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Bulletin of Indonesian Economic Studies

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SURVEY OF RECENT DEVELOPMENTS
Reza Y. Siregar
To cite this article: Reza Y. Siregar (2001) SURVEY OF RECENT DEVELOPMENTS, Bulletin of
Indonesian Economic Studies, 37:3, 277-303, DOI: 10.1080/00074910152669127
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Bulletin of Indonesian Economic Studies, Vol. 37, No. 3, 2001: 277–303

S URVEY OF RECENT D EVELOPMENTS
Reza Y. Siregar*
National University of Singapore

S UMM ARY
An unexpectedly quick and peaceful
presidential transition from Abdurrahman Wahid to Megawati Sukarnoputri
in July brought a renewed sense of confidence to both domestic politics and the
economy. In mid August the new president exceeded the expectations of many
in her selection of cabinet members, particularly her choice of well respected

technocrats and professionals to handle
the economic portfolios. Within about
two weeks of the cabinet’s inauguration,
the economic team signed a new Letter
of Intent (LOI) to the International Monetary Fund (IMF), which paved the way
for the disbursement in September of the
long delayed $400 million loan tranche
to Indonesia.
Despite these encouraging signs, the
economy remains fragile. Misuse of
funds and various forms of corruption
continue to hamper economic recovery.
The murder of a Supreme Court judge
shortly after Megawati took office and
another bomb explosion in September
at a large shopping centre in the heart
of Jakarta are reminders of the current
serious lack of security.

Achieving targets set in the 2001 and

2002 budgets and meeting the LOI commitments are the government’s current
major economic concerns. Indonesia’s
recovery depends heavily on the performance of the bank restructuring
agency, IBRA, in relation to asset recoveries, and on privatisation of stateowned enterprises. The government is
also relying on obtaining fresh loans and
securing approval from multilateral and
bilateral donors for the rescheduling of
existing foreig n debt. Realistically
speaking, none of these budget financing sources can be taken for granted.
The 11 September terrorist attacks in
New York and Washington have heightened the risk of a steeper, longer downturn for an already deteriorating world
economy. A global downturn implies an
even greater need for recovery to be generated domestically. The challenges are
great, but the consequences of another
round of political and economic mishaps
such as those that occurred under former
President Abdurrahman Wahid may be
too much for Indonesia to bear in its
current highly vulnerable condition.

ISSN 0007-4918 print/ISSN 1472-7234 online/01/030277-27

© 2001 Indonesia Project ANU

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278

Reza Y. Siregar

ANOTHER CHANGE
OF G OVERNMENT
On 23 July 2001, after the dismissal
of Abdurrahman Wahid, Megawati
Sukarnoputri was sworn in as the coun-

try’s fifth president—the fourth in the
past three years. The new president enjoys wide popular support and her
party, the Indonesian Democratic Party
of Struggle (PDI-P), won more votes

BOX 1 T HE M EGAWATI P RESI DENCY
The Vice President
Mr Hamzah Haz from the Muslim United Development Party (PPP) was
elected vice president by the MPR. Hamzah’s party had won only 11% of the
votes in the 1999 general election, but he represented the loose alliance of
Muslim parties known as the Central Axis. His presence in the top leadership is expected to tie Muslim supporters of the Central Axis to the government. Furthermore, as a representative from Kalimantan, he provides
geographical balance in a government headed by Megawati, who is of
Javanese–Sumatran descent.
The Cabinet
The cabinet is headed by three Coordinating Ministers responsible for Political and Security Affairs, the Economy, and the People’s Welfare respectively.
Seventeen ministers head departments and ten were appointed as Ministers
of State with responsibilities in specific fields. Finally, three non-ministerial
appointees—the State Secretary, the Attorney General and the head of the
National Intelligence Agency—were given cabinet status, and the cabinet
status of the planning agency, Bappenas, was reinstated, having been lost
under former President Wahid.
Despite earlier fears, the key economic policy making positions in the cabinet were awarded to highly respected professionals with acknowledged credentials. Heading the economics team is Professor Dorodjatun Kuntjoro-Jakti,
former Dean of the Economics Faculty at the University of Indonesia and
former Ambassador to the US. Another key figure in the economics team is

the Minister of Finance, Boediono, who had served on the board of Bank
Indonesia under President Soeharto, and as head of Bappenas under President Habibie. Two leaders of Megawati’s party, PDI-P, both of whom served
briefly as ministers under Wahid, were also appointed to economic posts.
Laksamana Sukardi is Minister of State Enterprises, and Kwik Kian Gie is
now head of Bappenas. One of the first acts of the government was to transfer responsibility for IBRA to Laksamana. A fifth key economic minister is
the Minister of Trade and Industry, Rini Soewandi, a leading businesswoman
and former head of the giant Astra group, who is also linked to PAN (the
National Mandate Party) through its chairman, the speaker of the MPR, Amien
Rais.
The military is represented in the cabinet by four retired officers. General
Susilo Bambang Yudhoyono has returned to the post of Coordinating Minister for Political and Security Affairs, a position he held in the second Wahid
cabinet. During the last years of Soeharto’s rule, Yudhoyono led a small group

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Survey of Recent Developments

than any other in the 1999 general election, securing 153 of the 500 seats in the
People’s Representative Council (DPR)
and 185 of the 695 places in the People’s

Consultative Assembly (MPR). On the

279

day she appointed her cabinet (box 1),
she announced her government’s sixpoint working program: to maintain
national unity; to continue reform and
democratisation; to normalise economic

BOX 1 (continued) T HE M EG AWAT I P RES IDENCY
of reform-minded officers who formulated the military’s ‘NewParadigm’ in
1998 and supported the concept of civilian supremacy over the military. A
second important military appointee is Lt Gen. Hari Sabarno, who takes over
the Department of Internal Affairs, a ministry that has been in military hands
since the presidency of Megawati’s father. Sabarno is one of the deputy chairmen of the MPR.
The other two military officers are both former Special Forces intelligence
officers who are linked to Megawati. Lt Gen. Hendropriyono and General
Agum Gumelar won her gratitude when President Soeharto attempted to
prevent her from taking over the leadership of the PDI—the predecessor of
the PDI-P—in 1993. Hendropriyono at the time was the Jakarta regional commander and Agum was the commandant of the Special Forces. Agum has

returned to his earlier position under Wahid as Minister of Transport, while
Hendropriyono, who recently joined the PDI-P and reportedly played a major role in advising Megawati on the make-up of the cabinet, has been appointed head of the National Intelligence Agency.
Several other important appointments should be noted. Megawati has followed her predecessor in appointing a civilian to the Department of Defence.
In contrast to Abdurrahman Wahid’s first Defence Minister but not unlike
his second, the new minister, Matori Abdul Djalil, is not known for any expertise on defence issues. The new Foreign Minister is Hassan Wirayuda, a
career diplomat who during the last year has overseen negotiations with the
Free Aceh Movement. The Minister of Justice and Human Rights is Professor
Yusril Ihza Mahendra, chairman of the Muslim party PBB (Partai Bulan
Bintang). The State Secretary is Bambang Kesowo, a career bureaucrat who
during the Soeharto years steadily worked his way up through the State Secretariat, which he joined as a young recruit in 1968. During the Wahid presidency he served as Secretary to then Vice President Megawati.
Selection of the new Attorney General was delayed by a week after
the appointment of the rest of the cabinet—presumably because of a
struggle among various interests, including Golkar (the party of former
President Soeharto, and the second largest party in the DPR). Megawati
resolved the battle by appointing a relatively little known prosecutor,
M .A. R ahm a n, from w ithin the Atto rney G enera l’s o ffice, wh ere
corruption is widely regarded as entrenched. Rahman had headed the
Attorney General’s investigation of human rights violations in East Timor;
no trials have taken place yet as a follow-up to this investigation.
Source: This draws heavily on ICG (2001).

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280

life; to uphold law, restore security and
peace, and eradicate corruption, collusion and nepotism; to restore Indonesia’s
international credibility; and to prepare
for the 2004 general election.
The composition of the new cabinet
has for the most part been praised. Its
membership provides representation to
the main political forces in the DPR, but
qualified and professional ministers
have been appointed to key economic
positions regardless of political affiliation, suggesting that coordination of economic policy, which was lacking during
Wahid’s presidency, is likely be improved.1 The delayed choice of the new
Attorney General injected a note of real
concern, however. And the appointment
of M.A. Rahman to the post—a little

known career prosecutor who has spent
35 years in the notoriously corrupt Attorney General’s office—has created
doubts about the government’s seriousness in seeking to eradicate corruption,
despite the president’s early warning
that her own family should avoid involvement in it. Rahman was earlier responsible for a limp investigation into
human rights abuses in East Timor, and
is seen as unlikely to act vigorously
against corruption, which in recent years
has spread from the centre of power to
become more pervasive and less predictable in character than before (Tempo,
21/8/01).
Other pressing problems include the
secessionist movements in the provinces
of Aceh and Irian Jaya. To emphasise her
commitment to national unity, Megawati made a short visit to Aceh in September and, in one of her first speeches
as president, apologised to its people for
mistakes and shortcomings in previous
governments’ handling of the province
(Dow Jones Newswires, 8/9/01). But implementation of more concrete measures
capable of dealing with the separatist

movements in these natural resource

Reza Y. Siregar

abundant provinces is still awaited. The
new president also acted quickly to dispel fears that she is an economic ultranationalist, among other thin gs by
extending the contract of Caltex to manage oil concessions in Riau, despite
local opposition.
The US government sent its Trade
Representative, Robert Zoellick, to Jakarta in August to deliver a letter of support from President Bush, and to invite
Megawati to visit Washington in September. Despite the 11 September terrorist attacks on the US, this visit went
ahead as scheduled. For her commitment to join the global war against terrorism, Megawati reaped instant and
much needed financial support from the
US, including the restoration of military
ties and a total of $657 million in financial assistance (box 2).
S ecurity and
Institutional Weaknesses
In July, Syaifuddin Kartasasmita, a Supreme Court Judge who was a member
of the panel that sentenced Hutomo
Mandala Putra (‘Tommy Soeharto’, the
youngest son of the former president)
to 18 months in jail for his part in a
multimillion -dollar land scam, was murdered on his way to work, just four days
after Megawati was sworn in as president. To make matters worse, a key suspect in the murder case was found dead
in police custody only a few weeks after
he had been detained. Then in October
the Supreme Court overturned Tommy’s
conviction on appeal, despite the fact
that he had earlier implicitly admitted
his guilt by requesting clemency from
former President Abdurrahman Wahid.
Blaming the lack of security in Aceh
and Irian Jaya, two giant US companies,
ExxonMobil and Freeport McMoran,
have reported declines in their production and investment in Indonesia. Two
of ExxonMobil’s four operation clusters

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Survey of Recent Developments

BOX 2 S UMMARY O F US PLEDGES

•
•
•
•
•
•
•
•

281

TO

I ND ONESIA IN S EPTEMB ER 2001

$400m to promote trade and investment in the oil and gas sector
$130m to finance legal and judicial reforms
$100m of GSP (Generalised System of Preferences) facilities to
expand bilateral trade
$10m to assist refugees in Maluku
$10m to train police
$5m to rebuild destroyed schools and infrastructure in Aceh
$2m to assist East Timorese who have chosen to stay in Indonesia
$400,000 to educate civilians on defence matters

Source: JP, 23/9/2001.

in Arun, Aceh, were closed down for
about four months because of disruption
by armed civilian groups. By mid October all four clusters were operating
again, but gas production had yet to
resume from two onshore fields, and
total daily production was only about
75% of last year’s average (Dow Jones
Newswires, 16/10/01). During their
meeting with President Megawati in
Texas in September, both James R.
Moffet of Freeport McMoran and Harry
J. Longwell of ExxonMobil had argued
that guarantees of security had become
indispensable for their companies to
continue to operate in Aceh and Irian
Jaya (JP, 24/9/01).
Already dampened by Megawati’s
choice of Attorney General, confidence
in the ability and resolve of government
officials to uphold the rule of law is
likely to decline further. Other important
institutions that should play a central
role in cleaning up the legal system and
helping to stabilise the country, such as
the police and the military, have instead
only created further embarrassment.
The number of reported clashes between
police and soldiers during 1997–99 was
28; but in 2000 alone, 90 such incidents

were reported (Straits Times, 21/9/01).
Another occurred on 15 September in
Madiun, East Java. Arguments between
three police officers and two military
policemen escalated into fierce attacks
by members of an infantry battalion on
Madiun police station and three substations. Scores of civilians were injured
and at least two were killed.
Some 81 bomb explosions were reported from January to July 2001, compared with around six in 1998 and seven
in 1999. Another took place at the
Atrium Plaza shopping mall in central
Jakarta on September 23—the second at
this location within two months. In late
July, a large number of casualties were
reported when explosions rocked two
churches in Jakarta.
M arket Confidence
These political developments have had
a clear impact on private sector confidence—although the most recent events
do not yet show up in published data.
The Consumer Confidence Index of the
Danareksa Research Institute (DRI) extended its descent to a low of 92 in June
as the MPR’s dismissal of President
Wahid loomed and the spectre of street

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282

Reza Y. Siregar
FIGURE 1 Consumer and Business Confidencea

150

120

Business
Consumer

90

60

30

0
Jan-01
a

Feb-01

Mar-01

Apr-01

May-01

Jun-01

Jul-01

Aug-01

The indices are ratios of optimists to pessimists among those surveyed.

Source: Danareksa Research Institute.

violence battered consumer sentiment
(figure 1). Following the installation of
the new Megawati government in late
July, there was a significant rebound to
112 in August—the first time ‘optimists’
had outnumbered ‘pessimists’ since February 2001. Similarly, the DRI’s Business
Sentiment Index declined steadily during the first seven months of 2001 to a
low of 109, but saw a significant rebound
to 116 in August following the change
in the presidency.
Inflation and increasing interest rates,
exchange rate volatility and heightened
political risk have been among the key
contributors to business pessimism. In
July 2001, the Standard and Poor ’s ratings agency lowered Indonesia’s longterm foreign currency rating to CCC+
from B–. Meanwhile, corporate profits
were squeezed from both the revenue
and cost sides. Wage disputes, new arbitrary levies and illegal imposts, and
the resurgence of coerced ‘donations’ are

a few of the factors that raise the cost of
production, but in current conditions
producers have limited ability to pass on
higher costs to consumers.
M ACROECONOMIC
PERFORM ANCE
G rowth
With further worsening of the external
environment and increasing domestic
political uncertainty, real GDP grew by
only 0.2% in the second quarter of 2001
(table 1a). On a year-on-year basis GDP
grew by 3.5%. Reflecting the usual seasonal pattern, agricultural output declined in the June qua rter after
expanding strongly in the previous
quarter. In year-on-year terms, agricultural output grew by only 1.3%, considerably more slowly than the economy
as a whole. Two other sectors, mining
and transport and communication, experienced slight contractions in the June
quarter, while still recording positive

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Survey of Recent Developments

283

TABLE 1a GDP Growth by Sector
(%)

Jun-00

Year-on-year
GDP
Agriculture, livestock, forestry
& fisheries
Mining & quarrying
Manufacturing
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport & communication
Finance, rental & business services
Services
Quarter-on-quarter
GDP
Agriculture, livestock, forestry
& fisheries
Mining & quarrying
Manufacturing
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport & communication
Finance, rental & business services
Services

Sep-00

Dec-00

Mar-01

Jun-01

5.2

4.4

5.2

3.2

3.5

1.0
2.1
7.3
8.0
9.2
6.4
10.0
5.4
1.9

3.4
1.3
5.1
8.0
5.1
5.0
8.7
5.0
2.0

9.9
4.4
4.5
7.7
1.3
5.7
7.8
2.9
2.3

1.6
1.1
3.6
7.3
0.1
5.8
7.2
2.9
1.3

1.3
2.3
4.8
9.9
1.0
5.3
6.1
2.4
1.6

–0.1

2.2

–0.7

1.8

0.2

–4.3
–1.3
0.9
4.0
0.0
1.5
0.6
1.1
1.1

5.9
2.0
1.8
3.3
0.1
1.9
2.1
0.7
0.2

–12.5
2.2
2.5
2.5
0.7
1.5
3.2
0.8
–0.1

14.7
–1.7
–1.6
–2.5
–0.7
0.7
1.2
0.3
0.1

–4.6
–0.2
2.0
6.4
0.9
1.0
–0.5
0.6
1.4

Source: CEIC database.

outcomes year-on-year. The decline in
the mining sector partly reflected security problems at key production sites in
various locations. All other sectors recorded positive growth in the June quarter. The construction sector has been a
drag on the economy in terms of yearon-year figures, although it grew more
rapidly in the June 2001 quarter than in
the previous four quarters. Manufacturing also performed relatively well. The
large rise in the output of the utilities
sector (electricity, gas and water supply)
is hard to explain.
All categories of expenditure except
imports and government consumption

slowed in the June quarter (table 1b). The
decline in the growth rate of private consumption is consistent with the relatively sharp worsening of consumer
confidence in June. Government consumption has exhibited considerable
volatility from one quarter to the next,
growing by 3.8% in the second quarter.
Investment spending increased by
more than 6% in the first quarter, but
then at the slower rate of 4.4% in the second, reflecting lower business confidence. M o re re cent data from the
Investment Coordinating Board suggest
an even gloomier picture, with realisation of investment projects previously

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284

Reza Y. Siregar
TABLE 1b GDP Growth by Expenditure
(%)

Jun-00

Sep-00

Dec-00

Mar-01

Jun-01

Year-on-year
GD P
Private consumption
Government consumption
Investment
Change in stocks
Exports
Imports

5.2
3.3
0.3
20.7
384.3
21.2
3.9

4.4
4.0
11.7
22.3
402.8
14.1
20.1

5.2
4.7
12.1
15.8
–60.1
14.2
44.2

3.2
5.9
6.0
17.5
24.7
15.4
39.3

3.5
4.8
5.7
17.9
23.9
13.5
29.7

Quarter-on-quarter
GD P
Private consumption
Government consumption
Investment
Change in stocks
Exports
Imports

–0.1
1.2
4.1
4
41.2
5
7.5

2.2
1.2
–5.5
3.4
–46.1
2.3
11.8

–0.7
1.2
8.2
2.6
–42.7
–0.9
16.6

1.8
2.2
–0.4
6.4
186.1
8.3
–0.5

0.2
0.2
3.8
4.4
40.3
3.3
0.1

Source: As for table 1a.

approved by it declining drastically
from its level in 2000. For the period
January–September, realised foreign investment was $1.8 billion in 2001, while
realised domestic investment was Rp 5.3
trillion, by comparison with $8.2 billion
and Rp 20 trillion, respectively, for the
same period in 2000.
Another cause for concern over the
business climate is reflected in the inventories (change in stocks) component of
expenditure on GDP, which shows two
consecutive quarters of sharp rises during the first half of 2001. This suggests that
demand has turned out to be less than
producers expected, and implies that production may need to be cut if stocks of
unsold goods are not to become excessive.
On the external front, exports were not
able to maintain the rapid 8% growth recorded in the first quarter, slowing to
roughly match the growth rate of the

economy as a whole. Nevertheless, exports contributed well to overall growth
on a year-on-year basis, at some 13.5%.
Import growth was stagnant during the
first half of 2001, and a further sharp drop
of 10.6% in the dollar value of merchandise imports was reported in July. Imports
of intermediate and capital goods for the
first semester of 2001 contracted by 9%
and 4%, respectively, relative to their second semester 2000 levels, providing further evidence of a slowing of business
activity and investment.
The outlook for the external side over
the rest of 2001 remains bleak. Initially,
the government projected 7.5% growth
in non-oil and gas exports. But it has
scaled back the forecast to 2–3% owing
to the economic slowdown in the US,
which in turn has adversely affected
other major trading partners of Indonesia, especially Japan. The July export

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Survey of Recent Developments

285

FIGURE 2 Cement Production and Car and Motorcycle Sales
(January 2001 = 100)
200

150

100

Cement

Cars

Motorcycles

50

0
Jan-01

Feb-01

Mar-01

Apr-01

M ay-01

Jun-01

Jul-01

Aug-01

Source: Danareksa Research Institute.

data from the Central Statistics Agency
(BPS) indicate a decline in the total value
of non-oil and gas merchandise exports
to several key trading partners. The head
of the National Agency for Export Development (BPEN) has indicated that
exporters have revised their 2001 export
targets downwards following the terrorist attacks on the US (JP, 21/9/01).
Figure 2 provides further evidence of
volatility in the production or sales of
three key products during the last few
months of the Wahid presidency. Motorcycle sales continued their impressive
expansion, while car sales fell back
after a remarkable jump in May–June.
Cement production also tapered off in
July and August, suggesting that the increase in construction activity in the June
quarter may not have been maintained.
The short-term outlook remains very
uncertain. Domestic political concerns
have abated with the change in government, but uncertainty in the world mar-

ket heightened drastically in the aftermath of the terrorist attacks in the US.
Confidence on the part of foreign investors in particular can be expected to be
relatively fragile for the last quarter. At
the same time, uncertainty in both regional and global markets is likely to
grow. Under these circumstances, Indonesia’s economy will probably remain
vulnerable for the rest of 2001, and the
growth rate for the year is likely to be
near the lower end of the target range of
3–3.5% stated in the revised 2001 budget.
Trends in the M onetary Indicators
Exchange Rate. After hovering at around
Rp 11,100–11,400/$ during the last two
months of Abdurrahman Wahid’s presidency, the rupiah strengthened markedly to Rp 8,200/$ within a period of
three weeks around the time of his dismissal (figure 3), reflecting a surge of
positive sentiment following the appointment of Megawati as president in

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286

Reza Y. Siregar
FIGURE 3 Recent Exchange Rate Movements
(Rp/$)

12,500

10,000

7,500

5,000

2,500

0
11-May

12-Jun

14-Jul

15-Aug

16-Sep

18-Oct

Source: Pacific Exchange Rate Service.

late July. This strengthening lasted only
a few weeks, however. From early September the rupia h again began to
weaken, especially after the 11 September terrorist attacks. The attacks also
forced the indefinite postponement of
the Paris Club meeting where the rescheduling of $2.8 billion of Indonesia’s
debt and the possibility of new borrowings were to have been discussed. Uncertainty over the Paris Club meeting
and, in particular, concern over the state
of the US economy, are weighing heavily on the rupiah.
The governor of Bank Indonesia (BI)
has expressed the bank’s commitment
to do everything in its power to prevent
the rupiah from sliding even further (JP,
23/9/01). In the revised budget for 2001
the government has targeted an average
exchange rate of Rp 9,600/$, which implies that the local currency would need
to s tabilise at aro und Rp 8,40 0/$
throughout the last four months of the

year. However, by mid October the exchange rate was above Rp 10,000/$.
Given the uncertainty in both domestic
and international markets, keeping the
rate at around Rp 8,400/$ is likely to be
very difficult.
Inflation. Inflationary pressure remained strong throughout the first half
of 2001 (figure 4). The consumer price
index (CPI) increased by 2.1% in July
alone, bringing year-on-year inflation to
13.0%. A slight fall in the CPI was reported in August, but this was more than
reversed in September. The inflation rate
for the year to September 2001 was
13.0%, which may be compared with the
government’s target of 9.3% for the calendar year. It will be surprising if this
target can be met.
Interest Rates. Deputy Governor of BI
Miranda Goeltom (Goeltom 2001) has
made the obvious point that further increases in the BI Certificate (SBI) rate,
together with sales of foreign exchange

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Survey of Recent Developments

287

FIGURE 4 Monetary Indicators
(% p.a., Rp trillion)
Base
money

Inflation &
interest rates
20

160

15

120

10

80

5

40
Inflation

0
Sep-00

3-month SBI

Base money
0

Dec-00

M ar-01

Jun-01

Sep-01

Source: As for table 1a.

in the market by BI, are necessary if the
base money targets are to be met. In the
absence of such actions it remains to be
seen whether the IMF, as international
lender of last resort, will continue to exercise its own equivalent of ‘regulatory
forbearance’ in relation to BI’s repeated
failure to comply with the monetary targets to which it is nominally committed.
As matters stand, however, BI’s ability
to sell dollars in the market is constrained by the commitment in the LOI
to maintain its holdings of international
reserves at roughly their current level—
a constraint that makes little sense in the
context of a floating exchange rate regime. This suggests that interest rates
will have to bear most of the burden of
meeting the money growth target. SBI
rates have continued to in crea se
throughout 2001, rising to nearly 18%
per annum in September.

Base Money. In the year to September
base money grew by some 19%, a rate
that has been maintained since the second quarter of 2000, and is well in excess of that targeted in the most recent
(and all preceding) LOIs. The volume
grew to around Rp 115.7 trillion, about
Rp 5 trillion more than even the new target of Rp 110.5 set in the latest LOI. It is
not surprising that inflation and interest rates have been increasing steadily
in these circumstances, and it is difficult
to see how such rapid money growth
can be reconciled with BI’s purported
commitment to preventing further depreciation of the currency.
First S emester 2001 Budget Outcomes
Revenue. At least half of the tax revenues
projected in the revised budget for 2001
were collected in the first semester. By
contrast, total realised non-tax revenues

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288

amounted to only 43% of the target for
the whole year. Of particular concern is
the shortfall in natural resource revenues,
which stood at only 44% at the halfway
mark. This outcome is dominated by the
major component, oil, revenues from
which amounted to only 37% of the full
year target in the first semester. On the
other hand, revenues from natural gas
were well ahead of target, at 69%. The two
other important categories of non-tax revenues were also well behind target: profit
transfers from SOEs (state-owned enterprises) stood at only 31% of the calendar
year projection, while other non-tax revenues, which include asset recovery and
privatisation proceeds, amounted to just
40% (table 2). Revenues as a whole for the
first semester totalled about 52% of the
full year targets.
Expenditure. On the other hand, realised total expenditures for the first semester reached only about 46% of the
projected full year amounts. Current expenditure as a whole was close to half
of the calendar year total, although there
is considerable variation among subcategories. For example, expenditure on
wages and salaries was considerably
higher than budgeted, as were interest
payments on both domestic and foreign
debt. On the other hand, subsidies have
been lowered significantly by comparison with the earlier projections. Perhaps
the major aspect of concern here is the
severe shortfall in development expenditures, which amounted to only 29%
of the full year projected amounts in the
first semester. Also of interest is the
drastic shortfall in natural resource revenue sharing, which amounted to only
16% of the full year total. This suggests
that earlier concern on the part of regional governments about whether they
would in fact receive what they had
been promised under this category of
funding (Pangestu and Goeltom 2001:
161) were well founded.

Reza Y. Siregar

Overall Balance and Financing. The first
semester overall result was a small deficit that amounted to only 14% of the full
year projection. In relation to the financing of the deficit, all amounts were far
below the one-semester pro-rated budget amounts. Privatisation efforts failed
to generate any revenue at all, while asset recoveries by IBRA stood at less than
42% of the full year amounts. New foreign financing of projects and programs
was also far below expectations, at 27%
and 16%, respectively, of the full year
projection.
THE 2002 BUDG ET
In her August speech on the 2002 budget, President Megawati underlined the
objective of striking a balance between
three essential targets: consolidating the
budget; stimulating the economy; and
enhancing regional autonomy by effectively relinquishing tasks and respons ibilities to the regio ns , and by
providing a commensurate amount of
funds. The 2002 budget initially assumed an economic growth rate of 5%,
inflation of 8%, an exchange rate of
Rp 8,500/$, an international oil price of
$22 per barrel, and an average interest
rate on three-month SBI of 14% per annum. The projected budget deficit was
equivalent to 2.5% of GDP (table 2).
However, with the terrorist attacks on
the US and the subsequent US-led attack on Afghanistan, the government
quickly revised these assumptions to
reflect the worsened international environment and its already evident destabilising impact at home. The revised
assumptions are for 4% growth, 9% inflation, a budget deficit of 2.7% of GDP,
and a n av er age exchange ra te of
Rp 9,000/$. Unfortunately no details of
changes to individual revenue and expenditure items have been announced,
so the following discussion is based on
the original budget figures.

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Survey of Recent Developments

289

TABLE 2 Budgets for 2001 and 2002
(Rp trillion)
2001
Revised

Total revenue
Tax revenues
Domestic taxes
Income tax
Value added tax
Other
International trade taxes
Non-tax revenues
Natural resources
Oil
Gas
Other
Profit transfers from SOEs
Other non-tax revenues
Total expenditure
Central government expenditure
Routine expenditure
Personnel
Goods & services
Interest payments
Domestic
External
Subsidies
Petroleum
Non-petroleum
Other
Development expenditure
Rupiah financing
Project financing
with foreign loans
Balancing funds (to regions)
Natural resource
revenue sharing
General Allocation Fund (DAU)
Special Allocation Fund (DAK)
Overall balance
(revenue – expenditure)
Financing
Domestic financing
Privatisation proceeds
Asset recoveries
Government bond issuance (net)
Foreign financing (net)
Project loan
Amortisation of foreign debt
Program loan & rescheduling
of foreign debt
Source: Ministry of Finance.

Semester I 2001

2002

% of Realised
% of
Budget
GDP
Revised

% of
GDP

286.0
185.3
174.3
95.0
53.5
25.8
11.0
100.7
79.4
57.9
17.4
4.2
9.0
12.3
340.3
258.8
213.4
38.2
9.9
89.6
61.2
28.4
66.3
53.8
12.5
9.4
45.5
21.7

19.5
12.6
11.9
6.5
3.6
1.7
0.7
6.9
5.4
3.9
1.2
0.3
0.6
0.8
23.2
17.7
14.5
2.6
0.7
6.1
4.2
1.9
4.5
3.7
0.9
0.6
3.1
1.5

147.9
105.0
99.5
56.3
30.9
12.3
5.5
42.9
35.2
21.6
12.0
1.6
2.7
5.0
155.4
117.2
104.1
21.7
4.8
51.0
33.6
17.4
26.2
23.8
2.4
0.4
13.0
4.7

51.7
56.7
57.1
59.2
57.8
47.6
50.4
42.6
44.3
37.3
69.2
37.5
30.5
40.4
45.7
45.3
48.8
56.9
48.6
56.9
54.9
61.2
39.6
44.2
19.5
4.0
28.7
21.8

289.4
216.8
204.2
101.9
69.9
32.4
12.6
72.6
55.9
37.9
13.6
4.3
8.2
8.6
332.5
242.1
195.0
40.7
11.5
87.0
59.6
27.4
46.2
32.3
13.9
9.5
47.1
22.8

17.1
12.8
12.1
6.0
4.1
1.9
0.7
4.3
3.3
2.2
0.8
0.3
0.5
0.5
19.6
14.3
11.5
2.4
0.7
5.1
3.5
1.6
2.7
1.9
0.8
0.6
2.8
1.4

23.7
81.5

1.6
5.5

8.3
38.2

35.0
46.9

24.4
90.3

1.4
5.3

20.3
60.5
0.7

1.4
4.1
0.0

3.2
35.1

15.6
58.0

23.2
66.4
0.8

1.4
3.9
0.0

–54.3

–3.7

–7.5

13.9

–43.0

–2.5

54.3
34.4
6.5
27.0
0.9
19.9
23.7
–20.2

3.7
2.3
0.4
1.8
0.1
1.4
1.6
–1.4

12.2
11.3

22.6
32.7

11.3

41.7

2.5
1.5
0.2
1.3

1.0
6.3
–9.9

4.8
26.6
49.3

43.0
25.4
4.0
21.5
0.0
17.6
24.4
–41.5

1.0
1.4
–2.5

16.3

1.1

2.6

16.1

34.7

2.1

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290

Revenue. Total revenue is expected to
be around Rp 289 trillion, or 17.1% of
GDP. About 75% of the total revenue is
expected to come from taxes, of which
domestic taxes will contribute close to
95%. Income tax continues to be the
most significant source of domestic tax
(at around 50%). The next largest source
of domestic tax is the value added tax,
which is expected to generate around
34% of the total. The non-tax revenues
will be derived mainly from natural resources, which will contribute around
Rp 56 trillion (77% of non-tax revenues).
The largest contributors are oil and gas,
at around 68% and 24% of total natural
resource revenues, respectively. Profit
transfers from state enterprises are projected to contribute Rp 8.2 trillio n,
which seems optimistic in view of the
shortfall in the first semester of 2001.
Targeted tax revenue is up by around
Rp 32 trillion, or 17%, relative to the revised 2001 budget. On the other hand,
revenues from oil and gas are budgeted
to fall significantly, by Rp 24 trillion. On
balance, total revenues are expected to
rise only marginally by about 1%—implying a fall of about 7% in real terms.
Expenditure. Expenditure in 2002 is
targeted to fall below the revised 2001
expenditure level by about Rp 8 trillion. The reduction is concentrated on
current expenditures, while development spending is projected to increase
slightly (in nominal terms). As in the
revised 2001 budget, around half of
development expenditure will be financed through foreign loans. As for
the fiscal decentralisation component
o f e x p en d i tu re , b a l a n c in g f u nd s
(transfers to lower levels of government) will increase by nearly Rp 9 trillion. Over 65% of the increase will take
the form of the General Allocation
Fund (Dana Alokasi Umum, DAU).
Two components of the current expenditure side are budgeted to fall. In-

Reza Y. Siregar

terest payments on domestic and external debt will decline in total by Rp 2.6
trillion. Of much greater significance,
however, is the decline in expenditure
on subsidies on petroleum products,
which are to be cut sharply by around
Rp 21 trillion, or roughly 40%. This will
force the government to raise fuel prices
by an average of 30% (beginning in January 2002). Despite this, the projected fuel
subsidy will remain relatively high at Rp
32 trillion, equivalent to around 68% of
total development expenditure. Similarly, electricity tariffs will also have to
increase by 3–4% in each quarter of 2002
to generate a total subsidy reduction of
around 1.9%. In a bid to lessen the burden on low-income people resulting
from these key subsidy cuts, compensatory programs will be implemented. In
particular, subsidies on food products
will increase by more than Rp 2.3 trillion, or by over 90%.
Four sectors were listed as key targets
for development spending in the 2002
budget: Agriculture, Forestry, Marine
and Fisheries; Education, National Culture, Youth and Sport; Social Welfare,
Health and Women’s Empowerment;
and Transportation, Meteorology and
Geophysics. Together these account for
more than 50% of total development
expenditures.
Overall Balance and Financing. The
budget deficit will be around Rp 11
trillion less than in 2001, or 2.5% of
GDP. About 59% of this will be financed domestically, from privatisation and asset recoveries by IBRA. The
latter is expected to contribute nearly
85% of the total.
Are the Key Assumptions
for the 2002 Budget R ealistic?
Growth Rate. The initial growth target
of 5% gave rise to concern. The former
Minister of Finance, Bambang Sudibyo,
underlined two reasons for pessimism

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Survey of Recent Developments

(Kompas, 17/9/01). The first was the current slowdown of major world economies, in particular the US, which seemed
very likely to be amplified by the new
war on international terrorism. The second was that the 2002 budget appears
to be contractionary rather than expansionary. The planned deficit is smaller,
and nearly all categories of expenditure
(including the provision of subsidies and
transfers to the regions) will fall as a
percentage of GDP by comparison with
the revised 2001 budget.
It is of immense importance, therefore, to do everything possible to raise
private sector confidence and willingness to invest. Unfortunately, however,
the US-led attacks on Afghanistan have
heightened uncertainty in Indonesia.
There have been demonstrations at the
US embassy in Jakarta and against a
number of US businesses. At the Japanese consulate general in Makasar,
South Sulawesi, staff were forced to
lower the Japanese flag and some property was destroyed. A bomb was detonated at a US-franchised business, and
another was found at the office of an
Australian insurance company, both in
the same city.
The gloomy outlook is shared by
other economies in the region. Singapore
has revised its 2001 growth projection
from a 1.5% expansion to a 3% contraction (Straits Times, 11/10/01), while a
recent forecast by Morgan Stanley and
Co. has revised downward the projected
overall growth rate for Asian countries,
excluding Japan, by 1% for 2001 and
2002 (Business Week, 22/10/01). Global
consumer confidence has also declined
sharply. Under the threat of potential
global recession at least through the first
half of 2002, the downward revision to
4% growth for Indonesia therefore
seems rather too optimistic.
Monetary Indicators. Different explanations have been offered for Indone-

291

sia’s high and increasing inflation. Depreciation of the rupiah and upward
adjustment of government-controlled
prices for key commodities such as fuel
and electricity have frequently been
blamed by both BI and BPS. There is also
a view that a widening of the budget
deficit cannot be financed ‘without leading to a serious further increase in inflationary pressures’ (Singh 2001). But
there has been surprisingly little emphasis—at least in government circles—on
the ro le o f exces sive ba s e m oney
growth, which is entirely attributable to
BI’s policies.
By contrast, McLeod (2001) argues
implicitly that there is no reason why the
target inflation level of 8% for 2002 cannot be met, provided BI sticks to the targeted growth rate for base money in the
LOI. This would rule out the possibility
of financing the budget deficit by money
creation, which is presumably the source
of Singh’s concern. Indeed, lower inflation could be achieved by reducing this
growth rate further. Unfortunately, however, BI’s track record for meeting the
LOI commitments is poor, and it has
shown in the recent past that it is prepared to trade off looser monetary
conditions—and, therefore, higher inflation—in the hope that this will hasten
recovery of the economy, avoid further
weakening of the banking system, and
contribute to a smaller budget deficit by
way of lower interest rates on bank recapitalisation bonds. In fact, the opposite is likely to be true. Slower base
money growth will lower inflation, soon
reducing inflationary expectations and
thus encouraging a decline in nominal
interest rates and a strengthening of the
rupiah. Indonesia’s experience from mid
1998 to mid 1999 shows that this policy
is quite compatible with an expanding
economy.
To cut subsidies by around Rp 20 trillion in 2002, the government will in-

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292

crease fuel prices and electricity tariffs
in late 2001 and early 2002. Many commentators take the view that this will
add to inflation. Indeed, increases in fuel
prices appear to have been largely responsible for the large mid-year increases in the transport component of
the consumer price index. However,
price controls have never been successful as an anti-inflation mechanism, and
the upward adjustment of administered
prices should have little lasting impact
on in flation, provided that money
growth is kept under control. On the
other hand, if BI responds to increases
in administered prices by increasing the
money supply to offset their immediate
negative impact on real money balances,
inflation is very likely to exceed the forecast level.
Likewise, many take the view that
increasing political instability and security concerns will cause further rupiah
depreciation and that this will add to
inflation. Again, in reality it is only
tradables prices that would be increased
in this scenario. Provided that the money
supply is not increased, real money balances will fall, and tradables prices
wo uld hav e to fa ll in order to reestablish equilibrium in the market for
money. In other words, there would be
a change in the price of tradable relative
to non-tradable goods and services,
without any implied increase in the average price level.
Thus it would seem that further empirical studies of inflation are needed if
there is to be a clearer understanding of
its causes. In turn, this should make it
possible for Indonesia to bring inflation
down permanently to much lower levels than those experienced recently.
Financing Components. The burden of
amortisation of public sector foreign
debt will be substantial next year, at approximately twice the 2001 amount, accounting for around 97% of the planned

Reza Y. Siregar

budget deficit of Rp 43 trillion. To keep
the deficit to 2.5% of GDP, the government is depending heavily on its ability
to generate new project and program
loans, and to negotiate the rescheduling
of maturing foreign debt. In turn, this
will depend on its ability to retain the
goodwill of the international community, which seems increasingly in doubt
as the US-led war on international terrorism results in threats to US citizens
and businesses resident in Indonesia,
and calls for Indonesia to cut its ties with
the US. The government’s success, or
lack of it, in meeting its LOI commitments will also determine whether further loans will be forthcoming from the
IMF, and whether Indonesia’s creditors
will be willing to reschedule debt repayments and provide new loans. At the
time of writing, there were few grounds
for optimism in relation to each of these
questions.
Two other key sources of revenue to
finance the 2002 budget are privatisation
of state-owned enterprises and asset recoveries in relation to liquidated and
restructured banks. These are expected
to contribute Rp 4 trillion and Rp 22 trillion, respectively. The assets of the stateowned enterprises are estimated at
around Rp 850 trillion (Tempo, 27/8/01),
although it is not clear whether this refers to market value or book value. The
assets under IBRA’s control have a book
value of around Rp 650 trillion, the market value of which is estimated to be
about 30% of that amount (Straits Times,
12/10/01). Clearly there is considerable
scope for generating cash revenues to
finance budget expenditures from these
two sources; whether this is realised,
however, is largely a matter of political
will and, in particular, the government’s
capacity to act independently of the DPR
in these matters. Again, early developments have not been encouraging, as
discussed below.

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Survey of Recent Developments

NEW LETTER OF INTENT
After eight months of delay, the government signed a new Letter of Intent with
the IMF in August. The last LOI was
signed in September 2000, with another
supposed to have been signed in December 2000. The government’s failure
to fulfil several of its previous commitments prompted the Fund to freeze the
subsequent $400 million loan tranche.
The latest agreement paves the way for
the IMF to disburse this tranche, and for
the Pa ris Club o f credit or natio ns
(whose planned meeting in September
was delayed indefinitely following the
terrorist attacks in the US) to discuss the
rescheduling of some $2.8 billion of
public sector foreign debt due to mature
this year.
The new LOI (dated 27/8/01) covers
six key areas: overall macroeconomic
policy objectives; fiscal decentralisation;
banking sector reforms; restructuring of
banking and corporate assets, particularly those under IBRA; legal reforms;
and reforms in the public sector and
other key sectors in the econom y
(www.imf.org). There are indications in
the new LOI that the IMF has agreed to
ease some targets in response to the
president’s request that donor countries
and institutions allow Indonesia some
‘breathing space’ in fulfilling its debt
obligations. The inflation target for 2001
has been raised to a range of 9–11% from
9.3% in 2000. Estimated GDP growth for
2001 is down from 4.8% in 2000 to
3–3.5%. On the other hand, the base
money target growth rate has been set
at 12.5% p.a., considerably less than the
19% growth recorded in the year to August 2001. The new LOI also shows a
shift in the IMF approach away from
micro-management to broader macro
guidelines.
In its remarks during the CGI (Consultative Group on Indonesia) meeting
in April, the IMF expressed its objection

293

to a proposal that the government might
issue bonds using future natural resource revenues as collateral. No such
proposal is to be found in the new LOI.
A further demonstration of the government’s efforts to regain IMF trust is evident in its commitment to revising the
law on BI to ensure a strong, independent and accountable central bank (although it has been decided that at least
a further six months is needed to study
the options for revision of the central
bank law). BI had been exposed to various forms of interv