly bonds) to re-capitalize ailing and expanding the public sector resource base. or bankrupt banks and compensate Bank Indonesia for liquidity credits during the early months of the * Maintaining fiscal discipline. The crisis and its crisis. aftermath have imposed severe strain on the budget: rising debt service costs have reduced Indonesia's high level of government debt and debt resources available for development programs service is not just a product of the instability that even as the need for development and poverty- Indonesia has experienced over the last four years - targeted spending has increased. But it is it is now a potential cause of economic instability as essential that such pressures are contained, and well. High debt service payments put considerable that the budget generate a continuing fiscal pressure on the Government's ability to maintain surplus over the medium term. This in turn will essential spending on development and poverty require both improved revenue mobilization reduction programs. And concerns about the (from both tax and non-tax sources) and sustainability of government debt exert a strong improved financial management and influence on investor confidence, affecting both procurement (especially in local governments, domestic interest rates and Indonesia's ability to where institutions and capacity remain weak). attract long term investment. High government indebtedness also renders the economy highly * Accelerating financial and corporate vulnerable to shocks, greatly limits the restructuring. The growth in domestic debt was Government's ability to respond to new shocks, and matched by government acquisition of leaves little margin for error in economic substantial assets (albeit of varying quality) management. Most worrying of all, a high level of mainly in the form of loans and equity. domestic debt tends to reduce the credibility of the Expeditious disposition of these assets is key for government's resolve to keep inflation low and two reasons: first, the receipts could be used to increases the incentive to "inflate" away the debt (as accelerate the reduction of domestic debt, and has happened in some Latin American countries). second, it would help galvanize the private sector and catalyze growth. Reducing government debt to more sustainable levels is a central focus of economic policy. Indeed, This essentially covers the entire macroeconomic the Government of Indonesia's commitment to fiscal agenda. We have already noted that progress on sustainability is prominently mentioned in its five these fronts in the "muddle-through" scenario will year program (Propenas, November 2000) and be limited. But even so, the debt burden can annual plans (Repetas 2001 and 2002). These focus gradually decline to moderate levels over the on the goal of reducing the government debt to GDP medium term (Figure 1.4). Specifically, the scenario ratio to below 60% by 2004. The 2001 and 2002 assumes: budgets have been consistent with this objective. - Page 1.14 - Figure 1.4 The sustainability of government debt under different scenarios (Using the trajectory of the ratio of government debt to GDP) In the muddle through scenario, debt-to-GDP ratios .....but much depends on growth andfiscal effort decline. External debt Smaller pnirrary fiseal surplus and GDP gro Ah halved - Domestic debt 1 percent smaller pnmary 90.0 | | | | 4/ 100 fiscalsurplus 80.0 9 7 80 70.0 600~~~~~~~~~~~~~~~~~~~~7 Off-bt~~~~~~~~~~~~~~~~~~~~~~~~~~~~ exeencente largerr bdyr Criss lus I~~~~~~~~~~~~~~~~1 andce iprcn faste GOProwt 60.0 00 40C0 040 Muddle 0hrouegh s0e0120 0 l 000 0000 CC al I X a~ CON OOC CSCSC- 5~~~~~~~~~~~~~~~~~~~~~ ~2 / pee larger p dar surplus ....as will the Government's ability to contain contingent . ... .but Indonesia would find it difficult to absorb the effects of liabilities and raise capital revenues (through asset sales)... another crisis. Off N-hrl exprilitures higber by Q-isis scenano I pffserat of GDPannua 2 820 10a i80~~~~~~~~~~~~~~~~~8 ~~~~~~~40 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 6 0 0 Source: World Bank staff estimates - Page 1. 15 - * GDP growth recovering to 4 percent by 2003, higher in 2010 than in the original scenario; and maintained through 2010; halving GDP growth would raise it an additional 14 percentage points, with the result that the debt ratio * primary fiscal surplus of 3 percent from 2002 fal'uhmr oety hogotteetr onwads whch asiallymeas epeningthe falls much more modestly throughout the entire onwards - which basically means expending the decade. Clearly, a combination of these two same fiscal effort as is being proposed in 2002; scen w lea d tom aniunsustanbe fsa scenarios would lead to an unsustainable fiscal * Inflation reduced from 10 percent in 2001 to 5 situation. Alternatively, if growth accelerates to 5 percent from 2003 onwards; percent (rather than 4 percent in the base case) and the primary surplus can be maintained at 4 percent * Constant real effective exchange rate from 2002 of GDP (rather than 3 percent), than the debt ratio onwards; would drop even more substantially, reaching * Reduction in domestic interest rates to 13 around 35 percent by the end of the decade." percent from 2003 onward; Similarly, consider a relaxation of the condition on * IBRA asset recovery and privatizations equal to "off-budget" contingent liabilities 12 If off-budget around 6 percent of GDP cumulatively over the liabilities equivalent to 1 percent of GDP annually next 3 years (around Rp. 16 trillion a year in 2002) require * No unanticipated large off-budget "surprises" or additional government borrowing, the pace of debt renewed crises requiring major additional debt reduction would slow, and the debt/GDP ratio would creation by government. reach 60 percent only in 2010. Alternatively, with higher capital revenues totaling 6 percent of GDP Under this scenario, the government debt to GDP during 2002-2003 - perhaps from additional asset ratio would decline steadily over the coming decade sales and privatization, the debt ratio at the end of from the 2000 peak, with reductions in both the the decade would drop to 42 percent (and the external and domestic components. By the end of Government's target of a debt/GDP ratio of 60 the decade, debt ratios would be lower than at any percent is reached in 2006). As the rupiah revenues time since the crisis began (although still twice as generated are used primarily to reduce domestic high as in 1996/97, the last pre-crisis year). But it debt, the share of domestic debt in GDP would drop should be emphasized that while such an outcome is to only 18 percent, compared to 44 percent in 2001. feasible, it is by no means guaranteed: all the risks mentioned in the previous section could threaten Finally, consider a crisis scenario, triggered. such an outcome, and the high level of debt itself perhaps, by some combination of external events and makes it less likely (see above). domestic pressures (concerns over policy credibility, decline in investor confidence). In this scenario, we Poor perfornance in one or more of these areas assume: (1) a precipitous drop in the exchange rate would jeopardize the debt reduction outcome shown. in 2002 (to 12,000 Rp/$); (2) a sharp rise in inflation Consider the effect of shortfalls in two key areas: a (by 5 percentage points) in 2002, and a slow return reduction in the primary surplus from 3 to 2 percent to 5 percent; (3) an increase in interest rates on of GDP, and a halving of the GDP growth rate from domestic debt (from 14 to 26 percent), with a slow 4 to 2 percent annually.'0 A lower primary fiscal surplus of one percentage point of GDP would lead ~1 While obviously a much worse outcome than the original to a debt/GDP ratio that is 10 percentage points scenario, in formal terms this scenario is still "sustainable", since the technical definition of sustainability requires only that Changes in the government debt to GDP ratio can be the government debt/GDP raio not rise over time. attributed to three factors: (1) the difference between the average 12 The key contingent liabilities include: (a) guarantees interest rate on the debt and the growth rate of GDP; (2) the size covering domestic banks' liabilities (excepting equity, of of the primary surplus; and (3) the net impact of capital revenues course); (b) obligations to private infrastructure providers (IBRA asset recovery, privatization) less off-budget losses (mainly in power generation, but also in toll roads); (c) (contingent liabilities, bailouts). The projections reported here obligations of minimum pension payments to civil servants; and are based on a simple accounting framework that incorporates (d) off-budget government-sponsored credit schemes to the these factors, and which has been used in earlier analyses of private sector; and (e) guarantees extended to some private Indonesia's debt dynamics. sector entities to restore the flow of credit. - Page 1.16 - return to existing levels; (4) no GDP growth for two borrowing). Fifth, seeking the best possible terms on years (2002-03), followed by slow recovery; (5) 2 new financing - including through increased use of percentage point drop in fiscal surplus/GDP ratio; IDA, ADF, and grants - will help minimize the debt and (6) off-budget contingent liabilities (increased service burden. And sixth, seeking opportunities to bank bailouts, etc.) equivalent to 6 percent of GDP lower debt-service temporarily, including through requiring financing over the 2002-2004 period. rescheduling under internationally accepted rules, will assist fiscal sustainability in the short term. The dimensions of this "crisis" would be considered quite serious for most countries, although they pale Finally, developing a strong debt management in comparison to Indonesia's experience in 1997. capability is essential. While the preceding analysis The net effect would be to drive debt ratios upward has focused largely on the quantitative aspects of the during the crisis period (2002-04) until they are debt situation in Indonesia, several institutional above their previous peak in 2000. But once issues deserve mention as well. The first concerns stability is restored and some growth resumes from the critical need to enhance government capacity for 2004 onward, the government-debt GDP ratio begins strategic debt management. The current to decline once again. By the end of the decade, fragmentation of data collection and control limits debt levels remain virtually unchanged from today. the ability of Government to monitor trends in the The salient point is that current high levels of debt, and hampers efforts to anticipate and respond government debt make Indonesia more susceptible to emerging pressures or sudden shocks. Ongoing to external or domestic shocks, increasing its efforts to develop an effective Debt Management vulnerability and limiting feasible policy options Unit in the Ministry of Finance need to be open to policymakers. intensified. Given the importance of domestic debt in the government's debt portfolio, and the close None of these analyses explore the possibility that connections between domestic and external debt, it the government may, at some point, be tempted to is critical that the unit be responsible for both monetize part of the budget deficit - sparking (unfortunately, the unit handling domestic debt is inflation, raising nominal interest rates sharply, and currently different from the one responsible for triggering rapid depreciation of the rupiah. This external debt). This joint unit should be in a position would place the economy in a vicious circle - to: implement the Government's debt management macroeconomic instability would lead to higher strategy; analyze alternative debt management deficits which in turn would be monetized, scenarios, with especial attention to key contributing to yet higher inflation. Thus, while uncertainties such as contingent government lowering debt ratios is feasible in a stable liabilities, asset recovery/sale options, and portfolio environment, the task becomes much more difficult risks (refinancing, currency, and interest rate risks); in an unstable one. and advise policymakers on the costs and benefits of different options. This analysis yields a number of conclusions about the importance of debt management and fiscal Very soon, large amounts of government debt will sustainability. First, growth and stability are reach maturity. While some of this maturing debt essential - so sticking with the discipline of the IMF could be redeemed, the bulk will probably need to be program will yield high returns in the long run. refinanced. To do so in an orderly fashion and Second, new borrowing should be done prudently, in without affecting macroeconomic stability will support of high priority public expenditures, and require an effective bond market - which essentially subject to best-practice financial controls and means creating the institutions, regulations, and procurement procedures. Third, efforts must be procedures needed for a functioning market. made to recover some of the costs incurred during the crisis through the restructuring and sale of assets Conclusion acquired by the Government. Fourth, prompt action must be taken to mitigate risks and ensure that no Economic growth slowed, and inflation climbed in additional contingent liabilities emerge that would the first half of 2001. The poverty rate, which had require budgetary resources (and hence more declined significantly between 1999 and 2000, has - Page 1.17 - probably budged little since then. The events of sources. Of greatest and immediate concern is fiscal September 11 and their effect on the global sustainability. The high level of government debt economy, will almost certainly slow the economy not only imposes a big burden on the budget, but is further. We project the economy to grow 3.3 percent itself a cause of instability. Maximizing fiscal 'effort in 2001 and 3.5 percent in 2002. In comparison to and bringing down the debt ratio will be'essential in projections for other crisis economies in East Asia, restoring stability and laying a foundation for this may appear quite good. But it is of concern for sustainable growth - both prerequisites for poverty Indonesia - especially since this outlook faces reduction. innumerable risks from domestic and external Chapter 2 Structural Reforms for Growth Indonesia's growth prospects appear to be less than Broadly speaking, IBRA possesses three types of cheerful. And the downside risks are worrying. Yet assets - non-performing loans, non-loan assets growth is an important prerequisite for poverty (largely shareholdings and property), and majority reduction. It brings with it increased employment, equity stakes in eleven recapitalized banks. Selling generates the resources necessary for investments in assets in each of these three categories requires human and physical capital, and stimulates shifts in different strategies and considerations. the structure of the economy toward higher productivity activities. In Indonesia, the In 2000, IBRA did a good job in achieving its asset Government's indebtedness precludes it from recovery objectives. It raised 96 percent of its sustaining economic recovery through fiscal means. Rp.18.9 trillion recovery target through loan The private sector engine must, therefore, provide collections and asset sales, including some of its the traction. But for the private sector to succeed SME and residential mortgage loan assets. But will require progress on two fronts - first the IBRA's net asset recovery targets for FY01 of Rp. removal of structural constraints that impede private 37 trillion (Rp. 27 trillion in cash and Rp. 10 trillion investment; and second, the development of in bond swaps) were considerably more ambitious, institutions that improve the quality of governance, requiring an acceleration in the pace of asset especially in the justice sector. This chapter deals disposal and corporate debt restructuring. By the with the first, focusing on five priorities - in the end of the third quarter in 2001, IBRA had raised short term, transferring productive public assets to Rp. 18.6 trillion in cash from asset sales and the private sector and restructuring the debt of redeemed Rp. 5.2 trillion worth of bonds from corporates; and in the medium term, reforming the recapitalized banks (Table 2.1). IBRA has, financial sector, reshaping sectoral policies (using however, transferred to MOF a slightly higher the examples of energy and agriculture), and amount of Rp. 19.8 trillion, which was met by promoting a responsive yet responsible private drawing down part of its reserves. sector. Sale of loan assets. To achieve its target for the Moving public assets to the private sector year within the next two months, IBRA has offered for sale several loan packages. IBRA has also Now that the banking system has largely been outsourced the bulk of its medium-sized loans recapitalized, the focus of Government must (which are slated to be sold in the first quarter of decisively shift toward moving financial assets back 2002) and launched the sale of its first set of to the private sector. There are two reasons why. restructured corporate loans and related equity The first is budgetary. Indonesia's bank stakes. Additionally, IBRA has sold a portion of its recapitalization costs (as a share of GDP) were the SME and residential loan mortgage book. To settle costliest the world has seen - and it is only the outstanding obligations of smaller borrowers, appropriate that IBRA makes every effort to recover IBRA has introduced new interest discount and the value of the assets (estimated "fair value" of Rp. foreign exchange rate incentives. All loan sales are 168 trillion as of year end 2000) in its care to ease to occur through transparent and competitive sale the government's debt burden. The second is to mechanisms. sustain the recovery. By selling its assets and returning them to the private sector where they can IBRA's recovery rates so far - about 49 percent on be used most productively, the Government will restructured corporate loans and 33 percent on un- signal its commitment to private sector led growth, restructured SME/retail loans - are reasonable. It is help attract capital back to the economy, and unrealistic, however, to expect future loan recovery stimulate new investment. rates in excess of 33 percent since IBRA's remaining loan assets are mostly low quality (mainly category 5) loans. - Page 2.2 - Table 2.1 and produce a large unmarketable bank with a weak IBRA's cash recoveries, end September 2001 capital base and poor risk management systems. (in Rp. trillion) Such a bank would likely soon need rescue and Actual 2001 Success recapitalization, adding further to the already target rate (%) enormous public cost of bank restructuring. It Sale of loans 9.4 14.7 64 would be far wiser to sell these institutions to the Sale of bank equity 0.5 2.3 22 private sector as soon as possible, and then allow Other income 2.7 1.8 147 market forces to dictate the direction of mergers and acquisitions within an appropriate regulatory Gross cash recoveries 19.3 29.5 65.0 framework. Net cash recoveries 18.6 27.0 69.0 Privatizing non-financial state-owned enterprises. No privatiiation transactions were concluded in Bond redemption 5.2 10.0 52.0 2000, and consequently there were no proceeds to Note: Net recoveries include deductions for recovery costs. set against the budget target of Rp. 6.5 trillion. An Source: IBRA identical target was adopted for 2001, with 16 state enterprises slated for privatization. So far, the results have been identical too, and prospects for Sale of non-loan assets. IBRA expects to achieve reaching the target appear slim. revenues of about Rp. 10 trillion from the sale of its shareholdings in more than 20 companies. Raising funds for the budget is an important Agreement of the concerned former bank owners has consideration for privatization. But it is not the only been provided and international advisory firms one. It is also a core component of the appointed for virtually all the proposed sales. Government's broader strategy for re-invigorating the economy and enabling rapid and sustainable Privatizing recapitalized banks. Selling assets in growth. There is now overwhelming intemational the third category - equity holdings in recapitalized evidence to show that privatization improves the banks - is not proceeding smoothly. Their tepid performance of firms and economies. The data financial performance has not helped. Loan-to- show that privatized firms display improved deposit ratios are below 25 percent. After lengthy efficiency, profitability, employment, and growth. and intense debate, Parliament recently agreed to More important, cross-country evidence indicates sell up to 51 percent of BCA (over and above the that for every 1 percent of GDP privatized. overall 22.5 percent equity that was sold last year) and 51 GDP and employment climb by about I percentage percent of Bank Niaga. The majority stake sales of point and 0.25 percentage points respectively the these two banks, scheduled for completion by end first year, and 0.8 percentage points and 0.5 2001, are considered a litmus test of the percentage points the second. And these aimns Government's seriousness in reforming and extend into the years beyond. restructuring the banking system. Yet there continues to be uncertainties surrounding both. Any Opponents of privatization urge delay, arguing that restrictions on the amounts that can be sold to asset prices will rise later. But buyers are scarce and strategic investors will not only reduce the bid price asset prices low largely because investors are for the shares, but likely deter the best, most skeptical about the Government's seriousness in competent international banks from investing in privatizing state assets. Asset prices will rise if there them. is investor interest, and investor interest will grow if the Government establishes a track record of The Government is also considering creating a successful privatization transactions. Moreover, it "power bank" through the merger of some smaller makes financial sense to delay asset sales only if IBRA banks. While further consolidation within the asset prices are expected to increase faster than the banking sector is overdue, a generalized, forced rate of interest - about 17 percent a year currently. merger of IBRA banks would delay privatization Asset values in Indonesia have not been rising -Page2.3 - anywhere near this rate, and in many cases, have Table 2.2 fallen. Estimates of corporate debt in Indonesia, end 2000 (Rp. trillion) In short, the case for moving ahead with privatization is compelling. But what is the best Onshore Offshore Total way forward - especially given opposition in (est.) Parliament? The logical choice would be to start with privatizing small firms operating in competitive Performing 25 34 59 markets (where transactions would be simple), Non-performing 37 23 60 develop a track record. establish credibility, and then Total 62 57 119 move on to bigger transactions. But Indonesia does not have that luxury. The needs of the budget dictate that large SOEs be privatized quickly. Source: JITF Unfortunately, privatizing such firms is never simple - they tend to have legal or contractual impediments, Corporate restructuring occupy a position of natural monopoly, or have substantial political support for keeping them in the The previous section focused on transferring assets public sector. from the public to the private sector. But there are many private corporates with unresolved debt Privatization requires strong political commitment at repayment problems (Table 2.2). Banks are all levels. To obtain and align this commitment, the understandably unwilling to lend to them until their Government needs to: debts are restructured. > First, reach agreement with Parliament on a state Corporate debt restructuring is occurring through enterprise restructuring and privatation three avenues. First, the Indonesian Banking strategy, following which Government should Restructuring Agency (IBRA) - holder of the bulk be allowed the freedom to proceed with of distressed loans - is actively engaged in individual transactions provided they are restructuring corporate debts. Second, the Jakarta consistent with it. Initiative Task Force (JITF) mediates restructuring negotiations between corporate debtors and creditors > Second, establish credible regulatory (often foreign creditors) and expedites needed arrangements for industries that enjoy a natural regulatory approvals and regulatory relief. And monopoly. Responsibilities for ownership, third, spontaneous private sector led debt policy-making, and regulation need to be clearly restructuring negotiations occur - with no separated, with regulatory agencies being government involvement. competent, transparent, and insulated from Government intervention. Corporate restructuring through IBRA. IBRA's mid October 2001 credit portfolio had a book value > Third, ensure transparency in privatization of Rp. 269 trillion. About 2 percent of its debtors transactions. accounted for almost 96 percent of loan assets, while some 194,153 small debtors (98 percent of the total > And fourth, avoid granting privatized companies debtors) with average debts of just Rp. 50 million any of the benefits - special tax treatment, accounted for 4 percent. subsidies, sovereign guarantees, preferred interest rates on bank loans - these firms may have received as state enterprises. But at the same time, Government should also eliminate their social obligations. - Page 2.4 - Table 2.3 Status of IBRA corporate debt restructuring, September 2001 (Amounts in Rp. trillions) Obligor group Early stage a/ Middle stage b/ Late stage c/ Completed d/ Total Top 21 4.3 2.7 68.9 14.9 9(.8 5% 3% 76% 16% Next 22-200 13.5 32.8 37.4 17.8 101.5 13% 32% 37% 18% Remainder 11.3 14.6 19.4 5.0 50.3 (201 onward) 22% 29% 38% 10% Total 29.1 50.1 125.7 37.7 242.6 12% 21% 52% 16% a! Early stage includes no action on workout or legal proceedings; preliminary negotiation; or standstill agreement. h/ Middle stage includes assignment of advisors; due diligence; or restructuring negotiations. c/ Late stage includes finalization of a workout MOU or initiation of legal action. d/ Completed includes loans that are in stages of implementation, full payment or disposal. Figures exclude retailUSME, SOEs, interbank claims, affiliated and non-resident loans Source: IBRA Early on., IBRA chose to sell its SME, retail, and resolution, or impose sanctions to penalize non- commercial loans - but restructure the large cooperation. corporate debts (Table 2.3). Only a very small proportion have actually been completed (Table 2.3). In April 2000, the JITF reviewed its docket of 214 IBRA is finding it difficult to close deals. Many cases and dismissed 154 cases where there was no remain stuck in litigation. And debtors remain realistic chance of restructuring or willingness to reluctant to move beyond the MOU stage, because cooperate. After the first quarter of 2000, cases this would mean disposing assets, accepting equity averaging $2.0 billion were added to JITF's docket dilution, or paying creditors. Unfortunately in in each quarter (Table 2.4). Some were FSPC Indonesia, recalcitrant debtors seem to ignore the referrals of cases where IBRA is a minority creditor. bankruptcy law with impunity (see below), and By mid October 2001, term sheets had been signed IBRA has little confidence of prevailing in the for 60 cases totaling $12.4 billion in debt. About 50 courts. percent or 30 cases with an amount of $4.6 billion have moved beyond the term-sheet stage to formal Out of court workouts. The Jakarta Initiative Task legal documentation and implementation. Force (JITF) was created to facilitate and mediate between debtors and creditors to help reach Quality of IBRA and JITF corporate debt agreement out-of-court in debt restructuring restructuring. Corporate debt restructuring negotiations. It also helps eliminate tax, legal, or agreements that have successfully reached the MoU regulatory impediments to corporate restructuring stage have the following features (Table 2.5): transactions on a case by case basis. More recently, it has been authorized to provide incentives (for > IBRA deals have rescheduled a lower proportion example, tax or regulatory relief) to motivate quick of debts than deals by other creditors. More - Page 2.5 - Table 2.4 JITF's Caseload ($ billions) Added during Completed Cumulative Active at end period during period completed of month 1999 n.m. 1.30 1.30 23.0 2000:Ql n.m. 0.67 1.97 6.67 2000:Q2 2.28 0.24 2.21 8.71 2000:Q3 3.64 2.96 5.17 9.39 2000:Q4 2.02 4.19 9.36 7.22 2001: Q1 2.07 1.04 10.4 8.0 2001: Q2 1.56 1.7 12.1 7.6 2001: Q3 1.75 0.08 12.21 9.3 Source: JITF recently, the Government has finalized Even where IBRA has reached agreement with agreements on key large debt restructuring corporate debtors, the quality of restructuring has cases, including Chandra Asri. been questionable. The Government adopted a new set of corporate debt restructuring principles in IBRA's top 21 deals rely heavily on debt April, 2001 to ensure more transparent restructuring conversion - 42 percent into convertible bonds agreements consistent with international best and 12 percent into equity. The future ability practice and to share the financial burden more of IBRA to recover substantial portions of its equally between debtors, creditors and taxpayers. assets at value hinges on the success of these In accordance with these new principles, IBRA's companies. Oversight Committee (OC) recently reviewed the first 31 MoUs between IBRA and its top 21 JITF agreements - in which foreign creditors are obligors, citing numerous deviations in each. So far, major participants - feature higher levels of debt the Financial Section Policy Committee (FSPC) has rescheduling (57 percent) and debt-equity published its response to only 13 such reviews. conversions (27 percent). While 16 debt-equity conversions have been agreed under JITF (but Creditor rights and insolvency. One of the reasons not implemented yet), six would give majority for the poor quality of corporate debt restructuring control to creditors. If MOUs are implemented, deals is the absence of a credible threat of as much as 42 percent of debt could be bankruptcy. Creditors have found that they can extinguished, of which debt-equity conversions rarely expect to prevail in court proceedings to accounting for 27 percent, debt to convertible enforce claims in cases of insolvency. Enforcement bond conversion 8 percent, debt buyback 3 of unsecured or secured debt are subject to percent, cash repayment 2 percent, and debt successive appeals by debtors to the District Court, cancellation 2 percent. the Court of Appeals, and through cassation - Page 2.6 - Table 2.5 Use of debt restructuring methods, July 2001 Non-official IBRA: IBRA: IBRA: (outside Top 21 Top 22-50 rest JITF IBRA/JITF) Debt restructured (Rp. Trillion) a! 74.8 14.9 13.8 81.6 16.6 No. of cases n.a. n.a. n.a. 43 20 Rescheduled (in percent) 27 40 32 57 81 Average term (years) n.a. n.a. n.a. 7 5 Grace on principal (percent n.a. n.a. n.a. 66 n.a. rescheduled) Length of grace (years) n.a. n.a. n.a. 2 n.a. Converted to equity (percent) 12 30 7 27 1 1 Converted to convertible bonds 42 13 22 8 0 (percent) Other (percent) b/ 19 17 39 7 8 a/ Includes past due interest and penalties for IBRA cases. b/ Includes cash payment, debt buyback. debt/asset swap, and debt cancellation. Note: Data for JITF is for January 1, 2000 to July 30, 2001. Exchange rate used was Rp. 8,000/US$ 1.- Source: JITF compilation, including IBRA data as well as reports from Bisnis Indonesia and Komnpas. procedures to the Supreme Court. There is also the understand the law or the principles underlying possibility of a civil review before a different it. chamber of the Supreme Court. All this results in a . Administrators and supervisory judges tend to lengthy and expensive judicial process. There IS be inexperienced, particularly in asset recovery also ample scope for anomalous judicial decisions and business reorganization. that - from the perspective of fact or law - are unfathomable. * If a judgment is made against a debtor, enforcement largely depends on the debtor's Indonesia's new bankruptcy law provides for cooperation. equitable treatment of creditors, corporate reorganization, and preservation of assets. Intended * Uncooperative debtors have many avenues with to be read together with the Civil Code and which to disrupt implementation of legal Commercial Code, the law is not implemented decisions not in their favor. Securing police 6 assistance is difficult. properly, for a variety of possible reasons: One recent case (see Box 2.1) indicates the potential ability of debtors to use provisions of the * Corruption. Bankruptcy Law to obtain court ratification of shady * Several decisions demonstrate that the composition plans to the disadvantage of bona fide Commercial Court appears not to fully creditors. 5White & Case LLP and Ali Budiardjo, Nugroho, Reksodiputro, "Legal Issues: Indonesia," in Guide to Restructuring in Asia 2001. 6 Pricewaterhouse Coopers, "Financial Issues: Indonesia," in Guide to Restructuring in Asia 2001. - Page 2.7 - Box 2.1 Phantom creditors put IFC in a (noodle) soup: the case of Panca In February 1998, Panin Overseas Finance stopped all payments of interest and principal due on its loans of around US$60 million to its creditors, including several foreign banks and IFC, a member of the World Bank Group. In 1999, the company name was changed to PT Panca Overseas Finance ("Panca"). Two separate audits by international accounting firms established that Panca had over US$40 million in assets, including US$25 million in cash. So the creditors rejected a plan that would return 17 percent of credits. Instead, in early September 2000, the creditors petitioned the commercial court to declare Panca bankrupt. The Commercial Court postponed the case for a month. When the court reconvened, Panca claimed to have drawn down Rupiah 1.6 trillion (US$175 million) in new unsecured loans during the month-long break. The loans, Panca claimed, had been arranged by Harvest Hero, a Hong Kong registered company with 13 other companies, based in Western Samoa and Bahamas. Panca claimed that the entire US$175 million in new loans had been used to purchase "factoring receivables" from a British Virgin Islands company that then defaulted the entire amount, so these new funds were not available to meet creditor claims. The creditors protested that Panca had created these fictitious creditors to block the bankruptcy petition. They provided evidence that Harvest Hero had paid-up capital of HK$2 (25 US cents), no telephone listing in Hong Kong, and no permit to lend money there. Similarly, until recently, all other syndicate members were offshore shelf companies in tax havens and none of them had engaged in international finance in their respective jurisdictions. Harvest Hero's registration listed the address of one of the directors who had signed the loan agreement with Panca. The address turned out to be a small North Jakarta chicken noodles restaurant, whose proprietor had never heard of the director or Harvest Hero. Although the director had signed the loan agreements in July 2000, he was appointed as a director in Harvest Hero only in September 2000. The Commercial Court, however, decided that the 14 new creditors were legitimate and allowed them to vote on the Company's composition plan. IFC appealed the Commercial Court decision, but the Supreme Court turned them down, reasoning that the new creditors were legitimate unless proven fraudulent by a court of law. IFC has petitioned the Supreme Court to re-open the case based on new evidence and the case is still under review. Reforming the financial sector system performance reveals the following (Figure 2.1): More than four years after the onset of the crisis, some progress has been made in stabilizing and * Lending. Bank lending seems to be staging a recapitalizing banks. But the banking system recovery, but it is hesitant and may be faltering, remains vulnerable to further shocks, non- and clearly inadequate to support substantial performing loans remain high, and intermediation increases in investment. Moreover, the data are margins are thin. Some banks have low capital such that it is difficult to differentiate between adequacy ratios and face declining profitability, defensive lending (which serves to rollover faltering progress in their debt restructuring, and repayments) and loans for genuine new slow resumption in new lending. Unfortunately, investments - and may therefore exaggerate the much of the official data on bank performance is of recovery in the banking system. low quality, so conclusions have to be tentative. 0 Liquidity. System-wide liquidity is relatively With this caveat in mind, a brief survey of banking stable, with 31 percent of liquid liabilities -Page2.8 - covered by liquid assets. But many banks have * Earnings. Rising interest rates and an unstable experienced liquidity pressures this year. After Rupiah meant that net interest margins (interest adjusting for exchange rate changes, during the income minus interest expense) fell further. second quarter of 2001 nationalized banks had Banks with mainly fixed rate bonds in their book the highest increase in deposits, while suffered the most, but banks with poor quality recapitalized private banks and foreign banks loans were also affected negatively as they experienced a decrease. The high concentration needed to increase reserves for loan losses when of short-term bank deposits from non-bank loans were downgraded. financial institutions is expected to create liquidity pressures in the near term as these * Non-performing loans. Non performing loans deoior a yer-n obliaon orse reported to Bank Indonesia declined to 16.6 depositherinvestmayyentalternabiv ate-sowsed percent in June 2001. At the same time, reserves banks,theainvilytrelnt ontemativesE d tepos red for loan losses also decreased, indicating that banks, heavily reliant on SOE depositors, are bak a rte f oebadlas hrr banks had written off some bad loans. There are also likely to face more severe pressures. growing concers that the NPL rate may be Figure 2.1 Some progress in performance of the banking system Loans are increasing in real terms... .... with most loans going to industry and trade... (percent growth in loans adjusted for inflation) (share of loans by sector) Percent 6.0 Ohr 4.0 Other Industry 2.0 Construction & 0.0 transport -2.0 Mining, gas, utilities -4.0 -6.0 Agriculture Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 JuL-01 Services rade ... while the capital assets ratio is rising.... .... but the non-performing loan ratio isfalling. (capital-assets ratio - unadjusted for risk weights) (non-performing loans as a share of total loans) Percent Reseres (IDR tiollon) NPL atio NPL (percet) 151) 400 _ / 19.0 350 18.5 300 ',* / ts 18.0 59 6.1 250 17.5 Loanloss5.2 2( ° ireserves 17.0 5.010017.5 Q I/0o Q 11/00 Q ivioo Q 1/lI Q [l/0 50 EI Eli [ El] U L 6.0 soDec-0 Jan-01 Feb-01 Mar-Ot Apr-01 May-01 Jun-01 -5.0 Source: World Bank staff estimates based on Bank Indonesia data. - Page 2.9 - higher than reported, especially as a recent Bank crises can be minimized if incentives are in place to Indonesia survey found many banks had not encourage good lending practices and sound risk properly classified their loans in accordance management. One such incentive (or, rather, with prevailing regulations. A higher NPL ratio disincentive) is the threat of closure or sanctions would require banks to (again) raise their loan from an effective regulatory and supervisory system. loss reserves which, in turn, will negatively affect their capital position. True, sale or closure will involve expenditures up- * Capital. The ratio of capital to total front, but will reduce costs over the medium-term (unweighted) assets has climbed steadily. and generate market confidence. Doing so is System-wide, banks still reported profits, which important to the central bank's credibility. retained earnings. This profitability could be the Government should give its support for sound result of reclassifying loans as performing assets supervision and prompt intervention when a bank's - and there is some concern whether this is finances are found to be fragile. For example, appropriate. Some banks, mostly small, still supervisors should not be fearful of intervening well have a capital adequacy ratio less than the before a weak bank's capital is exhausted. And required 8 percent and may not reach the target there should be every effort made to move towards by year end. So the solvency of the banking new standards. Better enforcement of existing system remains tenuous. The assets of many regulations would help. banks are domiiiated by government bonds. By June 2001, banks had shifted only 12.8 percent As another measure to further strengthen of their government bonds (totaling Rp. 439 recapitalized banks, Government needs to convert a trillion) from the investment to the trading portion of fixed rate recapitalization bonds to portfolio, a move which involves marking these floating rate bonds - for two reasons: to improve bonds to market (in August 2001 such intermediation margins; and to stimulate a secondary government bonds were traded at an average of market for recap bonds and thereby increase 83 percent of face value). As banks start lending liquidity. This again will involve up-front costs. more and apply risk weights for new loans, But the benefits of such an action will far outweigh solvency could be expected to deteriorate. its costs. Bank and corporate restructuring is to undo the Second, decide the future of state banks. In the excesses and mistakes of the past. But what about future, a key issue is the share of government owned the future? One opportunity from current crisis in banks in the banking system. The Indonesian Indonesia is the chance to build the foundations for authorities have announced their intent to reduce an efficient and safe financial system. Weaknesses this. The Government is committed by end 2001 to in the financial system played a major role in the put forward its strategy for the divestment of its four 1997 crisis, and despite many reforms, progress has state-owned banks - Bank Mandiri, BNI, BRI and been limited. Government and parliament need a BTN -- which account for one-half of the banking common vision of the Indonesian financial sector - system's liabilities.' and then work together to make it a reality. Much of While state banks are being prepared for the focus will need to be on the banking sector, privatization, they should be the subject of intense because of its large size and its importance to central bank scrutiny to ensure they avoid bad macroeconomic stability. But other elements are lending. It is possible that some state banks may also important. If the Government were to prepare a remain government owned. If they do, it may make financial sector strategy - as a road map for the sense to turn them into "narrow" banks (banks future - then the following five broad issues would accepting deposits but holding only government be sure to be part of it. debt) to limi,t any proclivity for bad lending and to keep their capital base as small as possible. First, ensure banks are safe and strong. Weak Converting some state banks into narrow banks is banks must not be allowed to threaten the viability of the entire banking system. The chances of further These commitments are made in the letter of intent to the IMF dated August 27, 2001. -Page 2.10 - not as big a step as it might seem - some state banks follow high risk strategies (moral hazard) and lower already have government bonds that account for 70 incentives for depositors to seek well-managed percent of their total assets. banks. Indeed, we have already noted that deposits have been rising fastest in nationalized banks (see To improve the performance of state banks and above). So eventually the blanket guarantee must be prepare them rfo r successful divestment, the removed. One way to do it is to lower the interest prepare them for successful divestment, the government should establish "best practice" rate ceiling gradually for all guaranteed deposits - govemanmen shouldurestablish "boce estfor each.At thereby encouraging depositors to judge for governance structures and procedures for each. At tesle h ikpeimte ol eur o the same time, it is important to press ahead with the themselves the risk premium they would require for operational restructuring of state banks. The depositing non-guaranteed funds in banks. Monitoring and Governance Unit (initially within Fourth, provide the poor with access to rinancial the Ministry of Finance but to be transferred to the . 2 Ministry of State-Owned Enterprises) has begun services. This will entail: monitoring their performance against financial and A coherent strategy for developing the rural and restructuring milestones contained in their business plans and performance contracts. The future of BTN micro-finance market and unification of the current plethora of programs under a single and the handling of its portfolio will need to be responsible authority with powers to implement resolved in the context of the Government's policy this strategy; decisions on continuation of housing finance subsidies and its overall housing finance policy. & The Goverment's partnering with emerging Further issues that remain to be addressed in coalitions of micro credit providers that focus on Indonesia's state banks include: sustainability of micro credit, and encouraging - the quality of the debt restructuring conducted links with the formal credit system; and the quality of the remedial loan portfolio; * Returning to market-based credit allocation anid * clarity in representation of portfolio quality; interest rates, and adequate evaluation and collection efforts, as for example, in BRI 3 the pace of operational restructuring (including programs, while eliminating the post-crisis, rationalization of branch networks and staffing unsustainable, subsidized credit programs: levels, improvements in credit practices, risk management and in external and internal . Improving the legal system related to titling and governance issues); pledging of collateral, the information on small .. periodic re-evaluation of the.realism.inborrowers, and other institutional mechanisms * perioic re-valuaton of he reaism infor lending to rural and micro borrowers. underlying assumptions (growth, revenues, etc.) underpinning the finalized business plans in Fifth, develop the bond market. We already noted each bank. in Chapter 1 how important a liquid bond market will be when refinancing recapitalization bonds upon Third, remove the blanket guarantee eventually - maturity. The bond market can be developed but not just yet. The blanket guarantee will be through a steady issue of government bonds, risky to remove until confidence in macroeconomic transparent auctions, an effective payments system, stability is restored, the banking system is stronger, and the establishment of a registry. It will also and the government has built a reputation for contribute to money and debt market development. effective supervision. Nor would removal now Passage of the long-delayed Government debt law is reduce the Government's contingent liability by needed to move forward in this area. much. After all, the Government owns virtually 80 percent of the banking system (and will remain, de The equity market is small and, while equity sales facto, a guarantor of the banks it owns), and owes a can be used to privatize firms, the market's limited substantial amount of debt to the banks. But blanket guarantees of such magnitude encourage banks to 2 See also the SME section in this chapter. - Page 2.11 - farmer incomes are artificially and expensively Box 2.2 propped up through trade protection. Such a strategy Soybeans: protein for the poor will include reforms ranging from granting farmers freedom to choose their crops to reinventing public Soybeans are an important source of protein for the institutions such as extension services. Government poor in Indonesia. Unfortunately, this is given scant funding of agricultural research remains an regard by growers' representatives who want an import important public function and could be enhanced to duty on this commodity. Production in Indonesia is reverse recent erosion of budgets. On the farm input marginally competitive at best, and for years, imports side, more aggressive liberalization of fertilizer have filled a major part of annual needs. Implementing a tariff on soybean imports would shift agricultural production and supply is needed to icrease market resources into a marginally competitive crop activity, competition and service standards. Rural micro- raise costs to poor consumers and potential processors, finance policies must move away from subsidized and detract from establishing an integrated, efficient credit programs and toward strengthening domestic processing capacity. A better approach would institutions delivering micro-finance. For land, both be to make available improved seeds and disseminate rapid improvements in land certification and superior planting practices, to help generate higher administration, and multi-stakeholder formulation of yields and returns. a broader, medium-term agenda for broad land policy reform, will begin to provide farmers with greater security when investing in land capacity to absorb new issues and improve corporate improvements. Finally, providing a healthy governance should not be overstated. The capital environment for farmers to create member-driven, market would benefit from better information, which enterprise-oriented organizations, such as is necessary for better governance and market cooperatives and water user associations, will help discipline. Regulation, though improving, is still an generate efficiencies in production and marketing issue in the minds of many potential investors. More generally, the equity market is unlikely to Rice policy. In January 2001, the Government take-off until macroeconomic stability returns and created an interdepartmental working group to demand increases as a result of growth in mutual formulate a national rice policy that would take funds (with a corpus of appropriate regulations account of these issues. This team has produced ensuring transparency), pension funds and insurance working papers and a technical proposal on future companies. And for this, as with banks, the pension rice policy.3 This proposal was presented and and insurance sectors would benefit from improved discussed in various public meetings.4 The core of governance, regulation, and supervision. this technical work is drafted into a proposed Inpres Tentang Penetapan Kebijakan Perberasan which (as Improving agricultural policy of October 2001) is still with the Coordinating Minister for Economic Affairs for further action. The challenge in agricultural policy is that commodities produced by small farmers are also The rice economy has undergone abrupt and wide- important in the consumption baskets of poor ranging changes since 1998. The Government no households. Indeed, many rural farm households are longer subsidizes all consumers through sales from net consumers of basic food items, such as rice and public stocks to the market. Instead, it provides rice soybeans (Box 2.2). Trying to help small farmers at a subsidized price only to poor households (OPK). through a high price policy, supported by import tariffs, usually hurts poor households, including many poor farmers. It also increases input costs to 3 Keputusan Kepala Bappenas no. 005/KA/01/2001 Tentang industries that employ the poor, consume their Tim Pengkajian Kebijakan Perberasan Nasional. Januari 23, 2001. Output, and supply their inputs. 4 See "Reformulasi Kebijakan Ekonomi Beras Nasional: Hasil Rumusan Tim Pengkajian Kebijakan Perberasan Nasional To distribute the benefits of growth broadly among sebagai usulan alternatif kebijakan bagi Pemerintah" in the rural poor requires a multi-dimensional strategy "Altematif Kebijakan Perberasan: Tinjauan Kritis Hasil Tim based on productivity improvements,notKajian Kebijakan Perberasan Nasional," Pusat Studi based on productivity improvements, not one where Pembangunan, Lembaga Penelitian IPB, Juli 2001. - Page 2.12 - The State Logistics Agency (BULOG) no longer * Role of BULOG. BULOG's mandate should be monopolizes rice imports and private imports are to maintain emergency rice stocks, operate the allowed, subject to a specific tariff (equivalent to subsidized consumer rice program (OPK), and about 30 percent ad valorem). Manipulation of procure for these public programs during the customs procedures and outright smuggling, peak harvest season. A new Keppres specifies however, blunt this trade instrument. BULOG also that Bulog will be coordinated by the Minister of no longer has access to cheap capital from the Agriculture, and that it will become a BUMN by Central Bank, and thus relies on commercial sources no later than end-May 2003.5 Bulog is also for its credit and the government budget for its pressing to regain State Trading Enterprise subsidies. BULOG is also charged with supporting status and privileges within the WTO a floor price for farmers that has climbed well above framework, on which basis it would reenter into the world price and which it has not been able to trading in additional commodities. Although a support in the previous two peak harvest seasons. change in BULOG's legal status to a BUMN would bring a change in its accounting rules and The institutional, financial, and policy dimensions of hence greater transparency in its financial rice policy are thus in transition. In developing its management, this shift in status should not be national rice policy, Indonesia needs to look beyond accompanied by foray's into commercial trading calls for a protected domestic rice market and of commodities for profit. develop a more robust rural incomes policy, since rice represents a small and declining share in rural Sugar. In January 2000, the Government incomes. Less than half the income of poor rural committed to consolidating and restructuring sugar households comes from agriculture, only a fifth from factories on Java and promoting private investment rice. Propping up the price on commodities that are a in sugar off-Java. Four sugar mills were to have declining source of producer income is a losing - been shut down upon completion of the cane and expensive - proposition. So the new national crushing season in 2000. Trade policy was adjusted rice policy needs to be set in the broader objective of to allow private imports, subject to a tariff of 25 raising living standards in rural areas through broad percent that was to be phased down over 3 years. A productivity gains - from on-farm as well as off- plan was to be prepared by June 2000 for farm activities. In this context, the following four consolidation of the rest of the Java-based industry, broad points need to be considered: and budget resources to be provided temporarily to firms implementing agreed restructuring plans. 3 Price policy. The floor price for paddy is unsupportable. An' alternative is to set a Little has happened since then. True, trade was procurement price for rice needed to maintain opened to general private importers and a tariff emergency stocks and the subsidized rice introduced. But the Ministry of Finance (MOF) program for poor households. Concentrating proved unwilling to finance the modest budget costs such purchases in the peak harvest period would of the strategic study, let alone the severance costs attenuate the price decline that inevitably occurs for plant closures. Indeed, some policy actions at that time. contradicted stated policy - for example, the Government loaned Rp. 600 billion to state-owned * Trade policv. The current policy balances sugar millers to procure sugar cane at above world p roduerand polico mer interests. Tariffs shuldc prices. In June 2000, the moribund Indonesia Sugar Board was replaced by a National Sugar Board, still be capped at the lowest level that is considered composed predominantly of goverment officials. It politically acceptable, and then should be too has been largely ineffective in defining a new reduced over time according to a pre-determined strategy for Indonesia's sugar sector. schedule. During this period, there should be no non-tariff barriers, imports should remain open to private participation, and BULOG imports should operate by the same rules. 5 Keppres no. 103/2001 tentang Kedudukan, Tugas, Fungsi, Kewenangan, Susunan Organisasi, dan Tata Kerja Lembaga Pemerintah Non Departemen, 13 September 2001. -Page 2.13 Fortunately for the sugar industry, world sugar Figure 2.2 prices have since strengthened and the rupiah has Sugar prices are high weakened, providing temporary relief to mills and 180 farmers, discouraging private imports, and reducing Sugar the domestic stock overhang (Figure 2.2). For the 2001 cane crushing season the Government has not 160 made any further interventions in market 150 . mechanisms and not repeated the previous several 140 * Flour years' support package of price support to farmers 130 . ', e r~ and provision of working capital to state sugar 120 millers. In addition the Ministry of Agriculture 110 facilitated piloting of a three-way contract among 100 C_ukng ull sugar farmers, millers and traders that specified 90 - - prices and delivery mechanisms for sugar without Jan-00 Apr-00 Jul-00 Oct-OS Jan-01 Apr-01 Jul-01 government involvement. Source: CBS This pricing arrangement is a positive step. But it is only one component of the strategy needed for . . . consolidation and renewal of the Java-based invaitiong industry. While implementing this broader strategy in the medium term, the government should: not Government needs to clarify long-run policy increase the current ad valorem 25 percent tariff on directions to make progress on needed liberalization sugar imports, and perhaps even lower it; close dire etio tmer progres Aong nee leralztions loopholes on tariff concessions; continue to allow te frer private imports; promote extension of the price neededare: contract pilot to other production areas; bring new 0 designing a formula relating the domestic private management and ownership into the sector natural gas price to the international price of through sale of the sugar production assets held by urea to eliminate windfall profits to fertilizer IBRA. companies, unnecessary costs to farmers, and the temptation to restrict urea exports (as is done Fertilizer. Policy for nitrogen-based fertilizers at present); (primarily urea) is driven by long-term contracts for * allowing each fertilizer firm to sell its own natural gas sales to fertilizer manufacturers. These output without hindrance; and include a large subsidy, so there is an incentive for * strengthening the fertilizer regulatory system to manufacturers and traders to export nitrogen ensure quality products to farmers. fertilizer rather than supply the domestic market. This prompted the Government to impose Reshaping energy policy restrictions on exports of nitrogen fertilizer in 2000 and to consider creating segmented market areas in Indonesia is blessed with huge energy resources - which selected producers and distributors will be yet the energy sector is in trouble. The problems are allowed to sell fertilizer. Marketing by state-owned twofold: pricing of energy at unsustainably low fertilizer firms remains under the management of the levels and a regulatory environment that does not holding company, PT Pusri. encourage efficiency and probity. Both issues dominate policy concerns in electric power and the In this policy environment, it will be difficult to hydrocarbon (oil and gas) sector. privatize PT Kaltim, a transaction that has been postponed several times. Investors face large risks Electric power. The price of electricity remains from a lack of clarity in long term policy on urea well below the long-term cost of supply, and PLN exports and domestic marketing. Moreover, the continues to record large financial losses. The government is finalizing arrangements for expanding Government and PLN have actively socialized the one state-owned fertilizer producer, not yet slated for - Page 2.14 - need to restore the electricity tariff to a Tanjung Jati A). In addition, the Government has commercially viable level, setting a nominal target agreed terms for repaying MIGA and OPIC for their of US 7 cents per KWh by 2005. claim payments to Enron (Pasuruan) and Mid- American Holdings (Dieng and Patuha) respectively. While there is no explicit strategy for accomplishing Intensive negotiations are underway for other this target yet, several tariff increases have been operating plants, including Paiton I and Paiton II, implemented. Following the 30 percent average but the process has been slow, further impairing increase of April, 2000--which affected primarily prospects for attracting new private investment in large industrial, business and residential the sector. consumers-average tariffs were increased by a further 22 percent through a two-stage increase in Finally, PLN's corporate restructuring commenced July and October of 2001. The largest increases this in late 2000, and progress has now been made time fell on mid-size consumers, while small towards decentralizing authority for key planning consumers - those with connection capacities of up and management functions. International to 450 VA and monthly consumptions of less than management consultants were engaged to assist with 3OKWh - were again protected. Public reaction to the next steps in the process, and in particular with these tariff increases has been relatively muted. the functional unbundling of the Java-Bali Unfortunately, the financial benefits of higher tariffs businesses. But there have been delays, and to PLN have been substantially eroded by the further concerted efforts are needed to get the program back depreciation of the Rupiah. on schedule. Pricing electricity below cost not only undermines In early 2001, the Government approved the PLN's financial viability but contributes to rapid restructuring of its loans to PLN for 1998-2000. growth in electricity consumption. Clearly, tariffs PLN had been unable to service its debt to need to be increased to commercially viable levels Government during this period, and the accumulated and prospective investors need to be assured of arrears and penalties meant PLN's equity turned earning adequate returns on efficiently managed negative by end-2000. Part of amount due has been investments. With virtually no new generation converted into a new Rupiah loan, while the balance capacity under construction, and no restrictions on has been treated as an increase in the Government's new connections, Java-Bali could be facing power equity in PLN. blackouts and brownouts in the next few years. Outside Java-Bali, many regions are already facing Oil and gas sector. The Law on Oil and Natural Gas severe power shortages. was approved by the DPR in October 2001, providing a framework for restructuring the sector. Implementation of a new legal and regulatory The law strips Pertamina of its monopoly powers, framework will also help. The draft of the new converting it into a state-owned limited liability Electricity Law, delivered to Parliament in February company (Persero), and establishes an implementing 2000, supports key reforms. But some further agency to oversee production sharing contracts and a refinement will be needed to: better delineate the regulatory agency to oversee natural monopolies in role of local governments in planning, regulation and the downstream part of the industry. Implementing licensing; better define the jurisdiction of the regulations, which are being finalized, will be independent regulatory agency; ensure the crucial to the successful implementation of the law, principles for tariff-setting are sound and and should be designed to support the goals of unambiguous; and specify more precisely the role of attracting new upstream and downstream investment the proposed Social Electricity Development Fund. and of promoting downstream efficiency improvements through effective competition. Finally, long-term agreements have been concluded for a few operating independent power producers While Pertamina has made a start on internal (IPPs), notably Drajat and Sengkang, while "close- corporate restructuring to prepare for out" agreements have been concluded for several implementation of the new law, the changes fall plants that did not reach financial closing (notably short of the major structural reforms needed to -Page 2.15 - enable and facilitate effective competition in half of the 45 counties surveyed have either downstream operations and to realize potential deregulated prices or have in place regulatory performance improvements in upstream and mechanisms that allow full automatic pass-through downstream operations. of international price changes.7 The others have established either discretionary or automatic fuel The fuel subsidy continues to impose a very heavy price smoothing mechanisms. However, these have burden on the budget despite several recent price been associated with significant fiscal costs for increases. In April 2001, the Government raised governments. In Indonesia's case, the need to restore prices for fuel supplied to medium and large fiscal sustainability and reduce the burden of public industries and to intemational shipping and fishing debt argues strongly for moving to eliminating fuel vessels. Under this scheme, foreign oil and mining subsidies and deregulating pricing policy as soon as companies, foreign ships, and Indonesian ships possible. operating international services are required to pay full international market prices, while medium and Indonesia partially moved toward such a system - as large industrial consumers and operators of fishing part of the April 2001 package (see above). But it is vessels are required to pay 50 percent of time to move towards a system of automatic price international market prices. The "international adjustments for all fuel products, while gradually prices" are set monthly on the basis of prevailing reducing the proportionate difference between the Singapore market prices in the preceding month.6 domestic and international price according to a pre- The April 2001 increase was estimated to be specified path. equivalent to a 16.5 percent weighted average rise in petroleum prices. Revitalizing mining In mid-June, 2001, a further round of price increases Invegtment in mineral exploration and mine were implemented, this time affecting the general development has all but ceased, and persuading public. The price of automotive diesel oil was world class investors to return will require the increased by 50 percent to Rp. 900 per liter, while Government to tackle a fornidable array of gasoline was increased by 26 percent from Rp. 1150 challenges. Of course, there is the prenging need to to Rp. 1450 per liter. However, the price of improve the overall investment climate - which is kerosene was increased by only 14 percent to Rp. the focus of the first three chapters of this report. 400 per liter, which is less than 20 Aferent of BUt in addition, there are several impediments Pertamina's published intemational market price for specifically discouraging mining investment, whieh September 2001 and hence encourages smuggling need to be resolved in the context of the passage of and itg guhtitution for othcr fuels. the new mining law. These include: * Authoritv to issue mining )hcenses. Th1 draft In a competitive market economy, there is a strong mining law authorizes districts, provinces, and case for allowing domestic fuel prices to be set in the State to issue licenses depending on the line with international prices, with change6 in world location of the rfsource, But this has two prices and/or exchange rates to be fully passed problems: first, licenses issued by authorities through to changes in domestic prices. This both other than the State - the "legal" owner of the allowg for producers and Consumers to allocate resource - are unlikely to be accepted as security resources and consume fuel products on the basis of by commercial lenders; and ge!Mnd, guch a market-based price signals, and also protects the multi-tiered licensing authority creates the risk government from incurring unduly large or volatile of overlapping jurisdictions. fiscal costs. A recent survey of petroleum pricing * Resticfons t) mprul exploration and policies in developing countries showed that almost extraction. The Forestry Law prohibits mineral exploration and extraction in protected forests 6 Average MOPS (Middle Oil Platts gingaporel prieeg for the preceding month, adjusted for octane and specification See Giulio Federico et al, "Domestic Petroleum Prce differences, plus 5 percent for distribution costs and 10 percent Smoothing in Developing and Transition Countries," IMF VAT. Working Paper 01/75, May 2001. -Page 2.16 - that cover around 30 percent of Indonesia's total The proliferation of licenses, permits, taxes and land area - and a decree from the Minister of levies - especially at local government level - Fisheries prohibits extractive industries on impose major costs on SMEs. In addition, SMEs "small" islands of less than 2000 km2. The face an "uneven playing field" due to laws and prohibited areas include a number of potentially regulations that favor large conglomerates and rich mining prospects including two very impose high fixed costs on small businesses. To cut promising nickel deposits. The Government is through red tape, the Government could create one- right to be concerned with protecting the stop shops at the regional level, possibly through environment - and to that end, it needs to earmarked grant programs, and ensure adequate develop forest and environment management formal channels for SME advocacy in the policy- practices which balance the need for making process. development with the need to protect the Government programs aimed at raising skills of environment.Goenetporm meatrtm skl f entrepreneurs are of variable, often low quality. I Incentives regime. The Government should Private sector service providers, on the other hand, carry out a full review of various taxes and are often undermined by public services that are charges levied by regional govemments as well below par. To rectify this, the Government needs to as the center, to see where improvements can be develop plans to eliminate, privatize or restructure made and the tax structure aligned more fully SME programs that do not meet appropriate with international best practice. performance criteria. Except in selected cases, the Government should move away from providing These issues are mostly outside the jurisdiction of business support services, and instead encourage the Ministry of Mines and Energy and therefore public-private partnerships and private business require inter-ministerial cooperation and centers. coordination, ag well as consultation with the major stakeholders (including Parliament). Banks lend little to SMEs because it is costly and risky. To overcome this constraint would require: Promoting a responsive vet responsible priyvat sector * a credit bureau and credit registries run by the private sector, that can improve access to The central thrust of Indonesia's growth strategy is information and reduce the risk of lcnding to thrQugh pMivte inveslmtnt gnd Dtoduction. But one WES; of the important lessons of the crisis is that private * incentives for banks to invest in staff training sector development cannot be sustained without and procedures for SME lending; appropriate attention to small and medium enterpnses, corporate governance, and competition * supervision and support mechanisms within the policy - all three of which ensure that development Ministry of Finance to assist small financial is broad based, and that all enterprises compete on a institutions that lend to micro enterprises (sueh level field and according to well ePtabLshed and as BPRs. deposit-taking NGOs, Credit Unions); understood rules. * programs to strengthen financial institutions Small and medium enterprises (SME). Most SME lending to small businesses. programs have failed, partly due to lack of coordination, poor program design, and inadequate Corporate governance. Not only is good monitoring and evaluation. The Government has governance crucial for investor confidence, it also created an inter-ministerial task stjel to reassess hClps develop a more Otable and efAcleent private strategy toward small and medium enterprises sector. In 1999, the Government established the (SMEs) and bring cohesion to the many government National Committee on Corporate Governance programs supporting SMEs. Unfortunately, there (NCCG) to: create a Code for Good Corporate has been little progress over the last six months. Governance that sets a benchmark for corporate - Page 2.17 - practice; suggest legal reforms to implement the ) Broadening the scope of work The law requires Code; and establish an institutional structure to KPPU to offer technical assessments and advise support the Code. Members of the NCCG were government agencies on policy and regulations appointed by the GOI and drawn from Government, affecting competition in markets. To achieve the academic world and the professions. this, KPPU needs to develop a framework and methodology to understand and approach the By early 2000 a draft Code of Good Corporate interactions between competition law and Governance had been prepared, and has economic regulation, SOE privatization, SME subsequently been revised in line with comments development, improved corporate governance, from the business community. The National and regional decentralization. The outcome will Committee is now focusing on its dissemination. enable KPPU to have a more comprehensive Institutions and groups in the academic and business vision of its role in shaping policy-making and communities have focused on various aspects of facilitating refonns. corporate governance, including through public seminars. BAPEPAM, the capital markets regulator, > Training government officials on the has shown some resolve in tackling enforcement Competition Law. Efforts here would focus on: issues. Private consulting companies are reporting an (i) strengthening regulatory, analytical and increase in the level of business from private clients enforcement capabilities at KPPU to address wishing to upgrade their corporate governance firm/consumer complaints and requests for practices. policy advice, (ii) initiating a dialogue with regional and local governments on the The Government is considering a Review of implications of the law; and (iii) training judges Standards and Codes (ROSC) in corporate on enforcement and compliance with the governance, possibly in FY01/02. Plans are also competition law. afoot to upgrade the listing rules of the Jakarta Stock Exchange and to examine the feasibility of > Dissemination of KPPU's objectives and policy demutualizing the Exchange in the medium term. principles. Dissemination would focus on the Future initiatives need to include continuing efforts preparation and publication of reports, booklets to strengthen institutions, to foster networking and brochures containing general information between institutions within Indonesia and also about the competition law and KPPU and would internationally, to increase public awareness, to train be aimed at government bodies, business practitioners and to promote implementation at the communities and public at-large. corporate level. Conclusion Competition Policy. In June 2000, GOI appointed 1Commetisioner tolic. rnunte C000GOmmIssion .o Progress on structural reforms has been slower than Busines I Com petiioners ("KPPU) rn thew C sin dnt f expected. While there has been forward movement Business Competition ("KPPU"), a new independent in some areas (bank recapitalization, corporate debt regulatory agency in charge of implementing and restructuring, Pertamina's procurement systems), enforcing Law No. 5/1999 on competition. The ressu on P erall program hasteen .. . . . ~~~~~progress on the overall program has been Commission's effectiveness will depend upon its significantly behind the Goverment's own capacity to: (i) remain independent from business; timetable. Of greatest concen is the need for (ii) address com.petition issues in a technical, stronger strategic leadership in a range of areas - transparent, non-intrusive and fair manner; and (iii) privatization, agricultural policies, energy and develop an effective advocacy strategy for public mining policies, and SME development. There is a policy measures affecting competition. critical need for a game plan to tackle the large There is still a gap between the objectives of the law structural issues that remain unresolved - including and its application in reality. To narrow this gap, state ownership of large swathes of the bnk KPPU has prepared a program with the following system and corporate sector; inefficient, state- objectives owned, loss-making sugar mills on Java; continuing large losses in PLN and the looming shortage of -Page 2.18 - power generation capacity; long-term food security, progress on competition law and corporate including rice policy and the role of BULOG; governance. Progress in these areas will be critical burdensome fuel subsidies; inefficiencies and for increased investor confidence and greater corruption stemming from Pertamina's monopoly efficiency in the allocation of Indonesia's over all aspects of the petroleum sector; and slow increasingly scarce resources. Chapter 3 Improving Governance and Anti-Corruption The first chapter dealt with the importance of savings of 10 percent could be realized in public macroeconomic stability - an essential prerequisite procurement in the development budget, it for growth. The second focused on structural would yield the exchequer some $500 million. reformns to encourage the efficient use of resources - The amounts would be significantly larger if off- especially important given Indonesia's unusually budget public investments were included. The constrained economic circumstances. This chapter reported loss of papers relating to the BLBI addresses a third important element in Indonesia's cases by the Attorney General's office, for economic agenda - namely the institutional and instance, could conceivably result in very large governance underpinnings that are needed to ensure losses to the public exchequer. sustained growth, even in a difficult world economic setting. It, therefore, pays special attention to such By their very nature, governance reforms will take issues as the fight against corruption, better publlic years to implement and take root. Yet action is financial management and procurement systems, needed now to develop and begin implementing reforming the legal and judicial system, effective these long term strategies, without which investor management of the decentralization program, civil confidence will prove difficult to restore and service reforms, and improved corporate sustainable poverty reduction will prove elusive. governance. It also looks at how these issues affect Moreover, there are potentially a number of 'quick the natural resources sector, mainly forestry and wins" that could significantly shift incentives and water. build momentum for these reforms. Indonesia is already paying a high price for poor Corruption governance: Corruption is the most well known symptom of poor * The heaviest price is paid by the poor, whose governance in Indonesia, and the one that is most ability to access essential services needed to detested by investors and the Indonesian public build their human capital to climb out of poverty alike. International surveys of foreign investors is compromised each day by a heavy handed and show Indonesia as among the most corrupt countries corrupt bureaucracy. A recent study shows that in the world. The Indonesian public seems to share the poor see corruption and lack of transparency this judgment. A recently released survey by the as financially costly, corrosive of morality and Partnership for Governance Reforms in Indonesia' social capital and eroding their human capital by shows that Indonesian households, enterprises and reducing their access to social services. (See civil servants all concur that corruption is one of the Box. 3.1) most severe problems facing Indonesia. Some key findings: * Investors are frightened away by the inability of the justice system to enforce contracts and by * Corruption in the public sector is regarded as the increased level of violence and frequency of very common by approximately 75 percent of all break downs in law and order. Recent court respondents, with 65 percent of households decisions and police investigations, particularly reporting actually experiencing corruption. those relating to Manulife and Panca (see Box 2.1), are reminders of the vulnerability of investors to a dysfunctional justice system. * Scarce government resources are being lost A Diagnostic Study of Corruption in Indonesia, Final Report, through a flawed procurement and financial October 2001. Partnership for Governance Reform in Indonesia. management system and through blatant The study is based on a survey of 2,300 respondents consisting disregard of public property. If a modest of 1,250 households, 650 public officials, and 400 business enterprises carried out in early 2001. - Page 3.2 - Box 3.1 Corruption and the Poor On the morning of June 29, 2001 Ibu Fitri hurriedly cleaned her small row house in Pulogadung, Jakarta, fed her youngest child, and then carried him to look for a minibus. That day was report card dav for Sari, her eldest child, who went to elementary school in Pulogadung. Before handing out the report card, the teacher told Ibu Fitri that the parent of a student had just passed away, and that other parents should contribute some money for the good cause. She told Ibu Fitri that she would only give out Sari's report card after she paid up some condolence money. According to the teacher, other parents had given Rp. 15.000 - Rp. 20.000, but not less than Rp. 10.000. Ibu Fitri felt her heart beating faster. This expense would mean her children would be short of food. Her husband barely earned enough to keep the fomilv going. Ibu Fitri went to the headmaster for confirmation of the teacher's story. Since he could see she was visibly angry, the head master admitted that no one had died, and this was a ruse to get parents to pay. However, the headmaster refused to exempt her from making the contribution. He said that he had no authority over the case, and that Ibu Fitri had to deal directly with the teacher. Ibu Fitri could not understand how a head master had no authority over a teacher. She wondered if the head master was getting a cut. But she understood now that she had no choice. With a lot of resentment, she gave the teacher Rp. 10.000, saving that she could not give more since her husband had not received his salary yet. With a sour face, the teacher snatched the money off Ibu Fitri's hand. When Ibu Fitri asked for a receipt, she kept saying angrily, "later, later". The teacher kept showing her animosity and would not pay any attention to Ibu Fitri. Since her youngest kid started crying, Ibu Fitri had no choice except to give the teacher another Rp. 5.000 for "pencil money". Only then did the teacher smile and hand her Sari's report card, a smile that made Ibu Fitri feel even more angry and frustrated. When she got home Ibu Fitri shared her anger and frustration with her neighbors. What she could not share was the burden of replenishing the Rp. 15.000 that she had used to pay the ransom for Sari's report card. It was supposed to be a happy day for Ibu Fitri because Sari passed herfirst grade. But it turned out to be a day of frustration. - The Poor Speak Up Each day in Indonesia, thousands of similar cdrama are enacted. Another poor person faces humiliation and anger as they face the cost of corruption and lack of transparency. They suffer from corruption in dealing with the police, at school, the electricity company, local aid projects, in obtaining ID cards, credit, etc. Speaking up for themselves, the poor see four major costs of corruption: financial costs - corruption eats into already tight budgets; moral decay - they see corruption eroding the rule of law and reinforcing a "culture of corruption"; loss of social capital - corruption destroys trust and damages relationships, corroding community cohesion; and human capital - corruption reduces access to and effectiveness of social services and thus erodes the human capital of poor people. When asked why they think corruption persists, the poor blame low salaries, lack of morality, lack of transparency and information, weak management and fear of repression: > "Officials have a poor attitude and lack morals, and everyone is used to bribing to the extent that it has become a culture ". > "Thze reasons and rules are not clear. We have never seen a circular letter explaining the Jakarta Capital City garbage retribution. le do not know much about the officer who is collecting the fees or his office oforigin" "The 'building fte' has become a frequentlv used term. Every time a new child enters that school they have to pay although they do not construct any new buildings" " "I do not speak up because I am afraid that next time around, when rice is delivered to my village, I will be excluded from the allocation Source: Corruption and the Poor, a joint initiative by the World Bank and the Partnership for Governance Reform in Indonesia, October 2001. - Page 3.3 - * The traffic police, the customs authority and the Corruption corrodes public trust in government and judiciary were ranked the three most corrupt distorts incentives. There are four key elements that institutions in Indonesia, while the media, the would be part of a national strategy. The first is to post office, and religious organizations were reduce opportunities for corruption. The second is ranked the least corrupt. Ironically, those ranked to repair broken accountability systems, through the least honest or most corrupt were also strengthening public financial management and perceived to be the least efficient in terms of procurement systems. The third is to strengthen the service delivery. legal framework for anti-corruption. The fourth is to deter corruption through better enforcement of the * Corruption extracts a high cost from society, law. In the medium to long term the establishment with between 1 and 5 percent of household of a more accountable, efficient civil service will income, official salary, or company revenue help bring about a reduction in corruption and a well spent on unofficial payments. Unsurprisingly executed decentralization program will make companies that paid more by way of bribes for governments more accountable to the people. These procurement contracts did more business with issues are addressed below as part of the key set of the government than companies that paid less. actions needed to strengthen institutions and improve governance in Indonesia. * Some 35 percent of companies surveyed said they were not investing in Indonesia because Reducing opportunities for corruption corruption related costs were too high. More than half the business enterprises surveyed (56 Much of the public anger against corruption in the percent) were willing to pay more than 5 percent Soeharto era came from what has come to be known of company revenues if corruption could be as "policy corruption": the unscrupulous use of eliminated. public policies to skew rewards towards a chosen few. The newly democratic Indonesia is already * While public attitudes to corruption appear to be building many checks and balances that prevent such highly negative with 70 percent of respondents an abuse of power for private gain. Parliament in regarding corruption as a serious social problem, particular has been exercising its oversight functions roughly a third of respondents when asked about with vigor. The media has been active in exposing hypothetical situations relating to their own corruption in public life, including in Parliament. values and behavior saw corruption as Fit and proper tests are being administered to high something normal and paid bribes. But they officials. Reducing opportunities for corruption, drew distinctions between bribing for a national however, calls for action on a few key fronts. identity card (KTP) which was seen as norrnal, and bribing a judge which was not seen as * Policv formulation: The government needs to normal. The lower the rank of the civil servant establish a clear process for policy formulation receiving the bribe, the less the act of bribing that leads to a disciplined, stable, transparent and was seen as wrong. structured policy-making process. Important govemment policies and decisions need to be * A vigorous debate is now underway throughout subject to review by all the relevant agencies the archipelago on how to control corruption. and departments prior to consideration by the The Partnership for Governance Reforms is Cabinet and the President. Where appropriate, facilitating this debate and has launched i.e., in the case of decisions that have large workshops to disseminate diagnostic work and consequences for the budget or the economy, help build consensus around a national anti- they need to be subjected to public hearings and corruption strategy. It needs to engage prior parliamentary review through white papers government and Parliament more closely in this or other mechanisms. Careful recording of debate and to encourage some quick wins even decisions and the monitoring of their as the more complex task of building consensus implementation needs to be ensured. This is gets underway. often not the case today, and opens the way for policy decisions and laws that have not been - Page 3.4 - subjected to the kind of scrutiny necessary both Public rinancial management and procurement to avoid misuse of power and obtain stakeholder systems buy-in, which in turn should maximize the prospects that such policies and laws attain their Strengthening fiduciary standards has become a high objectives. priority for Government - for four reasons. First, the public is demanding it, and understandably so. * Enhanced transparency: The government needs Indonesia's move to greater democracy and to develop a strategy to greatly enhance public transparency must begin with better management of access to information. A freedom of public finances. Second, donors and creditors are information law is under consideration and demanding it. Stung by revelations of "leakage" of needs to be expedited. In the meantime, much public resources, donor and creditor agencies are could be done to make widely available all concerned their aid is used for the purposes intended government laws and regulations and to actively and reaches ultimate beneficiaries. Third, shrinking publicize administered prices and government budgetary resources and rising public expenditure procurement tenders and outcomes. needs makes it imperative to use public resources wisely, prudently, and transparently. And fourth, * Allowing choice and voice: Government fiscal decentralization has added a layer of departments need to eliminate public complexity that demands installation of new and monopolies where appropriate or ensure that improved systems. consumers have a choice. And where not appropriate, as for example with natural While reform of public financial management and monopolies like water, ensure the voice of procurement systems will take many years, there are consumers is heard and acted upon. Reversing two actions that need immediate attention: the huge accretions to public ownership that were an inadvertent consequence of the financial creafing a legal framework to anchor future crisis will also help greatly reduce opportunities for corruption. (see Chapter 2). Rapid progress * creating the right organizational structure to in privatization, through an open and transparent guide the reforn of Indonesia's public process, is critical not just to the macro- procurement system. economic reform agenda, but to the corruption agenda as well. Public financial management: New draft state finance, treasury and audit laws are under * Improving the legal and regulatory framework. consideration. These offer an unprecedented All laws, regulations, procedures and controls opportunity to set new rules for modern, effective need to be reviewed to reduce the discretionary management of public finances. But the current powers of the bureaucracy and to increase drafts of these laws could benefit greatly from efficiency in public service delivery. This is revisions through a process that involves major where the state interacts daily with citizens and stakeholders, including Parliament, the Ministry of corruption has become the norm. With Finance, and the Supreme Audit Board. decentralization, this will become an even bigger Intemational experience suggests that tinkering at challenge. the margin does not work: something more fundamental is needed. Next steps: These are long term measures, but as with all governance issues, lack a champion who Revisions to the draft laws should be guided by four will shepherd and push this agenda. An inter- key principles, namely: accountability for results to ministerial committee under a senior minister needs Parliament and the people, full transparency in all to take this and other elements of the anti-corruption government transactions, empowerment of agenda and hammer out a program of actions that professional managers, and oversight by a principal can then be implemented over time. expert auditor. These principles suggest that the drafts need improvements in the following areas: - Page 3.5 - * Clear definition of the role and responsibilities Procurement reforms: The World Bank's Country of key players in the budget process, and better Procurement Assessment Report2 analyzed the definition of the budget process itself, to ensure procurement system in Indonesia and found it to be best possible use of government money, while deeply flawed. Following discussions on the report, safeguarding macroeconomic stability. the Government established an interdepartmental Steering Committee and a Working Group in late * Enhanced budget documentation and reporting 2000 to guide procurement reforms - beginning with requirements for Government so Parliament can the adoption and publication of an action plan to fulfill its oversight role, and focus not just on reform the legal framework and organization inputs, but also on outputs and outcomes. structure for procurement. The Working Group has been reviewing existing procurement regulations, * Strengthening the role of the Ministry of Finance and carrying out preparatory work for the in the budget process and budget establishment of a National Public Procurement implementation as manager of the Government's Office (NPPO), and for building procurement money and accounts. In exchange, the Ministry capacity in all government agencies. But progress of Finance should be made more accountable to toward preparation and adoption of an action plan Parliament through regular, scheduled reporting. has been slow. * Reinforcing both the position of the Supreme If the current hemorrhaging of public funds due to Audit Board (BPK) as the sole external auditor poor procurement practices is to be stopped, and if of all central government finance and its Indonesia's procurement systems are to be brought independence through tenure of its members and up to international standards to meet AFTA and financing arrangements. Ensuring BPK's right to WTO requirements, it is essential to appoint a full audit all state finances, providing a clear time senior official immediately to lead procurement relationship between BPK and Parliament, and reform (with a strong determination to rid public ensuring that BPK has unrestricted access to procurement of corrupt and collusive practices). information. This senior official needs to prepare, within a set timetable: (i) principles for reform of the The Minister of Finance established a high-level organizational structure including the establishment Committee in April 2001, to guide reforms of the of the NPPO and a legal framework for financial management system, and it has been procurement, (ii) a set of reform options for a high- engaged in discussions with Parliament on the draft level decision on the preferred option, and (iii) a laws ever since. An agreement is now needed with draft action plan for implementation of the agreed Parliament on broad principles for a modem public option within a specified timeframe, and (iv) financial management system for Indonesia and for measures to ensure uniform procurement standards the laws along the lines suggested above. apply throughout Indonesia. Next steps could include the appointment of a The legal framework drafting committee with members representing Parliament, the Supreme Audit Board, and the The legal framework for anti-corruption is Ministry of Finance, to finalize the laws according to reasonably robust with recent changes made in the agreed principles. The broad principles for reform anti-corruption law. The law will establish an Anti- and a strategy for a time-bound action program for Corruption Commission with powers to investigate the preparation of laws by the drafting committee of and prosecute corruption cases. While experience in reforms could be adopted and made public, by a set other countries shows a mixed record for such date, in a "White Paper". But for this to happen, commissions, the current state of the Indonesian government needs to appoint a senior official as judiciary suggests that this may be the only way to champion to steer these reforms forward and be held impart momentum to the enforcement of anti- accountable for results. 2 The World Bank, March 27, 2001. Indonesia: Country Procurement Assessment Report. - Page 3.6 - Box 3.2 Money Laundering in Indonesia: Implications of the FATF Report In June 2001, the Financial Action Task Force on Money Laundering (FATF) included Indonesia in its list of non- cooperative countries and territories. This will have important implications for the country, especially in light of increased world awareness of such issues after the September 1 1 events. What is the FATF? The FATF is a 29 member inter-governmental body, with its Secretariat at the OECD, tasked to help all financial centers adopt international standards to prevent, detect, and punish money laundering. The FATF prepared forty recommendations as the international standard for effective anti-money-laundering measures, covering the criminal justice system and law enforcement, the financial system and its regulation, and international cooperation. Non-cooperative countries and territories (NCCTs). In February 2000, the FATF published an initial report on non-cooperative countries and territories., setting out: (i) 25 criteria to identify practices and rules that impede international cooperation in the fight against money laundering; (ii) a process to idejiLify countries with such practices and rules and encourage them to implement international standards in this area; and (iii) possible counter-measures that FATF members could use to protect their economies against the proceeds of crime. In June 2000, the FATF published its first set of NCCTs, containing 15 countries, and updated this list in June 2001. Indonesia is now on the list. Indonesia meets 9 out of the 25 NCCT criteria, and partially meets 4 other criteria. It lacks a basic set of anti-money laundering provisions. Money laundering is presently not a criminal offense in Indonesia. There is no mandatory systenm of reporting suspicious transactions to a Financial Intelligence Unit. Customner identification regulations have been recently introduced, but only apply to banks and not to non-bank financial institutions. In order to rectify those deficiencies, the Government has drafted a law concerning Eradication of Money Laundering Criminal Acts. The draft is being discussed in Parliament. Implications for NCCTs. The FATF members request their financial institutions to give special attention to businesses and transactions with entities in countries identified as non-cooperative. This increases the cost of doing business. If a country does not make adequate progress, further counter-measures and sanctions are implemented. This could include a rigid examination of all incoming and outgoing financial transactions between banks and their foreign counterparts. It could lead to time-consuming and costly verification of transactions. Moreover, sanctions can increase the price of exports to FATF member countries to incorporate the cost of coping with stringent bank requirements. Foreign banks would also be more stringent with applications for letters of credit, further increasing the price of export products. In the Philippines, for example, government officials estimated that the counter-measures could cost $7 million a day in delayed transactions and greater scrutiny. To get off the list, a country must satisfy the FATF that it has addressed the deficiencies identified. Particular importance is given to the relevant aspects of criminal law, financial supervision, customer identification, suspicious transactions reporting and international cooperation. Any new legislation or regulations must not only have been enacted but also have come into effect. Furthermore, the FATF takes steps to ensure that the jurisdictions concerned are indeed implementing the necessary changes effectively. Indonesia's case will be reviewed in June 2002. corruption laws, But this will only work if and by the recent UN Security Council resolution commissioners are carefully chosen for their calling on countries to act firmly against money integrity and ability and if the 2002 budget laundering (Box 3.2). adequately funds the Commission. One big lacuna in the legal framework, however, was highlighted by Indonesia has therefore begun work on a law to the decision of the Financial Action Task Force eradicate money laundering. The present draft has (FATF) in June 2001 to declare Indonesia a non- many problems. These include the failure to cover cooperating country on matters of money laundering non financial institutions, the need to ensure - Page 3.7 - Box 3.3 Perceptions of corruption in the legal system The Indonesian judiciary, police, and prosecutor are seen as among the most corrupt in the country. Judges and prosecutors, according to a recent diagnostic study of corruption in Indonesia,' were "consistently ranked among the least honest, just above the traffic police and customs". Of households and businesses which had recent experiences with the justice system, roughly a third paid bribes to judges. Two-thirds of households who did so paid bribes to prosecutors and three-fifths to staff in the prosecutor's office. Businesses paid between Rp. 1-5 million while households paid an average Rp. I million to courts, with 11 percent of households and 20 percent of businesses paying more than Rp. 5 million. Households generally do not use the court system to resolve disputes, but businesses were more likely to do so. Asked to list obstacles to using the courts, key reasons given were that judges would make unfair decisions, that it would take too long, that unofficial costs were too high, that court decisions would not be enforced and that judges were incompetent. These reasons tally with the views of foreign investors in Figure 3.1. coverage of extra-territorial criminal acts relating to confidence in the sector is low (See Box 3.3). money laundering, vagueness in the provisions Investor confidence is even lower (Figure 3.1). relating to the proposed Commission for the Indonesia rates particularly low on the court Eradication of Money Laundering Criminal Acts, system's reputation for honesty and corruption. and for the proposed center for Financial Transaction Reporting and Analysis, and inadequate There have been a number of initiatives in the past coverage relating to assets to be frozen seized or three years to tackle weaknesses in the justice sector. confiscated. First, an effort was made (perhaps prematurely) to free the courts of interference from the executive and Legal and.iustice sector reforms the legislative branches of government, by giving courts autonomy, raising the salaries of judges and Reducing corruption, creating a positive investment conducting fit and proper tests for vacancies arising climate and ensuring that the benefits of on the Supreme Court. Second, to deal with development reach the poor all depend on an bankruptcy cases, a commercial court was effective justice sector. In the New Order period, established outside the traditional court structure. Indonesia attained high rates of growth and poverty The Supreme Court was persuaded to appoint ad hoc reduction despite the lack of a strong justice sector. judges to this court, and to require that this court This was possible in a network based autocracy. publish its judgments. Third, a concerted effort was Indonesia's transition to a democracy is a transition made to establish a legal infrastructure to fight away from a society governed by networks and corruption through a new anti-corruption law which personal connections to one based on rules. also required the establishment of an Anti Democratic governments cannot guarantee investors Corruption Commission by August 2001 (see the kind of stability that authoritarian regimes above). Further efforts included the appointment of sometimes achieve unless they are able to establish an Ombudsman, the establishment of a standing the rule of law. The justice sector is at the heart of Committee for the Audit of Assets of State Officials, Indonesia's governance reform efforts because it is the creation of a Joint Investigating Team under the the sector where rules are laid down and enforced. Attorney General's Office to pursue allegations of corruption against the judiciary and the The critically weak and almost dysfunctional commissioning of a governance audit of the condition of the justice sector in Indonesia - the Attorney General's Office. Finally, recognizing the judiciary, the bureaucracy responsible for many ad hoc nature of many of these initiatives, President aspects of the machinery of the legal and judicial Wahid appointed a National Law Commission to system, the Attorney General's Office, the police - develop a coherent plan of action for reform of the is one of the most fundamental impediments to both sector. economic recovery and sustainable long-term development in the country. As the recent But few positive results have come from these diagnostic survey on anti-corruption revealed public efforts at reform: - Page 3.8 - Figure 3.1 Business perceptions of the legal system Indonesia's legal s stem is seen as hig hl artial.... ........ dishonest Most unfair Least honest Argentina Indonesia 1 Indronesia IUkraine| Russia Russia Ukraine Argentina Me,,io Menico Brazil Bangadesh Bangladesh Philippines \igeria Brazil US I I Nigeria Cha-ta - iIndia Philippines Turkey Turkev Ghana Pakistan thUSn UKChn Irtdia Mal.asi Malaia EtPaksan China t h enraae =368 Thalan AVerag,e = 3.79 China ~~~~~~~~~~~UK Thailand South Africa South Africa t Egypt t Most 1onest Egypt Least aufair Singapore Singapore ........ unaffordable ........... and somewhat slow. Least alLeda je | rgentina Slowest Br5snl ........ Bangladesh _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ guntzn gBrazil LtK India US Nigeria Imiojesa Turkey Indtia Indonesia Philippin s Russia Banglabsh Philippines Palisa Ukrainet Nigena Mexico si th A na South Africa Riassia UK Thailand si Maaysia Thailand Turkey Ghana Mknico nae94Malaysia nrg 3 Gfwihaa ; Pakistan Ukrmine l China Otina Egypt SiraP()re NW Mst afferdalie Singapore Quickest Court decisions are not enforced ....and there is not much confidence in the system Ieas enforced Russia Least confidence Indones-a Ukraine Rassia , Bangladesh Banrglades_ Nigerta$ Ukraine Aregentina PhilippincR - -Braztl India Indonesia Areentni UK Mexic Ghana Bral'i Pakistan Lis Turkey U K ._ _ Egyt Thailand South Africa Nigeria S PakiPsanhilpines Malaysia t vertige = 31 exico Averaige 3.32 Tarkey China Ghana India So)uth Ahn _ Malaysia China I Most confidence Egypt Most efnfoced Thaigandr Siagapor _ 2 Iaptr I I 5 2 z; : 3b ¢ os Source: World Business Environment Survey. Note: Score ranges from I to 6. The higher the score, the worse-off the country is. The survey covered 81 countries. - Page 3.9 - * Despite the appointment of several new justices decisions, for example, has not only been valuable in to the Supreme Court, including the Chief evaluating the competence and integrity of that Justice, through a fit and proper test court, but also is likely to trigger similar changes in administered by Parliament in full public view, the rest of the judiciary. Slow progress to some recent judgments demonstrate that the pattern of extent also reflects lack of political consensus on questionable judgments persists. Moreover, how to deal with the past. Very few corruption when the Joint Investigating Team in the cases of any significance have been prosecuted and, Attorney General's Office tried to prosecute of those that were, many got dismissed on judges on the Supreme Court for corruption, the technicalities. An agreed approach to how to address Court promptly declared invalid the regulation the past with a view to reducing the burden on the establishing the Team - and thus revealed its system will be an important precondition. But the unwillingness to reform itself. Meanwhile, main factor underlying this limited success is the surveys and anecdotal evidence also confirm apparent lack of political commitment to manage continuing widespread public skepticism about and coordinate what are extremely complex long- the honesty and impartiality of the judiciary. term reform goals. * The Commercial Court, through a number of For meaningful reform to occur, the Government of questionable judgments, has not gained the Indonesia should seriously consider making confidence of the investor community either, comprehensive justice sector reform an explicit and consequently has not played a significant national policy priority with a commensurate role in corporate restructuring, which in tum has allocation of political attention and resources. To progressed slowly, sporadically and that end, the Government should adopt a time-bound unsatisfactorily (see Chapter 2). framework for justice reform consisting of measures and initiatives, determined to the maximum extent * The Anti Corruption Commission has yet to be practicable based on a participatory process with established. Other institutions established to relevant stakeholders including the National Law fight corruption lack adequate funding and Commission. International experience suggests that political support. The Committee for the Audit the framework and resulting reform program should: of Assets of State Officials is struggling to get itself underway and even more to ensure that * Address all aspects of reform of the various there is effective compliance with its mandate. institutions of the justice sector -- the police, the No formal follow-up to, the findings of the Attorney General's Office, the judiciary, the governance audit of the Attorney General's prison system, and the relationships among Office appears to have taken place. them. * The National Law Commission does not appear * Articulate a vision of the proper role and to have been able to stake out a major role in responsibilities of these institutions, a basic policy-making circles. Like most other policy statement for each such institution, and commissions, it has not been given a budget, and the reform objectives to be attained through the it appears to have no client in Government to reform program. This should be based on the whom it is accountable or to whom it can direct adoption of a vision statement for each its recommendations, even though it is formally institution that takes account of, and follows, a charged with advising the President. broad-based process of consultation with stakeholders and of a quick governance audit. To some extent it is understandable that the steps taken to date show few demonstrable results: * Require the police, the Attorney General's institutional reform is a long-term process and Office, the judiciary, and the prison system to typically takes years. And some measures taken may provide, within say 4 months, a strategy and appear modest but are likely to have far-reaching implementation program for reforming impact: the publication of commercial court themselves in line with the Government's vision statement. Each such program should be - Page 3.10 - evaluated in light of the independent audit a decision. Moreover, judgments by these courts findings and recommendations and be subjected and by the Commercial Courts should be to a structured process of public scrutiny and reviewed and this review should be used to debate. Final programs for reform should be establish legal benchmarks. Promotions and adopted by the Government and endorsed by the postings should be based on such reviews. DPR within 6 months of the targeted completion date for the presentation of the in-house Decentralization program. The "Big Bang" decentralization on January 1, 2001 * Provide for monitoring of the program against started better than most observers-including the the objectives and targets of the time-bound World Bank-had expected, especially as several action plan and for regular reporting of program key safeguards were only put in place at the last status and achievements, with an emphasis on minute. With the exception of teacher strikes on the transparency. issue of back-pay increases, the first 9 months of the programn have been without mnajor incident. The Given the lack of credibility of the justice sector in crucial transfer of 2.1 million civil servants is largely Indonesia, any program of reform for the sector is completed, the general allocation grant (DAU) to likely to be greeted with profound skepticism. For regions is being distributed, and disbursements of this reason, the Government of Indonesia should shared revenues began in July. But reports on further consider taking a number of short-term predatory regional taxes are on the increase, whereas measures that are within its control to demonstrate the center's supervision does not yet seem to work its intent and resolve. The following illustrative smoothly. Some key regulations are still steps could contribute powerfully to establishing outstanding. Moreover, the regulatory framework such credibility: shows several weaknesses - in part signs of the haste with which it was put together, but in part because * A public deadline could be established (by law if some of the regulations- seem to contravene the laws. necessary) for all state officials to register And within a year of implementing Law 22, statements of wealth and sources of such wealth Government has now decided to revise it, causing with the State Commission for Auditing the significant uncertainty at the regional level. Wealth of State Officials. Failure to register would result in immediate suspension. Failure Regulatory framework. In the days just preceding to adequately explain the sources of their wealth January 1, 2001, the Government issued many should at least lead to loss of public office. regulations supporting implementation of Decentralization Laws 22 and 25/99 - and this was * All members of the Supreme Court and Courts followed by another spate of regulations in early of Appeal who have not taken a fit-and-proper 2001 (Table.3.2). In the process, there are several test in the last 3 years could be required to do so. regulatory issues that have arisen, including: Failure to submit to, or pass such a test should result in immediate and permanent suspension or * The far-reaching regulatory powers of the dismissal from service. regions may interfere with the free flow of goods, services, and capital within Indonesia, * The law could be amended to require the with potentially damaging consequences for the Supreme Court and Courts of Appeal to follow economy. the Commercial Court practice and publish reasoned judgments within a specified period of -Page 3.11 - * Part of Presidential Decree 62/2001 on the revision of Laws 22 and 25, and yet allows functions of the central bureaus seems to regions to issue any bylaw on matters of contradict Law 22-by granting the land agency decentralization not yet regulated by the center. BPN continued right to manage land affairs-a While the decentralization laws are far from function which is among the obligatory perfect, a major revision now may disrupt the functions of the regions. decentralization process just embarked upon. * MPR decree IV of August 2000 - calls for a * Two laws on special autonomy for Aceh and Table 3.1 Laws and regulations on decentralization issued in 2001 Laws UU No. Distinctive Autonomy for Special Regional Province of Aceh as the Province of Nanggroe 18/2001 Aceh Darussalam Government regulations PP No. 56/2001 Concerning the Reporting on Regional Government Implementation PP No. 52/2001 Implementation of Provision of Assistance Function PP No. 39/2001 Implementation of Dc-concentration PP No. 20/2001 Concerning the Management & Supervision of Regional Government Implementation PP No. 11/2001 Concerning Regional Finance Information PP No. 2/2001 Concerning the Protection and Transfer of the State Owned Goods/Properties from Central Government to Regional Government in the process of Regional Autonomy Implementation PP No. 1/2001 Concerning the Guidelines of Compiling Regional House of Representative Regulations Presidential decrees Keppres No. Concerning Supervision Management of Regional Government Execution 74/2001 Keppres No. The Amendment of Keppres No. 166/2000 concerning the Position, Duty, Function, 62/2001 Authority, Organization Structure, and Working Procedure of Non Department Government Agency that has been changed several times with last change by Keppres No. 42 /2001 Keppres No. Amendment of Keppres No. 166/2000 concerning the Position. Duty, Function, Authority, 42/ 2001 Organization Structure, and Working Procedure of Non Department Government Agency that has been changed several times with last change by Keppres No. 16 /2001 Keppres No. Utilizing of Contingency Fund for Assistances in Personnel Transfer, Equipments, Payments 39/2001 and Documents (P3D) to Regional Government Keppres No. Amendment of Keppres No. 178/2000 concerning the Organization Structure & Function of 17/2001 Non Department Government Agency Keppres No. Amendment of Keppres No. 166/2000 concerning the Position. Duty, Function, Authority, 16/2001 Organization Structure, and Working Procedure of Non Department Government Agency that has been changed several times with last change by Keppres No. 173/2001 Keppres No. Concerning Determination of Numbers & Procedures in filling up membership of Regional 6/2001 House Representative in New Provinces and Regencies/Cities after the Election year 1999 Keppres No. The Implementation of Regency/City Authorities 5/2001 Source: http://www.gtzsfdm.or.id/ - Page 3.12 - Papua have been passed (Box 3.4) - which grant disbursements totaled Rp. 3 trillion- but this is likely these two provinces additional resources - to be temporary. beyond that provided by existing law. Regional regulations. Perhaps motivated by the Transfer of units and civil servants. By end- budgetary squeeze, many regions were eager to raise September 2001, the transfer of civil servants, levies and taxes. Law 34/00 allows regions to do so, facilities, and archives was largely completed. In as long as they conforn to principles listed in the total, 239 provincial level offices of the central law. The imposition of regional taxes has become a government, 3,933 district/city level offices, and significant concern for investors, and some obvious over 16,000 implementing units were handed over to abuses of Law 34 have been widely published. By the provinces, districts, and cities3. With these August, 2001 MOHA received a total of 1060 offices, some 2.1 million civil servants were also regional regulations of which 809 have been transferred-200,000 less than originally assumed. approved and 84 were rejected; the remainder are pending review. The rejected regulations, however, Given limited funding at the provincial level and the have not been formally cancelled. Instead, the large number of civil servants that remained at that regions were requested by letter to reconsider them. level, the provinces found their budgets squeezed. The situation worsened when all civil servants were Safeguards. The Government put in place some key granted a wage hike, which came on top of wage safeguards to hedge against the risks of increases for regional civil servants arising from an decentralization, for example: upgrading in their functions. The contingency fund * It banned regions from new borrowing in 2000, for decentralization brought some relief- except through the center. While government regulations set affordability limits to borrowing by individual regions, this would not have Box 3.4 assured that aggregate regional borrowing was Special autonomy for Aceh and Papua in line with macroeconomic requirements *In the 2001 budget, the Government also Law 18/2001 (approved on August 9, 2001) and the draft Inclued the aontinenc fund Law on Papua provide for special autonomy of Aceh and icue h frmnindcnignyfn Papuao of Rp. 6 trillion, of which half was used by mid- Papua. September. The speed of decentralization made Existing laws require the center to share with all regions it virtually impossible to match decentralized 80 percent of revenues arising in the region from general expenditures with needed revenues, and despite mining, forestry and fishery, 15 percent from petroleum, transitional elements in the general grant and 30 percent from gas. The Special Autonomy Law for allocation formula, mismatches were inevitable. Aceh gives more -- 55 percent of revenues from As discussed, the contingency came in handy, petroleum and 40 percent from gas.4 These arrangements especially at the provincial level. for Aceh will cost the center Rp.1.5 trillion, which is * Central Government decided to continue to pay equivalent to Rp. 375,000 for each Acehnese. the civil service for a transitional period of 5 . . ~~~~~~~~~~months, while deducting the wage bill from the The draft Special Autonomy Law on Papua gives the genera, grant alloctint the regions. thi Papuans 70 percent from oil and gas. The draft Special Autonomy Law for Papua will cost the center an assured a smoother transition of personnel than additional Rp. 1.52 trillion - about Rp. 700,000 for each anticipated. Papuan. As the Government's statement suggests, the center's development budget (Rp. 52.3 trillion) may also Beyond these short-term safeguards, attention must serve as a further channel for resource transfers to the now shift to the longer term task of ensuring that region. local governments adopt fiduciary safeguards and strong anti-corruption measures. The short-term risks of an increase in corruption following 4The arrangement appears to become less advantageous after 3GTZ Decentralization News, March 2001. eight years, i.e., 2009. - Page 3.13 - Box 3.5 Decentralization and corruption As Government decentralizes and moves closer to the people, the cost of monitoring politicians should decrease, and so should corruption. Information provided by the Central Government can be used by local pressure groups to influence local governments. Political parties may be more accountable to their constituents, and may be tempted also to associate themselves with successful projects and programs. Competition among regions may also lead to decreased corruption and improved service delivery In the short term, however, many fear that corruption will flourish in the regions due to their sudden increase in money, power, and resources, but without appropriate checks and balances. Ensuring that these checks and balances exist and, more importantly, that the right incentives are in place to prevent corruption. is a priority for reform. How to do this? Some clear lessons have emerged both from international experience and experience with projects in Indonesia. Insisting on transparency and involving communities in decisions about their own development tends to prevent corruption. The Kecamatan Development Program (KDP) - supported by a World Bank loan - emphasizes transparency and community empowerment. It also bypasses local government, transferring money directly to villages. Roads and bridges built under KDP are on average 30 percent cheaper than comparable items in other projects. This, arguably, is a strong indicator of lower corruption levels. Internal rates of return also appear to be consistently higher than standard projects and ex-post maintenance reviews (3-5 years) found maintenance substantially better than through normal public service delivery methods. Getting the incentives and accountabilities right is key to preventing corruption. In KDP's case, those who control the project are also its beneficiaries. They therefore have an interest in not seeing money disappear. How can one take this process from the Kecamatan to the Kabupaten? Attention will need to be paid to community consultation processes, exit and voice policies, auditing procedures and the role of matching grants. In particular, matching grants with budgetary contributions from the district and/or community would raise the local stake in projects and programs and increase local incentives to monitor projects closely - and may, in turn, encourage politicians to associate with these projects. decentralization are high, but these risks can be One way forward would be for the Government to managed (see Box 3.5). submit a "White Paper" on decentralization to the MPR session in August, to present the Next steps. First, continued efforts should be made Government's strategy in decentralization, and agree to make the general allocation grant (DAU) to revise the laws once sufficient experience with the mechanism more equalizing across regions as well current laws has been gained. as predictable and transparent. Unfortunately, Parliament recently requested Government to revisit Third, Government could reinforce its review of distribution of the Rp. 69 trillion general allocation regional regulations, and actually cancel some that grant to the regions so that no region would get less conflict with national law. This would send a strong than last year. This makes the allocation less signal to investors and constituents that the center is equalizing and moves it in the wrong direction. prepared to challenge abuse of power in the regions. Second, Government needs to clarify the process by Fourth, is to establish a more comprehensive which Law 22 will be revised, and what changes it monitoring system. Early detection of emerging plans to implement beyond the elimination of issues in decentralization, and a quick response by obvious flaws. The announced revision has created the center, will be keys to the success of the considerable uncertainty in the regions, and has program. given central ministries - reluctant to decentralize in the first place - an excuse to slow implementation. - Page 3.14 - Fourth, the Government needs to finalize the promotions, career management, training, and regulatory framework quickly, especially for Special competency standards. Allocation Grants (DAK) and for on-lending arrangements to the regions. The absence of such Decentralization is hardly the only challenge for the arrangements is holding back the timely preparation civil service. The Government officially wants to of projects for financing by the international creditor shrink the size of the civil service, but it is unclear community. But finalizing on-lending arrangements how this can be achieved in a decentralized could still take time as the Government needs to environment. Line ministries and regions are free to reach closure on a variety of issues, including terms hire contract workers so long as they pay from their and conditions, monitoring and accounting own resources. In addition, from a survey done mechanisms, and institutional arrangements. In the among civil servants, it is clear that a lack of meantime, to reduce uncertainty and motivate local performance management and corruption are of government participation in project preparation, greater concern than pay. In fact, recent research clear and unambiguous interim arrangements need to suggests that most civil servants' income is in line be announced and communicated. with their private sector comparators, given their age and education level. This finding sharply Finally, the Government should complete and fund a contrasts with surveys of the public who feel low program for capacity building in support of pay is a main cause of corruption (Box 3.6). decentralization. This program - of benefit to the center and the regions - could signal the Central Next Steps. After the transfer of civil servants, the Government's seriousness in getting decentralization Government should shift attention to some of the right and in working together with the regions for a unresolved issues in decentralization, including successful outcome. potential overstaffing and wages. Government should also continue to watch closely whether Civil service reforms regions are reluctant to accept central civil servants on their payroll. Some regions may consider Aside from decentralization, there has been little providing incentives for civil servants to leave progress on civil service refonrs. Government employment, in which case the Central Government should therefore return to its focus on preparing a could consider sharing the costs of retrenchment. civil service reform strategy to which it committed Government should also consider whether continued in September 2000. Such a strategy should include central wage setting is appropriate for Indonesia- the size of the civil service, pay, extent of especially now that finances for the regions are no decentralization, measures to improve performance, longer provided earmarked for wages. Over time, and steps to fight corruption. Following this responsibility for civil service pensions will also strategy, the revision of the Civil Service ILaw in line need to be sorted out - until now it has been the with the new decentralized environment will become Central Government that paid, but for future hires necessary. responsibility will shift to the regions. How this will be done, and how the pensions will be managed is Decentralization first. The Government rightly key for future mobility of civil servants among the focused on decentralization as a key challenge for regions. the civil service. Decentralization required the reassignrnent of some 2.1 million civil servants on Finally, the Government needs to clarify lhow it top of the 150,000 already decentralized last year, intends to build a civil service that is professional, and just managing the issuance and countersigning efficient, productive, transparent, and free of of the transfer letters was a major achievement. But corruption, collusion and nepotism - as the MPR has much remains to be done. Law 22/99 requires a instructed.5 The initial attempts to formulate a civil fundamentally different way of managing the civil service reform strategy which started last year came service - with much of the authority to hire and fire to a halt due to the frequent changes in leadership in devolved to the regions. Although regulations indicate how the new system will work, much MPR Broad Guidelines of State Policy 1999-2004, Chapter 3, remains to be clarified - including authority over B 7. - Page 3.15 - Box 3.6 Better managed institutions are less corrupt In a recent survey on corruption conducted by the Partnership for Governance Reform in Indonesia, low salaries were seen as the most important factor causing corruption, with morality and lack of controls being cited as other factors. However, regression analysis showed that public institutions had lower levels of corruption wherc: . budgets were perceived to be developed in close consultation with managers; * rules, personnel polices, and procurement guidelines were perceived to be formalized, well-specified and implemented; * budget decisions and personnel decisions were perceived to be clear, transparent, and effectively monitored; * management tried to eliminate corruption involving even small amounts of money; . merit and qualifications were considered more important in the treatment of staff than other non-objective criteria. The above findings point to organizational characteristics of public institutions as causes of corruption over individual employment aspects such as salary and performance. In particular, quality management practices in procurement, budget, and personnel processes backed by strong anti-corruption orientation, limited discretion, and the implementation of rules were found to be significantly related to lower levels of corruption in public institutions."' IA Diagnostic Study of Corruption in Indonesia, Final Report, October 2001. Partnership for Govemance Reform in Indonesia. the State Ministry for Administrative Reforms As in most other areas of governance, the laws and (MenPAN), and the lack of coordination amongst policy instruments for managing natural resources the ' Civil Service Agency (BKN), State are mostly in place; what seems to be missing is the Administrative Board (LAN), and Ministry of Home will to use them effectively. Nowhere is this more Affairs. Now is the time to revamp this civil service true than in the forestry sector where the larger crisis reform strategy. The Steering Committee which of governance has affected the environment - and prepared the early draft could be in charge, if development - with tragic consequences. adequately supplemented with staff and resources. The strategy should include changes to the incentive Forestry. In February 2000, the Government system, size of the civil service, recruitment, committed itself to reforms supporting sustainable performance management, remuneration, and\ management of forest resources. These included: probity. It should clarify responsibilities for urgent action to control illegal logging, update the managing, monitoring and reporting on the reforms, forest inventory, maintain the (temporary) and set a clear timetable for implementation. To moratorium on natural forest conversion, and show its commitment, the Government should restructure the debt of only those wood processing submit its strategy to Parliament for review and final firms with legal and sustainable supplies of logs; approval. Only after a clear strategy has emerged establish an Interdepartmental Committee on would it make sense to revise Law 43/99. Forestry (IDCF); and start a new National Forest Program (NFP) in consultation with all stakeholders. Governance and decentralization - the case of Unfortunately, the Government made little progress forestry on this agenda, the only exceptions being the establishment of the IDCF and 70 percent Performance in every sector is affected by the completion of the forest inventory. In November quality of governance - directly and indirectly - as 2000, the Government prepared a remedial action well as by the forces of decentralization. This is plan to advance stalled forestry management reforms particularly important in natural resource but this too stalled. management because environmental degradation has effects that tend to spread far beyond regional Since March 2001, however, there has been some boundaries, and because the capacity of local forward movement in reforms - focused on illegal governments is especially weak in this area. logging, forest fire management, and forest - Page 3.16 - inventory and mapping - but too little, as yet, to protection and conservation forest surveyed are have made any difference to Indonesia's forests, no longer forested where conditions are worsening. * Among 14 recent cases of illegal logging, one * In October 2001, the Ministers of Industry and suspect was a police district commander. He has Trade and Forestry issued a joint decree putting been dismissed and is going to trial. Both in place a ban on export of logs and raw material Government and independent observers have for wood chips. The Bank, other donors and confirmed a marked decrease in illegal logging creditors and even the forest industry have in that district followed this enforcement action. pointed out that this needs to be accompanied by vast improvements in monitoring and * On April 12, the Government issued a decree enforcement and a crack-down on the corrupt temporarily banning cutting of ramin and practices that enable the present high level of requested the secretariat of the Convention on illegal exports. International Trade in Endangered Species (CITES) to identify ramin as a species * The moratorium on conversion of natural forest temporarily banned for export from Indonesia. included among the February 2000 The CITES listing became effective in August commitments has been observed by the Ministry but is not being effectively enforced, as of Forestry but has become a much more evidenced by ramin from Indonesia being difficult goal to achieve since decentralization, unloaded in Singapore. which expanded the authority of provinces and * Forest fire management in Indonesia has been districts to issue logging and conversion permits. hampered by the Government's failure to prosecute companies that have been implicated. The moratorium on natural forest conversion is There has been slow improvement in this area: supposed to remain in effect until the inventory and five companies were eventually prosecuted in appnmg is complete and the new National Forest 1998, and the pace of enforcement has Program has been formulated. Once the forest accelerated somewhat. There is also a private- inventory and mapping is completed and the forest sector initiative, the Haze Prevention Group, set boundary re-drawn, the Government could release upby three of the largest wood industry deforested "forest" land to local governments and to up to the ar oest firy individual and communal owners, with incentives conglomerates to prevent and control forest fire. and technical assistance to promote agro-forestry. * A process is underway to evaluate and classify This may help to reduce pressure for forest indebted wood-processing firms (128 firms, total conversion. debt Rp. 21.8 trillion) in IBRA's portfolio. Work was underway to prepare and implement One of the early activities of the IDCF should have due diligence criteria and procedures. The been to develop the National Forest Program. Some intention was to take into account a company's activities toward the eventual formulation of the forest management and regulatory compliance Program are underway, but the IDCF action needed when restructuring its debt. This effort has - establishment of a multi-stakeholder working stalled; meanwhile substantial amounts of forest group to guide and review the process - is industry debt are being restructured without conspicuously absent. In fact, nearly all of the adequate consideration of forest management activities to date to improve forest management are implications. being conducted solely by the Ministry of Foresty, * The results of the forest cover mapping despite the widespread agreement that much of the conducted in 1999 were made publicly available work needed, particularly as regards governance, is on a website and in the course of 2000, the beyond the authority and capacity of any single quality of the mapping was upgraded with new agency. satellite imagery for about 60 percent of the forest estate. The results reveal that 30 percent of the production forest and 6 percent of the - Page 3.17 - Conclusion financial management, and forestry policy. Indonesia's international reputation for honest and Institutional development for better governance will efficient government is badly tarnished. Improving take years, if not decades. But in Indonesia, a start that reputation will take years of assiduous effort. needs to be made immediately - especially in legal So there is little time to lose. and judicial reforms, civil service reforms, public Chapter 4 Toward a Strategy for Poverty Reduction A recurring theme in this report has been the Poverty trends importance of stability and growth for poverty reduction. But stability and growth are not Economic recovery and macroeconomic stability enough. While cross country analysis shows have helped reduce poverty substantially, as higher growth to be correlated with faster declines Chapter 1 reports. Preliminary estimates on the in poverty rates, countries with broadly similar basis of SUSENAS 2000 suggest that, using the growth rates have experienced very different national poverty line, the poverty rate has declined poverty outcomes. Research into this question substantially from its peak of 27 percent of the finds that poverty tends to fall faster in countries population in 1999 to around 15 percent (Table where all aspects of government activity - 4.1). While still higher than its pre-crisis low of 11 policies, programs, expenditures, institutional percent in 1997, it is now at a level comparable to development - are geared toward poverty that of 1996. Calculations using the international reduction. A narrow focus on paternalistic standard poverty lines of US$1 and US$2 a day programs designed to "help" the poor tend to have per capita (at 1993 PPP prices) yield much the little impact. Far more effective are efforts to same conclusion. change the policy, institutional, and regulatory environment that affects the poor - so they have The largest contributor to the reduction in poverty avenues to participate in decisions that shape their was rising income and a decline in food prices, lives and avail themselves of opportunities offered notably that of rice. Estimates suggest that the by growth. Poverty, after all is multidimensional drop in food prices between February 1999 and in nature, and its reduction will need a February 2000 explains around 41 percent of the multidimensional approach. decline in the poverty rate. More than three- quarters of this comes from the decline in the price This chapter makes five points. First, at a minimum, government policies should not work against the poor, and preferably should work for Table 4.1 the poor. Second, public investment in the poor - Latest estimates for Indonesia's poverty rate through health and education programs - is (Headcount index; percent of population) essential for poverty reduction not only because it 1996 1999 2000 raises productivity and incomes of the poor, but also generates external benefits for the rest of Nationalpovertvline society. Third, new institutional arrangements, Urban 7.2 16.3 7.3 especially in a decentralizing Indonesia, should Rural 20.5 34.1 20.7 not disrupt the delivery of public services to the Indonesia 15.7 27.1 15.2 poor in the short term, and improve and sustain the Other povertv lines: quality and quantity of such services over time. US$1 a day 7.8 12.0 7.8 Fourth, the poor need to be empowered to shape US$2 a day 50.5 65.1 57.9 the policies and programs that affect their lives and ensure efficient and effective implementation Note: The US$ I and US$2 a day poverty lines are at of public service delivery. And fifth, given the 1993 PPP prices and are the standard poverty lines multidimensional nature of poverty - and the need used to compare poverty rates across countries. They to mainstream "poverty concerns" in all are applied to all Indonesia. government interventions - the Government Source: World Bank staff estimates based on should prepare a broad-based poverty strategy SUSENAS data. (after consultation with all stakeholders) incorporating all the above elements. - Page 4.2 - The profile of poverty in rural areas - by region, 2000 Headcount Index *27.3 to 55.5 (6) *18.4 o27.3 (5) *10.2 to 18.4 (7) 1 0 to 10.2 (5) missing (3) The profile of poverty in urban areas - by region, 2000 I_ , - Headcount Index M12.4 lo 19.3 5) * 6.3 to 12.4 (7) * 3.5 lo 6.3 f7) A 0.0 to 3.5 (5) missing (2) - Page 4.3 - constantly vulnerable to falling into poverty. Poverty Table 4.2 reduction, therefore, cannot be construed simply as r re p ic rIcet reducing the poverty headcount index, but also (in percent of population) reducing the vulnerability of this broad swathe of the population, and should continue to be the overarching Treatment Hcadcount objective of government policy. (percent) Projecting poverty rates forward shows that they Actual poverty, 1999 27.1 decline even under the muddle-through scenario - but Actual poverty rate, 2000 15.2 only gradually. Indeed, by 2005, roughly the same Difference 11.9 proportion of the population will be below the US$2 poverty line as in 1996.3 Clearly, the muddle- Accounted for by: through scenario does not lead to the poverty Change in rice price only 3.8 reduction rates that Indonesia could and should Increased incomes 7.5 achieve - and highlights the importance of rapid Change in price of local chicken meat -0.1 growth as an important condition for reducing Change in price of coconut oil 0.0 poverty and vulnerability. But as we noted at the Change in price of cassava leaves -0. I beginning of this chapter, growth is not enough. Change i prce of cassava leaves -0.1 What is also needed are pro-poor government policies Other factors (non-food prices) -0. an4moemnto h or == = _= ~~~~~~~~~and empowerment of the poor. Source: World Bank staff estimates Government policies and the poor of rice. Higher incomes explain the remaining 60 The impact of govemment policy on poverty goes percent.2 But renewed inflation and rising food well beyond the impact of direct interventions. prices since February 1999 may indeed have Economic policies sometimes inadvertently work reversed some of these gains. against the poor, and may even divert resources away from them. Striking examples are rice policy and Moreover, lest victory be declared prematurely, we should remind ourselves that the headcount Table 4.3 index of poverty is only one of many poverty Poverty rates in the muddle through scenario a/ measures. It does not acknowledge the broader, (Headcount index; percent of population) multidimensional nature of poverty. When the concept of poverty is expanded to include these 2000 2001 2002 2003 2004 2005 other dimensions - r-duced vulnerability, access to health, education, and basic infrastructure, and a Poverty lines chance to participate in social and political life as National 15.2 15.7 14.6 13.3 12.1 10.9 equals - then the number of people considered US$1 a day 7.8 7.1 6.5 5.8 5.5 4.5 poor increases considerably. Consider the concept US$2 a day 57.9 56.7 55.1 53.4 51.5 49.5 of vulnerability alone. Another crisis (or even a sharp increase in the relative price of rice), and al The simulations from 2002 onward assume no change in Indonesia's headcount index of poverty could relative prices or income distribution, but do take into account double again. The huge difference in the poverty differences in sectoral growth rates. For 2001, we have rate between the US$1 and US$2 a day poverty incorporated changes in the relative price of food as of lines (Table 4.1) is clear evidence that a large September. proportion of the population is "near poor" and are Source: World Bank staff estimates. This estimate is based on 1999 expenditure weights. 2 Other factors, such as the change in price of non-food 3 The poverty rate using the US$2 a day poverty line is projected items, partially offset the poverty reducing effect of declining to be 49.5 percent in 2005 (Table 4.3). and it was 50.5 percent in food prices and rising incomes. 1996 (Table 4.1). - Page 4.4 - fuel subsidies, and emerging intergovernmental program of choice for this should be OPK Beras. fiscal relations could be next. * Intergovernmental fiscal system. With * Rice is the main food item for the poor. The decentralization, regional governments have Government has protected rice producers become responsible for many of the services that through import tariffs and domestic floor are central to poverty reduction. Quite apart from prices (see Chapter 2). The unintentional the capacity of local governments and effect, unfortunately, has been to hurt the participation of the poor in decision making (two poor, including many poor farmers. Indeed, longstanding and well known concerns), a key about two-thirds of farmers tend to work on factor for delivering public services to the poor such small land holdings that they are net will be the availability of adequate resources with consumers of rice - that is, they buy more rice regional governments. For regional governments on the open market than they sell. Naturally, as a whole this is the case, because increases in if the relative price of rice rises as the result of their revenues exceed their new expenditure a tariff, their real incomes fall. In recognition responsibilities. But the distribution of the Rp. of this, an interdepartmental government team, 84 trillion "balance fund' is, in fact, quite created in January 2001, produced working unbalanced. The general allocation fund (DAU) papers and a technical proposal on future rice does equalize resources across regions by policy.4 It is important that in implementing assisting the poorer regions more than the richer this policy, rice tariffs should be capped and ones, and the distribution formula has been then reduced over time, and there should be no improved for next year. Yet deep fiscal non-tariff barriers introduced. Instead the inequalities persist among regions. Next year, Government should focus on increasing the richest district or city will have thirty times farmer productivity by using existing more revenues per capita than the poorest.6 Even infrastructure optimally, and accelerating the the disparity between the average district/city and transfer of research findings into farmers' the poorest one is 5 to 1. Historical patterns of practices. spending, and the political need to accommodate demands from resource-rich regions explain * Fuel subsidy. Despite the price increases of some of this inequality. But if these patterns April and June this year, the Government will persist, they are likely to translate into significant spend some Rp. 62 Trillion on fuel subsidies inequalities in public service delivery and poverty in 2001. This is almost 20 percent of alleviation efforts. The Government recently government spending, and half as much again revised the formula to allocate Rp. 69.1 trillion in as all development spending. Less than 5 2002 through general allocation funds and make percent of these subsidies reaches the poorest the distribution more equalizing across regions. 20 percent of the population, and less than 10 Disappointingly, Parliament asked government to percent reaches the poorest 40 percent. revisit this decision so that no region would get Moreover the fiscal burden of fuel subsidies less than last year. This will simply continue the means that development spending of benefit to inequalities that already exist. the poor is squeezed. Fortunately, the Government is by now well aware of this Land. In practice, land laws and regulations work misallocation of resources, 5 and has agreed against the poor, who often hold only customary with Parliament to increase fuel prices by an rights to land with no official title. Land conflicts are average of 30 percent next year. Part of the many and growing in frequency. They arise when resources freed up can be used to compensate large projects (for example, in infrastructure, the poor, and as Chapter 1 pointed out, the construction, industrial, or plantations) need land. 4 Keputusan Kepala Bappenas no. 005/KAion2003 Tentang And maybe more, if Parliament insists on a "hold harmless" of Tim1 Pengkajian Kebijakan Perberasan Nasional, 23 Januari the rich regions that received an unwarranted amount of DAU in 2001. 2001 because their resource revenues were not counted as Quote form Megawati's budget speech. constituting fiscal capacity. - Page 4.5 - Table 4.4 Public expenditures on health and education in Investing in the poor Indonesia (Rp.'000s, per capita, in constant prices, 1993=100) The crisis has placed considerable pressure on the central budget. The sharp rise in debt service and 1996/97 1997/98 1998/99 1999/00 high fuel subsidies have left little room for development spending. While the Government made Health serious efforts to protect spending on services to the Primary care 10.3 9.6 8.5 8.2 poor (health, education, and basic infrastructure Hospital care 4.1 4.4 4-6 53 services such as rural roads, clean water etc.), an Total 14.4 14.0 13.1 13.6 overall drop in their budgetary share and per capita real spending could not be averted. To illustrate the Education consequences, we focus here on the two key areas of Primary 31.3 30.1 21.4 25.5 health and education. Junior secondary 11.5 11.9 8.1 9.1 Senior secondary 6.6 6.7 4.9 5.7 Health. Efforts to maintain government spending on University 8.9 9.3 6.7 7.4 health and education at constant real levels, for Non-fornal 0.7 0.8 0.5 0.5 example, were not successful. Total public sector Total 59.0 58.8 41.5 48.2 health spending fell by 8 percent in 1997/98 and a Source: Ministrv of Finance, Ministry of Health, BKKBN, further 12 percent in 1998/99. As a result of the Ministry of Education. crisis, government health expenditures per capita were not sustained at the peak pre-crisis figure, but were protected at or above the mid 1990s level. The poor are displaced time and again and Nevertheless, average per capita outlays remained compensated inadequately - and receive little very low overall and were especially low in provinces protection from prevailing laws or the judicial such as West Java. During the economic downturn, system. A mechanism for adjudication and dispute much greater use was made of external assistance, but resolution is not in place. such support did not, it appears, contribute to the sustainability of health financing and spending. Land titles help protect the rights of the poor, There also were shifts in the composition of increase access to credit, and encourage Thereials, including in pe capitionbof sustainable use of natural resources. Since 1994, expenditures, including reduced per capita public the National Land Agency (BPN) has issued over spending on primary health care and a rise in per 2 million land certificates to the poor on Java. capita hospital outlays (Table 4.4). These trends in Broadening this approach to areas off Java will outlays ran counter to policy intentions and actual have to take account of more traditional communal needs In short, spending patterns exhibited land ownership patterns. significant weaknesses even as the country was shifting to new funding and allocation arrangements In addition, Indonesia needs fundamental reforms in 2001. to the legal and institutional framework for land administration. In this respect, it is encouraging Education fared little better. Overall spending fell that the MPR is in the final stages of accepting a sharply (by over 28 percent) in real terms in 1998/99 draft directive of the Agrarian and Natural before rebounding partially in 1999/2000. The share Resources Management Reform. The of education in the total budget fell from 13 percent decentralization of land administration offers the to under 10 percent but then recovered to almost 14 opportunity for fundamental reform, but needs to percent in 2000. Real spending per student in progress with attention to the governance a 1999/2000 was 18 percent lower that in 1997/98 framework to avoid the risk of simply level. Primary school outlays per student (-13 decentralizing the previously corrupt and percent change) were better protected than junior inequitable system. secondary (-25 percent), senior secondary (-19) and university levels (-22 percent). Part of this trend of - Page 4.6 - declining outlays per student can be explained by Instead, quality problem may stem from the way continued increases in enrollment at the secondary resources are allocated, and the limited attention and level (Table 4.5). commitment to quality on the part of education decision makers. One indication of this was the These spending reductions were not as painful as government's decision to draw on development they could have been due to the government's budget allocations to finance expanding access, efforts to maintain basic education enrolment consisting mainly of junior secondary school during the crisis through the Scholarships and construction. On the other hand, donor funds were Grants Program (SGP). The goal of the SGP was used to raise learning attainment. While laudable, to sustain pre-crisis participation and quality levels these quality-strengthening initiatives were project- in basic and secondary education throughout based, and usually were not sustained after the Indonesia. These aims have been achieved, at least project. partially: enrolment has been maintained and schools serving poor areas have continued to Consequences of low quality services. The low operate. Effects on student learning are harder to quality of health and education services is beginning detect, in part because pre-crisis achievement to take its toll. International comparisons of education levels were already quite low. SGP also achievement suggest that Indonesian schooling introduced important institutional advances, compares unfavorably with neighboring countries. including arrangements for transferring funds Warning signals on low learning achievement began directly to districts and schools, along with to accumulate in the early 1980s and continue to be mechanisms for receiving and acting upon seen. The PROPENAS (2000-2004) cites Indonesia's community complaints. low ranking in recent cross-country assessments of reading and mathematical ability. At the same time, These schemes are being continued, but there parental and community dissatisfaction was (and is) remains a dire need for improving the quality of registered in different ways including high drop-out basic education in Indonesia and for rehabilitating rates and relatively low proportions of students functioning schools in the poorest parts of the proceeding to middle school even in localities with country. It appears that quality deficiencies are accessible facilities. Till 2000, enrollment seems to not easily attributable to overall resource have held steady (Table 4.5). Enrollment continues to constraints. In particular, junior secondary school improve and so does the share of the public sector in expansion did not deprive primary school students the provision of junior secondary education. This is of funds needed to finance quality improvements. because most of the increase in enrollment stems from poor families who rely on the public sector. Table 4.5 Use of health and education services by provider Quite a different picture emerges in health. Here the 1997 1998 1999 2000 government faces more competition, and the use of Health a/ public services is in decline. Use of outpatient public Modern provider b/ 12.8 10.5 10.6 9.0 health services dropped by 25 percent at the outset of Public 6.7 5.0 5.3 4.2 the crisis, recovered by 6 percent the following year, Private 6.7 6.2 5.9 5.4 only to drop by another 20 percent from 1999 to Education c/ 2000. Part of this decrease in the use of public Primary 108 0 107.6 108.0 107 services resulted from a shift toward private sector Junior secondary 74.2 73.4 761 77 8 providers, but a growing share of the ill resorted to Junior seondary 7.2 73.4 6.1 77.8 self-treatment. Senior secondary 46.5 47.4 48.4 50.1 a! Percent of population that made at least one outpatient visit Ensuring sustainable public service delivery to the in the previous month h/ Public and private do not add up to "modern" because poor will require more than increased funding alone. people can visit both providers in the same month. First, the resources should be allocated to pro-poor c/ Gross enrollment. priorities such as primary health care and education Source: Susenas data tapes rather than curative care and tertiary education. Second, because service delivery is now largely -Page 4.7 - decentralized, it requires appropriate institutional centralized health programs was largely shifted to arrangements that govern the roles and provinces and districts. They are expected to finance accountability of the center and regional most of the operational costs, with sharply lower governments, and empowerment of the poor so resources from the center. While complete data are that they have a voice in the allocation of public not available, a recent World Bank supervision resources and can ensure sufficient and effective mission to two provinces revealed that none of the implementation of public service delivery. districts visited by the mission had allocated any resources for immunization in their annual budget Reducing poverty in a decentralized plans. This could reflect either: weak advocacy by environment the central government; a serious lack of district capacity in priority setting; "free rider" behavior by The impact of the decentralization process on the local governments; or the districts' collective belief poor is difficult to determine at this early stage. that the central government might be forced to The difficult transfer of civil servants and resume funding for this basic public health service. government facilities has gone surprisingly well, but the regulatory framework shows signs of Education is a further example of transitional haste, and the regions have little guidance of what difficulties. Thousands of teachers went on strike is expected of them. Capacity of the civil service because back pay due to a salary increase was not is highly uneven across the country, and seems to paid out. The reason for this was that the central be getting more uneven, as some regions have government-which determines wages-announced signaled problems in obtaining key personnel in the salary increase largely after local budgets had education and health. Moreover, the uneven been passed. Thus, even though the central distribution of fiscal resources is likely to have its government increased the grants to the regions to consequences for inequality of service delivery.7 cover the increase, this could not be disbursed And simply the added difficulty of monitoring because there was no authorized budget. public expenditures on key services and their outcomes when a large part of government Early indications from the regions give cause for spending is decentralized will prove a serious concern. An analysis of 146 approved district challenge. Finally, the regional governments seem budgets reveals that the average share spent on to have an appetite for increasing local levies and development dropped from 36 to 32 percent between charges. If history is any guide, this could hurt the FY2000 and 2001. Furthermore, the share in the total poor, notably poor farmers whose farm gate prices development budget decreased slightly for education will drop if transport costs increase because of (52 to 48 percent) although it increased for health levies, and small industries for whom low fixed (from 25 to 30 percent). But there are large variations costs is their only competitive advantage.8 between districts, and data are incomplete-and not always of high quality. Moreover, they represent The transition to a decentralized system presents budget plans; what is actually implemented - and the important hurdles, however, as illustrated by outcomes they produce - will need to be evaluated as experience with basic immunization. the data come in. Responsibility for what had been one of the most One advantage of decentralization is that it offers 7 Before decentralization, Indonesia showed a remarkable opportunities for local initiatives. This has started to equality of human development indicators, which was hardly show. New funding arrangements in NTB target correlated with per capita output. See M. Zulfan Tajoeddin education expenditures to students, not facilities, and e.a. Regional Disparities and Centre-Regional Conflicts in incase copetito amontservice and Indonesia, UNSFIR Working Paper 01/01-E, 2001 So increase competition among service providers. 8 SMERU has reported extensively on this phenomenon. Many regions went through a participatory planning Their reports show that after the introduction of law 18/1997 and budgeting process, while all regional heads had which abolished many fees and taxes, farm gate prices rose. to submit their "Renstra" - which specify clearly the In their recent work that tracks a number of regions during local government's goals. Budget watchdogs have decentralization, they have observed a significant increase in fees. See for instance, SMERU, Otonomi Daerah dan Iklama sprung up i large numbers i the regions (Box 4.1). Usaha, Bahan Konferensi, April 2001. And several provinces have started health projects - Page 4.8 - Box 4.1 Budget watchdogs in the regions FITRA (Forum Indonesia untuk Transparansi Anggaran) in North Sumatra is a new NGO that monitors the transparency of the region's budget. FITRA is a network consisting of around 30 North Sumatran NGOs. The organization is largely funded by the Ford Foundation, but undertake studies financed by other sources as well. Their most recent effort, funded by the British Council, was a three months study of public services. They facilitated meetirrgs between housewives and public transport providers on the implications of the decreased fuel subsidy for public transport fares for school children. Last year, they analyzed the province's budget; this year they will analyze the budgets of two districts in addition to that of the province. The two districts were chosen because the government informed them that these are the ones most prepared for decentralization. They also intend to campaign for more open debate in the preparation of the provincial budget. The debate will be focused on how responsive is the government towards poverty, education, women's empowerment and health. that will link their districts with the province to Empowering the poor. capture economies of scale of province-wide initiatives. These tender green shoots of local The pobr need to be empowered to shape the policies initiatives and responsiveness may not necessarily and programs that affect their lives and ensure herald a spring, but they certainly give cause for efficient and effective implementation of public hope. service delivery. In a decentralized environment this is easier to do than in a centralized one, but it is not a While decentralization may spur innovation and guarantee for participation. Artificially "creating" cut costs, there is no guarantee that regional participation through government sponsored governments will show greater focus on poverty organizations may not be an appropriate solution reduction than the center. For one, regional elites (Box 4.2). But steps toward more participation can may capture local institutions for their own be taken-at every level of decision making on purposes, and divert resources away from pro-poor programs that benefit the poor. From consultation in activities. Moreover, poverty programs tend to the planning stage, to community implementation of have positive externalities, so regional programs, to monitoring of poverty programs, the governments may be disinclined to devote poor or organizations with strong affinity for the poor significant resources to an activity that may yield should be involved to ensure their voice is heard benefits outside the region. when local governments allocate resources, approve program design, and implement projects. Ensuring minimum standards for service delivery could help, but apart from being hard to specify There is considerable international and Indonesian for poverty programs, they could also stifle local experience with participatory policy processes to initiatives. Moreover, some aspects of poverty build on. The participatory planning and budgeting programs are best implemented locally, such as processes in Bima, the Philippines' report card on identifying the poor. To resolve this dilemma, the pro-poor services, the implementation of the Government (and external creditors and donors) Kecamatan Development Project (Box 4.3), and will need to make greater use of the special NGO participation in South Africa's Medium Term allocation grant mechanism (dana alokasi khusus Expenditure Framework -- these are all examples of or DAK) for poverty programs. Currently, the meaningful participation in government decision DAK is only used for reforestation, but central making. Ironically, it seems to be Parliaments at government could prepare a DAK that funds central and local level that are least inclined to hear poverty programs in the regions, possibly with the voices of the people: public hearings on draft bills cost sharing depending on the region's fiscal or regional regulations seem to be more the exception capacity. than the rule, and debates often only become public when the major decisions have been taken. - Page 4.9 - Box 4.2 The chilling presence of government The World Bank-funded "Local Level Institutions Study" documents changes in the social landscape and its effect on local decision making. The study uses a panel of 1000 households in 48 villages, and compares results with initial work conducted in 1995/1996. Several findings emerge. * First, the study reveals the vibrancy of local endogenous institutions before and during the recent political changes. Strong local capacity exists and there are as many locally initiated and funded activities as existing government programs. * Second, a household's own involvement with government-sponsored organizations tends to increase their reports of positive voice, participation, and information. Interestingly, it also tends to decrease the reports of positive voice etc. of those households in the village that are not members of these organizations. A similar "chilling effect" was found in the dissemination of information. Again, a larger share of household members in government-sponsored organizations said they were being informed while non-members said their access to information had decreased. * Third, households living in a village where more people are members of the government sponsored village organizations are substantially less likely to be engaged in a protest. This is in contrast to the pattern found for membership in locally initiated social organizations: membership in locally initiated organization tends to increase the likelihood of a household being involved in protest activity (1.26 percentage points), and households living in villages with higher membership rates in locally initiated organizations tend to participate more often in protest activities (2.83 percentage points). The study demonstrates the dangers of relying solely on official administrative structures without efforts to broaden participation and allow groups outside government sponsored institutions to have effective voice in local decision making. At a broader level, this empirical work extends the literature on "social capital" by demonstrating that not all local organizations are equal. Depending on who is doing the organizing, and why, increased participation in local organizations can either be exclusionary and reinforce existing divisions and structures (as appears to be the case for mandatory government organizations), or can widen the base of voice, information, and participation and increase the responsiveness of local government. Government and civil society are presently working on separate tracks, and getting them to work together will require major changes in the way local governments work with local communities. Mainstreaming poverty reduction Poverty, therefore, cannot be viewed as distinct from development. The development strategy incorporated Poverty reduction requires growth in which the in the PROPENAS is a poverty reduction strategy. poor can participate fully. Effective delivery of Just as that document correctly indicates, the right public services to the poor is essential to meet this approach to poverty reduction is to mainstream it into objective. All the issues raised in this report have all government activities. some consequences for one or other - from economic stability to the investment climate, from The Coordinating Agency for Poverty Reduction was governance to the role of local governments in created in March 2001 to help prepare the country's public service delivery. And so it is the case with poverty reduction strategy in consultation with Government. If it is to take poverty alleviation stakeholders and to provide guidance on the seriously, and push beyond the current paradigm, implementation of the strategy. The agency was able all government interventions - policies, programs, to gradually build a core of expertise and prepared a and projects - will need to be viewed through the draft agenda for consultations with stakeholders,9 and prism of poverty reduction so that the overall thrust of government policy is in the desired direction. 9 "Building a National Consensus for Poverty Reduction", Draft for discussion, Jakarta, August 2001. - Page 4.10 - Box 4.3 How a community, demand-driven, project like KDP can reduce poverty KDP is a large, decentralized community development project in Indonesia. It covers more than 15,000 villages in approximately 27 provinces across the country. It works by giving villagers decision-making power over funds, which can be used either as grants for village infrastructure or as loans for income-generating ventures. The project is designed to give villagers the chance to prioritize village development needs and a say over how village resources are used. Villages compete with one another for project funds, giving villages an incentive to propose well-designed projects of demonstrable benefit. How does a project like KDP support Indonesia's fight against poverty? Simply put, KDP works by strengthening local institutions, both formal and informal. For many of the most basic kinds of poverty fighting investments, local people are those who know best how to match local needs with available resources. KDP produces more economically productive infrastructure at lower cost for poor villages than any similar projects. Villagers, especially the poor, have the right: * to participate in all aspects of the project, from planning and decision making to implementation. About six months before the start of a project, KDP facilitators disseminate information about KDP by holding open village meetings; talking about KDP at local gatherings; meeting with small groups of villagers, including women-only groups; and publicizing infornation about KDP on village notice-boards. In this way, villagers are able to learn about their rights in KDP and about what to do if they are dissatisfied with it. * to transparency. According to KDP rules, all financial information must be publicly disclosed. This includes details of budgets for original proposals; information about salaries and honoraria for all project participants; market prices of materials for infrastructure; details of funds borrowed as micro-credit and rates of repayment; details of bank withdrawals; and receipts and accounts for all project monies spent. * to be protected from corruption and misuse of funds: Funds are transferred directly from the center to kecamatan-level bank accounts, with no local government control over funds. It also gets rid of all bureaucratic procedures usually associated with development projects, such as intermediary forms and approvals. By getting rid of red tape and direct government management, it minimizes in one step many of the opportunities to skim funds. Villagers control project budgets, and financial formats are simplified so villagers can understand them and they can tell when money seems to be missing. a "Poverty Toolkit" to assist regions in shaping ensure that future growth and development brings their policies and programs from a poverty with it lasting benefits for the poor. reduction perspective. The need for a poverty reduction strategy should not Subsequently, however, in October 2001, the be to have yet another government document or to agency was abolished, and the President satisfy the international creditor and donor announced that the Coordinating Ministers for the community, but to coordinate all the arms of Economy and People's Welfare will henceforth be government, inform all government departments of jointly responsible for developing and their role in the grand design, and ensure that the implementing the country's poverty reduction public and the poor (as well as the international strategy. The Coordinating Minister for Welfare community) understand the government's approach will bring strengths in program implementation so they can support it. and practical problem solving. The Coordinating Minister for the Economy will provide the overall To be meaningful, all stakeholders - central and local strategic direction and cohesive focus needed to government line ministries and agencies, central and -Page 4.11 - local parliaments, non-government organizations, departments, the international community, non- the poor themselves, and the international government organizations, and of course the poor community - should be consulted in the themselves. And it will take the entire range of preparation of such a strategy. Such consultations instruments in the government's arsenal of constitute a dual purpose - it could be an avenue interventions. To ensure these actors and instruments for receiving good ideas, but it is also an important are all working toward the same goal will require the means of disseminating the government's own preparation of a poverty reduction strategy that is the vision of the future and what it means for the poor. product of consultation with all the key stakeholders - and truly represents a national consensus. The Conclusion appointment of the two coordinating ministers to lead this effort is encouraging, but it is only the first step Poverty reduction remains the overarching in a long-term effort - one in which the country objective of Government - as well as the cannot fail. international community. To achieve it will require the coordinated effort of all government Statistical Annex STATISTICAL ANNEX List of Tables Social Indicators 1 Selected Social Indicators, 1990-2000 2 Key Social Indicators 3 Poverty Line and Number of People Below the Poverty Line 4 Population and Growth Rates by Province, 1971-2000 5 Labor Force Participant by Province (%), 1980-2000 6 Employment by Main Industry, 1990-2000 National Income Accounts 7 Gross Domestic Product by Industrial Origin at Current Market Prices, 1990-2001 8 Gross Domestic Product by Industrial Origin at Constant Market Prices, 1990-2001 9 Gross Domestic Product by Expenditure Category at Current Market Prices, 1990-2001 10 Gross Domestic Product by Expenditure Category at Constant Market Prices, 1990-2001 International Trade & Balance of Payments 11 Balance of Payments, 1994-2001 12 Selected Non-oil Exports, 1990-2001 13 Value of Exports by Principal Country of Destination, 1990-2001 14 Value of Imports by Principal Country of Origin, 1990-2001 External Debt 15 External Public Debt Outstanding including Undisbursed as of December 31, 2000 16 Service Payments, Commitments, Disbursements and Outstanding Amounts of Total External Debt, 1980-2013 17 External Debt Outstanding December 1997-June 2001 Public Finance 18 Central Government Budget Summary, 1994/95-2002 19 Central Government Revenues, 1994/95-2002 20 Central Government Expenditures, 1994/95-2002 a With the exception of the tables on External Debt, the Statistical Annex is a compilation of official data from Government sources. In some instances, these data may differ from data in the main text due to different Bank definitions and methodologies in constructing the statistical series. Statistical Annex Monetary Statistics 21 Money Supply (MI), 1991-2001 22 Changes in Money Supply and Affecting Factors, 1990-2001 23 Consolidated Balance Sheet of the Monetary System, 1990-2001 24 Banking System Credits by Economic Sector, 1990-2001 25 Banking Credits Outstanding in Rupiah and Foreign Exchange by Group of Banks, 1990-2001 26 Commercial Banks' Outstanding Investment Credits in Rupiah and Foreign Exchange by Economic Sector, 1990-2001 27 Commercial Banks' Outstanding Funds in Rupiah and Foreign Exchange by Group of Banks, 1990-2001 28 Interest Rates, 1990-2001 Agricultural Statistics 29 Principal Agricultural Products by Subsectors, 1990-2000 30 Production of Major Crops by Type of Estate, 1990-2000 31 Rice-Area Harvested, Production and Yield, 1990-2001 Industrial Statistics 32 Production of Minerals, 1990-2001 33 Fuel Production by Company, 1990-2001 34 Domestic Sales of Petroleum Products, 1990-2001 Prices 35 Domestic Prices of Petroleum Products, 1985-2001 36 Indonesia Wholesale Price Index, 1990-2001 37 Consumer Price Index, 1990-2001 Investment Statistics 38 Approved Foreign Direct Investment by Sector, 1990-2001 39 Approved Domestic Investment by Sector, 1990-2001 Tabel 1. Selected Social Indicators. 1990-2000 1990 1993 1996 1999 2000 Demography Population (million) 179.5 189.1 198.3 206.5 203.5 Population ages 0- 14 yrold (%) 36.5 34.9 32.0 30.0 29.8 Population ages 15 - 64 yr old(%) 59.6 61.3 63.8 65.3 65.6 Population ages 65+ yr old (%) 3.9 3.8 4.2 4.7 4.6 Population growth rate (%) 2.0 1.7 1.6 1.6 1.4 Population density (per Km2) 94 99 103 107 106 Urban population, % urban to total 30.9 34.0 37.1 39.4 42.1 Gender ratio, male to 100females 99.5 99.5 99.1 99.1 99.8 Dependency ratio (%) 67.8 63.4 57.0 53.1 52.4 Education Elementary school net enrollment ratio, % of relevant iged group 83.2 91.5 94.8 92.7 94.9 Junior high school net enrollment ratio, % of relevant aged group 40.5 .. 48.6 59.2 60.8 Senior high school net enrollment ratio, % of relevant aged group .. .. .. 38.5 39.8 Population > 10 yr old not completed primary school (%) 37.5 41.8 40.1 35.4 34.0 Population > 10 yr old finished primary and Junior high school (%) 48.8 46.3 45.0 47.0 47.7 Population> IOyr old finished high school and college (%) 13.7 11.9 14.9 17.6 18.3 Adult literacy rate 81.5 83.3 85.3 88.4 88.6 Health Life expectancy rate 62.5 62.7 63.2 65.5 68.0 Fertility rate, births per woman 3.1 2.9 2.8 2.6 2.5 Infant mortality rate, per 1000 live births 63.5 58.1 56.0 46.0 44.0 Mortality rate of children < 5 yr old, per 1000 86.4 78.1 70.4 59.6 44.7 Children < 5 yr old that have good nutrition (%) 54.2 55.5 63.9 69.7 71.1 Children < 5 yr old that had been immunized (%) 69.3 76.3 88.2 89.9 90.1 Number of medical doctor per 1 00,000 population .. 10.4 10.7 10.8 Housing and Sanitation Household with access to piped water (%) 12.9 14.7 16.7 18.6 18.6 Household with access to own septic tank (%) 17.9 22.0 26.1 30.4 28.5 Household with electricity (%) 46.8 55.3 72.2 83.7 86.3 Labor force Employed (%) 55.9 55.1 55.5 62.9 63.6 Looking for work (%) 1.44 1.56 2.85 4.27 4.12 Labor force participation (%) 57.3 58.0 58.3 67.2 67.8 Open unemployment rate (%) 3.2 4.3 4.9 6.4 6.1 Working children in 10-14 year old group (%) 9.5 10.8 7.9 6.9 4.7 Poverty and inequality Number of people under poverty line (million) 27.2 25.9 34.5 /a 48.4 /a Population under poverty line (%) 15.1 13.7 17.7 /a 23.5 /a Expenditure share of the lowest 40%, (%) 21.3 14.6 20.2 21.3 Expenditure share of the middle 40%, (%) 36.8 41.6 35.0 37.0 Expenditure share of the highest 20%, (%) 41.9 43.9 44.7 41.6 Gini Coefficient 0.32 0.34 0.36 0.32 ..: Data are not available /a Using Susenas 1998 definition of the poverty line (the "new" definition). Source: Central Bureau of Statistics. Table 2. Key Social Indicators Indicator Latest Period Previous Period Indicator Latest Period Previous Period Poverty Rate (%) Feb-99 Feb-96 Literacy Rate (%) 2000 1999 - National 23.5 17.7 - National 88.6 88.4 - Urban 19.5 13.6 Urban 94.0 94.0 Rural 26.1 19.9 - Rural 84.4 84.5 Inequality (Gini Coefficient) Feb-99 Feb-96 School Dropout (%) 2000 1999 - National 0.32 0.36 - Primary school 1.4 1.4 - Urban (1.33 0.37 - Junior high school 2.1 2.2 - Rural 0.25 0.28 - Senior high school 2.6 2.6 Mortality Rate 2000 1999 Health Facilities 1999 1998 - Infant Mortality Rate 44.0 46.0 - Community Health Centers: - Mortality rate of childien < 5 yr old 44.7 65.5 * Total number 42,247 36,307 * Per 100,0(1( populatiorn 2(14 17.8 Nutritional Status of Children under Five 2000 1999 - Hospitals: -Good(%) 71.1 61.1 *Totalnumber 1,111 1,112 - Medium (%) 18.4 21.2 * Number of beds 123,598 123,168 - Bad (%) 10.5 16.6 * Beds per 100,000 population 59.4 60.3 - Medical doctor per 100,000 population 10.8 11.0 School Enrollment (%) 2000 1999 - 7-12 years old: Labor Force Participation 2000 1999 * National 95.5 95.3 - National 67.8 67.2 * Urban 97.3 97.5 -Urban 61.2 61.2 * Rural 94.4 94.2 - Rural 72.8 71.6 - 13-15 years old: * National 79.6 79.0 Hourly Real Wages (1999 Rp) 2000 1999 * Urban 88.3 88.0 - Agriculture 1,542 1,323 * Rural 73.8 73.6 - Manufacturing 2,108 1,648 - 16-18 years old: - Constmction 2,168 1,843 * National 51.2 51.1 -Trade 1,936 1,661 * Urban 66.7 68.8 - Transportation 2,586 2,111 *Rural 38.4 38.0 -Finance 4,127 3,161) - Services 3,129 2,663 Others 3,396 3,200 Source: Central Bureau of Statistics. Table 3. Poverty Line and Number of People Below the Poverty Line Year 1976-1996 Poverty Line Number of Percentage of Year (Rp/capita/month) People Below the Poverty Line Population Below the Poverty Line (million) (%) Urban Rural Urban Rural Urban+Rural Urban Rural Urban+Rural 1976 4,522 2,849 10.0 44.2 54.2 38.8 40.4 40.1 1978 4,969 2,981 8.3 38.9 47.2 30.8 33.4 33.3 1980 6,831 4,449 9.5 32.8 42.3 29.0 28.4 28.6 1981 9,777 5,877 9.3 31.3 40.6 28.1 26.5 26.9 1984 13,731 7,746 9.3 25.7 35.0 23.1 21.2 21.6 1987 17,381 10.294 9.7 20.3 30.0 20.1 16.1 17.4 1990 20,614 13,295 9.4 17.8 27.2 16.8 14.3 15.1 1993 27,905 18,244 8.7 17.2 25.9 13.5 13.8 13.7 1996 38,246 27,413 7.2 15.3 22.5 9.7 12.3 11.3 Year 1996-1999/a Poverty Line Number of Percentage of Year (Rp/capita/month) People Below the Poverty Line Population Below the Poverty Line (in million) (%) Urban Rural Urban Rural Urban+Rural Urban Rural Urban+Rural 1996 42.032 31,366 9.6 24.9 34.5 13.6 19.9 17.7 1998 /b 96,959 72,780 17.6 31.9 49.5 21.9 25.7 24.2 1999/c 92,409 74,272 15.7 32.7 48.4 19.5 26.1 23.5 /a Using Susenas 1998 definition of the poverty line (the "new" definition). /b Based on Susenas of December 1998. /c Based on Susenas of February (regular) 1999. Source: Central Bureau of Statistics. Table 4. Population and Growth Rates by Province, 1971-2000 Region Population (thousand person) /a Average growth rate (percent per year) 1971 /b 1980 1990 1995 2000 1971-1980 1980-1990 1990-2000 Java 76.086 91,270 107.581 114,980 120,429 2.0 1.7 11 DKI Jakarta 4,579 6,503 8,259 9,144 8,385 4.0 2.4 0.2 West Java 21,624 27,454 35,384 39,340 43,553 2.7 2.6 2.1 Central Java 21,877 25,373 28,521 29,691 30,857 1.7 1.2 0.8 Dl Yogjakarta 2,489 2,751 2,913 2,917 3,109 1.1 0.6 0.7 East Java 25,517 29,189 32.504 33,889 34,526 1.5 1.1 0.6 Sumatra 20,809 28,017 36,507 40,984 42,666 3.4 2.7 1.6 Lampung 2,777 4,625 6,018 6,680 6,654 5.8 2.7 1.0 Bengkulu 519 768 1,179 1,418 1,405 4.5 4.4 1.8 South Sumatra 3,441 4,630 6,313 7,239 7,757 3.4 3.1 2.1 Riau 1,642 2,169 3,304 3,923 4,734 3.1 4.3 3.7 Jambi 1,006 1,446 2,021 2,383 2,401 4.1 3.4 1.7 West Sumatra 2,793 3,407 4,000 4,334 4,228 2.2 1.6 0.6 North Sumatra 6,622 8,361 10,256 11,144 11,476 2.6 2.1 1.1 Aceh 2,009 2,611 3,416 3,863 4,011 3.0 2.7 1.6 Kalimantan 5.155 6.723 9.100 10,52 10.948 3.0 3.1 1.9 West Kalirnantan 2,020 2,486 3,229 3,650 3,740 2.3 2.6 1.5 Central Kalimantan 702 954 1,396 1,636 1,802 3.5 3.9 2.6 South Kalimantan 1,699 2,065 2,598 2,904 2,970 2.2 2.3 1.3 East Kalimantan 734 1,218 1,877 2,330 2,437 5.8 4.4 2.6 Sulawesi 8,528 10.409 12,521 13,775 14,446 2.2 1.9 1.4 Central Sulawesi 914 1,290 1,711 1,946 2,066 3.9 2.9 1.9 North Sulawesi 1,719 2,115 2,478 2,655 2,821 2.3 1.6 1.3 South Sulawesi 5,181 6,062 6.982 7,578 7,787 1.8 1.4 1.1 Southeast Sulawesi 714 942 1,350 1,596 1,772 3.1 3.7 2.8 Other Islands 8.630 11.072 13.672 15,035 14.966 2.8 2.1 0.9 Bali 2,120 2,470 2,778 2,900 3,125 1.7 1.2 1.2 West Nusa Tenggara 2,203 2,725 3,370 3,655 3,822 2.4 2.1 1.3 East Nusa Tenggara 2,295 2,737 3,269 3,588 3,929 2.0 1.8 1.9 Maluku 1,089 1,411 1,858 2,095 1,978 2.9 2.8 0.6 [rian Jaya 923 1,174 1;649 1,954 2,113 2.7 3.5 2.5 Indonesia 1693 .a11 /a Based on Population survey 1971, 1980, 1990, 1995 and 2000. /b Includes adjustment for the exclusion of rural Irian Jaya. Source- Central Bureau of Statistics. Table 5. Labor Force Participation by Province (%). 1980-2000 Region 1980 1985 1990 1995 1996 1997 1998 1999 2000 Java 50.9 53.1 56.8 56.1 57.7 58.0 65.5 66.7 67.0 DKIJakarta 42.3 42.6 44.3 48.6 51.2 53.1 58.2 60.2 WestJava 45.4 48.2 51.6 51.8 52.5 51.7 60.4 61.9 Central Java 54.9 57.1 62.2 60.2 62.5 61.4 71.2 72.2 DI Yogjakarta 58.9 61.1 64.9 60.6 61.3 63.0 67.7 69.6 East Java 53.0 56.4 60.9 59.4 60.9 60.8 69.8 69.8 Sumatra 50.2 52.7 57.2 55.9 58.2 57.8 68.4 66.9 68.5 Lampung 50.2 53.4 59.3 57.8 60.6 57.5 71.6 68.5 Bengkulu 55.1 58.8 66.4 60.8 65.3 63.4 74.9 74.1 South Sumatra 51.9 53.2 56.2 55.1 57.3 57.5 68.4 69.8 Riau 47.1 48.5 50.3 52.6 54.5 55.1 63.7 61.5 Jambi 51.2 52.2 56.2 52.5 56.9 55.0 66.8 65.9 West Sumatra 46.9 50.2 54.2 54.5 55.7 56.7 66.4 64.8 North Sumatra 52.5 52.5 56.9 57.2 58.3 58.5 68.4 69.0 Aceh 46.9 52.8 58.3 56.9 57.0 58.5 66.7 61.7 Kalimantan 53.0 56.0 60.0 59.7 62.1 61.3 69.5 69.4 70.9 West Kalimantan 57.8 58.2 61.2 61.2 61.7 61.4 69.0 69.6 Central Kalimantan 57.8 57.3 63.4 60.5 65.1 64.1 69.4 70.2 South Kalimantan 51.8 56.7 60.0 61.0 64.5 65.5 72.9 73.0 East Kalimantan 44.7 51.8 55.3 55.9 57.0 54.4 66.8 64.9 Sulawesi 44.7 50.4 55.6 55.6 57.6 57.7 65.2 65.1 62.8 Central Sulawesi 45.3 48.4 54.9 55.0 55.8 55.5 60.1 61.0 North Sulawesi 49.5 53.4 58.0 59.8 61.8 62.3 70.4 70.4 South Sulawesi 39.4 42.9 49.2 50.0 54.1 52.5 61.5 60.2 Southeast Sulawesi 44.9 57.0 60.3 57.4 58.7 60.7 68.9 68.9 Other Islands Bali 53.6 61.1 68.4 69.0 70.1 70.8 76.8 76.4 WestNusaTenggara 50.1 51.6 61.1 61.8 63.5 65.5 70.8 72.1 EastNusaTenggara 53.0 61.2 67.3 64.1 65.4 65.3 74.1 73.4 Maluku 42.2 58.7 49.8 50.1 55.0 53.8 64.8 67.3 Irian Jaya 48.3 59.6 62.6 65.3 63.8 66.6 75.5 76.8 Indonesia 50.2 5S30 57.3 56.6 58.3 58.0 66.9 67.2 67.8 ..: Data are not available Source: Central Bureau of Statistics. Table 6. Employment by Main Industry , 1990-2000 /a 1990 1995 1996 1997 1998 1999 2000 Main Industry million % million %S million % million % million % million % million % Agriculture, forestry, hunting & fishcry 35.5 50.1 35.2 44.0 37.7 44.0 35.8 41.2 39.4 45.0 38.4 43.2 40.5 45.1 Mining and quarrying 0.7 1.0 0.6 0.8 0.8 0.9 0.9 1.0 0.7 0.8 0.7 0.8 0.5 0.5 Manufacturing 8.2 11.6 10.1 12.6 10.8 12.6 11.2 12.9 9.9 11.3 11.5 13.0 11.7 13.0 Electricity, gas & water 0.1 0.1 0.2 0.3 0.2 0.2 0.2 0.3 0.1 0.2 0.2 0.2 0.1 0.1 Construction 2.8 4.0 3.8 4.7 3.8 4.4 4.2 4.8 3.5 4.0 3.4 3.8 3.5 3.9 Wholesale and retail trade&restaurants 10.6 15.0 13.9 17.3 16.1 18.8 17.2 19.8 16.8 19.2 17.5 19.7 18.5 20.6 Transportation, storage & communications 2.7 3.8 3.5 4.3 3.9 4.6 4.1 4.8 4.2 4.7 4.2 4.7 4.6 5.1 Finance, insurance, real estate & business serv. 0.5 0.7 0.7 0.8 0.7 0.8 0.7 0.8 0.6 0.7 0.6 0.7 0.9 1.0 Public services 9.7 13.7 12.1 15.1 11.7 13.7 12.6 14.5 12.4 14.1 12.2 13.8 9.6 10.7 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total 70.8 100.0 80.1 100.0 85.7 100.0 87.0 100.0 87.7 100.0 88.8 100.0 89.8 100.0 /a 1990-1998 data refer to population of 10 years of age and above who worked during the week prior to the census, starting 1999 data refer to population 15 years of age and above. Source: Central Bureau of Statistics. Table 7. Gross Domestic Product by Industrial Origin at Current Market Prices, 1990-2001 /a (Rp. billion) 1983 base 1 1993 base 1990 1991 1992 1993 1 993 1994 1995 1996 1997 1998 1999* 2000* 2001** Jan-Jun I Agriculture, Livestock 41 44.721 50.733 55746 58.963 66,072 77.896 88.792 101,009 172,828 216.914 218.398 122,617 Forestry and Fishery a. Farm food crops 25,908 26,149 29,443 31,404 , 32,093 34,941 42,200 47,622 52,189 91,346 115,135 110,641 65,459 b. Non-food crops 6,667 7,604 8,717 9,422 9,015 10,587 12,667 14,435 16,447 33,290 36,692 34,785 17,131 c. Livestock products 4,368 5,126 6,041 7,026 6,203 7,102 8,079 9,524 11,688 15,744 23,939 27,507 15,753 d. Forestry 1,855 2,018 2,180 2,541 6,268 6,897 7,390 8,171 9,807 11,701 13,840 15,078 7,962 e. Fishery 3,352 3,823 4,353 5,353 5,385 6,544 7,561 9,041 10,878 20,748 27,308 30,388 16,312 2. Mining & Ouarrying 26.119 3403 29.907 30,750 31,497 33,507 40195 46,088 55.562 120,329 109.974 166.563 94,009 a. Oil & natural gas 21,789 26,126 23,384 23,169 ! 23,121 23,070 25,410 28,118 34,037 74,884 71,847 123,410 65,387 b. Oth. mining & quarrying 4,330 5,277 6,523 7,581 8,377 10,437 14,785 17,970 21,525 45,445 38,127 43,153 28,622 3. Manufacturing 38.910 47,666 56,542 67.441 73.556 ,24 109,689 136,426 168,178 238,897 287,703 336,053 184.427 a. Refinery oil 3,575 3,807 4,322 5,211 , 5,541 5,855 6,599 8,340 8,116 15,092 16,217 21,824 13,002 b. LNG 3,715 4,714 4,384 4,253 1 4,253 4,584 4,800 5,854 7,506 18,080 18,325 28,108 14,666 c. Non-oil&gasmfg. 31,621 39,145 47,836 57,977 63,763 78,802 98,290 122,232 152,556 205,725 253,161 286,121 156,759 4. Electricity, gas & water 1.258 1,750 2,148 2.714 3.290 4,577 5,655 6,893 7,833 11,283 13.429 15,072 8.241 5. Construction 10,749 12 902 15.305 18 140 22 513 28.017 34,42 42,025 46.679 61,762 74,496 92,176 50,644 6. Trade, Hotels & Restaurants 33,000 36,954 42,732 49 789 S5,298 72,843 87137 ,582 146.740 176,664 196,050 108337 a. Retail & wholesale trade 27,712 30,770 35,645 41,496 | 44,605 51,134 60,379 69,375 77,543 116,689 141,099 156,324 86,113 b. Hotels & Restaurants 5,288 6,184 7,086 8,293 ! 10,693 12,725 12,464 17,762 22,039 30,052 35.565 39,726 22,225 7. Transport & Communications 11,000 13908 17,099 20 728 23 249 27.353 9 34,926 38.531 51,937 55 190 64.550 37,407 a. Transport 9,694 12,327 15,133 18,183 , 20,101 23,191 25,477 29,246 31,498 41,837 42,736 49,337 29,032 b. Communications 1,306 1,581 1,966 2,545 3,148 4,162 5,318 5,680 7,033 10,100 12,454 15,213 8,375 8. Banks & Finance 8.287 10,158 12,500 15,257 14.005 17,88 20,852 21853 24,831 31,710 30.529 34,901 20334 9. Ownership of Dwellings/b 4,891 5,925 6.596 7.611 9,695 11,239 11.89 13,649 1 24.434 27,272 14,900 10. Other Services 19,236 22065 26.323 33.842 37.709 40,539 47,441 54,779 67,402 97,128 120, 139,649 75344 a. Public 12,801 14,622 17,309 22,458 22,458 22,755 26,555 29,753 32,128 40,641 56,745 69,460 36,892 b.OtherPrivate& Services/c 6,434 7,443 9,014 11,384 15,251 17,784 20,886 25,026 35,274 56,487 63,903 70,189 38,452 Gross Domestic Products 19 ,7 227,450 202M8 1 329.776 L,1 94fi221 L221 l6S 8 Preliminary figures. * Very preliminary figures. /a. In 1996, the Govemment released national accounts series using the 1993 base. /b. Using the 1983 base, this line refers only to Ownership of Dwellings. Using the new base, it includes Real Estates. /c. Includes Business Services. Source: Central Bureau of Statistics. Table 8. Gross Domestic Product by Industrial Origin at Constant Market Prices, 1990-2001 /a (Rp. billion) 1983 base 1993 base 1990 1991 1992 1993 1993 1994 1995 1996 1997 1998 1999* 2000( 2(81lIt Jan-Jun I Agriculture, Livestock 22.357 22,715 24_226 24_569 5896 59,291 61,885 6328 64,468 63.610 6539 66432 34207 Forestry and Fishery a. Farm food crops 13,558 13,484 14,527 14,356 32,093 31,408 32,952 33,647 32,688 33,350 33,971 34,302 18,745 b. Non-foodcrops/h 3,724 3,924 4,111 4,351 9,015 9,472 9,912 1(0,355 10,497 10,50)2 10,741 10,909 4,708 c. Livestockproducts 2,328 2,468 2,665 2,814 6,203 6,451 6,790 7,133 7,483 6,440 6,869 7,060 3,664 d. Forcstcy 1,003 1,003 980 997 6,268 6,301 6,304 6,444 7,190 6,581 6,299 6,411 3,301 e. Fishery 1,745 1,835 1,943 2,(153 5,385 5,661) 5,928 6,249 6,610 6,737 7,460 7,750 3,789 2. Mining & Ouarrying 17,532 19,317 18,958 19,370 31,497 33,262 35,502 37,739 38.538 37,473 36,572 37,423 18,801 a (Oi &natural gas 16,()30 17,513 16,719 16,667 23,121 23,720 23,720 24,063 23,920) 23,340 22,137 22,23(1 1(0,661 b Oth mining & quarrying 1,502 1,804 2,239 2,704 j 8,377 9,542 11,782 13,677 14,619 14,133 14,435 15,193 8,140 3. Manufacturine 22,337 24.585 26,964 29,484 73.556 82.649 91,637 102.260 107,630 95,321 98,949 105,085 53,789 a. Refinery oil 1,094 1,137 1,2(02 1,187 5,541 5,548 5,392 6,291 5,926 6,310 6,607 7,069 3,642 b. LNG 4,093 4,433 4,663 4,753 4,253 4,721 4,390) 4,572 4,725 4,732 5,082 4,503 2,208 c. Non-oil &gas mfg. 17,150 19,015 21,099 23,544 63,763 72,38() 81,855 91,396 96,980 84,278 87,261 93,513 47,939 4. Electricity, gas & water 726 843 928 1.022 j 3290 3.703 4,292 4 877 5 480 5,646 6.113 6,649 3,495 5. Construction 6,673 7.424 8,224 9,223 22.513 25.858 29,19 32,924 35,346 22,465 22286 23,789 11,929 6. Trade, Hotels & Restaurants 18,569 19,576 21,009 22,850 j 55,298 59.504 64.231 69.475 73,524 60,131 60.195 63,621 32,999 a. Retail & wholesale trade 15,425 16,214 17,406 18,969 44,605 47,620 51,397 55,514 58,842 47,846 47,694 50,457 26,2(07 h. Hotels & Restaurants 3,143 3,363 3,603 3,881 10,693 11,#85 12,834 13,962 14,682 12,285 12,501 13,165 6,792 7. Transport & Communications 6.368 6.869 MM 8.302 23,249 25,189 27.329 29,701 31,783 5 26,772 29,284 15,311 a. Transport 5,596 6,003 6,601 7,192 20,101 21,400 22,932 24,445 25,609 20,504 19,738 21,431 11,0197 h. Communications 772 867 954 1,110 3,148 3,788 4,397 5,257 6,174 6,471 7,035 7,854 4,214 8. Banks & Finance 4,894 5,535 6256 7,070 14.005 15,945 18,109 18R887 19.956 13,173 11,765 12,403 6.384 9. Ownership of Dwellines/c 2,999 3,120 3,249 3,411 9.695 10.087 10,643 11,266 11,826 9,476 8.906 9,205 4,611 10. Other Services 12.764 13,24 13.817 14,405 7.02 39.155 40,967 42.842 44,696 42,105 42,661 43.775 22163 a. Public 8,783 9,052 9,320 9,5(9 22,458 22,752 23,(46 23,338 23,617 21,888 22,251 22,555 1,3(07 h. OtherPrivate & Services/d 3,981 4,189 4,497 4,897 15,251 16,4(3 17,921 19,503 21,(79 20,218 20,410 21,220 10,855 Gross Domestic Products 115f217 122L 131A85 .372 j 62.2L 346 1, , L3.24 2 3Z5F 397.666 203.89 * Preliminary figures. * Very preliminary figures. /a. In 1996, the Governmetit released national accounts series using the 1993 base. /b. Includes the lminer smallholder and estate food crops under the National Accounts with a 1983 base, /c. Using the 1983 base, this line refcrs only to Ownership of Dwelliigs. Using the new hase, it includes Real Estates. /d Includes Business Services. Source: Central Bureau of Statistics. Table 9. Gross Domestic Product by Expenditure Category at Current Market Prices, 1990-2001 /a (Rp. billion) 1983 base 1993 base 1990 1991 1992 1993 i 1993 1994 1995 1996 1997 1998 1999* 2000* 2001** Jan-Jun 1. Private consumption 106,312 125,036 135,880 158,342 192,959 228,119 279,876 332,094 387,171 647,824 813,183 867,997 477,184 2. Government consumption 17,573 20,785 24,731 29,757 29,757 31,014 35,584 40,299 42,952 54.416 72,631 90,780 50,199 3. Gross fixed investment 55,633 63,894 70,820 78,243 86,667 105,381 129,218 157,653 177,686 243,043 240,322 313,915 189,451 4. Changes in stock/b 15,072 16,848 22,405 28,286 10,546 13,327 15,900 5,800 21,615 -82,716 -105,063 -83,319 -49,116 5. Exports of goods and nonfactorservices 51,953 62,264 76,384 85,454 I 88,231 101,332 119,593 137,533 174,871 506,245 390,560 497,519 318,791 6. Less: Imports of goods and nonfactor services 50,946 61,376 70,337 78,065 78,383 96,953 125,657 140,812 176,600 413,058 301,654 396,208 270,250 Gross Domestic Product 195,597 227.45 259,885 302.01 329.776 382220 454,514 532,568 627,695 955,754 1.109,980 1.290.684 716.258 *: Preliminary figures. **: Very preliminary figures. /a. In 1996, the Government released national accounts series using the 1993 base, based on an up-date of the 1990 Input-Output Table and refined estimates of some sub-sectors. /b. Residuals. Source: Central Bureau of Statistics. Table 10. Gross Domestic Product by Expenditure Category at Constant Market Prices. 1990-2001 /a (Rp. billion) 1983 base 1993 base 1990 1991 1992 1993 1 1993 1994 1995 1996 1997 1998 1999* 2000* 2001** |___________________________________________________________________ Jan-Jun 1. Private consumption 62,053 66,584 68,485 72,476 1 192,958 208,062 215,798 257,016 277,116 260,023 272.070 281,957 146,741 2. Governiientconsumption 11,317 12,113 12,819 12,830 29,757 30,443 31,476 31,681 31,701 26,828 27,014 28,768 15,199 3. Gross fixed investment 32,732 34,867 36,589 38,671 86,667 98,589 114,022 128,699 139,726 93,605 75,468 88,985 50,622 4. Changes in stock /b 3,303 1,990 2,314 3,404 10,546 14,836 23,435 5,873 3,342 -6,387 -8,572 -16,138 -13,400 5. Exports of goods and nonfactor services 28,863 34,600 39,675 42,297 , 88,231 97,002 102,975 112,391 121,158 134,707 92,124 106,918 59,851 6. Less: Imports of goods and nonfactor services 23,050 26,929 28,697 29,971 I 78,383 94,291 103,938 121,863 139,796 132,401 78,546 92,823 55,325 Gross Domestic Product 115,217 123,225 131.185 139,707 329.776 354.641 383.768 413,798 433.246 376.375 379.558 397.666 203.689 *: Preliminary figures. **: Very preliminary figures. /a. In 1996, the Government released national accounts series using the 1993 base, based on an update of the 1990 Input-Output Table and refined estimates of some sub-sectors. /b. Residuals. Source: Central Bureau of Statistics. Table 11. Balance of Payments. 1994-2001 (US$ million) Items 1994 1995 1996 1997 1998 1999 2000 2001/c I Non oillgas, merch. (net) 1,595 -96 -1,849 3,129 13,864 14,355 15,963 14,470 2 Oil, merch. (net) 2,329 2,851 3,122 2,266 1,518 1,975 2,197 2,205 3 Gas, merch. (net) 2,755 6,644 5,896 4,679 3,047 4,314 6,881 5,329 4 Current account -2,960 -6,760 -7,801 -5,001 4,097 5,783 7.998 4,249 a. Exports, fob 40,223 47,454 50,188 56,297 50,371 51,243 65.408 62,113 b. Imports, fob -32,322 -40,921 -44,240 -46,223 -31,942 -30,599 -40,367 -40,109 c. Services, net -10,861 -13,293 -13,749 -15,075 -14,332 -14,861 -17,043 -17,755 5 Official Capital 307 336 -522 2,880 9,971 5,353 3,217 1,528 a. Inflows 5,838 5,785 5.693 7,594 7,414 6,560 3,862 4,055 IGGI 3,908 5,635 5,093 7,594 5,897 6,560 3,862 4,055 Special assistance 268 226 165 92 0 0 0 0 Program aid 0 0 0 3,036 1,821 3,870 1,360 1.580 Food aid 0 0 0 0 160 273 76 0 Project aid 3,640 5,409 4,928 4,466 3,916 2,417 2,426 2.475 ODA 2,493 3,591 3,274 2,601 1,718 1.686 2,193 2,110 Non-ODA 1,147 1.818 1,654 1.865 2,198 731 233 364 Commercial loan 141 150 600 0 1,517 0 0 0 b. Amortization -5,390 -5,449 -6.215 -4,714 -3.765 -4.070 -4.272 -4,892 c. Exceptional financing 0 0 0 3,036 6.322 2.863 3,627 2,365 - IMFPurchases/a 0 0 0 3,036 5,761 1,373 1,124 1,009 - IMF Repurchases 0 0 0 0 561 0 0 -1,502 - Rescheduling 0 0 0 0 0 1,490 2,503 2,858 6 Private Capital 3,701 10,252 11,511 -338 -13,846 -9,923 -9,992 -9.516 a. Foreign direct invesment 2,108 4,345 6,194 4,677 -356 -2,745 -4,549 -5,347 Inflow 3,412 5,975 8,154 10,005 6,986 3.702 2,974 2,824 Outflow -1,304 -1,630 -1,960 -5,328 -7,342 -6,447 -7.523 -8,171 b. Others 1,593 5,907 5,317 -5,015 -13,490 -7,178 -5,443 -4,169 7 Capital account (5+6) 4,008 10,588 10,989 2,542 -3,875 -4,570 -6,775 -7,988 8 TOTAL (4 + 8) 1,048 3,828 3,188 -2.459 222 1,213 1,223 -3,739 9 Errors & omissions, net -(8+10) -242 -2,312 1.263 -1,986 2,122 2,079 3,820 589 10 Monetary movements/b -806 -1,516 -4,451 4,445 -7,254 -3,292 -5,043 3,150 /a Including Japanese new financing. /b Since 1998 Monetary Movement is based on Gross Foreign Assets (GFA) repl Since 2000, based on change reserve assets replacing GFA. Negative represents surplus and Positive represents deficit. /c Projections Table 12. Selected Non-oil Exports. 1990-2001 (US$ million) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Jan-Jun 1. Rubber 885 924 1,039 959 1,268 1,986 1,894 1,505 1,010 855 881 628 2. Coffee 372 355 236 333 750 622 598 583 607 474 334 74 3. Palm oil &Cernel 253 335 465 535 878 973 1,017 1,662 816 1,170 1,195 459 4. Rattan 275 275 307 333 354 374 324 204 37 255 296 144 5. Foodstuff 308 382 467 455 603 670 747 881 923 904 718 348 6. Shrimps, Lobster, Tuna 705 811 802 902 1,056 1,093 1,058 1,097 1,768 1,607 1,672 743 7. Tin 176 146 148 92 121 240 310 277 260 242 234 112 8. Copper 400 146 687 646 879 1,551 1,397 1,548 1,749 1,077 1,854 1,282 9. Nickel 319 512 269 304 334 410 374 233 165 219 360 186 10. AluminumT 216 304 214 165 204 354 320 280 200 135 248 129 11. Iron Steel 367 172 381 464 454 522 608 660 990 772 805 3,445 12. Plywood 2,690 2,772 3,219 4,128 3,650 3,452 3,544 3,477 2,327 2,254 1,995 881 13. Textiles 1,084 2,772 2,470 2,311 2,517 2,908 2,683 3,390 3,461 3,086 3,540 1,509 14. Hlandicraft 346 1,539 541 663 978 655 526 1,027 2,089 612 617 309 15. Electrical app. 237 379 1,017 1,301 1,774 2,724 3,593 3,261 2,813 3,401 6,369 3,232 16. Garment 1,570 2,203 3,212 3,395 3,096 3,324 3,187 4,181 3,817 3,777 4,581 1,974 17. Pulp and Paper 250 312 401 483 782 1,504 1,369 1,953 2,469 2,646 3,042 1,103 Others 4,305 3,716 7,748 8,612 10,172 12,854 13,499 16,914 16,358 16,022 19,743 5,818 TotalNon-oilExports/a 14,758 18,054 2362 26,080 29.870 36.214 37,046 43,133 41,859 39,510 484,8- 22_376 /a Exclude exports from Batam. Source: Bank Indonesia. Table 13. Value of Exports by Principal Country of Destination, 1990-2001 (US$ million) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Jan-May Asean 2.543 3.197 4.361 4.997 5,981 6,476 7.689 9,258 9.347 8,278 10_883 3.983 Malaysia 253 342 488 586 738 987 1,110 1,506 1,359 1,336 1,972 722 Thailand 189 267 353 468 401 703 823 847 943 813 1,026 440 Philippines 161 168 181 285 365 590 689 793 708 695 820 331 Singapore 1,902 2,410 3,314 3,372 4,150 3,767 4,565 5,462 5,718 4.931 6,562 2,280 Brunei 11 10 25 35 50 24 27 40 36 28 25 8 Vietnam 27 141 165 172 196 264 337 390 351 332 361 143 Cambodia /a - - - 40 44 80 60 70 65 69 52 28 Laos/a - - - 0 1 1 1 1 2 2 1 0 Myanmar /a - - - 40 35 60 78 150 167 74 65 30 Hong Kong 618 703 881 901 1,321 1,657 1,625 1,778 1,865 1,330 1,554 590 Japan 10,923 10,767 10,761 11,172 10,929 12,288 12,885 12,461 9,116 10,397 14,415 5,874 Other Asia 6,728 7,368 8,664 9,475 10,593 9,244 10,138 13,352 5,206 Africa 199 394 419 463 638 621 639 771 908 1,063 1,099 496 USA 3,365 3,509 4,419 5,230 5,829 6,322 6,795 7,113 7,031 6,896 8,476 3,408 Canada 139 172 289 304 322 359 368 398 412 354 404 170 Other America 102 184 328 469 562 759 758 950 927 830 1,075 408 Australia 403 628 746 774 705 915 1,216 1,511 1,533 1,485 1,520 666 Other Oceania 84 39 53 78 67 156 71 69 121 142 175 97 EFC 3.029 3.43 4.844 5.391 5.948 6.760 7.724 8.056 7.766 7.085 8.665 3,367 o/w United Kingdom 517 654 844 1,005 1,038 1,129 1,193 1,231 1,143 1,176 1,508 584 Netherlands 723 838 1,100 1,086 1,324 1,452 1,667 1,835 1,512 1,544 1,838 630 Germany 750 907 978 1,178 1,263 1,382 1,489 1,459 1,401 1,234 1,443 585 Belgium & Luxemburg 210 258 401 366 409 539 682 788 877 695 837 339 France 286 386 495 500 426 520 564 497 547 503 718 285 Italy 276 382 583 615 661 784 744 823 859 656 758 277 Spain 152 169 255 333 454 535 813 886 869 742 932 398 Others in Europe 264 269 301 316 385 441 571 485 578 667 508 237 Total 21,669 23,605 27,402 36,824 40,054 45,418 49,815 53,443 48,848 48,665 62,124 24.503 /a Before 1993 these countries trade data are included in 'other Asia' Table 14. Value of Ifimports by Principal Country of Oripin, 1990-2001 (US$ million) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 200)0 2001 Jan-May Asean 2,430 2.465 2,593 2.659 3,)44 4,219 5,124 54)3 4.56 4784 6485 2326 Malaysia 326 407 525 517 579 767 824 865 627 606 1,129 390 Thailand 183 278 345 235 406 737 1,095 867 842 933 1,109 519 Philippines 649 81 52 57 65 81 9() 127 65 56 115 47 Singapore 1,272 1,699 1,67() 1,793 1,877 2,368 2,875 3,411 2,543 2,526 3,789 1,28() Brunei 0 0 1 1 0 1 1 6 () 38 17 0 Vietnam 43 87 93 38 79 156 2(04 117 421 605 303 79 Cambodia /a I 1 4 3 0 (I ) I ( Laos /a - - - 0 0 0 () ) 0 (I I 0 Myanmar /a - 15 37 105 33 19 9 19 22 11 Hong Kong 273 232 229 247 241 275 262 325 264 228 342 131 Japan 5,300 6,327 6,014 6,248 7,740 9,217 8,504 8,252 4,292 2,913 5,397 2,370 Other Asia 4,633 5,156 5,496 6,014 6,750 8,111 8,423 8()35 5,033 5,952 9,196 4,191 Africa 170 195 213 140 332 608 643 684 431) 573 825 590 USA 2,520 3,397 3,822 3,255 3,588 4,756 5,060 5,441 3,517 2,839 3,390 1,702 Canada 407 354 459 410 497 811 786 682 504 421 638 198 Other America 519 597 488 625 755 1,088 1,089 927 515 584 597 215 Australia 1,186 1,378 1,413 1,399 1,542 2,016 2,535 2,427 1,761 1.460 1,694 968 OtherOceaniai 115 118 136 161 184 206 245 234 166 117 265 130 EEC 4.060 47(05 5.400 6.651 6,6 8,175 9,234 8333 5,866 3801 4,163 1965 o/0United Kingdom 440 603 719 782 710 902 1,118 1,084 920 511 557 334 Netherlands 550 505 507 626 564 842 493 566 338 347 434 174 Germany 1,502 2,061 2,141 2,072 2,473 2,819 3,()01 2,629 2,366 1,399 1,245 597 Belgium & Luxemburg 232 254 324 340 292 401 394 340 277 178 239 114 France 643 544 816 853 786 1,064 1,006 1,017 568 372 4(8) 176 Denmark 61 49 124 158 106 105 191 159 50 38 44 26 Ireland 74 13 23 21 22 41 39 35 26 31 66 21 Italy 410 536 558 523 670 791 1,212 918 480 277 345 196 Greece 6 5 8 12 26 61 76 52 19 25 15 7 Porlugal 6 4 2 2 4 8 5 23 2 2 2 1 Spain 136 131 178 262 174 219 345 370 160 206 185 97 Others in Europe 764 899 969 519 700 1,148 1,025 927 483 332 522 257 Total 22,430 25,871 27,279 28.328 31,984 40,629 42,929 41,679 27,337 24,003 33,515 15,()42 /a Before 1993 these countries trade d,ila aire includledt in 'other Asia' Source: Central Bureau of Statistics. Table 15. External.Public Debt Outstanding including Undisbursed as of December 31. 2000 (US$ thousand) Type of creditor/ Debt outstanding Present creditor country Disbursed Undisbursed Total Value PUBLIC AND PUBLICLY GUARANTEED DEBT Bilateral Loans Australia 739,793 28,730 768,523 507,206 Austria 243,622 59,495 303,1 17 187,556 Belgium 129,211 2,548 131,759 100,808 Brunei 82,262 0 82,262 40,874 Canada 423,558 24,259 447,817 273,997 China 18,846 4,444 23,290 14,409 Denmark 39,944 0 39,944 30,599 Finland 12,510 4,116 16,626 10,649 France 698,203 37,037 735,240 460,839 Germany, Fed. Rep. of 2,650,653 196,566 2,847,219 2,008,262 Italy 176,367 0 176,367 123,074 Japan 22,517,675 5,606,320 28,123,996 21,755,874 Korea, Republic of 80,476 4,771 85,246 65,787 Kuwait 51,369 15,546 66,915 40,377 Multiple Lenders 3,632,714 0 3,632,714 3,049,266 Netherlands 599,335 14,239 613,574 416,504 New Zealand 4 0 4 0 Norway 30,060 0 30,060 22,170 Other 20,366 0 20,366 14,985 Saudi Arabia 23,823 0 23,823 13,306 Singapore 1,194 0 1,194 1,146 Slovak Republic 3,421 0 3,421 3,362 Spain 339,554 61,694 401,248 224,122 Sweden 11,606 0 11,606 10,704 Switzerland 151,083 0 151,083 132,769 United Kingdom 24,794 395 25,190 25,570 United States 2.495.755 107,106 2,602,861 1,874,179 Total Bilateral Loans 35,198,198 6,167,267 41,365,464 31,408,393 Bonds Multiple Lenders 545.000 0 545,000 541,317 United States 426,000 0 426,000 435,507 Total Bonds 971,000 0 971,000 976,824 Export Credits Austria 660,963 14,543 675,506 559,774 Belgium 136,572 266 136,837 107,222 Denmark 37.569 0 37,569 28.191 Finland 42,026 0 42,026 32,450 France 665,608 20,873 686,480 483,804 Germany, Fed. Rep. of 14,734 0 14,734 8,053 Japan 38,977 0 38,977 36,796 Netherlands 227,140 0 227,140 180,979 Norway 44,005 0 44,005 30,333 Spain 50,806 0 50,806 36,621 Sweden 22,213 0 22,213 11,634 Switzerland 266,396 0 266.396 198,062 United Kingdom 549,336 62,467. 611,803 397,168 United States 245,220 0 245,220 178,812 Total Export Credits 3,001,564 98,149 3,099,712 2,289,898 Continued Table 15. External Public Debt Outstandinv includinit Undisbursed as of December 31, 2000 (US$ thousand) Type of creditor/ Debt outstanding Present creditor country Disbursed Undisbursed Total Value Financial Institutions Australia 2,243 0 2,243 674 Austria 147,493 15.585 163,078 120,982 Belgium 2,228 461 2,689 1,946 France 176,095 39,071 215,166 148,535 Germany, Fed. Rep. of 2,020 79 2,098 1,780 Hong Kong 461,518 133,457 594,975 457,413 Japan 147,272 1,270 148,542 145,847 Multiple Lenders 6,885,475 0 6,885,475 6,843,055 Netherlands 59,966 8,076 68,042 50,744 Norway 40,595 8,544 49,139 27,526 Singapore 1,162,292 466,976 1.629,268 1,011,527 Spain 4,199 0 4,199 2,741 Switzerland 2,139 0 2,139 1,601 United Kingdom 389,484 37,862 427,346 269,024 Total Financial Institutions 9,483.019 711,379 10,194,398 9,083,395 Multilateral Loans ASDB "soft window" 648,714 150,525 799,239 353,831 Asian Dev. Bank 6,355,420 2,552,275 8.907,695 6,173,208 EEC 3,647 0 3,647 2,135 European Dev. Fund 1,236 393 1,628 971 IBRD 11,714,727 1,866,538 13.581,265 1 2,709,832 IDA 713,566 178,938 892,504 399,751 Intl. Fund Agr. (FAD) 101,538 14,397 115,936 84,212 Islamic Dev. Bank 83,680 13,948 97,627 85,356 Nordic Invest. Bank 170,604 8,370 178,974 160,042 Nordic Investment Fund 11,301 0 11,301 10.237 Total Multilateral Loans 19,804,432 4,785,383 24,589,816 19,979,576 Nationalizationi Netherlands 15,876 0 15,876 14,723 Total Nationalization 15,876 0 15,876 14,723 Supplier Credits France 0 2,624 2,624 0 Japan 834,985 1,431 836,416 742,295 Singapore 0 6,246 6,246 1 Slovak Republic 0 10,413 10,413 0 United States 0 18,465 18.465 19 Total Supplier Credits 834,985 39,179 874,164 742,315 Creditor Types Bilateral Loans 35,198,198 6,167,267 41,365,464 31,408,393 Bonds 971,000 0 971,000 976,824 Export Credits 3,001,564 98,149 3,099,712 2,289,898 Financial Institutions 9,483,019 711,379 10,194,398 9,083,395 Multilateral Loans 19,804,432 4,785,383 24,589,816 19.979,576 Nationalization 15,876 0 15,876 14,723 Supplier Credits 834.985 39,179 874,164 742,315 Total 69,309.074 11,801,357 81,110,432 64,495,124 Notes: (I ) Only debts with an original or extended maturity of over one year are included in this table . (2) Debt outstanding includes principal in arrears but excludes interest in arrears . Source: IBRD Debtor Reporting System, based on data provided by Bank Indonesia. ~~~toot - o' nio - rit N rN no NC- r0 _N._rNit7rti, O, - 00C Nn r' oRNCOCn°0O;> 00X (NRX>oir 00 - N - X (N ( N - - _o. _r r-.rr or o ic_cN< - NnoCoNNCo Co 00 Co oCO r O-No-CC-f CCCCC )- cOCCCCCCCNt 1 00~~~~~ _o x -- 8-V : ;rr L_( .V 0N-i '< c~~~0 C vCtr o -r_00 V N XClC 000-ON C0O0r000 mo-r ^ o-xnr I- - o N NoOOo C o--0 N o Nt0N.N o 2c _0Ooo-on nO-COcon Cn O00on-OoooN 00u vN 0r 000C0 r00y x _ -OOc y oNO C CO O-- v , 0r _rxv 2 0.0 .z r.r,00o t r x>N r xr N'OO'1- V r _2 _~~~ 0 C *s C0 -. notooo C CC 0N NCN nO -- N C ONC- o 05 ._0v09Cf oNS _vox0 r.0$C r0 . x r0f.oo _ r. 0N 00-nv r caDtvz ;Sf ,CEoxgSV rtt*Rr ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ D ' D n X° X XN X X f xb x x ; , Ot' g S o § b CO B _ N r g v Eb x o o = rtri t N 0 E0 Coo~~~~~~~> Sror sr or E= sr eo NNNNNNN Table 17. External Debt Outstandin2 December 1997-june 2001 (US$ million) 1997 1998 1999 2000 2001 December March June September Decemiiber March June September December March June September December March Julne External Debt 125,817 131,587 135,005 136.299 145,599 146,448 141,296 142,764 144,798 140,725 141587 138,394 139,496 136,486 135,151 Govemment Ia 53,865 54,159 55,166 518,666 67,315 68,404 70,418 74,809 75,720 75.(36 76,356 75.3(4 74,891 72.324 70,665 ODA 3R,162 37,853 38,672 40,803 48,421 49,788 52,091 55,445 56.453 56.316 57,179 56,620 56,152 53,756 53,100 Non ODA 14,812 14,632 14.164 15,485 16,045 16,247 15,952 16,982 16,880 16,336 16,794 16,307 16,342 16,225 15,576 Commercial 890 1,674 2,330 2,378 2,149 2,369 2,375 2,382 2,317 2,364 2,383 2,377 2,397 2,343 1,989 StateEnterprises 3,995 3,842 4,008 3,850 4,153 4.123 4,121 4,0)20 5,004 4,937 5,126 5.114 5,0)13 5,002 4,837 Pertamina & Garuda 3,757 3,720 3,829 3,688 3,992 3,91() 3,948 3,821) 3,667 3,639 3,597 3,576 3,583 3,490 3,438 Otherstate enterprises 239 122 179 162 161 143 173 200 1.337 1,298 1,529 1,537 1,500 1,512 1,399 Banks/b 14,364 12,826 12,622 10,817 10.769 11.748 10,631 10,3R4 10,836 10.379 10.314 9,387 7,718 7,848 7,684 State banks 5.910 5,024 4,967 4,360 4,744 4,872 4,926 4.732 4,705 4,667 4,733 4,399 4,150 4,154 4,118 Privatebanks 8,454 7.802 7,655 6,457 6,025 6,876 5,705 5,652 6.131 5,712 5,581 4,988 3,568 3,694 3,566 Private noiBatiks/b 53,593 60,760 63,209 62,966 63,362 62,173 56,126 53,551 53,238 5),373 49,791 48,589 51,805 51,312 51,965 Loan 49,179 52,628 55,584 55,376 55,954 54,718 49,161 46,902 46,909 44,134 43,666 42,708 46,333 46.163 47.068 Bonds 4,414 8.132 7,625 7,590 7,409 7,455 6.965 6,649 6,329 6.239 6,125 5,181 5,472 5,149 4,897 DannesticSecuritiesOwnedbynon-residents 10,271 6,432 5,607 5,667 5,287 7,491 3.653 3,178 3,299 3,559 2,577 2,398 2,197 2.089 3.646 Denontiiated in Rupiah 2,858 1.187 740 724 656 422 795 399 589 710 434 363 184 158 1,875 Bonds 322 170 102 98 99 56 96 72 90 104 78 79 30 21 23 SBls 245 229 248 182 13 30 275 38 142 256 132 102 26 11 15 MTNs 369 165 87 93 109 86 86 71 11() I(N) 77 51 17 6 4 CPs I I 10 6 6 9 4 9 8 1 0 2 7 7 5 4 3 CDs 1.()81 240 SI 30 24 0 18 0 0 () 0 0 0 0 0 PNs 823 373 246 315 402 246 311 210 237 248 140 124 106 116 1.830 FRNs () 0 0 0 0 0 0 0 0 0 0 0 Denominated in USD 7,413 5,245 4,867 4,943 4,631 3,1N69 2,858 2.779 2,71(1 2.849 2,143 2.035 2,0)13 1,931 1,771 PNs 5,297 3,708 3,731 3.525 3,295 1,839 1,693 1,610 1,661 1.817 1.128 1,115 1.147 1,061 1,015 MTNs /c 1,974 1.365 1,069 1.343 1,263 1,184 1,106 1,115 1.004 992 991 91)1 842 848 734 CPs /c 29 43 44 49 5() 35 42 39 35 30 17 17 17 17 17 Bonds 98 127 22 24 21 7 13 13 8 8 7 () 7 5 5 FRNs 2 2 1 2 2 4 4 2 2 2 () 2 () 0 0 CDs 13 0 () 0 0) 0 0 () 0 0 0 0 () 0 Total External Obligations 136,088 138,019 140,612 141,966 150,886 149,939 144,949 145,942 148,097 144,284 144,164 140,792 141,693 138,575 138,797 /a Includes debt owed to IMF. /b Includes loans obtained by branches of Indonesian banks and afftliates ol' Indonesiaii companies abroad and channeled into Iitdoniesia. /c Including securities denominatcd in JPY. Source: Bank Indonesia. Table 18. Central Government Budeet Summary, 1994/95-2002 /a (Rp. billion) Provision < ----------------------------------- Actual -----------------------------------------> Actual <------- Budget --------> 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000 2001 /b 2002 9 months revision 1. Domestic revenues/c 64,412 70.852 87,630 107,965 146,872 204,422 194,146 286,006 301,874 2. Current expenditures 32,137 35,201 44,972 75,232 115,272 173,444 164.087 213,388 193,741 3. Government saving (1-2) 32.276 35.651 42.658 32.733 31,600 30.978 30.059 72.618 108_133 4. Development expenditures 28,430 27,201 32,928 36,311 52,824 57,638 25,926 45,461 52,299 5 Balanced funds 0 0 0 0 0 0 33,894 81,477 97,969 /d 6 Primary Balance 10,316 15,325 19,632 13.157 11,349 15,628 23,568 35,250 46,365 7 Overal Balance (3-4-5 8, 45 9 3722 2 2 -54,320 42 135 Financing (6+7) -8,461 -11,480 -1,100 1,636 22,403 45,633 29,761 52.530 42,135 8 Domestic 0 0 0 0 1,634 16,867 18,139 33,500 23,501 9 Foreign, net -8,461 -11,480 -1,100 1,636 20,769 28,766 11,622 19,030 18,634 Program loan 0 0 0 0 24,926 25,201 3,296 13,728 36,771 /e Project loan 9,838 9,009 11,900 14,386 26,181 24,383 16,389 22,265 25,830 Amortization -18,298 -20,489 -13,000 -12,750 -30,337 -20,818 -8,063 -16,963 -43,967 /a Government new format since 1999/2000 and applied it to 1994/95-1998/99. /b Budget revision April 2001 /c Including grants. /d Including Fund for Special Authonomy /e Including rescheduling. Source: Ministry of Finance. Table 19. Central Government Revenues, 1994/95-2002 /a (Rp. billion) Provision <--------------------------------------- Actual -----------------------------------------> Actual <------- Budget --------> 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000 2000 2001 /b 2002 9 months revision State Revenues and Grants 64,412 70,852 87,630 107,965 146,872 204,422 194,146 286,006 301,874 1. Domestic Revenues 64,412 70.852 87,630 107,965 146.872 204,422 193,935 286,006 301,874 1. Tax Revenues 49,175 54,258 64,422 81,752 118,795 135,533 111,064 185,260 219,628 a. Domestic Taxes 45,144 51,042 61,762 78,625 111.860 130,497 104,610 174,255 207,029 i. Income Taxes 23,497 26,583 34,144 45,206 72,345 82,311 57,615 94,971 104,497 - Non-Oil & Gas 18,764 21,012 27,062 34,388 55,944 59,683 40,144 69,246 88,815 -Oil & Gas 4,733 5,571 7,082 10,818 16,401 22,628 17,472 25,725 15,682 ii. Sales tax (VAT) 16,545 18,519 20,351 25,199 27,803 33,087 31,525 53,457 70,100 iii. Property taxes 1,647 1,894 2,413 2,641 3,565 4,107 3,824 6,289 8,129 iv. Excises 3,153 3,593 4.263 5.101 7,733 10,381 10,632 17,501 22,353 v. Othertaxes 302 453 591 478 413 611 1,014 1,938 1,950 b. International Trade Taxes 4,031 3,216 2,660 3,127 6,936 5,036 6,454 11,005 12,599 i.lmport duties 3,900 3,029 2,579 2,999 2,306 4,177 6,116 10,398 12,249 ii.Export taxes 131 186 81 129 4,630 859 338 607 350 2. Non Tax Receipts 15,237 16,595 23,209 26,213 28,076 68,889 82,871 100,746 82,247 a. Natural Resources Revenues 8,804 10,483 13,055 15,431 15,431 35,854 70,186 79,446 63,195 i. Oil 7,603 9,093 11,235 10,701 10,701 28,898 44,892 57,867 44,013 ii. Gas 1,201 1,391 1,821 4,730 4,730 6,956 14,726 17,359 14,524 iii. Public Mining 0 0 0 0 0 0 620 928 1,340 iv. Forestry 0 0 0 0 0 0 9,923 3,001 3,026 v. Fishery 0 0 0 0 0 0 25 292 292 b. Profits of Public Enterprises 1,322 1,604 2,650 2,341 3,428 5,430 5,281 9,000 10,351 c. Other Non-tax revenues (PNBP) 5,111 4,508 7,503 8,442 9,217 27,605 7,403 12,300 8,700 11. Grants 0 0 0 0 0 0 211 0 0 /a Government new format since 1999/2000 and applied it to 1994/95 - 1998/99 /b Budget revision April 2001 Source: Ministry of Finance. Table 20. Central Government Expenditures. 1994/95-2002 /a (Rp. billion) Provision <--------------------------------- Actual ---------------------------------------> Actual <------ Budget --------> 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000( 2000 2001 /b 2002 9 months revision Total Expenditures 60,567 62,402 77.900 111,543 168.096 231,082 223,907 340.326 344.009 1. Current Expenditures 32137 5,201 44,97 75-232 115,272 173444 164,087 213,388 193.741 Personnel expenditures 12,596 13,001 14,455 17,269 23,216 32,719 29.990 38,206 40,748 Material expenditures 4,319 5,175 8,109 8,999 9,862 10.765 9.047 9,909 12,863 Transfers to regions 7,272 8.227 9,358 11,061 13,074 17,485 0 0 0 Interest Payments 6,470 6,875 9,902 16,735 32,574 42,288 53,329 89,570 88,500 Domestic () 0 0 0 8,385 22,230 34,770 61,174 59,525 External 6,470 6,875 9,902 16,735 24,189 20,058 18,559 28,395 28,975 Subsidies 687 0 1,416 20,413 33,872 65,916 59.725 66,269 41,586 Petroleum subsidies 687 0 1,416 9,814 28,607 40,923 51,135 53,774 30,377 Non-petroleuin subsidies 0 0 0 10,599 5,265 24,993 8,590 12,495 11,209 Other Current Expenditures 793 1,923 1,733 756 2,674 4,271 11,996 9,433 10,043 Development l:xpenditurcs 28,430 27,201 32,928 36,311 52,824 57,638 25,926 45,461 52,299 1. Rupiah Financiig 18,592 18,192 21,028 21,926 26,643 33,255 9,326 21,712 26,469 a. Capital transfer to region 5.6711 5,488 6,472 7,512 13,575 12,451 0 0 0 h. Central government budget 12,922 12.704 14,556 14,414 13,068 20.804 9,326 21,712 26.469 2. Project financing with loreign loan 9,838 9,009 11,900 14,386 26,181 24,383 16,600 23,749 25,830 11. Balanced Funds () 0 0 0 0 0 33,894 81.477 94,532 1. Revenue sharing funds 0 0 0 0 0 0 3,418 20,259 24.600 2. General allocation iunds () 0 0 0 0 0 30,476 60,517 69,114 3. Special allocation funds 0 0 0 0 0 0 0 701 817 III Fund for Special Authonomy 0 0 0 0 0 0 0 0 3,437 /a Govcrnment new format since 1999/2000 and applied it to 1994/95 - 1998/99 /b Budget revisiott April 2001 Source: Mihistry of Finance. Table 21. Money Supply (MI), 1999-2001 (Rp. billion) End of Period Total Currency Demand deposits Change over period Amount (%) Amount (%) Amount (%) 1991 1 23,570 9,026 38.3 14,544 61.7 1,415 6.4 II 24,609 8,824 35.9 15,785 64.1 1,404 6.1 III 25,805 9,025 35.0 16,780 65.0 2,823 12.3 IV 26,342 9,346 35.5 16,996 64.5 2,523 10.6 1992 1 27,318 11,025 40.4 16,293 59.6 3,748 15.9 II 26,844 9,944 37.0 16,900 63.0 2,235 9.1 [II 27,626 10,440 37.8 17,186 62.2 1,821 7.1 IV 28,779 11,478 39.9 17,301 60.1 2,437 9.3 1993 1 30,592 12,324 40.3 18,268 59.7 3,274 12.0 II 31,563 12,386 39.2 19,177 60.8 4,719 17.6 III 35,041 13,106 37.4 21,935 62.6 7,415 26.8 IV 36,805 14,431 39.2 22,374 60.8 8,026 27.9 1994 1 37,908 15,340 40.5 22,568 59.5 7,316 23.9 11 39,886 15,825 39.7 24,061 60.3 8,323 26.4 III 42,195 17,555 41.6 24,640 58.4 7,154 20.4 IV 45,374 18,634 41.1 26,740 58.9 10,333 29.5 1995 1 44,908 18,902 42.1 26,006 57.9 7,000 18.5 II 47,045 19,186 40.8 27,859 59.2 7,159 17.9 HII 48,981 19,564 39.9 29,417 60.1 6,786 16.1 IV 52,677 20,807 39.5 31,870 60.5 7,303 16.1 1996 1 53,162 21,121 39.7 32,041 60.3 8,254 18.4 11 56,448 21,271 37.7 35,177 62.3 9,403 20.0 III 59,684 21,055 35.3 38,629 64.7 10,703 21.9 IV 64,089 22,487 35.1 41,602 64.9 11,412 21.7 1997 1 63,565 23,312 36.7 40,253 63.3 10,403 19.6 II 69,950 23,754 34.0 46,196 66.0 13,502 23.9 III 66,258 23,916 36.1 42,342 63.9 6,574 11.0 IV 78,343 28,424 36.3 49,919 63.7 14,254 22.2 1998 1 98,270 38,196 38.9 60,074 61.1 34,705 54.6 II 109,480 44,924 41.0 64,556 59.0 39,530 56.5 III 102,563 42,725 41.7 59,838 58.3 36,305 54.8 IV 101,197 41,394 40.9 59,803 59.1 22,854 29.2 1999 1 105,705 44,682 42.3 61,023 57.7 7,435 7.6 II 105,964 43,530 41.1 62,434 58.9 -3,516 -3.2 III 118,124 46,424 39.3 71,700 60.7 15,561 15.2 IV 124,633 58,353 46.8 66,280 53.2 23,436 23.2 2000 I 124,663 51,197 41.1 73,466 58.9 18,958 17.9 11 133,832 55,831 41.7 78,001 58.3 27,868 26.3 III 135,431 56,844 42.0 78,587 58.0 17,307 14.7 IV 162,186 72,371 44.6 89,815 55.4 37,553 30.1 2001 I 148,376 60,114 40.5 88,262 59.5 23,713 19.0 II 160,142 66,201 41.3 93,941 58.7 26,310 19.7 Source: Bank Indonesia. Table 22. Chanzes in Money Supply and Affecting Factors, 1990-2001 (Rp. billion) Public sector Claims Net claims on official Total change in broad Net on entities Claims on Net money supply (M2) End of foreign Central & public businesses & other Amount Percentage period assets Government enterprises individuals items (%) 1990 -2,171 -3,877 -921 35,809 -2,914 25,926 44.2 1991 7,499 -1,355 104 20,263 -12,083 14,428 17.0 1992 7,013 -1,292 492 15,257 -1,475 19,995 20.2 1993 -934 731 1,505 30,230 -5,383 26,149 22.0 1994 -4,428 -4,686 -485 37,845 1,064 29,310 20.1 1995 7,354 -7,472 1,305 47,504 -565 48,126 27.6 1996 18,015 -2,757 4,626 51,768 -5,658 65,994 29.6 1997 17,344 -16,486 5,031 132,031 -70,909 67,011 23.2 1998 73,692 17,513 6,389 93,032 31,112 221,738 62.3 1999 -12,581 425,287 /a -8,139 -291,550 -44,193 68,824 11.9 2000 81,637 123,060 -4,505 46,852 -143,096 100,823 16.4 2001 /b -30,440 357 -61 16.613 40,542 27,011 4.4 /a Includes effects of bank recapitalization /b January-August 2001 Source: Bank Indonesia. Table 23. Consolidated Balance Sheet of the Monetary System. 1990-2001 (Rp. billion) End of period 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 as of August Net foreign assets 16,122 23,621 30.634 29,700 25.272 32.626 50641 67,985 4,7 129,096 210.733 180,293 Domestic credit 93,142 112,154 126,611 159,077 192.225 233.088 284,507 404,396 521,759 649.833 _815240 832,148 Claims on public sector -4,322 -5,573 -6,373 -4,137 -8,834 -15,345 -15,694 -27,836 -3,505 416,119 534,674 534,970 Central government -12,202 -13,581 -14,873 -14,142 -18,828 -26,300 -29,057 -45,543 -28,037 397,257 520,317 520,674 Claims on public enterprises 7,904 8,008 8,500 10,005 9,994 10,955 13,363 17,707 24,532 18,862 14,357 14,296 Government-blocked account -24 0 0 0 0 0 0 0 0 0 0 0 Claims on private enterprises and individuals 97,464 117,727 132,984 163,214 201,059 248,433 300,201 432,232 525,264 233,714 280,566 297,179 Assets = liabilities 109,264 135,775 157,245 188,777 217,497 265,714 335,148 472,381 663,436 778,929 1,025,973 1,012,441 Import deposits 1048 966 890 1699 1.541 1,779 2.099 1,419 2,417 1.658 4.783 6379 Netotheritems 23.586 35.751 37,302 41,876 41,444 41.297 46.635 118.224 86,114 131,06 274.162 232,22 Money and quasi money 84.630 99.058 119_053 145.202 174.512 222,638 288,632 355.643 577,381 646,205 747.028 774.037 Money 23,819 26,341 28,779 36,805 45,374 52,677 64,089 78,343 101,197 124,633 162,186 166,851 Currency 9,094 9,346 11,478 14,431 18,634 20,807 22,487 28,424 41,394 58,353 72,371 69,136 Demand deposits 14,725 16,995 17,301 22,374 26,740 31,870 41,602 49,919 59,803 66,280 89,815 97,715 Quasi money 60,811 72,717 90,274 108,397 129,138 169,961 224,543 277,300 476,184 521,572 584,842 607,186 Source: Bank Indonesia. Table 24. Banking System Credits by Economic Sector. 1990-2001 /a (Rp. billion) 1990 1991 /e 1992 1993 /f 1994 1995 1996 1997 1998 1999 2000 2001/g Agriculture 7,176 8465 10,281 12,057 13,860 15,525 17.630 26,002 39,308 23.777 19,503 21.407 In rupiah 6,884 7,979 9,173 10,368 12,026 13,661 15,158 20.340 29,430 21,139 15,028 16.223 Inforeign exchange 292 486 1,108 1,689 1,834 1,864 2,472 5,662 9,878 2,638 4,475 5,184 Mining/b 615 743 762 777 799 913 1.693 5,316 5,909 3,697 6,680 4,159 In rupiah 570 614 605 416 359 434 716 2,769 2,729 879 2,879 2,558 Inforeignexchange 45 129 157 361 440 479 977 2,547 3,180 2,818 3,801 1,601 Manufacturing industry Ic 30.502 33,131 37,458 51,432 60.211 72,088 78.85 111,679 171,668 84259 106,782 112,780 Inrupiah 25,002 24,828 26,197 36,334 42,236 48,476 51,984 56,123 85.594 35,561 35,697 44,665 In foreign exchange 5,500 8,303 11,261 15,098 17,975 23,612 26,866 55,556 86.074 48,698 71,085 68,115 Trade 29,737 33049 3244 37.794 44372 54,224 70586 82264 96364 43,288 44099 453743 In rupiah 27,267 28,842 28,100 31,470 36,840 43,608 55,763 57,471 59,830 29,687 30,601 35,535 In foreign exchange 2,470 4,207 4,844 6,324 7.532 10,616 14,823 24,793 36,534 13,601 13,498 10.208 Service rendering industry/d 17897 20,066 25899 35.82 50,80 66,584 91.655 113,569 139.124 43,161 44,316 46,865 In rupiah 14,943 16,683 21,979 30,167 42,453 57,432 78,392 85,598 101,129 26,332 23,784 28,209 In foreign exchange 2,954 3,383 3,920 5.657 8,353 9,152 13,263 27.971 37,995 16,829 20,532 18,656 Others 11,769 17.371 15,574 12.387 18.832 25,277 32.507 39,304 35.053 26.951 47,620 78,343 Inrupiah 11.197 16,326 14,653 12,374 18,824 25,265 32,478 39,233 34,406 26.929 44,493 54,752 Inforeignexchange 572 1,045 921 13 8 12 29 71 647 22 3,127 23,591 IQW9 112825 2218888 2222 2 2629 02 In rupiah 85,863 95,272 100,707 121,129 152,738 188,876 234,491 261,534 313,118 140,527 152,482 181,942 In foreign exchange 11.833 17,553 22,211 29,142 36,142 45,735 58,430 116,600 174,308 84,606 116,518 127,355 /a Credits outstanding at end of period. Includes investment credits, KIK and KMKP. Excludes interbank credits, credits to central govemment and to nonresidents, bridging finance credit, foreign exchange component of project aid, local cost of investment fund accounts. and credit extended to bank branches abroad. /b Includes credits to PERTAMINA for repayment of foreign borrowing. /c Processing of agricultural products is classified under manufacturing industry according to ISIC 1968 /d Credits for electricity, gas and water supply are included in service rendering industry sector. /e Since 1991 excludes Bank Indonesia /f As of 1993 includes Commercial Banks ex Non-Bank Financial Institutions. /g As of August 2001 Source: Bank Indonesia. Table 25. Bankine Credits Outstandina in Rtzpiah and Foreien Exchange by Group of Banks, 1990-2001/a (Rp. billion) 199( 1991 1992 1993 1994 1995 1996 1997 199S 1999 2(10W 2(XI/d Bank Indonesia direct credits /h 718 783 771 158 1330 7)1 26 50 40 38 36 36 Inrupiah 718 783 771 158 130 71 26 50 40 38 36 36 In foreign exchange 0 0 () 0 0 0 0 0 0 0 0 () State banks 553826 59,861 68236 71,760 80.010 93,480 108,925 153.266 220,747 112_28 102061 l_ 1187 In rupiah 50.648 52,628 58.133 59,738 68,085 79.394 93,051 113.436 160.113 84.1)38 68.489 75.446 In foreign exchange 5,178 7,233 10,103 11,805 11,925 14.086 15,874 39,830 60.634 28,250 33,572 31.741 Private national banks/c 34,975 44,452 45.352 63.995 90,50 164 188 156.412 176,262 199,931 2805 92531 112.763 In rupiah 31,458 39,467 39,685 55,076 76,506 99,466 13(1.194 135,475 139,155 46.047 66.281 84,821 In foreign exchange 3.517 4.985 5,667 S,919 13.998 17.420 26,218 40,787 60.776 16.758 26.250 27.942 Foreien banks 6177 8,512 9.330 14,733 18366 24.245 27,584 4606 6.748 5040 7440 67.940 In rupiah 3,039 3,177 2,889 6315 8,147 10.016 11.245 12,623 13.850 10,442 17,712 21,675 In foreign exchange 3,138 5.335 6,441 8,418 10.219 14,229 16,339 35,983 52,898 39,598 56,696 46,265 TotaL 979 130 ! 2 150429 890 234682 294 378.184 487466 2251 1 71 269036 2879 In rupiah 85,863 96,055 lOt1478 121,287 152.868 188,947 234,516 261.584 313.158 140,565 152,518 181,978 In foreignexchange 11,833 17,553 22,211 29,142 36,142 45,735 58,431 116,600 174,308 84,6(6 116.518 105,948 /a Credits outstanding at end of period. Includes investment credits. Excludes interbank credits, credits to Central Government and to non-residents, bridging finance credit, foreign exchange components of project aid, local cost of investment fund accounts and credits extended to bankd branches abroad. lb Excludes liquidity credits, includes credits to Pertamina for repayment for foreign borrowing. /c Includes regional gevernment banks. Id As of August 2001. Source: Bank Indonesia. Table 26. Commercial Banks' Outstanding Investment Credits in Rupiah and Foreign Exchange bv Economic Sector. 1990-2001 (Rp. billion) End of period 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001/b Credits outstanding/a 20_734 25.748 35.223 42.713 47,136 59.274 70,443 100_735 141464 57.691 65_256 78.099 Agriculture 4,520 5,450 7,050 8,730 9,865 10,564 11,737 14,629 17,250 11,615 10,810 13,084 Mining 373 459 459 310 196 256 405 1,321 2,029 1,329 2,884 3,022 Manufacturing industry 8,920 10,484 15,416 17,371 19,516 23,159 24,248 35,094 49,801 22,981 26,210 35,117 Trade 2,157 3,372 4,099 7,192 6,154 8,468 11,891 17,928 24,299 7,107 7,781 8,156 Service rendering industry 4,307 5,032 7,150 9,110 11,405 16,827 22,162 31,763 48.085 14,659 17,571 18,720 Others 457 951 1,049 0 0 0 0 0 0 0 0 0 /a Excludes Small Scale Investment Credits, investment credits to the Central Government and to non resident, bridging finance credit, foreign exchange components of project aid, and local cost of investment fund accounts and credit extended bank branches abroad. /b As of August 2001. Source: Bank Indonesia. Table 27. Commercial Banks' Outstanding Funds in Rupiah and Foreign Exchange by Group of Banks, 1990-2001 /a (Rp. billion) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 As of Aug Deposits State Banks 40,638 41,812 52,600 61,684 64,283 75,920 90,434 133,042 271,554 286,427 328,457 327,776 Private Banks 33,951 43,143 51,079 67,541 88,925 117,451 164,979 177,193 235,605 252,880 279,037 286,540 Regional Development Banks 2,550 3,228 3,697 4,773 6,183 7,812 8,522 8,796 10,932 14,017 19,896 33,469 Foreign Banks 6,016 6,935 7,474 8,681 11,015 13,581 17,783 38,582 55,433 72,294 92,989 85,153 Total 83,155 95,118 114.850 142679 170406 21476 8 3 24 2 18 720,379 732,938 Share in Total Deposits State Banks 48.9 44.0 45.8 43.2 37.7 35.4 32.1 37.2 47.3 45.8 45.6 44.7 Private Banks 40.8 45.4 44.5 47.3 52.2 54.7 58.6 49.5 41.1 40.4 38.7 39.1 Regional Development Banks 3.1 3.4 3.2 3.3 3.6 3.6 3.0 2.5 1.9 2.2 2.8 4.6 Foreign Banks 7.2 7.3 6.5 6.1 6.5 6.3 6.3 10.8 9.7 11.6 12.9 11.6 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 Annual Growth Rate in Deposits StateBanks 36.7 2.9 25.8 17.3 4.2 18.1 19.1 47.1 104.1 5.5 14.7 1.1 Private Banks 72.7 27.1 18.4 32.2 31.7 32.1 40.5 7.4 33.0 7.3 10.3 1.1 Regional Development Banks 52.3 26.6 14.5 29.1 29.5 26.3 9.1 3.2 24.3 28.2 41.9 1.9 Foreign Banks 81.5 15.3 7.8 16.1 26.9 23.3 30.9 117.0 43.7 30.4 28.6 1.1 Total 52.9 14.4 20.7 24.2 19.4 26.0 31.2 26.9 60.4 9.1 i15.1 1.1 /a Demand, time and savings deposits including non recident and central government accounts Source: Bank Indonesia. Table 28. Interest Rates. 1990-2001 (Percent per year) Time Deposits Year Interbank State bank Private national bank call money SBI 1 3 6 12 24 1 3 6 12 24 /a /b mo mos mos mos mos mo mos mos mos mos 1990 14.3 16.2 21.2 20.6 19.4 18.1 18.5 22.6 21.4 20.5 19.8 21.0 1991 14.7 19.3 20.0 21.3 22.3 22.5 21.0 21.8 22.6 23.3 23.4 18.6 1992 11.9 15.8 17.4 18.6 19.8 20.9 21.0 19.2 20.4 21.2 21.7 18.7 1993 8.4 10.4 11.2 10.8 14.3 15.7 18.5 14.8 15.8 16.6 17.1 17.4 1994 10.0 10.4 9.7 9.9 11.6 12.1 14.1 13.6 13.8 13.8 14.0 17.8 1995 13.8 14.2 14.4 13.9 14.8 13.9 14.0 17.4 17.4 17.2 16.0 16.2 1996 14.0 13.8 15.2 14.9 16.3 16.0 15.4 17.5 17.8 17.7 17.3 16.6 1997 29.2 14.7 17.7 17.9 15.3 15.5 15.4 22.0 21.0 17.4 17.2 16.9 1998 63.3 52.0 47.4 38.5 25.6 22.3 15.9 49.7 40.3 26.9 21.4 19.0 1999 23.6 23.4 23.3 25.8 25.2 27.8 17.2 23.7 25.9 24.6 25.4 21.8 2000 10.3 12.3 11.4 12.7 12.9 15.5 13.8 11.1 12.2 12.5 12.7 14.3 2001 /c 14.8 16.0 14.1 15.0 14.8 13.8 16.4 13.9 14.7 14.4 12.3 16.1 /a Average rate of overnight interest rate on Interbank Call Money transactions recorded at the Jakarta Clearing House. /b Thirty days Bank Indonesia Certificate transactions. /c Average rate January - September 2001. Source: Bank Indonesia. Table 29. Principal Apricultural Products by Subsectors, 1990-2000 (thousand tons) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Food crops Paddy/a 45,179 44,689 48,240 48,181 46,641 49,744 51,101 49,377 49,200 50,855 51,899 Corn 6,734 6,256 7,995 6,460 6,869 8,246 9,307 8,771 10,169 9,204 9,677 Cassava 15,830 15,954 16,516 17,285 15,729 15,441 17,002 15,134 14,696 16,459 16,089 Sweet potato 1,971 2,039 2,171 2,088 1,845 2,171 2,018 1,847 1,935 1,666 1,828 Soya beans (shelled) 1,487 1,555 1,870 1,709 1,565 1,680 1,517 1,357 1,306 1.383 1,01S Peanuts (shelled) 651 652 739 639 632 760 738 688 692 660 737 Fishery Saltwater fish 2,370 2,505 2,692 2,886 3,080 3,293 3,384 3,613 3,490 3,930 4,076 Freshwater fish 793 807 851 909 900 971 1,069 967 976 1,098 1,041 Cash crops Rubber 1,275 1,284 1,399 1,476 1,499 1,573 1,574 1,553 1,661 1,715 1,752 Coconutlcopra 2,332 2,337 2,455 2,588 2,649 2,704 2,761 2,704 2,778 2,789 2,778 Coffee 413 419 437 439 450 458 459 428 514 511 495 Cloves 66 84 73 67 78 90 89 59 67 68 68 Tea 155 159 154 165 139 154 169 154 167 162 159 Sugar 2,119 2,253 2,307 2,329 2,454 2,077 2,160 2,187 1,929 1,907 2,093 Tobacco 156 161 112 121 130 140 151 210 105 105 109 Pepper 70 69 65 66 54 59 52 47 65 65 65 Palm oil 2,413 2,658 3,266 4,003 4,008 4,480 4,899 5,380 5,640 5,466 5,771 Forestry /b Log 25,312 23,892 28,267 26,848 24,027 24,850 26,069 29,520 19027 20,620 13,798 Sawn Timber 3,117 3,006 3,534 2,244 1,730 2,014 3,565 2,613 2707 2,060 3.021 Plywood 9,415 9,124 9,874 9,924 8,066 9,122 10,270 6,710 7155 4,612 3,711 /a Dry husk paddy grain ready for milling. /b In thousand cubic meters, and in GOI FY -April to March until the year 1999, and April to December in FY 2000. Source: Central Bureau of Statistics, Ministry of Agriculture, and Ministry of Forestry. Table 30. Production of Maior Crons by TyDe of Estate. 1990-2000 (thousand tons) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Smallholders Rubber 913 919 1,030 1,102 1,139 1,191 1,193 1,174 1,243 1,295 1,240 Coconut/copra 2,313 2,317 2,426 2,558 2,601 2,662 2,687 2,620 2,690 2,700 2,689 Coffee 384 390 409 410 422 430 436 396 470 466 1.503 Tea 31 32 32 37 30 33 34 33 34 34 34 Sugar 1,609 1,610 1,653 1,685 1,673 1,368 1,512 1,196 759 760 908 Tobacco 152 157 110 119 128 137 148 206 102 102 102 Pepper 70 69 65 66 54 59 52 47 64 65 65 Cotton 33 13 13 14 14 8 8 7 5 7 5 Palm oil 0 0 0 582 839 1,001 1,134 1,293 1,348 1,441 1,503 Private estates Rubber 145 146 163 166 172 182 179 190 226 224 228 Coconut/copra 19 20 29 30 27 28 55 63 66 66 67 Coffee 13 13 11 12 11 11 10 11 19 19 19 Cloves 2 2 2 2 2 2 2 1 2 2 2 Tea 29 30 28 33 31 34 39 33 42 40 39 Sugar 204 257 178 251 272 287 265 630 424 512 612 Tobacco 0 0 0 0 0 0 0 0 0 0 0 Pepper 0 0 0 0 0 0 0 0 0 0 0 Cotton 0 0 0 0 0 0 0 0 0 0 0 Palm oil 789 884 1,077 1,370 1,597 1.864 2.058 2.287 2,435 2,553 2,658 Government estates Rubber 217 219 205 208 188 200 202 188 193 196 200 Coconut/copra 0 0 0 18 21 15 19 21 22 22 23 Coffee 16 16 17 17 18 17 13 21 26 26 26 Cloves 0 0 0 0 0 0 0 0 0 0 0 Tea 95 97 94 95 78 87 97 88 91 88 83 Sugar 306 386 476 394 509 422 317 365 305 217 321 Tobacco 4 4 2 2 2 3 3 3 2 2 2 Pepper 0 0 0 0 0 0 0 0 0 0 0 Cotton 0 0 0 0 0 0 0 0 0 0 0 Palm oil 1,624 1,774 2,189 2,051 1,572 1,614 1,707 1,800 1,857 1,995 2,097 Source: Central Bureau of Statistics and Ministry of Agriculture. Table 31. Rice-Area Harvested, Production and Yield, 1990-2001 Area Average Paddy Rice Year harvested yield output output /a Growth (thd. ha) (tons/ha) (thd. tons) (thd. tons) (%) 1990 10,502 4.3 45,179 29,366 1.0 1991 10,282 4.3 44,689 29,048 -1.1 1992 1 1,1103 4.3 48,240 31,356 7.9 1993 11,013 4.4 48,181 31,318 -0.1 1994 10,734 4.3 46,641 30,317 -3.2 1995 11,439 4.3 49,744 32,334 6.7 1996 11,570 4.4 51,102 33,216 2.7 1997 11,141 4.4 49,377 32,095 -3.4 1998 11,716 4.2 49,200 31,980 -0.4 1999 11,963 4.3 50,855 33,056 3.4 2000 1 1 ,793 4.4 51,899 33,734 2.1 2001 /b 11,412 4.4 50,096 32,563 -3.5 a/ Estimated on the basis of a conversion factor of 0.68 from paddy into rice for the years prior to 1989, and 0.65 for the years 1989 and after. b/ Projections. Source: Central Bureau of Statistics. Table 32. Production of Minerals. 1990-2001 Crude oil Tin Copper ore Nickel Iron sand Natural Year and condensate concentrate concentrate ore Bauxite Coal concentrate Gold Silver gas (Dm]n bb]s) < ------------------------------ Metric tons ----------------------------------- > (kg) (kg) (mmscf) 1990 534 30 399 2,217 1,206 10,462 145 9,355 62,158 2,828 1991 581 30 657 2,300 1,406 14.143 173 13,889 77,897 2,462 1992 551 28 907 2,512 804 23,120 288 37,987 99,954 2,583 1993 547 30 928 1,976 1,320 27,605 341 42,097 90.301 2,662 1994 551 31 1,065 2,312 1,342 31,238 335 42,605 107,026 2,942 1995 547 38 1.517 2,513 899 41.517 348 62,818 265,222 2,999 1996 554 51 1,759 3,427 842 47,339 425 83,660 254,893 3,167 1997 549 55 1,841 2,830 809 52,074 487 89,979 270,392 3,189 1998 538 54 2,640 3,233 1,056 60.321 561 124.019 348,974 2,979 1999 495 48 2,645 3,235 1,143 70,703 562 129 292 3,064 2000 518 50 3,194 3,349 1,175 76,820 538 118 335 2,907 2001 /a 165 12 841 991 231 19,758 136 29 101 961 /a Data January - April 2001 Source: Central Bureau of Statistics. Table 33. Fuel Production by Company, 1990-2001 (thousand bbls) Crude Oil Condensate Natural gas (000 MSCF) Pertamina Production sharing Contract Pertamina Production sharing Contract Pertamina Production sharing Contract of Work Contract of Work Contract 1990 24,137 427,447 12,726 187 65,807 157 260,878 1,868,647 1991 24,816 479,698 10,166 192 65,832 135 256,290 2,118,336 1992 24,613 451,912 9,405 1(9 64,677 132 270,882 2,308,299 1993 27,196 450,736 7,213 54 62,134 97 283,329 2,380,557 1994 23,761 462,694 0 67 64,624 0 300,233 2,644,745 1995 20,656 465,812 0 273 60,155 0 329,675 2,675,683 1996 27,251 463,570 0 60 63,042 0 345,193 2,821,427 1997 31,423 454,159 0 95 59,034 0 340,451 2,747,548 1998 43,090 438,565 0 518 55,327 0 338,012 2,641,448 1999 41,161 400,183 0 209 53,972 0 327,584 2,740,238 2000 45,683 419,700 0 720 51,401 0 347,662 2,559,665 2001 /a 15,137 132,909 0 165 16,856 0 116,799 843,887 /a Data January - April 2(01 Source: Ministry of Mines and Energy. Table 34. Domestic Sales of Petroleum Products. 1990-2001 (thousand bbls.) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Aviation gas 59 58 54 51 50 51 51 46 35 35 34 Aviation turbo 4,607 4,889 5,315 6,039 10,188 10,969 7,206 7,325 4,980 4,107 4,680 Regular gasoline 39,005 43,023 45,308 46,733 52,463 57,798 63,747 67,700 68,576 71,978 78,125 Kerosene 49,472 50,573 53,850 54,242 56,110 58,188 61,656 62,302 63,407 72,424 78,322 Motor diesel 72,950 80,837 92,061 104,460 100,730 106,755 119,138 136,509 122,967 126,721 136,481 Industrial diesel 10,720 10,806 11,318 11,445 11,174 10,069 8,679 8,821 7,950 9,491 9,125 Fuel oil 24,847 28,899 29,313 30,154 25,456 25,543 24,524 31,607 32,681 33,935 37,471 Total 202.707 219,085 237,219 253.124 256,171 269,373 285,00 314,311 3 94 18692 339524 Source: Ministry of Mines and Energy. Table 35. Domestic Prices of Petroleum Products, 1985-2001 (Rp./liter) Apr-i, 1985- Jul-10, 1986- May-25, 1990- Jul-lt, 1991- Jan-8, 1993- May-5, 1998- May-16, 1998- Oct-2000 - June 16, 2001 Jul-9, 1986 May-24, 1990 Jul-10, 1991 Jan-7, 1993 May-4, 1998 May-16. 1998 Sep-2000 June 15, 2001 - Present Subsidy price /c Aviation gas 330 300 330 400 420 600 /b /b /b Aviation turbo 330 300 330 400 250 600 /b /b /b Premium gasoline 440 440 /a /a /a /a /a /a /a Regular gasoline 385 385 450 550 700 1,200 1,000 1,150 1450 Kerosene 165 165 190 220 280 350 280 350 400 Motor diesel 242 200 245 300 380 600 550 600 900 Industrial diesel 220 200 235 285 360 350 350 400 600 Fuel oil 220 220 220 220 240 350 350 350 400 /a Discontinued since May 20, 1990 /b No longer regulated by the government since May 16, 2000 /c Since August 2001, there are four levels of prices; subsidy prices, 100%, 50% of world market prices and bunker international pfices. Source: Ministry of Mines and Energy. Table 36. Indonesia Wholesale Price Index. 1990-2001 /a (1983 = 100) /b Sectors'/c 1990 1991 1992 1993 1994 1995 1996 1997 1998 1998 1999 2000 200 1/d Agriculture (40) 191 206 225 251 298 355 400 445 750 298 410 459 594 Mining&quarrying(8) 169 188 201 218 237 266 296 318 396 173 214 236 281 Manufacturing(I 183) 176 194 206 218 231 256 265 275 455 217 268 278 315 Irnports (50) 191 201 208 211 215 230 243 261 598 286 289 316 368 Exports (46) 159 153 159 (57 157 178 203 238 592 417 366 461 540 Excluding petroleum & gas (43) 195 203 212 223 255 298 306 353 994 444 370 393 482 Petroleuim (31 148 139 143 137 128 142 173 204 474 348 355 634 686 General index 327 178 (87 197 204 215 240 259 282 568 288 320 363 430 General index excluding exports (281) 185 199 210 221 235 261 280 298 560 250 298 320 430 General index excluding exports of petroleurn (324. 182 198 211 227 250 285 303 326 588 284 311 333 397 /a Figures show the average for the year. /b Startingl998 onward - present based on 1993=l100. /c Figures within brackets ( ) under sector column indicate number of items represented in that sectors /d Index of July 2001 Source: Central Buireau of Statistics. Table 37. Consumer Price Index. 1990-2001 /a /b End of Foodstiff Housing Clothinig Educationl Prepared food Ilealth 'l'ransport and Others Total Change period and beverages Communication (percent) /c 1990 109.3 107.8 111.2 - - 112.4 112.4 5.6 1991 118.3 128.2 117.1 - - - 126.7 123.1 9.4 1992 127.4 136.8 124.1 - - - 137.6 131.9 7.2 1993 136.3 154.9 135.7 - - 150.7 145.1 10.0 1994 151.1 170.1 144.5 - - - 158.3 157.4 8.5 1995 171.2 185.1 153.8 - - - 168.4 172.3 9.4 1996 187.4 194.8 164.2 - - - 184.6 185.9 7.9 1997 108.7 1(05.2 105.5 104.2 108.5 109.1 103.7 - 106.1 6.1 1998 209.2 173.9 141.7 191.7 179.5 147.0 145.1 - 168.2 58.5 1999 261.5 164.8 230.7 165.3 215.9 218.1 169.4 202.8 20.5 2000 249.0 175.2 245.3 183.9 229.5 229.9 182.8 - 210.3 3.7 2001 /c 266.7 194.0 266.1 209.0 258.7 254.1 2(05.6 231.9 10.3 /a Consumer price index average of the year. /b Before 1997 using base period (April 1988-March 1989 = I 00). Starting 1997 using new base period (1996= 100), and classified into 7 components. /c Average index of the January - October 2001. Source: Cettlral Bureau of Statistics. Table 38. Approved Foreign Direct Investment by Sector, 1990-2001 /a (US$ million) Sector 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001/b Agriculture 117 14 66 138 690 1.153 1.306 437 965 413 390 280 Forestry 20 1 138 22 0 0 136 0 0 70 50 I Fishery 20 11 28 0 40 231 80 27 33 9 5 81 Minin_& quurving 116 0 2,312 0 0 0 1.697 2 0 14 1 106 Manufacturing 5,2 3,970 5,669 3423 18,739 30441 19,884 23.017 8,388 6,929 10,634 3,902 Food 99 382 213 141 1,235 1,332 691 573 342 681 701 122 Textiles & leather 1,094 532 591 419 396 471 515 373 217 240 401 301 Wood&woodproducts 218 62 34 50 68 263 101 70 71 113 157 9 Paper & paper products 730 822 686 202 5.120 2,540 2,907 5,353 41 1.412 88 728 Chemicals & Pharmaceutical 1,991 923 2,342 1,171 7,743 19,368 7,362 12,376 6,179 3,268 7,407 1,715 Nonmetallic minerals 125 133 841 98 632 289 793 1,457 237 110 10 100 Basic metals 825 197 47 186 2,082 292 651 357 394 501 831 464 Metal products 460 856 863 1,114 1,423 2.258 2,939 2,332 891 593 1.005 0 Others 281 62 52 42 40 3.628 3,925 127 17 10 35 464 Construction 77 26 41 97 77 206 297 307 198 153 161 42 Hotels 874 4,019 919 394 344 999 1717 463 451 229 257 263 Transpart & communications 803 167 14 85 145 5,539 695 5,900 79 103 I217 315 Real estate and business services 902 570 1136 3 292 3604 1,314 4.076 1398 271 171 302 55 Toa 9,493 8,9 4 10,323 8144 39.915 29929 33.833 356 10892 15284 57 /a Intended Capital Investment. Amount represents original approvals plus expansions minus cancellations. /b Preliminary data January to August 2001 Source: Investment Coordinating Board. Table 39. Approved Domestic Investment by Sector, 1990-2001 /a (Rp billion) Sector 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001/b Agriculture, fishery andlivestock 6.442 3,468 1,952 2835 7,140 8,621 16,026 14,642 4,772 1,586 1,543 1,239 Forestry 593 310 534 258 262 1,476 46 166 543 749 52 43 Mining 155 182 236 69 112 205 460 126 116 30 3 6 l,012 Manufacturing 39.850 27.624 19.U79 24_037 31_933 43.962 62.703 79.334 44.908 94.335 81.994 36.024 Textiles 12,561 3,646 2,546 3,539 5,518 7,177 3,366 6,831 1,138 2,524 2,386 1,926 Chernicals 7,894 8,425 3,299 7,689 5,150 8,740 13,335 22,497 15,583 2,431 56,436 19,889 Electrical goods 0 0 0 5 12 620 3,486 11,639 3,469 51,917 274 234 Other manufacturing 19,395 15,553 13,235 12,804 21,253 27,425 42,517 38,367 24,718 37,463 22,898 13,975 Construction 87 275 215 187 731 848 1,550 877 1,992 395 843 1,973 Hotels 42703 3.895 3,115 3,051 4342 3792 5019 2588 1150 1713 154 1,636 Real estate 1.783 2.633 536 3,049 3.336 4.659 8,688 4.301 1,548 996 293 438 Others 2898 785 3.675 5,965 5,434 6.290 6224 79 5,720 1,356 3.227 1,570 Total 56.511 41,078 29,342 39450 53,289 69,853 100,715 119,873 60,749 101,160 88,143 43,935 /a Figures refer to intended capital investments, and reprcsent original approvals pius approved expansion minus cancellations. /b Preliminary data January to August 2001 Source: Investment Coordinating Board. 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