51205 INDONESIA Amid slowing world trade and regional growth, the as the intermediation margins of banks ­ allowed base Megawati administration has inherited a fragile economy. money to grow faster than warranted. In addition, during Financial markets gave the new team a strong vote of this period, a range of uncertainties impeded the confidence but the honeymoon will be short. The management of Bank Indonesia, including controversy over Government faces a daunting agenda, including: maintaining possible amendments to the central bank law. macroeconomic stability, accelerating bank and corporate The real economy. Recovery in the real economy also restructuring, regaining fiscal sustainability, and ensuring remains fragile. Despite the fact that the second quarter continued service delivery to the poor while rapidly GDP results were better than expected, the first half results decentralizing government. reveal a marked slowdown in growth3.4 percent over the same period the previous year (compared to 4.7 percent in MACROECONOMIC ROUNDUP the first semester of 2000). Growth in government Political developments. The last two months have consumption eased because of fiscal strains, but consumption growth held up well, despite a sharp decrease generated some cautious optimism in Indonesia. Following in consumer confidence amid political turmoil, and net a special session of the Peoples' Consultative Assembly, exports declined substantially in the wake of the global there was a smooth and peaceful transfer of presidential slowdown (see below). But the big surprise was fxed i power from Abudurrahman Wahid to Megawati capital formation which, defying pervasive evidence of Soekarnoputri, ending months of heightened social tensions investor pessimism, climbed significantly in the first half of and political uncertainty. The new President earned general 2001, maintaining a trend that began in early 2000. Part of acclaim in the press for her new cabinet appointments ­ this could be statistical artifact, owing to the choice of especially her choice of professionals to hold key economic investment deflator. But it could also indicate increased portfolios. The new administration's economic team maintenance and rehabilitation of capital stock as growing promptly initiated negotiations with the IMF and signed a manufacturing and rising capacity utilization have exacted a letter of intent on August 27, 2001 (Box 1). The new letter toll on existing plant and machinery. In export industries, it of intent emphasizes measures to restore macroeconomic may reflect genuine investment in new capacity as firms stability and re-start the stalled structural reform program in responded to high profitability in the wake depreciation in the bank and corporate sectors. the currency. Despite this, however, investment continues to be below pre-crisis levels. The exchange rate . The markets responded favorably to these developments. After depreciating virtually Slower GDP growth in 2001 has been the result of a continuously throughout 2000 and the first half of 2001, the slowdown in virtually all sectors of the economy ­ but this Rupiah had reached Rp. 11,600 per US dollar by May 28, was particularly pronounced in some of the non-tradable 2001, its lowest value since 1998. But the resolution of the subsectors, including construction, transport, and finance. political crisis sparked a rally that carried the Rupiah to Rp. Puzzlingly, other non-tradable subsectors, such as utilities 8,500 per US dollar, representing a 25 percent appreciation and retail and wholesale trade, continued to perform in less than three months. Despite these gains, however, the relatively well, showing few signs of being affected by the Rupiah remains weaker than other regional currencies in real rest of the economy. terms. Moreover, in recent days, the Rupiah has once again Slower GDP growth in 2001 has been the result of a started to decline, reflecting a deteriorating external slowdown in virtually all sectors of the economy ­ but this payments position. was particularly pronounced in some of the non-tradable Inflation and interest rates. The weakness in the Rupiah subsectors, including construction, transport, and finance. combined with administrative price increases (for fuel), Puzzlingly, other non-tradable subsectors, such as utilities government wage hikes, and accelerated monetary growth, and retail and wholesale trade, continued to perform to push inflation from virtually zero in April 2000 to a two - relatively well, showing few signs of being affected by the year high of over 13 percent in July 2001 (although it rest of the economy. subsided marginally to 12.2 percent in August). Monetary policy was slow to respond as Bank Indonesia ­ concerned with the impact of higher interest rates on the budget as well Indonesia 2 Box 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 $10-11 billion. · Submit an amended version of the Bankruptcy Law to Parliament by end-2001. · The Anti-Corruption Commission to become fully effective in coming months. Public Sector and Other Structural Reforms · BPKP audit of the Reforestation Fund will be completed by end-2001. · Publish audits and announce corrective actions of key SOEs by end-September. · Publish audit of the tax office by end-September and announce corrective actions by mid-October. Indonesia 3 Figure 1: A macroeconomic snapshot, January 2000 ­ August 2001 The Rupiah depreciated from January 2000 to May 2001 The stock exchange declined before climbing sharply. (Jakarta stock exchange composite index and one month Bank (Rupiah per US$, spot rate daily) Indonesia certificate rate) Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 JSX index BI's cert.rate (%) 20 7,000 7,000 720 670 18 BI's certificate 8,000 8,000 rate 620 16 570 9,000 9,000 14 520 10,000 10,000 470 12 420 10 11,000 11,000 370 JSX composite indices 320 8 12,000 12,000 Oct-99 Jan-00 May-00 Oct-99 Feb-00 May-00 Sep-00 Dec-00 Apr-01 Source: Bloomberg Source: CBS Inflation climbed. After initially falling, interest rates climbed too. (12 month percentage change in consumer & food price index) (One month Rupiah deposit rate in Indonesia) 13.0 12 General CPI 10 12.0 Domestic Banks 8 6 Food Price 11.0 4 2 10.0 Foreign Banks 0 9.0 -2 -4 8.0 -6 -8 7.0 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Source: CBS Source: Bank Indonesia GDP growth remained positive. Fixed capital formation climbed steadily (% Y on year and quarterly growth) (GDP, consumption and investment index, Q11998=100) 10 120 Private 110 Consumption 5 GDP 100 0 90 -5 80 Fixed Capital -10 Formation 70 -15 yoy growth 60 qq growth -20 50 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 1997 1998 1999 2000 2001 1998 1999 2000* 2001** Source: CBS Source: CBS Indonesia 4 Table 1: GDP growth slowed in 2001 Year-on-year export growth has been negative now for four (Growth in p ercent compared to same semester the previous year) months in a row, mirroring the performance of other countries in the region. Non-oil exports for July 2001 was 2000 2001 10.9 percentage points below July 2000, the second straight Sem. 1 Sem. 2 Sem.1 month for which there was a double digit decline -- the first GDP growth 4.7 4.8 3.4 time this has happened since June and July 1999. Electrical Non-oil GDP 5.1 5.4 3.9 products destined for the United States and Japan have been By expenditure hardest hit. In addition, a shutdown in Acehnese gas category production triggered by regional unrest affected gas exports, Consumption 2.8 5.0 5.4 and declining world oil prices dampened oil export revenues. Household 2.9 4.3 5.3 The deceleration in domestic demand and weaker exports Government 1.6 11.9 5.8 meant that imports also declined for the first time in July Investment 16.8 18.9 17.7 2001. The slowdown has been marked, as one would Exports 18.1 14.1 14.4 Imports 4.4 32.0 34.4 expect, in imports of intermediate goods (notably in chemical products), while consumer goods have remained By sector reasonably steady. Tradables Agriculture -2.5 6.3 1.5 External payments and international reserves. Official Mining & quarrying 1.8 2.8 1.7 foreign exchange reserves drifted down from $29.4 billion in Manufacturing 7.7 4.8 4.2 end-2000 to $28.6 billion in end-August, 2001. But this Non-tradables relatively stable reserve position belies the large imbalances Construction 10.6 3.1 0.5 between the official and private capital accounts. The Finance 5.5 3.9 2.7 official capital account continues to be in significant surplus, Transport 10.6 8.3 6.7 Utilities 9.8 7.8 8.6 thanks in large part to the Paris Club arrangement. But the Retail trade etc. 6.0 5.4 5.5 private capital account is in large deficit owing to continued Other 2.3 2.2 1.8 capital outflows and despite large amounts of exceptional financing (arrears and rescheduling of overdue private International trade . The combination of a global corporate debt). Arrears accumulation appears to be slowdown and resilient domestic demand has shrunk the declining gradually, however, as an increasing number of monthly trade surplus moderately ­ even though the indebted banks and corporates reach rescheduling downward pressure on the Rupiah throughout 2000 and the agreements with their creditors. Finally, net FDI continues first half of 2001 has given Indonesian products a strong to be significantly negative ­ partly because inflows have price advantage in domestic and international markets. slowed to a trickle but also because FDI corporates are paying off their debt.1 Figure 2: A Slowdown in International Trade Sluggish non-oil exports..... ....and, more recently, imports. y-o-y growth y-o-y growth $ Million $ Million rates rates 8,000 60 5,500 80 5,000 year-on-year growth 7,000 40 rates 60 year-on-year growth 4,500 6,000 rates 20 40 4,000 5,000 0 3,500 20 Non-oil 3,000 4,000 -20 0 exports Imports 2,500 -20 3,000 -40 2,000 1,500 -40 2,000 -60 May May May Mar Mar Mar Aug Aug Feb Jun Feb Jun Feb Jun Jul Jul Jul Nov Nov Jan Jan Jan Dec Dec Apr Apr Apr Sep Oct Sep Oct Aug Aug Mar Mar Mar Nov Nov Feb Jun Dec Feb Jun Dec Feb Jun Jul Jul Jul Apr Apr Apr Jan Jan Jan May May May Sep Oct Sep Oct 1999 2000 2001 1999 2000 2001 Source: BPS Source: BPS 1 Indonesia's FDI outflow estimates are overestimated because they include repayments by FDI companies to commercial creditors, including banks and NBFIs ­ which should strictly be included under "Other investment according to the IMF's Balance of Payments Manual Indonesia 5 Slow progress in bank restructuring and reform financial restructuring, including a swap of variable rate for fixed rate bonds. Bank financial performance. Bank restructuring and reform slowed in the first half of 2001 on account of a Bank Indonesia. Progress, albeit slow, continues to be difficult political and policy environment and deteriorating made in strengthening Bank Indonesia's supervisory economic conditions. To make matters worse, the financial capacity, even as it plans the establishment of an performance of the banking system continued to cause independent Financial Sector Supervisory Institution (FSSI). concern, largely because the banking system as a whole Work is ongoing to develop onsite supervision capability in remains under-capitalized ­ despite a large injection of all large banks, implement risk-based supervision, address government bonds. Although some banks have capital well the deficiencies related to the Basle Core Principles for in excess of 8 percent of risk weighted assets, a few are Effective Supervision, and publish individual bank data struggling to meet this prudential requirement by the cut-off monthly. As important, after discussion with parliament, the date of end-2001. Furthermore, some banks were re- Government is expected to replenish the Government capitalized with bonds bearing below-market, fixed interest Deposit Guarantee Fund in Bank Indonesia, in an amount of rates and the steady climb in market interest rates has Rp. 40 trillion, to enable IBRA to continue uninterrupted lowered their (mark-to-market) asset value. Higher interest with its bank restructuring program. rates narrowed intermediation margins, especially for those IBRA Asset recoveries. This is another area where banks holding large amounts of fixed interest rate bonds. progress continues to be difficult in the absence of adequate This further eroded the equity base of these banks and will political consensus and support. By end-July 2001, IBRA likely remain a recurring problem unless the Government was able to recover Rp. 13.3 trillion, about 34 percent of its swaps fixed rate bonds for variable rate bonds or allows total 2001 recovery target of Rp. 39.5 trillion.2 banks to mark their assets to market, and absorbs the fiscal costs of higher interest payments or additional Some 60 percent, or Rp. 7.8 trillion, was achieved through recapitalization. On the bright side, NPLs in banks declined the settlement, auction, or refinancing of the corporate loans by Rp. 28 trillion in 2000 as troubled loans got restructured. that IBRA holds. An additional Rp. 5 trillion in sales are in But little is known about the underlying quality of the the pipeline following special incentives for cash settlement, restructured loans and whether they could become non- and procedures are being finalized to swap restructured performing in the future, especially if macroeconomic loans with recapitalization bonds and to dispose of conditions deteriorate further. unrestructured loans using competitive bidding mechanisms. State and nationalized banks. State bank recapitalization was completed in late 2000 but little progress has been made The remaining 40 percent of IBRA's 2001 recovery since then on operational restructuring or governance performance has been achieved through the sale of industrial reforms. This should begin in BNI and BRI, for which and other assets that were pledged by banks owners. This performance contracts and business plans have now been effort is being thwarted by lack of cooperation by some bank finalized. Bank Mandiri has progressed with some owners, and IBRA is pursuing legal action in eight such operational restructuring in advance of an IPO planned to be cases. Making things worse, many of the pledged assets are completed by end-2001. Nevertheless, the manner in which subject to legal encumbrances and, in some cases, sales of it has addressed its liquidity problem (by transferring in assets are complicated by the legal troubles of the owners government deposits) is not sustainable, and efforts will themselves. need to be made to broaden its deposit base. Moreover, To improve the governance framework for IBRA, large Bank Mandiri is also planning to acquire BII (a troubled restructuring cases involving more than Rp. 1 trillion in bank taken over recently by IBRA) to strengthen its own restructured loans are subject to review by the Financial branch network. Care will need to be taken that this Sector Policy Committee (FSPC). The final decision of the acquisition does not jeopardize Mandiri's own liquidity, FSPC in such cases is subject to further review by an profitability, asset quality, and efficiency. independent Oversight Committee to ensure that these large The privatization of BCA and Bank Niaga have faced restructurings are consistent with a published set of continued delays, reflecting fundamental concerns within the corporate restructuring principles that had been developed government and parliament. Ten percent of BCA's stock with the assistance of the World Bank and the IMF. was sold in a public offering, but bids from two strategic Reviews for the first four restructurings have now been investors for a further 30 percent were considered made publicly available and show that none accorded with unsatisfactory. The new government is now discussing with the agreed principles. The Government must now prepare a parliament the option of selling a 51 percent stake in the public response either agreeing to re-negotiate or stating the bank in the expectation that this will attract better offers. Other banks under IBRA will also need to be privatized 2 (Bank Niaga, for example, is slated for privatization by end- The bulk of the Rp. 39.5 trillion recovery is to be in the form of cash. Some Rp. 10 trillion can be achieved by swapping 2001), but in most cases there will need to be some further restructured loans for recapitalization bonds. Indonesia 6 reasons why such a deviation from the principles would still · selected cuts in lesser priority development spending; be justified. and · a range of administrative revenue measures. Finally, IBRA has now been brought under the purview of the Minister of State Owned Enterprises who, among his The budget revisions also included some Rp. 2.2 trillion in other duties, is also responsible for the state enterprise schemes to offset the impact of the fuel and electricity price privatization program. increases on the poor. In all, seven schemes were designed f These were: the expansion o the OPK subsidized rice Fiscal Sustainability scheme by 1.215 million households; bus subsidy schemes to avoid increases in bus fares; various health initiatives; Fiscal sustainability has become a crucial medium -term various education programs for the poor; a clean water challenge for Indonesia. In this context, the outcome of the scheme in 314 locations; a micro-capital scheme through 2001 budget and the preparation of the 2002 budget should 1,000 institutions; and a coastal community empowerment become important first steps in consolidating the scheme. Despite the urgent need for some of these government's fiscal position, and providing a firm basis for measures, several of them have been delayed. The most further measures in succeeding years. important of these schemes, however ­ the expansion of the Table 2: IBRA gross asset recoveries, Jan-July OPK subsidized rice scheme ­ has been started by BULOG, 2001 but in the absence of any progress reports, no assessment of Target for Jan-July Share of its effectiveness can be made. The next most important 2001 recoveries target (%) scheme ­ to subsidize bus operators and avoid an increase in bus fares ­ has been dropped because bus operators in mo st urban areas increased their fares following the fuel price Loan sales 14.7 7.9 54 hike and were no longer in need of a government subsidy. Enterprise equity 10.7 3.5 33 sales The budget revisions notwithstanding, the fiscal outlook Other asset sales 4.1 1.9 46 continues to be difficult. On the revenue side, oil revenues Redeemed bonds 10.0 0.0 0 are likely to be suffer a shortfall because of lower-than- Total recoveries 39.5 13.3 34 expected production. On the expenditure side, oil subsidies are likely to come in higher than expected, as domestic Source: IBRA. consumption is expected to exceed projections. The 2001 budget. The fiscal outlook for 2001 continues to And there is likely to be a shortfall in available domestic and be difficult. The combination of higher interest rates and a external financing as well ­ for three reasons. First, we have weaker exchange rate had raised the projected deficit from already noted that IBRA sales are lagging. Second, meeting 3.7 percent of GP to 6.0 percent (Box 2). Parliament the privatization target in the few months remaining this approved a package of measures in mid-June 2001 to restore fiscal year will prove to be challenging. No state the projected deficit to 3.7 percent of GDP to be consistent enterprises were privatized in 2000, even though the 2000 with projected financing from domestic nonbank sources budget included a privatization revenue target of Rp. 6.5 (IBRA cash recoveries and privatization receipts) and trillion. In the priority enterprises targeted for privatization, external financing. The revision to the budget contained many issues still need resolution -- including appropriate several bold measures with an estimated total impact regulatory structures ­ before sale can commence. Finally, equivalent to about 2.3 percent of GDP. The approved program financing is expected to fall short of expectations. package included: The second tranche of the World Bank's Social Safety Net Adjustment Loan (SSNAL) was cancelled because the · increasing fuel prices for non-industrial users by just conditions of tranche release were not fulfilled. Similarly, in over 30 percent; 3 the remaining program loans, most of which are being · raising electricity prices for large consumers in two offered by the ADB (with some co-financing from Japan), phases by an average of 17½ percent (with the second there continue to be several conditions that are still to be increase to be completed in October); met. Unless there is a concerted effort by all branches of · reduce the non-neutrality of fiscal decentralization on government to meet these policy conditions, there is a strong the central government budget; likelihood the disbursement of these loans will slip into the next fiscal year. Ironically, because the budget deficit is 3 measured on a cash basis, this will cause the deficit to be This comes on top of an increase in fuel prices on April 1, lower rather than higher, but the flip side of this would be 2001in which the government raised prices for industrial users by domestic arrears. 108 percent and will reset them monthly to equal 50 percent of the international market price. Furthermore, foreign ships, vessels with international destinations, foreign mining and oil and gas companies will be required to pay for fuel at the international rate. Indonesia 7 circumstances). This comes, however, at some cost: the central government's development budget, for example, is Box 2: New structural underpinnings budget dynamics expected to be cut to 2.8 percent of GDP (down from 3.1 In earlier years, a depreciating currency and higher oil percent in this year's budget). This decline is significant, if prices would have a positive effect of the budget ­ and only because the development budget has already been cut higher domestic interest rates would have no effect. Not three years in a row, and this is reflected in the state of any more. Fiscal decentralization and the newly acquired Indonesia's infrastructure and declining quality in social burden of variable interest rate domestic debt have changed services. Of course, local governments could compensate by the structural underpinnings of the budget. A depreciation increasing the size of their development budgets (now in the currency of Rp. 1000 per dollar enlarges the deficit estimated to be about 2.0 percent of GDP), but there is no by 0.6 percentage points of GDP. Similarly, a 10 percent certainty this will actually happen, as the regions are free to increase in the oil price now increases the central spend their general grant as they see fit. government deficit by 0.2 percent of GDP. The key reason Maintaining the deficit at 2,5 percent of GDP requires a is that increased revenues from depreciation and higher oil significant improvement in tax effort. Oil revenues--which prices is shared with the regions, while higher spending on interest and fuel subsidies is not. In addition, a 100 basis are expected to amount to 6.9 percent of GDP, will drop to points rise in interest rates swells the deficit by 0.15 only 3.9 percent of GDP next year because of lower oil percent of GDP, not to mention adding contingent prices and a stronger Rupiah. To counter this, the liabilities to the government's balance sheet if it also Government plans to increase tax revenues with 1.3 contributes to higher recapitalization needs in banks. percentage point of GDP to 12.8 percent--a plan that will Unfortunately for Indonesia, recent movement in all three require significant administrative reforms. variables has been in the direction of worsening the budget. Service delivery to the poor in a decentralized The budget no longer possesses automatic stabilizers; the environment only stabilizer now is conscious corrective action by The ongoing transition to a decentralized system of government. This year, the government restricted the government, while creating uncertainties in the short term, damage of depreciation and oil price increase by also provides Indonesia greater hope for sustainable progress maintaining the transfers to the regions at the amounts in on poverty reduction in the long term. There is now much the original budget. Next year, the Government plans to further reduce fuel subsidies, thereby regaining the hedge more open debate in Indonesia over key development issues in the budget against exchange rate movements. such as debt, corruption, and the participation of civil society in public policy formulation. Greater transparency in politics The draft 2002 budget. The Government has submitted a and government is building pressure for reform. draft 2002 budget to parliament on September 7, 2001. The draft budget incorporates an overall deficit of 2.5 percent of A free press keeps a watchful eye on the political process GDP, consistent with the overarching policy of balancing the and the courts. If properly managed, decentralization can continued need for maintaining a central development help build local democratic institutions and give people budget while consolidating the government's debt position. greater control over their lives. But, if managed badly, the The draft budget assumes for 2002 a GDP growth rate of 5 transition to a decentralized Indonesia could not only derail percent--which is somewhat on the high side, but largely macroeconomic stability, but also seriously affect the inconsequential--an annual inflation rate of 8 percent, and delivery of government services. Special attention must be an exchange rate of Rp. 8500 per dollar. Key features of the paid to the way in which it is carried out or the poor could draft budget include: a deficit of 2.5 percent of GDP; some well be left behind. increases in tax revenues based on improved tax On the basis of Indonesia's national poverty line, more than administration and some changes in excise taxes; a very 30 million Indonesians live in poverty today. But once the modest rise in civil service salaries; a further increase in fuel multidimensional breadth and dynamics of poverty are prices and consequential reduction in fuel subsidies; changes acknowledged, poverty is a reality that, in one form or to the formula for allocating central grants to districts another, confronts more than half of all Indonesians. The (making the allocation more equalizing); a central 1997/98 economic contraction resulted in rapid increases in government development budget of 2.8 percent of GDP; a poverty in Indonesia, in particular in urban areas and on challenging target for IBRA and privatization sales; and an Java. In response, the Government developed a three- external financing strategy that maximizes the use of pronged response to the social impacts of the crisis: (i) concessional finance. Planned new donor financing is lower maintaining food security; (ii) expanding employment and than this year's, and Government is preparing for another income generation opportunities; and (iii) preserving access round of Paris Club rescheduling should the need arise. to critical social services. The draft budget represents a considered approach to This crisis strategy was accompanied by a public gradually bringing the deficit down while keeping the commitment by the government to address governance government's debt service burden to a minimum (under the issues, in particular efforts to minimize corruption in safety Indonesia 8 net programs, although they were unable to fulfill the second Efforts to maintain government spending on health and tranche disbursement criteria of the Social Safety Net education at constant real levels have not been successful. Adjustment Loan (SSNAL) linked to these commitments, Total public sector health spending fell by 8 percent in and the loan closed in December, 2000 without disbursing 1997/98 and a further 12 percent in 1998/99. As far as 2000 the final $300 million. is concerned, government health expenditures per capita were not sustained at the peak pre-crisis figure, but were Table 3: Key Social Indicators protected at or above the mid 1990s level. Nevertheless, Latest Previous Period average per capita outlays remained very low overall and Data (date) were especially low in provinces such as West Java. During (date) the economic downturn, much greater use was made of donor assistance, but such support did not, it appears, Human Development 2000 1999 Primary enrollment rate (net) 92.3 94.3 contribute to the sustainability of health financing and Female 92.6 94.5 spending. There also were shifts in the composition of Male 92 94.2 expenditures, including reduced per capita public spending Secondary enrollment (net) 59.6 65.4 on primary health care and a rise in per capita hospital Female 60.7 66.2 outlays. These trends in outlays ran counter to policy Male 58.6 64.7 intentions and actual needs. In short, spending patterns Tertiary enrollment 37.9 45.7 exhibited significant weaknesses even as the country was Female (% total enrollment) 38.9 48.5 shifting to new funding and allocation arrangements in 2001. Male (% total enrollment) 36.9 43.1 In the education sector, too, total public expenditure fell by Infant mortality rate 41 percent between 1996/97 and 1997/98, but rebounded From DHS somewhat in 1998/99 to 72 percent of pre-crisis levels. Total 45.7 58.9 realized public spending on education has declined both as a From SUPAS (92-97) (87-92) share of total government expenditures (7.7 percent in 51.4 71 (1986) 1996/97 to 3.9 percent in 1997/98) and as a share of GDP (1991) (1.4 percent in 1996/97 to 0.7 percent in 1997/98). Despite Poverty & Income Distribution. 2000* 1999 shortfalls in financing, several studies have indicated that the National Headcount Index 1/ social cost in terms of dropouts from primary and secondary Urban Headcount Index 1/ 22 (Feb) 23.5(Feb) schools has been small ­ partly because of targeted school Rural Headcount Index 1/ 16.6 20 scholarship schemes that were successfully implemented Gini Index 2/ 26.2 26 using innovative means for transferring the resources to 0.30 0.30 needy students. These schemes are being continued, but Government Expenditures FY2000 FY99/00 there remains a dire need for improving the quality of basic Health budget 1,473 2,054 education in Indonesia and for rehabilitating functioning As % of total 2.3 2.9 schools in the poorest parts of the country. Education budget 6,128 8,539 As % of total 9.8 12.1 Real wages in agriculture and industry are one of the few Labor Market 2000 1999 indicators available for evaluating the impact of these Unemployment rate (%) 6.1 6.4 programs on poverty alleviation and service delivery to the Female 6.7 6.9 poor. With little data that allows the tracking of poverty on Male 5.7 6.0 a periodic basis, the purchasing power of the daily or Participation rate (%) 67.3 66.9 weekly wage is a reasonable proxy for the incomes of the Female 51.7 51.2 poor. In the year ending March 2001 real wages of Male 84.2 83.6 agricultural workers declined marginally. Industrial workers' real wages stagnated in the last three quarters of Real wages ( %change) 13.6 1.95 2000. And construction workers' wages rose over the year Manufacturing sector 21.5 -0.7 ending in May 2001. This would seem to suggest that in Agriculture sector 10.75 1.78 2000, the poverty headcount index would be unlikely to Female/male wage ratio 70.19 67.7 have changed substantially. This would also be consistent with the observation that in 2000, the exchange rate * Very Preliminary results depreciated substantially and inflation climbed, both forces 1/ Using BPS Poverty Line acting to compress real wages and counteracting the 2/ Based on Core Susenas Expenditure beneficial effects of real economic growth on the demand for labor. Indonesia 9 The Susenas 2000 also contained a component on self- perceived changes in family welfare over the period 1997- Table 4: Broad Indicators of Poverty 2000, and although these types of questions are difficult to answer and interpret meaningfully, they yielded interesting Dimension of Poverty 2004 results. Highest improvements were noted for availability of Empirical Measure (%) 2000 1999 Goal staple foods at markets, access to health services, participation in religious activities and feeling of security. Households felt they were worse off when it came to their Material Standard of ability to obtain formal-sector jobs, and opportunities for Living recreational activities. Overall, most Indonesian households Headcount consider themselves slightly better off than three years ago, Expenditure Poverty/a 25.79 27.13 Half `99* although this varies by location: slightly higher improvements are reported for Java compared to off-Java, Human Investment and substantially higher improvements are reported in rural Completion of basic ed areas compared to urban areas. for bottom quintile 57 52 67* Infant mortality bottom 109 77* The impact of the decentralization process on the poor is quintile n.a. difficult to determine at this early stage, although a number Children in bottom of problems are emerging. One critical problem is a lack of quintile with acute minimum service standards w hich would maintain a basic respiratory infection level of services to the poor. Moreover, simply the added treated medically 39.1 39 45* difficulty of monitoring expenditures on key services when a large part of government spending is decentralized Infrastructure Access decentralized to provinces or districts is proving a serious Access of bottom challenge. quintile to "improved" The transition itself presents some important hurdles, as water sources 23.3 22 62* illustrated by current experience with basic immunization. Access of bottom Responsibility for what had been one of the most centralized quintile to "adequate" sanitation 13.6 13 31* health programs was largely shifted to provinces and districts. They are expected to finance most of the operational costs, with sharply decreased resources now Social Poverty available for immunization from the center. While complete Percent of bottom (LLI data are not available, a recent Bank supervision mission to quintile who data) two provinces revealed that none of the districts visited by participate in local 13 16* the mission had allocated any resources for immunization in political decisions that their annual budget plans. This reflects either weak affect their lives advocacy by the central government, a serious lack of district capacity in priority setting, or the districts' collective Vulnerability to belief that the central government might be forced to resume material poverty funding for this basic public health service. Vulnerability to expenditure poverty n.a. 50 Half `99* Education is a further example of transitional difficulties: thousands of teachers went on strike because back pay due *Proposed goals to a salary increase was not paid out. The reason for this /a very preliminary result from Susenas 2000 core was that the central government--which determines module wages--announced the salary increase largely after local budgets had been passed. Thus, even though the central government increased the grants to the regions t cover the increase, this could not be disbursed because there was no authorized budget. This Brief was prepared with contributions from Magda Adriani, Bert Hofman, Yoichiro Ishihara, Vikram Nehru, Jacqueline Pomeroy and Menno Prasad Pradhan.