(D) -Suppressed to avoid disclosing data of individual companies Source: U.S. Department of Commerce, Survey of Current Business August 1991, Vol. 71, No. 8, Table 11.3 INDONESIA Key Economic Indicators (Billions of 1983 Rupiah (RP) Unless Otherwise Noted) 1/ Annual growth rate, except for 1991 which is first half of 1991 over first half of 1990. 2/ Interbank funds rates; 1991 rate is January to June INDONESIA average. 3/ End of period. For 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. Fiscal year is from April 1 to March 31. 4/ First nine months of 1991. 5/ 1983 equals 100; end of year except for 1991 which is end-June. 6/ Period average; for 1991, 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.) 9/ Jan-Jun 1991 total only. 1. General Policy Framework The principal objectives of the Indonesian government's economic policies are twofold: to reduce the country's reliance on the oil sector as a source of foreign exchange and government revenues, and to stimulate job creation by giving freer rein to the private sector. Since the early 1980s the government's strategy has been generally successful in enhancing the country's economic performance. Growth in real gross domestic product has exceeded five percent every year since 1986, and was above seven percent in both 1989 and 1990. Due to the government's success in promoting non-oil exports, the performance of the national economy is less closely tied to the price of oil: in FY 1981/82 oil and gas comprised more than 80 percent of export earnings and 70 percent of domestic revenues; in FY 1990/91 they contributed 43 percent of export earnings and 45 percent of domestic revenues. This progress has been achieved while holding inflation to single digit levels and maintaining a convertible currency for both current and capital account transactions. While underemployment remains a concern, job creation has generally kept pace with the rapidly expanding work force. The government's wide-ranging reforms, known as "deregulation," are aimed at reducing burdensome regulations and administrative controls. The reforms have covered sectors such as banking and capital markets, taxation, customs, foreign trade, investment, transport, and telecommunications. The deregulation program has boosted economic performance and given the private sector a more prominent role in the economy. New opportunities for sales in export and domestic markets have resulted in rapid expansion of the non-oil manufacturing sector, which since 1983 has grown at an average annual rate of over 12 percent. Private investment has also been robust. Foreign investment approvals in 1990 exceeded $8.7 billion; domestic investment approvals were over $30 billion. Private fixed investment as a percentage of total fixed investment increased from about 50 percent in the late 1970s to 61 percent in 1990, underlining the growing role of the private sector in the economy. Strong domestic demand, fueled by vigorous private and public investment, has strained limited infrastructure and pushed up inflation. Increased private sector borrowing from offshore to finance investment has heightened concern about INDONESIA Indonesia's ability to service the resulting higher levels of debt. In addition, the current account deficit in 1990 grew rapidly due to higher imports and slower growth in exports. In an effort to reduce inflation and curb the demand for imports, in mid-1990 the government responded by slowing monetary growth. In October 1991 it further decided to postpone several major projects financed with foreign commercial credits. In the longer term, creating jobs for the country's relatively young population will pose a continuing challenge for economic policymakers. While the population growth rate has been reduced to just under two percent, an estimated 2.3 million persons will enter the workforce each year. The government estimates that creating jobs for these new entrants will require annual GDP growth of five percent or better for the foreseeable future. Another 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. The Government, however, remains fully committed to the process of deregulation, and more deregulation packages are in preparation. Fiscal policy: The Government is seeking to augment its limited funds available for development through efforts to increase tax collections; in each of the last three fiscal years, domestic revenues have increased by at least 30 percent. The Indonesian authorities are required in principle to maintain a balanced budget without borrowing from domestic sources; however, external debt payments and government salaries together account for about 70 percent of operating expenditures. Foreign donors therefore finance a major share of development expenditures through bilateral or multilateral aid 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: In the conduct of monetary policy, the Central Bank buys and sells financial paper. The Government has on occasion ordered state-owned enterprises to withdraw deposits from the banking system. It also provides subsidized credit to financial institutions lending in target sectors. In early 1990 the government announced its decision to phase out these credits and further restricted new credits to a few priority sectors; between January 1990 and September 1991, outstanding liquidity credits declined almost 20 percent, from Rp 16.2 trillion to Rp 13.5 trillion (approximately $6.9 billion). In 1988 reserve requirements were cut from 15 percent to 2 percent. Indonesia imposes no capital controls. 2. Exchange Rate Policies The government has maintained the convertibility of the rupiah since the 1960s. There are no foreign exchange controls. The government follows a managed float policy 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. The exchange rate on INDONESIA November 1, 1991 was 1,977 rupiah per U.S. dollar. In 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. mid-1990 the government, in response to domestic shortages, prohibited the export of certain types of cement. In 1990, the government established a new domestic clove trading system; the purchasing body's clove buying is supported with Central Bank liquidity credits. 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 subsidies were removed. The fertilizer subsidy has been reduced annually from 1989 through 1991. Individuals and businesses are subject to income taxes. The maximum rate is 35 percent of annual earnings in excess of Rp 50 million (about $25,000). 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. In October 1989 export taxes on sawn lumber were raised to prohibitive levels. In July 1988, Indonesia and the United States signed a double taxation agreement, which entered into force in December 1990. 4. Debt Management Policies Indonesia's medium and long term foreign debt, both official and private, totals about $65 billion. In 1991 Indonesia will pay approximately $4.7 billion in principal payments and $2.9 billion in interest payments on public sector debt, or about 26 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. In response to the sharp increase in external debt occasioned by higher private sector offshore borrowing, the government in September 1991 set up a cabinet-level team to oversee foreign borrowing. The team is charged with reviewing applications for foreign commercial credits to finance projects in which the government or a state-owned enterprise is involved. The announcement of the team's formation stated that financing for purely private projects is not directly affected. The team is also charged with prioritizing the use of offshore funds by project and with establishing ceilings for government total borrowing by fiscal year. In October 1991 the team announced guidelines on public and private sector foreign commercial borrowing through FY 1995/96 ranging from $5.6 to $6.5 billion total per year. It also decided to defer four large projects in the petroleum sector with a total cost of $9.8 billion. |