00074910012331337773
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of Recent Developments
George Fane
To cite this article: George Fane (2000) Survey of Recent Developments, Bulletin of Indonesian
Economic Studies, 36:1, 13-45, DOI: 10.1080/00074910012331337773
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Date: 19 January 2016, At: 22:03
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Bulletin of Indonesian Economic Studies
Vol 36 No 1, April 2000, pp. 13–45
SURVEY OF RECENT DEVELOPMENTS
George Fane
Australian National University
SUMMARY
GDP grew slowly but steadily during 1999, thus confirming that Indonesia
is at last recovering, although more slowly than the other countries most
affected by the Asian crisis. Growth in 2000 is officially forecast at 3–4%.
With the effects of discretionary fiscal policies included, inflation during
2000 is expected to be in the range 5–8%, compared with 2% during 1999.
Indonesia’s sluggish output growth is probably due mainly to delays
in restructuring the banking sector and resolving corporate debts. About
80% of the Rp 639 trillion of government bonds needed to recapitalise
the banks has now been issued. However, with capital–asset ratios of
only 4%, and assets dominated by illiquid bond holdings, the banks
appear fragile.
The meeting of the Consultative Group on Indonesia promised new
official loans of $4.7 billion. In addition, Indonesia signed a new agreement
with the IMF that raises the total amount of its promised loan from $11
billion to $16 billion.
The policies to be followed under the new IMF agreement continue
to emphasise the avoidance of money creation as a way of financing the
budget deficits that will result from the interest payments on the
government’s greatly increased debts. The government has unveiled new
initiatives to deal with judicial corruption, and hopes that they will
improve the workings of the bankruptcy law and hence the restructuring
of corporate debt.
More important than any economic event was the civilian government’s assertion of its dominance over the military, at least for the time
being. Following the finding by the National Commission on Human
Rights that General Wiranto should be held accountable for the ‘planned
and systematic violence’ in East Timor, the President forced him out of
the cabinet.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
14
George Fane
MACROECONOMIC DEVELOPMENTS
The massive fall in GDP—which was 13.7% lower in 1998 than in 1997—
has been arrested, and a sluggish recovery has now been sustained since
the fourth quarter (Q4) of 1998. However, because of the collapse of
exports, fixed investment and stock accumulation during 1998, GDP in
Q1 of 1999 was 8% lower than a year earlier, and GDP for the whole of
1999 was only 0.2% above its 1998 level.1 Bank Indonesia is forecasting
that in 2000 it will be 3–4% higher than in 1999, and the government is
hoping to achieve a medium-term annual GDP growth rate of 5–6%.
Table 1 shows that household and government consumption never
fell as sharply as exports and investment; they have now been growing
since Q2 of 1998. In contrast, exports, fixed investment and the level of
stocks continued to fall until the middle of 1999, but began to grow in
Q3.2 In this quarter, total exports and fixed investment were only 59%
and 70%, respectively, of their level in Q1 of 1998. An important element
in the plunge in exports was the difficulty experienced by Indonesian
companies in getting trade credit. The collapse of investment was part
cause and part consequence of the fact that Indonesian banks have not
made major new loans since the middle of 1998, and Indonesian
companies have not been able to get new offshore loans since the start of
the crisis.3 The main factor in the recovery of GDP has been the switching
of domestic spending from imported to domestic goods. The fact that
imports in Q3 of 1999 were only 46% of their level in Q1 of 1998 means
that consumption and investment spending on domestic goods fell much
less than total consumption and investment (table 1).
The consumer price index, which had risen by 78% between December
1997 and December 1998, rose by only 2% between December 1998 and
December 1999. This overall CPI change was the combination of falling
prices of tradable goods, due to the strengthening rupiah, and rising prices
of non-tradables. Inflation is expected to rise this year: Bank Indonesia is
forecasting that the increase in the CPI between December 1999 and
December 2000 will be 3–5% if the effects of increased VAT, fuel price
rises and the tariff on rice are excluded. These effects are expected to add
2–3 percentage points during the year, thus bringing the total increase to
5–8%.
The sharp fall in inflation in 1999 and the expected increase in 2000
are of course closely linked to the movement of the exchange rate. In
1999, the price of foreign exchange fell by 12%, from about Rp 8,025/$ in
December 1998 to about Rp 7,100/$ in December 1999. With the exception
of a brief period in mid 1999 when the rate fell below Rp 7,000/$, this
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
15
TABLE 1 National Accounts, 1998–99
(1993 Rp trillion)
1998
Q1
1998
Q2
Consumption
Household
Government
69.2
7.1
68.5
6.6
Gross fixed capital
formation
25.4
Change in stock
1998
Q4
1999
Q1
1999
Q2
63.8
6.2
66.4
6.9
67.1
6.8
67.3
7.3
67.9
7.2
22.0
22.9
19.7
18.0
17.3
17.7
–1.0
–5.9
–2.5
–1.7
–2.4
–2.2
3.7
Exports of goods
& services
39.3
35.3
38.9
21.2
22.0
21.6
23.4
Imports of goods
& services
39.0
36.1
35.2
22.1
18.5
8.0
17.8
101.1
90.4
94.1
90.4
93.0
93.2
94.6
–8.0
3.1
0.5
GDP
% GDP growth
(from 1 year before)
1998
Q3
1999
Q3
Source: Bank Indonesia (BI).
was the strongest rupiah exchange rate since early 1998. During January
2000, however, the rupiah weakened to around Rp 7,500/$, and the
budget assumption that the average exchange rate for the year would be
Rp 7,000/$ began to look optimistic. This weakening was probably due
mainly to the widespread violence and civil unrest, and the rumours of a
military coup.
Table 2 and figures 1 and 2 document Indonesia’s progress relative to
the four other countries most seriously affected by the Asian crisis.
Indonesia had by far the largest GDP fall in 1998, and it has recovered
FIGURE 1 Exchange Rates of Asian Crisis Countries, 1997–99
(units of local currency per $; Jan-97 = 100)
700
600
Indonesia
500
400
300
Thailand
Malaysia
200
100
Philippines
Source: CEIC Data Hong Kong.
TABLE 2 GDP Growth in Asian Crisis Countries, 1996–99
(% change from one year before)
Indonesia
1996
1997
1998
1999
1999 Q1
1999 Q2
1999 Q3
1999 Q4
Korea
Malaysia Philippines Thailand
7.8
4.7
–13.2
0.2
6.8
5.0
–5.8
7.8
10.0
7.5
–7.5
5.1
7.2
5.2
0.1
0.7
5.9
–1.8
–10.4
3.9
–8.0
3.1
0.5
6.2
4.5
9.9
12.3
4.8
–1.3
4.1
8.1
9.3
2.1
3.8
3.3
–5.6
0.9
3.3
7.7
3.8
Source: As for figure 1.
Dec-99
Sep-99
Mar-99
Dec-98
Sep-98
Jun-98
Mar-98
Dec-97
Sep-97
Jun-97
Jun-99
Korea
0
Mar-97
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
George Fane
16
17
FIGURE 2 3-Month Interest Rates, Asian Crisis Countries, 1997–99
(% per annum)
60
Indonesia
45
Korea
Thailand
30
Philippines
15
Malaysia
Dec-99
Sep-99
Jun-99
Mar-99
Dec-98
Sep-98
Jun-98
Mar-98
Dec-97
Sep-97
Jun-97
0
Mar-97
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
Malaysia: Interbank rate, weighted average, 3 months.
Indonesia: Bank Indonesia Certificates (SBI) rate, 90 days (auction result).
Korea: Yield on certificates of deposit, monthly average, 91 days.
Philippines: Interbank rate, Central Bank of the Philippines, 3 months.
Thailand: Weighted average interbank interest rate (Bangkok Bank, Siam Bank,
Standard Chartered Bank), 3 months.
Source: As for figure 1.
the most slowly in 1999. Figure 1 shows that the rupiah has appreciated
relative to the other four currencies since mid 1998; it initially depreciated
by much more, but the recent appreciation has not been nearly large
enough to offset the original depreciation relative to the others. Figure 2
tells a similar story for interest rates: 3-month interest rates rose by much
more in Indonesia than in any of the other countries. Since late 1998,
interest rates have come down by more in Indonesia than elsewhere, but
are still higher than in any of the other crisis countries.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
18
George Fane
Table 3 shows that whereas in 1996 there was an official capital outflow
of $0.5 billion, the total official net inflow in the three years 1997–99 was
$19.4 billion. Capital flows were first substantially affected by the crisis
in the last quarter of 1997, when there was an official net inflow of $3.2
billion and a private net outflow of $8.6 billion. If ‘the crisis’ is defined as
the period from Q4 of 1997 to Q4 of 1999 inclusive, then adding the flows
in Q4 of 1997 to those shown in table 3 for 1998 and 1999 implies that the
total official net inflow during the crisis was $20 billion and the total net
private outflow was $32 billion. While the official inflows during the
course of the crisis have amounted to only 45% of the $43 billion label
used to describe the original November 1997 IMF package, they have
been large enough to offset over 60% of the private net outflows in this
period. The budget papers predict that the total capital account will be
almost in balance in 2000.
DEMOCRACY, ECONOMIC POLICY MAKING
AND THE RULE OF LAW
Indonesia’s current political situation and its social and legal problems
are vitally important in their own right, but are also crucial to economic
recovery because of their impact on investor confidence. For all the killings
and destruction that accompanied its withdrawal from East Timor,
Indonesia has at least shed the moral and financial burden of its former
province and is stronger for having done so. It is also immensely
strengthened by having a democratic government whose legitimacy is
generally accepted. However, before the economy can recover fully,
Indonesia must also restore civil and political tranquillity and strengthen
the rule of law. Most of all, this means ending the ethnic and religious
violence that continues to smoulder in several regions and that flared up
during the last few months in Maluku, Lombok and Aceh. It also means
resolving the secessionist demands in Aceh (those in Irian Jaya are much
less serious), consolidating Indonesia’s remarkable progress from military
dictatorship to democracy, and greatly strengthening the legal system.
Economic Policy Making
An unintended side effect of the new independence of Bank Indonesia
has been to fragment the group of ministers responsible for economic
policy (McLeod 1999: 148). As a result of BI’s independence, its Governor, Sjahril Sabirin, is no longer in the cabinet, and in consequence of the
failings exposed by a very critical audit of BI, he has lost the confidence
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
19
TABLE 3 Balance of Payments, 1996–2000
($ billion)
1 Exports of goods
Non-oil & gas
Oil & gas
2 Imports of goods
Non-oil & gas
Oil & gas
3 Trade balance (1 – 2)
Non-oil & gas
Oil & gas
4 Services
Non-oil & gas
Oil & gas
5 Current account (3 + 4)
Non-oil & gas
Oil & gas
6 Official capital inflow
7 Private capital inflow
8 Capital inflow (6 + 7)
9 Errors & omissions
10 Balance of payments
surplus (5 + 8 + 9)
1996
1997
1998
1999
2000
(prelim.) (prelim.)
50.2
38.0
12.2
44.2
39.9
4.4
5.9
–1.8
7.8
–13.7
–10.2
–3.5
–7.8
–12.1
4.3
–0.5
11.5
11.0
1.3
56.3
44.6
11.7
46.2
41.4
4.8
10.1
3.1
6.9
–15.1
–10.5
–4.6
–5.0
–7.4
2.4
2.9
–0.3
2.5
–1.7
50.4
43.0
7.4
31.9
29.1
2.9
18.4
13.9
4.6
–14.3
–11.4
–2.9
4.1
–2.4
1.7
10.0
–13.8
–3.9
2.1
51.6
41.4
10.2
31.3
27.4
3.9
20.3
14.0
6.3
–15.1
–12.0
–3.1
5.2
–2.0
3.2
6.5
–9.8
–3.2
1.4
55.1
44.2
10.9
35.7
31.4
4.3
19.4
12.8
6.6
–15.8
–12.5
–3.2
3.7
0.3
3.4
5.8
–6.4
–0.6
0.0
4.5
–4.1
–2.3
–3.4
3.0
Source: BI.
of the President. The audit, prepared by KPMG and the local firm
Siddharta and Harsono (JP, 3/1/2000), found that BI had violated its
own lending procedures in the disbursement of the last-resort loans it
extended to the banks in 1997–99. A separate criticism made by the auditors is that BI did not have proper internal controls. For example, it had
no proper inventory of its fixed assets and had lost its certificates of ownership of the gold that it has deposited in various overseas custodial banks.
President Abdurrahman Wahid (Gus Dur) called for the parliament (DPR)
to dismiss Sjahril. However, the Governor indicated his determination
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
20
George Fane
to continue in his position, and under the new Bank Indonesia Act he
can only be forced out of office on medical grounds or for the commission of a crime.
The fragmented state of economic policy making was deplored in an
article by the Senior Deputy Governor of BI, Professor Anwar Nasution,
who has been tipped as a likely successor to Sjahril (The Business Times,
26/1/2000). One of the problems of the economics ministers is that, in
common with the rest of the National Unity Cabinet (Mackie 1999), they
represent a wide spectrum of political parties. The Finance Minister,
Bambang Sudibyo, is a member of Amien Rais’s National Mandate Party
(PAN), the Coordinating Minister, Kwik Kian Gie, and the State Minister
of Investment and State Enterprises, Laksamana Sukardi, belong to
Megawati’s PDI-P, while Yusuf Kalla, the Minister of Trade and Industry,
is a Golkar member.
In order to avoid being dominated by the economics ministries, the
President has set up his own board of economic advisers, the DEN (Dewan
Ekonomi Nasional), which comprises a number of prominent economists
and businessmen and is headed by Emil Salim, one of the most eminent
of the group of technocrats that pressed for deregulation during the
Soeharto years. Perhaps in part because of a lack of interest in economic
problems, Gus Dur has not used the DEN to flesh out his own preferred
economic policies, but has rather suggested that its members take their
ideas to the various economics ministers. The latter are reported to be
understandably unenthusiastic about taking advice from the new
interlopers. The President’s willingness to tolerate divisions among his
economics ministers and advisers and to delegate concern with economic
policy to others may well reflect the fact that these matters are mostly of
secondary importance now that the outlines and much of the detail of
economic policy for the next four years have been laid down in the
agreement with the IMF.
The New IMF Program
Because it was not satisfied that former President Habibie’s government
had responded satisfactorily to the PricewaterhouseCoopers (PwC)
investigation into the Bank Bali scandal, and because of the bloodshed
that followed East Timor’s vote for secession, the IMF suspended its
lending program in September 1999.4
The new government worked quickly to mend its bridges with
Washington, and began to negotiate an extension of the IMF program. In
January 2000, US Treasury Secretary Lawrence Summers visited Jakarta
and held out the promise of US support for new loans of $10 billion from
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
21
the international community, on condition that Indonesia pressed ahead
with economic reforms. At the same time Richard Holbrooke, US
Ambassador to the UN, explicitly warned Indonesia’s generals that the
loans were also conditional on their not staging a coup. The government
signed a new letter of intent (LOI) to the IMF on 20 January, in which it
noted that a strong set of measures was being taken to ‘credibly advance’
its investigation of the Bank Bali affair. These were: to release the full
version of the PwC report; to name six suspects, among whom were a
senior official of Bank Indonesia, the former deputy chairman of IBRA
(the Indonesian Bank Restructuring Agency), the former head of Bank
Bali and Mr Tanri Abeng, a former minister; and to instruct the Attorney
General to investigate the case further.
The new LOI is longer and more detailed than its predecessors, and
much of the new detail involves defining procedures to audit state
agencies and set up committees to investigate cases of suspected
corruption and prosecute those responsible. There seems little reason to
doubt that the increased emphasis on fighting corruption comes at least
as much from the new government as from the IMF.
The budget begins the process of applying the economic policies in
the LOI, which preserve the principles of earlier LOIs. BI is committed to
keeping annual inflation to 5% and will do this by targeting base money;
the poverty alleviation programs are being overhauled and expanded in
aggregate; bank restructuring should be completed this year; the
government plans to reduce its debts by privatising state-owned
enterprises and selling off assets acquired as a result of the bank bailout;
attempts are to be made to force judges to apply the bankruptcy law
correctly; and teeth are being put into the Jakarta Initiative, which was
originally created in 1998 as a purely voluntary mediation system for
restructuring corporate debt.
In early February 2000, the loans promised by the US Treasury
Secretary were officially approved. The Consultative Group on Indonesia
(CGI)—the group of official lenders dominated by the World Bank, the
Asian Development Bank (ADB) and Japan—met in Jakarta on 1 and 2
February and agreed to lend Indonesia $4.7 billion.5 Then on 4 February,
the IMF formally agreed to add $5 billion to the $11 billion that it had
previously agreed to lend, and immediately disbursed $349 million.
President Abdurrahman has been criticised for spending too much
time out of the country and for neglecting economic issues. However,
Indonesia has little alternative but to follow the very detailed economic
policies laid down in the LOI to the IMF. What is important is to press
ahead as quickly as possible with the implementation of this program,
and on this the President has acted decisively: because IBRA had been
1999/2000
(12 months)
(Rp trillion)
2000
(9 months)
(Rp trillion)
1999/2000
2000
(% of GDP)
(% of GDP)
(1)
(2)
(3)
(4)
Increase as
% of GDP
% Growth
of Share
in GDP
(5)
(6)
(4) – (3)
(5) as % of (3)
Total revenue
Tax revenue
Domestic taxes
Income tax
Non-oil & gas
Oil & gas
Value added tax
Land & building tax
Excises
Other taxes
Taxes on international trade
Import duties
Export tax
Non-tax revenue
Natural resources
Oil & gas
Other natural resources
Profit transfers from SOEs
Other non-tax receipts
129.2
99.5
93.9
45.4
40.6
4.7
34.6
3.2
10.2
0.6
5.5
3.0
2.6
29.7
8.1
16.2
1.9
4.0
7.6
37.7
97.8
91.9
53.0
44.2
8.8
26.3
2.9
9.3
0.4
5.9
5.0
0.9
39.9
30.3
28.6
1.7
4.0
5.6
10.6
8.1
7.7
3.7
3.3
0.4
2.8
0.3
0.8
0.0
0.5
0.2
0.2
2.4
1.5
1.3
0.2
0.3
0.6
15.1
10.7
10.1
5.8
4.9
1.0
2.9
0.3
1.0
0.0
0.6
0.5
0.1
4.4
3.3
3.1
0.2
0.4
0.6
4.6
2.6
2.4
2.1
1.5
0.6
0.1
0.1
0.2
0.0
0.2
0.3
–0.1
2.0
1.9
1.8
0.0
0.1
0.0
Memo item: GDP (Rp trillion)
1,224.2
910.4
1,224.2
910.4
–25.6
43.3
32.2
31.5
57.1
46.3
150.4
2.1
20.1
22.7
3.0
43.0
126.8
–52.2
80.6
125.0
137.3
19.9
34.5
–1.0
George Fane
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
22
TABLE 4 Draft Budget Revenues
for 1999/2000 and 2000
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
23
making only very slow progress with bank restructuring and asset sales,
he replaced its head and some of its most senior staff members.
Confined to Barracks for Now
Indonesia’s National Commission on Human Rights, which had been
requested by the government to investigate alleged atrocities in East
Timor, presented a report to the Attorney General on 31 January,
documenting some of the ‘planned and systematic violence’ that had
followed the ballot. The report recommended that ‘General Wiranto, as
TNI [Indonesian military] chief, should be held accountable’ and that
the Attorney General investigate Wiranto and 31 others, among whom
are five other generals. In mid February, Wiranto was suspended from
cabinet, and his position as Coordinating Minister for Political Affairs
and Security was assumed on an acting basis by Lt General (ret.) Surjadi
Soedirdja, the Minister of Home Affairs. Despite the earlier rumours of a
coup, the military seemingly accepted Wiranto’s dismissal, and the
prospect that he and other officers may be brought to trial for their part
in the events in East Timor.
At least for the time being, the President appears to have established
the dominance of a democratically elected civilian government over the
armed forces. This achievement is fragile, but it is something that seemed
scarcely possible even two years ago. Gus Dur’s astute judgment has
been one important factor in bringing it about; others include the popular
fury that toppled Soeharto, the increased dependence of Indonesia on
the international community, the disgrace that the armed forces brought
on themselves in East Timor and the fact that the National Commission
on Human Rights did not flinch from its duty.
THE BUDGET
Projected Revenues and Expenditures in 2000
The President and Vice President unveiled the new budget on 27 January
(tables 4, 5 and 6). The new financial year, beginning on 1 April, will last
only nine months, so as to align the financial and calendar years with
effect from 2001.
The main items in the new budget are the reform of tax administration
so as to reduce avoidance and raise tax revenue as a share of GDP;
increases in public sector wages as part of the fight against corruption;
reduction of general subsidies to domestic fuel users; and increases in
the total revenue allocated to poverty alleviation programs, accompanied
1999/20
(12 months)
(Rp trillion)
2000
(9 months)
(Rp trillion)
1999/2000
2000
(% of GDP)
(% of GDP)
(1)
2)
(3)
(4)
Expenditure, including interest
Expenditure, excluding interest
Increase as
% of GDP
% Growth
of Share
in GDP
(5)
(6)
(4) – (3)
(5) as % of (3)
212.7
158.2
183.1
124.1
17.4
12.9
20.1
13.6
2.7
0.7
15.7
5.5
Current non-interest expenditures
Personnel
Material
Regional
Subsidies
Fuel subsidies
Non-fuel subsidies
Other routine expenditures
96.4
33.6
11.0
19.5
28.0
10.0
18.0
4.3
84.7
29.4
8.9
17.1
26.7
18.3
8.4
2.6
7.9
2.7
0.9
1.6
2.3
0.8
1.5
0.4
9.3
3.2
1.0
1.9
2.9
2.0
0.9
0.3
1.4
0.5
0.1
0.3
0.6
1.2
–0.6
–0.1
18.1
17.6
8.9
18.0
28.0
146.4
–37.6
–17.9
Development expenditures & net lending
Rupiah financing
Transfers to regions
Managed by central government
Project financing
61.7
31.7
16.1
15.6
30.0
39.4
23.4
15.1
8.2
16.0
5.0
2.6
1.3
1.3
2.5
4.3
2.6
1.7
0.9
1.8
–0.7
0.0
0.3
–0.4
–0.7
–14.2
–1.1
26.2
–29.3
–28.2
Interest payments
Interest on domestic debt
Interest on foreign debt
54.5
34.0
20.5
59.0
42.4
16.6
4.5
2.8
1.7
6.5
4.7
1.8
2.0
1.9
0.1
45.5
67.5
8.9
1,224.2
910.4
1,224.2
910.4
–25.6
Memo item: GDP (Rp trillion)
George Fane
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
24
TABLE 5 Draft Budget Expenditures
for 1999/2000 and 2000
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
25
TABLE 6 Draft Budget Financing
for 1999/2000 and 2000
1999/2000
(12 months)
(Rp trillion)
(1)
2000
1999/
2000
Increase
(9 months)
2000
as %
(Rp trillion) (% of GDP) (% of GDP) of GDP
(2)
(3)
(4)
(5)
(4) – (3)
Primary surplus
(before interest)
–29.0
Interest payments
54.5
Overall surplus
–83.5
Financing
83.5
Domestic financing
30.0
Privatisation proceeds 13.0
Asset recovery
17.0
Foreign financing
53.5
Gross drawing
77.4
Program loans
47.4
Project loans
30.0
Amortisation
–23.9
13.6
59.0
–45.4
45.4
22.2
5.9
16.3
23.2
31.8
15.8
16.0
–8.6
–2.4
4.5
–6.8
6.8
2.5
1.1
1.4
4.4
6.3
3.9
2.5
–2.0
1.5
6.5
–5.0
5.0
2.4
0.7
1.8
2.5
3.5
1.7
1.8
–0.9
Memo item:
GDP (Rp trillion)
910.4
1,224.2
910.4
1,224.2
3.9
2.0
1.8
–1.8
0.0
–0.4
0.4
–1.8
–2.8
–2.1
–0.7
1.0
by the phasing out of some emergency programs created to deal with the
crisis-related increase in poverty. The regions are gradually getting more
fiscal autonomy, but the main changes (Booth 1999: 27–32) will not occur
until 2001.
As a result of the growth of debt, the interest cost of the government
bonds already issued to banks is expected to be Rp 42.4 trillion in the
nine months of FY 2000, which is much higher than the Rp 34 trillion in
the full 12 months of the 1999/2000 budget. The government expects to
raise total tax revenue from 8.1% of GDP in FY 1999/2000 to 10.7% in FY
2000. Most of the increase is assumed to come from the rise in income tax
revenue from 3.7 to 5.8% of GDP. The higher world price of oil should
raise non-tax revenue from 2.4 to 4.4% of GDP. These revenue increases
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
26
George Fane
are assumed to offset the rise in non-interest expenditures by enough to
convert the primary deficit (i.e. the deficit before allowing for interest
payments) of 2.4% of GDP in FY 1999/2000 into a primary surplus of
1.5% of GDP in FY 2000.
However, interest payments on government debt are projected to rise
from 4.5% of GDP in FY 1999/2000 to 6.5% in FY 2000. As a result, the
overall deficit in FY 2000, as officially measured, is projected to be 5% of
GDP. This happens to be less than the measured deficit in FY 1999/2000
of 6.8% of GDP, but the comparison is meaningless: budget deficits are
supposed to measure how much the government is borrowing from other
sectors, but in the aftermath of Indonesia’s economic crisis its budget
deficits do not have this (or any other simple) meaning. The reason is
that the cost of the bank bailout has not been acknowledged as an onbudget expense.6 Since the deficit in FY 1999/2000 should have included
a large part of the cost of bailing out the banks, it was really many times
the size of the true deficit in FY 2000.
The officially measured deficit for FY 1999/2000 reported in table 6 is
smaller than predicted, because oil prices and revenues are higher than
expected, and because development spending fell behind schedule. The
latter was due partly to recent political uncertainties and civil unrest,
and partly to donors delaying disbursement of funds in response to the
Bank Bali affair.
Roughly half of the measured deficit in FY 2000 is to be financed by
official foreign borrowing. The budget assumed that Indonesia would
obtain $4.1 billion in new loans from major donors at the CGI meeting, a
target easily surpassed by the $4.7 billion actually pledged. Most of the
remaining half of the measured deficit is to be financed by IBRA’s asset
sales and portfolio income (1.8% of GDP), the rest by privatisation of
state-owned enterprises (0.7% of GDP).
If repayments of arrears owed by the central government to Pertamina
were excluded, expenditure would fall from 13.6% of GDP to just over
10%. For simplicity, revenues and expenditures are conventionally
recorded when they are realised; conceptually, however, there is a good
case for recording them on an accruals basis: the arrears have arisen in
earlier years because Pertamina did not receive the full amounts that it
was entitled to under the fuel subsidy arrangements, which require it to
buy crude oil at the world market price and sell refined products at lower
domestic prices. Payments this year to Pertamina to finance last year’s
fuel subsidy are really an outlay for last year, not this year. If this
convention were adopted, the deficit would be reduced to 3.5% of GDP.
A good case can also be made that IBRA’s portfolio income should be
classified with other profits of state-owned enterprises, and that its asset
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
27
disposals and privatisation sales should be classified as dis-investment
in assets directly controlled by the government. If all three of the above
corrections were made, the measured deficit of 5% of GDP in FY 2000
would become a surplus of 1.5%. In contrast, if measured expenditures
in FY 1999/2000 were adjusted for the omission of the cost of the bank
bailout and for the delays in reimbursing Pertamina for fuel subsidies,
the true deficit would be far in excess of the 6.8% officially recorded.
TRADE LIBERALISATION
Although the trade regime is now much more open than it was in 1995,
when it was already far more open than it had been in the mid 1980s,
Indonesia has fallen behind the targets set in the May 1995 trade
liberalisation package (Nasution 1995: 13–18). A new package of trade
reforms announced on 31 December reduced the rates on 232 tariff lines,
but this still left 2,142 lines above the 1995 target.
Apart from those on automobiles and alcohol, the highest tariff rate
is now 25%, and this rate applies to only 45 tariff lines, mainly in the steel
and chemical sectors. The four-year program agreed to with the IMF
contains a commitment by the government to have a three-tier tariff
structure in place by the end of 2003, with rates of 0, 5 and 10% for all
items except automobiles and alcohol. Most non-tariff barriers have
already been removed and all the remaining ones, except those required
for health and safety reasons, are scheduled to go by the end of 2003. The
taxes on exports of sawn timber are to be replaced by higher royalties
and resource rent taxes. Indonesia is obliged by the barriers imposed on
it by the industrialised countries to set quotas on exports of garments.
All its other export licensing requirements—the main ones are now coffee,
logs and wood products—are to be removed by the end of 2000.
The LOI makes a commitment to remove all import duty exemptions.
This proposal is quite controversial, since such exemptions currently
apply to about half of imports and are used mainly for producing exports
and by investors. The LOI sides with those who argue that exemptions
should be avoided and tax bases made as broad as possible, so as to
allow rates to be set low. The opposite school of thought is that it is
important for non-oil exporters to have access to inputs at world prices,
and that the inevitable delays in obtaining duty drawbacks therefore make
exemptions highly desirable.
Trade in rice is now open to all general importers and exporters, but
the government has introduced a tariff of Rp 430/kg on rice to cushion
farmers from the effects of falling world market prices and the
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George Fane
strengthening of the rupiah. This tariff is supposed to be temporary and
will end in August 2000, unless it is explicitly renewed at that time. Exports
of crude palm oil are still taxed, but the tax rate was reduced from 30% of
the government’s reference price to 10% in July 1999. The effective rate is
lower because world prices are now below the reference price.
PRIVATISATION
The government continues to make only very slow progress in privatising
state-owned enterprises (SOEs). In FY 1999/2000, the initial budget
projection was for privatisation revenue of Rp 13.0 trillion. This was
reduced in the LOI to Rp 8.6 trillion and, with the financial year almost
over, the total amount realised was only Rp 6.2 trillion. This was made
up by sales of blocks of shares in only four enterprises: Telkom (Rp 2.8
trillion), two container terminals (Rp 2.8 trillion) and Indofood (Rp 0.5
trillion). Planned sales to strategic investors of shares in plantation
companies and the Soekarno–Hatta airport authority fell through because,
in each case, the prospective investor and the government could not agree
on the price.
The economic case for privatisation is that managers answerable to
private shareholders have a more direct incentive to eliminate crosssubsidies and maximise profits than do managers answerable to a
minister. However, privatisation presents a dilemma to governments:
selling assets yields an immediate cash flow far in excess of their earnings
in a single year, but is politically unpopular, in part because many people
feel that enterprises that are national icons should not be sold to private
entrepreneurs, and in part because full privatisation puts an end to hidden
cross-subsidies to employees, favoured customers and suppliers.
In the past, the government has resolved the privatisation dilemma
by selling blocks of shares in SOEs, while still retaining control. For
example, it never gave up control of the cement company, PT Semen
Gresik, despite making an initial public offering (IPO) of some of its shares
in 1991 and then selling a further 14% of its shares to Cemex of Mexico in
1998. Similarly, it has retained about two-thirds of the shares in Telkom
and Indosat, following IPOs in 1995 and the subsequent sale of a further
9.8% of its shares in Telkom in 1999. Although the need to finance the
bailout of the financial sector has made the government more desperate
for revenue than ever before, it has deviated from this strategy of selling
shares while retaining a controlling interest in only one case: its sale in
1999 of 51% of the shares in the Jakarta International Container Terminal
at Tanjung Priok to Grospeak (a subsidiary of Hutchinson Whampoa of
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
29
Hong Kong) for $243 million. The government did sell the whole of its
former shareholding in Indofood, but this was only ever a minority
shareholding. The sale of the Surabaya container terminal to Mermaid (a
subsidiary of P&O Australia) raised $174 million. In this case, the
government retained 51% of the shares.
Revenue from privatisation in FY 2000 is projected to be at least
Rp 5.9 trillion, which is about 13% of the measured budget deficit. The
State Minister for Investment and State Enterprises has suggested that
the actual amount raised may be as high as Rp 8 trillion. These amounts
refer to sales of shares in traditionally state-owned firms. Thus the FY
2000 projection excludes the IPO in Bank Central Asia, which is counted
as part of IBRA’s contribution to the financing of the budget deficit.7
The government has not yet announced exactly what it will sell in FY
2000. Although the LOI mentions Telkom and Indosat as strong possible
candidates for further privatisation, the government plans to deregulate
the telecommunications sector before fully privatising it, and deregulation
is not expected to be completed before 2004. However, this does not
preclude the possibility of further sales of blocks of shares in 2000:
following IPOs in 1995, and the 1999 sale of a further 9.8% of its remaining
Telkom shares, the government still owns roughly two-thirds of both
companies.8 Other privatisation possibilities in 2000 are: Sukarno–Hatta
International Airport in Jakarta; Garuda Indonesia; palm oil plantations
in North Sumatra; a fertiliser company in East Kalimantan; a coal mining
company in South Sumatra (PT Bukit Asam); and two pharmaceutical
companies.
THE TEXMACO AFFAIR
In late November, the State Minister for Investment and State Enterprises,
Laksamana Sukardi, revealed that President Soeharto had been directly
involved in helping the textile and engineering conglomerate Texmaco,
run by Mr Marimutu Sinivasan, to secure loans from Bank Indonesia
that were channelled through Bank Negara Indonesia (BNI) and other
state banks answerable to Sukardi’s ministry. The total loan package,
which was negotiated between November 1997 and February 1998, was
for about $1 billion, in the form of $754 million in foreign exchange and
Rp 1.9 trillion (anything from $180 million at the February 1998 exchange
rate to $500 million at the November 1997 rate) in domestic currency.
Had the loan been a normal commercial one, it would have breached
the prudential regulation that bars a bank from making a loan to any
single borrower for more than 20% of its capital. Instead, it was made
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
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George Fane
under a special BI facility for export finance, to which this prudential
limit does not apply. In the event, Texmaco apparently used the loan to
repay short-term foreign currency debts. From Texmaco’s viewpoint, the
loan from the export finance facility also had the advantage of being at a
heavily subsidised interest rate.
At least initially, the reaction of the DPR seems to have been that the
Texmaco group is so important a generator of jobs and exports that the
affair must not be allowed to disrupt its operations. The Chairman of the
Indonesian Textile Association said that ‘if you want to kill a rat, don’t
burn down the house to do it’ (Business Indonesia Perspective, 1/1/2000:
21). One might add ‘so find a better way’. The Attorney General is still
investigating possible illegalities.
POVERTY
Estimates of the Proportion of the Population in Poverty
The debate over the extent to which poverty increased as a result of the
crisis was comprehensively surveyed by Booth (1999). As Booth’s table 6
showed, the special ‘mini’ (‘Susenas-type’) survey of household
expenditure carried out by the Central Statistics Agency (BPS) in
December 1998 indicated that the poverty rate rose from 11.3% in February
1996 to 16.7% in December 1998.9 These estimates refer to the ‘headcount’
rate of poverty, defined as the percentage of the population with
consumption expenditures below the official BPS poverty line.
In February 1999, a full household expenditure survey was
undertaken and the results have now been released. Suryahadi, Sumarno,
Suharso and Pritchett (1999)—henceforth SSSP—analyse these data and
adjust existing studies so as to put them all on a comparable basis and
estimate how poverty changed during the crisis. The main features of
their results are summarised in table 7. Starting from the rate of 11.3%,
which was officially estimated by BPS from a full household expenditure
survey in February 1996, poverty fell to 7.2% in August–October 1997,
just before it began to be affected by the crisis (SSSP 1999: table 6, last
column).10 It then rose sharply to just over 20% in August 1998 and was
still just over 20% in February 1999. The exact rate implied by the February
1999 survey is 20.3%. If this new estimate is correct, it implies that the
poverty rate in February 1999 was similar to the rate observed in the mid
1980s, whereas the December 1998 mini household expenditure survey
had implied a regression only to late 1980s rates.
Another mini household expenditure survey was undertaken in
August 1999. The results have not yet been officially released, but they
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
31
TABLE 7 Estimates of Poverty Rate on a Consistent BPS Basis, 1996–99
Survey Date
Poverty
Rate
%
Feb-96
Aug-97
Aug-98
Sep–Dec 98
Dec-98
Dec-98
Feb-99
11.3
7.2
20.7
20.1
15.3
16.7
20.3
Survey
BPS/Susenas
National Accountsa
‘100 villages’ adjustedb
IFLS/Rand adjustedc
‘100 villages’ adjustedd
BPS/mini Susenas
BPS/Susenas
a
There was no survey in August 1997. The estimate was derived by Suryahadi et
al. (1999), who adjusted the BPS estimate for February 1996 using national accounts
data on the changes in consumption between February 1996 and August 1997.
b
Adjustment by SSSP of estimate by the Social Monitoring and Early Response
Unit (SMERU); reported rate was 21.41%.
c
Adjustment by SSSP of estimate from a special round of the Indonesian Family
Life Survey (IFLS) conducted by the Rand Corporation; reported rate was 19.9%.
d
Adjustment by SSSP of estimate by SMERU; reported rate was 16.79%.
Source: Suryahadi et al. (1999) (SSSP), in which see further details of the surveys
cited above, and the methods by which the non-BPS surveys were adjusted to a
consistent BPS basis.
apparently indicate a much lower poverty rate even than the 16.7%
estimated for December 1998. At least some of the surveys must contain
measurement errors, because they tell an implausible story in which the
poverty rate took a one-year roller coaster ride from somewhere between
20 and 21% in mid 1998 down to 16.7% in December, climbed to 20.3% in
February 1999, and then by August 1999 had apparently swooped back
down to below the rate in December 1998.11
One possible interpretation of these estimates is the following. Because
the price of rice (which has a much higher weight in the basket that defines
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
32
George Fane
the poverty line than in the CPI) has been falling both in absolute terms
and relative to the CPI, poverty really did fall between mid 1998 and mid
1999. But the roller coaster ride surely exaggerates the real changes.
Although the full household expenditure survey (February 1999) and
the mini surveys (December 1998 and August 1999) used identical
questionnaires, they were undertaken by different groups within BPS,
which may have treated in different ways some of the inevitably arbitrary
decisions that must be made in such surveys.
Spending on Programs to Combat Poverty
The new budget and LOI distinguish three broad groups of policies for
helping poor people: the social safety net (SSN), poverty alleviation and
targeted fuel subsidies.12 The ‘targeted fuel subsidies’ in the welfare
program are expected to cost Rp 1.3 trillion in FY 2000, and represent
compensation to poor families for higher domestic fuel prices. The main
element is the increased price of kerosene. No decision has yet been made
on how to distribute these subsidies.
The difference between the safety net and poverty alleviation
programs is partly real and partly a matter of labelling. The SSN programs
were created hurriedly in response to the crisis and are now mostly being
wound back, whereas the ‘poverty alleviation’ programs are being
expanded. For FY 1999/2000, one can say which programs were in the
SSN category (budgeted to cost Rp 5.6 trillion in that year) and which
were in the poverty alleviation category. Table 8 shows the distribution
of the budgetary estimates between the two categories in FY 2000 as it
appears in the LOI. However, this division has little meaning, because
decisions on which programs to expand and which to eliminate have not
yet been finalised. The poverty alleviation program, for which Rp 1.7
trillion was budgeted in FY 1999/2000, is the much amended descendant
of the program for backward villages (IDT: Inpres Desa Tertinggal), first
introduced in 1994. In FY 2000, this program will be retained and an
analogous program for urban areas will be added. But the fate of the
individual elements that were in the SSN in FY 1999/2000 has not yet
been decided. Some, such as the programs for spending on scholarships
and schools, may well be retained, but the majority will be phased out.
The programs that are judged to have been most successful and are
retained on a long-term basis will be reclassified from ‘SSN’ to ‘poverty
alleviation’.
Table 8 shows that although the social safety net is being phased out,
total spending on all the poverty programs is to be expanded substan-
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
33
TABLE 8 Expenditure on Social Safety Net and Poverty Alleviation, 1999–2000
FY 1999/
2000
(12 months)
(Rp trillion)
FY 2000
(9 months)
(Rp trillion)
FY 2000
Growth in
x 12/9
Nominal
(12 months) Expenditure
(Rp trillion)
(%)
SSN + poverty alleviation
Social safety net
Poverty alleviation
7.3
5.6
1.7
7.2
2.7
4.5
9.6
3.6
6.0
32
–36
253
Targeted fuel subsidies
0.0
1.3
1.7
n.a.
Total
7.3
8.5
11.3
55
Sources: LOI, 20 January 2000; World Bank.
tially: when the FY 2000 budget projections are scaled up to a 12 months
basis, the increase will be 55% if the targeted fuel subsidies are included,
and 32% if they are excluded.
There are two other kinds of welfare programs in addition to the
‘mainstream’ ones included in table 8. First, there are programs run by
NGOs and funded directly by donations from foreign governments. These
are small compared with the mainstream programs, but are believed to
be growing rapidly. The new LOI expresses the government’s approval
of this trend. Second, there are numerous initiatives by provincial
governments to alleviate poverty using the growing share of GDP that
the central government is allocating directly to them.
The Social Safety Net and Poverty Alleviation Programs
There are currently four elements in the social safety net: a subsidised
food program; a program to provide block grants to schools in poor
communities and scholarships to help children from poor families to stay
in school; a program to subsidise health clinics and medicines in poor
areas; and various job creation schemes.
Appraisals of the social safety net programs by SMERU suggest that
education subsidies have been the most effectively targeted.13 The funds
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
34
George Fane
for scholarships have been handed out to village community groups who
then have the responsibility of selecting the most needy and deserving
children.
The rice subsidy program has not escaped allegations of corruption,14
but is judged by SMERU to have worked quite well, given that the
administrative resources needed to issue and stamp ration coupons were
not available. Data collected by the National Family Planning Board were
used to identify 17 million poor households, using criteria such as whether
they live in houses with earth floors and whether they are too poor to
own a motorcycle. These data determine the total entitlements of all the
poor people in particular villages or urban areas. It appears that trucks
are then sent to these locations with roughly appropriate amounts of
cheap rice, which people then queue to buy. Self-selection probably
ensures that the poor get most of it.
The subsidised health program faces the inevitable problem that in
rural areas many families are located far from the nearest health clinics
and find it very difficult to make use of even heavily subsidised facilities
and medicines. The least successful schemes have been the job creation
programs. The contractors who successfully tender for the funds to
operate these programs have little incentive to try to allocate the jobs to
the most needy, and the infrastructure projects that have been
commissioned sometimes appear to have little value.
In 1999/2000 there was one main poverty alleviation program: the
kecamatan (subdistrict) development program (KDP). This is descended
from the IDT program to help poor villages, but differs from it in several
ways: funds under the IDT program went directly to villages identified
by the government. Under the KDP, funds go to each kecamatan, and
villages can compete by submitting proposals. The villages whose
proposals are selected then have considerable control over the details of
how their grants are spent. The rules of the competition favour smallscale labour-intensive projects that will provide facilities for the use of
local communities; examples include repairing roads, renovating or
extending schools, clinics and other public buildings, or improving
facilities in open air markets.
Although the KDP is not exclusively rural, it has a strong rural bias.
Because the recent crisis has affected urban areas much more severely
than rural areas, a new program is being introduced this year that will
resemble the KDP, but will be focused on urban areas.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
35
BANKRUPTCY
Progress und
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of Recent Developments
George Fane
To cite this article: George Fane (2000) Survey of Recent Developments, Bulletin of Indonesian
Economic Studies, 36:1, 13-45, DOI: 10.1080/00074910012331337773
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Bulletin of Indonesian Economic Studies
Vol 36 No 1, April 2000, pp. 13–45
SURVEY OF RECENT DEVELOPMENTS
George Fane
Australian National University
SUMMARY
GDP grew slowly but steadily during 1999, thus confirming that Indonesia
is at last recovering, although more slowly than the other countries most
affected by the Asian crisis. Growth in 2000 is officially forecast at 3–4%.
With the effects of discretionary fiscal policies included, inflation during
2000 is expected to be in the range 5–8%, compared with 2% during 1999.
Indonesia’s sluggish output growth is probably due mainly to delays
in restructuring the banking sector and resolving corporate debts. About
80% of the Rp 639 trillion of government bonds needed to recapitalise
the banks has now been issued. However, with capital–asset ratios of
only 4%, and assets dominated by illiquid bond holdings, the banks
appear fragile.
The meeting of the Consultative Group on Indonesia promised new
official loans of $4.7 billion. In addition, Indonesia signed a new agreement
with the IMF that raises the total amount of its promised loan from $11
billion to $16 billion.
The policies to be followed under the new IMF agreement continue
to emphasise the avoidance of money creation as a way of financing the
budget deficits that will result from the interest payments on the
government’s greatly increased debts. The government has unveiled new
initiatives to deal with judicial corruption, and hopes that they will
improve the workings of the bankruptcy law and hence the restructuring
of corporate debt.
More important than any economic event was the civilian government’s assertion of its dominance over the military, at least for the time
being. Following the finding by the National Commission on Human
Rights that General Wiranto should be held accountable for the ‘planned
and systematic violence’ in East Timor, the President forced him out of
the cabinet.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
14
George Fane
MACROECONOMIC DEVELOPMENTS
The massive fall in GDP—which was 13.7% lower in 1998 than in 1997—
has been arrested, and a sluggish recovery has now been sustained since
the fourth quarter (Q4) of 1998. However, because of the collapse of
exports, fixed investment and stock accumulation during 1998, GDP in
Q1 of 1999 was 8% lower than a year earlier, and GDP for the whole of
1999 was only 0.2% above its 1998 level.1 Bank Indonesia is forecasting
that in 2000 it will be 3–4% higher than in 1999, and the government is
hoping to achieve a medium-term annual GDP growth rate of 5–6%.
Table 1 shows that household and government consumption never
fell as sharply as exports and investment; they have now been growing
since Q2 of 1998. In contrast, exports, fixed investment and the level of
stocks continued to fall until the middle of 1999, but began to grow in
Q3.2 In this quarter, total exports and fixed investment were only 59%
and 70%, respectively, of their level in Q1 of 1998. An important element
in the plunge in exports was the difficulty experienced by Indonesian
companies in getting trade credit. The collapse of investment was part
cause and part consequence of the fact that Indonesian banks have not
made major new loans since the middle of 1998, and Indonesian
companies have not been able to get new offshore loans since the start of
the crisis.3 The main factor in the recovery of GDP has been the switching
of domestic spending from imported to domestic goods. The fact that
imports in Q3 of 1999 were only 46% of their level in Q1 of 1998 means
that consumption and investment spending on domestic goods fell much
less than total consumption and investment (table 1).
The consumer price index, which had risen by 78% between December
1997 and December 1998, rose by only 2% between December 1998 and
December 1999. This overall CPI change was the combination of falling
prices of tradable goods, due to the strengthening rupiah, and rising prices
of non-tradables. Inflation is expected to rise this year: Bank Indonesia is
forecasting that the increase in the CPI between December 1999 and
December 2000 will be 3–5% if the effects of increased VAT, fuel price
rises and the tariff on rice are excluded. These effects are expected to add
2–3 percentage points during the year, thus bringing the total increase to
5–8%.
The sharp fall in inflation in 1999 and the expected increase in 2000
are of course closely linked to the movement of the exchange rate. In
1999, the price of foreign exchange fell by 12%, from about Rp 8,025/$ in
December 1998 to about Rp 7,100/$ in December 1999. With the exception
of a brief period in mid 1999 when the rate fell below Rp 7,000/$, this
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
15
TABLE 1 National Accounts, 1998–99
(1993 Rp trillion)
1998
Q1
1998
Q2
Consumption
Household
Government
69.2
7.1
68.5
6.6
Gross fixed capital
formation
25.4
Change in stock
1998
Q4
1999
Q1
1999
Q2
63.8
6.2
66.4
6.9
67.1
6.8
67.3
7.3
67.9
7.2
22.0
22.9
19.7
18.0
17.3
17.7
–1.0
–5.9
–2.5
–1.7
–2.4
–2.2
3.7
Exports of goods
& services
39.3
35.3
38.9
21.2
22.0
21.6
23.4
Imports of goods
& services
39.0
36.1
35.2
22.1
18.5
8.0
17.8
101.1
90.4
94.1
90.4
93.0
93.2
94.6
–8.0
3.1
0.5
GDP
% GDP growth
(from 1 year before)
1998
Q3
1999
Q3
Source: Bank Indonesia (BI).
was the strongest rupiah exchange rate since early 1998. During January
2000, however, the rupiah weakened to around Rp 7,500/$, and the
budget assumption that the average exchange rate for the year would be
Rp 7,000/$ began to look optimistic. This weakening was probably due
mainly to the widespread violence and civil unrest, and the rumours of a
military coup.
Table 2 and figures 1 and 2 document Indonesia’s progress relative to
the four other countries most seriously affected by the Asian crisis.
Indonesia had by far the largest GDP fall in 1998, and it has recovered
FIGURE 1 Exchange Rates of Asian Crisis Countries, 1997–99
(units of local currency per $; Jan-97 = 100)
700
600
Indonesia
500
400
300
Thailand
Malaysia
200
100
Philippines
Source: CEIC Data Hong Kong.
TABLE 2 GDP Growth in Asian Crisis Countries, 1996–99
(% change from one year before)
Indonesia
1996
1997
1998
1999
1999 Q1
1999 Q2
1999 Q3
1999 Q4
Korea
Malaysia Philippines Thailand
7.8
4.7
–13.2
0.2
6.8
5.0
–5.8
7.8
10.0
7.5
–7.5
5.1
7.2
5.2
0.1
0.7
5.9
–1.8
–10.4
3.9
–8.0
3.1
0.5
6.2
4.5
9.9
12.3
4.8
–1.3
4.1
8.1
9.3
2.1
3.8
3.3
–5.6
0.9
3.3
7.7
3.8
Source: As for figure 1.
Dec-99
Sep-99
Mar-99
Dec-98
Sep-98
Jun-98
Mar-98
Dec-97
Sep-97
Jun-97
Jun-99
Korea
0
Mar-97
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
George Fane
16
17
FIGURE 2 3-Month Interest Rates, Asian Crisis Countries, 1997–99
(% per annum)
60
Indonesia
45
Korea
Thailand
30
Philippines
15
Malaysia
Dec-99
Sep-99
Jun-99
Mar-99
Dec-98
Sep-98
Jun-98
Mar-98
Dec-97
Sep-97
Jun-97
0
Mar-97
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
Malaysia: Interbank rate, weighted average, 3 months.
Indonesia: Bank Indonesia Certificates (SBI) rate, 90 days (auction result).
Korea: Yield on certificates of deposit, monthly average, 91 days.
Philippines: Interbank rate, Central Bank of the Philippines, 3 months.
Thailand: Weighted average interbank interest rate (Bangkok Bank, Siam Bank,
Standard Chartered Bank), 3 months.
Source: As for figure 1.
the most slowly in 1999. Figure 1 shows that the rupiah has appreciated
relative to the other four currencies since mid 1998; it initially depreciated
by much more, but the recent appreciation has not been nearly large
enough to offset the original depreciation relative to the others. Figure 2
tells a similar story for interest rates: 3-month interest rates rose by much
more in Indonesia than in any of the other countries. Since late 1998,
interest rates have come down by more in Indonesia than elsewhere, but
are still higher than in any of the other crisis countries.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
18
George Fane
Table 3 shows that whereas in 1996 there was an official capital outflow
of $0.5 billion, the total official net inflow in the three years 1997–99 was
$19.4 billion. Capital flows were first substantially affected by the crisis
in the last quarter of 1997, when there was an official net inflow of $3.2
billion and a private net outflow of $8.6 billion. If ‘the crisis’ is defined as
the period from Q4 of 1997 to Q4 of 1999 inclusive, then adding the flows
in Q4 of 1997 to those shown in table 3 for 1998 and 1999 implies that the
total official net inflow during the crisis was $20 billion and the total net
private outflow was $32 billion. While the official inflows during the
course of the crisis have amounted to only 45% of the $43 billion label
used to describe the original November 1997 IMF package, they have
been large enough to offset over 60% of the private net outflows in this
period. The budget papers predict that the total capital account will be
almost in balance in 2000.
DEMOCRACY, ECONOMIC POLICY MAKING
AND THE RULE OF LAW
Indonesia’s current political situation and its social and legal problems
are vitally important in their own right, but are also crucial to economic
recovery because of their impact on investor confidence. For all the killings
and destruction that accompanied its withdrawal from East Timor,
Indonesia has at least shed the moral and financial burden of its former
province and is stronger for having done so. It is also immensely
strengthened by having a democratic government whose legitimacy is
generally accepted. However, before the economy can recover fully,
Indonesia must also restore civil and political tranquillity and strengthen
the rule of law. Most of all, this means ending the ethnic and religious
violence that continues to smoulder in several regions and that flared up
during the last few months in Maluku, Lombok and Aceh. It also means
resolving the secessionist demands in Aceh (those in Irian Jaya are much
less serious), consolidating Indonesia’s remarkable progress from military
dictatorship to democracy, and greatly strengthening the legal system.
Economic Policy Making
An unintended side effect of the new independence of Bank Indonesia
has been to fragment the group of ministers responsible for economic
policy (McLeod 1999: 148). As a result of BI’s independence, its Governor, Sjahril Sabirin, is no longer in the cabinet, and in consequence of the
failings exposed by a very critical audit of BI, he has lost the confidence
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
19
TABLE 3 Balance of Payments, 1996–2000
($ billion)
1 Exports of goods
Non-oil & gas
Oil & gas
2 Imports of goods
Non-oil & gas
Oil & gas
3 Trade balance (1 – 2)
Non-oil & gas
Oil & gas
4 Services
Non-oil & gas
Oil & gas
5 Current account (3 + 4)
Non-oil & gas
Oil & gas
6 Official capital inflow
7 Private capital inflow
8 Capital inflow (6 + 7)
9 Errors & omissions
10 Balance of payments
surplus (5 + 8 + 9)
1996
1997
1998
1999
2000
(prelim.) (prelim.)
50.2
38.0
12.2
44.2
39.9
4.4
5.9
–1.8
7.8
–13.7
–10.2
–3.5
–7.8
–12.1
4.3
–0.5
11.5
11.0
1.3
56.3
44.6
11.7
46.2
41.4
4.8
10.1
3.1
6.9
–15.1
–10.5
–4.6
–5.0
–7.4
2.4
2.9
–0.3
2.5
–1.7
50.4
43.0
7.4
31.9
29.1
2.9
18.4
13.9
4.6
–14.3
–11.4
–2.9
4.1
–2.4
1.7
10.0
–13.8
–3.9
2.1
51.6
41.4
10.2
31.3
27.4
3.9
20.3
14.0
6.3
–15.1
–12.0
–3.1
5.2
–2.0
3.2
6.5
–9.8
–3.2
1.4
55.1
44.2
10.9
35.7
31.4
4.3
19.4
12.8
6.6
–15.8
–12.5
–3.2
3.7
0.3
3.4
5.8
–6.4
–0.6
0.0
4.5
–4.1
–2.3
–3.4
3.0
Source: BI.
of the President. The audit, prepared by KPMG and the local firm
Siddharta and Harsono (JP, 3/1/2000), found that BI had violated its
own lending procedures in the disbursement of the last-resort loans it
extended to the banks in 1997–99. A separate criticism made by the auditors is that BI did not have proper internal controls. For example, it had
no proper inventory of its fixed assets and had lost its certificates of ownership of the gold that it has deposited in various overseas custodial banks.
President Abdurrahman Wahid (Gus Dur) called for the parliament (DPR)
to dismiss Sjahril. However, the Governor indicated his determination
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
20
George Fane
to continue in his position, and under the new Bank Indonesia Act he
can only be forced out of office on medical grounds or for the commission of a crime.
The fragmented state of economic policy making was deplored in an
article by the Senior Deputy Governor of BI, Professor Anwar Nasution,
who has been tipped as a likely successor to Sjahril (The Business Times,
26/1/2000). One of the problems of the economics ministers is that, in
common with the rest of the National Unity Cabinet (Mackie 1999), they
represent a wide spectrum of political parties. The Finance Minister,
Bambang Sudibyo, is a member of Amien Rais’s National Mandate Party
(PAN), the Coordinating Minister, Kwik Kian Gie, and the State Minister
of Investment and State Enterprises, Laksamana Sukardi, belong to
Megawati’s PDI-P, while Yusuf Kalla, the Minister of Trade and Industry,
is a Golkar member.
In order to avoid being dominated by the economics ministries, the
President has set up his own board of economic advisers, the DEN (Dewan
Ekonomi Nasional), which comprises a number of prominent economists
and businessmen and is headed by Emil Salim, one of the most eminent
of the group of technocrats that pressed for deregulation during the
Soeharto years. Perhaps in part because of a lack of interest in economic
problems, Gus Dur has not used the DEN to flesh out his own preferred
economic policies, but has rather suggested that its members take their
ideas to the various economics ministers. The latter are reported to be
understandably unenthusiastic about taking advice from the new
interlopers. The President’s willingness to tolerate divisions among his
economics ministers and advisers and to delegate concern with economic
policy to others may well reflect the fact that these matters are mostly of
secondary importance now that the outlines and much of the detail of
economic policy for the next four years have been laid down in the
agreement with the IMF.
The New IMF Program
Because it was not satisfied that former President Habibie’s government
had responded satisfactorily to the PricewaterhouseCoopers (PwC)
investigation into the Bank Bali scandal, and because of the bloodshed
that followed East Timor’s vote for secession, the IMF suspended its
lending program in September 1999.4
The new government worked quickly to mend its bridges with
Washington, and began to negotiate an extension of the IMF program. In
January 2000, US Treasury Secretary Lawrence Summers visited Jakarta
and held out the promise of US support for new loans of $10 billion from
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
21
the international community, on condition that Indonesia pressed ahead
with economic reforms. At the same time Richard Holbrooke, US
Ambassador to the UN, explicitly warned Indonesia’s generals that the
loans were also conditional on their not staging a coup. The government
signed a new letter of intent (LOI) to the IMF on 20 January, in which it
noted that a strong set of measures was being taken to ‘credibly advance’
its investigation of the Bank Bali affair. These were: to release the full
version of the PwC report; to name six suspects, among whom were a
senior official of Bank Indonesia, the former deputy chairman of IBRA
(the Indonesian Bank Restructuring Agency), the former head of Bank
Bali and Mr Tanri Abeng, a former minister; and to instruct the Attorney
General to investigate the case further.
The new LOI is longer and more detailed than its predecessors, and
much of the new detail involves defining procedures to audit state
agencies and set up committees to investigate cases of suspected
corruption and prosecute those responsible. There seems little reason to
doubt that the increased emphasis on fighting corruption comes at least
as much from the new government as from the IMF.
The budget begins the process of applying the economic policies in
the LOI, which preserve the principles of earlier LOIs. BI is committed to
keeping annual inflation to 5% and will do this by targeting base money;
the poverty alleviation programs are being overhauled and expanded in
aggregate; bank restructuring should be completed this year; the
government plans to reduce its debts by privatising state-owned
enterprises and selling off assets acquired as a result of the bank bailout;
attempts are to be made to force judges to apply the bankruptcy law
correctly; and teeth are being put into the Jakarta Initiative, which was
originally created in 1998 as a purely voluntary mediation system for
restructuring corporate debt.
In early February 2000, the loans promised by the US Treasury
Secretary were officially approved. The Consultative Group on Indonesia
(CGI)—the group of official lenders dominated by the World Bank, the
Asian Development Bank (ADB) and Japan—met in Jakarta on 1 and 2
February and agreed to lend Indonesia $4.7 billion.5 Then on 4 February,
the IMF formally agreed to add $5 billion to the $11 billion that it had
previously agreed to lend, and immediately disbursed $349 million.
President Abdurrahman has been criticised for spending too much
time out of the country and for neglecting economic issues. However,
Indonesia has little alternative but to follow the very detailed economic
policies laid down in the LOI to the IMF. What is important is to press
ahead as quickly as possible with the implementation of this program,
and on this the President has acted decisively: because IBRA had been
1999/2000
(12 months)
(Rp trillion)
2000
(9 months)
(Rp trillion)
1999/2000
2000
(% of GDP)
(% of GDP)
(1)
(2)
(3)
(4)
Increase as
% of GDP
% Growth
of Share
in GDP
(5)
(6)
(4) – (3)
(5) as % of (3)
Total revenue
Tax revenue
Domestic taxes
Income tax
Non-oil & gas
Oil & gas
Value added tax
Land & building tax
Excises
Other taxes
Taxes on international trade
Import duties
Export tax
Non-tax revenue
Natural resources
Oil & gas
Other natural resources
Profit transfers from SOEs
Other non-tax receipts
129.2
99.5
93.9
45.4
40.6
4.7
34.6
3.2
10.2
0.6
5.5
3.0
2.6
29.7
8.1
16.2
1.9
4.0
7.6
37.7
97.8
91.9
53.0
44.2
8.8
26.3
2.9
9.3
0.4
5.9
5.0
0.9
39.9
30.3
28.6
1.7
4.0
5.6
10.6
8.1
7.7
3.7
3.3
0.4
2.8
0.3
0.8
0.0
0.5
0.2
0.2
2.4
1.5
1.3
0.2
0.3
0.6
15.1
10.7
10.1
5.8
4.9
1.0
2.9
0.3
1.0
0.0
0.6
0.5
0.1
4.4
3.3
3.1
0.2
0.4
0.6
4.6
2.6
2.4
2.1
1.5
0.6
0.1
0.1
0.2
0.0
0.2
0.3
–0.1
2.0
1.9
1.8
0.0
0.1
0.0
Memo item: GDP (Rp trillion)
1,224.2
910.4
1,224.2
910.4
–25.6
43.3
32.2
31.5
57.1
46.3
150.4
2.1
20.1
22.7
3.0
43.0
126.8
–52.2
80.6
125.0
137.3
19.9
34.5
–1.0
George Fane
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
22
TABLE 4 Draft Budget Revenues
for 1999/2000 and 2000
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
23
making only very slow progress with bank restructuring and asset sales,
he replaced its head and some of its most senior staff members.
Confined to Barracks for Now
Indonesia’s National Commission on Human Rights, which had been
requested by the government to investigate alleged atrocities in East
Timor, presented a report to the Attorney General on 31 January,
documenting some of the ‘planned and systematic violence’ that had
followed the ballot. The report recommended that ‘General Wiranto, as
TNI [Indonesian military] chief, should be held accountable’ and that
the Attorney General investigate Wiranto and 31 others, among whom
are five other generals. In mid February, Wiranto was suspended from
cabinet, and his position as Coordinating Minister for Political Affairs
and Security was assumed on an acting basis by Lt General (ret.) Surjadi
Soedirdja, the Minister of Home Affairs. Despite the earlier rumours of a
coup, the military seemingly accepted Wiranto’s dismissal, and the
prospect that he and other officers may be brought to trial for their part
in the events in East Timor.
At least for the time being, the President appears to have established
the dominance of a democratically elected civilian government over the
armed forces. This achievement is fragile, but it is something that seemed
scarcely possible even two years ago. Gus Dur’s astute judgment has
been one important factor in bringing it about; others include the popular
fury that toppled Soeharto, the increased dependence of Indonesia on
the international community, the disgrace that the armed forces brought
on themselves in East Timor and the fact that the National Commission
on Human Rights did not flinch from its duty.
THE BUDGET
Projected Revenues and Expenditures in 2000
The President and Vice President unveiled the new budget on 27 January
(tables 4, 5 and 6). The new financial year, beginning on 1 April, will last
only nine months, so as to align the financial and calendar years with
effect from 2001.
The main items in the new budget are the reform of tax administration
so as to reduce avoidance and raise tax revenue as a share of GDP;
increases in public sector wages as part of the fight against corruption;
reduction of general subsidies to domestic fuel users; and increases in
the total revenue allocated to poverty alleviation programs, accompanied
1999/20
(12 months)
(Rp trillion)
2000
(9 months)
(Rp trillion)
1999/2000
2000
(% of GDP)
(% of GDP)
(1)
2)
(3)
(4)
Expenditure, including interest
Expenditure, excluding interest
Increase as
% of GDP
% Growth
of Share
in GDP
(5)
(6)
(4) – (3)
(5) as % of (3)
212.7
158.2
183.1
124.1
17.4
12.9
20.1
13.6
2.7
0.7
15.7
5.5
Current non-interest expenditures
Personnel
Material
Regional
Subsidies
Fuel subsidies
Non-fuel subsidies
Other routine expenditures
96.4
33.6
11.0
19.5
28.0
10.0
18.0
4.3
84.7
29.4
8.9
17.1
26.7
18.3
8.4
2.6
7.9
2.7
0.9
1.6
2.3
0.8
1.5
0.4
9.3
3.2
1.0
1.9
2.9
2.0
0.9
0.3
1.4
0.5
0.1
0.3
0.6
1.2
–0.6
–0.1
18.1
17.6
8.9
18.0
28.0
146.4
–37.6
–17.9
Development expenditures & net lending
Rupiah financing
Transfers to regions
Managed by central government
Project financing
61.7
31.7
16.1
15.6
30.0
39.4
23.4
15.1
8.2
16.0
5.0
2.6
1.3
1.3
2.5
4.3
2.6
1.7
0.9
1.8
–0.7
0.0
0.3
–0.4
–0.7
–14.2
–1.1
26.2
–29.3
–28.2
Interest payments
Interest on domestic debt
Interest on foreign debt
54.5
34.0
20.5
59.0
42.4
16.6
4.5
2.8
1.7
6.5
4.7
1.8
2.0
1.9
0.1
45.5
67.5
8.9
1,224.2
910.4
1,224.2
910.4
–25.6
Memo item: GDP (Rp trillion)
George Fane
im Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUA
24
TABLE 5 Draft Budget Expenditures
for 1999/2000 and 2000
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:03 19
Survey of Recent Developments
25
TABLE 6 Draft Budget Financing
for 1999/2000 and 2000
1999/2000
(12 months)
(Rp trillion)
(1)
2000
1999/
2000
Increase
(9 months)
2000
as %
(Rp trillion) (% of GDP) (% of GDP) of GDP
(2)
(3)
(4)
(5)
(4) – (3)
Primary surplus
(before interest)
–29.0
Interest payments
54.5
Overall surplus
–83.5
Financing
83.5
Domestic financing
30.0
Privatisation proceeds 13.0
Asset recovery
17.0
Foreign financing
53.5
Gross drawing
77.4
Program loans
47.4
Project loans
30.0
Amortisation
–23.9
13.6
59.0
–45.4
45.4
22.2
5.9
16.3
23.2
31.8
15.8
16.0
–8.6
–2.4
4.5
–6.8
6.8
2.5
1.1
1.4
4.4
6.3
3.9
2.5
–2.0
1.5
6.5
–5.0
5.0
2.4
0.7
1.8
2.5
3.5
1.7
1.8
–0.9
Memo item:
GDP (Rp trillion)
910.4
1,224.2
910.4
1,224.2
3.9
2.0
1.8
–1.8
0.0
–0.4
0.4
–1.8
–2.8
–2.1
–0.7
1.0
by the phasing out of some emergency programs created to deal with the
crisis-related increase in poverty. The regions are gradually getting more
fiscal autonomy, but the main changes (Booth 1999: 27–32) will not occur
until 2001.
As a result of the growth of debt, the interest cost of the government
bonds already issued to banks is expected to be Rp 42.4 trillion in the
nine months of FY 2000, which is much higher than the Rp 34 trillion in
the full 12 months of the 1999/2000 budget. The government expects to
raise total tax revenue from 8.1% of GDP in FY 1999/2000 to 10.7% in FY
2000. Most of the increase is assumed to come from the rise in income tax
revenue from 3.7 to 5.8% of GDP. The higher world price of oil should
raise non-tax revenue from 2.4 to 4.4% of GDP. These revenue increases
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26
George Fane
are assumed to offset the rise in non-interest expenditures by enough to
convert the primary deficit (i.e. the deficit before allowing for interest
payments) of 2.4% of GDP in FY 1999/2000 into a primary surplus of
1.5% of GDP in FY 2000.
However, interest payments on government debt are projected to rise
from 4.5% of GDP in FY 1999/2000 to 6.5% in FY 2000. As a result, the
overall deficit in FY 2000, as officially measured, is projected to be 5% of
GDP. This happens to be less than the measured deficit in FY 1999/2000
of 6.8% of GDP, but the comparison is meaningless: budget deficits are
supposed to measure how much the government is borrowing from other
sectors, but in the aftermath of Indonesia’s economic crisis its budget
deficits do not have this (or any other simple) meaning. The reason is
that the cost of the bank bailout has not been acknowledged as an onbudget expense.6 Since the deficit in FY 1999/2000 should have included
a large part of the cost of bailing out the banks, it was really many times
the size of the true deficit in FY 2000.
The officially measured deficit for FY 1999/2000 reported in table 6 is
smaller than predicted, because oil prices and revenues are higher than
expected, and because development spending fell behind schedule. The
latter was due partly to recent political uncertainties and civil unrest,
and partly to donors delaying disbursement of funds in response to the
Bank Bali affair.
Roughly half of the measured deficit in FY 2000 is to be financed by
official foreign borrowing. The budget assumed that Indonesia would
obtain $4.1 billion in new loans from major donors at the CGI meeting, a
target easily surpassed by the $4.7 billion actually pledged. Most of the
remaining half of the measured deficit is to be financed by IBRA’s asset
sales and portfolio income (1.8% of GDP), the rest by privatisation of
state-owned enterprises (0.7% of GDP).
If repayments of arrears owed by the central government to Pertamina
were excluded, expenditure would fall from 13.6% of GDP to just over
10%. For simplicity, revenues and expenditures are conventionally
recorded when they are realised; conceptually, however, there is a good
case for recording them on an accruals basis: the arrears have arisen in
earlier years because Pertamina did not receive the full amounts that it
was entitled to under the fuel subsidy arrangements, which require it to
buy crude oil at the world market price and sell refined products at lower
domestic prices. Payments this year to Pertamina to finance last year’s
fuel subsidy are really an outlay for last year, not this year. If this
convention were adopted, the deficit would be reduced to 3.5% of GDP.
A good case can also be made that IBRA’s portfolio income should be
classified with other profits of state-owned enterprises, and that its asset
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Survey of Recent Developments
27
disposals and privatisation sales should be classified as dis-investment
in assets directly controlled by the government. If all three of the above
corrections were made, the measured deficit of 5% of GDP in FY 2000
would become a surplus of 1.5%. In contrast, if measured expenditures
in FY 1999/2000 were adjusted for the omission of the cost of the bank
bailout and for the delays in reimbursing Pertamina for fuel subsidies,
the true deficit would be far in excess of the 6.8% officially recorded.
TRADE LIBERALISATION
Although the trade regime is now much more open than it was in 1995,
when it was already far more open than it had been in the mid 1980s,
Indonesia has fallen behind the targets set in the May 1995 trade
liberalisation package (Nasution 1995: 13–18). A new package of trade
reforms announced on 31 December reduced the rates on 232 tariff lines,
but this still left 2,142 lines above the 1995 target.
Apart from those on automobiles and alcohol, the highest tariff rate
is now 25%, and this rate applies to only 45 tariff lines, mainly in the steel
and chemical sectors. The four-year program agreed to with the IMF
contains a commitment by the government to have a three-tier tariff
structure in place by the end of 2003, with rates of 0, 5 and 10% for all
items except automobiles and alcohol. Most non-tariff barriers have
already been removed and all the remaining ones, except those required
for health and safety reasons, are scheduled to go by the end of 2003. The
taxes on exports of sawn timber are to be replaced by higher royalties
and resource rent taxes. Indonesia is obliged by the barriers imposed on
it by the industrialised countries to set quotas on exports of garments.
All its other export licensing requirements—the main ones are now coffee,
logs and wood products—are to be removed by the end of 2000.
The LOI makes a commitment to remove all import duty exemptions.
This proposal is quite controversial, since such exemptions currently
apply to about half of imports and are used mainly for producing exports
and by investors. The LOI sides with those who argue that exemptions
should be avoided and tax bases made as broad as possible, so as to
allow rates to be set low. The opposite school of thought is that it is
important for non-oil exporters to have access to inputs at world prices,
and that the inevitable delays in obtaining duty drawbacks therefore make
exemptions highly desirable.
Trade in rice is now open to all general importers and exporters, but
the government has introduced a tariff of Rp 430/kg on rice to cushion
farmers from the effects of falling world market prices and the
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strengthening of the rupiah. This tariff is supposed to be temporary and
will end in August 2000, unless it is explicitly renewed at that time. Exports
of crude palm oil are still taxed, but the tax rate was reduced from 30% of
the government’s reference price to 10% in July 1999. The effective rate is
lower because world prices are now below the reference price.
PRIVATISATION
The government continues to make only very slow progress in privatising
state-owned enterprises (SOEs). In FY 1999/2000, the initial budget
projection was for privatisation revenue of Rp 13.0 trillion. This was
reduced in the LOI to Rp 8.6 trillion and, with the financial year almost
over, the total amount realised was only Rp 6.2 trillion. This was made
up by sales of blocks of shares in only four enterprises: Telkom (Rp 2.8
trillion), two container terminals (Rp 2.8 trillion) and Indofood (Rp 0.5
trillion). Planned sales to strategic investors of shares in plantation
companies and the Soekarno–Hatta airport authority fell through because,
in each case, the prospective investor and the government could not agree
on the price.
The economic case for privatisation is that managers answerable to
private shareholders have a more direct incentive to eliminate crosssubsidies and maximise profits than do managers answerable to a
minister. However, privatisation presents a dilemma to governments:
selling assets yields an immediate cash flow far in excess of their earnings
in a single year, but is politically unpopular, in part because many people
feel that enterprises that are national icons should not be sold to private
entrepreneurs, and in part because full privatisation puts an end to hidden
cross-subsidies to employees, favoured customers and suppliers.
In the past, the government has resolved the privatisation dilemma
by selling blocks of shares in SOEs, while still retaining control. For
example, it never gave up control of the cement company, PT Semen
Gresik, despite making an initial public offering (IPO) of some of its shares
in 1991 and then selling a further 14% of its shares to Cemex of Mexico in
1998. Similarly, it has retained about two-thirds of the shares in Telkom
and Indosat, following IPOs in 1995 and the subsequent sale of a further
9.8% of its shares in Telkom in 1999. Although the need to finance the
bailout of the financial sector has made the government more desperate
for revenue than ever before, it has deviated from this strategy of selling
shares while retaining a controlling interest in only one case: its sale in
1999 of 51% of the shares in the Jakarta International Container Terminal
at Tanjung Priok to Grospeak (a subsidiary of Hutchinson Whampoa of
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Survey of Recent Developments
29
Hong Kong) for $243 million. The government did sell the whole of its
former shareholding in Indofood, but this was only ever a minority
shareholding. The sale of the Surabaya container terminal to Mermaid (a
subsidiary of P&O Australia) raised $174 million. In this case, the
government retained 51% of the shares.
Revenue from privatisation in FY 2000 is projected to be at least
Rp 5.9 trillion, which is about 13% of the measured budget deficit. The
State Minister for Investment and State Enterprises has suggested that
the actual amount raised may be as high as Rp 8 trillion. These amounts
refer to sales of shares in traditionally state-owned firms. Thus the FY
2000 projection excludes the IPO in Bank Central Asia, which is counted
as part of IBRA’s contribution to the financing of the budget deficit.7
The government has not yet announced exactly what it will sell in FY
2000. Although the LOI mentions Telkom and Indosat as strong possible
candidates for further privatisation, the government plans to deregulate
the telecommunications sector before fully privatising it, and deregulation
is not expected to be completed before 2004. However, this does not
preclude the possibility of further sales of blocks of shares in 2000:
following IPOs in 1995, and the 1999 sale of a further 9.8% of its remaining
Telkom shares, the government still owns roughly two-thirds of both
companies.8 Other privatisation possibilities in 2000 are: Sukarno–Hatta
International Airport in Jakarta; Garuda Indonesia; palm oil plantations
in North Sumatra; a fertiliser company in East Kalimantan; a coal mining
company in South Sumatra (PT Bukit Asam); and two pharmaceutical
companies.
THE TEXMACO AFFAIR
In late November, the State Minister for Investment and State Enterprises,
Laksamana Sukardi, revealed that President Soeharto had been directly
involved in helping the textile and engineering conglomerate Texmaco,
run by Mr Marimutu Sinivasan, to secure loans from Bank Indonesia
that were channelled through Bank Negara Indonesia (BNI) and other
state banks answerable to Sukardi’s ministry. The total loan package,
which was negotiated between November 1997 and February 1998, was
for about $1 billion, in the form of $754 million in foreign exchange and
Rp 1.9 trillion (anything from $180 million at the February 1998 exchange
rate to $500 million at the November 1997 rate) in domestic currency.
Had the loan been a normal commercial one, it would have breached
the prudential regulation that bars a bank from making a loan to any
single borrower for more than 20% of its capital. Instead, it was made
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George Fane
under a special BI facility for export finance, to which this prudential
limit does not apply. In the event, Texmaco apparently used the loan to
repay short-term foreign currency debts. From Texmaco’s viewpoint, the
loan from the export finance facility also had the advantage of being at a
heavily subsidised interest rate.
At least initially, the reaction of the DPR seems to have been that the
Texmaco group is so important a generator of jobs and exports that the
affair must not be allowed to disrupt its operations. The Chairman of the
Indonesian Textile Association said that ‘if you want to kill a rat, don’t
burn down the house to do it’ (Business Indonesia Perspective, 1/1/2000:
21). One might add ‘so find a better way’. The Attorney General is still
investigating possible illegalities.
POVERTY
Estimates of the Proportion of the Population in Poverty
The debate over the extent to which poverty increased as a result of the
crisis was comprehensively surveyed by Booth (1999). As Booth’s table 6
showed, the special ‘mini’ (‘Susenas-type’) survey of household
expenditure carried out by the Central Statistics Agency (BPS) in
December 1998 indicated that the poverty rate rose from 11.3% in February
1996 to 16.7% in December 1998.9 These estimates refer to the ‘headcount’
rate of poverty, defined as the percentage of the population with
consumption expenditures below the official BPS poverty line.
In February 1999, a full household expenditure survey was
undertaken and the results have now been released. Suryahadi, Sumarno,
Suharso and Pritchett (1999)—henceforth SSSP—analyse these data and
adjust existing studies so as to put them all on a comparable basis and
estimate how poverty changed during the crisis. The main features of
their results are summarised in table 7. Starting from the rate of 11.3%,
which was officially estimated by BPS from a full household expenditure
survey in February 1996, poverty fell to 7.2% in August–October 1997,
just before it began to be affected by the crisis (SSSP 1999: table 6, last
column).10 It then rose sharply to just over 20% in August 1998 and was
still just over 20% in February 1999. The exact rate implied by the February
1999 survey is 20.3%. If this new estimate is correct, it implies that the
poverty rate in February 1999 was similar to the rate observed in the mid
1980s, whereas the December 1998 mini household expenditure survey
had implied a regression only to late 1980s rates.
Another mini household expenditure survey was undertaken in
August 1999. The results have not yet been officially released, but they
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Survey of Recent Developments
31
TABLE 7 Estimates of Poverty Rate on a Consistent BPS Basis, 1996–99
Survey Date
Poverty
Rate
%
Feb-96
Aug-97
Aug-98
Sep–Dec 98
Dec-98
Dec-98
Feb-99
11.3
7.2
20.7
20.1
15.3
16.7
20.3
Survey
BPS/Susenas
National Accountsa
‘100 villages’ adjustedb
IFLS/Rand adjustedc
‘100 villages’ adjustedd
BPS/mini Susenas
BPS/Susenas
a
There was no survey in August 1997. The estimate was derived by Suryahadi et
al. (1999), who adjusted the BPS estimate for February 1996 using national accounts
data on the changes in consumption between February 1996 and August 1997.
b
Adjustment by SSSP of estimate by the Social Monitoring and Early Response
Unit (SMERU); reported rate was 21.41%.
c
Adjustment by SSSP of estimate from a special round of the Indonesian Family
Life Survey (IFLS) conducted by the Rand Corporation; reported rate was 19.9%.
d
Adjustment by SSSP of estimate by SMERU; reported rate was 16.79%.
Source: Suryahadi et al. (1999) (SSSP), in which see further details of the surveys
cited above, and the methods by which the non-BPS surveys were adjusted to a
consistent BPS basis.
apparently indicate a much lower poverty rate even than the 16.7%
estimated for December 1998. At least some of the surveys must contain
measurement errors, because they tell an implausible story in which the
poverty rate took a one-year roller coaster ride from somewhere between
20 and 21% in mid 1998 down to 16.7% in December, climbed to 20.3% in
February 1999, and then by August 1999 had apparently swooped back
down to below the rate in December 1998.11
One possible interpretation of these estimates is the following. Because
the price of rice (which has a much higher weight in the basket that defines
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George Fane
the poverty line than in the CPI) has been falling both in absolute terms
and relative to the CPI, poverty really did fall between mid 1998 and mid
1999. But the roller coaster ride surely exaggerates the real changes.
Although the full household expenditure survey (February 1999) and
the mini surveys (December 1998 and August 1999) used identical
questionnaires, they were undertaken by different groups within BPS,
which may have treated in different ways some of the inevitably arbitrary
decisions that must be made in such surveys.
Spending on Programs to Combat Poverty
The new budget and LOI distinguish three broad groups of policies for
helping poor people: the social safety net (SSN), poverty alleviation and
targeted fuel subsidies.12 The ‘targeted fuel subsidies’ in the welfare
program are expected to cost Rp 1.3 trillion in FY 2000, and represent
compensation to poor families for higher domestic fuel prices. The main
element is the increased price of kerosene. No decision has yet been made
on how to distribute these subsidies.
The difference between the safety net and poverty alleviation
programs is partly real and partly a matter of labelling. The SSN programs
were created hurriedly in response to the crisis and are now mostly being
wound back, whereas the ‘poverty alleviation’ programs are being
expanded. For FY 1999/2000, one can say which programs were in the
SSN category (budgeted to cost Rp 5.6 trillion in that year) and which
were in the poverty alleviation category. Table 8 shows the distribution
of the budgetary estimates between the two categories in FY 2000 as it
appears in the LOI. However, this division has little meaning, because
decisions on which programs to expand and which to eliminate have not
yet been finalised. The poverty alleviation program, for which Rp 1.7
trillion was budgeted in FY 1999/2000, is the much amended descendant
of the program for backward villages (IDT: Inpres Desa Tertinggal), first
introduced in 1994. In FY 2000, this program will be retained and an
analogous program for urban areas will be added. But the fate of the
individual elements that were in the SSN in FY 1999/2000 has not yet
been decided. Some, such as the programs for spending on scholarships
and schools, may well be retained, but the majority will be phased out.
The programs that are judged to have been most successful and are
retained on a long-term basis will be reclassified from ‘SSN’ to ‘poverty
alleviation’.
Table 8 shows that although the social safety net is being phased out,
total spending on all the poverty programs is to be expanded substan-
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Survey of Recent Developments
33
TABLE 8 Expenditure on Social Safety Net and Poverty Alleviation, 1999–2000
FY 1999/
2000
(12 months)
(Rp trillion)
FY 2000
(9 months)
(Rp trillion)
FY 2000
Growth in
x 12/9
Nominal
(12 months) Expenditure
(Rp trillion)
(%)
SSN + poverty alleviation
Social safety net
Poverty alleviation
7.3
5.6
1.7
7.2
2.7
4.5
9.6
3.6
6.0
32
–36
253
Targeted fuel subsidies
0.0
1.3
1.7
n.a.
Total
7.3
8.5
11.3
55
Sources: LOI, 20 January 2000; World Bank.
tially: when the FY 2000 budget projections are scaled up to a 12 months
basis, the increase will be 55% if the targeted fuel subsidies are included,
and 32% if they are excluded.
There are two other kinds of welfare programs in addition to the
‘mainstream’ ones included in table 8. First, there are programs run by
NGOs and funded directly by donations from foreign governments. These
are small compared with the mainstream programs, but are believed to
be growing rapidly. The new LOI expresses the government’s approval
of this trend. Second, there are numerous initiatives by provincial
governments to alleviate poverty using the growing share of GDP that
the central government is allocating directly to them.
The Social Safety Net and Poverty Alleviation Programs
There are currently four elements in the social safety net: a subsidised
food program; a program to provide block grants to schools in poor
communities and scholarships to help children from poor families to stay
in school; a program to subsidise health clinics and medicines in poor
areas; and various job creation schemes.
Appraisals of the social safety net programs by SMERU suggest that
education subsidies have been the most effectively targeted.13 The funds
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34
George Fane
for scholarships have been handed out to village community groups who
then have the responsibility of selecting the most needy and deserving
children.
The rice subsidy program has not escaped allegations of corruption,14
but is judged by SMERU to have worked quite well, given that the
administrative resources needed to issue and stamp ration coupons were
not available. Data collected by the National Family Planning Board were
used to identify 17 million poor households, using criteria such as whether
they live in houses with earth floors and whether they are too poor to
own a motorcycle. These data determine the total entitlements of all the
poor people in particular villages or urban areas. It appears that trucks
are then sent to these locations with roughly appropriate amounts of
cheap rice, which people then queue to buy. Self-selection probably
ensures that the poor get most of it.
The subsidised health program faces the inevitable problem that in
rural areas many families are located far from the nearest health clinics
and find it very difficult to make use of even heavily subsidised facilities
and medicines. The least successful schemes have been the job creation
programs. The contractors who successfully tender for the funds to
operate these programs have little incentive to try to allocate the jobs to
the most needy, and the infrastructure projects that have been
commissioned sometimes appear to have little value.
In 1999/2000 there was one main poverty alleviation program: the
kecamatan (subdistrict) development program (KDP). This is descended
from the IDT program to help poor villages, but differs from it in several
ways: funds under the IDT program went directly to villages identified
by the government. Under the KDP, funds go to each kecamatan, and
villages can compete by submitting proposals. The villages whose
proposals are selected then have considerable control over the details of
how their grants are spent. The rules of the competition favour smallscale labour-intensive projects that will provide facilities for the use of
local communities; examples include repairing roads, renovating or
extending schools, clinics and other public buildings, or improving
facilities in open air markets.
Although the KDP is not exclusively rural, it has a strong rural bias.
Because the recent crisis has affected urban areas much more severely
than rural areas, a new program is being introduced this year that will
resemble the KDP, but will be focused on urban areas.
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Survey of Recent Developments
35
BANKRUPTCY
Progress und