00074910012331338943
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of Recent Developments
Eric D. Ramstetter
To cite this article: Eric D. Ramstetter (2000) Survey of Recent Developments, Bulletin of
Indonesian Economic Studies, 36:3, 3-47
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Date: 19 January 2016, At: 22:06
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Bulletin of Indonesian Economic Studies
Vol 36 No 3, December 2000, pp. 3–47
SURVEY OF RECENT DEVELOPMENTS
Eric D. Ramstetter*
International Centre for the Study of East Asian Development, Kitakyushu
SUMMARY
Indonesia continued to struggle with institutional change and political
uncertainty in recent months. President Abdurrahman Wahid delegated
some responsibilities to Vice President Megawati Sukarnoputri, but
subsequently appointed a new cabinet that consisted primarily of people
close to him, making many wonder if he had really given up any power.
The killing of UN personnel in Atambua, West Timor, led to renewed
pressure on the government to rein in the militias operating there. The
president also tried to increase his control over the military, the police
and the judiciary, with mixed results.
The economy continued to recover, with the annualised growth rate
in the first half of 2000 reaching 4.6%. This growth was fuelled largely by
exports and fixed investment, which markedly increased their shares of
real GDP. Consumption also remained robust. If the recovery of fixed
investment can be sustained, the economy could grow 5% or more for
the year. There is some concern that the money supply is expanding faster
than desired, and inflation accelerated in the third quarter. The fuel price
increase in October will also lead to higher prices, but the annual inflation
rate is likely to be 8% or less. The large domestic debt burden incurred in
recapitalising the banks will raise expenditures significantly, and
increased revenue sharing will reduce central government revenues from
the 2000 and 2001 budgets. Finding the finance for related deficits is the
major macroeconomic challenge for the government in the next few years.
Rapid growth of office and electrical machinery exports in the first
half of 2000 signals a notable structural change. These exports originate
largely from foreign multinationals (MNCs), and their growth indicates
that Indonesia is being integrated into the MNC networks that dominate
these industries in Southeast Asia.
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4
Eric D. Ramstetter
INSTITUTIONAL CHANGE CONTINUES AT A RAPID PACE
The two and a half years since the fall of the New Order regime have
witnessed rapid institutional change that appears likely to continue. In
the last few months the efforts of President Abdurrahman Wahid (Gus
Dur) to define his role in a democratically elected government have been
particularly conspicuous, though there is much scepticism about their
effectiveness, and continued uncertainty about political and
administrative arrangements.
The President, the MPR, and the Economic Policy Making Team
The August session of the People’s Consultative Assembly (MPR, Majelis
Permusyawaratan Rakyat) began with the possibility that some legislators
would mount a serious effort to impeach the president. His report on the
performance of his administration was poorly received, most importantly
because he often gives the impression of making policy statements
without thinking through the issue at hand and is often perceived as
meddling in affairs where he should not. Moreover, his frequent trips
abroad make him vulnerable to charges that he is not giving sufficient
priority to domestic affairs in general, and to the economy in particular.
Partly in response to these criticisms, the president agreed to delegate
much of the authority for day-to-day administration to the vice president.
He also streamlined the cabinet, reducing the number of posts to 26 from
35 in the October 1999 cabinet; however, three key former cabinet posts
(Attorney General, State Secretary and Commander of the Armed Forces)
still exist outside the cabinet. The most significant streamlining came
where two ministries were combined (e.g. Home Affairs and Regional
Autonomy; Agriculture and Forestry; and Manpower and Transmigration), although these mergers may not result in a significant
reduction of the bureaucracy. The government is understandably reluctant
to cut too many government posts at a time when the labour market is
perceived to be weak.
The most significant cabinet changes in the economic policy sphere
were the appointments of Rizal Ramli as Coordinating Minister for
Economic Affairs and Priyadi Praptosuhardjo as Minister of Finance.
Other important new appointments in the economic ministries include
those of Bungaran Saragih (Agriculture and Forestry) and Purnomo
Yusgiantoro (Energy and Mineral Resources). Cacuk Sudarijanto was
appointed Junior Minister for Restructuring of the National Economy,
while retaining his post as head of the Indonesian Bank Restructuring
Agency (IBRA). (In late October he was replaced at IBRA by former
Citibank executive Edwin Gerungan in a move aimed at shoring up
IBRA’s reputation.) A number of previous economic ministers were also
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Survey of Recent Developments
5
retained.1 This cabinet has been dubbed ‘all the president’s men’, because
it consists mainly of people close to Gus Dur, whereas the previous cabinet
was the result of political compromise following his election by the MPR
in 1999. Many observers are sceptical about just how much power the
president has given up in this process (e.g. MacIntyre 2000).
Rizal Ramli is generally seen as a more forceful leader than his
predecessor, Kwik Kian Gie, and this has led some to hope for a more
focused and effective economic policy (ESCOM Monthly Journal,
September 2000: 4–12). Nevertheless, Rizal and Priyadi are thought to
disagree over how to handle the case of Bank Rakyat Indonesia, the bank
Priyadi was previously nominated to head.2 In a related matter, the press
suggested in September that Rizal was in a ‘major turf battle’ with then
IBRA head Cacuk for control of Indonesia’s state-owned enterprises
(Business Times Singapore, 18/9/00: 1), though this may have been an
exaggeration. There is also continuing strain in relations between the
government and Bank Indonesia (the central bank), which is keen to
protect its newly legislated independence and is campaigning for the
release of its governor, Syahril Sabirin, following his detention on charges
of involvement in the Bank Bali scandal (McLeod 2000: 8). Fortunately,
Rizal appears to get along reasonably well with the acting central bank
governor, Anwar Nasution, and the rumoured rifts between Rizal and
others in the administration have not yet led to major problems. In short,
there is guarded optimism that the present policy making team may be
able to work better together than its predecessor, but there are many
potential problems and little margin for error in the next few years.
Whatever transpires, Indonesia is going through a profound process
of institutional change and institution building. The political system and
the policy making bureaucracy are in a state of flux as a result. This process
is likely to proceed in a haphazard and sometimes chaotic fashion for the
foreseeable future and, although the international community often
demands institutional change as a precondition for extending assistance,
a realistic assessment would suggest that many of the changes demanded
(e.g. to the judiciary’s handling of bankruptcy proceedings) will take years
to realise. Most of the international agencies on the ground—the
International Monetary Fund (IMF), the World Bank, and bilateral
agencies—appear to be aware of this contradiction, but there are some
areas in which Indonesia may be forced to respond rather rapidly.
Security and the Role of the Military
The international community has become increasingly impatient with
the Wahid administration over the slow process of repatriating East
Timorese refugees now in West Timor, and the continuing activities of
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
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Eric D. Ramstetter
armed militias in refugee camps. The latter problem came to a head when
three United Nations (UN) aid workers were killed in Atambua on
6 September. UN officials issued stern warnings to Indonesian
representatives at the Millennium Summit in New York, and the US
Defense Secretary, William Cohen, gave a similar warning during a visit
to Jakarta, saying that a failure to disband the militias would ‘have
consequences for Jakarta’s relations with the international community’.
The Indonesian response to Cohen’s vague threat was generally negative.
Many observers, and most of the press, complained about foreign
intervention in domestic affairs, and some went so far as to suggest that
the US was threatening a trade embargo against Indonesia, though there
is no evidence of this (Capital, 2–8 October 2000: 6–8). In reality, failure to
control the militias might have negative effects on Indonesia’s efforts to
secure economic aid, but the strong strategic interest of the US, the
European Union, Japan and Australia in supporting Indonesia’s new
democracy makes it very unlikely that a trade embargo or any major cut
in funding will result as long as the country remains democratic.3
Indonesia is now very dependent on international assistance,
however, and as the October meeting of the Consultative Group on
Indonesia (CGI) in Tokyo approached, the Cohen threat initially appeared
to have had the desired effect of spurring a new set of efforts to disarm
the militias in West Timor. Another important member of the new cabinet,
Susilo Bambang Yudhoyono (Coordinating Minister for Political, Social
and Security Affairs), was dispatched to New York to explain to UN
authorities the actions that the Indonesian authorities were planning to
take, and was given the responsibility of disarming the militias. Vice
President Megawati attended a high profile collection of arms from militia
personnel on 24 September, but the occasion ended in disorder when
militia members stormed the collection point and took back most of the
arms collected during the day. After this farce, and given the previous
record of the Indonesian government, many observers were sceptical
about its efforts to disarm the militias. The government continued to insist
that it was serious, and during a visit to Singapore in early October,
Minister Rizal emphasised that ‘a large number of weapons’ had been
confiscated (Reuters wire story, 8/10/00). Also in early October,
Indonesian officials detained an important militia leader, Eurico Guterres,
on weapons charges, indicating that those favouring a tougher stand on
the militias may be prevailing, at least in the short run. However, a
statement by Defence Minister Mohammad Mahfud Mahmodin in
September indicated a reluctance within the government to address the
East Timor issue realistically.4
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Survey of Recent Developments
7
Perhaps more important in the medium term are the president’s
attempts to exercise more control over the security apparatus, the military
and the police. Through the appointment of Coordinating Minister
Bambang Yudhoyono, the subsequent abolition of the post of Deputy
TNI (armed forces) Commander and removal of the office’s occupant,
General Fachrul Razi, and the controversial (and probably illegal)
dismissal of the national police chief, Gus Dur has tried to signal that he
is indeed supreme commander as mandated by the constitution.
However, he has apparently been unable to get his candidates appointed
to top military posts (Tempo, 9–15 October 2000). The military appears
highly demoralised, and it is unclear whether the chain of command really
works any longer. In short, there is still considerable doubt that recent
actions can be translated into the increased political and military will
necessary to control militias in West Timor, to manage volatile situations
in other regions such as Maluku, or to stop the series of bombings in
Jakarta and elsewhere over the last six months. Some observers (e.g. The
Economist, 3 September – 6 October 2000) have wondered if certain serving
or retired senior military officials might be behind some of these problems,
and have suggested that the president’s efforts to assert more control
over the security apparatus could end in failure.
The Stock Exchange Bombing, the Soeharto Trial,
Bank Restructuring, and the Rule of Law
The bombing of the Jakarta Stock Exchange building on 13 September
created a domestic outcry. This was the latest in a series of terrorist acts
that appeared to be correlated with steps in the bid to try former President
Soeharto and other family members on corruption charges.5 Apparently
convinced that these events were related, the president ordered the arrest
of Soeharto’s youngest son, Hutomo Mandala Putra (Tommy), and
another associate, in connection with the bombing. However, the then
police chief refused to make the arrest, saying that there was no evidence
to warrant it, though Tommy was taken in for questioning in the affair.
This led to the firing of the police chief. Subsequently, a group who
appeared to hail from Aceh, and who included two individuals from a
special military unit, were arrested in connection with the bombing.
Meanwhile a panel of judges ruled that former President Soeharto
was medically and psychologically unfit to stand trial. This effectively
ends the government’s attempts to try the former president on criminal
charges, unless a higher court overturns the decision or another court
rules differently on a separate indictment.6 Here again the president
expressed dissatisfaction with the proceedings and hinted that he would
seek to replace the judges that presided over the case (JP, 3/9/00: 1).
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Eric D. Ramstetter
In a different sphere, as of 27 August IBRA had brought bankruptcy
proceedings in 51 cases, and civil court proceedings in 146 cases (IBRA,
Monthly Report, September 2000: 5). Meanwhile, by 16 August, IBRA had
had 37 legal cases brought against it. IBRA has lost the majority of the
cases where judgments have been rendered.
As discussed by Fane (2000a: 36–7), judicial corruption is a major
problem in Indonesia, and is widely thought to be a factor in the decisions
rendered in the Soeharto and IBRA cases. In this context, the president’s
comments about the Soeharto trial are perhaps understandable. There is
also a perception that a similar level of corruption extends to the police,
which may explain the president’s desire to give specific instructions to
them. However, the police chief was legally obliged to refuse the
president’s order if there was indeed no evidence to support the arrest of
Soeharto’s son. The president is also legally required to consult with the
legislature before dismissing the police chief. More fundamentally, the
fact that Gus Dur has expressed opinions about specific cases before the
courts or the police is disturbing. The president does have an important
role to play in the appointment and removal of judges and of the police
chief, but the challenge is to reform the judiciary and police without
continuing the practice of excessive executive control that existed under
Soeharto. See box 1 for a brief discussion of progress with law reform.
MACROECONOMIC TRENDS AND POLICY ISSUES
There are finally signs that the economy may be recovering after the sharp
contraction in 1998 and lacklustre performance in 1999. Indeed, it seems
that first consumers and then investors have become used to political
uncertainty and institutional flux, and have begun to spend more.
Expenditure Components of GDP
Gross Domestic Product (GDP) grew 4.6% in the first half of 2000
compared with the first half of 1999, in marked contrast to negative growth
rates of –2.6% a year earlier, and –13.2% in 1998 (table 1). In 1999 and in
1996 (the last full pre-crisis year), the annual growth rate exceeded the
rate for the first half. This was also the case in 1992–93 and 1995, and
many observers expect growth to be stronger in the second half of 2000
as well.7 Growth in the first half of the year was still rather slow compared
to the annual growth rates of 7% or more in 1989–96, but is likely to be
only slightly below the rates of 5–6% in 1986–88, the last time Indonesia
emerged from an economic slowdown (ICSEAD 2000: 87–8).
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
Survey of Recent Developments
9
Box 1 THE FAILURE OF LAW REFORM
There is growing despondency among Indonesian law reform
leaders. The window of opportunity that opened after Abdurrahman
Wahid’s election seems to have almost closed. Few expected that the
flood of statutory reforms approved by Habibie would achieve more
than symbolic change, but it was hoped that a purging and
restructuring of key legal institutions under his successor would
usher in a new legal culture. The commissions set up to overhaul the
corrupt and incompetent judicial system have, however, run headon into the lingering power of the New Order system.
Some operating methods of the New Order were those of criminal
gangs. The territorialised system of the petty standover criminals,
or preman, was writ large as the state used systematic intimidation
and corruption to extract rents to help sustain Soeharto’s political
franchise. Controlling the courts was a key part of this strategy, and
Soeharto was a master: barely a decision went against his government
in three decades. Post-Soeharto reformasi succeeded in publicly
identifying the essential criminality of much of public life and pushed
many key figures into the background, but it has failed to effect any
real change to the system itself. In many cases, the ‘gangs’ pushed
out of the state’s systems simply went ‘private’, operating now as
enemies of the state. The consequences can be seen in aspects of militia
activity in Eastern Indonesia, bombings in Jakarta and the rise of
vigilantism—a response to state loss of control. More subtly, it is
demonstrated by the continued corruption of the courts, which favour
the old elite at the expense of reformasi, as shown by the farce of the
Soeharto trial and the recent dismissal of charges against three
allegedly corrupt judges. So far, not one ‘big fish’ has been both finally
convicted and jailed.
It is now becoming obvious that the government has limited
authority to control the state apparatus; it can offer little guarantee
of the proper functioning of the legal system; and it has almost no
ability to prevent or punish violence or corruption. Alarmingly, the
president’s response is, increasingly, political intervention—ordering
arrests and trials—itself one of the causes of past decay in legal
institutions.
Tim Lindsey
University of Melbourne
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Eric D. Ramstetter
TABLE 1 Real GDP Growth, Real Per Capita GDP, and Expenditure Shares of GDP,
1996–2000
GDP growth at 1993 prices
(% p.a.)
1996
1997
7.8
4.7
1998
–13.2
1999
S1a
1999
S2a
2000
S1a
–2.6
3.2
4.6
Per capita GDP and consumption expenditures in 1993 prices (1996 = 100)b
GDP per capita
100
103
88
87
88
89
Private consumption per capita 100
106
101
100
102
101
Shares of GDP at 1993 prices (%)
Private consumption
62.1
Foodc
34.5
Government consumption
7.7
Fixed investment
31.1
Inventory investment
1.4
Exports
27.2
Imports
29.4
64.0
35.5
7.3
32.3
0.8
28.0
32.3
71.2
39.6
7.1
24.0
–2.9
35.8
35.2
72.1
40.0
7.6
19.0
–1.3
23.7
21.1
72.2
40.1
6.8
18.8
–2.2
24.8
20.4
70.4
38.0
7.2
22.0
–6.2
27.5
21.1
Shares of GDP at current prices (%)
Private consumption
62.4
Foodc
33.3
Government consumption
7.6
Fixed investment
29.6
Inventory investment
1.1
Exports
25.8
Goodsc
21.7
Servicesc
4.1
Imports
26.4
Goodsc
21.5
Servicesc
4.9
61.7
33.6
6.8
28.3
3.4
27.9
24.2
3.7
28.1
21.9
6.2
66.2
39.0
5.4
22.1
–3.0
50.5
46.3
4.2
41.2
31.8
9.4
73.4
46.4
6.9
19.1
–5.9
33.8
30.6
3.2
27.5
20.7
6.7
74.5
45.1
6.2
19.5
–9.6
36.3
33.2
3.0
26.8
19.9
6.9
69.3
46.7
7.3
24.0
–10.8
37.2
29.6
2.7
27.0
17.9
6.5
a
S1 = first half, S2 = second half; growth rates refer to the growth over the corresponding half of the previous year.
b
Real GDP is originally estimated at 1993 prices; per capita GDP is then rebased to
1996; population is estimated to grow by 1.49% in 1999 and 1.47% in 2000 (growth
rates were 1.51% in 1998 and 1.53% in 1997), and population growth is assumed to
be evenly distributed throughout 1999 and 2000.
c
Figures for 2000 S1 in these categories refer to the first quarter of 2000 only, and
have not been revised as is the case for other GDP components.
Sources: BPS (2000a, 2000c); World Bank (2000b).
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Survey of Recent Developments
11
As a result of the contraction in 1998 and the first half of 1999, per
capita real GDP was 13% lower in the first half of 1999 than in 1996
(table 1). It has since started to recover, and was back to 11% below precrisis levels in the first half of 2000. Private consumption per capita (as
calculated from the national accounts) never fell below 1996 levels
throughout the crisis. By contrast, if estimates of consumption expenditure
from the National Socio-Economic Survey (Susenas) are deflated using
the consumer price index (CPI), real consumption expenditure appears
to have declined 3% between 1996 and 1999 (figure 1). If the private
consumption deflator from the national accounts is used instead of the
CPI to deflate these estimates, the decline becomes much larger (16%),
because the private consumption deflator rose much more rapidly than
the CPI in this period (table 2). For a discussion of anomalies among
various price deflators in Indonesia, see box 2.
FIGURE 1 Shares of Consumption Expenditure by Expenditure Group (%)
and Index of Real Per Capita Expenditurea
(1996 = 100)
100%
100
80%
80
60%
43%
45%
40%
37%
35%
41%
38%
60
40
20
20%
20%
20%
22%
1993
1996
1999
0
0%
Lowest 40%
Middle 40%
Top 20%
Real per capita expenditure
a
Per capita expenditure is deflated by the consumer price index.
Sources: BPS (2000b); World Bank (2000a).
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Eric D. Ramstetter
TABLE 2 Various Price Indicators, 1997–2000 (1996 = 100)
Item
1997
1998
1999
S1a
1999
S2a
2000
S1a
GDP deflatorb
113
207
National accounts deflators by expenditure categoryb
Private consumption
108
192
Foodc
110
211
Government consumption
107
159
Fixed investment
104
201
Exports
118
307
Imports
109
270
National accounts deflators by industryb
Agriculture, fisheries, etc.
113
195
Mining & quarrying
118
291
Manufacturing
117
187
Electricity, gas, & water
101
141
Construction
103
215
Trade, hotels & restaurants
108
221
Transport & communications
103
164
Finance, ownership, business services
117
205
Community, social, personal services
117
178
Consumer price indexd
106
168
Foodstuffs, prepared foods & beveragesb 107
194
Wholesale price indexe
109
218
Agriculture
112
189
Mining
107
131
Manufacturing
104
169
Imports
107
239
Exports
117
297
Oil & gas
118
275
Non-oil & gas
115
326
Non-oil export prices from Rosnerf
119
342
Rp/$, period average
124
428
Rp/$, end of period
195
337
233
224
243
236
279
215
246
349
336
230
261
207
244
344
328
238
292
241
278
346
346
251
235
215
155
252
244
229
225
211
205
251
234
259
158
207
238
275
239
262
270
356
323
227
265
221
156
268
244
192
225
201
200
233
234
258
166
209
236
245
328
263
239
314
325
235
316
230
158
288
251
208
230
222
206
239
252
282
174
212
248
262
436
303
na
334
342
a
S1 = first half, S2 = second half.
b
Deflators calculated from annual or quarterly data defined as 1993 = 100 in the source.
c
See table 1, note c.
d
Annual averages of monthly price indices defined as 1996 = 100 in the source.
e
Annual averages of monthly price indices defined as 1993 = 100 in the source.
f
Annual averages of quarterly price indices defined as 1994 Q2 = 100 in $ in the source, translated to rupiah at period average exchange rates.
Sources: Bank Indonesia (BI), Indonesian Financial Statistics (IFS) (various issues); BPS (2000a,
2000c); IMF (2000); Rosner (2000); World Bank (2000a).
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Survey of Recent Developments
13
Box 2 NATIONAL ACCOUNTS DEFLATORS AND
PRICE INDICES IN INDONESIA
In Indonesia, there are substantial differences between trends in
national accounts deflators and other price indices that appear to
measure similar prices (table 2). As indicated in the discussion of
consumption trends, there is a large difference between trends in
the private consumption deflator, which show that the cost of private
consumption rose 138% between 1996 and the first half of 2000, and
trends in the CPI, which suggest a 106% rise in the same period.
Even if the comparison is limited to food, the consumption deflator
is much higher by the first quarter of 2000 than the corresponding
CPI component: 292 versus 239. National accounts deflators also
indicate much larger increases in export and import prices than do
the corresponding components of the wholesale price index (WPI).
Furthermore, in the first half of 2000, national accounts deflators are
higher than the corresponding WPI components for mining and
manufacturing, but the WPI is higher for agriculture. Some
differences between national accounts deflators on the one hand and
CPI and WPI components on the other are to be expected, because
these indicators measure prices of different baskets of goods and
services, and are calculated using different formulae. However, the
differences observed in table 2 are often so large as to make one
wonder if substantial measurement errors are involved. This point
is further underscored by Rosner (2000), who compares a relatively
comprehensive set of export price estimates with the WPI export
components, which have more limited commodity coverage.
The distribution of consumption expenditures appears to have
become somewhat more equal in 1996–99 (figure 1). The 40% of
households with the lowest expenditures increased their share of total
expenditures from 20% to 22%, while the share of the middle 40% rose
from 35% to 38%, and that of the top 20% fell from 45% to 41%. However,
the share of poorer households would probably rise much less if one
were to calculate the shares in constant prices, and to account for the fact
that food occupies a much larger share of expenditures in poor
households, because food prices rose more rapidly than prices of other
consumer goods (table 2).8
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14
Eric D. Ramstetter
There were conspicuous increases in fixed investment and exports in
the first half of 2000 (table 1). Consequently, shares of these items in real
GDP rose from 19% to 22% and from 24% to 28%, respectively, compared
to the first half of 1999. The share of fixed investment was still far below
pre-crisis levels (e.g. 31% in 1996), but the long awaited turnaround in
fixed investment finally appears to have begun in the first half of 2000.9
Likewise, the share of imports remained steady after falling dramatically
in 1999, although it too is still far below pre-crisis levels. If the turnaround
in fixed investment is sustained, the share of imports is likely to rise in
the medium term, because capital goods account for a large proportion
of imports. On the other hand, the share of private consumption fell in
the first half of 2000 after rising steadily in 1997–99. Of particular
significance is the levelling off and apparent decline in the share of food
expenditures in the first quarter of 2000.10 To the extent that the estimate
is reliable, the large negative share of inventory investment indicates that
existing inventories were rapidly drawn down in the first half of 2000.11
There are some markedly different patterns observed if shares are
calculated in current prices, reflecting the fact that price movements have
varied greatly across GDP components (tables 1 and 2). For example, the
rise in the share of private consumption from 1997 to the second half of
1999, and its subsequent fall, are much larger when shares are calculated
in current prices. This reflects the fact that the consumption deflator rose
more rapidly than the GDP deflator through 1999, a pattern reversed in
the first half of 2000. Food shares increased particularly sharply in current
prices, the rise in this deflator being even greater than that in the
consumption deflator. In 1999 and the first half of 2000, the fixed
investment deflator also rose quite rapidly, resulting in smaller declines
or larger increases in GDP shares when measured in current prices.
However, by far the largest differences between nominal and real shares
were in trade shares of GDP, which were also much larger in current
prices, because export and import prices rose much faster than the GDP
deflator through 1999.
Monetary Developments
One of the more important consequences of the crisis, discussed at length
by Fane (2000b), was the rapid rise in prices from early 1998 through
early 1999. For example, the annualised rate at which the CPI increased
(compared to the same month a year earlier) accelerated from under 10%
in the last half of 1997 to 40% or more in April 1998 to March 1999, before
falling back below 10% from August 1999 (figure 2). Earlier changes in
base money and the exchange rate appear to be highly correlated with
changes in the CPI in this period. More recently, CPI inflation declined to
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
Survey of Recent Developments
15
FIGURE 2 Exchange Rate Movements, Inflation and Base Money Growtha
(% p.a.)
Rp/$,
period average
CPI,
Base money
120%
480%
100%
400%
80%
320%
60%
240%
40%
160%
20%
80%
0%
0%
-20%
Jul-97
-80%
Jan-98
Jul-98
Rp/$, average
Jan-99
Jul-99
CPI
Jan-00
Jul-00
Base money
a
All growth rates are annualised rates comparing the month in question with the
same month one year earlier. Monthly money supply figures are measured at the
end of the month; exchange rates are monthly average rates; various components
of the CPI are collected at different intervals throughout the month.
Sources: BI, IFS (various issues); World Bank (2000a).
very low levels between September 1999 and June 2000 (of –1% to 2%),
before increasing to 5% in July 2000, 6% in August 2000, and 7% in
September 2000. Growth rates of base money have been more volatile,
but were generally below 20% from May 1999 to May 2000; they then
climbed to 22% in June and July and 20% in August, before falling back
to 16% in September. As a result, by the end of August base money was
5.7% higher than the performance criteria, and by the end of September
it was 5.2% higher than the indicative target identified in the Letter of
Intent submitted to the IMF in July (Bank Indonesia [BI], Indonesian
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
16
Eric D. Ramstetter
Financial Statistics [IFS], various issues; tables downloaded from
). Some observers have worried that failure to control
the money supply would lead to increased inflation in the second half of
2000 (Feridhanusetyawan 2000: 2–3; McLeod 2000: 16–20). Moreover, the
government began reducing its subsidy of oil products on 1 October,
raising fuel prices an average of 12%, a move that is generally thought to
add to inflationary pressures. Nonetheless, Bank Indonesia still expects
that annual CPI inflation will be only about 1% higher than the 5–7%
predicted earlier (Dow Jones Newswires, 11/10/00), and the data in
figure 2 suggest that this is a reasonable estimate.
One reason that Bank Indonesia is hesitant to slow the growth of
money is that this would require it to issue certificates of deposit (Sertifikat
Bank Indonesia, SBI). In conjunction with the bank recapitalisation
program the government has issued a large amount of floating rate bonds,
which pay the same rate as the three-month SBIs. Tighter monetary policy
and higher interest rates would therefore increase the domestic interest
burden in the budget. Three-month SBI rates have already moved
markedly higher in recent months, from 11.1% in June to 13.0% in July,
and 13.3% in August (BI, IFS, various issues). Table 3 shows that 28-day
SBI rates were not much higher than interest rates on simple time deposits,
underscoring the weak incentive to hold these securities. Deposit interest
rates have been much lower in foreign and joint banks in recent months,
suggesting that the public may have more confidence in these banks than
before. It is also interesting that private national banks now pay lower
interest than state banks, reversing the large differential that existed in
1996–97, when their liabilities were not explicitly guaranteed.
Indonesia’s bank recapitalisation program is nearing completion, as
illustrated by the turnaround in the level of equity from negative to
positive by June 2000 in the private banks and by August in the state
banks (table 3). The recapitalisation has been accomplished only because
the government has taken control of a large portion of banking assets
and assumed commensurate responsibility for associated debts. The scale
of this bailout of bank depositors and creditors can be seen from the sharp
decline in loans extended by commercial banks, from Rp 487 trillion at
the end of 1998 to only Rp 251 trillion in the first half of 1999. Bank lending
may finally be recovering, as total loans at the end of June 2000 were
Rp 15 trillion, or 7%, higher than the corresponding figure at the end of
1999, with most of the increased lending going to manufacturing, other
industries, and trade. However, there was very little increase in lending
between June and August 2000.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
Survey of Recent Developments
17
TABLE 3 Selected Interest Rates and Indicators for Commercial Banks, 1997–2000
(end of period)
Item
Dec-97
Dec-98
One-month time deposit and SBI rates (%)
State banks
19.7
41.2
Private national banks
27.7
41.9
Foreign & joint banks
17.7
33.1
SBI interest rate
20.0
38.4
Jun-99
Dec-99
Jun-00
Aug-00
24.1
23.9
19.2
22.1
12.5
12.1
9.5
12.5
10.7
10.2
8.6
11.7
11.5
11.3
9.1
13.5
Equity (including reserves and retained earnings) of commercial banks
(Rp trillion)
Total
47
–99
–216
–22
8
State banks
14
–25
–211
–18
–15
Private national banks
26
–48
–11
–10
15
Commercial banks’ outstanding loans (rupiah & foreign exchange)
(Rp trillion)
Total
378
487
251
225
240
Agriculture
26
39
23
24
23
Mining
5
6
4
4
6
Manufacturing
112
172
91
84
90
Trade
82
96
54
43
47
Services
114
139
53
43
44
Other
39
35
27
27
31
34
10
16
242
23
5
90
47
43
34
Source: BI, IFS (various issues).
These figures reflect both the successes and the problems that IBRA
has had in restructuring Indonesia’s banking sector. Progress has been
somewhat slower when dealing with state-owned than with private
banks, as political infighting complicates the process. To finance the
recapitalisation, IBRA had issued bonds worth Rp 412 trillion by July
2000, including Rp 270 trillion for four state banks (Bank Mandiri, Bank
BNI, Bank BRI and Bank BTN) and Rp 109 trillion for four private banks
taken over in 1998 (Bank Tiara Asia, Bank Central Asia, Bank PDFCI and
Bank Danamon). In addition, in 1998 and 1999 the government issued
repayment bonds to Bank Indonesia totalling Rp 228 trillion, including
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
18
Eric D. Ramstetter
Rp 165 trillion to refund liquidity support and Rp 54 trillion to refund
outlays related to bank guarantees. Combined, these bonds comprise
IBRA’s liabilities of Rp 640 trillion in government bonds, Rp 151 trillion
of which are fixed rate bonds, Rp 271 trillion variable rate bonds, and Rp
218 trillion inflation indexed bonds (Feridhanusetyawan 2000: 11). In the
process of bank restructuring, IBRA had acquired assets with an estimated
book value of Rp 470 trillion at the end of July 2000. However, their market
value has recently been estimated at 35–40% of the book value
(Feridhanusetyawan 2000: 12).
This process has left IBRA and the government with three large
problems. First, in the short run, the government has to find a way to
pay the interest on the recapitalisation bonds. This will represent a serious
fiscal burden over the next few years, as can be seen in the budget
presented below. Second, the government will soon have to start paying
down the principal on these bonds, some of which begin to mature in
2003, creating a further fiscal burden. Third, IBRA has to dispose of the
assets it has acquired. The estimated recovery rate of 35–40% implies
that IBRA should be able to raise only about Rp 175 trillion to help alleviate
these fiscal burdens.
The process of disposing of the IBRA assets is riddled with political
difficulties. First, there are fears that previous owners will just buy back
their old assets, which IBRA seized at a considerable discount to book
value, with the taxpayer left bear the burden of the losses incurred by
these bankers. This could create a strong political reaction against IBRA
and the government, even if could be justified on the grounds that
previous owners made the best offers for the assets. Second, IBRA and
the government are hesitant to sell to foreign buyers, partly because they
risk being seen as offering Indonesian assets to foreigners at ‘fire-sale’
prices. This nationalist sentiment is so strong that IBRA cannot ignore it,
even if nationalism is costly to the economy. As a result, IBRA has been
relatively slow to dispose of the assets it holds. Experience from other
countries suggests, however, that the longer IBRA holds them, the lower
the recovery rate is likely to be.
Another important aspect of IBRA’s operations concerns the
restructuring of corporate debts.12 There are several agencies in addition
to IBRA that are involved in this process, the major ones being the
Indonesian Debt Restructuring Agency (INDRA), the Jakarta Initiative
(JI), and the Financial Sector Policy Committee (FSPC). INDRA was
established in 1998 to help smooth out payments of dollar-denominated
debts over time, but there was very little participation, and the
government has decided to close INDRA as a result. The JI is a private
agency which works to facilitate resolution of debts among creditors and
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
Survey of Recent Developments
19
debtors outside the court system. It has been more successful in eliciting
participation, but the amount of debt worked out through the JI has been
limited. In response to slow progress in resolving corporate debt, the
FSPC began operation in February 2000. This is an interministerial
committee now headed by Coordinating Economics Minister Rizal Ramli;
it is charged with developing guidelines for both bank and corporate
restructuring, and with overseeing the operations of IBRA and the JI.
However, in a statement on 25 September after concluding a consultation
with Indonesia, the IMF expressed concern over the slow progress not
only of IBRA, but also of the JI and the FSPC (JP, 27/9/00: 5).
Fiscal Developments and Public Sector Debt
The budget will be extremely tight for the next several years because of
the cost of servicing the large public debt incurred in the process of bank
restructuring. Table 4 shows that the domestic interest burden will rise
from an actual expenditure of only 0.02% of GDP in fiscal 1998/99 and
1999/2000 (April–March) to a projected 4.2% of GDP in fiscal 2000
(March–December), this increase being almost equal to the total increase
in budgeted expenditure in this period. The newly announced budget
projects that this burden will be similar in 2001 (January–December).13
The burden the domestic debt places on the budget will increase further
in 2003, when the government has to start retiring some of the bonds
issued. Two important sources of revenue for the government to make
up the shortfalls caused by debt servicing are the sale of banking assets
held in IBRA and the sale of state-owned corporations, including banks
and other firms such as PT Telkom. However, progress on privatisation
has been slow, with realised receipts being far below those projected for
1998/99, and probably below the target for 1999/2000 as well. As with
problems in the state-owned banks, an important obstacle to the
privatisation process is the lack of a political consensus on how, or
whether, to proceed.
While public sector debt will place a large burden on government
finances in the next few years, it should be emphasised that Indonesian
fiscal policy has historically been conservative and deficits have been
small. The debt burden is thus likely be a temporary problem, though it
will take some years to bring it down to more moderate levels. Deficits
are projected to increase in the next few years, but the situation is very
different from that in numerous other countries that have experienced
fiscal difficulties in the past (e.g. the Philippines in the 1980s and early
1990s), where large public sector debt was the result of running substantial
deficits over a long period. Indeed, in view of the significant decline in
economic activity in 1998 and the very slow growth in 1999, one could
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
20
Eric D. Ramstetter
TABLE 4 Government Revenue and Expenditure Items (% of GDP)
1998/1999a
Itemc
1999/2000a
Budget Actual Budget Actual
Total revenues
12.61
Domestic revenues
12.61
Income tax
2.43
VAT
2.72
Other domestic taxes
1.10
Import duties
0.52
Export tax
0.09
Non-tax, oil & gas
4.67
Non-tax, other
1.09
Total expenditures
21.66
Current expenditures
12.95
Personnel
2.33
Materials
1.07
Transfers to regions
1.25
Domestic interest
0.18
Foreign interest
2.91
Other current expenditures
5.21
Of which: petroleum subsidy 2.59
Of which: other subsidies
2.37
Development expenditures,
net lending
8.70
Rupiah
4.90
Ministries, agencies
1.27
Regional development
1.01
Other
2.62
Of which: bank restructuring 1.41
Project aid
3.81
Equalisation fund (= balanced fund) na
Financing (= – surplus/deficit) 9.04
Domestic
1.41
Privatisation
1.41
Asset recovery
na
Foreign
10.76
Program aid
6.95
Project aid
3.81
Amortisation of foreign debt
–3.12
Other financing
0.00
Budgetsb
2000a
2001a
14.05
14.05
4.67
2.67
1.09
0.21
0.43
3.87
1.11
17.29
10.91
2.30
1.04
1.33
0.02
2.26
3.96
2.55
1.22
11.47
11.47
3.61
3.07
1.24
0.26
0.23
1.86
1.20
17.28
10.05
2.98
0.98
1.73
0.03
1.82
2.51
0.89
1.27
na
na
4.88
2.93
1.30
0.33
0.07
5.00
na
na
na
2.98
0.96
1.70
0.02
na
na
na
na
16.80
16.80
6.00
3.00
1.50
0.50
0.10
3.60
2.10
21.60
15.10
3.40
1.00
na
4.20
1.80
4.70
2.50
0.90
17.30
17.30
6.60
3.30
1.70
0.70
0.00
3.50
1.50
21.00
13.30
2.80
0.90
na
4.00
1.50
4.10
2.60
0.80
6.37
3.94
1.17
0.92
1.85
0.94
2.43
na
3.24
0.30
0.30
na
5.85
3.42
2.43
–2.96
0.04
7.23
4.57
1.13
1.20
2.23
1.51
2.66
na
5.90
1.15
1.15
na
6.87
4.21
2.66
–2.12
–0.22
na
na
1.08
1.14
na
na
1.62
na
na
na
na
na
3.87
2.25
1.62
na
na
2.90
1.10
na
na
na
na
1.80
3.70
4.80
2.70
0.70
2.00
3.00
1.20
1.80
–0.90
na
2.40
0.80
na
na
na
na
1.60
5.30
3.70
2.30
0.40
1.90
2.50
0.90
1.60
–1.10
na
a
1998/1999 and 1999/2000 refer to fiscal years from April to March; 2000 refers to March–
December; from 2001 fiscal and calendar years will coincide.
b
The 2000 budget is the revised budget as of April 2000; the 2001 budget is the preliminary budget as of 2 October 2000.
c
The items used here correspond to those in Ministry of Finance (2000).
Sources: BPS (2000a, 2000c); BI, IFS (various issues); Ministry of Finance (2000); World
Bank (2000a).
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
Survey of Recent Developments
21
easily argue that the government has been far too conservative, and that
the tendency to underspend the budget in 1998/99, for example, was
very costly to the economy. The costs include growth lost through failure
to stimulate aggregate demand and to maintain aggressive development
spending (in a country that still lacks basic physical and educational
infrastructure). Of course, the argument that Indonesia should have run
larger deficits is based on the assumption that adequate financing could
have been found, and that the funds could have been efficiently allocated
to the necessary projects—which may have been politically impossible
during this period, especially given the problems on the monetary side.
There will also be important long-term changes in the budget in
coming years. The first will result from implementation of a decentralisation plan under which the central government intends to return about
one-quarter of its domestic revenues to local governments, a process due
to begin in January 2001 (McLeod 2000: 30–8). It is unclear how this will
proceed, though the 2001 budget does explicitly account for the change
with the newly established equalisation fund, which is projected to grow
to 5.3% of GDP in 2001. (For a comment on the impact of efforts by local
governments to increase their revenues in the context of fiscal decentralisation, see box 3.) A second change stems from the decision to roll
back some of the subsidies that the government provides. Political difficulties with implementation caused the first increase in fuel prices to be
delayed from 1 April 2000 to 1 October. However, this rise has apparently been carried out with relatively little public outcry, and another
increase of 20% is scheduled to take place in April 2001. The removal of
subsidies is desirable both to lessen the burden on the budget and, more
importantly, to promote efficient use of resources.
The Balance of Payments and External Debt
In contrast to the increased domestic debt burden, the foreign debt burden
is declining, although it remains substantial. Government spending on
foreign interest was over 2.3% of GDP in 1998/99, but is projected to
decline to 1.8% in 1999/2000 and in the 9-month budget for 2000 (table 4).
Financing in the form of debt amortisation is also projected to fall from
–3.0% of GDP to –2.1% and –0.9% respectively. Public sector debt in
dollars, including that of the government and Bank Indonesia, continued
to rise in 1998 and 1999, however, reaching a peak of $76 billion at the
end of 1999 (table 5). On the other hand, the external debt of private
companies and total debt both began to fall in 1999. More importantly,
the relative size of total debt has fallen markedly, from 151% of GDP in
1998 to 89% in the first quarter of 2000, largely owing to the rebound of
the rupiah.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
22
Eric D. Ramstetter
Box 3 DECENTRALISATION AND THE RETURN OF
THE ‘HIGH COST ECONOMY’
There is increasing evidence to suggest that decentralisation, on its
present course, will generate new interregional trade barriers that
work to undermine the integrity of the Indonesian economy and
nation. This is unfortunate, as to enjoy the efficiency benefits of
decentralisation Indonesia must continue to promote and maintain
free and open domestic markets.
Perhaps the most significant barrier to internal trade that may
arise out of, or be exacerbated by, the decentralisation process is the
imposition of taxes, fees, levies, licences and other charges on the
movement of agricultural produce. Many of these distortions were
eliminated by Law 18/1997—much to the relief of farmers and other
small-scale rural producers. Unfortunately this law is now under
threat of revision, with amendments currently being considered by
the DPR that will give greater flexibility to local governments to
generate more revenues from domestic trade and business activities.
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of Recent Developments
Eric D. Ramstetter
To cite this article: Eric D. Ramstetter (2000) Survey of Recent Developments, Bulletin of
Indonesian Economic Studies, 36:3, 3-47
To link to this article: http://dx.doi.org/10.1080/00074910012331338943
Published online: 18 Aug 2006.
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Date: 19 January 2016, At: 22:06
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Bulletin of Indonesian Economic Studies
Vol 36 No 3, December 2000, pp. 3–47
SURVEY OF RECENT DEVELOPMENTS
Eric D. Ramstetter*
International Centre for the Study of East Asian Development, Kitakyushu
SUMMARY
Indonesia continued to struggle with institutional change and political
uncertainty in recent months. President Abdurrahman Wahid delegated
some responsibilities to Vice President Megawati Sukarnoputri, but
subsequently appointed a new cabinet that consisted primarily of people
close to him, making many wonder if he had really given up any power.
The killing of UN personnel in Atambua, West Timor, led to renewed
pressure on the government to rein in the militias operating there. The
president also tried to increase his control over the military, the police
and the judiciary, with mixed results.
The economy continued to recover, with the annualised growth rate
in the first half of 2000 reaching 4.6%. This growth was fuelled largely by
exports and fixed investment, which markedly increased their shares of
real GDP. Consumption also remained robust. If the recovery of fixed
investment can be sustained, the economy could grow 5% or more for
the year. There is some concern that the money supply is expanding faster
than desired, and inflation accelerated in the third quarter. The fuel price
increase in October will also lead to higher prices, but the annual inflation
rate is likely to be 8% or less. The large domestic debt burden incurred in
recapitalising the banks will raise expenditures significantly, and
increased revenue sharing will reduce central government revenues from
the 2000 and 2001 budgets. Finding the finance for related deficits is the
major macroeconomic challenge for the government in the next few years.
Rapid growth of office and electrical machinery exports in the first
half of 2000 signals a notable structural change. These exports originate
largely from foreign multinationals (MNCs), and their growth indicates
that Indonesia is being integrated into the MNC networks that dominate
these industries in Southeast Asia.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
4
Eric D. Ramstetter
INSTITUTIONAL CHANGE CONTINUES AT A RAPID PACE
The two and a half years since the fall of the New Order regime have
witnessed rapid institutional change that appears likely to continue. In
the last few months the efforts of President Abdurrahman Wahid (Gus
Dur) to define his role in a democratically elected government have been
particularly conspicuous, though there is much scepticism about their
effectiveness, and continued uncertainty about political and
administrative arrangements.
The President, the MPR, and the Economic Policy Making Team
The August session of the People’s Consultative Assembly (MPR, Majelis
Permusyawaratan Rakyat) began with the possibility that some legislators
would mount a serious effort to impeach the president. His report on the
performance of his administration was poorly received, most importantly
because he often gives the impression of making policy statements
without thinking through the issue at hand and is often perceived as
meddling in affairs where he should not. Moreover, his frequent trips
abroad make him vulnerable to charges that he is not giving sufficient
priority to domestic affairs in general, and to the economy in particular.
Partly in response to these criticisms, the president agreed to delegate
much of the authority for day-to-day administration to the vice president.
He also streamlined the cabinet, reducing the number of posts to 26 from
35 in the October 1999 cabinet; however, three key former cabinet posts
(Attorney General, State Secretary and Commander of the Armed Forces)
still exist outside the cabinet. The most significant streamlining came
where two ministries were combined (e.g. Home Affairs and Regional
Autonomy; Agriculture and Forestry; and Manpower and Transmigration), although these mergers may not result in a significant
reduction of the bureaucracy. The government is understandably reluctant
to cut too many government posts at a time when the labour market is
perceived to be weak.
The most significant cabinet changes in the economic policy sphere
were the appointments of Rizal Ramli as Coordinating Minister for
Economic Affairs and Priyadi Praptosuhardjo as Minister of Finance.
Other important new appointments in the economic ministries include
those of Bungaran Saragih (Agriculture and Forestry) and Purnomo
Yusgiantoro (Energy and Mineral Resources). Cacuk Sudarijanto was
appointed Junior Minister for Restructuring of the National Economy,
while retaining his post as head of the Indonesian Bank Restructuring
Agency (IBRA). (In late October he was replaced at IBRA by former
Citibank executive Edwin Gerungan in a move aimed at shoring up
IBRA’s reputation.) A number of previous economic ministers were also
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
Survey of Recent Developments
5
retained.1 This cabinet has been dubbed ‘all the president’s men’, because
it consists mainly of people close to Gus Dur, whereas the previous cabinet
was the result of political compromise following his election by the MPR
in 1999. Many observers are sceptical about just how much power the
president has given up in this process (e.g. MacIntyre 2000).
Rizal Ramli is generally seen as a more forceful leader than his
predecessor, Kwik Kian Gie, and this has led some to hope for a more
focused and effective economic policy (ESCOM Monthly Journal,
September 2000: 4–12). Nevertheless, Rizal and Priyadi are thought to
disagree over how to handle the case of Bank Rakyat Indonesia, the bank
Priyadi was previously nominated to head.2 In a related matter, the press
suggested in September that Rizal was in a ‘major turf battle’ with then
IBRA head Cacuk for control of Indonesia’s state-owned enterprises
(Business Times Singapore, 18/9/00: 1), though this may have been an
exaggeration. There is also continuing strain in relations between the
government and Bank Indonesia (the central bank), which is keen to
protect its newly legislated independence and is campaigning for the
release of its governor, Syahril Sabirin, following his detention on charges
of involvement in the Bank Bali scandal (McLeod 2000: 8). Fortunately,
Rizal appears to get along reasonably well with the acting central bank
governor, Anwar Nasution, and the rumoured rifts between Rizal and
others in the administration have not yet led to major problems. In short,
there is guarded optimism that the present policy making team may be
able to work better together than its predecessor, but there are many
potential problems and little margin for error in the next few years.
Whatever transpires, Indonesia is going through a profound process
of institutional change and institution building. The political system and
the policy making bureaucracy are in a state of flux as a result. This process
is likely to proceed in a haphazard and sometimes chaotic fashion for the
foreseeable future and, although the international community often
demands institutional change as a precondition for extending assistance,
a realistic assessment would suggest that many of the changes demanded
(e.g. to the judiciary’s handling of bankruptcy proceedings) will take years
to realise. Most of the international agencies on the ground—the
International Monetary Fund (IMF), the World Bank, and bilateral
agencies—appear to be aware of this contradiction, but there are some
areas in which Indonesia may be forced to respond rather rapidly.
Security and the Role of the Military
The international community has become increasingly impatient with
the Wahid administration over the slow process of repatriating East
Timorese refugees now in West Timor, and the continuing activities of
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Eric D. Ramstetter
armed militias in refugee camps. The latter problem came to a head when
three United Nations (UN) aid workers were killed in Atambua on
6 September. UN officials issued stern warnings to Indonesian
representatives at the Millennium Summit in New York, and the US
Defense Secretary, William Cohen, gave a similar warning during a visit
to Jakarta, saying that a failure to disband the militias would ‘have
consequences for Jakarta’s relations with the international community’.
The Indonesian response to Cohen’s vague threat was generally negative.
Many observers, and most of the press, complained about foreign
intervention in domestic affairs, and some went so far as to suggest that
the US was threatening a trade embargo against Indonesia, though there
is no evidence of this (Capital, 2–8 October 2000: 6–8). In reality, failure to
control the militias might have negative effects on Indonesia’s efforts to
secure economic aid, but the strong strategic interest of the US, the
European Union, Japan and Australia in supporting Indonesia’s new
democracy makes it very unlikely that a trade embargo or any major cut
in funding will result as long as the country remains democratic.3
Indonesia is now very dependent on international assistance,
however, and as the October meeting of the Consultative Group on
Indonesia (CGI) in Tokyo approached, the Cohen threat initially appeared
to have had the desired effect of spurring a new set of efforts to disarm
the militias in West Timor. Another important member of the new cabinet,
Susilo Bambang Yudhoyono (Coordinating Minister for Political, Social
and Security Affairs), was dispatched to New York to explain to UN
authorities the actions that the Indonesian authorities were planning to
take, and was given the responsibility of disarming the militias. Vice
President Megawati attended a high profile collection of arms from militia
personnel on 24 September, but the occasion ended in disorder when
militia members stormed the collection point and took back most of the
arms collected during the day. After this farce, and given the previous
record of the Indonesian government, many observers were sceptical
about its efforts to disarm the militias. The government continued to insist
that it was serious, and during a visit to Singapore in early October,
Minister Rizal emphasised that ‘a large number of weapons’ had been
confiscated (Reuters wire story, 8/10/00). Also in early October,
Indonesian officials detained an important militia leader, Eurico Guterres,
on weapons charges, indicating that those favouring a tougher stand on
the militias may be prevailing, at least in the short run. However, a
statement by Defence Minister Mohammad Mahfud Mahmodin in
September indicated a reluctance within the government to address the
East Timor issue realistically.4
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Survey of Recent Developments
7
Perhaps more important in the medium term are the president’s
attempts to exercise more control over the security apparatus, the military
and the police. Through the appointment of Coordinating Minister
Bambang Yudhoyono, the subsequent abolition of the post of Deputy
TNI (armed forces) Commander and removal of the office’s occupant,
General Fachrul Razi, and the controversial (and probably illegal)
dismissal of the national police chief, Gus Dur has tried to signal that he
is indeed supreme commander as mandated by the constitution.
However, he has apparently been unable to get his candidates appointed
to top military posts (Tempo, 9–15 October 2000). The military appears
highly demoralised, and it is unclear whether the chain of command really
works any longer. In short, there is still considerable doubt that recent
actions can be translated into the increased political and military will
necessary to control militias in West Timor, to manage volatile situations
in other regions such as Maluku, or to stop the series of bombings in
Jakarta and elsewhere over the last six months. Some observers (e.g. The
Economist, 3 September – 6 October 2000) have wondered if certain serving
or retired senior military officials might be behind some of these problems,
and have suggested that the president’s efforts to assert more control
over the security apparatus could end in failure.
The Stock Exchange Bombing, the Soeharto Trial,
Bank Restructuring, and the Rule of Law
The bombing of the Jakarta Stock Exchange building on 13 September
created a domestic outcry. This was the latest in a series of terrorist acts
that appeared to be correlated with steps in the bid to try former President
Soeharto and other family members on corruption charges.5 Apparently
convinced that these events were related, the president ordered the arrest
of Soeharto’s youngest son, Hutomo Mandala Putra (Tommy), and
another associate, in connection with the bombing. However, the then
police chief refused to make the arrest, saying that there was no evidence
to warrant it, though Tommy was taken in for questioning in the affair.
This led to the firing of the police chief. Subsequently, a group who
appeared to hail from Aceh, and who included two individuals from a
special military unit, were arrested in connection with the bombing.
Meanwhile a panel of judges ruled that former President Soeharto
was medically and psychologically unfit to stand trial. This effectively
ends the government’s attempts to try the former president on criminal
charges, unless a higher court overturns the decision or another court
rules differently on a separate indictment.6 Here again the president
expressed dissatisfaction with the proceedings and hinted that he would
seek to replace the judges that presided over the case (JP, 3/9/00: 1).
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Eric D. Ramstetter
In a different sphere, as of 27 August IBRA had brought bankruptcy
proceedings in 51 cases, and civil court proceedings in 146 cases (IBRA,
Monthly Report, September 2000: 5). Meanwhile, by 16 August, IBRA had
had 37 legal cases brought against it. IBRA has lost the majority of the
cases where judgments have been rendered.
As discussed by Fane (2000a: 36–7), judicial corruption is a major
problem in Indonesia, and is widely thought to be a factor in the decisions
rendered in the Soeharto and IBRA cases. In this context, the president’s
comments about the Soeharto trial are perhaps understandable. There is
also a perception that a similar level of corruption extends to the police,
which may explain the president’s desire to give specific instructions to
them. However, the police chief was legally obliged to refuse the
president’s order if there was indeed no evidence to support the arrest of
Soeharto’s son. The president is also legally required to consult with the
legislature before dismissing the police chief. More fundamentally, the
fact that Gus Dur has expressed opinions about specific cases before the
courts or the police is disturbing. The president does have an important
role to play in the appointment and removal of judges and of the police
chief, but the challenge is to reform the judiciary and police without
continuing the practice of excessive executive control that existed under
Soeharto. See box 1 for a brief discussion of progress with law reform.
MACROECONOMIC TRENDS AND POLICY ISSUES
There are finally signs that the economy may be recovering after the sharp
contraction in 1998 and lacklustre performance in 1999. Indeed, it seems
that first consumers and then investors have become used to political
uncertainty and institutional flux, and have begun to spend more.
Expenditure Components of GDP
Gross Domestic Product (GDP) grew 4.6% in the first half of 2000
compared with the first half of 1999, in marked contrast to negative growth
rates of –2.6% a year earlier, and –13.2% in 1998 (table 1). In 1999 and in
1996 (the last full pre-crisis year), the annual growth rate exceeded the
rate for the first half. This was also the case in 1992–93 and 1995, and
many observers expect growth to be stronger in the second half of 2000
as well.7 Growth in the first half of the year was still rather slow compared
to the annual growth rates of 7% or more in 1989–96, but is likely to be
only slightly below the rates of 5–6% in 1986–88, the last time Indonesia
emerged from an economic slowdown (ICSEAD 2000: 87–8).
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Survey of Recent Developments
9
Box 1 THE FAILURE OF LAW REFORM
There is growing despondency among Indonesian law reform
leaders. The window of opportunity that opened after Abdurrahman
Wahid’s election seems to have almost closed. Few expected that the
flood of statutory reforms approved by Habibie would achieve more
than symbolic change, but it was hoped that a purging and
restructuring of key legal institutions under his successor would
usher in a new legal culture. The commissions set up to overhaul the
corrupt and incompetent judicial system have, however, run headon into the lingering power of the New Order system.
Some operating methods of the New Order were those of criminal
gangs. The territorialised system of the petty standover criminals,
or preman, was writ large as the state used systematic intimidation
and corruption to extract rents to help sustain Soeharto’s political
franchise. Controlling the courts was a key part of this strategy, and
Soeharto was a master: barely a decision went against his government
in three decades. Post-Soeharto reformasi succeeded in publicly
identifying the essential criminality of much of public life and pushed
many key figures into the background, but it has failed to effect any
real change to the system itself. In many cases, the ‘gangs’ pushed
out of the state’s systems simply went ‘private’, operating now as
enemies of the state. The consequences can be seen in aspects of militia
activity in Eastern Indonesia, bombings in Jakarta and the rise of
vigilantism—a response to state loss of control. More subtly, it is
demonstrated by the continued corruption of the courts, which favour
the old elite at the expense of reformasi, as shown by the farce of the
Soeharto trial and the recent dismissal of charges against three
allegedly corrupt judges. So far, not one ‘big fish’ has been both finally
convicted and jailed.
It is now becoming obvious that the government has limited
authority to control the state apparatus; it can offer little guarantee
of the proper functioning of the legal system; and it has almost no
ability to prevent or punish violence or corruption. Alarmingly, the
president’s response is, increasingly, political intervention—ordering
arrests and trials—itself one of the causes of past decay in legal
institutions.
Tim Lindsey
University of Melbourne
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Eric D. Ramstetter
TABLE 1 Real GDP Growth, Real Per Capita GDP, and Expenditure Shares of GDP,
1996–2000
GDP growth at 1993 prices
(% p.a.)
1996
1997
7.8
4.7
1998
–13.2
1999
S1a
1999
S2a
2000
S1a
–2.6
3.2
4.6
Per capita GDP and consumption expenditures in 1993 prices (1996 = 100)b
GDP per capita
100
103
88
87
88
89
Private consumption per capita 100
106
101
100
102
101
Shares of GDP at 1993 prices (%)
Private consumption
62.1
Foodc
34.5
Government consumption
7.7
Fixed investment
31.1
Inventory investment
1.4
Exports
27.2
Imports
29.4
64.0
35.5
7.3
32.3
0.8
28.0
32.3
71.2
39.6
7.1
24.0
–2.9
35.8
35.2
72.1
40.0
7.6
19.0
–1.3
23.7
21.1
72.2
40.1
6.8
18.8
–2.2
24.8
20.4
70.4
38.0
7.2
22.0
–6.2
27.5
21.1
Shares of GDP at current prices (%)
Private consumption
62.4
Foodc
33.3
Government consumption
7.6
Fixed investment
29.6
Inventory investment
1.1
Exports
25.8
Goodsc
21.7
Servicesc
4.1
Imports
26.4
Goodsc
21.5
Servicesc
4.9
61.7
33.6
6.8
28.3
3.4
27.9
24.2
3.7
28.1
21.9
6.2
66.2
39.0
5.4
22.1
–3.0
50.5
46.3
4.2
41.2
31.8
9.4
73.4
46.4
6.9
19.1
–5.9
33.8
30.6
3.2
27.5
20.7
6.7
74.5
45.1
6.2
19.5
–9.6
36.3
33.2
3.0
26.8
19.9
6.9
69.3
46.7
7.3
24.0
–10.8
37.2
29.6
2.7
27.0
17.9
6.5
a
S1 = first half, S2 = second half; growth rates refer to the growth over the corresponding half of the previous year.
b
Real GDP is originally estimated at 1993 prices; per capita GDP is then rebased to
1996; population is estimated to grow by 1.49% in 1999 and 1.47% in 2000 (growth
rates were 1.51% in 1998 and 1.53% in 1997), and population growth is assumed to
be evenly distributed throughout 1999 and 2000.
c
Figures for 2000 S1 in these categories refer to the first quarter of 2000 only, and
have not been revised as is the case for other GDP components.
Sources: BPS (2000a, 2000c); World Bank (2000b).
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Survey of Recent Developments
11
As a result of the contraction in 1998 and the first half of 1999, per
capita real GDP was 13% lower in the first half of 1999 than in 1996
(table 1). It has since started to recover, and was back to 11% below precrisis levels in the first half of 2000. Private consumption per capita (as
calculated from the national accounts) never fell below 1996 levels
throughout the crisis. By contrast, if estimates of consumption expenditure
from the National Socio-Economic Survey (Susenas) are deflated using
the consumer price index (CPI), real consumption expenditure appears
to have declined 3% between 1996 and 1999 (figure 1). If the private
consumption deflator from the national accounts is used instead of the
CPI to deflate these estimates, the decline becomes much larger (16%),
because the private consumption deflator rose much more rapidly than
the CPI in this period (table 2). For a discussion of anomalies among
various price deflators in Indonesia, see box 2.
FIGURE 1 Shares of Consumption Expenditure by Expenditure Group (%)
and Index of Real Per Capita Expenditurea
(1996 = 100)
100%
100
80%
80
60%
43%
45%
40%
37%
35%
41%
38%
60
40
20
20%
20%
20%
22%
1993
1996
1999
0
0%
Lowest 40%
Middle 40%
Top 20%
Real per capita expenditure
a
Per capita expenditure is deflated by the consumer price index.
Sources: BPS (2000b); World Bank (2000a).
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Eric D. Ramstetter
TABLE 2 Various Price Indicators, 1997–2000 (1996 = 100)
Item
1997
1998
1999
S1a
1999
S2a
2000
S1a
GDP deflatorb
113
207
National accounts deflators by expenditure categoryb
Private consumption
108
192
Foodc
110
211
Government consumption
107
159
Fixed investment
104
201
Exports
118
307
Imports
109
270
National accounts deflators by industryb
Agriculture, fisheries, etc.
113
195
Mining & quarrying
118
291
Manufacturing
117
187
Electricity, gas, & water
101
141
Construction
103
215
Trade, hotels & restaurants
108
221
Transport & communications
103
164
Finance, ownership, business services
117
205
Community, social, personal services
117
178
Consumer price indexd
106
168
Foodstuffs, prepared foods & beveragesb 107
194
Wholesale price indexe
109
218
Agriculture
112
189
Mining
107
131
Manufacturing
104
169
Imports
107
239
Exports
117
297
Oil & gas
118
275
Non-oil & gas
115
326
Non-oil export prices from Rosnerf
119
342
Rp/$, period average
124
428
Rp/$, end of period
195
337
233
224
243
236
279
215
246
349
336
230
261
207
244
344
328
238
292
241
278
346
346
251
235
215
155
252
244
229
225
211
205
251
234
259
158
207
238
275
239
262
270
356
323
227
265
221
156
268
244
192
225
201
200
233
234
258
166
209
236
245
328
263
239
314
325
235
316
230
158
288
251
208
230
222
206
239
252
282
174
212
248
262
436
303
na
334
342
a
S1 = first half, S2 = second half.
b
Deflators calculated from annual or quarterly data defined as 1993 = 100 in the source.
c
See table 1, note c.
d
Annual averages of monthly price indices defined as 1996 = 100 in the source.
e
Annual averages of monthly price indices defined as 1993 = 100 in the source.
f
Annual averages of quarterly price indices defined as 1994 Q2 = 100 in $ in the source, translated to rupiah at period average exchange rates.
Sources: Bank Indonesia (BI), Indonesian Financial Statistics (IFS) (various issues); BPS (2000a,
2000c); IMF (2000); Rosner (2000); World Bank (2000a).
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Survey of Recent Developments
13
Box 2 NATIONAL ACCOUNTS DEFLATORS AND
PRICE INDICES IN INDONESIA
In Indonesia, there are substantial differences between trends in
national accounts deflators and other price indices that appear to
measure similar prices (table 2). As indicated in the discussion of
consumption trends, there is a large difference between trends in
the private consumption deflator, which show that the cost of private
consumption rose 138% between 1996 and the first half of 2000, and
trends in the CPI, which suggest a 106% rise in the same period.
Even if the comparison is limited to food, the consumption deflator
is much higher by the first quarter of 2000 than the corresponding
CPI component: 292 versus 239. National accounts deflators also
indicate much larger increases in export and import prices than do
the corresponding components of the wholesale price index (WPI).
Furthermore, in the first half of 2000, national accounts deflators are
higher than the corresponding WPI components for mining and
manufacturing, but the WPI is higher for agriculture. Some
differences between national accounts deflators on the one hand and
CPI and WPI components on the other are to be expected, because
these indicators measure prices of different baskets of goods and
services, and are calculated using different formulae. However, the
differences observed in table 2 are often so large as to make one
wonder if substantial measurement errors are involved. This point
is further underscored by Rosner (2000), who compares a relatively
comprehensive set of export price estimates with the WPI export
components, which have more limited commodity coverage.
The distribution of consumption expenditures appears to have
become somewhat more equal in 1996–99 (figure 1). The 40% of
households with the lowest expenditures increased their share of total
expenditures from 20% to 22%, while the share of the middle 40% rose
from 35% to 38%, and that of the top 20% fell from 45% to 41%. However,
the share of poorer households would probably rise much less if one
were to calculate the shares in constant prices, and to account for the fact
that food occupies a much larger share of expenditures in poor
households, because food prices rose more rapidly than prices of other
consumer goods (table 2).8
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Eric D. Ramstetter
There were conspicuous increases in fixed investment and exports in
the first half of 2000 (table 1). Consequently, shares of these items in real
GDP rose from 19% to 22% and from 24% to 28%, respectively, compared
to the first half of 1999. The share of fixed investment was still far below
pre-crisis levels (e.g. 31% in 1996), but the long awaited turnaround in
fixed investment finally appears to have begun in the first half of 2000.9
Likewise, the share of imports remained steady after falling dramatically
in 1999, although it too is still far below pre-crisis levels. If the turnaround
in fixed investment is sustained, the share of imports is likely to rise in
the medium term, because capital goods account for a large proportion
of imports. On the other hand, the share of private consumption fell in
the first half of 2000 after rising steadily in 1997–99. Of particular
significance is the levelling off and apparent decline in the share of food
expenditures in the first quarter of 2000.10 To the extent that the estimate
is reliable, the large negative share of inventory investment indicates that
existing inventories were rapidly drawn down in the first half of 2000.11
There are some markedly different patterns observed if shares are
calculated in current prices, reflecting the fact that price movements have
varied greatly across GDP components (tables 1 and 2). For example, the
rise in the share of private consumption from 1997 to the second half of
1999, and its subsequent fall, are much larger when shares are calculated
in current prices. This reflects the fact that the consumption deflator rose
more rapidly than the GDP deflator through 1999, a pattern reversed in
the first half of 2000. Food shares increased particularly sharply in current
prices, the rise in this deflator being even greater than that in the
consumption deflator. In 1999 and the first half of 2000, the fixed
investment deflator also rose quite rapidly, resulting in smaller declines
or larger increases in GDP shares when measured in current prices.
However, by far the largest differences between nominal and real shares
were in trade shares of GDP, which were also much larger in current
prices, because export and import prices rose much faster than the GDP
deflator through 1999.
Monetary Developments
One of the more important consequences of the crisis, discussed at length
by Fane (2000b), was the rapid rise in prices from early 1998 through
early 1999. For example, the annualised rate at which the CPI increased
(compared to the same month a year earlier) accelerated from under 10%
in the last half of 1997 to 40% or more in April 1998 to March 1999, before
falling back below 10% from August 1999 (figure 2). Earlier changes in
base money and the exchange rate appear to be highly correlated with
changes in the CPI in this period. More recently, CPI inflation declined to
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Survey of Recent Developments
15
FIGURE 2 Exchange Rate Movements, Inflation and Base Money Growtha
(% p.a.)
Rp/$,
period average
CPI,
Base money
120%
480%
100%
400%
80%
320%
60%
240%
40%
160%
20%
80%
0%
0%
-20%
Jul-97
-80%
Jan-98
Jul-98
Rp/$, average
Jan-99
Jul-99
CPI
Jan-00
Jul-00
Base money
a
All growth rates are annualised rates comparing the month in question with the
same month one year earlier. Monthly money supply figures are measured at the
end of the month; exchange rates are monthly average rates; various components
of the CPI are collected at different intervals throughout the month.
Sources: BI, IFS (various issues); World Bank (2000a).
very low levels between September 1999 and June 2000 (of –1% to 2%),
before increasing to 5% in July 2000, 6% in August 2000, and 7% in
September 2000. Growth rates of base money have been more volatile,
but were generally below 20% from May 1999 to May 2000; they then
climbed to 22% in June and July and 20% in August, before falling back
to 16% in September. As a result, by the end of August base money was
5.7% higher than the performance criteria, and by the end of September
it was 5.2% higher than the indicative target identified in the Letter of
Intent submitted to the IMF in July (Bank Indonesia [BI], Indonesian
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16
Eric D. Ramstetter
Financial Statistics [IFS], various issues; tables downloaded from
). Some observers have worried that failure to control
the money supply would lead to increased inflation in the second half of
2000 (Feridhanusetyawan 2000: 2–3; McLeod 2000: 16–20). Moreover, the
government began reducing its subsidy of oil products on 1 October,
raising fuel prices an average of 12%, a move that is generally thought to
add to inflationary pressures. Nonetheless, Bank Indonesia still expects
that annual CPI inflation will be only about 1% higher than the 5–7%
predicted earlier (Dow Jones Newswires, 11/10/00), and the data in
figure 2 suggest that this is a reasonable estimate.
One reason that Bank Indonesia is hesitant to slow the growth of
money is that this would require it to issue certificates of deposit (Sertifikat
Bank Indonesia, SBI). In conjunction with the bank recapitalisation
program the government has issued a large amount of floating rate bonds,
which pay the same rate as the three-month SBIs. Tighter monetary policy
and higher interest rates would therefore increase the domestic interest
burden in the budget. Three-month SBI rates have already moved
markedly higher in recent months, from 11.1% in June to 13.0% in July,
and 13.3% in August (BI, IFS, various issues). Table 3 shows that 28-day
SBI rates were not much higher than interest rates on simple time deposits,
underscoring the weak incentive to hold these securities. Deposit interest
rates have been much lower in foreign and joint banks in recent months,
suggesting that the public may have more confidence in these banks than
before. It is also interesting that private national banks now pay lower
interest than state banks, reversing the large differential that existed in
1996–97, when their liabilities were not explicitly guaranteed.
Indonesia’s bank recapitalisation program is nearing completion, as
illustrated by the turnaround in the level of equity from negative to
positive by June 2000 in the private banks and by August in the state
banks (table 3). The recapitalisation has been accomplished only because
the government has taken control of a large portion of banking assets
and assumed commensurate responsibility for associated debts. The scale
of this bailout of bank depositors and creditors can be seen from the sharp
decline in loans extended by commercial banks, from Rp 487 trillion at
the end of 1998 to only Rp 251 trillion in the first half of 1999. Bank lending
may finally be recovering, as total loans at the end of June 2000 were
Rp 15 trillion, or 7%, higher than the corresponding figure at the end of
1999, with most of the increased lending going to manufacturing, other
industries, and trade. However, there was very little increase in lending
between June and August 2000.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
Survey of Recent Developments
17
TABLE 3 Selected Interest Rates and Indicators for Commercial Banks, 1997–2000
(end of period)
Item
Dec-97
Dec-98
One-month time deposit and SBI rates (%)
State banks
19.7
41.2
Private national banks
27.7
41.9
Foreign & joint banks
17.7
33.1
SBI interest rate
20.0
38.4
Jun-99
Dec-99
Jun-00
Aug-00
24.1
23.9
19.2
22.1
12.5
12.1
9.5
12.5
10.7
10.2
8.6
11.7
11.5
11.3
9.1
13.5
Equity (including reserves and retained earnings) of commercial banks
(Rp trillion)
Total
47
–99
–216
–22
8
State banks
14
–25
–211
–18
–15
Private national banks
26
–48
–11
–10
15
Commercial banks’ outstanding loans (rupiah & foreign exchange)
(Rp trillion)
Total
378
487
251
225
240
Agriculture
26
39
23
24
23
Mining
5
6
4
4
6
Manufacturing
112
172
91
84
90
Trade
82
96
54
43
47
Services
114
139
53
43
44
Other
39
35
27
27
31
34
10
16
242
23
5
90
47
43
34
Source: BI, IFS (various issues).
These figures reflect both the successes and the problems that IBRA
has had in restructuring Indonesia’s banking sector. Progress has been
somewhat slower when dealing with state-owned than with private
banks, as political infighting complicates the process. To finance the
recapitalisation, IBRA had issued bonds worth Rp 412 trillion by July
2000, including Rp 270 trillion for four state banks (Bank Mandiri, Bank
BNI, Bank BRI and Bank BTN) and Rp 109 trillion for four private banks
taken over in 1998 (Bank Tiara Asia, Bank Central Asia, Bank PDFCI and
Bank Danamon). In addition, in 1998 and 1999 the government issued
repayment bonds to Bank Indonesia totalling Rp 228 trillion, including
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
18
Eric D. Ramstetter
Rp 165 trillion to refund liquidity support and Rp 54 trillion to refund
outlays related to bank guarantees. Combined, these bonds comprise
IBRA’s liabilities of Rp 640 trillion in government bonds, Rp 151 trillion
of which are fixed rate bonds, Rp 271 trillion variable rate bonds, and Rp
218 trillion inflation indexed bonds (Feridhanusetyawan 2000: 11). In the
process of bank restructuring, IBRA had acquired assets with an estimated
book value of Rp 470 trillion at the end of July 2000. However, their market
value has recently been estimated at 35–40% of the book value
(Feridhanusetyawan 2000: 12).
This process has left IBRA and the government with three large
problems. First, in the short run, the government has to find a way to
pay the interest on the recapitalisation bonds. This will represent a serious
fiscal burden over the next few years, as can be seen in the budget
presented below. Second, the government will soon have to start paying
down the principal on these bonds, some of which begin to mature in
2003, creating a further fiscal burden. Third, IBRA has to dispose of the
assets it has acquired. The estimated recovery rate of 35–40% implies
that IBRA should be able to raise only about Rp 175 trillion to help alleviate
these fiscal burdens.
The process of disposing of the IBRA assets is riddled with political
difficulties. First, there are fears that previous owners will just buy back
their old assets, which IBRA seized at a considerable discount to book
value, with the taxpayer left bear the burden of the losses incurred by
these bankers. This could create a strong political reaction against IBRA
and the government, even if could be justified on the grounds that
previous owners made the best offers for the assets. Second, IBRA and
the government are hesitant to sell to foreign buyers, partly because they
risk being seen as offering Indonesian assets to foreigners at ‘fire-sale’
prices. This nationalist sentiment is so strong that IBRA cannot ignore it,
even if nationalism is costly to the economy. As a result, IBRA has been
relatively slow to dispose of the assets it holds. Experience from other
countries suggests, however, that the longer IBRA holds them, the lower
the recovery rate is likely to be.
Another important aspect of IBRA’s operations concerns the
restructuring of corporate debts.12 There are several agencies in addition
to IBRA that are involved in this process, the major ones being the
Indonesian Debt Restructuring Agency (INDRA), the Jakarta Initiative
(JI), and the Financial Sector Policy Committee (FSPC). INDRA was
established in 1998 to help smooth out payments of dollar-denominated
debts over time, but there was very little participation, and the
government has decided to close INDRA as a result. The JI is a private
agency which works to facilitate resolution of debts among creditors and
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
Survey of Recent Developments
19
debtors outside the court system. It has been more successful in eliciting
participation, but the amount of debt worked out through the JI has been
limited. In response to slow progress in resolving corporate debt, the
FSPC began operation in February 2000. This is an interministerial
committee now headed by Coordinating Economics Minister Rizal Ramli;
it is charged with developing guidelines for both bank and corporate
restructuring, and with overseeing the operations of IBRA and the JI.
However, in a statement on 25 September after concluding a consultation
with Indonesia, the IMF expressed concern over the slow progress not
only of IBRA, but also of the JI and the FSPC (JP, 27/9/00: 5).
Fiscal Developments and Public Sector Debt
The budget will be extremely tight for the next several years because of
the cost of servicing the large public debt incurred in the process of bank
restructuring. Table 4 shows that the domestic interest burden will rise
from an actual expenditure of only 0.02% of GDP in fiscal 1998/99 and
1999/2000 (April–March) to a projected 4.2% of GDP in fiscal 2000
(March–December), this increase being almost equal to the total increase
in budgeted expenditure in this period. The newly announced budget
projects that this burden will be similar in 2001 (January–December).13
The burden the domestic debt places on the budget will increase further
in 2003, when the government has to start retiring some of the bonds
issued. Two important sources of revenue for the government to make
up the shortfalls caused by debt servicing are the sale of banking assets
held in IBRA and the sale of state-owned corporations, including banks
and other firms such as PT Telkom. However, progress on privatisation
has been slow, with realised receipts being far below those projected for
1998/99, and probably below the target for 1999/2000 as well. As with
problems in the state-owned banks, an important obstacle to the
privatisation process is the lack of a political consensus on how, or
whether, to proceed.
While public sector debt will place a large burden on government
finances in the next few years, it should be emphasised that Indonesian
fiscal policy has historically been conservative and deficits have been
small. The debt burden is thus likely be a temporary problem, though it
will take some years to bring it down to more moderate levels. Deficits
are projected to increase in the next few years, but the situation is very
different from that in numerous other countries that have experienced
fiscal difficulties in the past (e.g. the Philippines in the 1980s and early
1990s), where large public sector debt was the result of running substantial
deficits over a long period. Indeed, in view of the significant decline in
economic activity in 1998 and the very slow growth in 1999, one could
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
20
Eric D. Ramstetter
TABLE 4 Government Revenue and Expenditure Items (% of GDP)
1998/1999a
Itemc
1999/2000a
Budget Actual Budget Actual
Total revenues
12.61
Domestic revenues
12.61
Income tax
2.43
VAT
2.72
Other domestic taxes
1.10
Import duties
0.52
Export tax
0.09
Non-tax, oil & gas
4.67
Non-tax, other
1.09
Total expenditures
21.66
Current expenditures
12.95
Personnel
2.33
Materials
1.07
Transfers to regions
1.25
Domestic interest
0.18
Foreign interest
2.91
Other current expenditures
5.21
Of which: petroleum subsidy 2.59
Of which: other subsidies
2.37
Development expenditures,
net lending
8.70
Rupiah
4.90
Ministries, agencies
1.27
Regional development
1.01
Other
2.62
Of which: bank restructuring 1.41
Project aid
3.81
Equalisation fund (= balanced fund) na
Financing (= – surplus/deficit) 9.04
Domestic
1.41
Privatisation
1.41
Asset recovery
na
Foreign
10.76
Program aid
6.95
Project aid
3.81
Amortisation of foreign debt
–3.12
Other financing
0.00
Budgetsb
2000a
2001a
14.05
14.05
4.67
2.67
1.09
0.21
0.43
3.87
1.11
17.29
10.91
2.30
1.04
1.33
0.02
2.26
3.96
2.55
1.22
11.47
11.47
3.61
3.07
1.24
0.26
0.23
1.86
1.20
17.28
10.05
2.98
0.98
1.73
0.03
1.82
2.51
0.89
1.27
na
na
4.88
2.93
1.30
0.33
0.07
5.00
na
na
na
2.98
0.96
1.70
0.02
na
na
na
na
16.80
16.80
6.00
3.00
1.50
0.50
0.10
3.60
2.10
21.60
15.10
3.40
1.00
na
4.20
1.80
4.70
2.50
0.90
17.30
17.30
6.60
3.30
1.70
0.70
0.00
3.50
1.50
21.00
13.30
2.80
0.90
na
4.00
1.50
4.10
2.60
0.80
6.37
3.94
1.17
0.92
1.85
0.94
2.43
na
3.24
0.30
0.30
na
5.85
3.42
2.43
–2.96
0.04
7.23
4.57
1.13
1.20
2.23
1.51
2.66
na
5.90
1.15
1.15
na
6.87
4.21
2.66
–2.12
–0.22
na
na
1.08
1.14
na
na
1.62
na
na
na
na
na
3.87
2.25
1.62
na
na
2.90
1.10
na
na
na
na
1.80
3.70
4.80
2.70
0.70
2.00
3.00
1.20
1.80
–0.90
na
2.40
0.80
na
na
na
na
1.60
5.30
3.70
2.30
0.40
1.90
2.50
0.90
1.60
–1.10
na
a
1998/1999 and 1999/2000 refer to fiscal years from April to March; 2000 refers to March–
December; from 2001 fiscal and calendar years will coincide.
b
The 2000 budget is the revised budget as of April 2000; the 2001 budget is the preliminary budget as of 2 October 2000.
c
The items used here correspond to those in Ministry of Finance (2000).
Sources: BPS (2000a, 2000c); BI, IFS (various issues); Ministry of Finance (2000); World
Bank (2000a).
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
Survey of Recent Developments
21
easily argue that the government has been far too conservative, and that
the tendency to underspend the budget in 1998/99, for example, was
very costly to the economy. The costs include growth lost through failure
to stimulate aggregate demand and to maintain aggressive development
spending (in a country that still lacks basic physical and educational
infrastructure). Of course, the argument that Indonesia should have run
larger deficits is based on the assumption that adequate financing could
have been found, and that the funds could have been efficiently allocated
to the necessary projects—which may have been politically impossible
during this period, especially given the problems on the monetary side.
There will also be important long-term changes in the budget in
coming years. The first will result from implementation of a decentralisation plan under which the central government intends to return about
one-quarter of its domestic revenues to local governments, a process due
to begin in January 2001 (McLeod 2000: 30–8). It is unclear how this will
proceed, though the 2001 budget does explicitly account for the change
with the newly established equalisation fund, which is projected to grow
to 5.3% of GDP in 2001. (For a comment on the impact of efforts by local
governments to increase their revenues in the context of fiscal decentralisation, see box 3.) A second change stems from the decision to roll
back some of the subsidies that the government provides. Political difficulties with implementation caused the first increase in fuel prices to be
delayed from 1 April 2000 to 1 October. However, this rise has apparently been carried out with relatively little public outcry, and another
increase of 20% is scheduled to take place in April 2001. The removal of
subsidies is desirable both to lessen the burden on the budget and, more
importantly, to promote efficient use of resources.
The Balance of Payments and External Debt
In contrast to the increased domestic debt burden, the foreign debt burden
is declining, although it remains substantial. Government spending on
foreign interest was over 2.3% of GDP in 1998/99, but is projected to
decline to 1.8% in 1999/2000 and in the 9-month budget for 2000 (table 4).
Financing in the form of debt amortisation is also projected to fall from
–3.0% of GDP to –2.1% and –0.9% respectively. Public sector debt in
dollars, including that of the government and Bank Indonesia, continued
to rise in 1998 and 1999, however, reaching a peak of $76 billion at the
end of 1999 (table 5). On the other hand, the external debt of private
companies and total debt both began to fall in 1999. More importantly,
the relative size of total debt has fallen markedly, from 151% of GDP in
1998 to 89% in the first quarter of 2000, largely owing to the rebound of
the rupiah.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:06 19
22
Eric D. Ramstetter
Box 3 DECENTRALISATION AND THE RETURN OF
THE ‘HIGH COST ECONOMY’
There is increasing evidence to suggest that decentralisation, on its
present course, will generate new interregional trade barriers that
work to undermine the integrity of the Indonesian economy and
nation. This is unfortunate, as to enjoy the efficiency benefits of
decentralisation Indonesia must continue to promote and maintain
free and open domestic markets.
Perhaps the most significant barrier to internal trade that may
arise out of, or be exacerbated by, the decentralisation process is the
imposition of taxes, fees, levies, licences and other charges on the
movement of agricultural produce. Many of these distortions were
eliminated by Law 18/1997—much to the relief of farmers and other
small-scale rural producers. Unfortunately this law is now under
threat of revision, with amendments currently being considered by
the DPR that will give greater flexibility to local governments to
generate more revenues from domestic trade and business activities.