Source: U.S. Department of Commerce, Survey of Current Business August 1990, Vol. 70, No. 8, Table 13 * Section 8 is an abridged version of Section 6 of the Hong Kong country report included in the Department of State's Country Reports on Human Rights Practices for 1990, submitted to the Congress January 31, 1991. For a comprehensive discussion of worker rights, please refer to that report. INDONESIA Key Economic Indicators (Billions of 1983 Rupiah (Rp) Unless Otherwise Noted) 1/ Annual growth rate, except for 1990 which is first half of 1990 over first half of 1989. 2/ 3/ INDONESIA Interbank funds rates; 1990 rate is January to June average. End of period. For 1988 and 1989, FY 1977/78 equals 100; starting 1990, FY 1988/89 equals 100; due to change in basis of calculating CPI, comparable data for earlier years are not available. 4/ 5/ 6/ First nine months of 1990. 1983 equals 100; end of year except 1990 which is end-July. Period average; for 1990, period is January to August. 7/ Whole year totals. 8/ Total is amount pledged at the annual Intergovernmental Group on Indonesia (IGGI) donors' meeting (does not include all special assistance and aid outside the IGGI context). 1. General Policy Framework Indonesia has responded well to the challenges of a changing global economy. In the face of declining oil prices in the 1980s, Indonesia curtailed government spending, tightened monetary expansion, and adopted an exchange rate policy aimed at improving the competitiveness of Indonesian exports. In addition, the government implemented wide-ranging reforms aimed at restructuring the economy toward greater market orientation. These measures are known as "deregulation" reforms because of their emphasis on reducing burdensome regulations and administrative control. The government's deregulation reforms have been generally successful in enhancing the country's economic performance. Over the past five years, the average real Gross Domestic Product (GDP) growth rate has exceeded five percent; 1989 growth surpassed seven percent. Inflation has been held to single-digit levels. For the past two years, the current account deficit has been below $2 billion, well within Indonesia's financing capacity. Aided by large amounts of foreign assistance, the government remains current on its foreign debt obligations (about $41 billion in 1990), and has maintained a convertible currency for both current and capital account transactions. The government's deregulation policies have been successful in reducing the economy's previous heavy dependence on the petroleum sector. In Fiscal Year (FY) 1981/82, oil and gas exports accounted for 80 percent of export revenues and 70 percent of tax revenues; by FY 1988/89, strong growth in non-oil and gas exports and tax reform brought these ratios down to less than half. Oil price increases during the second half of 1990 could change the ratios, but are not expected to derail the process of diversification into activities outside the petroleum sector. Foreign investment approvals in the non-oil sector during the first eight months of 1990 exceeded $6 billion; domestic investment approvals in that period exceeded $20 billion. Even partial realization of these levels of approved investment and the continuation of seven percent and higher growth rates offer many new opportunities for U.S. exports. Continued good economic performance will depend in part upon the government's responses to a number of challenges. While the population growth rate has been reduced to a little over two percent, an estimated 2.3 million persons will enter the workforce each year. The government estimates that INDONESIA A creating jobs for these new entrants will require annual GDP growth of five percent or better for the foreseeable future. second challenge will be completing and consolidating deregulation reform. Entrenched interests and restrictive regulations in certain sectors continue to pose obstacles to increasing the flexibility and efficiency of the economy. government, however, remains fully committed to the process of deregulation, and more deregulation packages are in preparation. The Fiscal policy: Domestic resources available for development are limited. Since domestic borrowing to finance the budget is limited by law, the Indonesian authorities are required in principle to maintain a balanced budget. Moreover, external debt payments and government salaries together account for about 80 percent of operating expenditures. While efforts are underway to improve tax collections, present circumstances force the government to rely heavily on foreign assistance for the funding of its development programs. The current five-year economic plan assigns a large role to private sector investment as a source of financing for economic growth. Monetary policy: The government controls the money supply through the purchase and sale of Central Bank certificates of deposit and money market instruments. It also provides subsidized credits to financial institutions lending in target sectors. In early 1990 the government announced its decision to phase out these credits and restricted new credits to a few priority sectors. In 1988 reserve requirements were cut from 15 percent to 2 percent. Indonesia imposes no capital controls. The government has maintained the convertibility of the rupiah since the 1960s. There are no foreign exchange controls. The government gauges the rupiah's exchange rate based on a basket of major trading currencies, including the U.S. dollar. Current policy is to maintain the competitiveness of the rupiah through a gradual depreciation against the dollar, at a rate of about five percent a year. In October 1989 the Central Bank curtailed the hours during which it buys and sells unlimited quantities of foreign currencies at a specified exchange rate. The new procedures are designed to give a larger role to private banks in setting exchange rates. The exchange rate on October 1, 1990 was 1,864 rupiah per U.S. dollar. In general, the government does not intervene directly to set prices, but allows the market to determine price levels. To promote food security, the government enforces a system of floor and ceiling prices for certain food products, for example, rice. In some cases, business associations, with government support, establish prices for their products. Domestic cement production shortfalls in mid-1990 led to an elimination of import tariffs on cement in a bid to increase supply and stabilize prices. Direct government subsidies are confined to certain goods such as fertilizers and petroleum products. The government is committed to reducing subsidies for agricultural inputs. On January 1, 1989 pesticides INDONESIA subsidies were removed. The fertilizer subsidy was reduced in October 1989 and October 1990. Individuals and businesses are subject to income taxes. The maximum rate is 35 percent of annual earnings in excess of Rp 50 million (about $27,000). On April 1, 1985 a value-added tax (VAT) was introduced. The level of tariff protection has been reduced. Companies can apply for an exemption from or a rebate of import duties and VAT paid on inputs used to produce exports. A few products remain subject to export taxes. October 1989 export taxes on sawn timber were raised to prohibitive levels. In July 1988 Indonesia and the United States signed a double taxation agreement. The Indonesian government ratified it in October 1988 and the U.S. Senate in September 1990. In Since the early 1980s, Indonesia has adopted a series of policy reform measures known as deregulation which collectively promote a more market-oriented, competitive economic system with greater reliance on non-oil exports. Focal points of the deregulation packages include foreign trade, investment, state-owned enterprises, and finance. 4. Debt Management Policies Indonesia's medium and long term foreign debt, both official and private, totals about $50 billion. In 1990 Indonesia will pay approximately $4 billion in principal payments and $3 billion in interest payments on public sector debt, or about 30 percent of its projected total export earnings. The government is fully committed to meeting its debt service obligations and has no plans to seek a debt rescheduling. Notwithstanding the heavy debt burden, a number of positive factors are worth noting. First, the share of concessional debt is high compared with other developing countries and the share of debt carrying variable interest rates is low. Second, net transfers of external assistance have risen sharply in recent years while net additional commercial credits have fallen, improving the terms and structure of Indonesia's external debt. Lastly, all indications are that the growth in debt service will slow considerably over the next five years (the large debt burden of the past several years resulted from a combination of unusually large repayments coming due on commercial loans from the early 1980s and foreign currency realignments). Since 1986 import licensing requirements have been relaxed in a series of deregulation packages, the most recent of which was issued in May 1990. Tariffs and surcharges have often replaced licenses as the preferred method of protecting certain domestically produced goods. Remaining import licensing requirements may be waived in some cases for companies importing goods to be incorporated into subsequent exports. Service barriers abound, but reductions have been enacted, particularly in the financial sector. Since October 1988 |