Report No. 11737-IND Indonesia Sustaining Development May 25, 1993 Country Department Ill East Asia & Pacific Regional Office FOR OFFICIAL USE ONLY ?IMICROFIC-HE COPY~ Report No.:11737-IND Type: (ECO) Title: SUSTAINING DEVELOPMENT Author: SHILLING, J. Ext.:82472 Room:A10037 Dept.:EA3CO DecumEnt of the WNodd Bnk, Thisqq*umet Waa irstricted 4listlbuin rand ~may -be used by'recipierns ;iy ote to. tornan of Oher ofiIa~uIe s contents rWay not otherwise b. dl,d d ;i t ',r n ! ,', "'a' o, Vnt - '' CURRENCY EQUIVALENTS Before November 15, 1978, US$1.00 = Rp.415 Annual Average 1979-1992 1979 US$1.00 = Rp.623 1980 US$1.00 = Rp.627 1981 US$1.00 = Rp.632 1982 Us$1.00 = Rp.661 1983 Us$1.00 = Rp.909 a 1984 US$1.00 = Rp.1,026 1985 US$1.00 = Rp.1,111 1986 US$1.00 = Rp.1,283 b 1987 US$1.00 = Rp.1,644 1988 US$1.00 = Rp.1,686 1989 US$1.00 = Rp.1,770 1990 US$1.00 = Rp.1,843 1991 US$1.00 = Rp.1,950 1992 US$1.00 = Rp.2,030 May 24, 1993 US$1.00 = Rp.2,079 FISCAL YEAR Government - April 1 to March 31 Bank Indonesia - April 1 to March 31 State Banks - January 1 to December 31 a On March 30, 1983 the Rupiah was devalued from US$1.00 = Rp.703 to US$1.00 = Rp.970. b On September 12, 1986 the Rupiah was devalued from US$1.00 = Rp.1,134 to US$1.00 = Rp.1,644. FOR OFMCUIL USE ONLY INDONESIA: SUSTA qING DEVELOPMENT CONTENTS Executive Sumnmay ..................................... vii 1 S_utng Developnt 1 A. Overview .1 B. Progress on Development. 2 C. Sustaning Development. 9 Growth with Stability .10 Eqwity through Wider Participation .14 Protecting the Enviroment .16 The Challenge of Integration .18 D. Toward an Integrated Agenda for Sustained Development .20 Macroeconomic Mangement .20 Incentives .22 Investment .24 Institutions ......................... 27 2 The NMcroeconowic Foundadon ................................... 31 A. Overview .......................... 31 B. Response to Recent Macroeconomic Pressures ........................ 31 Macroeconomic Policy in 1992/93 .......................... 32 Macroeconomic Outcomes ......... ................ 37 This report was prepared by a team led by Zia Qureshi. The principal authors were Timothy Condon, Dipak Dasgupta, Don Hanna and Zia Qureshi. Ramgopal Agarwala, Swati Ghosh, James Harrison, Oscar de Bruyn Kops and Nicholas Prescott made major contributions. Yasmine Hamid prepared the Statistical Annex and the graphics and, together with Cyrus Talati, provided research support. The report draws on background inputs prepared by Izak Atiyas, Richard Calkins, Rozany Deen, Stephen Dice, James Douglas, Chita Jarvis, Frida Johansen, Albert Kennefick, Brian Levy, Andres Liebentdal, Samuel Liebermian, John Nellis, Akihiko Nishio, Vicente Paqueo, Aftab Raza, Arun Sanghvi, Anwar Shah, Hafeez Shailh, A. Shanmugarajah, David Wheeler, Stuart Whitehead, and Heng-Fu Zou (ali Bank staff), and by Amaresh Bagchi, Brian Binder, Petr Hanel, David Hawes, Chris Jones, Sanjaya LaUl, and Sanmel Paul (consultants). Jessica Ardinoto, Inneke Herawati, Mary Kepferle, Datty Sembodo and Ester Tjahyadi were responsible for document processing. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ii Contents C. Sustined Growth and Macroeconomic Consistry ..................... 42 The Challenges ................... ..................... 42 Prospec for Growth and Structural Change ...................... 45 Extena Financing and Debt Managemnt Strategy .................. 48 Corsistent Macroeconomic Policies for Sustained Growth ...... ........ 52 D. Economic Management in an Uncertain External Environment ...... ........ 56 The Main External Sources of Uncertainty ........ .. ............. 56 Quantifying External Uncertainty ............. ................ 60 Policy Implications .................. .................... 61 3 1ncfies .................................................. 63 A. Overview: Making the Most of Markets .................. .......... 63 B. Extending and Strenghening Competition . ............................ 64 Extending Trade Policy Reform ............................... 64 Removing Price Controls .................................. 71 Dismanding Barriers to Entry ................................ 76 C. Developing Factor Markets ................................... 79 Advancing Financial Reforms ............................... 79 Developing Well-Functioning Land Markets ........... ............ 83 spurring Technology Markets ............... ................. 87 D. Improving Market Inf sucture .................................. 88 Establishing Transparent Market Rules ............ .............. 89 Broadening Market Access ................................. 90 E. Manging the Enviromnent ................................... 94 Overcoming Policy Failures: Win-Win Policies .................... 94 Overcoming Market Failures: Targeted Interventions ...... .. ......... 95 Combating Poverty to Improve the Environment ....... .. ........... 99 Choosing Environmental Management Tools ........ .. ........... 100 4 lIvestment ....................... .......................... 101 A. Overview: More and Better Investment ............................. 101 B. Overail Investment and the PrivatPublic Balane .102 C. Priorities for Public Investment ..107 Raising the Efficiency of Investment and the Quality of Services . .107 Directly Productive Activities ..108 Infrastructure Development ..110 Human Resource Development ..116 D. Targeting Social Sector Exenditures to the Poor .123 Access of the Poor to Social Services.123 Contens Hi Who Benefits from Public Subsidies? . .......................... 124 Pricing Policies for Better Targeting . .......................... 127 E. Priorities for Envirommental Investment ............................. 129 5 IDstitUdon D............................ 135 A. Overview: Fostering Responsive Institutions ........................ 135 B. Strengthening the Institutional Underpinnngs for Private Enerprise .... ....... 136 The Commercial Lega System .. 136 Framework for Acunimng and Auditing .138 C. Public Enterprise Reform .140 Recent Reforms and Performane .140 Current Issues .142 Directions for Future Reform .144 D. Public Administration and Civil Service Reform .146 RecentTrends in Civil Service . 147 Ongoing Reforms .148 Intensifying Administrative Reform .149 E. Fiscal Decentralization ............... 152 Assigmnent of Expenditure Responsibilities .153 Increasing Local Govemment Revemes .155 Inter-governmental Transfers and Loan Finance .157 Framework for Plaming, Budgeting and Montoring .159 Building Loca Government Instutional Capacities .161 F. Institutional Framework for Environmental Mangement ...... ............ 162 Improving Information anmi Analysis .......... ................. 162 Developing Instution Aageens . ......................... 163 EnbancingLocal Participadon . .............................. 164 ANEXE Statistical Annex ................... 167 TABLES IN TEXT 1.1 Key Economic dicators ....................... .. .. .. 4 1.2 Human Resource Development: Selected Countries, 1960-1990 ..... ......... 7 2.1 Indonesia: Monetary Survey .................. 33 2.2 Cental Government Operations, 1988/89-1993/94 ...................... 36 iv C ontents 2.3 Key Macroeconomic Indicators .................................. 38 2.4 Non-Oil Merchndise Imports, 1987/88-1991/92 .40 2.5 Balance of Payments, 1988/89-1992/93 .41 2.6 Projections of Key Macroeconomic Indicators .46 2.7 Balance of Payments Projections, 1992/93-2000/01 .47 2.8 Projeted External Financing .49 2.9 Medium- and Long-Term Debt Indicators. 1990-2000 .51 2.10 Savings-Investment Balances, 1983-2000 .55 2.11 Currency Composition of Exports and Inports. 60 3.1 Coverage of Non-Tariff Barriers .65 3.2 Changes in the Tariff Schedule .66 3.3 The Structure of Protection .70 3.4 Conglomerates in Indonesia, 1990 .91 4.1 Sectoral Investment Priorities for Public Investment .106 4.2 Indicative Public Expenditures in Agriculture .109 4.3 Indicative Infrastructure Investment Program by Sector and Public/ Private Participation .111 4.4 Indicative Public Investment Program for Electric Power .112 4.5 Indicative Public Investment Program for Telecommunications .... .......... 113 4.6 Indicative Public Investment Program for Transport .114 4.7 Changing Priorities in Irrigation and Water Resource Expenditures. 115 4.8 Reading Achievement Test Scores, 1992 .118 4.9 Government Budget for Education and Health ......................... 120 4.10 Education Development Goals and 1998 Expenditure Scenarios: MOEC Education Policy and Planning Project .121 4.11 Role of Private Providers and Household Expenditures in Education .... ....... 122 4.12 Indicative Public Investment Program for Water and Sanitation .131 5.1 Overview of Public Enterprise Fmancial Perfonnance, 1987-91 .141 5.2 Central-Local Fiscal Relations: Some International Comparisos. 153 FIGURES IN TEXT 1.1 Selected Indicators of Economic Performance. 2 1.2 Incidence of Poverty and Income Distribution, 1970-1990. 5 1.3 Trends in Regional Income Distribution. 6 1.4 Access of the Poor to Social Services. 6 1.5 Indicators of Infrstru Development, 1970-1990. 8 1.6 Changing Economic Structure .13 1.7 Environmental Challenges: Urban and Industrial Pollution .18 2.1 Non-Oil Trade Deficit. 32 2.2 Devaluation Expectations .34 2.3 Indonesia Country Risk Premium .34 2.4 Commercial Bank Interest Rate Spread .34 2.5 Real Effective Exchange Rate .37 Contents v 2.6 Growth of Non-Oi Exports by Detination, 1989-1992 ................... 39 2.7 Growth on Non-Oil Exports by Product and Market, 1989-1992 . ... ........ 39 2.8 Sources of Foreig Direc vt ..............................I.. 49 2.9 The Changing Composition of Indonesia's Exports ........ .. ............ 57 2.10 Manifactured Exports and the Nature of Potential Market Constraints .... ...... 58 2.11 The Intrest Rate Structure of Public Debt, 1980 to 1991 ........ .......... 59 2.12 Currency Composition of Public Debt Outstanding ...................... 59 2.13 Impact of Shocks on Current Account Deficit ..60 4.1 Private and Pjblic Investment Trends and Projections .................... 103 4.2 Education Subsidy Per Capita by Program, 1989 .125 4.3 Health Subsidy Per Capita by Program, 1990. 126 5.1 Financial Soundness of Public Enterprises .142 5.2 Civil Service Size .147 5.3 Financing of Local Goverment Expenditues, 1990/91 155 BOXES IN TEXT 1.1 Indonesia's PROKASIH (Clean Rivers) Prgram. 8 1.2 Adjusdng Fuel Prices: An example of "Win-Win-Win" Policies .19 3.1 Customs and Tariff Reform ..67 3.2 Economic and Envirnmental Sustainabiity: The Forestry Example . .68 3.3 Examples of Domestic Trade Restrictions ..72 3.4 Permits for Land Acquisition and Development .. 86 3.5 Poilution Control for the Brantas River Basin ..99 4.1 Public Pricing Policy for Junior Seondary Schools ..107 4.2 AIDS in Indonesia: Trends and Opdons ..118 5.1 Qualifying as a CPA in Thailand and Malaysia ..140 5.2 Benefits of Privatization: Some Inernational Findings .. 145 5.3 Administrative Reform in Singapore ..150 5.4 An Expement in Dentralizing Health Services .160 5.5 Environental Management: The Search for Creative Solutions .165 5.6 Local Participation Fosters Development Effectiveness and Sustainability ....... 166 Executive Sumnmary i4 EUTIVE ASUIMRY L. This report discusses the challenges Indonesia faces in skdning devedopment. Indonesia's economic achievements over the past twenty-five years are significant: continued strong growth; resilience to major external shocks; implemention of substantial strutural reforms that diversified the economy, expanding the role of the private sector anc reducing reliance on oil; considerable reduction of poverty; and a notable start on improving environmental management. These achievements have brought Indonesia to a new threshold of development. Although Indonesia remains a low-income coutry with a per capita income of $650 and 27 million people still living in absolute poverty, it is well placed to make substantial progress that would place it firmly in the ranks of middle-income countries by the turn of the century. A strong economic foundation has been laid that the Government can now build on as it looks ahead and formulates the Sixth Five-Year Development Plan (REPEuTA) and the Second Long- Term (25-year) Development Program, both of which start next year. ii. This progress can be realized, however, only if there is a clear recVgnition of and response to the formidable challenges of sustauining development. While past achievemerats have opened up new opportunities for development, they have also given rise to new challenges. The transition to a higher level of development will be associated with important stucral shifts and changes in the nature of the policy agenda. The momentum of growth will need to be maintined amid a changing economic landscape, while improving equity and dealing with emerging issues of environmental management. Export growth will have to contend with increasingly competitive international markets and the need to diversify into new products. Indonesia's past success in managing structural change and rising to new challenges gives confidence that the important transitions likely in the years ahead can be managed smoothly. The key will be a continued commitment to sound economic management and action on an evolving agenda for development. iiu. Many ef the key challenges of sustaining development are reflected in the issues that currendy occupy Indonesian policymakers. Concerns about Indonesia's high external debt explain the increased attention to domestic resource mobilzation and careful management of external financing. The current high real interest rates, their effect on private investment, and strains in the financial system have raised concerns about the risks they pose to the sustainability of growth and to financial stability. Questions as to what policies would best support the next phase of industrial development in Indonesia motivate the current debate on industrial and technology policy. Coes about the relative dominance of conglomerates in industry stem from the implications for both the efficiency and equity of private sector development. Recognition of the evolving challenges of development is also reflected in the increased emphasis on raising the quality of human resources. Moreover, growing awareness, in Indonesia and around the world, of how environmental degradation can jeopardize the sustainability of development underlies the increased interest of policymakers in improved environmental management. The report analyzes these and other issues within the broad framework of its central theme of sustaiing development. SustainiDevelopment: The Chlenges iv. The report discusses the task of sustaining development in its three major, complementay dimensions: o maintaiinng robust economic growth, by capturing the enhanced opportuies for development and diversification that now present themselves; i' Executive Summary o promoting equiy, by firther reducing poverty and broadening participation in development; and * protecting the environment, by conserving resources and limiting pollution. Growth, equity and environmental protection are all necessary ingredients of sustined development. Strong synergies exist among them. Growth generates the employment and increase in resources necessary to reduce poverty and improve environmental management. Equitable development broadens the base of growth and reduces poverty-a major source of pressures on the environment. Protection of the environment fosters efficient, long-term growth and benefits the poor who tend to suffer most from environmental degradation. Trade-offs also exist, for examle, between industial growth and pollution control. But the answer is not to produce less, but differently. Effectively integrating the objectives of growth, equity and environmental protection is the crux of sustained development. It calls for a long-term vision of development, and policies and programs, such as those supporting efficient functioning of markets and human resource development, that take maximum advantage of the complementarities that exist among these objectives. It also calls for actions that deal effectively and efficiently with trade-offs among the objectives. V. Within this broad framework for suaed development, the future policy agenda will be shaped by some fundamental structura transformations and transitions. As outlined below, in all the three areas of growth, equity and enviromental protection, a new generation of issues is emerging that will test the responsiveness of the policy and iustitutional framework. vi. Growth with Stability. Indonesia needs to sustain growth of 6-7% p.a. in non-oil GDP to employ the growing labor force (annual increase of about 2.3 million) at rising levels of productivity and continue to improve the general living standards. A fundamental condition for sustained, robust growth is the maintenance of a stble nacroeconomic environment, a condition reinforced by Indonesia's high external debt and debt service (58% of GNP and 30% of exports, respectively, for MLT debt). But policies will also need to adapt to some hudamenl qualtaive shis in the growth process as well as to continuing major stuctua tramfonnatiens in the economy. The qualitative shifts include: o an increasingly important role for improvements in efficiency and produeviWty as a source of growth; and o a transtion frm quantiy to qualiy in the production of goods and services. With increasing competition in international markets, raising efficiency and productivity will be the key to sustaining the dynamism of non-oil exports, which will remain a major driving force of Indonesia's growth and diversification. The sources of Indonesia's competitive edge will shift gradually from the basic cost advantages of cheap domestic labor and abundant raw materials to gains in productivity. Besides exports, eificiendy supplying the large domestic market offers substantial scope for productivity improvements and growth, with large gains for Indonesian consumers. The critical need is to foster increased competition, not only by opening the economy further to competition from abroad, but also by intensifying efforts to remove barriers to competition within the domestic economy. The need to give greater attention to quality will manifest itself in several ways: shifts in the focus of public service provision increasingly toward quality improvements as quantity targets are met (e.g., in basic educaion); increasing private use of quality improvements and new product development to capture markets; and a shift toward environmentally benign methods of production. Executive Swnmary ix vii. Key structural transformations that will shape the pattern of future growth include: o a continuing shift in publc-ptivate roles; o a declning role of od in the economy; and * major inter-sectoral and intra-secdoral shfts within the non-oil economy. With the private sector leading in expanding productive capacity, the Government's role will need to continme to shift to ensuring efficient functioning of markets and providing public services effectively and equitably. The share of oil could fall to as low Ps 5% of GDP over the next two decades, from about 28% in 1980 and 18% in 1990. This underscores the importance of continuing to promote non-oil sources of growth and exports. Maintaining the dynamism of non-oil manufacturing constitutes the core of this effort; the sector will need to post growth of around 10% p.a. for Indonesia to achieve its overall growth and export targets, which would double the sector's share in GDP over the next two decades (to over 33%). Within the sector, the structure of production will be expected to shift gradually in response to market forces toward more downstream processing and higher value-added activities. But, with labor supply remaining relatively abundant, labor-intensive mdustries will remain Indonesia's main area of comparative advantage. Agrieulture will continue to lose share in GDP, but will still play a vital role as the main source of employment and producer of wage goods and raw materials. Growth in the sector will rely increasingly on non-rice activities. Sustaining the overall growth momentum while adapting to the foregoing qualitative and structural shifts in the economy, and maintaning macroeconomic stability, will be a major challenge. viii. Equity through Wider Partidpation. Ensuring equitable development wih cal for continued progress on three related fronts: * contiing to reduce and, in the long rtu, lgey elimnate povegy; 3 ensuring widespread regional pa1ipadon in deveopment; and * promoting broad-based private sector growth. Indonesia's progress in reducing poverty, sutained during the adjustment to major external shocks in the 1980s, has been impressive. In 1970, 60% of the people were absolutely poor, compared with 15% in 1990. As poverty declines, further reductions may become increasingly difficult. A progressively larger proportion of the remaiing poor are likely to be those who are harder to reach through a general growth of incomes and services, such as people living in resource poor and remote areas. A reflection of this is the uneven geograhical pattern of poverty in Indonesia; the incidence of poverty remains high in the Eastern Islands and parts of Java. The centerpiece of the strategy to reduce poverty will remain the promotion of a broad-based pattern of growth that expands opportunities for the productive use of labor, the poor's most abundant asset, and the widespread provision of education and health services that enhance the poor's capacity to grasp those opportunities. However, the role of interventions specifically targeted at the disadvantaged groups and backward areas will increase in importance as the poor become a smaller part of the general population. Also, non-agricultural (and within agriculture, non-rice) activities will need to make a greater contribution to poverty reduction than in the past. Given continuation of appropriate policies, Indonesia can realistically set itself the objective of reducing poverty (as currently defined) to below 10% by 2000 and largely eliminating poverty, except for a small hard core of particularly disadvawtaged people, by the end of the Second Long-Term Development Program. x Executive Summary ix. The promotion of a broad-based pattern of growth, which uses the diverse regional potentials for development, would also help reduce regional income disparities. A source of increasing concern in recent years has been the relatively high concetrdation of ownership, and market power, in the modern business sector in the hands of large business groups, or conglomerates. The dominance of conglomerates raises issues of both equity (equal access to market opportunities) and efficiency (remov/al of barriers to competition). Effectively and efficiently dealing with this issue will be an important test of policies to foster broad participation in private sector development. x. Protetn the Environent. Sustainable growth will depend on efficient use and conservation of Indonesia's natural resources, including preventing pollution from destroying those resources. Essential to sustained growth, environmental protection is closely linked to the qualitatve and structural shifts in the economy outlined above. Through such shifts, the structure and sources of growth need to change, to use resources, especially non-renewable resources, less intensively and to generate less polludon. An increasingly flexible, resilient and efficient private sector is essential for such shifts to occur with minimum dampenig of growth. Policies that reduce the pressure of population growth make an important contribution to environmentally sustainable growth by generating demographic shifts that permit a given standard of living to be achieved with less use of resources and less pollution. xi. Sustainable use of natural resources is particularly important to Indonesia's development prospects given the major role these resources play in the economy: direct extracton and primary processing account for about 40% of GDP; and the primary sectors still generate about 60% of export earnigs and 50% of employment. Sustained growth requires carefully managing the environment as a source of these resources. Key issues concern: o increasing scarcity and deteriorating quality of water supply, especially in Java (in dense urban areas, groundwater extraction rates have already exceeded natural replenishment, leading to salt water intrusion; in Jakarta, water pumped from the ground each year is estimated to be almost three times the sustainable level); and o deforestation, land degradation and loss of biediversity, mainly in the outer islands (harvests from tropical forests are running about 50% higher than the estimated sustainable cut). xii. In addition to utiliziLg the resource base, growth will lead to increased urbanization and industrialization. As noted earlier, the share of nuri in GDP could double over the next two decades. The urban populationhas been growing at 5% p.a.; from only 15% of total population in 1970, it has already reached 30%. By the end of the Second Long-Term Development Program, half of the population may reside in urban areas. Cities in Java will need to cope with 1.5 million new residents each year. Some of this growth will come from reclassifying densely populated rural areas as urban, but it will still lead to increasingly complicated problems of urban environmental management. Rising polludon and congestion intensify the need to ensure sustnable use of the capacity of the enviwnent as a sink for urban and industrial wastes. Major issues include: * in industry, control of air and water pollution and hazardous waste disposal (industrial pollution in urban areas could increase 10-fold over the next 25 years; it is already serious in many areas on the north coast of Java); and * in cities, better sanitation and solid waste disposal, and lower air pollution-especially from vehicle emissions-and congestion (in a recent survey in Jakarta, 93% of shallow wells, the dominant form of residential water supply, were found to be contamiated with human Executve Summary xi waste, while tap and hydrant water samples revealed rates of contamination of 21% and 58%, respectively; also in Jakarta, particulates, lead and other airborne pollutants have already reached levels that harm health). The Agenda xiii. Capturing Indonesia's enhanced prospects for growth in an equitable and sustainable numnner will require action across a wide-ranging policy agenda. It will call for mainenance of a stable macroeconomic foundation; improvements in the incentives regime for enterprise; substantial investment in human and physical capital; and institutional reform and development. This suggests an agenda for sustained development, integrating the objectives of growth, equity and evironmernal protection, that is linked by four broad themes: macroeconomic management; incentives; investment; and insdtutions. xiv. Macroeconomic agement. Macroeconomic stability is a fundamental condition for sustained growth. By providing a stable seting conducive to a continuous increase in incomes and to efficient decision-making (through a clearer transmission of market signals), it also underpins efforts to reduce pover.y and protect the environment. Prudent macroeconomic management has been an important hallmark of Government policies. The measures taken by the Government since 1990 to cool down an overheated economy are bearing fruit, while mainuing robust non-oil GDP growth (7.5% in 1992). The current account deficit is estimated to have declined from 3.8% of GNP in 1991/92 to 2.4% in 1992/93, helped by an exceptionally strong growth in non-oil exports (30% in dollar terms). Inflation fell from about 10% in 1991 to 5% (end-year basis) in 1992. Restrained macroeconomic policies contributed to this outcome. The resurgence of inflation in the first quarter of 1993, however, demonstrates the never- ending need for cautious macroeconomic management. xv. The main chaUenge in mainaiing macroeconomic stability is navigating the narrow path between sufficiently rapid growth and excessive demand pressures and external shocks that would raise the current account deficit and inflation. Indonesia's room for maneuver is tighy constrained by its relatively heavy external debt, which necessitates that the current account deficit be reduced to, and then maintained at, sustainable levels. This calls for keeping the current account deficit on a downward course, to reduce it to about 2% of GNP, and carefuy mwaging the extena debt. Sustaining robust non-oil export growth will be central to achieving the current account targets. To sustain non-oil GDP growth of 6-7% p.a., the overall investment rate will need to rise, from about 23% in 1992 to about 25.5% toward the end of the decade. Reconciling the higher investment rate with a lower current account deficit will require an increase in the national savings rate, from about 20% in 1992 to 23.5% toward the end of the decade. This underscores the need to intensify domestc resource mobilzaton. xvi. Keeping the economy on a sustainable growth path will call for a baanced, coordinted use offiscal4 monetary and exchange rate polcies. The burden of reducing excess domestic demand since 1990 has been borne primarily by monetary policy. AJbaerfjlscal stance would produce a better policy balance, helping to lower the curren high real interest rates and allowing higher private investment without rekindling demand pressures. A fiscal stance consistent with both a sustainable external balance and continued robust growth in private investment, while adequately providing for complementary public investments, will be a key element in macroeconomic management for growth with stability. xvii. Reconciling the roles of fiscal policy in supporting stabilization and promodng growth calls for increasingpublic savings and allocating them to priority investments, while generating a fiscal balance consistent with the overall macroeconomic policy framework. This, in turn, calls for: mobilizing more public revemnes, emphasizing efficiency-enhancing improvements in cost recovery and better tax xXi Executive Summary administration; restraining growth in governmient administrative spending; guiding public investment allocations by a sound set of priorities and raising the efficiency with which investments are implemented; and improving public enterprise financial performance. Incorporating all government expenditures in the budget would subject them to the discipline of the budgetary process and enhance transparency and efficiency in the use of public resources. It would also lead to more effective implementation of fiscal policy since non-budget operations were a major cause of the increase in the overall fiscal deficit in 1992/93. ivate saings need to rise too. Sustaining growth, maintaining financial stability, fostering financial deepening, and promoting profitable, widespread investment opportunities through continued improvements in the incentives regime, as outlined below, should contribute to higher private savings, by households and firms. Demographic shifts resulting in a lower dependency ratio may also help boost savings rates. xviii. Incentives. Both the toughening international business climate and Indonesia's outward- oriented development strategy place a premium on policies that provide incentives to raise efficiency and productivity. Through its structural reform program, Indonesia has taken major strides in improving the incentives regime; but much still has to be done to lower the high costs that remain in many sectors of the economy. There is concern among investors, both domestic and foreign, that regulatory reforms have slowed. Restoring strong momentum to these refonns is a high priority. Reforms need to focus on making mar*e work better, by strengthening both external and domestic sources of competiton. The reform agenda comprises three broad elements: Competition in the product markets needs to be boosted by a reinvigorated drive to remove remaining regulatory barriers. Despite substantial trade policy reform, many activities, in both industry and agriculture, remain protected from external competition, contributing to a high-cost economy. Indonesia's production coverage of non-tariff barriers (about 30% in both manufactuing and agriculture) and effective rates of protection (over 50% in manufacturing) are high relative to those in most of its East Asian neighbors. Priorities in tade reform include: eliminating virtually all non-tariff barriers; reducing tariffs so that few lie above 20% (currently nearly 4,000 tariff items, or about 45% of the total, have tariffs and surcharges above 20%; of these, about 1,450 items, 16% of the total, have tariffs and surcharges of 40% or more); and reducing export restrictions, especially on forestry products (in conjunction with raising forestry fees and royalties). Deregulation should be applied with equal vigor to domestic trade, by dismantling trading monopolies (e.g., for many agricultural products) and removing barriers to inter-regional trade. Ensuring correct price signals also calls for reforming domesi prkingpolides, including appropriatepricing of public goods (utilities) and freeing the prices of private goods (e.g., sugar, fertilizer and cement); the recent major reform of fuel pricing provides an excellent example to follow. Investment reukaons, for both domestic and foreign investment, have been substantially eased, but there remain areas for further reform to increase the number of competitors in markets and attract larger inflows of foreign direct investment, including: shortening the negative investment list; relaxing minimum local content and export requirements; further easing the requirem for dilution of foreign ownership; streamlining a confinuing array of regulations at the local level; increasing the scope for competitive private entry in the provision of public services; and improving the actual implementation of reform measures (e.g., in customs). o Factor mar*et need to become more flexible and efficient, to help translate incentive reforms into a robust supply response. For the flnanci system, which has grown rapidly in response to extensive deregulation, the priority tasks are to consolidate past growth, Executive Sumnary .xii continue to strengthen prudential reguation and supervision, and safeguard the stability of the system, which is currently under strain. Increased confidence in the system and improved efficiency of banks will contribute to lowering the high real interest rates. Related issues are developing viable ways to reduce the concentration of credit and improve credit availability to smaller businesses, and developing the market for equity (to reduce relatively high debt-equity ratios). The land market remains underdeveloped, with the cost and complexity of transacdons acting as a deterrent to business, especially foreign investment. A market-based system of land allocation needs to be introduced by: sharply reducing and simplifying land regulations; improving and expediting land itling and registration; and instituting competitive auctioning for the allocation of Stave land. An efficient market for technology will be increasingly important for maintaining the competitive edge of Indonesian industries and developing new products. International experience shows that the acquisition and assimilation of technology are best achieved by mainining an open regime for trade, investment and technology licensing and a strong emphasis on education and training, supplemented by a technological support infrastructure-R&D facilities, standard setting and quality control-that is well-focused and responsive to private needs. In contrast, policies centered on a "technological leapfrogging" strategy, involving the development of targeted high-technology industries supported by direct public investment or subsidies and high levels of protection, have proven costly and ineffective in most countries. Also, such policies are inconsistent with Indonesia's strategy of broad-based growth and generation of enough jobs to employ the growing labor force. The labor market is relatively free of distortions in Indonesia; the main tasks are to increase the supply of better educated and more skldled workers, and to avoid actions that underine the flexibility of the market, such as barriers to the use of expatriate skilled workers. 3 The policy and regulatory infrastructure for markets needs to be improved to support better mare*d outcomes. First is the need to develop up-to-date, clear and enforceable commercda credit and contract laws, stadards for accounting, adiing and Jinanci disclosure, and transparent procedures for Govement interations with the private sedcr. Such "rules of the game" support efficient and equitable functioning of markets. Policies that "level the playing field"-dismantling of trade and investment barriers and other sources of monopoly advantage, prudential regulation of bank lending to interlocking business interests, and commercial legal reform-are the best way to prevent excessive concetrtion of market power and ensure that conglomerates face effective competitive pressures. It is particularly important that relations between the Government and the private sector be disciplined by transparent, competitive procedures to avoid real or apparent conflict of interest and discourage rent seeking. Regulatory reforms and supportive market infrastructure that promote competition and equalize access to market opportunities will also be a more effective means of promoting the development of small and medium-sized enterprises than direct govemment interventions. Second is the need to improve the framework of incentves to protect the environment. Allowing markets to work efficiently helps exploit the synergies betweer good economics and good ecology; examples are eliminating subsidies on natural resources-maintaining economic pricing of fuel, raising water and power charges, and correcting policies that result in underpricing of forest resources-and clarifying land rights. Even where markets fail because of externalites, market-based measures (e.g., pollution taxes and tradeable permits) are likely to be more effective and cost-efficient. However, regulatory measures are also needed, such as emission or ambient standards and land-use planning; their design needs to reflect institutional capacities for implementation and enforcement. xiv Executive Summary xix. Investment. A sustained, vigorous investment effort will be required to meet Indonesia's development objectives. There are four broad priorities in the investment agenda: o While the investment rate, both private and public, will need to rise, equally important will be raising the eficiency and quality of investment. Without efficiency improvements, resources will be insufficient to meet requirements. Higher productivity of private investment will depend critically on the provision of a more outward-oriented and competitive incentives regime, as outlined above. Higher efficiency of public investment will depend on continued progress in several areas: market-based public pricing policies; effective operation and maintenance of existing investments; exposure to private competition, where feasible; systematic evaluation of project proposals; and enhancement of project planning, implementation and management capacities of investment agencies. * The composition of investment should emphasize complementarity in private and public investment, with the latter focused on inftrcture and human resource development. Private enterprise should focus on investment in directly productive activities, but can also be tapped to contribute more to improving the availability and quality of public services, in both infrastructure and social sectors. The framnework for private participation in public service provision needs to be carefully structured to generate competitive pressures and protect the public interest. Around 85% of total public investment over the REPELITA VI period could be allocated to infrastructure and human resource development, slightly higher an in REPEIA v, but much higher than the 70% allocation during REPEUTA IV. In infrastructure, in view of the pressure of rapidly rising demand on existing capacity, the expansion of power supply is a high priority. In human resource development, basic education and health will remain the major focus of public spending, with a growing emphasis on quality enhancement. The emphasis at higher levels of education and in vocational training will also need to be on raising quality and improving relevance. o -IThe effectiveness and efficiency of expenditures on povery alleation can be enhanced through better targeting of public subsidies for social services. The poor's access to education and health has improved substantially, but much could be done to make the poor benefit more effectively from public expendiures on these services. Targeting these expenditures better for the poor calls for: identifying more accurately the location of the poor; shifting expenditures more toward programs of largest benefit to the poor, such as primary education and public health centers; increasing the use of public programs by the poor where it is low, such as in junior secondary education; and reducing service charges for the poor, and financing these reductions from improved cost recovery from the better-off. o Expenditures on envionm l protection will need to be raised. For public investnent, the priorities will be water supply, sanitation and solid waste disposal services; improved quality of urban ransport; and forest protection. Expenditures on human resource development (education, health, family planning) and poverty alleviation programs will indirectly, but importantly, benefit the environment. The private sector will need to spend more on urban and industrial pollution abatement. The incremental costs of public and private environment-related investments are sizable, but modest in comparison with their economic and social returns. There are two inmortant points to remember. First, improved pricing and cost recovery will be essential to pay for much of the needed public investment. Second, prevention is cheaper than cure; improved envrnmentl evaluation of projects and Excutive Summary xv adoption of cleaner technologies for new investments can save expenditures later on fighting environmental degrdation. xx. bstions. Institutional capacities will have a major bearing on the effectiveness of the incentive reforms and investments outlined above. Over the longer haul, the responsiveness of the institutional framework to strategic and structural shifts in the economy will be a major determinant of the sustainability of development. The transitions that the Indonesian economy is undergoing-the dismaning of regulatory controls, the increasing role and capacities of the private sector, and the shift toward more decentralized decision maklng-and the new challenges of development that are emerging, most notably that of environmental protection, have profound implications for institudonal roles and capacities. The agenda encompasses both market and public institutions. It comprises three main thrss: strengthening the institutional underpinnings of markets to support efficient and broad-based private sector development; adapting and developing public institutions, focusing their capacities on efficient and equitable provision of public services; and developing the institutional framework for environmental management. xxi. Two critically important, and related, insional underpinnings of mar*ets are a well- functioning legal system, to provide a predictable and fair environment for business, and a sound accounting and auditing system, to instill financial discipline. The need for clear, modem commercial laws and accountig and auditing standards was noted above, but these laws and standards would be of relatively little practical value without adequate means for their implementation and enforcement. The main needs are: strengthening the court system and arbitration mechanisms; upgrading the training of lawyers, accountants and auditors and developing their professional associations and standards; and widely disseminating legal information. xxii. The evolving role of government implies the need for major adaptations and improvements in public sector management: Pubic enterptrse reform needs to be accelerated, proceeding on two tracks: further commercialization of enteprises providing public goods and services that need to remain in the public domain; and a gradual divestiture of enterprises providing private goods and services. Improving the performance of enterprises remaining public needs to emphasize greater exposure to competition, autonomy in a framework of enhanced accountability, and financial discipline. Divestiture should employ transparent, competitive mechanisms that protect the public interest and allow broad private participation. o Reassessing and realigning goveument adninisbwtve stures and the size, deployment, skill-mix and incentives of the civil service to perform the changing functions of government are an essential complement to economic reforms. These reforms imply the elimination of many routine government administrative, control and licensing functions, and an increasing focus on policy analysis, promotion, monitoring and coordinating functions. One important implication is to move toward a leaner but more professional and technically skilled civil service, with better compensation linked to higher productivity. o A key dimension of public sector reform to provide public services more efficiently is th decntralization of responsibilities for local services to local governments. Mobilizing moie local revenues, to reduce the present heavy dependence of local governments on central transfers, and building local institutional capacities will be essential for successful decentralization. xvi Executve Summary xxiii. Closing the existing large gap between environmental policy and inplementation calls for strengthening the instational cqpacites for environmental management. Progress wIll be needed on three main fronts: improving the systems for environmental information and analysis to inform priority- setting and policy design; strengthening the institutions responsible for environmental management, including clarifying their roles and improving coordination; and enhancing local participation in policymaking, monitoring and enforcement. xxiv. Prioritdes in the Agenda. The foregoing discussion suggests the following priorities in the agenda for sustained development: o Macroeconomic Management: continue prudent macroeconomic policies to maintain financial stability, mobilize domestic resources and ease the burden of external debt. Raising both public and private savings will be central to macroeconomic management for growth with stability. e Incentives: strengthen both external and domestic sources of competition to support efficient and broad-based private sector development, building environmental concerns into the framework of incentives. Greater integration with the regional and global economy, through removing barriers to international flows of trade, investment and technology, should form a principal thrust of policies to raise efficiency and productivity. * Investment focus public investment on infrastructure and human resource development, emphasizing efficiency and quality of services and better targeting for the poor. In the other sectors, the primary role of Government should be in providing a competitive environment for private investment. * Instions: adapt and develop public institutions in line with the evolving role of government, focusing public capacities on providing the institutional underpinnings for efficient functioning of markets and on effectively and equitably delivering public services, including environmental protection. Extenal Enang Implications xxv. The projected pace of growth, poverty reduction and reform will call for substantial external resources, even with the expected rise in domestic savings. Given Indonesia's still low per capita income, substanal poverty and heavy debt-service burden, much of the external financing needs to be on concessional terms and in forms that effectively meet the financing requrmets of the economy. In 1993/94, total gross external fancing is projected to be about $10.5 biUlion, substantially lower than in the past three years. This reflects the major progress achieved since 1990 in reducing unsustaibly high current account deficits and associated large increases in foreign borrowing, especially private borrowing. The projected financing plan for 1993/94 is based on the following important assumptions. First, the current account deficit will be contained to $2.9 billion, about the same as in 1992/93, despite an expected decline in the world oil price; this implies an improvement in the non-oil current account balance of $0.5 billion and a decline in the total current account deficit from 2.4% of GNP in 1992/93 to 2.2% in 1993/94. Second, amordzation payments will rise sharply from $7.4 billion in 1992/93 to $8.4 biUlion. Tbird, part of the large financial inflows attracted by high domestic interest rates in 1992/93 will flow out as interest rates gradually decline toward international levels. Fourth, official reserves wil be maintained at levels equivalent to 4-4.5 months of imports, levels that are prudent given Indonesia's open capital account and vulnerability to external shocks. Executve Swunmary xvii xxvi. Private borrowing is expected to decline to more sustainable levels in 1993/94, but would rise again thereafter. Private capital, including foreign direct investment, would provide about half of Indonesia's total external financing needs in the 1990s, compared to negligible amounts in the 1980s. The increasing role of private capital in external financing calls for continued careful attention to debt management and policies that ensure efficient use of resources, especially given Indonesia's already large stock of debt. First, the incentives framework needs to ensure that these external resources flow into efficient uses and generate rapid, high returns, especially in export-oriented activities. In this regard, large, capital-intensive projects, and projects with high follow-up costs, need particularly careful scrutiny as such projects can add rapidly to Indonesia's debt, while crowding out potentially more profitable investments by small and medium-sized enterprises. Second, the availability of private financing at the projected levels cannot be taken for granted and will depend heavily on perceptions of Indonesia's creditworthiness. Third, the shift in the composition of Indonesia's debt toward private capital implies that Indonesia will have to cope with a rising average borrowing cost and a shortening maturity profile of debt. xxvii. Given the size of Indonesia's existing debt and the hardening of average terms, direct investment needs to be a larger share of capital iflows. Such inflows reduce the need for borrowing, and the risks associated with higher levels of debt, and also provide new technologies and export market access. Foreign direct investment has risen significantly in response to the regulatory reforms of recent years, but larger flows can be promoted by policies that enhance Indonesia's attractiveness as a home for foreign investment. xxviii. Within the overall financing plan, concessional assistance will play a strategically important role, even though such assistance will decline significantly in net terms and in relation to the size of the economy throughout the decade. An adequate flow of concessional assistance is an essential part of Indonesia's transition to a more diversified financing pattern. First, such assistance will condnue to provide financial support to projects and programs in such key areas as infrastructure and human resource development. Second, it will enable Indonesia to continue to pursue with confidence its program of stural reforms to enhance productivity and competitiveness, while it seeks to improve fiurther its macroeconomic balances. Third, as amortization payments rise, it will be important to ensure that the net flow of concessional external resou:ces does not fall too rapidly. Fourth, an adequate degree of concessionality will support prudent external debt management by keeping the rising average borrowing costs noted above within limits that are manageable, given Indonesia's high indebtedness. Worlkng together, these factors will help improve Indonesia's access to international financial markets, and attractiveness to foreign direct investment, and thus increase the probability that the projected private and commercial flows will be available as needed. xxix. This financing scenario projects that current levels of concessional financing are maintained. With an appropriate mix of project and sector assistance, and further efforts to improve project implementation, cGI commitments at about the same level as last year ($4.9 billion) would generate the projected concessional flows. As discussed at last year's CGI meeting, infrastructure and human resource development remain priority areas for this assistance. SUSTA G DEVELOPMENT A. Overview 1.01 "The achievement of sustained and equitable development remains the greatest challenge facing the human race." So begins the last World Development Report.' This also provides an apt opening for this Report which focuses on the challenges Indonesia faces in sustaining development in the years ahead. Indonesia's recent development record is impressive: continued rapid growth; resilience to major external shocks; management of substantial structural change; considerable reduction of poverty; and a notable start on improving environmenal management. Past achievements have laid a good foundation for firther progress, to move the country up the income ladder. Indonesia is still a low income country, though fast closing the gap with the middle income group; large numbers remain poor; and there are major issues emerging in envirnmental preservation. Sustainng development, the central theme of this Report, has three major, complementary dimensions: mainaining robust growth, capturing the enhanced opportunities for economic expansion and diversification that now present themselves; promoting eqaiy in development, in further reducing poverty and broadening participation in the process of economic growth; and protecting the envronment. Effectively integratng these objectives is the essence of sustained development. 1.02 in sustaining development, Indonesia will face continuing major structural shifts in the economy and an evolving array of challenges associated with the transition to a higher level of development and an increasingly competitive world. These range from the shifting roles of government and economic sectors to the rising imperatives of improving efficiency and productivity (and hence fostering greater competition) in the production of goods and services. The focus of investment will need to shift increasmgly from quantity to quality. The issues of environmental management will in general require greater attention. Institutional development and reform, encompassing both market and public institutions, will have an increasingly important role in the policy agenda. Indonesia's effective management of strucural change in the past inspires confidence that the transitions that lie ahead can be managed successfuly. But the challenges of sustaining success are formidable, and should not be underestimated. The key will be a continued firm commitment to sound economic management and responsiveness to an evolving agenda of reforms. 1.03 This chapter sets out the thematic and structural framework of the Report, and provides an overview of its main conclusions. Starting with a review of Indonesia's progress on development in Section B, it discusses, in Section C, the main challenges of sustaining developmen. The discussion highlights the evolving nature of the challenges. It also brings out the links between the ree dimensions of sustained development: growth, equity and environen preservation. Meeting these challenges will require action across a broad policy agenda. This agenda is discussed in Section D, organized under four themes: macroeconomic management; incentves; investnt; and insfittions. Each of these themes in turn forms the subject of a subsequent chapter, where the various elements of the agenda are analyzed and developed more fully. World Dewlopment Report 1992: Deuelopment and the Environment, World Bank, Oxford University Press, May 1992, p. 1. 2 Chapter 1 1.04 The themes of macroeconomic management, incentives, investment and institutions provide a useful, cross-cutting framework for integrating the agenda for growth, equity and the environment. Thus, for example, the chapter on incentives (Chapter 3) addresses reforms needed in the incentives regime not only to promote productivity and efficiency-and hence economic growth-but also to foster equity through wider access to opportunities and to improve environmental outcomes; the complex of issues discussed ranges across sectors, public/private as well as economic sectors. A similar, integrated approach is taken in the chapters on investment (Chapter 4), which includes social spending, and on institutions (Chapter 5). Also, the chapter on macroeconomic management (Chapter 2) goes beyond the usual macroeconomic issues to analyze the implications of the medium- to long-term economic outlook for poverty and the environment. This way, the three dimensions of the challenge of sustained development are discussed in each chapter, bringing out their complementarities as well as noting the trade-offs. B. Progress on Development 1.05 Indonesia can be justifiably proud of its development record. Twenty five years ago, it was one of the poorest countries in the world, with a per capita income of only $50. Since then, it has made great strides, achieving an average GDP growth of almost 7% p.a., a growth performance that ranks among the ten fastest in the world and on par with that of the dynamic East Asian economies (Figure 1.1). Rising at a rate of about 4.5% p.a. over this period, Indonesia's per capita income reached $650 in 1992, implying a substantial improvement in living standards. Indonesia is still classified as a low income country, but, provided the momentum of development is sustained, it is now within striking distance of joining the ranks of middle income countries. Figure 1.1: Slctd Indicaors of Economic Peomanoce GDP Growth (% p.a,) Export Growth (% p.a.) 1S07-7 1974-80 1981-85 1986-91 1968-78 19748 19814 1 98691 ~Indonesla BE*J TNH DC' *Idnsa Esst Asa:i * Dollas tems; nonoi for Indonedia Inflation (% p.a.) Debt Service Ratio (%) 1987-79 1974-80 19818S 1986-91 1967-78 1974-80 1981-85 198691 i Indonesis M Ea Asia 1M CoesI h Eas Asi EZHAlIe - Sustaining Development 3 1.06 Growth, Finandal Stability and Structural Reform. Consistent emphasis on maintaining economic stability, marked by the willingness to take hard decisions in times of both booni and bust, provided a solid foundation for sustained, robust growth. Prudence was exercised during the years of the oil boom in the 1970s, spreading the use of the oil windfatls over time and across sectors in a manner that avoided the erosion of the non-oil sectors that plagued most other oil-exporting countries. The development strategy emphasized channeling oil revenues into raising agricultural output and developing physical and social infrastructure. The emphasis on agriculture supported broad-based growth of rural incomes. The development of infrastructure strengthened the foundations for future growth. The economy grew at nearly 8% p.a. during the 1970s. A quick, tough response in the mid-1970s avoided a potentially serious debt problem. Subsequent cautious macroeconomic policies, including a conservative external borrowing strategy, mantained financial balances, although inflation rose moderately in response to the increased spending based on oil revenues. At the turn of the decade, the external current account was in surplus and the debt-service ratio was below 13%, about one-quarter of Mexico's level. 1.07 Indonesia faced a series of severe external shocks in the mid-1980s, including the collapse of oil prices, the rise in internadonal interest rates and the depreciation of the US dollar. These developments sharply reduced exports and fiscal revenues, opening up sizable external and domestic financial imbalances, and raised external debt service (these shocks together are estimated to have entailed an average loss of income for Indonesia of 7-8% of GDP p.a. during 1983-88). The Government responded promptly and effectively by embarking on a two-pronged adjustment program: restoring macroeconomic stability through fiscal and monetary restraint, supported by improvement of external conmetitiveness through a responsive exchange rate policy; and establishing a more diversified and efficient productive base through structural reforms that reduced the dependence on oil. The strategy to develop the non-oil economy had two main thrusts: promotion of the private sector; and encouragement of a more outward-oriented economic structure. The structural reforms were developed within a comprehensive, medium-term framework that fostered credibility through consistent implementation. While wide-ranging in scope, the reforms were particularly far-reaching in the areas of trade, investment, taxation and finance. 1.08 This strategy was successful in stabilizing the economy, maintining growth and transforming the structure of production (Table 1.1). Sound maLroeconomic management substantially reduced the current account and fiscal deficits, and contained inflation to below 10% p.a. Prudence in external borrowing allowed Indonesia to service its debt without requiring any rescheduling, at a time when many other oil-exporting countries encountered serious debt difficulties. Despite its large debt, Indonesia retained access to voluntary market finance throughout the adjustment period, in contrast to the general experience of the heavily-indebted developing countries. 1.09 Supported by prompt macroeconomic stabilization measures and structural reforms that spurred competition and enlarged opportunities for growth, especially of non-oil exports, the economy rebounded quickly from the effects of the shocks. Economic growth averaged close to 7% during 1988-91, having dipped to around 4% in the mid-1980s in the wake of the severe external shocks. The major force driving economic recovery was the private sector, as private investment responded vigorously to the policies of deregulation. The private sector contributed over 70% of the total GDP growth during 1983-91. Besides the increasing role of the private sector, evidence of successful structural diversification abounds. Non-oil exports and non-oil budget revenues increased from about one-quarter of total exports and budget revenues in the early 1980s to about two-thirds by the end of the decade, while the share of non-oil m a in total GDP almost doubled (Table 1.1). Non-oil export growth averaged about 18% over the past five years, with a still faster growth of 26% p.a. in exports of manufacrs, an achievement that compares favorably with the region's best performers. 4 Chapter I Table 1.1: Key Economic hidicators a 1975-83 1983-87 1988-89 1990 1991 1992 (est.) Average real growth rates (% p.a.) GDP 6.5 5.0 6.6 7.1 6.6 5.8 Non-oil 7.0 5.7 7.8 6.9 6.3 7.5 Non-oil exports 10.5 12.2 17.8 2.8 24.3 26.6 Fixed investment 10.7 -3.7 11.9 14.6 6.0 5.0 Plivate 9.1 0.9 10.7 16.2 3.0 3.7 Macroeconomic balances (%) b Current account/GNP -7.8 -2.5 -1.9 -3.4 -3.8 -2.4 Overall public sector balance/oDP -4.8 -2.7 -2.1 0.3 -1.1 -1.4 MLT debt service/exports 16.8 34.8 35.8 29.7 31.6 30.0 StmCture of the economy (%) b Non-oil exports/total exports 23.0 51.9 61.1 55.0 64.0 70.5 Non-oil revenues/total revenues 35.6 56.5 58.9 57.0 62.3 66.0 Non-oil manufacuring/ODP 9.9 12.8 13.9 14.9 15.4 16.0 Private fixed investment/ total fixed investment 52.1 60.6 58.7 59.1 57.7 57.0 a Blnce of payments data are for fisa years (starting April 1). b For last year of multi-year periods. Source: Central Bureau of Statistics and World Bank staff estimates. 1.10 Following the successful adjustment to the external shocks of the 1980s, the Government has faced the challenge of managing dynamic, private-sector led growth in an increasingly deregulated economy. In 1990/91, a strong surge in private investment, responding to the incentive and regulatory reform, combined with an easing of monetary policy, led to the emergence of excess demand pressures. These were reflected in a widening of the current account deficit, an associated sharp increase in external borrowing, and higher inflation. The Government responded by tightening monetary and fiscal policies and restraining public and publicly-related external borrowing, which helped dampen the demand pressures. It moved to strengthen the framework for prudential regulation of the financial sector, which showed signs of stress following rapid growth spurred by extensive sector deregulation. At the same time, the Government continued to build on earlier reforms in trade policy and investment and mdustrial regulations. These more recent macroeconomic developments and structural reforms are reviewed in greater detail in Chapters 2 and 3, respectively. 1.11 Poverty and Income Distribution. Perhaps the most powerful indicator of the success of Indonesia's development strategy and adjustment to the shocks of the 1980s is the degree of poverty reduction. Indonesia started the 1970s with around 70 million people, or 60% of the population, in absolute poverty. By 1990, the number of the poor had dropped to about 27 million, or 15% of the population (Figure 1.2). Even during the difficult adjustment period in the 1980s, poverty reduction was sustained. The 1990 World Development Report found that, over the last two decades, Indonesia achieved the highest annual average reduction in the incidence of poverty among all the countries studied. Sustaining Development 5 hdonesia's success in reducing poverty is atibutable to seveall dements of its development saegy: substanta invesunent in ecnomic and social Iratucue tat supported sustained, broad-based growth, strong emphasis on improvig productivity in agriculture, the source of lIelihood to a majority of the population and the overwhelming bulk of the ura poor; structural reforms that induced a shift from inward-oriented, capital-intensive activities toward export-ork nted, labor-intensive activies; and cushioning of the impact of adjustment in the 1980s on exdiue progras benficial to the poor, notably social services. Figure 1.2: Inddonc of i 5D If DWAbn9 1ffi UD 10 _1I 6840~~~~~~~~~~~~~* _ a . l 11 U N/ d pm 16.1 272k 2~~~~~~~~~~~~~~03 1970 198 I~~j7 198 190 1700m w 1.12 Evidence on the distrbution of income, personal and regional, is more limited than on poverty, but the available indicators point to a gradual reduction of disparities. The share of personal expenditures by the poorest 20% of the puion improved from 6.9% in 1970 to 8.9% in 1990; the latter compaes with 5.5% in the Philpines, and 4.5% in Mlaysia and Sri Lana. Indonesia's reladvely low and declining level of inequalt is also Indicated by the trend in the Gin Coefficient (esimated from the distribution of personal expeditu), which fl fhom 0.35 in 1970 (0.38 in 1978) to 0.32 in 1990 (Figure 1.2). There is evidence also of a gradual narwmg of regiond income disparities, though the disparities remain large (Figure 1.3). Againt these fvorable trends, a source of concern has been the emergence of a relatively high concentrton of ownrsip, and market power, in the modem business sector in the hands of large business groups, or conglomeres, and its implications for both the efficiency and eqity of private sector growth. The operations of the top 200 such groups were estmated in 1990 at the equivalent of around one-third of GDP (excluding the swalholder and the oil extraction sectors), of which about a third was accounted for by the top S groups. 6 Chapter 1 Flgwre 1.3: Trends in Reional lIcome Distbution Pvnd I GDP Shm (COonst5 indiC of Reionl Per Capa Income' 1983 pXts) [35G ShminTowoDp ~~~~~30Q 250 0.7 ~~~~~~~~~~200- 0^ / 150-_ Q4 in 19lg100 u k ~~~~~~~~~~~~~~~~~~~~u eI Q01 Others 0~~~~~~~~~~~~ O 02 0.4 0A 0 78 79 80 81 82 83 84 85 86 87 88 89 90 SknTIn ^*Na NNonal per capita income = 100 Flgure 1.4: Aoces of the Poor to Social Selces Change in Emlent Res Chwnes in Utilan of Heaflh Seovies Arong te Pooret 40% 1978-1987 Afong te Poorest 40%, 1978-1987 (% of age group enrol"ec) (lot repoftniwfi 1s h who wwe wtO atb 81 FeMale IM 67 61 52 51 51 48 41 35~ 33 32 Plmaw S y Teiy 197987 1 819 19 90 ~~~~~~UibanJa Rurljwa Woftft1 RIalUUWnds 78 ~ Female C HeatU Ceonte U Ouw Modem ProMd.r j ~~~0 2 Prmat kmc# Teflha Sustaining Development 7 1.13 Human Resource Development, b and Environment. Human resource development has received strong emphasis in the Government's development strategy, both as a means of raising living standards and increasing the capacities for growth. The successes are evident from the social indicators shown in Table 1.2. Infant survival, life expectancy, literacy, school enrollments and access to health services have all improved substantially. Cross-country comparisons of social services show Indonesia catching up fast with its East Asian neighbors, despite having a much lower income level and starting from a much lower base. Attention to women's role in development and poverty reduction is reflected in female school enrolhments rising faster than average, so that 48% of all primary school students and 45% of secondary school students are female. The development of social services has been accompanied by an improvement in the access of the poor to these services (Figure 1.4). Improved access of the poor to basic education and health services has been an inportant factor in the reduction of poverty. Table 1.2: Human Resource Development - Slected Countries, 1960-1990 Life xpecay Infant Adul Priiary Secondary Populton at birth mortality illiteracy enrollument enrollment per &mm rate a b ratio c ratio d DhVSiCiA 1960 1990 1960 1990 1960 1990 1960 1989 1960 1989 1960 1984 Indonesia b41 62 159 61 61 23 71 118 6 47 46,780 9,410 East Asia & Pacific Philippines 53 64 134 41 28 10 95 111 26 73 n.a. 6,570 Malaysia 54 70 105 16 42 22 96 96 19 59 7,020 1,930 Thailand 52 66 149 27 32 7 83 86 13 28 7,950 6,290 South Korea 54 71 120 17 29 4 94 108 27 86 3,540 1,160 South Asia India 43 59 165 92 72 52 61 98 20 43 4,850 2,520 SriLanka 62 71 71 19 25 12 95 107 27 74 4,490 5,520 All Developing Countries 46 63 233 69 n.a. 40 n.a. 105 n.a. 43 n.a. 4,980 a Number of infamts per thousand live births, in a given year, who die before reaching one year of age. b Proportion of the populaton over the age of fifteen who cannot, with understanding, read and write a short, simple statement on their everyday life. Base period illiteracy rate is for 1960 except for: Indonesia and India (1961); Malaysia (1970); and Sri LTmka (1963). c Gross enrollment of all ages at the primay level as a percentAge of primary-school-age children. d Computed in the same manner as the primary enrollment ratio. Source: World Dewlopment Report, various issues; The State of The World's Children, 1989. 8 Chapter 1 1.14 The development of physical infrastructure has been a second major plank, Flw 1.5: Indloar of IntsMtuotre Dlopmoont i,io-i alongside human resource development, of the P h dC aputy ( Tele hone Unes 000) Government's strategy to promote strong, lIC 12W broad-based growth. Infrastructure 8.0 . 1,000 development has consistently received high 60 Sao II priority in successive five-year development . eIID plans (RIpELrrAs), averaging over 40% of all 0400 development expenditure. This is reflected in 2.0. 200 a substantial expansion of services in all o iorn _ 9 19II major infrastructure sectors over the past two 19r0 1s90 19T0 1080 decades. For example, the installed capacity PakWRoads MoDen) dU d k#LIt of the state electricity company (PLN) 120 increased 18-fold; the number of telephone 100 | l lines rose seven-fold; and the length of paved 80 111 2 roads increased nearly six-fold (Figure 1.5). 80 . The expansion and improvement of 40 L 1'0 infrastructure facilitate the strong private 20 mO supply response to the investment 0 M0979 opportunities opened up by Government deregulation policies. Box 1.1: Indonesa's PROXASH (aean Rivers) Progam The PROKASIH Program in Idonesia was initiated in 1989 in response to growing pollution loads, especially from rapidly expanding industries, in cricad watersheds. It was designed to overcome the fragmentation of previous efforts to control pollution. At its inception, the Program included the eight most industrialized provinces: East Java, Central Java, West Java, DRI Jakarta, North Sumat, South Sumatra, Lampung and East Kdimantm. In 1990, Riau, Aceh and West Kalimantan alsojoined. The initial focus was on the worst industrial polluters in the 24 most affected rivers, with a stated goal of reducing their pollution loads by 50% within two years. Technical and administrative coordinaon of the Program is provided by central agencies, but the implementaion is carried out by provincial authorities, with central support as needed. The mass media is encouraged to report on the enviental damage caused by pollution and on significant clean-up efforts. NOos are encouraged to help community groups participate in envirnmental activities. The Program involves five key steps: (a) establishing the local PROKASIH Teams; (b) identifying specific firms in highly polluting industries; (c) getting these firms to sign voluntary "Letters of Commitment. to cut pollution loads in half within an agreed time frame; (d) monitoring subsequent results; and (e) applying increasing pressure on those not malkng a good-faith effort to comply with their commitment. While it is still a relatively new program, there have been some notable successes. PROKASIH Teams are now in place in the 11 provinces, and voluntary agmens have been signed by some 2,000 firms. Pollution loads have been reduced in several provinces, partcularly in those with the strongest technical capacity to pursue the objectives of the Program. There are stiU major shortcomins in the Government's capacity to monitor actual industral effluents, and in the private sector's capacity to design and operate pollution abatement systems. The political commitment to enforce environmental standards, however, has been greatly enhanced by the favorable publicity sunounding the PROKAsM Progrm, which in turn has increased the credibility of the national and proviciad authorities in their enforcement efforts with individual firms. Sustaining Development 9 1.15 Indonesia has taken imporant steps to improve environmental management. This reflects growing awareness, in Indonesia and around the world, of the serious risks environmental degradation poses to sustainable development. Among developing countries, Indonesia has played a leading role in articulating a sustainable development strategy and putting in place essential elements of a regulatory and institutional framework to support that strategy. These initiatives include: establishment of an environmental protection agency (BAPEDAL); environmental impact analysis (MA) requirements for development projects; and new legislation on spatial planning. Specific sectoral or cross-sectoral environmental initiatives include: the preparation of a Tropical Forestry Action Plan, setting out the agenda for sustainable management of forest resources; the preparation of a National Biodiversity Action Plan, aimed at preserving Indonesia's rich array of plant, animal and marine life; the start of a Clean Rivers Program, PROKASH, which targets reducing industrial pollution in 24 most polluted rivers across Indonesia (Box 1.1); and a review of the institutional arrangements for water resource management. In the years ahead, Indonesia faces major challenges of environmental sustainability. The implementation of the above initiatives is constrained by institutional weaknesses and limited financial resources, but a good foundation has been laid for future efforts in responding to these challenges. C. Sustaining Development 1.16 Indonesia's development achievements over the past twenty-five years, including the demonstrated resilience to major external shocks, are impressive. The past successes enable the Government to build on a strong economic foundation as it looks ahead and formulates the next (Sixth) Five-Year Development Plan (RPEuTA) and the Second Long-Term (25-year) Development Program (both of which start next year). At the same time, there needs to be a clear recognition of the formidable challenges of sustaining development that lie ahead. While past achievements have tpened up new opportunities for development, they have also given rise to new challenges. Future challenges stem both from the fact that, despite past progress, Indonesia remains a low income country, with a sizable segment of its population still living in absolute poverty, and from significant changes in the nature of the policy agenda associated with the economy's transition to a higher level of development. The task of sustaining development is three-fold: o maintaining a robust pace of economic growth to improve living standards and provide gainful employment to the rapidly expanding labor force; * promoting equi* by reducing poverty and broadening participation in development; and o protecting the envronment by conserving resources and limiting pollution. Sharing the common aim of improving human welfare, growth, equity and environmental protection are all essential to sustained development. Strong synergies exist among these objectives.2 Growth supplies the increase in resources necessary to reduce poverty and improve environmental management. Equitable development broadens the base of growth and alleviates a major source of pressures on the environment-poverty. Proction of the environment fosters efficient, long-term growth and contributes to equity as the poor tend to be the most vulnerable to the consequences of environmental degradation. Trade-offs also exist. An example is industrial growth and the control of pollution. However, 2 oPromoting growth, alleviating poverty, and protecting the envionment are mutuly supporive objectives...", EnWronment, Growth, and Development, World Bank, Devepment Committee Pamphiet 14, 1987, p. 5. 10 Ohapter ) appropriate, well-targeted policies can mitigate these trade-offs. Concerns about the costs of environmental protection, such as pollution control, in terms of foregone income growth are often short- sighted and based on an incomplete consideration of the benefits of oetter environmental management (or of the costs of environmental inaction). The 1992 World Development Report aptly termed the distinction between development and the environment a false dichotomy.3 Similarly, there cxists no inherent dichotomy between growth and equity, as borne out by increasing international evidence of a positive correlation between strong and equitable growth-the East Asian, and Indonesia's own, record of robust growth combined with impressive reductions in poverty is a case in point.4 The central challenge in sustainable development is to take maximumn advantage of the complermentarities that exist between growth, equity and environmenal protection and to minimize the costs of addressing the trade-offs. 1.17 In Indonesia, the harmonization of growth, equity and stability, often referred to as the "Trilogy of Development", has been a fundamental principle guiding development policy for the past 25 years. In a major statement on economic policy (1992 Independence Day Speech), President Soeharto underlined the Government's continuing emphasis on the consistency of these goals, but, looking ahead to the next Long-Term Development Program, also noted the increasingly important need to improve emvironmental management.s The funmental objectives of Government development policy thus support the goal of sustainable development in its broadest sense, and provide a guiding framework for consistent policy formulation to meet the challenges of sustained conomic progress. 1.18 Within this broad framework for sustaining development, the future policy agenda will be shaped by some fundamental structral transformations and transitions underway in the economy. These shifts associated with the evolution of the economy imply important changes in the nature of ongoing callenges as well as the emergence of new challenges. As elaborated below, in all the three areas of growth, equity, and environmental protection, a new generadon of issues is emerging. Success in sustaining development will depend on both pressing ahead with the unfinished agenda in the existng areas of policy reform and adapting and developing policies and capacities to cope with the new issues. Growth wih Stbt 1.19 Sustaied robust growth is central to achieving Indonesia's development objectives. To employ the labor force, which is increasing by 2.3 million people anmnally, at rising levels of productivity, improve living standards and continue to reduce poverty, non-oil GDP will need to grow at 6-7% p.a. At this growth rate, Indonesia's per capita income would exceed $1,000 by the year 2000, placing it in the category of middle income countries, and rise to more than $2,000 by the end of the Second Long-Term Development Program. Sustining this rate of growth, while minai macroeconomic stability and adaptng to major structural transformations and transitions the economy will undergo, will be a major challenge. 3 World Development Report 1992, op. cit., p. 25. 4 More Eviden on Income Ditribtion and Growth, George R. G. Clarke, Policy Research Worldng Paper No. 1064, World Bank, January 1993. 5 "Anotber challenge that we have to take into account from now on is the scarcity and limitation of natural resources, (and) the impact of industrialization on the quality of our environment. We are deermined that our industiization is a sustainable one." StAte Address by President Soeharto on the 47th Idependene Day, August 17, 1992. SsnainMng Development 11 1.20 A stable macroeconomic foundaton is a necessary condition for sustaed economic growth.6 In mantamin a stable macroeconomic environment, the main challenge stems from Indonesia's large external debt; total MLT debt amounted to 58% of ONP and 176% of exports at end-1992. The MLT debt-service ratio in 1992 was 30%. In absolute terms, Indonesia's external debt is now one of the largest in the developing world. Cautious extenal borrowing policies, backed by strong growth in non-oil exports, have allowed Indonesia to maintain an unblemished debt service record, unlike most countries in similar circumstances. Nonetheless, the debt burden is heavy, and it limits Indonesia's policy flexibility and raises its vulnerability to external shocks. A central goal of macroeconomic management will be to reduce this burden gradually to levels that awe more sustainable in the medium to long term. This goal has two important implications: reducing the current account deficit; and mainta g a prudent approach to external fiancig. Sustinng robust non-oil export growth will be the key to reducing the external deficit. To achieve and sustain a non-oil GDP growth of 6-7% p.a., the investment rate will need to rise, from about 23% of GDP in 1992 to about 25.5% by the end of the decade. Reconciling the higher investment rate with the need to reduce the current account deficit will require an increase in the national savings rate, from about 20% of GDP in 1992 to about 23.5% toward the end of the decade. This underscores the need to intensify domestic resource mobilization. Even with a declining current account deficit, Indonesia wi1l need substantial exernal nancing in coming years. One challenge will be to manage a smooth transition to an increased role of private capital in external fimancing, and to diversify the sources and types of financing. A related challenge will be to promote greater foreign direct investment, with its twin advantages of reducing the need for debt-creating flows, and providing new technologies and market access. 1.21 Policies for growth will need to adapt to the evolving nature of the growth process as the economy moves toward higher levels of development. Success in sustainig the momentum of growth will depend greatly on how effectively Indonesia manages some important dimensions of this evolution. These will include both some fumdamental qualitve shifs in the growth process and major struww tanformations in the economy. The former comprise: * an increasingly important role of improvements in efficiency and productivity as a source of growth; and 4 a transition from quantity to quality in the production of goods and services. 1.22 In an increasingly tougher international business climate, maked by globalization and keen competition, raising eicinc and proctivity would be the key to sustaining the dynmism of non-oil exports, which will remain the primum mobile of Indonesia's economic growth and diversification. The sources of Indonesia's competitive edge will need to shift gradually from the basic cost advantages arising from the availability of cheap unskilled and semi-skilled labor and relatively abundant raw materials to gains in productivity. Besides exports, efficiency and productivity improvements hold the key to the role the domestic market will play in fue growth. Indonesia has a large domestic market. Supplying this market more efficiently offers substantial scope for productivity gains and future growth, with large benefits for Indonesian consumers. The critical need is to foster increased competition, not only by opening the economy further to competition from abroad, but also by promoting greater competition within the domestic economy, an area where less progress has been made so far. More broadly, raising efficiency and productivity will be essential to realizng Indonesia's growth objectives within the limits S Strong cross-counny evidence showing mamroeonomic stability is positively associated with long-mn economic growth is provided in Macroeconomic Factors in Growh, Staley Fische, pape prsented t World Bank Conference on "How Do Nadonal PoLicies Affect Long-Run Growth", Washington D.C., February 1993. 12 Chapter I of available resources. International-including East Asian-experience provides strong evidence of a positive correlation between economic growth and productivity increases and between the latter and the reduction of market distortions (more opemess and domestic competition).' President Soeharto underlined the Government's clear recognition of these fiundamental challenges by making efficiency and productivity a central theme of his 1992 Independence Day Speech.8 1.23 A transition from qua_ty to qualty in the production of goods and services is closely related to raising efficiency and productivity. It has several important dimensions. In the public sector, it implies a shift of focus from expanding services to improving their quality. In the key area of human resource development, for example, past efforts have been instrumental in putting a school and a health clinic in almost every village; the priority now, as recognized by the Govermment, is to improve the quality of the education and health services, a critical element in the effort to raise the productivity of labor and support technological progress. In physical infrstructure as well, the quality and reliability of services, increasingly important to the competitiveness of domestic production as it grows in sophistication, will need stronger emphasis. The reorientation of the focus of public investment from quantity to quality will need to be supported by improved operation and mannce of investments. In the private sector, improving the quality of goods, and developing new products, will become increasingly inportant sources of market growth. Another dimension of quality requiring increased attention, and relevant to both the public and private sectors, is the shift toward environmentaly cleaner methods of production. 1.24 Accompanying these fundamental qualitative shifts in the growth process will be the challenge of managing contimuing major transformations in the structure of the economy, in the form of changing roles of sectors, and of activities within sectors. Key structural changes will include: o a continuing shift in public-private sector roles; o a declining role of oil in the economy; and * major iter-sectoral and intra-sectoral shifts within the non-oil economy. 1.25 The Government's role will need to continue to shift from direct management and control of productive activities, including the production of many private goods and services, toward the facilitation of sound private sector development. This translates into an increasing Government focus on: maiing a stable macroeconomy; facilitating efficient functioning of markets; and providing public goods, notably infrastructure and human resource development services, efficiently and equitably. In addition to being the dominant provider of private goods and services, the private sector will be expected to play an increased role in the provision of public services that can be provided within a competitive framework. This reorientation of the Government's role entails a major agenda of policy reform and institutional restructuring. 7 World Developmnt Repot 1991: The Challenge of Development, World Bank, Oxford University Press, June 1991, pp. 4546 and 98-100. On the lessons of East Asian experience with productivity growth, see Govemmet Poltdes and Produivity Growth: ts at Asia an Exception, Vinod Thomas and Yan Wang, mimeo., World Bank, 1992. 8 *We must [use] heightened national efficiency and productivity as the primay basis of our economic growth, for today and in the fiture. ...A resilient economy is one that consists of resilient industries, namely those which rely on high productivity and efficiency...' President Soearto, op. cit. SLstaining Development 13 1.26 The continming decine in the S role of oil is reflected in the prospect that FI(GDP 1.61:==0s Indonesia would likely become a net oil importer within this decade and the sector's eo share in GDP would drop to about 6% by the 61 50 year 2010, compared to 18% in 1990 and 40 28% in 1980 (Figure 1.6). By the end of the 40 - Second Long-Term Development Program, 0o 28 oil may play only a minor role in the 2 820 Indonesian economy. These prospec 10 underscore the case for continuing to strengthen the non-oil sources of growth, 180 1900 2000 20 0 exports and fiscal revenues. For example, MO_/___A__________g____o__ non-oil exports would likely need to generate | * OMu n USstv | about 85% of total export earnings in 2000. uaunV au¢ W&. 1.27 Growth in non-oil exports, as well as the momentum of overaU growth in the economy, viUi depend heavily on the contiued dynamism of non-oi manfadturing. Maintaining a non-oil manufacturing growth rate of around 10% p.a. would be important, and appears feasible provided efforts to improve the environment for efficient private sector development are sustained. At this rate, the share of non-oil mucuri in GDP could rise from around 16% currently to 23% by 2000. The sector's share would be expected to rise further to around 33% by 2010 (Figure 1.6). The critical role of the sector in export growth is indicated by the expected increase in the share of mn _factur in total exports, to about 65% by 2000 from 45% recently. Given the fiercely competitive export markets for manufactures, this again underscores the importance of promoting efficiency and productivity in industrial growth. The likely increase in the share of non-oil man ing in total employment wi1l be slower (from about 10% currently to 13% by 2000), but would stil make an important contribution to absorbing new entras into the labor force and raising the average labor productivity in the economy. 1.28 In contrast, the share of agriutur in GDP would be expected to continue to decline, from about 20% in 1990 to 15% by 2000 and fiurther to 11% by 2010. Nonetheless, the sector will continue to play a vital role in the economy, as the main source of employment (still providing about 50% of the jobs in 2000 and 40% in 2010) as well as the producer of critical wage goods, industrial raw materials and commodity exports. Also, given supportive policies, agricultural growth, while slowing, could still average 3% p.a. during 1990-2010, exceeding population growth and thereby contnuing to contribute to raising living standards and reducing poverty. In servies, a moderate increase in the sector's share in GDP and employment is likely (Figure 1.6). Spurred by deregulation, financial services have grown rapidly in recent years. In coming years, inauctur-related services and tourism are the likely major sources of growth. Sustaining robust industrial growth and dismantling regulatory barriers would be key to the prospects for expansion and productivity gains in services, and would allow the sector as a whole to grow by around 7% p.a. 1.29 lnft-seCtoral shifts wiUl be an equally important dimension of the likely development transitions. In m a , the share of basic processing activities is expected to decline gradually while that of more downstream processing and higher value-added activities is expected to increase. A relative decline in the contribution of resource-intensive industries would reflect both the normal evolution of indutrialization and moves toward a more sustainable use of natural resources. Labor-intensive industries will remain Indonesia's main area of comparative advantage, as the domestic supply of labor wil remain plentful even though labor force growth is likely to decelerate somewhat later in the decade 14 Ohapter I as the effects of slower population growth are felt on working-age groups. An outward-oriented strategy is essential to ensure these industries are efficient and generate adequate employment. In agrculture, the share of rice is expected to decline, and those of such other activities as non-rice food crops, lives!ock and fisheries are expected to increase. Successfully achieving this diversification in agriculture, through policies that allow the sector to respond flexibility to evolving needs, will be important to sustained growth in the sector and to continued progress on poverty alleviation and regional development. 1.30 These inter- and intra-sectoral structural shifts are fundamentally similar to those experienced by both the developed countries and the rapidly industrializing economies of East Asia at corresponding stages of their economic evolution. nternational experience shows they are achievable, but it also shows they are not automatic; the difference between success and failure has been the sustained implementation of a strategy conducive to development, such as the one that has brought Indonesia to its present threshold of opportunity. Equity trough Wider Participation 1.31 The promotion of an equitable pattern of economic growth has been a major goal of the Government.9 In pursuing this goal in the years ahead, the Government will face three main, related challenges: o continuing to reduce and, in the long run, largely eliminate poverty; o ensuring widespread regional participation in development; and * promoting broad-based private sector growth. 1.32 Progress in reducing poveny over the past two deades has been impressive, but major challenges remain. About 27 million people, 15% of the population, remain below the poverty line, with many millions more of 'near poor" with incomes just above that level. In addition to the large number of the remaining poor, the nature of the challenge to reduce poverty is likely to change. As poverty declines, further reductions in poverty tend to become increasingly difficult as a progressively larger proportion of the remaining poor are likely to be those who are harder to reach through a general growth of incomes and services, such as people in resource poor or remote areas. A reflection of this is the uneven geographical pattern of the incidence of poverty in Indonesia; it remains high in the Eastern Islands and parts of Java. The incidence of poverty ranged from 45.6% in East Nusa Tenggara to 1.3% in DKI Jakrta in 1990. Within Java, the incidence of poverty is lower than in most of the Eastern Iblands, but there remain large pockets of poverty, with the result that, in absolute terms, the majority of the poor still live in Java. The centerpiece of the strategy to reduce poverty will remain the promotion of a pattern of growth that expands opportunities for the productive use of the poor's most abundant asset-labor-and the widespread provision of basic social services-education and health-that enhance the poor's capacity to grasp those opportunities. However, finding ways to target these interventions to reach the disadvantaged groups and backward areas will be increasingly important. Accordingly, accurate identification of where the poor are located, and proper design of the targeted intervenions (such as subsidized basic education and health for the poor), will have an increasingly important bearing on the efficiency and effectiveness of poverty allevition programs. 9 'From the very onset we realized that equitable distributionwithu gwwth will only mean sbaring poverty. Growth without equitable distribution meams sharing injustice." President Soeharto, 1991/92 Budget Speech. Susaning Development 15 1.33 Provided Indonesia can sustain the pace and pattern of growth of output and employment discussed in the previous section, and complement it with specific policies and programs effectively targeted at the needs and location of the poor, it can look forward to continued robust progress in reducing poverty. It can realistically set itself the targets of reducing poverty (as currently defined) below 10% by the year 2000 and largely eliminating poverty, except for a small hard core of the poor with particular disadvantages, by the end of the Second Long-Term Development Program. 1.34 Related to the reduction of regional disparities in the incidence of poverty is the broader objective of promoting more balanced regional development. Regional income disparities have shown a tendency to narrow, but they remain large. The development potential and options vary considerably across the regions, reflecting wide regional differences in resource endowments and the level of past development. More research is needed to identify what specific development options hold the most promise in different lower income regions, in the Eastern Islands as well as in Java. However, in broad, strategic terms, three important elements of the chaUenge to bolster the development of these regions can be distinguished: * In areas where the resource base provides good potential for agncultural development, the provision of agricultural services tailored to the specific regional needs would be important. The strategy of rice-led agricultural development, which has played a major role in reducing poverty and raising incomes in Java, is less relevant off-Java where the resource base for such development is lacking (and also in similar parts within Java, such as the uplands in Cental and East Java and the coastal areas in North Java). However, good opportunities for non-rice agricultural development-in non-rice food crops, tree crops, fisheries, livestock and forestry-exist in some of these areas. The development of agricultural support services, e.g., extension, hitherto focused primarily on rice, needs to be oriented more toward such opportunities in these areas. In exploiting these opportmities, there is a need to devise approaches that do not deplete the fragile resource base and that promote linkages with the local economies rather than result in enclaves. o in areas where the natural resource base precludes significant agricultural growth, the emphasis needs to be on exploring and developing viable non-agricultural activities, such as light manufacturing, marketing and other services. To the extent such activities could be developed in rural areas, it would help reduce the incentive to migrate and add to urban congestion. Where potential for viable non-agricultural rural activities exists, adequate provision of rural infrastructure, such as transport and power, and access to credit acquire particular importance. The development of both non-rice agricultural activities and rural non-agricultural activities should not be inhibited by regulatory restrictions on cropping patterns and land use. o In areas of very limited productive potential, the primary emphasis needs to be on improving the population's access to quality human resource development services. In addition to raising the local people's present welfare, this would enhance their capacity to find alternative income-earning opportunities, including through migration to other areas of greater productive potential. 1.35 Both poverty reduction and the broader objective of narrowing regional income disparites would benefit from fuller participation of women in development, for which women's access to adequate education, health and family planning services is critically important. These objectives would also benefit from wider participation of local institutions and communities, including project beneficiaries, in the 16 Chapter I planning and implementation of development. Building more constuctive partnerships with local representatives would help tailor development prorms and projects better to local needs, opportunities and constraints. 1.36 A thd challenge is to promote wier pafiipaln in the growth of the modem privat sector. Besides equity, broad participation, by large and small firms, is conducive to the efficiency, diversity and robustness of private sector development. The key to addressing the concerns arising from the dominance of conglomerates in industry lies in pressing ahead with Government regulatory reforms to expose businesses to greater domestic and external competition, and dismantle the sources of monopoly protection and rent seeking that remain. To establish a level playing field so that businesses face the same kinds of competitive pressures and opportunities, underpinning market forces with a stronger and transparent commercial legal framework and prudential regulation of the financial sector are equally important. Protecding the Efronment 1.37 Sustainable growth will depend on efficient use and conservation of Indonesia's natural resources, including preventng pollution from destroying those resources. Essential to sustained growth, environmental protection is closely linked to the qualitative and structural shifts in the economy discussed above. Through such shifts, the structure and sources of growth need to change, to use resources, especially non-renewable resources, less intensively and to generate less pollution. An increasingly flexible, resilient and efficient private sector is essential for such shifts to occur with minimum loss to the pace of growth. Policies that reduce the pressure of population growth will also mean that a given standard of living can be achieved with the use of fewer resources and less pollution. The effects of population pressures on people's lives and on the environment will become increasingly stark on marginal lands, on the edges of forests and in urban slums. 1.38 Sustainable use of natural resources is particularly important to Indonesia's development prospects given the major role these resources play in the economy: direct extraction and primary processing account for about 40% of oDP; and the primary sectors generate about 60% of export earnings and 50% of employment. Sustained growth requires carefully managing the environment as a source of these resources. Key issues concern: * increasing scarcity and deteriorating quality of water supply, especially in Java; and o deforestation, land degradation and loss of biodiversity, mainly in the outer islands. 1.39 In addition to utilizing the resource base, future growth will lead to increased urbanization and industrialization. As noted earlier, the share of m rin in GDP could double over the next two decades, rising to 33% by 2010. Urbanpopulationhas beengrowing at 5% p.a. From only 15% of total population in 1970, the urban population has already reached 30% and, by the end of the Second Long- Term Development Program, half of the population may reside in urban areas. Cities on Java will need to cope with 1.5 million new residents each year. Some of this growth will come from reclassifying densely populated rural areas as urban, but it will still lead to increasingly complicated problems of urban enviro_nent management. Rising pollution and congestion intensify the need to ensure sustainable use of the capacity of the envinment as a sink for urban and industial wastes. Major issues include: o in industry: control of air and water pollution and hazardous waste disposal, particularly on the north coast of Java; and o in cities: better sanitation and solid waste disposal, and lower air pollution and congestion. Sustaining Development 17 1.40 Water, Forests, Laud and Blodiveriy. Increasing and often conflicting demands on water resources on Java from agriculture, industry and sanitation have limited the availability of water and degraded its quality. The major demand is for irrigation, where supply and demand need to be brought into a more efficient balance by developing viable pricing schemes. In dense urban areas, high rates of ground water extraction have already exceeded natural replanishment, leading to salt water intrusion. In Jakarta, for example, water pumped from the ground each year is estimated to be almost three times the sustainable level. With this imbalance, salt water intrusion is advancing 0.5-1 kIlometer per year. As with irrigation water, enviromentally sound urban water use will require improved pricing. 1.41 Sustainable cuts from Indonesia's tropical forest are estimated at 22 mcm per year, but harvests are currently running at over 33 mcm per year. Logging, in combination with conversion for agricultural use and forest fires, claims 1.1 million ha. of forest each year, roughly 1% of Indonesia's forests. Forests are a major source of exports and livelihood and are important to the quality of the environment. While steps are being taken, developing and implementing an effective policy and institutional framework for sustainable management of forests will be a key challenge. Sustainable forest management is also central to the prevention of land degradation and loss of Indonesia's rich blodverui*. 1.42 Urban and Indusrial Po on. In the urban environment, the Government is strugging with the burden of household and industrial wastes, both major sources of pollution, and both sources that will expand substantially as growth (especially industrial growth) continues apace (Figure 1.7). Lack of adequate sewerage treatment leads to contamnated rivers and ground water. In a recent survey in Jakarta, 93% of shallow wells, the dominant form of residential water supply, were found to be contaminated with human waste; tap water samples revealed a 21% rate of contamination, and hydrant samples 58%. About 75% of the biological oxygen demand (BOD) in Jakarta's rivers comes from household waste, with another 15% coming from industry. Industrial BOD loads have increased one and a half times since 1980, and are projected to do so again before 2000, and increast 10-fold by 2020. In 76addition, industrial growth is raising concentrations of toxic chemicals and heavy metals in water. Increased urban households and firms are also generating growing amounts of solid waste, 5-6% more each year. Collection and disposal are inadequate, with as much as 40% of solid waste dumped illegaUy, often into rivers and canals. The largest cities are also suffering from increasing problems of air pollution. Vehicle emissions are the largest single factor in urban air pollution, and are also likely to be the fastest growing source (Figure 1.7). Already in Jakarta, particulates, lead and other airborne pollutants have reached levels that harm health. Air poUlution from industrial sources is becoming an increasingly serious problem in many areas of the country. Even with a decline in the polluon-itensity of industrial output, total industrial air pollution loads wil increase considerably: an estimated 13-fold increase in sulphur dioxide by 2020, a 15-fold increase in suspended particulates and a 19-fold increase in the emissions of bio-accumlative metals. 1.43 Air and water poRution from household and industrial sources imposes significant costs on the economy and human welfare. Air pollution in Jakarta alone costs between $200-$500 million per year in reduced human health. The costs of fatal diarrhea contracted from polluted water are $100-300 million per year, leave alone the costs from less serious diarhea or other diseases. Water pollution also imposes significant costs in terms of destruction of aquatic ecosystems. As urban pollution and congestion rise, they act as an increasingly important deterrent to economic activity, as the experience of several cities (e.g., Bangkok) demonstates. Containment of such enviomnent degradation is thus important both on grounds of health and sustainability of economic growth in urban and industrial centers. 18 chapter I Flgure 1.7: Environmental Challenges: Urban and Indusftral Pollution Poklun hum ULibn Soumes: Di Jaiaft 5 _............................... .................;/ 4 _ ;~~~~~~~~i v.'.'........... t6 ................. .........X 4......... ......... ......... 1 7O 1980 1990 2000 2010 ° %ro 1960 low 2000 2010 - Huan wn -Sod Wsw PoWIIuon from Indtsby: Irdoneal Toteis 80 Al Mo6 ,, BUMW eo .................. I. . .. . . .. . .. . . .. . .. . . .. . .. .. ,/ 40 . 100 ...........-------;-.-'.---- 20 ... . .... ... ...'. 117 1980eo 1990 2000 2010 1%7o 1960 2 1%0 1980 1990 2000 2010 -Wat :6OD --Atr: PutbaWe[s3 8ouoaS --Air A-P TcWod - h Metdb The Cafege of Integral on 1.44 Effectively igrating the growth, equity and environmental objectives dussed above is the crux of the challenge of achieving sustained development. The main elements of the policy agenda to meet this challenge are discussed in the next section. Successful integration of growth, equity and environmental protection requires that three key principles guide this effort. These are: * adopting and maintaining a long-krin focus; o taking maximum advantage of the ceompmenadles that exist between growth, equity and environmental protection; and o dealing effectively and efficiently with the otdeffs. 1.45 A long-term vision is central to the issues of sustinability of development. It facilitates a clearer recognition of the consequences-costs and benefits-of policies down the road. It helps bring out the conmplementarity of objectives that might appear to be in conflict in the short run (e.g., growth and equity), and shows the ustinabiity of policies that might not be evident with a shorter horizon (e.g., distortions encouraging wasteful resource use). There is considerable scope for policies that simultaneously promote income growth, improve eqLity and protect the environment. Examples of such Sustaining Development 19 policies are: appropriate pricing of resources; clarifying property rights and resource ownership, and strengthening the legal framework supporting the functioning of markets; and improving access to, and the quality of, human resource development services (Box 1.2). The discussion above emphasized efficiency and quality as major underpinxings of future growth; these are also necessary for sustainable improvements in equity and better enironental management. In general, policies that allow markets to work efficiently also make them more equitable and environmentally friendlier. Box 1.2: Adjusting Fuel Prie: An Example of "Win-WIn-WIn" PolicIes In a landmark decision announced by President Soeharto in his 1993/94 Budget Speech, the Government subst ly raised domestic fuel prices with the aim of eliminating budgetary subsidies for all fuel pioducts, except for a reduced and temporary kerosene subsidy. The President asserted the important principle that "we have to treat energy as an ordinary commodity with the going price at the interational market'. Retail prices for diesel, fuel oil and aviation fuels were raised to their world market levels, while the implicit tax on gasoline was raised to 66% to cross-subsidize the remaining 33% subsidy on kerosene. The overall price adjustment averaged 24%. The estimated fiscal impact of these price increases is large: revenues from domestic sales will increase by about Rp.3 trilion (1.1% of GDP) in 1993/94, switching an estimated budgetary fuel subsidy of about Rp.1 triUion (at the assumed world oil price of $18/bbl.) to a surplus of about Rp.2 trilion. This adjustment provides a powerful example of policies that simultaneously contribute to gowth, equity and enviromental protection. Growth. Adjusting fuel prices by eliminating subsidies wiU improve the efficiency of use of fuel products and encourage substtution by economicaly cheaper fuels. It will ease macroeconomic constnts on higher economic growth. Higher prices will help to slow the rapid growth in domestic consumption, maintain Indonesia's exportable oil surplus longer, and reduce pressr on the current account balance. At the same time, eliminating fuel subsidies wil improve the fiscd balance, mobilizing additional public savings needed to finane public investments in iftuctu and human resources to support sustained private sector growth. Equity. Eliminating fuel subsidies wil support better targeting of public expenditures to help the poor. Just eliminating the large automotive diesel subsidy, which did not benefit the poor directly, wiUl save about Rp. 1.3 triUion in 1993/94. Reallocating these resources to strongly pro-poor programs, such as primary education, health centers and health subcenters, could dramatily raise their quality and coverage. Recurrent public expenditure on these programs amounted to only Rp. 1,800 billion, Rp. 190 billion and Rp.55 billion, respectively, in 1990/91. Going one step further to eliminate the remaining kerosene subsidy, only 8% of which benefits the poorest 20% of the population, would release additional resources, about Rp.0.7 trillion, that could be realocated to better targeted programs. Moreover, the adverse welfare impact on the poor of raising the price of kerosene could be largely offset by dergulating trade in sugar, which the poorest 20% of the population spend more on than on kerosene (3.3% compared to 2.5 % of consumption expenditure). Import controls raise the domestic sugar price by about 40% above the world market price; eiminati import controls could reduce the price by about 30%. EnvIoment. The environment would benefit from more efficient use of petroleum products, a non-renewable resource, as well as substitution by less polluting alternatives, such as natural gas (in industry and transport), cent station power generation (instead of diesel-based captive power generation) and Lpo (in household and industial uses). 20 Chapter 1 1.46 While such "win-win-win" policies are extremely important, and must be exploited fully, they alone are not enough to harmonize growth with equity and the environment. Specific policies are also needed to deal with the trade-offs or negative links that exist between economic activity and the environment, such as industrial production and pollution, and to address aspects of equity that growth alone might not, such as attacking hard-to-reach pockets of poverty. Appropriate choice, design and targeting of policies, working as much as possible with the grain of the market rather than against it, are important both to dealing with these problems effectively and to keeping the costs of these interventions to a minimum. D. Toward an Integrated Agenda for Sustained Development 1.47 As reviewed in the preceding sections, Indonesia's rapid economic progress over the past two decades has laid the foundations for substantial frther advances in development, including the prospect of the country reaching middle income saus within this decade. With the new opportunmities opened up by past progress, however, have come new challenges, including continuing structural shifts in the economy and a new generation of issues in the efficiency, eqUty and sustinability of development. Maintaining the momentum of progress will depend on how effectively these challenges are met. Of fundamental importance is the need for the economy to be flexible and adaptable, able to respond to change. 1.48 The agenda for sustaining development is wide ranging. The 1991 World Development Reporte0 highlighted four key elements of the development agenda: a stable macroeconomic foundation; a competitive climate for enterprise; invesbtment in human and physical infastructure; and institutional development. Drawing on these themes, the discussion of Indonesia's agenda for sustained development in this Report is organized under four broad headings: macroeconomic management; incentives; investment; and institutions. These themes provide a useful, overarching framework for integrating the agenda for growth, equity and environmental protection. The main elements of this agenda outlined below are developed more fully in the chapters that follow. Maareoomic Managemet 1.49 Macroeconomic stability is an essential foundation for sustained growth. Realizing Indonesia's growth objectives will require higher investment but, given the need to reduce the external debt burden, also higher savings to finance it. Macroeconomic stability fosters a climate conducive to both investment and savings. It promotes competitiveness, by providing a solid foundation for pressing ahead with strucural reforms that raise productivity and by holding down inflation, thus helping to maintain the critically important non-oil export growth. At the same time, by providing a setting conducive to a sustained growth of incomes and to efficient decision-making (through a clearer transmission of market signals), it underpins efforts to reduce poverty and protect the environment. The macroeconomic policy agenda has three broad, related elements: following bhaance4 coordaed fiscal, monetar and exchange rate polices to manage aggregate demand, mobilize domestic resources and support external competitiveness; 10 World Development Report 1991, op. cit., pp. 6-11. Sustaining Development 21 * maintainmg aprdent approch to externi financng and improving extern riskand debt management; and o improving the capacito monior economic trends and developing the indirect policy instruments needed for macroeconomic management in an increasingly deregulated, private- sector-led economy. 1.50 The stabilization measures taken by the Government to cool down an overheated economy are bearing results, as reflected in a declining current account deficit and inflation in 1992/93. The principal task for macroeconomic management is to keep the current account deficit on a downward path to achieve a more sustainable level of around 2 % of GNP in the medium term (from an estimated 2.4% in 1992/93), while supporting economic growth at a rate that continues to generate sufficient employment for the growing labor force at rising levels of productivity. Carting this narrow course between adequate growth and maintenane of financial stability will call for a balanced, coordinated use of fiscal, monetary and exchange rate policies. The burden of restraining domestic demand has been borne primarily by monetary policy. A firmer fiscal stance would produce a better policy balance, helping to lower the current high real interest rates and allowing higher private investment without risking a relindling of domestic demand pressures. A fiscal stance consistent with both a sustinable external balance and continued robust growth in private investment, while adequately providing for complementary public investments, is the key to macroeconomic management for growth with stability. 1.51 Reconciling the roles of fiscal policy in supporting stabilization and promoting growth requires increasing public savings and allocating them to priority investments, while generating a fiscal balance consistent with the overall macroeconomic policy framework. This, in turn, calls for: mobilizing more public revenues, emphasizing efficiency-enhancing improvements in cost recovery and better tax administration; restraining growth in government current spending, by reducing subsidies, such as on fertlizer, and containing personnel spending; guiding public investment aUlocations by a sound set of priorities; and improving the fimancial performance of public enterprises. Private savings need to rise too. Su'taning strong economic growth, maininig a stable financial environment, fosterng financial deepemng, and promoting profitable, widespread investment opportmities through contimued improvements in the incentives regime, as outlined in the next section, should contribute to higher private savings, by household and firms. A lower depedency ratio resulting from demographic shifts should also help boost savings. 1.52 The high level of external indebtedness underscores the need for a cautious approach to external borrowing. Both to guide the overall level of borrowing, to ensure it stays within sustainable limits, and to help diversify the sources and types of borrowing to obtain the best possible terms as the role of private capital in Indonesia's external financing increases, call for furher developing the institutional framework for managing external debt and formulating policies and advice on access to international financial markets. Greater attention will also need to be given to the use of financial instruments in managing external risks. The most important external risk insurance mechanism, however, reriains the continued diversification of Indonesia's exports. Much potential exists for attracting larger flows of foreign direct investment; tapping it would depend on maing a stable macroeconomic environment and further improving the investnent climate. 1.53 With the progressive dismantlig of direct economic controls, such as interest and credit restrictions, and investment and import barriers, macroeconomic management needs to rely increasingly on indirect mechanisms. Also, deregulation has caused changes in relationships among economic variables, e.g., among monetary aggregates as a result of financial sector reforms, and the role of private 22 Chapter 1 capital flows has increased. These developments have two important implications for the conduct of macroeconomic policy. First, continuous and improved economic monitoring will be necessary, to enable macroeconomic management to respond promptly to changing conditions. The recent overheating of the economy illustrates how quickly demand pressures can develop. The timeliness, reliability and analysis of economic data will need to improve to support vigilant, responsive macroeconomic management. Second, the indirect mechanisms for influencing economic behavior will need to be developed firther. Examples include: deepening and broadening the market for monetary instruments for more effective open market operations; and using improved mechanisms for review of public enterprise investment programs, and prudential measures promoting funcial discipline in banks and firms, to influence their exernal borrowing in place of directly administered borrowing ceilings. Incentives 1.54 Bolstering incentives to raise efficiency and productivity will be fundamental to sustaining the dynamism of the economy and maintaining the momentum of the private sector. Indonesia's outward- oriented development strategy and the increasingly tougher international business climate place a premium on policies that enhance competition. Through its strucal reform program, Indonesia has taken major strides in improving the incentives regime, but this effort needs to be sustained and extended to respond to emerging new challenges. The focus of this effort is mar*ets, and its central thrust is to increase competitin, both from abroad and within the domestc economy. The future agenda comprises three broad elements: • removing regulatory barriers to stronger competion in dte pdct markets; • developing more flexible, effici factor markets; and * supporting better mar*et outcomes, by 'mproving market infrastructure (transparent "rules of the game" contributing to a level playing field for large and small finns) and strengthening incentives for environmentally sound growth. 1.55 Further reductons in trade barriers will be a key source of increased competition and productivity. Despite substantial trade policy reform, many activities, in both industry and agriculture, reman shielded from external competition by non-taiff barriers (NThs) and high tariff walls, contributing to a high-cost economy and biasing incentves against exports. While declining, Indonesia's production coverage of NTBs (about 30% in both m fcr and agriculture) and effective rates of protection (an effective rate of protection of 52% in manufacturing) remain appreciably higher than those in its East Asian neighbors. Activities with particularly high protection include food crops, food processing, paper products and engineering industries. Priorities in trade reform include: accelerating the elimination of NTBs; reducing tariffs so that few lie above 20% and simplifying the tariff structure; and reducing export restrictions, especially on forestry products (coupled with an increase in forestry fees) to support more efficient and sustainable use of forest resources. Deregulation should be applied with equal vigor to domestic trade, by dismantling trading monopolies (such as the clove and citrus trading monopolies and several BULoG-State Logistics Agency-monopolies) and removing barriers to inter-regional trade. Ensuring correct price signals in the economy also calls for reforming domestic pricing policies, including appropriate pricing of public goods (utilities) and freeing the prices of private goods (e.g., sugar, fertilizer and cement) in conjunction with removal of barriers to trade and entry to ensure a competitive environment. While moving utility tariffs toward efficiency levels, their equity goals, where relevant, could be safeguarded through improved targeting. Sustaining Development 23 1.56 Besides "getting prices right", increasing the number of competitors by removing barriers to entry is important to enabling markets to spur efficiency. Restrictions on both domestic and foreign investment have been substantially eased, but there remain areas for further reform, including: shortening the negative investment list; relaxing local content, export and divestment conditions; easing approval requirements for capacity expansion; streamlining a continuing array of regulations at the local level; and improving the acttwl implementation of reform measur (e.g., in customs). Continuing trade policy reform complemented by investment deregulation would allow Indonesia to benefit more fully from export-oriented foreign direct investment, as well as promote more efficient an broad-based domestic iiavestment. There is scope also for exposing the provision of public goods and services, dominated by public monopolies, to greater competition. 1.57 Flexible factor markets help translate incentives reform into an efficient supply response. Spurred by extensive deregulation in recent years, the banking system has expanded rapidly and become more competitive. The major tasks ahead are to consolidate past growth, strengthen the frunework for prudential regulation and supervision, and safeguard the stability of the system which has recently come under strain as the loan portfolio quality has weakened. Increased confidence in the banking system will contribute to lowering the high real interest rates. Related issues are developing viable ways of reducing the concentration of credit and improving credit availability to smaller businesses and deepening and diversifying the financial and capital markets, including developing the market for equity (there is relatively high leveraging). In the market for land, the cost and complexity of transactions are a major deterrent to business activity, especially foreign direct investment; the underpricing of State land causes inefficient allocation and feeds rent-seeking; and the lack of clear property rights undermines equity and concern for the enviromnent. A market-based system of land allocation needs to be introduced by: sharply reducing and simplifying land regulations; using auctions for allocating State land; and improving and expediting land titling and registration. 1.58 The labor market in Indonesia is relatively flexible and free of distortions, and has facilitated the expansion of labor-absorbing, export-oriented activities in which the country has comparative advantage. The main requirement, discussed in the next section, is to raise skill levels through improved education and training. Skdll development is closely related to the development of the technology market. An efficient market for technology will be an increasingly important condition for sustaining the competitiveness of Indonesia's industries and for developing new sources of growth. Intenatonal experence shows that the development, acquisition and assimilation of technology are best achieved by mauintaining an open trade and investment regime, accompanied by emphasis on education and training. In addition to investing in education and training, the Government can contribute to technological advancement by undertaking sound research and development (R&D) activities, which are well-focsed and responsive to private secte. needs, and by strengthening and coordinating the technological support infasucu (e.g., standard setting and quality control). 1.59 Clear, enforceable commercial, credit and contract laws, and standards for accounting, auditing and financial disclosure constitute important infrastructure for markets to function efficiently and equitably. The existing gaps in these laws and standards raise the risks and costs of doing business, reduce confidence of foreign and domestic investors, undermine financial discipline, and place smaller enterprises at a disadvantage. Equally important, tansparent rules and procedures can limit rent seeking. Providing adequate legal underpinnings for markets is a key function of goverment. Over the past year or so, the Govenmment has initiated some important efforts in that direction. Priorities include: adopting new company laws, including clear rules on mergers, acquisition and bankruptcy; establishing proper legal req iements for accouning and auditing of company financial records and disclosure of information; insting modern credit and security laws, incorporating current practices and expanding 24 chapter I the range of pernitted securities and thereby broadening the credit possibilities for smaller businesses; and improving credit and security registration and information systes. Together with the dismanting of trade and other sources of monopoly advantage and prudential regulation of bank lendig to interlocking business interests, commercial legal reform is important to leveling the playing field for businesses and addressing concerns arising from the concentation of economic power in the hands of a relatively few business groups. 1.60 The framework of incentives to protect the environment also needs systematic improvements. The first priority is for policies that exploit the synergies between good economics and good ecology. Allowing markets to work efficiently is central to these policies. Important examples are eliminadng subsidies on natural resources-maintaining economic pricing of fuel, raising water and power charges, correcting policies that result in underpricing of forest resources-an spporting market development, e.g., land titling. Poverty alleviation, education, and d naon of information on the enviromet complement the working of the market. Where markets fail becase of extemalities, policy interventions to change private behavior are necessary. Even here, measures that work through the market-pollution taxes/charges and tradeable permits-are likely to be more effective and cost-efficient. However, regulatory measures, such as effluent/emission and ambient standards for water and air and land-use planning, are also needed. Their design needs to reflect institutional capacities for implementation. As in commerce, clear legal ground rules-laws and sanctions-are important for compliance and enforcement. investment 1.61 Achieving Indonesia's development objectives will require sustainiDg a robust investment effort, including increases in both private and public investment. Key elements of the investment agenda are:11 o raising the effcy and qualy of investment, both private and public; * fostering comlemenaity in private and public investment, focusing the latter on infrast u and n mesource devopnent, * better targeting expenditures on povt allebiadox; and * adequately reflectng emerging envlronneni concern in investment policies and programs. 1.62 While the investment rate w '1 need to rise (para. 1.20), an equally important challenge will be to raise the efficiency and quality of investment. The latter is essential both to hnprove the competitiveness of the economy and to ensure that prospective investment requirements could be met within available resources. Enhancing the productivity of private investmen will require futher reforms of the incentives regime, to provide a more outward-oriented and competitive market environment, as discussed above. Inernational experience shows that economic rates of return on investment projects are In addition to capital investment, the discussion here encompases issues relating to recrrent expendiu that is development in nature, such as recurrent expenditure on human resource development and expenditure on operon and mainteance of existg investme. Sustaining Development 25 higher in markets that are less distorted.'2 By promoting higher profitability and guiding resources to more viable activities, market reforms support not only more efficient but also higher and more sustainable private investment. Raising the efficiency of public investment will require continued progress on several fronts: basing public pricing policies on economic costs (important to both the efficiency of investment and cost recovery); providing adequately for effective operation and maintenance of existing investments; where feasible, exposing public investment to competition from the private sector; promoting systematic evaluation of project proposals; and implementing institutional reforms to enhance project planning and management capacities of investment agencies, bolster incentives for improved public enterprise performance, and decentralize responsibilities that are more efficiently performed at the local level. 1.63 The private sector will need to provide the bulk of investment in directly productive activities. Consistent with this, the public sector would be expected progressively to reduce its role in these activities, through limiting fresh investment and through divestiture. The private sector is expected to play an increased role also in the provision of public services. Its role in providing social services is already substantial, but there are possibilities for increased participation in both existing and new areas, e.g., vocational, including employer-based, training, and health insurance. The public sector will remain the dominant provider of physical infrastructure, but increased private participation could contribute to raising efficiency, by introducing competition, and to alleviating pressures on public institutional and financial capacities. Infrastructure services are often near natural monopolies and the policy and institutional framework for private participation will need to be carefully designed to generate competitive pressures and protect the public interest. The scope for private participation is largest for those services that can be provided in a competitive market setting, such as transport and power generation. Given a sound, supportive framework, the private sector's share in total investment in physical infrastructure could rise to about one-third in REPEUTA VI, from around 15% in REPEUTA Iv. 1.64 While the share of the private sector in total investment is likely to continue to increase, public investment will remain important. Complementing private investment, the priorities for public investment are infrastructure and human resource development, areas well-suited for public investment because of their public good nature and important positive externalities. Increasing national and international evidence supports the complemenarity of public infrasucture investment with private investment and overall growth."3 Infatmctue provision is an important element of govemment role in providing an enabling environment for private enterprise; public infrastructure shortages force private firms to resort to higher cost alternatives, for example, captive power generation, and can deter growth, especially of small businesses. Supporting human resource development is an equally, if not an even more, important role of government. Recent years have seen a spate of studies bringing out the 12 World Development Rport 1991, op. cit., pp. 82-84. 13 Among recent studies, see, for example, Infratacture Sector Polcy Review, World Bank, Urban Development Divsion, December 1992 (Working Draft), and Fiscal Policy and Econonmc Growth: An Empirical Invesagation, WiUilm Easterly and Sergio Rebelo, paper presented at World Bank Confnce on *How Do National Policies Affect Long-Run Growth", Washington D.C., February 1993. 26 cOapter I importance of human resource development to increasing productivity and growth and alleviating poverty, and providing evidence of very high rates of return on investing in people.14 1.65 Already accorded priority by the Government, the further shift in public resource allocation toward infrastructure and human resource development in recent years is in order, and needs to be ma ined, raising the share of these sectors in total public investment from around 70% in REPELTA IV to around 85% in REP8MA vi. Physical infrastructure (power, transport, telecommunications, and water and sanitation) will likely claim more than one-half of total public investment during REPJUA vi. With existing facilities coming under strong pressure from rapid economic growth, expanding infrastructure capacity, and improving the quality and reliability of services, are important to maintaining the dynamism of the private sector. Power sector investment will command an especially high priority. In human resource development (education, health, nutrition and family planning), which will likely claimn close to one-third of total public investment during RsEPLTA VI, expenditure priorities will be shaped by an increasing shift in emphasis from service expansion to improving service quality and by the changing needs associated with the demographic transition (e.g., change in age structure). Basic education and health wiU remain the major focus of public expenditure, but incremental resources will need to be directed primarily to quality enhancing measures, such as better teaching materials and teacher training, and adequate and better quality health staff and medical supplies. The emphasis at higher levels of education, and in vocational training, wiUl also need to be on raising quality. Effectively responding to the country's evolving, and differentiated, human resource development needs will require improvements in service design and means of delivery, as well as varying the public-private mix for different services. 1.66 Improving the poor's access to quality education and health services will be central to further poverty reduction. These services address directly some of the worst consequences of being poor, but they also attack some of the most important causes of poverty. While the poor's access has increased, much remains to be done to make the poor benefit more effectively from public expenditures on these services. Public subsidy on education and health per capita accruing to the richest quintile of the population was recently estimated to be more than twice as large as that accruing to the poorest.'5 Better targeting public education and health expenditures on the poor calls for: more accurately lentfing where the poor are located; shiftng expenditures more toward pro-poor programs, such as prmiary education and public health centers/subcenters; increasing utilization by the poor of public programs where it is low, such as in junior secondary education, while inducing the better-off to shift to privately provided services, such as in hospital care; and reducing service charges for the poor, and financing these reductions from improved cost recovery from the better-off. 14 See, for example, World Devepmet Report 1991, op. cit., Chapter 3, and Intenational Comparisons of Educatonal Auamment, Robert Barro and Jong-wha Lee, paper presented at the World Bank February 1993 Confaence, op. cit. The latter underscores the role of education of women, and a passage from it is worth quoting: "Our results about female human capital accord in some respects with the viewpoints of [L. H.) Summers [Investng in AU the People: Edcating Women in Developing Countes, prested at 1992 World Bank Annual Meetings]. He goes quite far, however, and even argues "...the education of girls may well be the highest return investment available in the developing world." It is unclear how to reconcile this conclusion with the findings of [J. B.] de Long and [L. H.] Summers [How Robust is the Growth-Machinery Nexus, paper presented at the World Bank February 1993 Conference, op.cit.l ...that investment in machinery is the key element in economic growth. Perhas the true key is to have educated women working with machines." u Indonesia: Pubic 1Enditure, Prices and the Poor, Draft, World Bank, 1993. Swtaining Development 27 1.67 Effective human resource development, including family planning, and poverty alleviation programs will contribute to better enviromental outcomes. However, expenditures on more directly environment-related programs wil also need to rise. For public investment, the priorities wfll be: improved urban water supply, sanitation and solid waste disposal services; improved quality of public urban transport (to reduce congestion and emissions from private vehicles); and protection of forests. Improved cost recovery from public services, e.g., from water and sanitation charges, and increasing public rent capture in forestry can pay for much of the incremental public investment that is needed. The costs of investments in urban and industrial pollution abatement will be borne primarily by the private sector, following the "polluter-pays" principle. The incremental costs of environment-related public and private investments are sizable, but amount to a relatively small proportion of total investment, and are modest in comparison with the benefits of these investments in terms of improved efficiency, growth and human welfare. Prevention is cheaper than cue; carefully evaluating the environmental implications of public projects, though the E.A process, and adopting cleaner technologies for new private investments will avoid larger expenditures later to tackle environmental degradation. 1.68 Stronger institutions will make the policy reforns and investments oudined above more effective. Similar policies have been found to produce different results across countries, and a major part of the explanation lies in the variation in respective institutional capabilities.'6 The foregoing discussion highlighted major strategic and structural shifts underway in the economy, such as the dismanting of regulatory controls, the increasing role and capacities of the private sector, and the shift toward more decentralized decision-making and greater local participation. Together with the evolving challenges in maintaining robust, equitable growth, new challenges are emerging, notably in envionmental management. An important determinant of the sustinability of development would be the responsiveness of the country's institutional framework to these changes and challenges. Adapting to, and managing, this process of change entails profound implications for institutional roles and capacities. 1.69 The institutional development agenda encompasses both market and public institutions. It comprises three fundamental thrusts: stregthening he itonal uepnd of markts to support efficient and broad- based private sector development; * adaptng and developing public institutions, focusing their capacities on eient and equiable provision of public serices; and o developing the imdtdlonl framework for improved envirownental mangement. Specific issues of insfitutional reform and capacity building, supporting a strategy of a stronger orientation toward the market and a more focsed, efficient public sector, are many and relatively complex. The main areas and directions of reform are oudined below. 1.70 A competitive incentives regime works best when reinforced by an instItUtional framework that provides the rules and information needed for efficient markets. Two critically important, and related, institutional underpimnings of markets are a well-functionig legal system, to provide a 16 Restruauring Economies in Distress, Vinod Thomas, Ajay Chhibber, Mansoor Dailami and Jaime de Mdo, New York, Oxford University Press, 1991. 28 Chapter I predictable and fair environment for business, and a sound accounting and auditing system, to support financial discipline. The need for clear, modem commercial laws and accounting and auditing standards was noted earlier (para. 1.59), but these laws and standards would be of relatively little practical value without adequate means for their implementation and enforcement. Key requirements are: strengthening the court system, including the establishment of specialized commercial courts and the development of arbitration mechanisms; upgrading the training of legal officials, acounns and auditors, and supporting the development of their professional bodies; and widely and systematically disseminating information on laws. Other important tasks in strengthening the institutional underpinnings for private enterprise include: developing the capacities of regulatory institutions in financial (including capital) and land markets; ensuring efficient customs operations; and making key support services for small enterprise development-in industry and agriculture-more efficient and responsive to changing needs. 1.71 Focusing public capacities on the provision of a policy and institutional framework for sound private enterprise, and on efficient and effective service delivery will require major adaptations and improvements in puc sector management 3 Publc enterprise reform needs to be accelerated, proceeding on the twin tracks of: further commercialization of enterprises producing public goods and services that need to remain in the public domain; and gradual divestiture of enteprises engaged in the production of private goods and services. Policies to improve the performance of enterprises remaining public need to focus on exposing them to greater competition and increasing their operational and financial autonomy within a framework of improved accountability and financial discipline. Transparent mechanisms need to be employed to ensure that divestiture occurs efficiently, protects the public interest and allows broad private participation. e Past and prospective deregulation implies the elimination of many routine government admnistative, control and licensing functions, and an increasing focus on policy analysis, promotion, monitoring and coordinating functions. Reassessing and realigning govemment adaai,aiugri ae ctures and the size, deployment, skill-mix and incentives of the civil service to perform the changing functions of government are an essential complement to these economic reforms. One major implication is the need to move toward a leaner but more professional and technically skldled civil service, with better compensation linked to higher productivity. o An important dimension of the reform of government administatve structure is decent ralkation. Appropriately devolving responsibilities to lower-level governments can contribute to more efficient and equitable delivery of public services by tapping local initiative, better matching expenditures with local needs, allowing more effective targeting of poverty alleviation programs, and fostering accountability. It also helps reduce the burden on central capacities. These considerations are especally relevant in a large and diverse country such as Indonesia, and become increasingly important as the economy expands. Mobilizing more local revenues, thereby reducing the current heavy local dependence on central transfers, and building local institutonal capacities will be essential for successful decentalizaion. 1.72 Developing the institutional framework and capacities is a crucial part of the agenda to improve envuvimental mangement. While a policy and regulatory framework has been taking shape, there remains a large gap between policy and implementation because of institutional weaknesses. Enhancing institutional capacities for eironl management wiUl require progress on three fronts. Susining Developmnt 29 First, the roles of the various agencies involved in environmenl management need to be clearly defined and arrangements for inter-agency coordination improved. Important dimensions of this effort include the effective dentralization of relevant responsibilities to the regional level, and improved coordination among central agencies and with their regional counterparts on programs that cut across sectors and regional boundaries, e.g., water resource management. Second, the supply of staff skilled in envir i analysis and management, especially limited at the regional level, will need to be increased. Where appropriat, as in monitoring and inspection, contrcting out of services to the private sector can relieve the sidils constraint in govemment agencies. Third, efforts need to continue to involve local communities, project beneficiaries and NOos more closely. Generally beneficial to the effectiveness of development acdvities, a more participatory approach is particularly valuable in environmental-and complementary poverty alleviationprograms, many of which require solutions closely tailored to local problems and conditions. NTe Macroeconomic Foundadon 31 2 THE MACROECONOMIC FOUNDATION A. Oerview 2.1 Indonesia's development over the past 25 years has been based on achieving a trilogy of objectives: growth, stability and equity. This trilogy is very close to the themes of this report. In particular, this chapter discusses macroeconomic policies for sustinable growth. Sustainable growth in Indonesia should be rapid enough to absorb new entrans to the labor force at a rising average standard of living. Sustainable growth should also result in widespread sharing of the benefits of growth, including condinued progress in reducing poverty. Sustainable growth should protect the environment so that future generations also benefit from Indonesia's rich endowment of naturwal resources. Finally, sustainable growth should be financeable; it must be consistent with the constrains Indonesia faces in using foreign savings to finance investment. 2.2 This report discusses policies to secre a sustinable growth path; this chapter focuses on the macroeconornic implications of this path, including mesures to realize it. A key feature of the sustainable growth path is the need to raise domestic reurces-public and private savings-in order to finance investment needed for growth, while containiag the current account deficit. An important dimension of this is a macroeconomic policy mix th-st uses a larger fiscal adjustment to raise public savings. A firmer fiscal stance would help impre 'e private confidence in macroeconomic policy, contributing to reducing domestic interest rates anC keeping them closely aligned with off-shore rates, and free resources needed to fnance higher private investment upon which continued rapid GDP growth will depend. This chapter identifies measures for raising public savings and prudent macroeconomic policies that will provide an environment conducive to raising private savings. 2.3 Indonesia has adjusted subntialy since the 1989-90 period of overheated domestic demand. The policies that supported this adjustment and its main features are discussed in the next section. Having reduced maceonomic imbalances, Indonesia is well placed to continue on a sustainable growth path with low ination and manageable enemal borrowing requirements. Section C identifes the medim-term chatlenges for the sustainable growth path, and presents a growth scenario that meets these challenges. Section C concludes with an analysis of the macroeconomic policies needed to support the growth scenario. Indonesia remams vulnerable to external shocks, particularly in view of its high external debt, and needs to manage growth carefilly to keep inflation and the current account deficit in check. The last section analyzes the sources of uncertaty-fluctuations in commodity prices, interest rates and exchange rates-as well as the uncertai emerging trade blocs pose for bIdonesia. B. Response to Recent Mcroeconomdc Presue 2.4 Backgound. In 1990, a surge in domestic demand combined with an accommodatig monetary policy caused accelerating inflation, a widening current account deficit and a decline in international reserves. Efforts to restrain demand started in 1990 and intensified in February 1991 when deposits of state enterprises equivalent to 25% of base money were converted into claims on Bank Indonesia (BI), the central bank. Later that year, limits were imposed on external borrowing by state enterprises, supplemented by guidelines for private extermal bofrowing. Bank Indonesia also raised interest rates on its certificates hs), the primary instuent for influencing monetary and credit conditions, by four percentge points. Deposit and lending rates followed suit. Restrained growth in money supply and higher interest rates stared to stem the reserve outflow after mid-1990, and in the last 32 Ohapter 2 three quarters of 1991/92 net foreign assets recovered by nearly $3 billion. The policies reduced domestic demand, especially fixed investment, thus restraining import growth and accommodating rapid growth of non-oil exports. Strong net export demand sutained robust 6.6% oDP growth. It was evident by March 1992 that the stabilization measures were working. 2.5 Considerable further adjustment was achieved in 1992/93. The most prominent gai Figue 2.1: Non-dl Trade Deficit was the fall in the non-oil trade balance (Figure 2.1). The ambitious target for non-oil sLun sml export growth-24% growth in value-was exceeded despite slower than projected growth in the world economy. The dramatic reduction in the non-oil trade deficit was the main reason for the strong current account performance; the 4 current account deficit fell from 3.8% of oN? in 1991/92 to 2.4%. The strength of the current 2 account was matched in the capital account by large inflows of foreign capital, which permitted o. . . a further build-up of international reserves. A J O J A J O J A J O J AJ J Inflation slowed to 5% in 1992 (end-year basis) Rm 2 dab f X p 12 mon. and deposit interest rates declined markaly. A s Cenbs of Statlos. significant step toward a more supportive fiscal ___:______BMW______ stance was taken in January 1993 with the elimination of subsidies for most fuel products. However, the sizable adjustments in fuel and some other administered prices contributed to a jump in the consumer price index in the first quarter of 1993. Macreconomic Policy In 19/93 2.6 The objective of monetay policy in 1992/93 was to support improvement in the external balance by keeping domestic demand pressures in check while achieving further progress in reducing inflation. Although the growth of domestic demand was slowing, the Goverment recognized that any relaxation of policies would be premature, particularly in view of the already large external debt. Slow domestic demand growth was expected to continue to improve the non-oil trade account, but a projected $2Ibbl. decline in oil prices and higher interest payments on external debt were expected to prevent this from leading to a reduction in the current account deficit. A small increase in international reserves was anticipated. 2.7 The stronger than anticipated external adjustment made it difficult to keep the growth of monetary and credit aggregates on target. Oil prices and non-oil export growth turned out to be higher than expected, reducing the projected current account deficit by $1.4 billion. The stronger current account bolstered confidence in the stability of the rupiah, which made domestic interest rates attractive and led to short-term capital inflows. Net foreign assets increase by nearly Rp. 10 trillion (Table 2.1) compared with the projected increase of less than Rp.0.5 trillion. However, much of the inflow was sterilized by commercial bank purchases of sBh, contributing to SBm sales of over Rp. 13 trillion. Because of the sterilization of most of the capital inflow, broad money growth of 22% was only a little higher than initially projected. However, private sector credit growth of 9% was well below initial projections. Subtracting estmated interest capitalization of impaired loans, private sector credit growth was only about 5.5%. T7e Macroeconomic Foundaton 33 Table 2.1: Indonesa: Monetary Survey (Rp. trllion) Annual Growth Rates (%) 1990 1991 1992 1993 1990 1991 1992 1993 March March March March March March March March Net Foreign Assets 17.9 20.2 23.6 33.3 -4.0 12.7 17.2 41.1 Net Domestic Credit 71.4 96.3 113.1 128.3 70.9 34.9 19.5 11.5 Public Sector 0.9 -5.4 -6.3 -6.3 -0.8 -61.3 -19.0 -0.1 Public Enterpries 8.8 7.3 8.8 8.6 14.4 -17.1 20.7 -2.6 Private sector 70.4 101.7 121.3 132.6 68.2 44.4 19.4 9.2 Otier items, net -24.9 -35.4 -37.9 -41.8 -53.4 -41.9 -7.0 -10.3 Broad Money 64.4 81.1 100.8 123.2 45.7 26.0 24.2 22.2 Memo item: Average velocity 2.7 2.5 2.3 2.1 Source: Bank ntdonesia. 2.8 Bank Indonesia faced a difficult job of lowering the interest rate on sBss in an effort to encourage commercial banks to extend loans to the private sector rather than invest in sBis while avoiding a premature relaxation that could rekindle domestic demand pressures. The rate on one-month SBls was reduced from 18% in March 1992 to 16% in June 1992 and 12.5% in March 1993. However, for a variety of reasons, commercial banks continued to use the proceeds of sales of foreign exchange to BI to purchase sms. One reason was weak domestic demand, which reduced credit demand from entrises dependent on domestic sales. Portfolio problems in the commercial banks also were a factor. Efforts of banks to meet tighter prudential nonns established by BI (para. 2.11) made purchase of SM's, a risk- free asset, an attractive option. Regulatory restrictions-the reurme that banks lend 20% of their portfolio to small borrowers and that joint venture banks lend 50% of their portfolio to exporters-may also have inhibited the supply of credit (Chapter 3). In addition to encouraging commercial banks to lend to the private sector, lower sm rates were desireable to ease the strain on Bi's cash flow. The sterilization of capital inflows by commercial bank purchases of 21s cost Bi an estimated $0.9 billion in 1992/93 from the interest differential between foreign assets and SBis. Quasi-fiscal operations (para. 2.15) added to the strain. A more supportive fical stance could have made it easier for BI to lower smI interest rates by reducing the danger that domestic demand would become overheated as rates fell. 2.9 The experience of 1992/93 highlights the limited scope for policy measures to affect directly domestic deposit interest rates. High nominal rupiah deposit interest rates reflect expectations of devaluation and a country risk premium. A measur of expected exchange rate depreciation is given by the nominal interest rate differential between financial assets that are identical in all respects except for the currency of denomination (Figure 2.2). A sharp increase in expectations of devaluation can be seen during 1990 leading to a peak in early 1991. Since then, adherence to sound macroeconomic policies has reduced expectations of depreciation. The scope for fiuther reductions in expectations of depreciation and interest rates seems high, however, especially in view of the strength of the balance of payments and .4 Chapter 2 the fact that over the past five years the actual annual depreciation of the rupiah against the u.s. Fipre 22 Dvdiua Bo dollar has averaged less than 5%. A larger fiscal tr"a dIfent bewen adjustment can reduce expectations of exchange 20" atsw m s rate depreciation by raising confidence in exchange rate and price stability. By following 6- consistent macroeconomic policies that keep the domestic economy from overheating, market 0 interest rates will decline further. 2.10 The country risk premium can be measured by the spread between interest rates on o u.s. dollar deposits in Indonesian commercial J J 87 J 88 J 89 J 90 I 91 J 92 baks and on u.s. dollar deposits in offshore 92c Do >ddbk* adWark Ofwa. banks (Figure 2.3). This measure of Indonesian country risk rose in 1987-88, was very low in 1989-90, and increased steadily from 1991 through 1992. The increase in 1992 coincides with the emergence of problems in the financial FRg 2.: rndtMa Country Risk Premium sector. It will take time for perceptions of (OrSh DeplDSt Ints Dmenia riskiness to fal and the role of policy in bringing 8.0 this about is to keep money and credit growth 2.s within prudent limits consistent with robust 20 i growth with low, stable inflation. An important role for the Government in reucing country risk 1.6 - is in creating a stable climate for investors, i O _ including an efficient, sound financial system. Chater 3 discusses specific measures for 0.6 o improving the investment climate and ensuring the | -71 soundness of the financial system. low IO T . low 01 It1 91:11 912:5 91Iv 02:1 D2:11 92:D 82V 2.11 The decline in rupiah deposit rates Soi Daa MOd by Bk donesia ad Wdd Bank staff cacIns. was not matched by falling lending rates, leading to widening commercial bank nominal spreads (Figure 2.4). The downward stickiness of lending rates reflected several factors. The most obvious Figure 2.4: Commercial Bank Interes Rae Sprad was the need for banks to strenghen their 1 ca* Dae* - 3nd Te Deposkt tu W l portfolios to meet new prudential guidelines. a Also, changes to the regulatory system affecting 7 - the income statements and balance sheets of 6 I commercial ban made the extension of new a - loans more cosdy. In March 1991, tightened 4 loan loss provisioning standards and mandad that commerial banks raise their capital-asset ratios to 5% by March 1992, 7% by March 1993 2 and 8% by December 1993. For banks where the t capital adequacy requiement was binding, an | 9101 111 1/02 602 ' 7/'2 902 11/92 increase in assets with a positive risk weighting, I I such as commercial loans, required additions to | :Da pi knesbandWadaksa l bank capital. Up to the point that the bank's The Macroeconomic Founndacon 35 blended cost of fuinds reacbed the sBi rate, the bas could defray the cost of increased time deposits by investing in sB!s, which have a wero risk weighting.' 2.12 The higher spreads will help banks improve their income and balance sheets. Over thme this will lead to a closer alignmenit of deposit and lending rates. Further, competitive pressures will emerge to narrow the spread. Substitutes for commerci e bank loans are becoming. more attraive: 11 domestic bonds worthl Rp.875 billion ($425 million) were issued on the Jakarta Stock Exchange in 1992. use of promissory notes is increasing and a commercial paper market is developing. Healthy banks-those that meet the capital-asset ratio requirement-will also begin to be more aggressive and take market share. In this way, commercial bank lending rae will gradually fall and margins naxrow. Relaxing the 20% requirement (para. 2.8), as discussed in Chapter 3, would hasten thi process. In addition, the 50r % requirement (pama. 28) coud also be Reviewed to assess its impact on domestic credit availability. Measures to deal with the strains in the financial system are discused in Chapter 3. Steady growth in the economy will help ease the finWanal strai in the banking system. A well-balanced policy mix, including a stronger fiscal effort, would promote sustnable growth by helping to bring about a more rapid decline in interest rates. 2.13 An inproved macroeconomic policy balance including the attainment of a fl surplus was an important objective of fiscal poely in 1992/93. By reducing the public sector's absorption of resources, more credit could be made available to the private seomr without creating pressures on the external balance target. An increase equivalent to about I.% of GDP in the overall fiscal balance of the Central Govenrment compaed with the previous year outcome was targeted (Table 2.2). The authorties projected a 24% increase in non-oil tax revenues to be brough about mainly by higher revenues from the income and the value added taxes. 2.14 Lower than projected revenue fr-om non-oil taxes, mainly a shortfall in indirect tax receipts, and higher current and development both budget and off-budget) outays more han offlset mugher od/LNk revenues and lower interest payments on extenal debt and resulted a sppage mi the budget balance of Rp.3.4 trillion compared with the target (Table 2.2). About Rp. 1 triion of the recorded fiscal deficit in 1993/94 reflected outlays on oil subsidy arrea and state bank recapitaizaccon, outlays that did not add diretey to dol mtic demand. However, even allowing for these fors, the fiscal outcome was not consistent with a balanced stance of macroeconomic policies conducive to an easig of Interest rates and a pick up in private investment while safeguarding the external position. The 1993/94 budget implies an improvement equivalent to about 1.5% of GDP over the 1992/93 fiscal balanc. Continued strong growth in revenues from the income tax is the main reason for the 23% increase projected in non-oil tax revenues. Total expenditures are projected to increase by about 8%, with a somewhat faster increase in current expenditures because of an average 15 % adjustment in civil service salaries announced in January. The fiscwl adjustosent targeted for 1993/94 woud improve the macroeconomic policy mix andmake a simgficant conibution toward a consistent, sutainable fiscal stance, which woud help achieve sustainable growth target, as discussed below (pawra. 2.60-62). A major step toward achieving the targeted adjustnent was taken in January with the elimination of nt budgetary subsidy on fuel.- 2.15 Quaas-fiscal operAtaons of Bi added to the strain on its cash flow. A 35% increase in liqudity credits to BuLO for prr ement and sorage of the bumper rice crop was offme by a reduction in other liquidity credits. However, during the year the Clove Marketing Board announced that it would be unable to repay maturing liquidity credits of about Rp.750 billion, which had been extended the The blended cost of funds to banks was 11.5% as of Januamy 1993 (based on a 24%/76% demand/ie deposit mix at interest rates of 6%/13%), when the imerest rate on sns was around 13%. 36 Chapter 2 previous year. BI rolled over the overdue principal. Apart from highlighting the well-known problems with the operations of the Clove Marketing Board, the incident underscores the importance of phasing out credits at below market interest rates, including below market rediscounting of liquidity credits and export bills. Credit is seldom the most appropriate way of providing subsidies. In the exceptional case a credit subsidy is called for, the need for transparency argues for showing the subsidy explicitly in the govermuent budget. Table 2.2: Central Government Opeations, 1988/11993/94 (Rp. trillion at current prices) Aual 1M99O/93 1993/94 1988/89 1989/90 1990/91 1991/92 Budget Prov. Est. Budget Revenue and grants 23.9 30.0 41.1 42.1 47.1 45.6 53.3 Oil and LNo taxes 9.9 11.8 17.6 15.5 13.9 15.3 15.1 Non-oil taxes 11.9 15.4 20.8 23.4 28.9 27.4 33.8 Non-tax revenues 1.6 2.2 2.4 2.7 3.7 2.3 3.8 Grnts 0.5 0.6 0.4 0.4 0.6 0.6 0.5 Cuffent expenditures 16.8 19.8 23.8 25.6 26.8 27.8 30.5 External interest 4.3 4.5 4.9 5.2 5.8 5.1 6.1 Subsidies 1.0 1.5 3.4 1.6 0.2 1.1 0.2 Otber 11.5 13.8 15.5 18.8 20.8 21.6 24.2 Govemment savings 7.1 10.2 17.3 16.5 20.3 17.8 22.8 Capital expendiures 10.6 11.6 13.6 18.0 19.5 20.4 21.5 Budget balance -3.5 -1.4 3.8 -1.5 0.8 -2.6 1.3 Rnwwed by Exteeal loans (net) 5.0 2.6 1.3 2.4 -0.8 0.8 -1.3 Asset drawdown -1.5 -1.2 -5.1 .0.9 0.0 1.8 0.0 Memo items (% of GMP): Non-oil taxes (% of non-oil GDP) 10.0 11.2 12.4 12.3 13.3 12.7 14.0 Govermet savings 4.8 5.9 8.5 7.0 7.7 6.8 7.9 Budget balance -2.4 -0.8 1.9 -0.6 0.3 -1.0 0.5 Total expediture 18.6 18.3 18.2 18.6 17.7 18.4 18.1 Primary balance a 0.6 1.9 4.3 1.6 2.5 0.9 2.5 a Budget balance net of extnal interest paymes. Soure: Minlsty of Finance and World Bak staf estimates. 2.16 The value of the exchange Ate is deermined by BI under a system of managed float. BI seeks to maintain the rupiah's c against a basket of currencies, manly by depreciating the rpiah to compensat for the differental between Indonesian and u.s. inflation and adjusting for The Macroeconomic Foundation 37 fluctuations in the u.s. dollar cross-exchange rate with other currencies. The comPetitiveness of the rupiah as measured by Flgure 2.5: Real Effectce Exchange Rate* the real effective exchange rate was (Jan. 1988 100) maintaned in 1992 (Figure 2.5). It showed 110 signs of appreciating in early 1993 4'ie to the large increases in the consumer price index 106 - resulting from the increase in domestic fuel and other administered prices, which widened 100 the inflation differential between Indonesia and its trading partners. Since the first 05 quarter jump in the consumer price index reflects one-time adjustments and not an so MM J SNJJSNJMMJSN acceleraton of underlying iaon, it is not 88 1 8e 1 9s 1 91 1 92 likely to lead to a loss of competitiveness. A * A decline i8 a depreciation. policy of slowing the rate of depreciation of swc: mF the exchange rate can be insumental in slowing inflation, both by keeping tradable goods price inflation low and, by providing a more stable nominal anchor for domestic prices, dampening inflationary expectations. However, to maintain competitiveness, this policy needs to be accompanied by appropriate restraint in financial policies to lower the rate of inflation and by continuing strutural reforms to raise productivity and eliminate the sources of high costs in the economy. Macroeconomic Outcomes 2.17 Despite the considerable challenges to policymakers described above, the economy's performance in 1992/93 was impressive. Non-oil GDP growth accelerated, led again by a remarkable performance of non-oil exports. There was a significant reduction in the current account deficit and the underlying inflation rate was brought under control. In short, the process of correcing the macroeconomic imbalances that emerged in 1990 was consolidated. 2.18 Total GDP and non-oil GDP grew by 5.8% and 7.5%, respectively, somewhat higher than initially projected (Table 2.3). Favorable weather accounts for part of the faster than expected groewd in non-oil GDP. Rice production rebounded from the drought-depressed 1991 production level of 44.7 million tons, reaching 47.3 million tons in 1992 and providing a major boost to overall growth in agriculture. Construction growth exceeded projections, in part reflecting the strength of public fixed investment. Growth in mauing remaied strong in 1992 because of rapid growth of labor-intensive non-oil mandyuurg exports, especially clothing and textiles, footwear, electronics and furniture. There was a 3.8% reduction in oil/LNs value added, reflecting lower OPEC quotas in 1992 following the Gulf-war-related increases. 2.19 As in 1991, nongoU expem were the fastest growing component of demand (Table 2.3). In view of the slowdown in major world economies and rising protectionism, the performance of non-oil exports is remarkable. Developing Asia has emerged as an important destination and now absorbs nearly 40% of Indonesia's non-oil exports, though some of this may be re-exported to other regions. Some 43% of the increase in wn-oil exports over 1989-92 went to Developing Asia (Figure 2.6), followed by the European Conmunity and North America. Japan absorbed 17% of Indonesia's non-oil exports in 1992, but only 4% of the 1989-92 growth in non-oil exports was to Japan. Textiles (including garments), Indonesia's, largest non-oil export, accouned for over 40% of the growth of non-oil exports during 38 Chapter 2 1989-92 (Figure 2.7). Developing Asia is the most important destination of garment exports, followed by the European Community and North America. The second largest increase was in "other industry". Table 2.3: Key Macoeoonomic hlicators a Acua Esed 1988-89 1990 1991 1992 Aerage real growth rates (% p.a.) GDP 6.6 7.1 6.6 5.8 Non-oil ODP 7.8 6.9 6.3 7.5 Agriculture 4.1 2.0 1.3 3.6 Manufacturing 12.2 13.0 10.6 9.7 Miing 4.8 14.6 18.1 24.0 Constuction 10.6 13.5 10.9 11.9 Other Services 8.2 7.4 6.0 7.2 GNY 7.0 8.4 5.4 5.5 Non-oil expors 17.8 2.8 24.3 26.6 Non-oil imports 12.7 26.0 9.6 7.7 Fixed investment 11.9 14.6 6.0 5.0 Public 13.8 11.9 11.2 7.0 Private 10.7 16.2 3.0 3.7 Macoeconoc balances(% CUrrent acount/ONP -1.9 -3.4 -3.8 -2.4 Non-intemat curfent aCcount/GNP 2.3 0.4 0.3 1.4 OveralU public sectr balanCe/GDP -2.1 0.3 -1.1 -1.4 mILT debt savice/exports 35.8 29.7 31.6 30.0 hILT debtexports 212.2 187.6 196.5 176.4 mILT debt/GNP 60.1 57.8 59.0 57.9 Stncrre of th economy (%) Non-oil manufamcuri/GDP 13.9 14.9 15.4 16.0 Non-oil exports/non-oil imports 88.8 71.2 77.5 90.2 Public savings/GDP 6.4 9.5 8.5 8.3 National savings/GDP 20.9 20.9 20.3 20.1 Fixed investment/GDP 20.6 22.5 22.7 22.5 Private fixed investment/ total fixed investment 58.7 59.1 57.7 56.9 ConSUMption/GDP 74.2 74.2 75.0 75.0 Consumption/ONY 75.1 75.0 75.6 76.0 prices O prices (usS/bbl) 17.9 22.6 18.3 17.4 Non-oil tms of trade (1983/84= 100) 95.9 95.3 91.5 90.6 Domestic inflation (% p.a.) b 6.7 7.9 9.4 7.5 a Balance of payments data are for fiscal years (staring Apil1 Other indicators are for calendar years. b As measured by the average conumer price index, wih an aj for rice prices during 1987-89. Soue: Bark Indonei Central Bueau of Stistcs and World Bank staff etmae. The Macroecononic Foundton 39 This is a large and diverse group of products including footwcar, ceramics, plastics and fumiture. Footwear exports have been F2:rldNoncDEptby , 1S1192 particularly dynamic. They surpassed the $1 billion mark in 1992 to become Indonesia's EC third largest manufctured export following 22t textiles (including garm) and plywood. Indonesia's share of world footwear exports is still negligible and footwear exports are not Jew subject to quotas, so prospects for continmed rapid 4% O4%r8 growth appear bright as long as Indonesia's 4 competitiveness is mainained. 2.20 Following several years of rapid growth, fixed inveshment growth was moderate in 1992 for a second year in a row (Table 2.3). The S¢Pd slowdown in private fixed investment during the past two years reflects the cooling off of domestic demand in response to conraconary policies. Public fixed investment growth exceeded that of the private sector. Weaker than projected private demand is consistent with the observed slow growth of credit to the private sector. Overall consw4pion increased by 6.0% with real priate cen,awqon growing by 5.0%, due mainly to higher rural incomes from the bumper rice crop. Farm household consumption grew by 7% in 1992. Riure 2J7: rwth of NonOl Exporft by PrdUct an Mrk 18192 V*od NWwoodpad 7% TOMBS41 X t%t hIbW ~ ~ ~ ~ f Nahlp110 IJ N bros: ROW PMau1 WifSW24Uo 8aw: CenG Wus d SM. 40 Chapter 2 2.21 The dampening of domestic demand was also reflected in a second consecutive year of slow growth of non-oil 6iMpor* (Table 2.4). Capital goods imports, which account for roughly one-third of the total, fell by 2.3% due to the slowdown in investment demand. Imports realized for Indonesian Investnent Coordinating Board (BKPrei approved imvestments grew by an estimated 114% in 1990 but only 13% in 1991 and fell by 16% in 1992. The largest absolute increases were in parts and accessories and intermediate goods, reflecting in part the inputs needed for rapid export expansion. The fastest growth was recorded by consumer good imports, which are a small fraction of total non-oil imports. Food inports, which account for much of this increase, were unusually high as a consequence of the need to replenish rice stocks following the drawdown in 1991/92 when drought reduced the rice harvest. Passenger car imports declined for a second consecutive year. Reports throughout the year that a deregulation package for the automotive sector was to be introduced may have prompted consumers to delay their car purchase plans in the hopes that deregulation would result in lower imported automobile prices. Table 2.4: Non-OR Mercandfse Imports, 1987/88-1991/92 a Value at current prices Growth in arrent prices 1USbxio,) (percent _.a.) Actua 1989190- 1990191- 1991/92- 1987/88 1989190 1990/91 1991192 1992/93 1990/91 1991192 1992/93 Capial goods 2.5 4.0 6.6 7.8 7.6 64.5 14.3 -2.3 Parts & accessories 2.2 2.6 3.8 4.2 5.1 48.7 14.2 21.5 Intermediate goods 6.4 8.9 10.1 11.1 13.0 14.1 9.4 16.6 Passenger vehicles 0.2 0.2 0.4 0.2 0.2 53.7 -45.2 0.0 Consumer goods 0.4 0.5 0.6 0.7 1.2 24.1 44.7 58.1 other b 0.1 0.1 0.1 0.1 0.1 -51.7 97.7 -26.5 TOTAL 11.8 16.3 21.6 24.2 27.2 32.S 12.0 12.5 a Disaggregation based on BPS import stistics, applied to Dl esdmated non.oil imports. b Goods not elsewhere specified. Source: Central Bureau of Statstics, Bank Indonesia and World Bank Staff estimates. 2.22 Inflaion decelerated steadily during 1992. Annual average consumer price inflation was 7.5%, but only 5% measured on an end-year basis. One reason was the slower rate of depreciation of the rupiah, which kept tradable goods price inflation low. Another was the large rice harvest, which put downward pressure on the consumer price index by holding rice prices virtually unchanged. Delayed adjustments in administered prices also kept the increase in the index low. Tighter demand management policies that kept the growth of monetary aggregates broadly in line with the target rates also contributed by dampenmg inflation expecations as reflected in the narrowing dollar-rupiah interest rate differential (Figure 2.2). The consumer price indexjunmped sharply in January-March 1993 as a result of substantial fuel price adjustmetns in January 1993, adjustments in electricity and transport tariffs, and seasonal pressure arising from the Idul Fitri and Chinese New Year holidays in March. These one-time pressures abated sharply in April 1993. Despite the large jump in the cpi in the first quarter of 1993, adherence to the 17% broad money growth target with projected 6.3% real GDP growth and continued reductions in rupiah deposit rates would make 1993 end-year inflation of about 8% attainable. 2 BM licenses inves projecs t benefit from duty exemptions for capital goods and initial inputs. The Macroeconomic Founrdon 41 2.23 Balnce ofpayments developments were dominated by the rapid growth of non-oil exports, slow growth in non-oil imports, the higher than anticipated oil price and the strength of capital inflows. The first two of these produced a $2.5 billion fall in the non-oil current account deficit (Table 2.5). The higher oil price raised the oil/LNG current account surplus by $1.2 bihion over the initial projection, though it declined by $1.1 billion from 1991/92. Higher interest paymens on short-term debt offset part of the overall improvement. Nevertheless, the current account deficit of $2.9 billion, or 2.4% of GNP, was $1.4 billion lower than anticipated. The stronger current account performance was matched by a stronger capital account performance, leading to a $6.1 billion increase in net foreign assets. The increase in net foreign assets was split between official reserves, which increased to $11.8 billion, equivalent to a prudent four months of imports, and reserves of the banking system. Table 2.5: Balance of Paymets, 198818941992193 (US$ billion) Actual &E:ed 1988/89 1989/90 1990/91 1991/92 1992/93 Merchandise exports (fob) 19.8 23.6 28.0 29.4 34.9 Oil & LNG 7.6 9.3 12.6 10.6 10.3 Non-oil 12.2 14.3 15.4 18.8 24.6 Merchandise imports (cif) -16.2 -19.4 -25.7 -27.8 -31.0 Oil & LNG -2.6 -3.1 -4.1 -3.6 -3.8 Non-oil -13.6 -16.3 -21.6 -24.2 -27.2 Trade balance 3.6 4.2 2.3 1.5 3.9 Non-factor services (net) -1.2 -1.2 -0.6 -0.6 -0.4 nutrest payments (NT) -3.2 -3.4 -3.4 -3.8 -3.9 Other factor services and transfers (net) -0.9 -1.2 -1.9 -1.5 -2.5 Current account balance -1.8 -1.5 -3.6 -4.3 -2.9 Oil/LNG current account 3.1 4.0 6.1 4.7 3.6 Non-oil current account -4.8 -5.5 -9.6 -9.0 -6.5 Public MLT loans (net) 3.1 1.4 0.5 1.8 2.1 Disbursements 7.4 6.1 5.1 6.6 6.8 Principal repayments a -4.3 -4.9 -4.6 -4.7 -4.8 Other capital (net) -1.6 0.2 6.3 3.9 6.9 Use of net foreign assets 0.3 0.1 -3.2 -1.4 -6.1 Use of official reserves 0.6 -0.4 -3.9 -0.9 -1.3 Use of comm. bank reserves -0.3 0.5 0.7 -0.5 4.8 Memo items: . . . . 051 Net official reserves (us$ bln.) b 5.3 5.7 9.6 10.5 11.8 - Months of imports c (3.3) (2.6) (4.1) (4.1) (4.1) Current account/ONP (%) -2.2 -1.7 -3.4 -3.8 -2.4 Non-interest CA/GNP (%) 2.2 2.4 0.4 0.3 1.4 mLT debt service/exports ( d 36.8 34.7 29.7 31.6 30.0 a Includes prepayments of $341 million in 1988/89 and $300 million in 1989/90. b Net official reserves are defined as gross official reserves minus outsading liabilities to the SMF and other short-term liabilities. c Net official reserves in months of next year's expected mercandise imports (oi/LNG and non-oil). d Debt service on public and private debt, excluding paepym; denominator is gross exports of goods and services. Source: Bank Indonesia and World Dank staff estimates. 42 Chapter 2 2.24 The composition of the capital account flows in 1992/93 reflected high domestic interest rates as well as confidence in Indonesia's economic prospects and management. Net foreign direct Investment rose to $1.7 billion, three times the level of four years ago. The sustainable growth path discussed below projects continued growth of foreign direct investment. Short-term borrowing, estimaed at $3.1 billion, reflected growth in trade finance and the scope for profiting from the wide differential between off-shore and on-shore interest rates. Medium- and long-term external borrowing by the private sector increased, though at a slower pace than in the previous two years. Gross disbursements of official assistace remained at the previous year level of $3.8 billion. Slower growth of debt and the increase in intenational reserves held the increase in net debt to $3.1 billion, a substantial slowdown from the increases of the previous two years ($9.8 billion and $8.4 billion in 1990/91 and 1991/92, respectively). C. Sustained Growth and Macroeconomic Consistency 2.25 Significant adjustment in 1992/93 sets the stage for continued tobust and sustainable growth. Sustainable growth over the medium term has four dimensions: it needs to be rapid enough to absorb new entrants to the labor force at a rising average standard of living; it should also allow a wider sharing of the benefits of growth, in particular continued progress in alleviadng poverty; it should protect the environment; and it should be financeable, consistent with the coustraints Indonesia faces in using foreign savings to finance investment. These challenges are quantified below and their implications for the economy analyzed. This is followed by a discussion of the macroeconomic policies needed to support this growth path, and meet the challenges it represents. 2.26 The economy should develop along a growth path rapid enough to meet the challenges without provoking demand pressures that lead to overheating. Such growth will require higher Investment. The high level of external debt limits maneuverability by claiming a large share of Indonesia's cash flow from exports. It also raises Indonesia's vulnerability to external shocks. A reduction in the debt burden is in order to increase flexibility and reduce vulnerability. However, reducing external borrowing means reducing the current account deficit-foreign savings-in relation to GDP, while rapid GDP growth requires higher total savings to finance the higher investment needs. Therefore, the essential requiement for achieving sustainable growth is to generate higher national savings, both public and private. Mm Chalenges 2.27 Labor Absorption. Indonesia's growth path during the 1990s will continue to be marked by a substantial shift of labor from agricultural to non-agriculural employment. The share of employment in agriculture fell from 65% in the early 1970s to about 50% in the early 1990s. Although agriculure's employment share has fallen, the absolute number of fam workers has increased, with no decline in productivity. However, the shift of labor into non-oil nufacturin has been accomplished at higher levels of productivity. Growth of labor productivity in non-oil manufacturing of over 6 % per year since the early 1980s has driven overall non-oil labor productivity growth to over 3% per year. 2.28 Indonesia's rapid GDP growth during the past decade has thus substantially raised the average productivity of Indonesian workers. This has been accomplished by drawing workers from agriculture into more productive jobs outside agriculture. Sustainable growth requires smooth continuation of this process, avoiding a rise in unemployment. Continued expansion of labor-intensive, non-agricultural employment is needed to absorb the stream of workers leaving agriculture as well as new entrants to the labor force. Continued expansion of productive employment in agriculture is needed too, so that the strean of workers to non-agricultural activities does not become a flood. Moreover, agricultural production and productivity must rise to provide food and raw materials for the rest of the economy. The Macroeconomic Foundation 43 2.29 Indonesia's past record suggests an elasticity of non-oil employment with respect to non-oil GDP of about 0.4. Although Indonesia's population growth rate is not high, the effects of more rapid population growth in the past will be felt through the 1990s. Indonesia needs to sustain non-oil GDP growth on the order of 6-7% p.a. to absorb new entrants into the labor force at rising levels of productivity. Agriculture is projected to mainin trend growth of 3% per year in the medium to long term. This implies that non-oil, non-agricultural GDP needs to grow by 7.5-8% annually. This compares with average annual growth of 8.6% during 1986-92. 2.30 With a labor force now at 81 million and projected to grow by 2.3 million each year for the rest of the 1990s, one percentage point slower non-oil GDP growth than noted above would mean 320,000 fewer jobs created annually. Since the mid-1980s, when deregulation and other structural reform measures started, employment growth has averaged 2.5 % annually. Continuation of these reforms will help sustain rapid employment growth. The extension of deregulation to still heavily protected activities will encourage the balanced growth needed to generate adequate employment. The expansion of labor- intensive non-oil manufucuring activities calls for improved availability of the direct input-a well- educated labor force-and indirect inputs-physical and institutional infrastructure required for business. Chapter 4 discusses the roles of the Government and the private sector in increasing the quantity and improving the quality of human and physical infrastructure. 2.31 Poverty AllevIaon. In view of the dramatic progress in poverty alleviation in the past two decades and the Government's commitment to extend this progress, a susainable growth path for Indonesia would also seek to maintain the positive link between economic growth and poverty alleviation. Poverty declined from 40% of the population in 1976 to 15% in 1990, when real GDP rose nearly 2.5 times, implying a unitary elasticity of the reduction of poverty incidence with respect to GDP growth. Data for 1987-90 suggest an elasticity of the reduction of poverty incidence with respect to non-oil GDP of 0.6. Assuming non-oil GDP grows at around 7% each year, as discussed above, maince of the pace of poverty alleviation attained during 1987-90 would mean the share of the population living in poverty could decline from 15% in 1990 to around 10% by 2000. This would be a remarkable achievement by any standard. 2.32 The best means to alleviate poverty is job creation. So, the implications for Government policy are fmenty the same as for employment generation: policies that support labor-intensive manufacturing growth, combined with contined robust growth of agriculture and human and physical infrastructure development. The majority of the poor remain in rural areas, and sustain a high rate of growth of agriculture wiUl be essential. Extending deregulation to agriculture, as discussed in Chapter 3, will raise productivity and reduce costs and thus improve the efficiency and employment-generating capacity of the sector. In addition, mechanisms to target Government anti-poverty program more effectively would be needed. The priorities for poverty alleviation are discussed funther in Chapter 4. 2.33 romnly Responsble Growth. With a per capita income of $650 and 27 million people still below the poverty line, raising the overall standard of living remains the highest priority. This will require rapid economic growth that is environmentally responsible. Synergies between economic growth, poverty alleviation and the enviromnent will need to be exploited (see Chapter 1). However, there will also be tradeoffs. It will be impossible, for example, to preserve all the existng stock of natural resources. Nor will it be possible to push economic growth up irrespective of the effects on environmental resources. Recognizing this, Indonesia has adopted a policy of suswinable growth that allows for natural resources to be converted into other forms of capital as an essential part of development. There are two important dimensions of this approach. First, some natural resources must be protected to preserve critical ecosystems (e.g., upland forest cover for watershed protection, gr3undwater aquifers that provide safe drinkng water). Second, where natural resources are converted 44 Chapter 2 into other forms of capital-exploiting mineral resources, cutting down tropical forests-sound environmental (and economic) management requires that those resources be utilized efficiently. 2.34 Envitonmentally sustainable growth in Indonesia faces two basic challenges. First, natural resources play an Important role in Indonesia's economic growth, and will continue to do so; sustainable exploitation of these resources, therefore, is intimately linked to the sustainability of long-term growth. The share of primary commodities (minerals, output in the agricultural, forestry, and fisheries sectors) in GDP has declined from about 60% in 1970 to 40% today, and could decline further to below 20% by 2010. However, in absolute terms, the value added of primary commodities has more than doubled over the past two decades, and is likely to increase by a further 50% by 2010, even though its growth rate will slow. Increased use of natural resources will also result from growth in the basic processing of primary commodities. Value added from these activities increased nearly eight-fold between 1970 and 1990, and is likely to continue to increase rapidly over the next two decades, rising anotier six-fold. 2.35 The second main challenge stems from the control of pollution from future industrial and urban growth. Indones's medium- to long-term growth path relies heavily on the growth of industry for the creation of higher-productivity jobs and non-oil exports. The nature and magnitude of future pollution loads from industry will depend on the scale of output and the intensity of various pollutants per unit of output. The damage/costs resulting from increasing pollution loads will depend on the location of specific industries and the size and concentration of the exposed population. Total industrial output has increased eight-fold since 1970, and is likely to expand another 13-fold by 2020. There has been a gradual shift in sectoral composition, with processing industries growing more slowly than assembly-type industries. Since the former are by far more pollution-itensive (especially for water pollutants, but also for many of the traditional air pollutants), there has been a noticeable deline in the pollution itensity of industrial output since 1970. Projections to the year 2020 indicate that this trend will continue. Nonetheless, with rapid growth of industrial output, pollution loads are still projected to increase 10-fold. 2.36 Growing congestion and pollution, especialy in the main urban and industrial centers, will increase the difficulty of attracting foreign investment. The increasing social and economic costs of uncontrolled pollution wiUl force a trade-off with economic growth. With urban population expected to more than double over the next 25 years, and with the increase in total industrial pollution, the pressure to slow the expansion of industry-in those areas most critical for futre growth-will increase. Increasing commuity resistance is exemplified by the experience of other industrialized and industrializing countries in the region (Japan, Korea and Taiwan). Meeting the challenge posed by increasing industrial pollution will require an incentive framework that encourages industry to adopt clean technology and requires it to bear the economic costs of pollution. Incentives for dealing with pollution are discussed in Chapter 3. In addition, investments in pollution abatement wil be required to achieve enviro,nmentally sustainable growth. Chapter 4 discsses the investment implications of controlling industrial pollution. 2.37 Efforts to reduce poverty fiuther will contribute to environmenally responsible growth. The poor have few alternatives. Little access to capital, few skdlls and insecre tenure force the rural poor to farm marginal lands that quickdy degrade. Efforts to lift people out of poverty will give them the option and incentive to use the enviroment responsibly, benefiting themselves and others. Continued implementation of effective voluntary programs to reduce the birth rate, combined with rising incomes and increased access to education and health services, will help reduce population growth and enable a given standard of living to be achieved with less growth, less use of non-renewable and other resources and less pollution. In the medium term, it will also reduce growth in the labor force, easing the challenge of generating adequate employment growth. The Macroeconomic Foundaon 45 2.38 The External Constrn. Even with its admirable growth record, Indonesia remains a low-income country; but one with abundant resources. It possesses a large, hard-working labor force and a rch endowment of naual resources. These endowments make it natura that investment opportumities to develop Indonesia's potential exceed the current saving capacity of the national economy. As in the past, Indonesia can rely on effective use of foreign resources to bridge the gap between the saving capacity of the national economy and the investments needed to develop its potential. 2.39 However, Indonesia's reliance on foreign resources in 1990/91-1991/92 was unsustainably high and led to a large bufld-up of external debt. Total external debt reached $79.4 billion by end-1991; $27.7 billion was owed by the private sector and $14.5 billion of this was short-tern. Servicing this debt absorbs over 30% of Indonesia's export earnings, which increases Indonesia's vulnerability to extenal shocks, such as an unexpected drop in oil prices or slowdown in major export markets. Experience indicates that developing countries that use foreign capital effectively to achieve satisfactory growth of incomes and exports can sustain current account deficits of about 2% of GDP over long periods without excessive build-up of foreign liabilities or erosion of creditworthins. Reflecting this, the current account deficit is projected to decline steadily from 2.4% of GNP in 1992/93 to the 2% level in 1995/96 and remain at that level in the medium term. Current account deficits in this range will provide adequate external resources for growth and result in improved creditworthiness, provided there is a commensurate inerease in national savings and improvement in investment efficiency. Increasing national savings is the only way to reconcile the greater need for resources required to develop Indonesia's potential and sustain rapid GDP growth with the goal of reducing the current account deficit (in relation to GNP) to a sustainable level. This requires bot higher public and private savings. Prospects for Growth and Strutual Change 2.40 Medium-term projections consistent with Indonesia's main challenges, as outlined above, are sumamized in Table 2.6. Growth of domestic demand is projected to accelerate slightly in 1993194, with a compositional shift toward investment. Fixed investment growth could rise to 7%, consistent with decliing interest rates, with consumption growth at 5.2%. The higher level of fixed investment demand would generate a higher level of imports. Non-oil export growth is projected to remain robust at around 10%. Overall GDP growth of 6.3% is projected, with non-oil GDP growing by 6.7%. On the supply side, non-oil manuturin is projected to continue to grow rapidly in response to continued strong export demand and recovering domestic demand. Agricultural growth is projected at 3% p.a. Favorable rains provide grounds for optimism that the projection for agricultural growth in 1993 will be realized. OWLNo production is projected to grow by 1.1%; expansion of LNG production accounts for all the increase. 2.41 Over the medium term, non-oil GDP grows by about 7% each year (7.8% excluding agriculture), sufficient to provide needed jobs. Consistent with projected strong non-oil export demand, non-oil maaur remains the main engine of growth in the economy on the supply side. Projected annual agricultural growth of 3% is nearly one percentage point lower than during the 1970s and up to the mid-1980s, when large public investments in irrigation and supportive infrastructure and provision of subsidized inputs spurred rapid growth. However, the projected growth rate is in line with average growth since the mid-1980s. One measure of the strucual change Indonesia will undergo during the 1990s is the decline in agriculure's share in GDP from 20% in the early 1990s to 15% in 2000. Overall GDP is projected to grow by an average of about 6% during the rest of the decade. Declining oil production is likely to be offset by rising LNG production so that combined oil/LNG sector value added remains almost unchanged in real terms over the medium term. However, the share of the oi/LNM sector would decline from nearly 20% of GDP in the late 1980s to 12% by 2000, another indicator of the continuing strucral transformation of the economy. 46 chapter 2 Table 2.6: Projectlons of Key Maooo nom.c Restm a 19£yi~r 1993 1994 5 1995-2000 Aerage real growth rates (% p.a.) GDP 5.8 6.3 5.7 6.0 Non-oil GDP 7.5 6.7 6.9 7.0 Agriculure 3.6 3.0 3.0 3.0 Manufacturing 9.7 10.0 10.2 10.5 Mining 24.0 20.0 10.0 10.0 Constwucdon 11.9 9.0 8.0 8.0 Other services 7.2 6.2 6.8 6.6 ONY 5.5 5.9 6.6 6.7 Non-oil exports 26.6 10.4 9.3 8.6 Non-oil imports 7.7 8.6 9.2 8.6 Fixed investment 5.0 7.0 7.2 7.6 Public 7.0 6.0 6.0 6.9 Private 3.7 7.6 7.9 8.0 Macroeconomic balances b CUrreUt aCOCUDtGNP -2.4 -2.2 -2.0 -2.0 Non-interst aUrreat account/ON? 1.4 1.5 1.5 0.9 Overall public setor balance/Gw? -1.4 -0.6 0.4 0.2 hLT debt sevice/exports 30.0 29.7 25.5 17.6 MLT debt/exports 176.4 163.5 137.3 92.4 MLT debt/ONP 57.9 54.6 47.2 35.1 Strnacre of the economy b Non-oil tnrlacturig/GDP 16.0 16.6 18.0 22.2 Non-oil exports/no-oil imports 90.2 92.6 94.6 97.0 Publc saving/GDP 8.3 9.2 10.2 10.4 National saving/GDP 20.1 20.8 22.1 23.5 Fixed iVnestmen/DP 22.5 22.8 23.2 24.4 Privae fixed investmen/ Total fixed Xnhvstmet 56.9 57.0 57.6 58.1 ConSuMption/GDP 75.0 74.6 73.9 73.4 ConsuMption/ONY 76.0 75.7 74.8 74.1 Pces Oil prices (us$/bbl) b 17.4 16.7 17.8 24.6 Non-oil terms of trade (1983/84=100) b 90.6 91.5 93.4 95.6 a Balance of payments data are for fiscal years (stating April 1). Other indicators are for calendar yeas. b For last year of multi-year periods. Sorce Central Bureau of Stastics and Worid Bank staff estimates. 2.42 The developmen in the oil sector highlight the ccial role of non-oil exports in reducing the current account deficit to a susinable level, and maintaining it at that level. Oil prices are projected to decline by $0.7/bbl in 1993/94. With production projected to remain constant and domestic conmption increasing, a $0.5 billion narrowin of the oil curent account surplus is projected (Table 2.7). Holding the overall currat account deficit at the 1992/93 level thus requires a compensating The Macroeconomic Foundation . 47 improvement in the non-oil current account. The oil surplus is projected to continue to decline, so that progress in narrowing the overall current account deficit toward 2% of GDP by 1995 will require addidonal improvement in the non-oil trade balance. The nain uncertainties in the balance of payments, discussed in section D, arise from fluctuations in world oil prices and in import growth in Indonesia's main trading partners. In the event either of these is lower than projected, measures to raise the competitiveness of non-oil exports would be needed to sustain progress in reaching the desired current account deficit. Table 2.7: Balance of Payments Projectons, 1992/93-2000101 (US$ billion) &imated _Proiected 1992/93 1993/94 1995/96 2000/01 Merchandise exports (fob) 34.9 38.4 45.9 79.0 Oil & LNG 10.3 10.0 9.6 12.0 Non-oil 24.6 28.4 36.3 67.0 Merchandise import (cif) -31.0 -34.9 42.4 -76.3 Oil & LNG -3.8 -4.2 4.1 -7.2 Non-oil -27.2 -30.7 -38.4 -69.1 Trade balance 3.9 3.5 3.5 2.7 Non-factor services (net) -0.4 -0.3 -0.2 0.2 Interest payments (MLT) -3.9 4.0 -4.2 4.9 Other factor services and transfers (net) -2.5 -2.1 -2.1 -2.9 Curment account balance -2.9 -2.9 -3.0 4.9 Oil/lNGcurrentaccount 3.6 3.1 2.7 1.0 Non-oil caunt account -6.5 -6.0 -5.8 -5.8 Public ALT loans (net) 2.1 2.0 1.6 2.0 Disbursements 6.8 7.0 6.8 8.9 Principal repaymemnts 4.8 -5.0 -5.2 -6.8 Other capital (net) 6.9 0.1 3.3 5.8 Use of net foreign assets -6.1 0.8 -1.9 -2.9 Meto items: Net official reserves a 11.8 12.6 16.3 29.2 - Months of imports b 4.1 4.0 4.1 4.1 Current a=count/ONP (%) -2.4 -2.2 -2.0 -2.0 Non-interest CA/GNP (%) 1.4 1.5 1.5 0.9 MLT debt service/exports (%) 30.0 29.7 25.5 17.6 a Net official reserves are defined as gross offcid reserves minus outStandg liabilities to the IMF and other short-term liabilities. b Net official reserves in months of next year's expected total merchandise imports. Source: Bank Indonesia and World Bank staff estimates. 2.43 Indonesia should be able to realize the rapid non-oil export growth projected for sustinable growth. Much of Indonesia's recent success in expanding non-oil exports is attributable to growth of 48 Chapter 2 textile (including clothing) exports. Textile exports surpassed plywood exports in value in 1990/91 to become Indonesia's largest manufactured export. Although Indonesia's textile exports have a significant 3% share of world exports in a sector where non-tariff barriers are important, there is reason for optimism about textile export prospects since Indonesia recently reached an agreement with the u.s. for a 35% larger textile quota. Textile investment projects requiring imports worth $10.6 billion have been approved by BKPM since 1986, and the realization rate for approved textile investments has been 45%, which is one of the highest rates of any sector. Greater capacity and the expansion of the u.s. quota should support the 12% annual growth of textile exports projected over the medium term. 2.44 In addition to continued growth of textiles, rapid growth of non-oil exports will increasingly depend on Indonesia's ability to expand exports of "other manufactures". Growth in this large, diverse group of products has been rapid since the late 1980s, yet Indonesia's share of world exports of these products remains small. The scope for further expansion is thus substantial. In footwear, the largest and one of the most rapidly growing other manufactures, Indonesia's share of world exports is less than 1%. Competitiveness rather than external market constraints will determine Indonesia's ability to expand this group of exports. The importance of competitiveness highlights the role of regulatory reform that exposes domestic sources of high costs to competitive pressures. With continued progress on that front and improving competitiveness, Indonesia should be able to sustain the 9-10% real growth of non-oil exports projected over the medium term. Extrn Fhacing and Debt Strategy 2.45 Extera Fhinng. Projections of Indonesia's external financing, based on the scenario outlined above, are presented in Table 2.8. Total gross external financing in 1993/94 is projected to be about $10.5 billion, substantially lower than in the past three years. This is due to the major progress achieved since 1990 in reducing unsustainable current account deficits and associated large increases in foreign borrowing, especially private non-guaranteed borrowing. The pattern of financing in 1992/93 included a large build-up of net foreign assets, including capital inflows attacted by high rupiah interest rates. As interest rates gradually decline toward international levels, it is probable that some of that capital will flow out, and this is reflected in the 1993/94 projection. At the same time, official reserves would be maiained equivalent to 4-4.5 months of imports, levels that are prudent given Indonesia's open capital account and vulnerability to external shocks, as discussed in Section D. The other major change in financing requirements is the growth in debt repayments from $7.4 billion in 1992/93 to $8.4 billion in 1993/94. Beyond 1993/94, Indonesia's externl financing needs will continue to grow, reflecting growing debt repayment obligations, the need to maintain reserve levels in relation to growing imports, and a gradual, sustainable rise in the cufrent account deficit (in absolute terms). 2.46 The financing plan implicit in the souwces of flwwiag projected in Table 2.8 recognizes the strategic role of contiued official assistance, but also foresees a growing reliance on other sources of finance. Following reductions to mriore sustainable levels in 1993/94, private capital inflows (including foreign direct investment, private medium- and long-term borrowing and trade-related flows) will become an increasingly important part of overall financig. Within public borrowing, loans from commercial sources will become more important as gross flows of official assistance are projected to remain roughly constant as total external borrowing rises. The Macroeconomic Foundadion 49 Table 2.8: Projed Edteoa Flnuavc (Peiod average for mti-year perdods. is billion) Actual l Proleaed 1986187- 1990191- 1992/93 1994/95 1996/97 1989/90 1991/92 1993/94 1995/96 2()021* Extermal Financing 6.6 12.4 16A 10.5 13.6 16.2 Current account deficit 2.4 3.9 2.9 2.9 2.9 4.1 (of which, MLT interest payments) (2.9) (3.6) (3.9) (4.0) (4.3) (4.6) Principal repayments 4.7 6.3 7.4 8.4 8.9 10.0 Increase in net foreign assets .0.5 2.2 6.1 -0.8 1.9 2.1 Sources 6.6 12.4 16.4 10.5 13.8 16.2 Directforeigninvestment(net) 0.5 1.5 1.7 1.8 1.9 2.1 Private mLT loans 1.1 4.9 3.6 2.7 3.8 4.7 Other capital (net) -1.1 0.5 4.3 -1.0 1.3 1.8 Public MLT loans 6.1 5.5 6.8 7.0 6.8 7.5 of whicb: Official assistance a (3.5) (3.8) (3.8) (3.8) (4.0) (4.0) Other (2.6) (1.7) (3.0) (3.2) (2.8) (3.5) a Excides gants, which are inchided in tansfers in the current accout Source: Bank Indonesia and World Bank staff estimates. 2.47 Net inflows of foreign direct Figure 2.8: Soures of ForeIn Direc Imvetmen investmetl (Fm) rose from $0.2 billion in (Bond an Appo veadrNwnussiof U ,U" 1985/86, before the opening of the economy through deregulation, to $1.7 billion in 1992/93. n 6e 1 In addition to increasing Indonesia's access to new 6x ideas and technology, FDI provides resources for investment without creating debt. The sources of private investment have been quite diversified (see Figure 2.8). Gradual increases from the 9% recently-achieved high foreign investment level o - are projected. Higher levels of PDI are possible, 41 EO together with higher import levels and rates of 1SX growth, but even maintaining the current level will depend on progress in several areas: reform am". Ivwsbnai Coorfn Boad. of investment and capital market regulations, easing of infrastructure bottlenecks, and institutional reforms, especiaUy in the legal framework and accounting. Such policies, discussed in more detail in subsequent Chapters, wiU not only make Indonesia more attractive to foreign investors, but will also provide the kind of environment domestic investors need for efficient, sustained growth. 2.48 Overall, private capital flows will provide about half of Indonesia's financing in the 1990s, compared with negligible amounts in the 1980s. This shift calls for careful attention to debt management and policies that ensure efficient use of resources, especiaUy given Indonesia's already large stock of external debt. Three points need to be kept in mind in implementing this scenario. First, the incentive framework needs to ensure that these external resurces flow into efficient uses, generatig rapid, high returns, especially in export-oriented, labor-intensive activities. In this regard, large, capital-intensive projects need particularly careful scrtny because such projects can add rapidly to Indonesia's debt, while 50 Chapter 2 crowding out smaller, potentially more profitable investments. Second, the availability of private financing at the projected levels cannot be taken for granted. It will depend on perceptions of Indonesia's creditworthiness and attractiveness as a home for foreign investment. Third, the projected shift in the composition of Indonesia's debt will raise the average borrowing cost and shorten the maturity structure of debt. 2.49 Within this overall financing plan, concessional assiance will play a strategically important role, even though such assistance is projected to decline significantly in net terms and in relation to the size of the economy throughout the 1990s. An adequate flow of concessional assistance is an essential part of Indonesia's transition to the more diversified financing pattern projected above. First, such assistance will continue to support projects and sectors-such as human resource development and infrastructure-that will enhance Indonesia's productivity, competitiveness, and attractiveness to foreign investors. This in turn will improve perceptions of Indonesia's creditworthiness. Second, it will ensure the net flow of concessional external resources does not fall too rapidly as amortization payments rise. Finally, by maintaining an adequate degree of concessionality, it will make the rising borrowing costs noted above more manageable. All these factors will work together to keep total borrowing costs manageable and to maintain Indonesia's access to international capital markets. This will increase the probability that the projected commercial flows will ba available as needed. 2.50 This financing plan implies that concessional financing flows remain at about current levels, with disbursements of official concessional assistance from Indonesia's Consultative Group (cGI), including grants, continuing at about their 1992/93 level of $3.8-3.9 billion. With an appropriate mix of project and sector assistance and further progress in improving project implementation, cGI commitments of about the same level as last year ($4.9 billion) would generate the projected concessional flows in 1993/94. As discussed at last year's coi meeting, human resource development and infastructure remain the priority areas for this assistance. This financing plan also assumes that other financing outside the normal donor framework remains at about last year's levels. 2.51 For the recommended level of commitments to generate the projected disbursements, the level and form of commitments need to be optimized, with continued improvements in project and programn design and implementation and with disbursement mechanisms well-suited to the requirements of the activities being assisted. This will prevent an excessive, disruptive drop in disbursements. Sector operations are likely to provide a particularly appropriate lending instrument since such operations support efficiency-enhancing sectoral programs and policies while disbursing in line with the overall pace of activity in the sector. The projected level of concessional assistance will mean that a substantial, though declining, share of Indonesia's debt will remain on concessional terms, keeping the rising overall borrowing costs within manageable limits. Continued concessional assistance, in combination with prudent macroeconomic management, will work together to bring about sustained improvements in indicators of Indonesia's debt and creditworthness. 2.52 Debt Mang n. The macroeconomic scenario, including the financing strategy, outlined above, leads to a significant improvement in creditworthiness, with the debt-service ratio falling below 20% by the end of the decade (Table 2.9). As noted, this will help ensure that the private capital inflows, which become increasingly important, materialize. Improvements in debt indicators alone, while necessary, are insufficient to ensure this. The economic and political environent for private investment must be attractive. The Government can help by maintang macroeconomic stability, sustaining the momentum of trade, finance and institutional reforms, and reducing infrastructure bottlenecks that hamper private sector development. Investor confidence would be helped by institutional developments to make the business environment more transparent and predictable. The list of areas where work is needed includes the legal and accounting framework, foreign investment regulation, and land-use and ownership. The Macroeconomic Foundaion 51 Table 2.9: Medlum- and Long-Term Debt Indicators, 1987-2000 (percent) Acta Poece a 1987-89 1990 1991 1992 1993 1995 DOD/GNP 62.7 57.8 59.0 57.9 54.6 47.2 35.1 Public 55.8 47.5 47.0 45.9 44.2 39.9 29.2 Private 7.0 10.3 12.0 11.9 10.5 7.2 5.9 DOD/exports b 222.6 187.6 196.5 176.4 163.5 137.3 92.4 Public 197.9 154.2 156.6 140.0 132.2 116.3 76.8 Private 24.6 33.4 39.8 36.4 31.3 21.1 15.6 Debt service/exports b, c 36.1 29.7 31.6 30.0 29.7 25.5 17.6 Public 30.4 23.7 23.2 21.3 19.9 16.4 11.7 Private 5.7 6.0 8.4 8.7 9.7 9.1 5.9 Interest/exports b 14.0 11.0 11.5 10.0 9.2 8.1 5.4 Public 12.1 9.0 8.9 8.0 7.3 6.4 4.1 Private 1.9 2.0 2.5 2.0 2.0 1.7 1.2 a Based on exchange rates of December 31, 1992. b Denominator is gross exports of goods and services. C Debt service excludes prepayments. Source: Bank Indonesia and World Bank staff estimates. 2.53 Indonesia could also consider implementing a strategy of market diversification. Such a strategy would include: (i) assessing Indonesia's financing requirements by volume, timing and use; (ii) considering potential sources and instruments, including the international bond market; and (iii) developing instiuonal capacity to carry out the strategy. In view of the dollar denominated burden of Indonesia's debt and the fact that exchange rate fluctuations have added significanty to the debt in the past, the use of specialized financial instruments and integrated asset-liability mnagement techniques to reduce Indonesia's exposure to external finacing and debt management risks deserves consideration. An array of financial instruments has emerged that allows governments, among others, to reduce exposure to currency, interest rate and commodity price risk. 2.54 Another debt management issue is how the Commercial Offshore Loan Team (COLT) should evolve. Rapid growth of private borrowing in 1989-90 and the reence of a number of large, capital-intensive public and publicly-related investment projects that were about to seek external loans led to the establishment of the COLT. The COLT was empowered to: (a) coordinate all public commercial borrowing, including state enterprise borrowing and private sector borrowing for projects involving the Government or its agencies; (b) set amnual ceilings on external commercial borrowing by public and quasi-public entities and establish guidelines for loan terms; (c) determine the priority order and timg of approved loans; and (d) improve reporting and information from public and private entities on enal commercial borrowing. The COLT later issued regulations for a prudent level of private borrowing that have tended to contain such borrowing. The regulations: (a) cap total public sector foreign exchange borrowing from intemational commercial banks in each fiscal year to FY95; (b) extend the restriction on commercial banks' net open position to include off-balance sheet transactions; and (c) limit commerci banks' short-term foreign liabilities to 30% of capital. 52 Chapter 2 2.55 Further development of the institutional framework to manage external borrowing is called for to keep it within prudent, sustainable limits in the context of an open capital account. Continued vigilance is needed to ensure that the ceilings on external borrowing for public and publicly-related projects are maintained. Efforts to circumvent such ceilings indicate the need for careful monitoring, and for increasing reliance on indirect means of managing external debt-macroeconoraic restraint, regular scrutiny of public enterprise investment programs, and financial sector and institutional reforms that encourage financial prudence by firms and banks. Subsequent chapters discuss public enterprise investments (Chapters 4 and 5) and measures to improve the financial discipline of banks and firms (Chapter 3). It would be useful to establish a debt policy body (possibly by extending the scope of the COLT) responsible for overall debt management. The body would need a secretariat with adequate full- time staff and resources to provide data and analysis needed for debt management. Improving the reliability and coverage of debt data, and systems for debt analysis would assist this effort. Consistent Macreeconomic Policies for Sustained Growth 2.56 The sustainable growth path outlined above is an objective. Macroeconomic policy is an important instrument the Government can use to achieve this objective. Recent experience illustrates that macroeconomic policies-fiscal, monetary and exchange rate policies-need to be used in a coordinated fashion to keep the economy on an even keel. Rapid monetary growth in 1990 raised inflation and expectations of exchange rate depreciation that pushed up nominal domestic interest rates. A more supportive fiscal stance in 1991/92 would have reduced the burden of adjustment on private investment. A more supportive fiscal stance in 1992/93 could have helped achieve a quicker alignment of domestic and offshore interest rates by improving confidence in price and exchange rate stability, and would have created more scope for an increase in private investment. Close coordination of macroeconomic policies will be needed to keep aggregate demand along a path that is consistent with robust growth with low nflation and manageable levels of external borrowing. 2.57 Exchange rate policy-the managed float-is projected to maintain the real effective exchange rate close to the present level. In view of the crucial role of non-oil export growth in the projected macroeconomic scenario, a competitive exchange rate would be essential. Under the managed float, the Government sets bilateral exchange rates for the rupiah vs-a-vs a basket of currencies. In practice the u.s. dollar has a heavy weight in the basket. Fluctuadons in the U.S. dollar against major currenies therefore affect Indonesia's competitiveness because of the exchange rate policy. Recent large fluctuations in the u.s. dollar exchange rate may continue and the Government may wish to consider managing the rupiah against a basket in which the doLlar has a lower weight. Recent experience also highlights the importance of expectations of exchange rate change. Changes in expectations of depreciation can quickly lead to capital inflows and outflows through Indonesia's open capital account. Policy inconsistency can raise such expectations. Therefore, adherence to the managed float exchange rate policy is easiest when there is a simultaneous commitment to a stable price level in conducting monetary policy. If the private sector perceives an inconsistency between the exchange rate policy and the goals of monetary policy, as occurred in 1990, confidence will erode and quickly lead to capital outflows. 2.58 Monetay poicy in 1992/93 faced the formidable task of sterilizing large inflows of capital using only one instrument, the sm. As noted above, sterilization operations are estimated to have cost Bl nearly $1 billion in 1992/93. Developing alternatives to sBs for B to sterilize capital inflows could relieve the strain on Brs income. This would be advisable because a large drop in BrI's profits could erode confidence and trigger capital outflows. Alternative ways of sterilizing capital inflows include prepayment of public debt, and increasing commercial bank required reserves or liquidity requirements. To encourage the development of a secondary market in Sins and commercial bank debt instruments The Macroecononic Foundation 53 (SBPUs), BI could coordinate balanced purchases and sales of these instrments. Over time the markets would become deeper and broader to permit m to sterilize capital flows by intervening in the secondary market for these instruments. 2.59 An issue for near-term monetary management is the renewal of the special sBJs that were exchanged for deposits of public enterprises in February 1991 as part of the contractionary measures to withdraw liquidity (para 2.4). The Rp.7. 1 trillion outstanding stock was renewed for another 6 months in February 1993. To avoid a destabilizing injection of liquidity, these special sBss should be carefully phased to mature over time. This could be accomplished by renewing them upon maturity in August 1993 at staggered maturities of 1-2 months to several months, with some rolled over longer as needed. Another near-term issue is the orderly unwinding of the large stock of ordinary SBIs. Bi should also review the need for its continued involvement in operations that can be better left to commercial banks, such as discounting of export bills. As the experience of 1992/93 demonstrates, such operations can make it difficult to keep the monetary aggregates on track. The effectiveness of monetary policy would also increase by accelerating the phasing out of subsidized liquidity credits. By insulating special classes of borrowers, these credits reduce the effectiveness of monetary policy and, within a given ceiling for credit growth, reduce credit to efficient private borrowers. 2.60 Because of the constraints Indonesia's exchange rate policy and open capital account put of monetary policy, fiscal policy is the most effective instrument for ensuring that excess demand pressures do not arise, causing inflation to accelerate or the current account deficit to become unsustainable. This means keeping the public sector's net absorption of resources to levels that prevent overheating. To do this, the fiscal stance must be consistent with the main macroeconomic targets. Inconsistency of policies would suggest that one or more macroeconomic targets may not be met, which might erode confidence. Maintenance of confidence in macroeconomic policy is essential to keep onshore interest rates aligned closely with offshore rates and to avoid destabilizing foreign capital inflows and outflows. 2.61 The consistency approach to determining the fiscal stance involves deriving public sector financial asset and liability movements, and the implied net financial position of the public sector, that are consistent with the main macroeconomic targets. One reason for adopting this approach to assessing fiscal policy rather than the usual one of counting expenditures and revenues is the nature of Indonesia's fiscal accounts. The public sector includes the central, provincial and local govermment levels. In addition, off-budget transactions are significant, public enterprises produce nearly one-fifth of GDP, and Bi engages in quasi-fiscal operations (para. 2.15). All these activities should be included in a measure of the impact of the consolidated public sector on the macroeconomy. Data on the stocks of public sector assets and liabilities are often more reliable and up-to-date than revenue and expenditure data. 2.62 A given net financial position of the consolidated public sector can correspond to three kinds of asset and liability movements: issuance of external debt, internal debt, and revenue from monezatdon. In Indonesia, the balanced budget law prohibits internal borrowing, leaving only external borrowing and money creaton. The medium-term scenario projects a sustainable path for the growth of net foreign liabilities of the public sector. Continued restraint on public borrowing along with the need to increase official reserves as the value of imports rises implies no real growth of public net foreign liabilities in the near to medium term. Revemie from monetization is determined by the demand for money, which depends on real GDP and the level of interest rates. Moneizaton is not a significant source of revenue; furthermore, it is projected to decline as inflaton falls from 7.4% in 1992/93 (annual average) toward 5% by 1995/96. The analysis suggests that the sustainable medium-term fiscal stance is a small overall fiscal surplus. Measures are needed to improve the Central Government overall fiscal position, which was a deficit of about 1.0% of GDP in 1992/93, by the equivalent of about 2% of GDP in the near to medium term. The Central Government budget for 1993/94 implies an improvement in the fiscal balance 54 Chapter 2 of about 1.5% of GDP during the year. Meeting this ambitious target would improve the balance of demand management policies, allowing private investment to revi-e as interest rates subside. For consistency with sustainable growth targets, the planned improvement in 1993/94 would need to be sustained in the medium term. As already emphasized, this would promote private confidence in the stability of the rupiah and in the price level, which would hasten the reduction in domestic interest rates. 2.63 Improving the fiscal stance while fluding priority public investwents underscores the need to strengthen public resource mobilulon and increase public savings. While there has been a trend improvement in the public savings rate in recent years (Tables 2.2 and 2.10), there remains sizable scope for further improvement by raising tax and non-tax revenues and conaining expenditures. The greatest potenial lies in tapping more fully sources of government non-tax revenue, including strengthening cost recovery from public services, raising revenue from forestry fees and improving the financial performance of public enterprises. Stronger revenue mobilization will need to be supplemented by improved public expenditure management to ensure that the additional resources lead to higher savings. The main tasks on the expenditure side will be to reduce subsidies, contain general administrative speding, and rationalize investment priorities. 2.64 A major reform of the tax system in the 1980s created a modem tax system based on the value added tax (VAT), the personal income tax and the corporate income tax. Coupled with improved tax collection, the new system raised non-oil taxes in relation to non-oil GDP from 7.2% in 1981 to an estimated 12.7% in 1992/93, an important achievement. Indonesia's tax ratio, however, remains below that of most other countries in the region (17% in Korea and Thailand, for example). Moreover, with oil revenue projected to continue to decline in relation to total revenue, mobilizing more non-oil tax revenue will remain important. The primary focus of efforts to raise tax revenues should be improving tax dnison. The proportion of potential revenue actually collected remains in the 50-60% range for several major taxes, including the income tax, the VAT and the property tax. In countries with more developed tax systems, this ratio tends to be as high as 80-85%. Also, recenly, there appears to have been some loss of earlier gains in customs duty collection. Besides strengthening efforts to improve tax administration, possible tax reform measures include raising the effective property tax rate from its current low level of 0.1%, further broadening the coverage of the VAT, and taxing personal income from iterest at the same rate as other personal income. Also, there is substantial scope for raising revenue from forestry fees; increasing government rent captre in the sector to 85% over the medium term could more than triple annual government forestry revenues from their present level of about Rp. 1 trillion (while also supporting environmental objectives). Other sources of improvement in public resource mobilization are discussed in the following chapters. Thus, improved public pricing policies-for fertilizer prices, power tariffs and water charges-are discussed in Chapter 3. Policies for improving the efficiency of public expenditures are discussed in Chapter 4. Also, Chapter 5 discusses measures to improve public enterprise performance, rationalize government administrative spending, and mobilize more revenues at the local government level. 2.65 Savings-Investment Balances and Sutnable Growth. The foregoing analysis of the consistency of macroeconomic policies highlights the supportive role that fiscal policy would need to play in achieving sustainable growth. To minimize risks to the medium-term macroeconomic scenario, which shows robust growth with low inflation and keeps external borrowing manageable, the Government's overall fiscal balance should move to and sustain a small surplus over the medium term. Prudence argues for targeting a somewhat larger fiscal adjustment so that unexpected shocks or demands on the Government budget do not lead to domestic demand overheating. 2.66 Keeping the fiscal stance on a sustainable path does not guarantee the underlying macroeconomic targets for growth, inflation and eemnal balance will be met; only that the fiscal stance The Macroeconomic Foundation 55 is consistent with them. Achieving the targets also depends on the private sector saving more to help finance growing investment demand. A key challenge throughout the decade will be to raise savings-both public, as already discussed, and private-to fmance the higher investment that would sustain economic growth while reducing the economy's dependence on foreign savings. With an improvement in overall investment efficiency, GDP growth fast enough to absorb labor force growth at rising levels of productivity can be achieved with a moderate increase in the investment rate (Table 2.10). Within this, public investment is projected to rise to around 10% of GDP, from about 9.5% currently. This reflects the need for increased public investment in physical infrastructure and human resource development (Chapter 4 discusses the priorities for public investment). Private investment would need to rise by more, from about 13% of GDP curey to about 14% by 1995 and further to 15% by the late 1990s. Table 2.10: Savilngs-Invesbet Bahles, 1983-2000 (percet of GDP at current prices) Actual P .roiecrion 1983-88 1989 1990 1991 1992 1995 20(N) Gross domestic investment 23.4 23.5 23.9 24.0 22.7 24.0 25.4 Fixed investment 20.4 21.2 22.5 22.7 22.5 23.2 24.4 Change in stocks 3.0 2.3 1.3 1.3 0.2 0.8 1.0 Gross national savings 20.1 21.8 20.9 20.3 20.1 22.1 23.5 Savings-investment gap a -3.3 -1.8 -2.9 -3.7 -2.6 -1.9 -1.9 Public sector Gross domestic investment b 8.8 8.6 9.2 9.6 9.7 9.8 10.2 Public savings 7.1 7.0 9.5 8.5 8.3 10.2 10.4 Saving-Investment gap -1.7 -1.6 0.3 -1.1 -1.4 0.4 0.2 ivate sector Gross domestic investment 14.6 14.9 14.7 14.4 13.0 14.2 15.2 Fixed investment 11.6 12.6 13.3 13.1 12.8 13.4 14.2 Change in stocks 3.0 2.3 1.3 1.3 0.2 0.8 1.0 Private savings 12.9 14.8 11.5 11.8 11.8 11.9 13.1 Savings-investment gap -1.6 -0.2 -3.2 -2.6 -1.2 -2.3 -2.1 a The inverse of the current account deficit expressed in calendar yeas. b Pixed investment only. Investment in stock changes is assumed to be financed wholly by the private sector. Source: Central Bureau of Staics and V.orld Bank staff esimates. 2.67 Reduced reliance on foreign savings and the need to raise investment imply that national savings would need to increase by about 2% of GDP in the medium term and by 3.5 % over the longer term (Table 2.10). Within this overal increase, adherence to a supportive fiscal stance would raise public saving by the equivalent of about 2% of GDP. Despite the increased savings effort from the public sector, private savings would also need to rise by close to 1.5% of GDP. The private savings rate declined sharply in 1990 and has recovered only marginaly since. Saving involves postponing consumption today in order to consume more in the future, so raising in the expected return to foregoing consumption should increase saving. Improving access to, and the quality of, education and bealth services are ways the 56 haapter 2 Government can help. Over the medium term, a lower dependency ratio resulting from demographic shifts should help boost saving. Sustaining strong economic growth, ma na g a stable financial environment, and promoting profitable, widespread investment opportumities through continued improvemet in the incentive regime, as discussed in Chapter 3, should also contribute to higher private savings, business and household. D. Economic cut in an Uncertai External Environment 2.68 Indonesia faced a difficult and volatile environment during the 1980s. Both oil and primary conunodities, which were Indonesia's principal exports, experienced large declines and considerable volatility in prices. The external environment in the 1990s is not projected to be significandy different from the second half of the 1980s. In the short term, the main uncertainties relate to oil prices and private capital flows. Indonesia also is vulnerable to currency and interest rate risks. Over the medium term, Indonesia will face two structural challenges: oil earnings in the 1990s are likely to decline because of a decline in the exportable surplus; and Indonesia needs to contain the current account deficit in relation to GDP while increasing its reliance on non-concessional sources of finance. The Main Extern Sources of Unctainty 2.69 The main external risks to macrnomic stability arise from fluctuations in: * oil prices; * non-oil commodity prices; * demand for Indonesia's manufacatued exports by major trading partners; * world interest rates; and * cros-currency exchange rates-particularly between the Japanese yen and the u.s. dollar. 2.70 Oil Prices. The outlook for oil prices depends greatly on demand conditions in the large oil-importing countries. With sluggish growth in the industial countries expected for the next few years, oil prices are likely to remain constant, implying a fall in real terms. Some improvement in real oil prices is projected toward the end of the decade, but declines in Indonesia's exportable surplus will limit the extent to which Indonesia benefits from that improvement. 2.71 Non-oil Commodity Prices. In the early 1980s, the Indonesian economy depended heavily on oil. In 1981, the oil/LNG sector accounted for over 25% of total GDP, 70% of government revemnes and over 70% of total exports. However, since the mid-1980s, the non-oil sector has expanded. Non-oil exports rose from under 30% of total exports in 1983 to 63% in 1991, a six-fold rise in real terms. Despite the diversification in export structure, both oil and non-oil primary commodities remain a significant proportion of total exports. Commodities account for over 56% of total earnings (of which 37% is oil/LNc-, Figure 2.9). Unlike the 1980s, world prices of non-oil commodities are not expected to show any long-term decline in real terms during the 1990s. Although projected sluggish growth in the OECD countries over the next few years can be expected to exert downward pressure on commodity prices, developing countries are expected to continue to shift away from production of non-oil commodities, which will exert upward pressure on prices. The aggregate non-oil commodity price index is expected to stabilize in real terms for the rest of the decade. Commodity prices have also been highly volatile in the past and there is no reason to expect that volatility around the projected trend will decline. The Macroecononic Foundion 57 lpgue 2.9: T he a Compositiof Indonesa's Expworb Share of Total Exports ,*Top Fie Oil PrmarY Commoditles < < 73U 192 Rest Total Exporht / 72 Non Oil4 27s Top Five ManuthcOure s 1A2x 1983 on Poimer CefntmedEbc< Total Export 4Mag Q12 ohn DO) 20-953 3Z0SX MM2B J036 42Lr84 5Q.089 80,443 S0U07B 59.715 65U009B 89uD04 7QAII slaralmumlaerl 17.705 19026 20,J6 2 6 1,4 25M 29.80 37.334 38684 41t4S4 44,404 58.415 CC,612 Othe /a 9.248 12JB2 14,741 14J356 17.425 20.600 23,114 21.093 18.261 20,62 15580 15290 COnnMITAMOrds1 4 ZM f 5J8 41 4.! 4LU 6UR 6U . i0 U! _4 DM Biaterul/multiaterl S2.157 2.503 2294 2.745 2.21 2.04 4,791 4.779 5,752 5257 6.310 5.067 Other Jc 2,7S5 4,477 3393 2.071 2.217 2.099 122 1,A06 1,413 066 16o2 1,113 Om bbuss_f 2DS7 UR9 4XQ9 AMS 3UiS 4M AMO U.4U OM23 d 4M7S AMBS AM BiateraUmultiaterai 1d362 15S 1,737 1,037 1,625 1900 3684 4287 4,26 4,151 4,556 5,309 Oher /c 1,310 2S6 38242 1,03 1J28 2,340 1,769 2.136 2.206 602 1,077 1337 IlBlaSera~ImUIt9atal 985 1,126 1,186 1,368 1,010 1.007 2.543 292 2,690 2.517 2,748 3,269 Othe la 633 1,721 250 22 212 611 (486 (9 (S64) (1.893) (126) (1,651) 'rsommwbwdeb m t1S 24 e i LZ 14E) =i3 H05 1 MT t1.12( (1.180) Bflatemrnl/multiaral es654 732 733 802 314 61 1,462 1648 1.4S5 091 957 1,2. Othe /a C26 983 1,723 (141) 33) ) (1677) (2,163 (1,060 .830) (2.14) .46") Pub5k dbMser*o 2 223S 2372 4 69 I= esss am ene am U a 71 A-onbz*m 1,054 1,104 1.290 1.600 2.330 262 3a,40 4.486 4,435 4.129 4.172 5007 Inter_ 991 1,132 1.23 1.629 1.43 2.072 2.273 2.525 2,501 2A5 266 282 Pubm am am am aam Na am me am U LOH aM LU! Bllatesel/muttistera 708 s63 1.04 1.135 1.311 1619 2.232 2.645 2.770 3,232 359 4.030 Other /c 13t 17 1,519 2.093 2.66 2675 3847 4,319 4.160 3,432 3.20 3,606 UndbureddW lTDOb 41 4b 39 39 37 a 32 31 31 D i U BhlatemJ/multflateral 43 44 43 43 41 37 34 32 32 25 30 28 Otherc /a 42 34 32 33 32 30 30 30 43 31 28 Gross d _ursernter o m ss e a1 1D 1 £ IV ii 71 71 If! w _ateral/multiateral 63 62 76 71 67 es 77 so 74 79 72 104 Other/a 47 58 so 94 67 111 147 163 156 e1 64 120 d3ttandeooxnlnunMld U21 24 Q 23 24 2! 2a 28 2A 2 1i a UiateraZ,mitI1aterl n14 14 16 16 13 15 21 25 23 21 21 26 othe /C 21 24 38 28 24 27 22 28 32 9 14 25 NHedWkMMnMMWgborxdEb. 21 72 Z4 at ai IV a Al Al la 26 21 Bl x Utl Ik nd ~~72 7l 68 ?1 02 53 69 09 so ,Bt so 62 OWher /c 48 73 77 47 11 26 (27 (45) (39 (315 (120) (128) rN#uvaoturov crWoy dqex. 23 4a 49 1! to 111 ) 13 bD la AmD la3 EraDl/muituatwes 48 48 42 41 19 4 40 38 35 22 21 24 Othr/a (2) 42 53 (7) (38) M2 (q (102) (89 (471) (199 (185 /a Data tis secor raer t pubic mwdum and ong tem kluis Lowns wh amwa ycd lssthan one year, cdfor LG exp2andobn. LPG *nd peaylene prjects and grntB we not biotuded /b SWd d year. /a 8upp' cedt ans k frm fiancal h _stlton uxxt eedb. bends and nallnalrln only. Idrss _dbumwnents asea proeta d undebue d dbt (I00-DOD) at begnnng of yew p hus _omm*nts ding to year. Soue: MORD Debtor epotg ysatn. based on dat preAdad by Bank indonesiaL 184 Satisdcal Ann fTabQ.2 Page 1 of 2 *IND-ONE1 C,OUNTR ECONO>MIC REiR xmtrl Pubieo Debt Outsadina as of Doeember 31. 1991 (U$ *000) Type of credltcrl Debt outstandins Mior repoted creditor oountry Disbursed Undlsbursed Total new commitments Jan 1-Deo 31 1981 SUsplrS' Crft. Finland 12,186 23,8691 5,8" 21,757 France 37 37 0 Japan 2,548,984 647,391 2,906,375 85,6w0 Korea, Repubic of 4,129 4,129 0 PaWstan 3,805 3,805 0 Switzerland 1,203 1,203 0 Total suoifW ore' 2dits o0s44 671J08 3041.426 107.417 Finaniolal Institutions FPance 252,647 9.630 262,277 0 Germany, Fed. Rep. of 1,737 1,737 0 Hong Kong 948,038 1,099,680 2,048,616 0 Itly 2,359 2359 0 Japan 3,148244 888,882 4,032,126 400,000 Muliple Lenders 93,750 93,750 0 Nothelands 945 945 0 Singapore 67,436 67,436 0 Unibtd Kingdom 147,053 167,070 5,023 0 Unied States 252,873 130,000 382,873 0 T0T9 flnnolial hsSdiAons 4 9118S 2 910 262 7227142 400 Q00Q Bonds Germany, Fod. Rep. of 197,689 197,889 0 Netheldands 11,693 11,693 0 witzedand 626500 82500 0 United Kingdom 88,100 88,100 0 United States 300,000 800,000 0 Total bonds 610182 Q 018Z Q Naionalization Notherands 120 120.907 Q Total nafonaliation 120,907 Q 120.907 Q Mullateral Loans Asian Dev. Bank 4,365,715 2,M99.604 7,305,319 990,000 EEC 4.243 4,243 0 I3RD 10,597,020 4,480,794 15,057,814 1,532,600 IDA 829,079 820,079 0 Ing. Fund Agr. Dev. (FAD) 53,39 61,988 115,227 0 Islamic Dav. Bank 472 472 0 Nordic Invest Bank 105,023 33,470 138,493 42,098 Total muiiateral loans 15.954,7t MANUOfl 2.460;64 584.f98 Stadstical Annex 185 Table 4.2 Page 2 of 2 INDONE81A COUNTRY ECONOMIC REPORT Extomal Publih Dobt Outandina a. of December 31. 1991 (US$ '°00) Type of creditor/ Debt outstanding Majorepofted oreditor country Disbursed Undisbursed Total new aommitmet Jan 1-Doo S1 1991 Bilateral Loans Audralia 386.057 101,413 487,470 0 Audda 42,831 23 42.854 0 Belgium 94,059 34,943 129,002 30,868 Bruno 100,000 100,000 0 Bulgaria 912 912 0 Canada 349,619 63,410 413,029 11,848 China 22,913 22,913 0 Czeohoslovalde 30,408 30,408 0 Denmark 22,749 41,790 64,539 36,324 Egypt, Arab Ropubi of 1,274 1,274 0 Frano 786,481 316,580 1,073,061 9,606 German Dem. Rep. 25,008 25,008 0 Germany, Fed.Rep.of 1,887,509 1,490,012 3,377,521 742,698 Hunga"y 7,5865 7,585 0 -ndia 10263 3,163 13,426 0 Italy 48,895 50,195 99,090 14,849 Jan 13,084,409 5,405,148 18,489,555 2,395,977 Korea, Republio of 2,041 9,711 11,752 0 Kuwait 65.572 60,116 125,687 0 Net:herands 1,249,512 69,116 1,318,628 0 New Zealand 8653 853 0 Other 20,000 20,000 0 Pakistan 3,096 3,096 0 Poland 42,712 42,712 0 Romania 6,123 6,123 0 Saudi Arabia 74,988 61,288 136,256 0 Spain 40,297 29,797 70,094 36,429 Switzedand 27,530 10,094 37,624 0 United Arab Emitates 3,980 3,980 0 United KIngdom 43,739 67,556 111,295 0 United States 2,310,505 702,340 3,012,845 320,768 USSR 445,683 445,663 0 Yugosiavia 51,195 51,195 0 Total bilatera loans 281.760 8.516692 29.775.453 3.601,588 Export Credib Austda 170,094 280,814 450,908 248,538 Belgium 131,641 152,979 284,620 60,577 Denmark 0 15,213 15,213 15,213 Franoe 1,158,607 646,572 1,805,179 307,676 Germany, Fed.Rsp.of 183,798 36,873 200,671 0 Hong Kong 98,510 96,510 89,885 Japan 202,527 59,20 261,777 15,000 Neheldands 216,157 147,824 363,981 02,623 Norway 483 483 0 SIngapofe 3,375 3,375 0 Spain 82 82 0 Sweden 155,487 155,487 0 Swiedand 83,402 63,612 147,014 58,458 United Kingdom 849,505 459,294 1,108,799 278,757 Total exooredits 9.331.669 1.862.431 4.894.098 1.168.726 Total extemal n8M l det 225 ALL% Sourc: l8RD Debtor ReportIng System, based on data provided by Bank Indonesia. COUNTRY ECONOMIC REPORT Sew4ce-Pawments. CommIdtments. DtsbursementB and OutStardna AMount of ExtteMat Public Deb1t DON cbMt _bBV at TrarastIons dudn pelod O#wChwans NW Otf leaod DIsburse SWAMs Paymenwts Cance. Adjust- °wlbt nloft mmo PMncipal Intrest Total lionh Tmha Actud 1980 15,027,314 24,0,975 4,277,373 2,6050 939494 823,811 1,763,305 118,21 1981 15,908,458 20,95,145 4,51,129 26,429 1,054,106 990,708 ,044,814 163,6 -1,20,56 1982 18,317,545 32,007,969 7,069,817 3,95136 1,104,100 1,132,291 2,2,391 5,472 - 1983 21,493,904 35,297,509 5,66,879 4,979,024 1,289,872 1,233,096 2522,6 197,66 -0,7 1984 22,265,831 36,359,169 4,816,038 3,889,87 1,59633 1,6,892 3,228,525 25,4 -2,136,511 1985 28,777,250 42,784,096 4,637,815 3,552,669 2,329,754 1,642,524 3,972,278 514,815 4,638,680 1986 32,633,661 50,088,546 4,103,343 4,240,035 2,6216 2,1,669 4,693,632 183,468 6,00 1987 40,907,509 60,447,572 5,992,347 5,462,822 3,406,766 2,272912 5,6,678 635,8 8,407,6 1988 41,240,885 60,076,075 6,087,470 6,422,6 4,437,776 2,,349 6,96125 59,490 -1,431,701 1989 41,092,228 59,715,386 7,165,685 6,471,469 4,435,217 2,01,122 6,936,339 293,194 Z797,82 1990 45,016,928 65,095P 6,24,163 4,75808 4,129,417 t5340 6,S6,922 898,612 4,1165,9 1991 48,043,553 69,003,554 8,001,281 5,632,684 4,172,108 2,645,766 6,817,874 1,956,864 2,035.69 1992 50,962,270 70,910,847 6,199,226 6,645,420 6,007,001 2,628,306 7,835,309 253,740 968,809 Projected 1993 50,809,050 62,996,23 - 5,501,984 5,654,058 ,823,404 8,477,463 2257,439 -1,146 1994 50,422,964 58,073,420 4,538,697 4,924,783 2754,661 7,679,450 1995 48,593,847 53,188,600 3,055,729 4,884,847 2,664,849 7,549,695 26 1996 46,I50,217 49,206,602 * 1,948386 3,982,015 2,518,182 6,500,197 18 1997 44,001,920 45,372450 1,275,898 3,834,196 Z367,603 6,201,199 43 1996 40,830,562 41,506,757 694,369 3,865,727 Z191,528 8,057,25. 35 /a INs comn show the anmuntof adthhmeft lrnbalances In the amount outstan Including undlibwd from one year to th nen The most common es of imbane are changes In echange rates and trns of debts rom one atego to anotrin the ta,o. Soue: IBRO Debtor Reportn System, based n dat provided by Bank Idones. RwmuIhM~~~nmrIuwKa i,lm COUNTRJE Cowmm. Di.b. A; Comm.,4 Disb. A.m mai Comm. A Dab. A CCOM.A DIs. CmmA ab Coamm A Disb. A On". met 0O.. Not arom Not Gte.. Not Gte0. Not 0.. Not C01 umombeuti AIJSTRALtA 41.1 42.0 4210 3212 46.2 46.2 84.0 71.7 71.7 10. 63.1 63.1 as8 77.4 77.4 10S.7 72.9 72.9 AUSTRIA 0.2 0.2 02 174 0.6 OA 9.2 10.5 69 2&7 IS? 44 26. 34.3 21.2 124. 49.3 36.1 U1.GWM .6 13. 11.3 7,1 3.8 i.8 11.9 13. 6.2 10.7 107 20.7 6.3 6.5 41. 6.3 42.4 37.4 CANADA 542 54. 52.1 374 45.4 43.0 88.9 43.3 40.1 61.7 38.4 33.4 37.6 519 48.4 14.1 45.4 42.7 FRANCS 8.3 45. 39.2 46.? 43.5 37.3 137.2 67.6 57.1 2889 11I.3 1069 209.7 136. 122.4 209.7 1414 1265 GERMANY 44.8 183.0 126.1 1390 140. 61.8 15.4 190.2 974 370.4 238. 514 2662 211.4 99.0 621.8 253.8 135.8 ITALY 15.7 12.4 114 3. 1. 194 8.1 2. 1.3 48.4 21.2 17.5 0. 11.3 9.8 is 358 14.3 WAAN 165. 337A4 160. 1336 941.1 7073 1,701.0 12647 9669 W1,45 1,407.1 1,143.3 1,509 1,131.9 867. 1500 1382. 1065. NKTIIEtLANIDS 102. 108. gm 113.7 163. 14063 254. 186. 182 222.2 191.0 1615 202. 228. 190.1 234.6 1Ms 139. NMZBALANID 1.2 211 2.4 is 2.1 21 2.4 2.3 13 - 2.2 2.2 3.3 3.1 3.1 1.8 2.4 2.4 SPAIN at .. .. . . 2342 23 2 23.2 232 SWIrrZERLAND 20.0 9.7 9. 16. 7A 7.4 8.3 28.4 29.4 7.0 21.4 21.4 19.6 19.4 19A4 5. 13.8 13. UNrTBD KINDOM 9.4 109 7.3 33. 14.5 10.4 3"4 21. 17.2 45.2 18.2 14.5 317.0 26.4 22.4 103 42.9 38. UNrrED STATBS 100.7 104. 46. 124.2 96.0 36.0 79.6 86.0 210 64.4 97.0 31.0 54.2 101.0 31.0 69A4 63 i8 Olh.tDAC.oisatdaa: DNMAARK 0.1 0.2 *0 - 0 0.3 11 3.4 IU$ ILI UA S.7 4.9 0.8 3 2.2 PDIAND Si3 1.4 1.4 1.7 1.a 1.8 ,9 3.3 3.3 5A 5.6 .9 1.7 1. 1.7 3.1 311 IREAND . . 0.1 UA 0.1 . . - 0 a NORWAY 4 4.2 4.2 3.i 08 0.t 2.2 2.0 . 12 0.5 0.3 .02 0.3 U -02 SvWEDN. . . . . 0.1 061 0 0.2 032 ARMB COUNETRIES 24.7 33.5 20.4 414 24.4 11.2 19.7 27.9 9.1 20.5 1.9 0.7 39.2 23.0 0.4 23.1 9 IfULTUA&TERAL AB.D.S, 451.3 205. 170.0 561 351 311.0 561.1 530.4 470.1 04. 700. 631.1 1.049 778.1 667.8 E..C. 24.0 7.3 7.3 3732 6.3 6.3 2.9 8.3 8.3 1.2 13.9 13. 26.1 139 12.4 27.7 12 12 ORD1 9611 810.1 59 1,418. 2.35 1,004.1 2.66 1,67.9 1.2192 07.4 1,264 783.4 1.562 987.3 436.4 MDA IL18. 124A 14.4 17 . L4 .43 1. .790 . . .23 MAD 062 174 13. 13.7 16. 15A 03 12.2 10. - 2. 10.1 21.9 12. 94 O.4 U.N. AGENCIES 43.9 40.0 40. 50.2 44. 449 4732 40.6 404 5Su 45.2 45.2 51.6 43.3 43.3 58. 49.2 49k.2 UN6DP 15 134 21.2 21.2 . 30 294 . 1. 19.1 Mt 17.0 27.0 23 17.2 .7 DIOTA . 346 346 . .1 5.1 3. 3.7 .? S.2 1.2 . 4.3 . 4.7 6.7 UMCE . 9.3 9.3 . 05105 i I 11.9 11.9 1. 11.3 . 10. 10.0 . 11.3 11.3 UNAWA . . . . . . .. .0 789?. 9 9.0 . 5.2 1.2 . 27 217 ?A7 74 &O6 S0 746 74 UMIICR. 2 3 2.5 2.9 2,9 . 1. 1.7 2.0 1.0 4.0 4.0O 6.4 4.4 OTHER AMUTIATERhL . 4.0 49 0 53 5.3 V . 6. I"0. I09 . 84 8.M 9.3 9.3 ARAB AOEIKM 53 43 0 92 Lo9 . 3 .4 lJo.2 . 2 0 LS1 1.3 SUBTOTAL LWA LW MA &Ma LW Il LM4 MM9 LWS 23=. 2261 k4W& 2fl LOW 1LW ML. IL! 21 TUAL &= MM LIMB ALOM UL &= am 4 mA U&N &=61 1MM -9 *&' 3.26 LM WZa 2L4W. &§ /a Culmdupem 8o ou..OEd sOmabtIDseuu EIah b.tDsbdsC.kF.,b ... 30ad D.Dbs q.2.jea oi3b 188 Statistical Annex Table 5.1 I~~~~~~~~IN C I d §~~1i EIg $> INDONE8 A COUNTRY ECOMIC REPORT Cntral ad mmunt Re b. m s. 1384 (Rp. bO11n) 198W 4 1 6 1667 1WM "OM l 19 91W _M. 19.W Taxes on hIcome 1L(m _v&9a mL Arn 1a0 2sm Z2A9 2 3 6 Inoometax 399 451 675 227 2,6 3,4 SA6 675 95 11,3 149 Copoat taxi 757 1s7 1mm Corpo tax on ci /b 9.S20 1040 1144 6,3N 07 9,s27 11,52 17,712 M9 13 S,t2 Witholdig tax/b 628 IPEDApopefty taxc 12m 1S7 16S e 275 424 s90 8s1 875 1,0 M,2 Oe Id 168 18 Taxes on domestc consumoon 139 L. IZ $.I 4.Jt9 fM II A 1US2 nl 14. 7 Bales/vakle added tax 57 22 2900 330 4505 5,83 7, 8,m 1714 £1,6 Exses 7m 87n 944 W6 ,10 t61,30 t,477 I,917 2,2 2381 2,4 OtheorolrvenuesA 0 0 0 lo0 0 0 0 0 0 0 210 Mleocfaneous levIe 44 0 206 190 3 292 276 244 3s5 360 34 Taxes on inteoanal tmde 916 o6 68 1s km- L;7Y9 2Q 8I1 266 8I Impoat dutis 5S7 530 07 960 938 1,12 187 ,46 62 3,106 Sals tax onlmporflI 2SS 2x1 EpoIttax 104 91 Si 19 184 156 m 44 19 9 30 Bontaxmookft PR at im L28 f.m 20 Pm z fl DWomeo menua tA OM6 192 tJI4 2|Q DM MMt E 4LS no5 f2Xg Develwonntfund A ISR L3 5 UR 90420 I6 L4as W6 955 Prmm aid IS 69 69 t,95 73 2.061 1,407 I,397 1,9B S12 427 Proect aid 5,068 3,409 35 3,795 S,40 7,950 84m 8mSm t O ,24; 9,1X Ia SInoe 1967 lnduded In Income ta lb 8noe 1964185, w _odng tax elimined as sepwate ategory and combined wh Income tax /a Snoe Januay 1966, Ipeda replaed by land and buaIdng tax /d Classification changedto othertx ncluded In miscellaneous le whioh oonsist of otertxes and stamp duty). 1e01 subsIides shown as ovenmet expenditues rom 1977/8 (sea Table 5.3). IA Since 1964185 olas_ation changed to value-added tax and tax on luxury goods. I9 Icudes commoecil bank and upplers' cre for development projects. SO, w: idnistry of Finance. INDONESIA COtUNRY ECONOMIC REPORT Central Government Exndituree. 1983J4 - 1998194 (Rp. bion) Actua Buet "S1W 1984Ws 19 "9S6t7 19S7M8 9IW 1990 1990A1 199Q 199298 11w Pesonnel exoendltures zm i! 4M 4311 U9s17 4> Z 4 9%I96 t Wages and soac 196 2207 3,073 333 3,561 3X833 4s 5s571 6.299 753 81168 Ric alowence 346 407 402 406 451 518 58 640 922 83 905 Food allowance 21 27 300 28 299 327 373 382 393 473 482 Other 88 90 161 77 176 5 243 264 279 313 342 Eeornal 66 72 82 110 130 135 171 198 209 259 297 Madeal expendituree X L8 LM18 3 92 L? 1 A3 Z= in 22 DomesI 100? 1L14 130 1,29 129 18 16 1670 2,2l7 8 2m Extwnal 50 49 59 73 90 114 133 160 1S5 189 1 Subsides to ralon /a t 54 L 4 28 26SO 2 86 3__ 3 66 4Q 4h si 6DZ Mdan Jaya 42 0 0 0 0 0 0 0 0 0 0 Other region 190 M183 249 2650 2.16 3,038 3i66 4,27 4Xs4 5,2SI 6.029 Debt seivlce avyments U11S 2m 33 SD _ 1oslO it"0 S ] 15217? 16.72 Itermal 30 39 2D 0 39 78 149 250 251 275 28 External Z073 2737 3,03 S,0S8 8l166 10A 11,790 13,145 11 4942 16.426 Oter exoenditures 9g4 540 so 7S4 in S15 n 3A- M 1195 14 0 Food subsIdy 0 0 0 29 0 0 0 0 . 0 0 ONl Ubsidy 92 507 374 2 0 0 0 0 692 0 Others/b 2: 33 380 145 s1S 271 92 3,4AO SllB 480 Routne expendtues 8.412 9.429 152 MS t742A 273 1022B 34.031 37X Develooment exoenditures /c 9&" 2 A 9A77 12n. ISA4 1&2 i2 24JM Tni2maf t8 3 1 AM S z 2 L 9 M2 MZ9 MN &a 49.450 502 2 2I am /a Sinoe 1964/85, this Item Is subdided Into wage/salary and non wagelsaary expenditures wHhout Identifing rgions.. /b This Ine shows debt sevice transers to PERTAMINA (1976/77- Rp. 31.0 biiion, 1977/78- Rp. 86A 4blion), PERTAMINA subsidy (1979/80 - Rp. 81.0 billIon) and expenditmes on the general eledon (1976/77 - Rp. 37.0 biiion, 1981/82 - Rp. 81.0 biliion, 1985/88 - Rp. 40.0 billion). Jo For details see Tables 5.4 and SS. I I Sd Ino uded: oiisubsoiy. Souf¢e: SNistly of iFinan¢e. INDONESI t COUNY ECONOIMIIC RtEPOfE r ,DevedoRLant Exow asum. 1983084 - 19SA4 (Rp. bmlon) Adw ~ ~ ~ ~ ~ * 69s 7 9 INM m 1S 19899 issois 199U2I" 19M M99W L D0eW1se 322 U4S 4, " 113 t8 C 29b 4M 7SSB 92CS I G0enealpe S40 SISgK so s 714 7 66 L4 0 1 2 Su"topb 253 253 2¢ 2913 290 334 3 486 S74 in 783 sdxanoksbap_ 194 I"s 19 us 2ss Z7 270 392 S83 83 tJB ,,0J_bvbg 92 9 99 Ss 102 112 112 St WS 3ZZ 390 & so ava m an xSm T 4SI a ft LZ2 I= M dmy#ol S49 so 572 5so 496 U3s 131 100 374 m 655 748 Ha 8t 65 III 108 74 12 19w3 269 395 eX ~ ~ ~ ~ ~~~~~i 11 2 4 12 3 3 3 3 2 2 5 t_4Waree s5 61 43 31 16 D 17 S 75 55 tO R ~~~~~~~~6S lot la 7X 4 U10 2115 69 972 I=Z t 4. 47JdES fS 70 8 S 222 6 P dl aa!. 2g~~~~~ 4 77 46 Z5 3!! DS 0! 3 5 ,~~~~~~~~~~~i in I N la lo uns Odw 44 47 o Su SO da 76S 5 72 Mfi 9. Dwoenme sSrAm hraw 21!1 1510 D TqiftAim M Mto m 9 2 Iod- 2. . .0 _0 . AM .... )b< ? lgpktlh S* mlad*y4 pk COUTRMY ECONOMIC REPORT Dewdlormnet Exmonditumo by Sector 1963184 - 199&194 (Rp. bEen) Sector 1~~~~~~~~~983* 1984* 198M* 198667 1987488 1983* 1989* 1990,9 19912 199,9 l99y94 AUICUtwe and bdgalp 913 1.69 US13 890 137 1,614 2,009 2,39 2713 3.24 3,05 uWip) (324) (732 (477) (467 (756) (200) (278 (265) (301) (275) (175) Iaimlzaa6dmubg 2153 839 1.189 481 335 545 420 714 722 861 822 Eleceb pown 660 911 1,447 960 I'm8 1,955 1,39 1,70 228 3.02 2,99 1noaabudm and tmb 1,52 PM42 1,84 1,131 to"9 2.011 3,06 3,743 3,91 4,53 4.667 Msopmw=dft=m%p" ~436 422 665 292 200 266 281 S80 718 897 954 R.giamddidopmt 749 791 85 939 930 1,137 1,3 1,93 2,478 2,92 3VW NWucJ= 1,03 1,23 1,413 1.184 1,181 146% 1,50 2*52 Z,417 3.47 3,56 PpqIala&uedt 779 32 398 326 225 339 470 723 891 95? 1,087 Ro"*dg=dwaftasv* 22 2 us5 337 432 481 495 677 80m 105 972 OemdapdstIcm1cs 89 97 7 769 652 733 909 1,247 1,34 1,0 1,58 Oowummuakd Po d at d 234 292 221 211 219 238 a25 335 411 409 394 OShauJb 76 1,599 1,23 107 684 1,30 I'm0 1,429 1,572 1,4661. Deeam stbmedguWathaas. ..2,0 1,500 TotdawdoomWm 2 19 MI 7 1WI nASI2JA n.64 2413 Ia La em6yardudec nd ck,oama pm INDONESIA COUNTRY ECONOMIC IEPORT ProJect Aid by Sector. 198384 - 1993194 (Rp. bilion) A udett 19S4 1985 1968 19867 1987/88 1989 1969/9D 199/1 19912 199293 1993t A 8lcaltureakdlngaioa 155 472 180 237 576 I,067 1 1,513 1.763 2,169 1.8 Induy and dihIg 1,061 671 666 632 267 327 240 409 454 709 647 Elecric power 1,182 653 1,172 791 769 1,783 1,269 1314 t,830 24 2237 flnPcztdoeandtowthi 669 601 a8 729 845 1,424 2,174 1,976 1,507 1,388 1084 MaapaWe d _ansgad 4S 76 36 123 62 98 83 91 83 52 33 RegAnde _dopet 7 1 8 25 4 4S 121 I55 240 22 1O Edcation 211 180 S9 346 718 1,236 i,96s 9S7 104S 124 t.2S Pq7datlii&Heaab 37 78 56 t00 36 t77 188 188 32 2X How gand watreqyl 51 84 77 139 273 400 351 444 S14 648 552 Gncalpebasaety 15 255 186 257 350 382 566 471 567 728 60 agmntocaptal p _*4*0= 45 160 203 18S 168 213 419 lEf 116 23S 213 Otbersla 42 179 171 231 35s Us S94 0 539 616 509 ha 5ic1979/80 hnIi aurlrcre derdapecn and esvrnmenL So nuzem MIi*ycman" e.tf w%mmppm*t so= c _ X d __y at Fmm1. 194 Statistcal Annex Table 6.1 INDONESIA COUNTRY ECONOMIC-REPORT Money SUpRlv. 1981 -I Ng9 (Rp. billion) End Of Total Currneny Demand deposits Change omer period Amnount (% Amount (%) Amount (% 1981 6,486 2,557 39 3,92 61 1,491 30 1982 7,121 2,934 41 4,187 59 635 10 1983 7,S69 3,333 44 4,236 56 448 6 1984 8,58 3,712 43 4,869 57 1,012 13 1965 10,104 4,440 44 5,664 56 1,523 18 1966 11,677 5,338 46 6,339 54 1,573 16 1987 12,65 5,782 46 6903 54 1,008 9 1988 14,392 6,246 43 8,146 57 1,707 13 1989 20,114 7,426 37 12,688 63 5,722 40 1990 23,819 9,094 38 .14,725 62 3,705 18 1991 26,342 9,346 35 16,99 65 2,523 11 199 28,779 11,478 40 17,301 60 2,437 9 Source: Bank Indonesia Stistical Anne 195 Table 6.2 INDONESIA COUNTRY ECONOMIC REPORT Changes In Facors Affectin Reserve Money SuRpply 1981-1992 (Rp. billion) PublcSetor Claims Net claims aon ofIcial Total chap in Net on entities Claimson Net MnteySupply End of foreign Central & pubUc business& o Amount Percentae perd asses Govenmnt entepis indiduals ems (%) 1981 149 -591 593 1,756 83 1,491 30 1982 -1,237 129 689 226 -591 63S 10 1983k 1,180 1'286 -42 2,183 815 448 6 1964 3,531 -3;359 190 3,646 882 1,012 13 1985 1,750 -214 511 3,333 -11S 1,523 18 1986/d 1,870 469 252 4,547 -2496 1573 16 1987 2,444 1,538 729 6,245 -4710 1'08 9 1988 -549 247 659 11,069 -3053 1,707 13 1989 409 .117S 1,444 22,132 .6156 S,722 40 1990 -2171 -3877 -921 35,009 -2498 3,70S 18 1991 7,430 -1356 105 20,263 -12095 2,523 11 1992 -419 792 -318 .666 1,121 2,437 9 /a Refers to gvnment accounts blocked for special purpoes. lb Does not include tevaluaion adjustmen to foreign exchange balances resulting from the rupiab dvaluation of November 15, 978 The adjustmens amount to Rp. 650 billon in net fSoei assets Rpb 46 bilion in net caimson Central goernment; Rp. 551 bion In clam on offical enties; Rp. 164 billon In blocked account; Rp. 41 blon n clims on busine and individual4 Rp 83 billion In tie and savings deposa and Rp. 1,041 blion In net other Items. /c Does not include revaluation adjugtment to forei ehange balances resulthig fom the rupiab dealuationof Match 30,1983. Ibe adustments mout to Rp. 1,6 bilon in net foreign auet Rp. 131 bllion in net clahs on Cotral pvernment; Rp. 146 bion in caims on offc entkies and public enerprise; Rp. 106 billon blocked account; Rp. 148 biUlon in clains on busness and IndMiduals; Rp 620 billion in thne and savinp deposts; and Rp. 1,399 bRion in net other Itms /d lncludes revaluation adjustment due to dluaion on September 12, 196 Source: Bank ndoneia INDONESIA COUNTRY ECONOMIC REPORT Consoldated Balance Sheet of the Montanr System. 1981-1992 (Rp. billion) HAd of perod 1981 196 1983/* 1964 196 196t6 1967 1968 1969 199 1 1992 Net facemn aS1 5U5 rS8 M7 123S 14.119 IM9 433 17Z4 ApM 1&13n W52 ___ EkmDcuodft MU e W 9.744 1a0AO 14X 19= SZ32 S 62.31 9.7142 11.43 9 13112 Cenramlo men -4,330 -193 -S,739 -9,96 -1939 6366 -7036 309 -12M .1353 -14673 Camsw on offical endtiti and pullctapis 447 4,979 S,040 S,230 6,034 S,993 6,725 7,361 8*5 7,904 8,009 UN501 Govuumest4b cked accout -360 -22 -240 -116 -52 41 44 -66 40 -24 0 0 Claimson ihasouterudees and !3il akb 6.094 8 .312 1068 14329 176 2Z40 39 S2 3 6 1.6S 9ZMA 117.727 IS L1s 5,844 7,995 10,1I4 1355 16,3I 2 20,409 26,07 36 SS,933 90.109 10559 iI,190 Othercim 250 317 499 779 1,270 1.800 2,3S2 3,021 5,722 73SS M 17.794 Anles - IabIlies 12M462 14881 22,713 244 3S.312 45,162 S766 80,44 109,64 3,706 15,4 Impcadeposts 298 300 242 218 268 402 424 684 632 1,046 966 690 Net oahetems 2,448 3,06 3,676 4,55 5291 7,6S1 11,277 O66 21,087 25 3S,661 37,3 Moe and auai oe, 9.716 11.07S 14 17 2&153 27.661 33= 49 5.705 84.3 S2 119.053 Moey 6,48S 7,121 7,569 6S56 10,104 11,677 12,665 14,392 20114 2,19 26,4 26779 Curec 2,SS7 2,934 3,333 3,712 4,440 S,33 5,782 6,246 7.426 9,094 9,346 11,478 Demand depoIts 3,926 4,187 4,236 4,869 S,664 6,339 6,903 8,146 12,688 14,725 16,99S 17,301 Qud money 3231 3,954 7,094 9,36 13,049 IS,964 21,200 27,60 36,591 60,11 7271 90,274 /a Iudesoa resuldaIgfm the ehange rae adjstme o Mach3,1983 from Rp. 703.S to Rp. 970 per USSL hb ldachangesremuin omte bangerateadjusmentonSeptember12,1986oRp 1,134toRp 1,644perUS$. Sowe: Bak lsdonadL II INDONESIA COUNY EONOIC EPORT Bankina System Cr o mlt by Eoomoc Sector. 1981-1992 la (Rp. MUNon) Secto. zs198 192 193f 194 196 l961g 1967 1966 1969 1990 1991 1992 In rplsh 813 1'2 1m 1,1 1.656 29 2,31 w1 5,21 7.176 7,97o 9173 In fofelgn _ange e 0 0 0 0 0 26 3 a9 192 486 1108; Mk*W L4m 80 t8a m ma 4 mL i£ 7m in In uph 6 1,47n O 384 258 394 371 1u 456 s7e 614 6as Inforelgnaxcang 0 o o 0 0 10 20 13 45 no is? MwwkknkmkKkW laaM SW ME~ 2Wz ME I-- ifM aMM 2 am nm a h upth u2,36 3,429 4,95 25 7,069 n39 1053 13,994 17,454 25A002 24,=8 26AW? In forign exhg 316 494 612 462 S23 166 409 962 2,69 550 63 112 Trade Id UR AM 3S AM 2M f12 4 19 lAM ilS am ffM so am In mpnlh 046 4,009 4,781 6,2 7,214 k,m zo is 1i. 27,267 26,8a 260 In en exchange 16 120 3S1 45 41 70 182 206 767 2t7 4,207 444 Soriv4erendoring Indatv l0 1& W¶t Lu me 4"j5 AM I= IW4 IZ&I 20 am In napah 1,36 L,6 2 %M 30 4,047 4,130 5UR1 4917 9,00 14,3 16,683 2,79 n*egnexehang. 3 7 24 1 13 2s 309 465 S24 20954 ,8s 392 OtherM 0 n 6 Lafl LaWt iL Em um mm 1 I It S In ptsh 444 406 651 9 210 256 ,14 3,667 1709 11,197 16,26 14A3 In forelgn xohng 0 0 0 2 3 6 44 54 157 512 1,6 921 lad am I=~ = alm Z am L am~ so2 2m im mm In uplah 9,754 12,401 14,312 1= 2144 25,95 31,864 41,994 5402 86,125 9522 10%,707 In forign ehnge 405 621 987 590 703 457 90 1745 441 I673 17,553 2,211 a Credit outsding end of peod" Inues wtent mcrlt, KIIK and KMVKP. Excludes kterbank credits, credis to oentral govemment and lo nonresidents, and foreign exchag componet of project sid. /'o Includes credit to PERTAMINA for repayment of foreign borrowing. Since March 979, credit In foreign exchange to PERTAMINA has been oonvertedto mplah credits. lo Prooccng of agdiultural products to classMed under manufacturing induby accordng to Intrnadional Standard Industial Classficion ISIC 196e). Stang 1980, credoi for conebucon whih were previously ncluded In mnubactui industby are now incuded In seeWoe-rndwdng industy. Id acludet reditsr food prm enw and hotel proe . IG Credt for electociy, gs and waftr supply we Included in servAc.-renceIn hndusry sector. /t Inrludes for y exhag realtion _aunt to Rp. 251 bilion. 1g Inoude . 1 ed)uentduelto1 dealuation September12, 1986. Sourc: Bank In6ww" INDONE81A COUNTRY ECONOIC REPORT Banedna Credts Outndng In Rufgah and Fomlan Exahanae by Group of Banks. 19i 1-19 h (fl. blOom) 1981 196 1983d 1984 1985 1986kc 1987 1988 1989 1990 1991 Bak% Indmonea darctcesid 2a z m E 04 1im 1ut I9 21 m WI In muplah 269 2,771 2.36 8m 964 1,144 1,347 1f47 696 718 783 7m lnfom haW 0 0 0 0 0 0 0 0 0 0 0 0 St omn mea banks la MR1 2.71 U5 J74 17.77 21i71 AM M7i 5Z5 S61 In mpah ,533 7.474 8,910 12,959 14,92S 17,711 21,22S 27,614 37,1 AM AM gin Inm foegne hange 38 5S7 8T1 386 449 71 451 1.07 24 Ws1 723 10.196 Nationa v s f4ant Ifi ia __ 3 4.746 &2 l X216 3 497 44AS2 4 In wupwh 1.0 1,534 2279 34D 4,01 6,061 8175 11,56 18,95S 31f 3867 39S In finW exchange 12 2D iS 72 ItS 211 248 374 12 3,S17 4.S S,667 Forslan Banlks a_ 86 L& Lil M 1A Ot 1M 1 i Ill 6 im gm In upit S13 622 767 914 934 1I920 1,122 t,559 2,173 3S9AW 3.m 2,389 In f n exchange 35 44 95 m 139 175 234 3 942 .1 SXS 6.441 In rupiah 9.754 12,401 14.312 18,2l3 21454 25,945 31t6 42,256 S8,97S $S3 96, 101478 In fn exhanw 4S 621 987 S90 703 457 9g3 1,745 4.631 11i63t 17,553 2,211 Ia Crdt ouanding at end of pedod. Indudes Inestme credt IK and KMP. Excludes Interbank credit, cdts to Centra Gnvemment and to nonreIdnts, and fobrign exchange component of praJect ai lb Inrludes foreign exchange rvauato aounfng to Rp. 251.0 bilon. /c Incdudes raluatio adjustment due to dealuaton on September 12 1986. Id Excludes liquidity aet Iludes aedit to Petamina or repaymen frforeign bowin. le Includes stae dvelopment bank and lqut aedt. f Indudes lquidiy credit. Naonalpatbaksrefrtonal pfv comm banks riond lknal dvdwelopment banks. Source: Bank Indonesia ii INDONESIA COUNTRY ECONOMIC REPORT Invesent Cedits by Economic Sector. 1981-196 la (tp. b nm) End of perod 1981 19 1983 1984 191E 1966 1987 1966 196 1990 1 992 Crd aowd lb 1^ 2A 3M0 411 Sf fl89 9A14 13M I& 1Xa 26^- gm! 4 Agdclu 340 467 734 809 1M40M 2,274 2, 3X93 S,QO9 6811 9,788 11,534 Mii 40 54 S7 179 363 32 495 461 32 517 525 M aan ng IndUs 911 1,369 I'm 2Z374 2,765 33M 3,0 5*182 761S 106742 11.714 16.910 Trde 67 134 1D 237 277 369 3ss 536 1J12 2,m 3,5 447S Se8ce ndedrtg lnustry S16 641 986 866 1.173 1AN m9 3.78 4On 4,14 6,6 7.724 Olther 12 14 11 44 S269 3 106 12S 11683 111C6 I1S Ceds outasldna L436 2021 u 5r 7 M-j3A 14.292 ".748 35 MM Agct 202 3 477 5$s 948 1*2 1'90 2,2X4 3,3S7 4361 5450 7.950 Mbinn 26 34 4 178 224 367 342 3n 358 372 439 459 ManuacdngIndsy 741 1.095 1A3 2,12 2,781 30s 3567 4.817 6,424 8866 10A484 IS,416 Tade 73 129 is5 168 36 443 43S 632 1= 189 337 4J99 Seic efdetng Industry 300 S19 576 770 1.9 1 1N Z249 SA1 4O 5.5 7.6 O0thes 4 9 9 29 24 71 41 68 12 43 9 1074 la Excludes Invstmnt credit from Bank xndbon Includes Stat Develop0ert Bank and ocal Deeopmet BanS. Data wifh t sm dnlkatln pdorto 1980 are not available. tb exud Small Scale nement CDeft, In ent cedis to the Cenra Govemnnt and fegn exchane component f prct ald Source: Bank Idonua INDONESIA F COUNTRY ECONOMAIC RtEPORT Oubtstnding Bank Funds Ln Rupiah and Foreign Exchange by Group of Banks. 1962-1992 la (Rp. billion) 1982 1983 1984 198 198 1987 1968 1989 1990 1991 1992 Deposits State Banka 6,169 6,38 10,035 12,916 15,193 184111 22,52 29,731 40,63 41,912 52,00 Privat Banks 1,284 2,119 3,92 4,550 SA43 8S0O 11,167 19,655 33,951 43,143 51,07 Regional Development Banks 411 498 700 825 797 954 1,300 1,674 250% 3,22 3,697 Foreign Banks 1,004 1,'m 1,743 1,88 2,086 2,226 2,516 3,315 6X06 6,93 7,474 Total &M 12 ISA98 20.174 23.S1 VA 373510 S4UM SU.15 !.11U 114.85 Share In Total Deposits State Banks 69.6 67.6 64.8 64.0 646 61.7 60.1 54.7 48. 44.0 45.8 Private Banks 14S 17.1 19.5 22.6 21.1 27.4 29.8 36.1 40.8 45.4 44.S Regional Development Banks 4.6 4.0 4. 4.1 3. 33 3.5 3.1 3 14 32 Foreign Banks 113 113 11.2 93 8.9 7.6 6. 6.1 72 73 6.5 Total 10.0 100.0 j00. 100.0 100.0 10" 100.0 100.0 100.0 100.0 100.0 Annual Growth Rats In Deposits Stats Banks 2.2 30.6 18.0 25.2 16.2 17.6 21.8 27.7 313 2.9 25.8 Private Banks 40.0 50.1 35.4 41.0 17.8 39.2 329 56.5 54.7 27.1 18.4 Regional Development Banks 16.1 19.2 34.0 16.4 -3.4 180 30.9 25.3 42.1 26.6 14. Foreign Banks 272 33.1 22.1 7.7 6.5 6.5 122 27.6 59.6 153 7.8 Total 102 33 22 264 21 21 246 31 42. 14.4 20.7 la Total funds are the sum of demand, time and savings deposits. Figures difer from the monetary survey because these Include Central Goverment accounts. Rural credit banks are excluded. Source: Bank Indonesia. E INDONESIA COUNTRtY ECONOMIC REPOR Interest Rate. on Damosk. at CeMommrcal Bfanks. 1081-1992 la (% p.a) TABANA TASKA C4utl. End .( Demand SAulug Swimg cat of tatBoank Psivate Nationa Bu& A PC"e Deposit Depst Depsts Depsts LetIan 3 6 12 24 Lesatn 3 6 a2 2 A /a 1M At S.cM amo gmo m. Mc 3 mooe* MOe SW Meg am 1978j I.8. 4.1 910 746. 6.0 9.0 12-15 12. 12s 15A 172 20.7 198 1.8.3 6415 910 109 12. 102 G) 91)12.1 I5A 17A 17.9 19A 191) 1962 1.-3 6-15 910 1as 7.7 8.M 1 9*1245s 169 hi. 185 193 18. l983 is.8.3 22.1 9) I5A 144 14.8 III 17.5 115 18. 17.4 188 19 193 1984 1.8.~IS3 2-15 9*0 165 151 17.1 17.2 187 172 198 2107 20.7 204 21.0 198 U.S- 12.1 9.* KS. 13.4 146 161 17A 183 14" 1.9 17.8 19* 21.3 198 1.8. 12IS 90 14O 13. 14.2 14.7 15.2 1.0 14* 15. 162 173 20.1 198 1I8- I5. 91) 154 155 1710 17. 171) 17.4 173 18.6 19.3 19.1 19.9 I96 1.8.3 151) 91) 15.9 158 181 18.4 18. 18. 20.2 20.1 20.3 202 209 198 asa . u. 13 15.1 16.2 172 187 18. 171) I* 18. 19.7 20.5 199 n.a un n.1. AS5 20. 20.7 205 201) 20. 213 21.3 21.2 21.0 199 8.9 n.a "A 1 2D0* 21.3 213 225 211) 21.8 226 23.3 2.4 186 199 72 asn .n 15.7 14.6 IS.7 173 18. 20.7 16. 17.7 189 1946 16A Ad TA AN'AS'TabungsAFe. Baugnaaso .aI'QIadoaueDevdp meup)rfdlnupybmavu satoutpnsb%ordab 'aua Teab n4ga.N a by'ltbeSasing lank) ad fesred 17 nfstae wne n oepiaendalemedlin,adps ofie.Utlue116.5 o mut tp 0,00gls;%am1~2000 t.Jn18:1%oR Solo o~. 2Ban mrkha p Imlio.Fo Jl 98e ovme 16:15 o a eon elo. eftret obnk'dsceln 2022StatistIc An _a~f 4 !~~~~~~~~~~~'t t i |0g B !s!§ldggMf 1 §gl§ !RF!t0Z$ i §;3 fl ggflsegp i ! §0§ ;i §8$gp || E §gFR U !Rd@Itl z tt 08 § U §nl2I#$ 1 j T i §}Xsa §a #Rg !geSaw5Ws7I S~~ X i .§R Bsi!!e^@!"p i ji 0!1 1 0la«ii Iijiu. I' Staistical Anner 203 Table ?. bPodowiit Mc mm TkV m EsanIe. iOSFlolS Product 1981 19 t1o 194 195 1966 1967 196S 169 1990 1991a 740 516 672 704 720 74) 7ff w aS 9on t9 COcoonuVoopro1.70 1,0 13 17 VW 28 20 217 219" 2,313 2UN26 Coglas 276 262 26W7 2011 266 216 359 362 m 34. #o Cie" 40 2 40 48 41 a3 57 9 53 64 62 Tea 2 2 a 5t as 30 2 3t 2 SWgar I2 t.7 I" t,57 up40 t.4t7 1.744 SAO mu2t Se t,6tO Tobacco l0t 97 toO 1O4 1s6 19 11O 113 77 t52 Pnppw 30 34 46 4s 41 40 4 5 6a 70 n Couoin t0 13 14 2 45 53 48 40 A 32 36 PalmoU 0 0 a 0 0 * 0 Palm kem * ° 0 ° 0 0 0 ° =Rud* 114 125 12 121 124 t5 1)5 143 141 142 146 U~~~~~~~ tt 14 U is 16 a 2 a is to 2 OdRes 8 6 S 9 tO 18 8 tO 11 1 13 Comm 0 I t 2 1 2 2 2 2 Tea 1S 16 7 18 1? a 21 U3 26 29 30 sumar 11 72 6 Ss 1 16 18 10t 181 204 257 T. baco 0 0 0 0 0 0 0 Pepper 0 00 0 0 Cotonmm 0 0 0 0 0 0 0 0 Palm on ass as e a9 se us 322 422 59t 79 664 Pamn kb_nd 2 47 69 69 In 73 76 81 11 179 181 r ~ ~ ~ ~~9 16 t9 201 266 211 106 200 39 21S 21t 21 in no oU o i o o o us o nO Coconutibopra 11 0 00 0 0 0 Os 10 U 1s U 1 13 16 16 cloves 1 0 01 0 0 0 0 0 0 01 Tea 7 61 70 84 0 8 80 a 90 96 f6 Sua 55 182 20 330 342 27 323 316 306 06 386 Tofc 9 9 4 5 S 3 2 4 4 4 Poppa' a0 0 0 0 0 0 0 0 Colton o 0 e a 0 0 0 0 0 0 Pa la 84 S99 71u on n0 9S 1SA VW I. 1A24 .774 Palmksml to 11o 9go 178 187 1 242 17 274 32 2 tDF~~~~~o tF t7t S mm t t O 2314 2" 2.1 2pS Z Cdblso 202 2D1 305 21s 31t 33 30 6 4D 413 419 clme 40 32 41 4 42 S 56 6a SS 46 84 Tea 1to 94 to 126 t27 15 126 U7 141 t5S 15S SLOW 1700 167 1,62 &t1 t,8 t 64 2.176 I" 21 2,1t9 2 Tobacco ItS 106 to9 106 161 164 11t 116 81 15 101 Poppa 39 34 46 46 41 40 49 56 66 7 71 Cofton 10 13 14 12 45 15 48 6 35 33 3 Palm oi 74 864 9o1 1t,47 1.243 I.2 t.6 1I.0 t,ff5 2.413 262 Palm komd 1t3 157 166 247 256 266 319 360 04 la Prob ayflgwm sumw: Suppsmept to Prsudmnt R oped Patf t AugatZ 15. 10M 204 Statisdcal Anna Table 7.3 INDONESIA COUNTRY ECONOMIC REPORT Rice - Area Harvestd. Production and Yield. 1981-1991 Area Average Paddy Rice Year harvested yield output output /a ('000 ha) (tons/ha) ('000 tons) '000 tons) 1981 9,382 3.49 32,774 22,286 1982 8,988 3.74 33,584 22,837 1983 9,162 3.85 35,302 24,006 1984 9,764 391 38,134 25,93 1985 9,02Q 3.97 39,033 26fS42 1986 9,988 4.00 39,726 26,784 1987 9,923 4.04 401X78 27,253 1988 10138 4.11 41,676 28,340 1989 10,531 4.25 44,726 29,072 1990 10502 4.30 45,179 29,366 1991 10,187 4.35 44,321 28,809 a EStimated on the basis of a conveion factor of 0.68 frm paddy Into rice for the yeas prior to 1989, and a factor of 65 fothe yeas 1989 and following Source: Centml Bureau of Statso. COUNTRY ECONOMIC REP-ORT BULOG Igce Proaram. 1981162 - 10929 (000o tons) 198 1 912 t ts3 98/ 1984/8 1985/8 198618 198718 98 19 1989140/ 199011 199119 Ig 192* / Beginning stook 124 1,62 1,04 1,497 2,43 2,172 1,87 755 1.07 1,499 978 957 Domestic pfocurement 1,95 1,93 1,195 2.31 1I95 1,447 1,21 1,80 2.173 1.48 1416 2000) import. 437 SW 1.1s lii 0 41 79 315 150 30 762 295 P-480 46 0 65 54 0 0 0 0 0 0 0 0 Ohwr foodleo 48 0 140 0 0 41 79 315 15 30 89 29S Commercial 343 50W 910 13 0 0 0 0 0 0 673 0 Total avalabllt 3 4ffZ 3.35 4AU 4'M UIQ 3161 z3.A1Z" 56 _ Diobfbuon/a ZZ4 !AT iII 2306 1.967 2. a76 JAZ# iAI2I7 W Govemnment 806 1,13 1,37 1,36 1,414 1,49 1,52 t,512 1.59 1I58 1610 165 State enterpui... 9 10 89 59 Ty 94 97 106 94 94 89 1o0 Market operaton. It 1$) 1,518 399 69 217 175 660 142 57 175 450 350 Met e/d so 29 it 116 418 200 110 8 168 13 18 30 LOa"e 26 45 28 22 27 26 34 26 28 28 32 31 End stock 1le91 1,04 1.45S Z241 2,172 1,867 755 1,0 1,49 978 957 MI9 Memoradum htem: Flce production lb 2Z2.26 22,837 24,006 2593M 26,54 27,014 27,23 2834 29,07 29,366 28,80 29,72 /a Since June I1902, el regions here received dic. In kind; fermoity, surplus regions received food allowancee In money. /b On calendar year bade. 10 PrMovIsona figures.. /d Includes export of 96,000 tens In 1984185 and 400,000 tone In 106516, 173,75 tons In 1966/87 and 100,OoO tonseIn 1007/86. /0 In 198718, the figure showe repaymnent of doce loans. If Includes specla sales at reduced price. of oubmarket standard rice of 18$0,000 tons In 1985/868 and I150.000 tone In 198M/7. ig Prelminary. lb Estimates Source: 81.00 (Badan Umisai Logistic/S1tate Logistic Board). 206 Statisticl Annex Table 7.5 INDONE8SI ! OUNTRY ECONOMIC REPORT Area Covered Under Rice IntensMcation Programs. 1981-1991 c000 ha) Year BIMAS INMAS Total Of wthch la lb INSUS Ac 1981 1,8l4 4,802 6,186 1,706 1962 1,296 S,047 6343 2,945 1983 1,308 5,387 6,69S 3,477 1984 434 6,936 7,369 3,806 1985 200 7,461 7,661 4,100 196 258 7,533 7,791 4,480 1987 n.a n. 8,03S 4,922 1988 nae n. 8,283 S,37 1989 na n.1 S26 6,847 1990 na na. 8876 7;260 19 na1 na. 8,642 7,146 /a IMAS - Bimbingan -asua (Mass rke planting guidace program). /b INMAS - Intenssfikas masse (Mass Intesuficadon program). /c INSUS - IntensUfa kbuu (Speca intendfication program). Sourem Supplement to the Preddent' Report to Parliament, August S, 1992. NIDONBSIA COUNTRY ECONOMIC ROT Indet of Maufactudna PModuo bv SetledGrouD. 11991 I (1963 = 100) Code a Ilds Desculapob 19t 1987 198 1 199 199 OIWp 31121 Cadensed ad dred uikereamery ad procewd bunter, frand presrd ceam (6) 873 94.0 1.3 1 1422 5. 31330 Maltluond malt(S) 94 113.2 16.4 1172 1468 1.1 31420 Clalrettes (80) 147.4 1665 177.7 1962 226.4 165. 31430 Oter dpett (13) 7.8 81.9 792 72 80.7 952 3211 Yan and tSrd (3 1S.9 1 169.0 192 2533 273. 32112 Wearing ils ( pt jute Weavig produc (409) 130.7 143 17M9 1 219 21S. 32114 Btilk (45) 95.8 81.8 83.9 111.1 144.0 2185 32130 KtNg mil (73) 2192 2333 2398 312 347.2 450.7 32400 Footwar (32) 113.1 915 1112 18. 202 20.9 33t13 bood (40) 1393 192.7 24 U 2662 26.7 273.7 34111 Paper manufacu (nR knds) (23) 1592 1S9.7 24±0 2513 298.1 292.3 35110 Bas cmical (oeept fedlir) (50) 119.0 1S6.4 139.0 1529 174. 189.9 35120 FertGer (10) 1660 121.8 129.7 143.7 ISI 158.1 35210 Pat, WOW. dlacque (25) 135.6 1263 912 12.9 1366 1272 35232 Mahs(S) 108.7 1423 17.5 154.4 1673 178.4 35S10 T1e and tubes (22) 1095 792 109.7 1412 157.4 20SA 3S21O Os and l produc (21) 178 1493 124A.6 1452 1633 253.9 36310 Cemt (7) 144A 10 149.8 198.1 206.4 217.9 37100 Bac irt and dsteel indsties (16) IS4 147.1 167.4 199.0 259.1 409.0 38130 Suctral mtd prdut (59) 1102 118. 125.7 1806 224A 191.1 38312 D dubatlees(7) 123.9 1IS5 S186 179.1 192A6 158.7 36320 RadIo,TV,settee,othercosmuatla eqdpent an appato (23) 906 86.9 1181 153.9 1806 11S. 38430 Mor veides asseayand manftu (23) 114.7 1268 115. 132S 200.0 2133 3644 Motor "ane and three wheel mowo vehices, assmly nd manfe e (11) 9. 8t13 763 10 104.9 187.6 Omglq s ia_ 143 .5 184.1 209.4A 2 L ha Ieanua fgues son eeate cacated a the aereof quartefldes lb Figre in bmeahe '( r ndleaa the number of oab soveredl n that grop. Sore CentDBuea OIsIlsU1s. INDONESIA COUNTRY ECONOMIC REPORT Production of Minerals. 1981-1991 Tin Copper ore Nickel Iron sand Natural Year Petroleum concentrate concentrate ore Bauxite Coal concentrate Gold/a Silverla gas (min bbls) 000 tons) (kg) (kg) (mc) 1961 64.6 35.4 186.S I,2 1,2034 926 666A 163.1 2Z0. 1,123. 1962 48662 33. 223.7 1,49 700.2 S88 1445 222.7 307T9 1,ll19 1983 490.S 2" 205.0 1,w 777.9 64&2 132.9 2,391S 35,473.1 1,1866 1984 16.5 232 190.3 1,066.8 1,03.2 1,4662 83.0 2,247.1 3794.7 1,5067 1965 48S 21.6 223.4 961.9 830.5 1,491.7 130.9 2,619.4 38,3Z73 1,50.0 1966 5072 24.0 252 15331 64" 1.7254 1.3 3,5 46,S96 129 1967 479.0 26.1 259A 1,825.7 6353 167. 194.0 372= 5A485 1,731 1966 484.7 36 294.7 1,7332 556.8 2,6S4S 202.6 4,730.9 61,538D0 1 .6 1969 5142 313 3313 2,X09 S3 4553.1 142.7 52393 2395.9 1,92S2 1990 S305 313 3966 2,179.1 1,16$ 7,302 1421 1%03.0 66,7235 2,159. 1991 S5Q. 303 6565 2,336 14.6 13,7152 1732 17,0245 79,S19A 237.7 /a Sinc 1963 pIOdCIof Wd and dsaer didng p* ate entarpse Sor CealwBfra ofStatiss El6 INDONESIA COUNTRY ECONOMIC REPORT Crude Oil Production bv ComDany. 1981-1992 ('000 bbls) Producton Average Contract of work sharing daily PERTAMINA LEMIOAS Caltex C &T Stanvac Subtotal contract Total output 1961 29,515 175 25S,SSI 1,799 13,141 270,45S 2,3 S84,3 1,60 1982 27,37S 193 17S,928 1,422 13,214 19,564 270,0SS 488,189 1,338 1983/a 26,947 233 191,307 1,411 11,766 204,484 286,384 S18,048 1,419 1984 31,002 203 - 1,S33 4,372 S,905 513J652 SS0,762 1,SOS 198 30,071 170 - 13 S,130 6,488 4S390 48991 1,3 1966 29,328 193 - 1,228 6,085 7,313 478,078 S14,912 1,411 1987 26,77S 210 - 1,236 8,3S4 9,590 47S,8S4 S12,429 1,404 1988 24,789 lb - 1,368 13,413 14,781 4S1,941 491,511 1,343 1989 25,567 lb 2,044 13,233 15,277 473,341 514,18S 1,409 1990 24483 b - 1,972 10,587 12,559 496,C64 S33,706 1,4 1991 24,988 hb 1,461 8,845 10,306 S4S,937 S81,231 1.592 1992 24,763 hb 1400 812S 9,S25 S16,697 SS0,98S 1,505 h /a Shoe May 1983, oat of ortt data have beeolldate& hb Sinoe 1988, Lania data have b_ iluded in Peraunah h N ambr and December reconcilIatom. Sot= Ml stryat Mlm ad Ewu, Dkorte OGer 0ia& Gas 210 S tatistica An .~~~~~~~~~~~~Iki -~~~~~~~ Sl n~~~~~~ "E~~~~~~~ R~~~~ l ai ii II IIS# II Ka i|i INDONESIA I COUNTRY ECONOMIC REPORT Domsodh Sales of Pettoleum roduets. t1961-192 la ('OO0 bble) 1981 1962 1963 1984 1965 19 196 1968 199 1990b 1991 1992 AM1atlon gas 110 l10 83 73 66 63 56 60 60 59 58 54 Avlatn turbo 4,869 4,99 3,66 434 4,442 3,806 4,199 4,44S 4,286 4,607 4,889 5315 Premium geactng 392 239 24? 523 738 124 1,431 188 2,451 1,04 lb lb Rgulbr gesolne 25,48 2A,79 24W0 249 25.206 2703 29,04 3085 3,199 39,0e 43s Kooene A9 51,77S 48,24 45S213 4394 438 432 44664 46,01 49,472 $5053 S3,850 motor deoo 44,737 48,918 49,790 46, 47.6 47,421 S4*75 59,143 64,08 72,950 80 92,a6 Indusddal del 9.391 9,311 9,978 10,2SS 10,329 8,8S5 8319 8,89 9,51S 10, 10,806 11 Fuel o0 17,587 19,341 21,149 2,25 223 1800 1954 18,9 18W9 24,47 28,899 29,313 TOWl ISSI 1727J jISSM lS2AM S 2A8 167t91 1 ZM9 2 L7 219.06 2721t9 /a Exelu lukbdoaing oil and smilar products. lb ProvisionaL Soue: MInsby of Mines and Energy, Directorate Genoral On and Gas. 1 . 2)2 Statistcal Annex Table 9.1 INDONESIA COUNTRY ECONOMIC REPOR Consumetr Price Index. 1979- 1992 la l (April 1977 - March 1978 -100) End of Foodstuff Housing Clothing Others Total Change (%) Ic 1979 141.1 140.9 168.2 137.7 143.1 21.8 /d 1980 165.6 168.7 190. 159.1 167.6 16.0 1981 1793 182.3 198.2 168. 179.8 7.1 1982 192.7 209.8 205.0 189.3 197.9 9.7 1983 212.7 2381 214.0 221.5 221.5 115 1981 226.4 270.0 220.6 246.5 241.6 8. 1985 230.9 289.4 228.0 259.7 252. 4.3 198 268. 30Y29 250.4 275.0 2753 9.2 1987 296.1 321.4 270.4 297.9 300.8 9.2 1988 320. 335A4 280.0 307A 317.6 5. 1989 1041 109.6 108.1 105.7 106.4 6.1 1990 111.5 123.9 113.4 1186 117.0 9.9 1991 122.6 1337 119.5 135.0 128.6 9.9 1992 130.2 140.0 1283 139.7 135.1 5.0 /a ib e onsue price index for Indmonsia has been use cowmmecing March 1979 to replac the Jakrt cosn of livin Wnem fo Starting 1989, using new base peio (Apri 1988March 1989 = 100). /c End-year badis /d Percentage change oftCPI for the peio January throgh December 1979 using the rate of increase of the Jakarta mgs of livig index for perio Januar throgh March 1979. Sourc Cenra Bureau Of Staistics INDONESIA COUNTRY ECONOMIC REPORT Indonesi Wholesale Price Index. 1983-1992 /a (1983 = 100) Sectors tb 198 1964 196 196 1987 1968 199 190 1991 19 Agfrultre (44) 100 113 118 128 145 163 177 191 206 225 Mining & quanyln (6) 100 109 117 125 1i2 143 1S6 169 188 201 Manufacturing (140) 100 103 1s 123 143 156 166 176 194 206 Imports (53) 100 113 119 129 158 164 178 191 201 208 EXporl (38) lo Ill 112 as 118 118 131 1s9 1s3 1s9 Excluding petroleum (34) 100 114 115 130 170 183 19s 195 203 212 Petroleum (4) 100 112 113 73 103 99 112 148 139 143 General index (281) 100 11 116 116 142 149 162 178 187 197 General index excluding exports (243) 100 1ll 117 127 149 160 173 185 199 210 General Index excluding exports of petroleum (224) 100 110 116 125 146 161 172 182 198 211 /a This new index replaces the previous WPI based on 1975. Figures show the average for year. lb Figures wthin brackets 1s( )* indicate the number of items represented In that sector. /c November 1991. Source: Central Bureau of statstics. INDONESIA COURY ECONOMIC REPORT Domesic Pre of Petoleum Producfs.1980-1992 (P.Ifltr) 1980/a 1981 1982/b 1963k 1984/d 1985/e 1986 1967 1988 1989 1990/f 1991/g 1992 Aviation gas 150 150 240 300 300 330 250 250 250 250 330 400 400 Avlation tubo iso 150 240 300 300 330 250 250 250 250 330 400 400 Premium gasoline 220 220 360 400 400 440 440 440 440 440 Ih lb hb Regular gasoline 150 150 240 320 350 385 385 385 385 385 450 5S0 SS0 Kerosene 38 38 60 100 150 165 165 165 165 165 190 220 220 Motor desel 53 53 85 145 220 242 200 200 200 200 24S 300 300 Industia dksel 45 45 75 25 200 220 200 200 200 200 235 285 285 Fuel ol 45 45 75 125 200 220 2 0 2 0 2 200 220 220 220 la From May1980. /b Price Increased on January 1. /c Price Increased on Januarly 7. /d Prbe Increased on January 12. /e Price Increased on April 1, due to the appfcation of 10% VAT. /n Prie Inreased on May 25. Ig Prke increased on July 11. /h Discontinued. Source: Ministry of Mines and Energy, Directorat General ON and Gas. INDONESIA COUNTRY ECONOMIC RP,ORT ADproved Foredan Invwtmont by Seator. t98t-1992 Is (US* milon) (IJ8$~~~~~~~~~~~~~~~~~~~~~~I Sotor 1981 I9n 193 1984 1916 1966 1967 1988 1989 1990 199 1992 Agdoultur 2 2 10 Q 2 I 9 1 U I IM 66 Forestry 32 2 9 9 9 f x 4 1 138 fsh9* 22 21 A 11 A 12 46 47 11 2B Minina & auanvlna 299 A 9 0 I 9 0 _ Qt 2X9 Manufatuodna m4 1.120 2As SAm W 8 2 53n2 3428 § 3M SAN Food 41 6 83 77 6 34 54 231 223 99 382 213 Textles & lahr 139 26 12 1 7 9 118 213 581 1,094 532 s87 Wood & wood produots 124 S 13 0 0 32 45 104 106 218 62 33 Paper & paper products 49 0 722 0 25 47 109 1,06 211 730 52 686 Cheticals & ubber 26 317 183 96 338 294 209 1,5 2S12 199 923 2 Nonmetaio minoers 20 57 50 0 3 0 251 30 184 12S 133 837 Baso mtWs aS 3 836 609 6S 39 7 61 106 2S 197 43 Met product 141 706 716 210 244 52 57 129 292 460 856 857 Ohrs 0 0 1 9 0 0 3 10 30 281 62 Si Conestrucdon 49 44 17 m 65 42 2 16 22 41 Trade & hotb Q 17 7?8 84 Q Q 9n 40S 9 8774 419 212 Wholeale trade 0 0 0 0 0 0 0 0 0 0 0 0 HoteS 0 17 78 84 0 0 196 405 98 874 4,019 919 Trnsot & oommunsloao 0 Q 2 4 Q 70 2 _ S 803 167 1 Real stat and businss IS m l0s o 27 2S ilQ m 2 a2 1.134 la Intended Capita Inveetmont Amount represents original plus expansion. minus oanoetstlone. Sour.: Investment Coordinating Bowd (BKPM). INDONESIti COtJNTRYEQRNONG A2RMM9 Danwdc Ln_v bir Sedw. 1981-19a in (Ftp UUMCM) secw im Igo im im tm 190 iw Igo im im 1"I Aadmftre. ond Westtft 02 m 2" m LM 2m 2M 3AIS Am SAM in ForsOy 93 21 60 AZ so im I'M HOW R a a m 94 147 U2 236 mmgmft IA19 LM im us in M VM 4&W 26-46 MM Texon m 110 10 127 97 263 I'm 21M 3" t2j612 3AG 2$* Chen*& m Ms 766 m 773 2" 3m 4AU U-Im S#w 3= goode 0 0 0 0 0 0 0 0 0 0 0 0 CwwI%Wk[lfftF--tU*V 918 I'm 2m go a? ON 2483 4," S.W l7jW 14,= 1=9 ConstruMm 10 m- ff n 3t t46 fz M- m "MIS 76 255 NA 17 m L= QW4 ME Realesoo s 74 204 31 267 log 8* "6 1.790 3504 oftm/b v- 19 La 1 2% 325 so 460 91 2AI4 im /a Figures reftrio hWided capUM MveMmt% and mp"M woW aWovals plus q4mved G)pWmft "VMS$ cwxmoo". b kxkidos Wmpoftft secW. Smwe: InvesUTwU OoordhaMg &wcL I a ICs GW &N NW SECTION MALAYUIA / 17 FAN SU RIB) 205 14R3 2 THAILAND id,o 1°w iw *20 140* 04nda Aceh PHILIPPINES , 13 MALAYSIA BRUNEI / fM Ln / \ U [ ' } ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I N D O N E S I A \ / i J / 12 / MALAYSIA 1 7 ....C.SINGAPORE MOflondo ProoInc Bo8odo,leo Pnb m on )AP19 HALMfAHERA - oo8o,,-I 8ondol0 O. 9onLlmilke 7~ Cl S 18 PodSng 1 10i825 1 5 PL A 8u Os5 1 O.K. JAKARTA R A ' P.1009kn. 20. SUIAWESf Jqtpu o 2 JAWABA RAAT 20P18g / S JAWA TENGAH 7 8 B i IRIAN JAYA 4 DC. YOGYAKARTA 0EUTIA t 16 2 CERAM 5 JAWATIMUR 9h9m , _K- M Aben 26 C 8 LAMPUNG6 7 BBNGKCULU6 a. 8 SUMATEPASELATAN MA 9 RIAU 27 IC JAMBI e 27 1I SUMATERASARAT aAR\If ,2 SUMATERAUTARA J A 13 01 ACEH bI KALIMANTAN SARAT 3 MAMMA 15KALIMANTAN TENGAH N{ MDs 18 KALIMANTAN SELATAN KALIMANTANTIMUR A2 5 18 BULAWESI TENSAAH 2 A5| BAWA r 19 SULAWESI UTARA Y.N.kwW DA FLOIE 20 SULAW SELATAN 4 / I - 21 SULAWESI TENGGARA - I 0 , 4 M&TNO MA RArAT 0* 22r h 23 iwo0 18 88 88 8 8 IV. 24 4NUSA TENOGARA TII1.R D2°8, 25 MALUKU 1l88U0W88nA8Wr 4= SUMBA 24 Ku-, 27 o 188 808 8o8 48 8O 000 800 800 26 IRIIAN JAYA 848'I4M l 48 27 TIMORTIMUR o 1.1.8 . 18_ KILOMETERS0 loop 10Ia 11I8 S18. 1811 128 oW ISV 140' FEBRUARY 1991