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Country Profile 2004

IndonesiaThis Country Profile is a reference work, analysing thecountry�s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit�s Country Reports analyse current trends and provide atwo-year forecast.

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Country Profile 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004

Indonesia 1

© The Economist Intelligence Unit Limited 2004 www.eiu.com Country Profile 2004

Contents

Indonesia

3 Basic data

4 Politics4 Political background4 Recent political developments8 Constitution, institutions and administration9 Political forces12 International relations and defence

16 Resources and infrastructure16 Population18 Education19 Health20 Natural resources and the environment21 Transport, communications and the Internet23 Energy provision

26 The economy26 Economic structure27 Economic policy32 Economic performance35 Regional trends

36 Economic sectors36 Agriculture41 Mining and semi-processing42 Manufacturing44 Construction45 Financial services46 Other services

47 The external sector47 Trade in goods50 Invisibles and the current account50 Capital flows and foreign debt53 Foreign reserves and the exchange rate

55 Regional overview55 Membership of organisations

58 Appendices58 Sources of information59 Reference tables59 Population59 Geographical distribution of population by province, 200060 Labour force60 Transport statistics

2 Indonesia


61 National energy production statistics61 Government finances62 Summary of government budgets62 Gross domestic product63 Real gross domestic product by expenditure63 Nominal gross domestic product by expenditure63 Prices and earnings64 Money supply64 Interest rates64 Agricultural production65 Minerals production65 Main composition of trade66 Balance of payments, IMF series67 External debt, World Bank series67 Foreign reserves67 Exchange rates

Indonesia 3


Indonesia

Basic data

1,904,443 sq km

3,166,163 sq km (before deductions for sea area now under East Timoresecontrol)

5,070,606 sq km (as above)

221m (projection for 2003 based on 2000 census results)

Population in �000 (2000 census)

Jakarta (capital) 8,385 Medan 1,792Surabaya 2,589 Semarang 1,345Bandung 2,142 Palembang 1,442

Tropical

Hottest months, April-May, 24-31°C (average daily minimum and maximum);coldest months, January-February, 23-29°C; wettest months, January-February,300 mm average rainfall

Indonesian (Bahasa Indonesia), as well as some 250 other regional languagesand dialects. English has replaced Dutch as the main second language, and iswidely spoken in government and business circles

Metric system

Rupiah (Rp). Average exchange rate in 2003: Rp8,577:US$1. Exchange rate onOctober 21st 2004: Rp9,110:US$1

Western Zone seven hours ahead of GMT, Central Zone eight hours ahead,Eastern Zone nine hours ahead

January 1st-December 31st (beginning in 2001)

New Year, January 1st; Independence Day, August 17th; Christmas, December25th. Other moveable holidays: Nyepi, Easter, Miraj, Ascension Day, Waisak,Eid al-Fitr, Eid ul-Adha, Islamic New Year, Maulud

Land area

Sea area (exclusiveeconomic zone)

Languages

Time

Currency

Measures

Fiscal year

Public holidays

Population

Main towns

Climate

Weather in Jakarta (altitudeeight metres)

Total area

4 Indonesia


Politics

The territorial extent of the Republic of Indonesia is defined principally by theboundaries of the former Dutch colonial empire in South-east Asia. Theterritories now comprising the country had never constituted a single politicalentity before the establishment of Dutch colonial rule, and their pre-colonialhistory was marked by the rise and fall of a number of important empires andkingdoms. Close commercial links with the Arabian Peninsula from the 13thcentury led to the gradual Islamisation of the archipelago, replacing much ofthe prevailing Hindu and Buddhist culture, although this remains strong in Bali.

Political background

In 1511 the Portuguese arrived in Indonesia, in the quest for spices, followed bythe Spanish, resulting in the introduction of Christianity to the region. By 1799the Dutch had established colonial rule in Indonesia and embarked on anextended period of territorial conquest, which continued into the early years ofthe 20th century. In the early 1900s a pan-Indonesian nationalism began toemerge. The Japanese conquest of the Dutch East Indies in 1942 andJapan�s subsequent defeat enabled the nationalists to proclaim Indonesia�sindependence on August 17th 1945. This was followed by an extended armedstruggle against returning Dutch forces. It was not until late 1949 that the Dutchformally transferred sovereignty over the archipelago, excluding Dutch NewGuinea (West Papua), to Indonesia. The Portuguese remained in control of EastTimor. The leader of the Indonesian nationalist party, Achmed Soekarno,became president.

In 1950 a unitary political structure was established, and in 1955 the first generalelection was held. Soekarno won, but the Indonesian Communist Party (PKI)gained a substantial 16% of the vote. Soekarno�s nationalism subsequently ledto the Indonesian invasion of West Papua in 1962 and to a conflict withMalaysia over parts of Borneo. The period was characterised by revolutionaryzeal, but also by political instability and a lack of economic prudence, andeventually economic decline. In 1965 an abortive coup, led by a group ofmiddle-ranking army officers but blamed on the PKI, heralded the end of theOld Order, as the Soekarno era came to be known. The coup was crushed bythe army, and as many as 750,000 alleged members of the PKI were killed. InMarch 1966 the New Order was established when the executive power ofgovernment was transferred to General Soeharto.

Recent political developments

Soeharto became acting president in March 1967, and was elected for six furtherfive-year terms. Soeharto, supported by the military, imposed a repressiveregime; there was no freedom of the press or of expression. A small number ofSoeharto�s family and friends amassed vast wealth, primarily through theexploitation of Indonesia�s abundant natural resources. The period wasnevertheless characterised by rapid economic expansion, particularly after 1970,

The New Order

Indonesia 5


and this probably helped to legitimise the regime in the eyes of the people.However, opposition to the regime started to become more vocal in the mid-1990s!the parliamentary election campaign in May 1997 was exceptionallyviolent!and was given added momentum by the severe economic crisis thatgripped Indonesia in late 1997. Four days of rioting in the capital, Jakarta, inmid-May 1998 convinced even Soeharto�s most loyal supporters that a changewas needed. Having lost the backing of the military high command and mostof his cabinet, the president resigned on May 21st 1998. He was succeeded byhis recently elected vice-president, Bacharuddin Jusuf Habibie.

After assuming the presidency, Mr Habibie had to distance himself from hisformer mentor, Soeharto; his survival depended on his ability to play to thediverse constituencies that had forced Soeharto to step down. All of theseconstituencies had reason to distrust Mr Habibie, and as a result his hold onpower was never secure. His weakness was demonstrated for the last timewhen the People�s Consultative Assembly (MPR) voted in October 1999 to rejecthis account of 18 months in office. This ended his hopes of re-election. One ofMr Habibie�s few notable achievements was the holding of a democraticelection, Indonesia�s first for 34 years, to select a legitimate successor. In theparliamentary election, on June 7th 1999, no single party won an outrightmajority. The party that won the most seats (153 out of 500) was the secularnationalist party, the Indonesian Democratic Party-Struggle (PDI-P), led bySoekarno�s daughter, Megawati Soekarnoputri.

Despite the numerical strength of the PDI-P, on October 20th 1999 the MPRappointed Abdurrahman Wahid, a moderate Muslim cleric and leader of theNational Awakening Party (PKB), as president. Ms Megawati, who gleaned 313votes compared with Mr Wahid�s 373, was appointed vice-president in anattempt to prevent civil unrest. The administration quickly ran into problems,with mounting tensions within the multiparty cabinet and also betweenMr Wahid and parliament. Mr Wahid, who suffered from ailing health, becamenotorious for unrehearsed, off-the-cuff comments, and for inconsistent andunprepared policies. His presidency was also marred by allegations ofcorruption. Although the allegations did not directly implicate Mr Wahid, theycost him much credibility. On July 23rd 2001, after only 21 months in office,Mr Wahid was formally impeached by the MPR on the grounds ofincompetence, and Ms Megawati was elected president. Shortly thereafterHamzah Haz, the leader of the Islamic United Development Party (PPP), waselected vice-president.

Following the near-chaotic presidency of Mr Wahid, a general consensusemerged among all political parties on the need to restore stability. A tacitagreement was reached to support the authority of Ms Megawati until the nextelection, due in 2004. Ms Megawati, for her part, nominated a multipartycabinet with representatives from all the main parties, the military and the twoleading Islamic organisations, Nadhlutal Ulama and Muhammadiyah. The twokey economic posts in the cabinet, the positions of co-ordinating minister for theeconomy and minister of finance, went to two respected technocrats, DorodjatunKuntjoro-Jakti and Boediono. Although there has been no direct challenge to

The Habibie presidency

Political instability escalatesunder Mr Wahid

Stability improves underMs Megawati

6 Indonesia


Ms Megawati�s presidency, legislating effectively has still proved difficult. Herparty�s lack of a majority in the House of People�s Representatives (DPR, thelower house) has meant that legislating, and particularly securing the passageof sensitive reform bills, has been protracted and often unsuccessful. Aftersettling into office Ms Megawati started to lean towards a resurgent military forsupport in the face of her uneasy relationship with the Islamic parties in hercoalition government.

In April 2004 the second parliamentary election since the downfall of Soehartoand the first under the new constitutional framework took place. In an orderlyand relatively transparent poll the electorate voted for members of the 550-seatDPR and for 128 members of the new Regional Representatives Assembly(DPD). Golkar, the political vehicle of former president Soeharto, won thelargest number of seats in the election, but still only received 21.8% of the vote;the PDI-P saw a sharp drop in its support base, garnering only 18.7% of the vote,and the mainstream Islamic parties failed to increase their share of the vote.The election was noteworthy for the rise in support (primarily in urban areas)for two smaller parties, the nationalist-secular Democratic Party (DP) and ahardline Islamist party, the Prosperous Justice Party (PKS). Despite itsfundamentalist Islamic views, the PKS campaigned primarily on an anti-corruption campaign, as did the DP.

In July 2004, for the first time in the country�s history, national elections wereheld for the president and vice-president. There was no outright winner in theJuly vote, and in September 2004 a second round run-off took place betweenthe two candidates who had received the highest number of votes in July. Theincumbent, Ms Megawati, faced her former security minister and a leadingmember of the DP, former lieutenant-general Susilo Bambang Yudhoyono.Mr Yudhoyono won a landslide victory, gaining 61% of the vote. His campaignhad focused on job-creation, economic growth and fighting corruption. He wasinaugurated on October 20th, and announced his cabinet a day later. The newcabinet continued the multiparty tradition, but had a heavier weighting of non-partisan technocrats. The cabinet was criticised for the number of �old faces� itcontained, despite Mr Yudhoyono�s promises of reform. However, without thesupport of at least some members of the larger parties, such as Golkar,Mr Yudhoyono would have found himself unable to legislate.

Important recent events

June 1999

The first free election since 1955 is won by the Indonesian Democratic Party-Struggle(PDI-P). Golkar, the political vehicle of former president Soeharto, comes second,with strong showings by the Islamic parties, the United Development Party (PPP)and the National Awakening Party (PKB).

August 1999

The East Timorese vote heavily in favour of independence in a referendum on theterritory�s political future. Following the announcement of the results on September

The first democraticallyelected president takes office

New parties emerge in the2004 elections

Indonesia 7


4th, the Indonesian military and local militia gangs launch a campaign of terrordirected against supporters of independence.

October 1999

The accountability speech of the president, Bacharuddin Jusuf Habibie, is rejected bythe People�s Consultative Assembly (MPR, the legislature), and he withdraws fromthe next day�s presidential election. Abdurrahman Wahid is elected president,defeating his nearest rival, Megawati Soekarnoputri, but Ms Megawati is appointedvice-president, averting the threat of massive civil unrest. East Timor formallyseparates from Indonesia.

May 2000

A scandal builds over the misuse of funds from the State Logistics Agency (Bulog).The deputy head of the agency stands accused of channelling Rp35bn (US$4.2m) ofagency funds to Mr Wahid�s personal masseur.

June 2000

A separatist congress held in Irian Jaya (Papua), attended by 3,000 people, declaresthe territory to have been an independent state since 1961.

November 2000

Leaders of the Papuan Presidium Council who called publicly for Papuanindependence in June are arrested and charged with treason.

July 2001

The MPR convenes in special session, and Mr Wahid is impeached for hisinvolvement in the misuse of Bulog funds. Ms Megawati is installed as the newpresident, and after four rounds of voting the MPR elects Hamzah Haz, the leader ofthe PPP, to the vice-presidency.

August 2002

At its annual session the MPR votes for direct elections of all political representatives,including the president and vice-president. It also decides that the security forces areto lose their right to 38 parliamentary seats in 2004. The assembly votes against theintroduction of Islamic (Sharia) law in Muslim provinces.

October 2002

A night-club on the holiday island of Bali is bombed, resulting in over 200 deaths.The bombings are believed to be the work of an Islamist terror group, JemaahIslamiah (JI).

December 2002

A peace accord is signed between the Free Aceh Movement (GAM) rebels and thegovernment. The government makes a number of key concessions, and there isoptimism about progress on ending separatist conflicts.

May 2003

The peace accord in Aceh breaks down. The government imposes martial law in theprovince and launches a massive military assault on GAM.

8 Indonesia


August 2003

A bomb goes off at the JW Marriott hotel in the capital, Jakarta. Twelve people arekilled and many injured. The bomb is blamed on JI.

April 2004

Golkar wins the largest number of seats (127) in the parliamentary election,following a significant loss of support for the PDI-P.

July 2004

The first direct election for the president and vice-president takes place. There is nooutright winner, but Ms Megawati and her former security minister, Susilo BambangYudhoyono, win the two largest shares of votes.

September 2004

The second round of the presidential election results in a landslide victory forMr Yudhoyono. He pledges to prioritise job creation and fighting corruption.

Constitution, institutions and administration

Indonesia is governed by a constitution drawn up in 1945 and based on fiveprinciples: monotheism, humanitarianism, national unity, representativedemocracy by consensus, and social justice. These principles are embodied inthe state ideology, Pancasila (a Sanskrit term originally referring to a Buddhistcode of ethics). The constitution also provides for six principal organs of state:the People�s Consultative Assembly (MPR); the presidency and vice-presidency;the House of People�s Representatives (DPR, the lower house); the SupremeAdvisory Council (DPA); the State Audit Board (BPK); and the Supreme Court.Under Soeharto�s rule these institutions were subordinated to the presidency,the country�s highest executive office. Each of the 27 provinces is headed by agovernor who is responsible to the president via the minister of home affairs,and represents the central government in his province.

A committee set up during the 1999 general session of the MPR madesubstantial amendments to the chapters of the constitution dealing with thepowers of the presidency, including limiting a president�s tenure to two five-year terms and reducing the president�s legislative powers. All new laws nowhave to be approved by the DPR, although the president retains the right toselect the cabinet (in consultation with the DPR). Further constitutionalamendments, passed at the 2002 annual session of the MPR, paved the way forthe president and vice-president to be elected by popular vote in 2004. If nopair of candidates wins an outright majority in the first round of voting, asecond round is held. Other amendments passed included changes to thecomposition of the MPR.

The MPR used to consist of a 500-strong DPR (including 38 non-electedmembers of the military and police forces) and 200 regional and interest grouprepresentatives. Following the elections in 2004 it now comprises a 550-seatDPR!with no appointments from the security forces!and the DPD (consistingof 128 directly elected regional representatives). Elections to the DPR and DPDare to be held every five years. Elected seats are contested under a complicated

The role of the DPR isstrengthened

Indonesia 9


system of proportional representation, which gives a disproportionately largenumber of seats to Indonesia�s outer islands. The DPD�s formal powers arelimited. It cannot pass or veto legislation, but can only propose bills to the DPR,discuss the bills and then monitor their implementation if they are passed.Furthermore, these roles are limited to legislation on specific topics related tothe regions.

The DPR has always had the right to initiate legislation, but never did so duringthe Soeharto years. Draft legislation is submitted to the DPR and passes throughfour stages: an explanation of the proposed legislation, a general debate,discussions between the relevant commissions and the government, and a finaldebate and vote. Any legislation that is approved is then sent to the presidentfor enactment. The president can, however, make use of direct legislativepowers in times of perceived national emergency.

The MPR historically met every five years to sanction the Broad Guidelines ofState Policy (GBHN) and elect the president and vice-president. Its function isnow more ceremonial, but it retains an important role if an impeachment caseis launched against the president. The BPK audits the state finances and reportsthe results of its investigations to the DPR.

Political forces

Political parties were subject to severe restrictions under Soeharto�s New Ordergovernment. The main New Order political grouping was Golkar, a coalition ofprofessional and functional groups, civil servants and retired military officersset up in the early 1960s to counter the growing appeal of the IndonesianCommunist Party (PKI). As a self-proclaimed �political group� rather than aparty, Golkar was not bound by the campaigning restrictions that applied topolitical parties, allowing it to develop a formidable electoral infrastructure,particularly in rural areas. From 1973 only two state-sanctioned oppositionparties were permitted, the Indonesian Democratic Party (PDI), a coalition ofChristian and nationalist parties, and the United Development Party (PPP), acoalition of Muslim parties. These parties stood little chance against theprivileged Golkar, and typically mustered only 30% of the vote in parlia-mentary elections, leaving Golkar with an unassailable majority.

Golkar is now registered as a political party. Despite being tainted by itsassociation with Soeharto�s autocratic regime, the party�s robust electoral infra-structure helped it to first place in the 2004 general election. However, theparty�s win was less than convincing, and it suffered embarrassment in thepresidential election when its candidate, General Wiranto, failed to make it tothe second round. The current party leader, Akbar Tandjung, has been dis-credited by allegations of corruption, and the party appears divided on thequestion of whether to support and work alongside the new president,Mr Yudhoyono, or use its numerical strength to undermine his position.

The nationalist-secular PDI-P, led by Ms Megawati (and founded by her in 1996 asa breakaway party from the PDI), remains the second-largest party in the DPR, butit has lost its reformist image, largely as a result of failing to take sufficient steps

Golkar dominated during theSoeharto regime

Nationalist-secular partiesremain dominant

10 Indonesia


against corruption during Ms Megawati�s term in office. The party is deeplydivided following its poor electoral performance. If Ms Megawati remains leaderof the PDI-P, relations between the party and the new president are likely to beacrimonious. Ms Megawati and Mr Yudhoyono fell out over the latter�s decision toleave Ms Megawati�s cabinet and run for the presidency.

The Democratic Party (DP), co-founded by Mr Yudhoyono, is a new party and didnot contest the 1999 elections. It has been vocal in its calls for reform andmeasures to tackle corruption. It did well in the 2004 elections, winning 10.3% ofthe seats in the DPR, perhaps because it offered a fresh alternative to theestablished political elite, but also because of the increasing popularity ofMr Yudhoyono.

The Islamic political parties have largely failed to capture the imagination of theelectorate since the demise of Soeharto, suggesting that the population is keento maintain a divide between politics and religion. Politicised Islam wasstrongly discouraged by Soeharto, but his successor, Mr Habibie, handedimportant cabinet portfolios to a number of modernist, nationalist Muslimsfrom the Association of Islamic Intellectuals. Although his successor aspresident, Mr Wahid, was a leader of Nahdlatul Ulama, a Muslim organisationwith 37m members that draws much of its support from traditionalist Muslimsin rural areas of East and Central Java, his political views were explicitlysecular.

In the 1999 general election the Islamic parties coalesced to form the so-calledCentre Axis, and secured the post of MPR speaker for the de facto leader of theaxis, Amien Rais. Mr Rais is a former leader of the 23m-strong Muhammadiyah,a modernist Muslim organisation with a large membership drawn from urbanareas. In the 2004 election the mainstream Islamic parties, of which the UnitedDevelopment Party (PPP) and the National Mandate Party (PAN) are the largest,campaigned independently and won slightly fewer seats. The success of themore fundamentalist Prosperous Justice Party (PKS) in the 2004 election isbelieved to have been largely the result of its clean image and reformist policystance, as it downplayed its Islamic credentials in its election campaign.

The form of Islam practised in Indonesia has traditionally been moderate, butsince the demise of Soeharto there have been signs of a more radicalfundamentalist movement gaining some support, although its membershipremains small. Initially it appeared to focus its attacks on the sizeable Christiancommunities in parts of Indonesia, but in recent years there have been clearindications that some elements have links with international Islamic terrorism,notably the al-Qaida network. The bombings in Bali in October 2002, and atthe JW Marriott hotel in the capital, Jakarta, in 2003 and the Australianembassy in 2004, both in the capital, Jakarta, have been attributed to a region-wide terror group, Jemaah Islamiah (JI), whose aim is to create a pan-regionalSouth-east Asian Islamic state. The Islamists are capitalising on the prevailingmistrust of the West to argue that the US-led �war on terror� is a war on Islam.

The Indonesian military (TNI) has been under intense pressure to end itspolitical role. Although it no longer has parliamentary representation, it retains

The military�s official politicalrole has ended

Fundamentalist Islam hassmall pockets of support

Political Islam has largelyfailed to gain ground

Indonesia 11


a powerful influence over the government and currently holds four importantposts in the cabinet. The need for tighter security (in the wake of the Balibombings) and the assault launched on separatist insurgents in the province ofAceh in May 2003 have bolstered the military�s political leverage. Ms Megawati,accused of being ineffectual, also leaned heavily on the military for support.

At end-September 2004 a revised military bill was passed, requiring that theTNI cease its involvement in business activity within five years. The originalbill, largely drafted from TNI inputs, had sought to increase the military�s powerand influence. However, by the time the bill was passed, it represented asetback for the military. Although the withdrawal of the TNI from involvementin business will be economically beneficial, the government will have tosupplant the TNI�s operational funding, at a cost of 1-3% of GDP.

Main political figures

Susilo Bambang Yudhoyono

Mr Yudhoyono was born in East Java in 1949. He rose to the rank of lieutenant-generaland was the army chief of territorial affairs before being appointed to the cabinet inOctober 1999 as minister of mines and energy. His political star rose with hisappointment to the influential post of co-ordinating minister for political, social andsecurity affairs in August 2000. The then president, Abdurrahman Wahid, sub-sequently sacked him in July 2001, but he was restored to his former post inMs Megawati�s August 2001 cabinet. While in office, Mr Yudhoyono won internationalacclaim for his strong stance against terrorism, and domestically he gained a reputationfor honesty. He completed a degree in agricultural economics in 2004. He was electedpresident with a huge popular mandate in the second round of the presidentialelection in September 2004.

Yusuf Kalla

Born in South Sulawesi, Mr Kalla has a degree in economics, and was active in bothbusiness and government during Soeharto�s rule. He is a member of the Golkarparty. He was involved with the Indonesian Chamber of Commerce and Industry(KADIN) at the provincial level in South Sulawesi, and served in the House ofPeople�s Representatives (DPR, the lower house) for four consecutive periods beforebecoming a member of the cabinet under Mr Wahid�s presidency in October 1999.He was not particularly close to Mr Wahid, and was sacked from his position astrade and industry minister by the president in April 2000. Mr Kalla held theposition of co-ordinating minister for people�s welfare in the Megawatiadministration. He has considerable investments in the agribusiness, retail andconstruction sectors, and there have been allegations in the past that he has abusedhis position to benefit his companies. He also has a reputation for more activistMuslim views.

Megawati Soekarnoputri

Daughter of Soekarno, the first president of Indonesia, Ms Megawati has been activein politics since 1987 and assumed the leadership of the Indonesian DemocraticParty (PDI) in December 1993. Her party won the 1999 parliamentary election, butshe was outmanoeuvred in the October presidential election and forced to acceptthe vice-presidency. However, in July 2001 she assumed the presidency following theimpeachment of Mr Wahid. Ms Megawati proved an enigmatic president, often

12 Indonesia


accused of ineffectiveness; nevertheless, by carefully balancing the many conflictinginterests in the country, she managed to oversee the return of relative political andeconomic stability. She lost to Mr Yudhoyono in the 2004 presidential electionlargely because of the perception that she had failed in her pledge to rid the countryof corruption, cronyism and nepotism (commonly referred to as KKN). In her lastmonth in office she damaged her reputation by failing to acknowledge defeat and byrushing through controversial legislation. She is likely to face challenges to herleadership of the PDI-P.

Agung Laksono

Mr Laksono is known as Akbar Tandjung�s protégé, but could become a keychallenger for the position of Golkar leader. He is a former minister of youth affairsunder Soeharto. He is known as an opportunist and long-time bureaucrat with linksto the military, business and the old political elite. In September 2004, Mr Laksonowas voted leader of the DPR. This is now a particularly important role, given thepresident�s lack of a party-political support base in the DPR. Mr Laksono has pledgedto work with the president, but he will play a pivotal role in the smooth functioningof the legislative process.

Akbar Tandjung

Mr Tandjung rose to prominence in May 1998, when he was appointed statesecretary to the president, Bacharuddin Jusuf Habibie, a powerful position withdirect access to the president. Before that, he had held two minor positions in theSoeharto government. He was voted chairman of Golkar in July 1998, and succeededin steering the party to second place in the 1999 DPR election. In October 1999Mr Tandjung was elected to the position of speaker of the DPR. Although he ledGolkar to victory in the 2004 election, Mr Tandjung�s personal ambitions have beenseverely damaged by allegations of corruption. He could also face a challenge to hisleadership.

The country�s provincial and district level governments have grown as apolitical force since the introduction of regional autonomy on January 1st 2001.This has at times placed Indonesia�s regions at odds with the centralgovernment, which is fighting to retain its authority. The legislation wasintroduced to appease resentment of the central government�s control ofnatural resource revenue and its insensitivity to regional differences. However,the legislation was rushed through and proved to be contradictory to manyexisting laws, creating considerable legal and administrative uncertainty. Arevision of the laws is now under way.

International relations and defence

The establishment of the New Order government resulted in a transformationof foreign policy. Soekarno�s quest for recognition as a revolutionary leader ofthe developing world was abandoned and replaced by a more pragmatic andlow-key approach. The new goal was to emphasise stability in Indonesia�sinternational relations, thereby allowing the country to concentrate ondomestic economic development. Despite theoretically adhering to the prin-ciple of non-alignment, Indonesia drew increasingly close to the West. It hasgenerally enjoyed good relations with most Western countries, although the

Greater regional autonomyis introduced

Foreign relations under theNew Order aimed at stability

Indonesia 13


IMF�s involvement in the country and the East Timor debacle have severelytested relations in recent years.

Until the mid-1980s Indonesia was content to focus its foreign policy within theregional context of the Association of South-East Asian Nations (ASEAN), and topermit its wider foreign policy initiatives to be taken under the auspices of thatorganisation. Having made much progress towards its primary aim of domesticeconomic development, the government began to seek a more prominentinternational role from the second half of the 1980s. Indonesia chaired theNon-Aligned Movement from 1992 to 1995, and played a leading part indeveloping the Asia-Pacific Economic Co-operation (APEC) forum, hosting itssecond annual summit in November 1994. Financial constraints and domesticinstability have forced a period of greater introspection since 1998.

The Portuguese withdrew from their colony of East Timor in 1975. The capital,Dili, was occupied by the left-wing Revolutionary Front for an Independent EastTimor (Fretilin). Indonesian troops intervened and set up a provisionalgovernment. In 1976 the Indonesians invaded and East Timor became the 27thIndonesian province, although this was never formally recognised by the UN.Local resistance to Indonesian rule remained strong, and in August 1999 areferendum was held, resulting in an overwhelming vote for independence.Following the referendum violence broke out between pro-independence andpro-Indonesian groups, and was only halted by international military inter-vention, led by Australia. In October 1999 the Indonesian government agreed toaccord East Timor its independence.

Relations with Australia and East Timor were subsequently strained for someyears. However, since East Timor gained full independence in 2002, there hasbeen a concerted effort by both the Indonesian and East Timorese governmentsto establish more cordial diplomatic relations. There remain unresolved issues,such as bringing to justice those guilty of orchestrating violence following theEast Timorese vote for independence, but the East Timorese government hasadopted a conciliatory approach.

Relations with Australia have also improved, particularly since the October2002 bombings in Bali, following which the Australian and Indonesian defenceforces worked closely together to catch the perpetrators of the crime. Thereremain sensitive issues with Australia as well, such as the treatment of refugeesusing Indonesia as a base for entry to Australia, and Australia�s staunch supportof US foreign policy, but again both governments appear committed tomaintaining amicable relations.

The US severed all military links with the Indonesian armed forces (TNI)following the 1999 violence in East Timor, and a resolution of the relatedhuman rights cases was made a precondition for the restoration of relations.However, the murder of two US teachers in Papua in August 2002 has been anadditional factor preventing progress. Initially the US suspected TNIinvolvement in the murder, but the US is now seeking the extradition of aPapuan activist, and is accusing the Indonesian authorities of failing toco-operate. It seems likely that Indonesia�s refusal to support the war against

East Timor issues dominatedinternational relations

Relations with the US are oftentense

14 Indonesia


Iraq and its only cautious support for the war on terror are the more likelyreasons for the continued withholding of US military aid.

The combat capacity of the armed forces was allowed to decline between themid-1960s and the late 1980s, and capital spending on defence fell to a low of2.5% of total development expenditure between fiscal year 1984/85 (April-March) and 1988/89. The end of the cold war (which led to a reduction of theUS presence in South-east Asia) and the militarisation of China and India thenprompted a drive to improve Indonesia�s defence capacity. Capital expenditureon defence and security increased to about 5% of total spending from 1989/90to 1993/94.

Armed forces, 2004Indonesia Australia South Korea Thailand

Army 233,000 25,300 560,000 190,000 Strategic reserve 30,000 � � - Regional commands 150,000 � � � Special forces 5,300 � � �Navy 45,000 12,850 63,000 70,600 Marines 15,000 11,860 28,000 8,026 Naval air 1,000 990 � 1,940Air force 24,000 13,650 64,700 46,000Paramilitary Police 280,000 � 4,500 113,700 Marine police 12,000 � 4,500 2,200 People�s securitya 40,000 � 3,500,000 45,000Total armed forces 702,000 73,400 5,187,000 506,600 Active 302,000 51,800 687,000 306,600 Reserves 400,000 21,600 4,500,000 200,000

a Part-time auxiliary force receiving three weeks� basic training each year in Indonesia; civilian defence corps in Thailand and South Korea.

Source: International Institute for Strategic Studies, The Military Balance, 2004-2005.

However, the recent economic crisis has since forced the military to put itsexpansion plans on hold. The defence budget fell from nearly 5% ofdevelopment (as distinct from current) spending in 1997/98 to only 1.9% ofdevelopment spending in 2002. It is estimated that the state budget accounts foronly 30% of military expenditure. The remaining 70% is funded by the militaryitself through its extensive commercial interests and private security arrange-ments. In 1999 the police formally separated from the armed forces, andspending on defence and security is now split between the two institutions.Following the US ban on military contact with the TNI, the procurement ofmilitary equipment has proved costly and problematic. In late 2003 theIndonesian air force obtained four Sukhoi jet fighters and two attack helicoptersfrom Russia as part of an effort to develop the country�s sources of militaryequipment.

Security risk in Indonesia

The outgoing president, Megawati Soekarnoputri, succeeded in restoring a modestdegree of stability after taking office in 2001. However, Indonesia�s vast size anddiversity creates an element of internal conflict that hinders progress on investmentprojects and the operations of foreign businesses. Greater political freedom since the

The economic crisis slows themilitary build-up

Indonesia 15


end of the Soeharto era has exacerbated these innate tensions, leading to a surge inseparatist violence, clashes between the military and civilian protestors, and ethnicand religious violence in many parts of the country. There are a number of risks,including the military assault on Aceh, a revision of decentralisation legislation andthe potential for growing factionalism in the nation�s politics.

Armed conflict

Communal violence between Christians and Muslims in the Moluccas, and Dyaksand Madurese in Central Kalimantan, has left thousands dead since the beginning of1999. Intermittent religious violence has also flared up on Lombok in West NusaTenggara, and (more seriously) in Poso, Central Sulawesi. Peace agreements in all ofthese areas are now being enforced, with varying degrees of success.

Separatist sentiment has been stimulated by the success of the East Timorese insecuring independence from Indonesia in 1999, and by the public exposure ofmassacres and other atrocities perpetrated by the military under the New Order. Thecollapse of the December 2002 Aceh peace accord led to the imposition of martiallaw in the province in May 2003. A military assault was simultaneously launched onthe Free Aceh Movement (GAM) guerrillas. Although martial law was replaced by�civil emergency status� in May 2004, there was no withdrawal of troops.

In the extreme east of the country, the Free Papua Organisation (OPM) continues tostruggle for independence in Papua, where support for its cause was voiced by abroad cross-section of the region�s population at a congress held in the provincebetween late May and early June 2000. Although it remains a less vociferousseparatist campaign than in Aceh, relations between Papua and the Indonesiangovernment have deteriorated since 2003 as the government attempted to dividePapua into three separate provinces. One of these, West Irian, was created, but theissue has proved so controversial that there has been no further progress.

Both Aceh and Papua have been offered autonomy in the form of much greatercontrol of revenue generated in the provinces and greater scope for self-rule: Aceh,for example, is being allowed to operate shariah (Islamic) law. However, GAM andthe OPM are not content to accept greater autonomy and continue to press forindependence. Ms Megawati, meanwhile, was adamant that there would be nodiscussion of independence. It appears unlikely that the conflicts in the twoprovinces will be resolved in the near future.

A number of foreign mining and oil and gas companies have interests in Aceh andPapua, which are rich in natural resources. Their operations have been largelyunaffected by the troubles, although ExxonMobil, a US oil company, was forced toclose its Aceh operations temporarily in March 2001 in the face of a deterioratingsecurity situation.

Terrorism

In October 2002 bombings on the holiday island of Bali killed 202 people andinjured many more. The bombings are believed to have been the work of Islamistterrorists, members of a region-wide terror group, Jemaah Islamiah (JI). As yet theextent and strength of JI is uncertain, but it appears to have active cells across South-east Asia, and its stated aim is the creation of a pan-regional Islamic state. Prior to

16 Indonesia


Bali there had been a number of isolated terrorist attacks, notably at Christianchurches on Christmas Eve in 2000, but the size of the Bali bombs and the fact thatforeign tourists were the target has led to a reassessment of the terrorist risk inIndonesia. A bomb at the JW Marriott hotel in the capital, Jakarta, in August 2003and another outside the Australian embassy in September 2004 confirmed thecontinued risk to foreign targets.

The Indonesian government acknowledges the risk, and the police force has beenco-operating extensively with other South-east Asian security forces and the US andAustralian counter-terrorist services. Tough, but temporary, anti-terrorism legislationwas enacted in the wake of the Bali bombings, but it was declared unconstitutionalin mid-2004. There remains the real risk of further terrorist attacks, perhaps becauseIndonesia is seen as an easy target.

Civil unrest

Mass demonstrations are a periodic feature of the Indonesian political landscape.Ongoing cuts to the fuel subsidy, rises in electricity prices and changes to the labourlaw have all led to public demonstrations in recent years, some of which result inviolence. Foreign businesses operating in more remote areas of the country have alsorecently been the target of angry protests!sometimes by those who have sufferedgenuine loss when land was acquired by large-scale investors, but also by peopleseeking to take advantage of the uncertainty caused by the rushed introduction ofregional autonomy.

Crime

Violent crime has been on the rise in recent years, but does not pose a serious threatto foreign business interests. Likewise, organised crime is seldom a threat to foreignbusiness, although it thrives in the Indonesian underworld. Kidnapping has nottraditionally affected foreigners, but in recent years separatist fighters in Papua havekidnapped several non-Indonesians. Extortion in the conventional sense does notaffect foreign business in Indonesia. However, government officials typicallydemand illegal payment for permits, licences and other privileges, and the army orpolice often require additional payments for security arrangements.

Resources and infrastructure

Population

Indonesia is the fourth most populous country in the world after China, Indiaand the US. The 2000 census placed the population at 206.3m (including non-permanent residents). Population growth in the 1990s was 1.5% per year, wellbelow an average of 2.3% recorded in the 1960s and 1970s and slower than therate of 2% between 1980 and 1990.

The falling rate of population growth is in part a result of a successful family-planning programme that has, since it was introduced in the early 1970s,reduced the fertility rate from 5.7 in the late 1960s to 2.6 in 1999. Accordingly, atthe time of the 2000 census 30.4% of the population was under 15 years of age,compared with 36.6% in 1990 and 41.9% in 1980. In 2000 the number of people

Population growth slows

Family planning is successful

Indonesia 17


aged over 65 years stood at 4.6% of the population, up from 2.5% of thepopulation in 1971.

Population, 2000a

(�000 unless otherwise indicated)

Age group Male Female Total % of total0-4 10,296 10,007 20,303 10.1

5-9 10,434 10,060 20,494 10.210-14 10,461 9,993 20,454 10.2

15-19 10,649 10,500 21,149 10.520-24 9,237 10,021 19,258 9.6

25-34 17,335 17,705 35,040 17.435-44 13,866 13,505 27,371 13.645-54 8,878 8,163 17,041 8.5

55-64 5,480 5,519 10,999 5.565+ 10,238 10,728 20,966 10.4

Total 100,935 100,307 201,242 100.0

a Permanent residents only.

Source: Central Bureau of Statistics, 2000 census.

About 95% of the population is of Malay origin, but there are over 300 minoritygroupings including Melanesian, Polynesian and Micronesian. There are anestimated 4m ethnic Chinese in Indonesia. During the breakdown in law andorder that followed the downfall of Soeharto, there was considerable hostilitytowards the largely wealthy Chinese community, resented for its active role inindustry and business. The population is 87% Muslim, 10% Christian, 2% Hindu(mainly in Bali) and 1% Buddhist.

Industrial development has brought large-scale migration to urban areas!42%of the population lived in cities in 2000, compared with 30.9% in 1990 and22.3% in 1980. The population distribution also remains highly uneven. Despiteattempts to ease congestion on Java, Bali and Madura through the nowmoribund transmigration programme, 60.4% of Indonesians still live on thesethree crowded islands, which make up only 7% of Indonesia�s land surface area.In 2002 the population density of Java island stood at an estimated 975 peopleper sq km; Bali was the second most densely populated area, at 573 people persq km. The population density of the capital, Jakarta, stood at 12,623 people persq km. Outside Java and Bali population density averages less than 100 per sqkm, with Papua having only six people per sq km.

In 2004 a United Nations Development Programme (UNDP) special report onhuman development in Indonesia cited progress in the country as a whole, butrepeatedly referred to the large regional variations. According to the UNDP,between 1999 and 2002 the number of people living in poverty fell from 23% to18%, although the report made the point that there was considerable movementin and out of poverty, affecting between one-third and one-half of thepopulation. The UNDP reported that child malnutrition had fallen to 27% in2002, down from 35% in 1996 and 45% in 1990, and that the infant mortalityrate is progressively falling. On the gender front, it praised the rise in the female

Distribution remainshighly uneven

The UNDP highlights regionalinequality

18 Indonesia


labour-force participation rate, but expressed concern at the fact that maternalmortality remains very high, at over 20,000 deaths a year.

Education

Education improved greatly under the New Order government of Soeharto, andas a result the proportion of the population who are illiterate fell from 39% in1971 to only 9.3% in 2002 (12.5% in rural areas and 5.3% in cities). Improvingaccess to primary education means that 95% of all children of eligible age (7-12years) were attending elementary school in 2000. Attendance has been helpedby special measures introduced to ensure that children remained in educationthroughout the 1997-98 economic crisis, including a decision to abolish allentrance fees for public schools in 1998-99. Education is compulsory for nineyears. However, regional inequality is evident: school attendance in Jakarta in2000 averaged 9.6 years, compared with 5.3 years in Papua

Budgetary constraints since 1997-98 have meant that there has been little newinvestment in the education sector, despite the fact that the constitutionallocates 20% of state expenditure on development to the education sector.Concurrently, falling per-head incomes have meant that students have beenstaying at school for less time, as parents have been keen for their children tostart paid labour or have been unable to afford the costs of higher education.There is an estimated 12% participation rate in tertiary education, comparedwith 22% in Thailand. The majority of tertiary institutions are privately owned,although there is a network of state institutions around the country. The qualityof tertiary colleges varies hugely, and many Indonesian students go abroad tocomplete their education.

In mid-2003 the state universities announced a plan to allow some newstudents to enter the universities without passing the normal tests if they paidlarge entry fees of Rp15m-150m (US$1,800-18,000). The �special commonentrance lane� for 20% of new students was a response to sharp cuts ingovernment funding. The government�s reaction to the universities� move wasto announce that it was drafting legislation to allow foreign learning institutionsto open branches in Indonesia in order to improve the quality of the country�shuman resources. Universities will be excluded!foreign institutions will beallowed only to own a 50% stake in them. The government is hoping thathigher-learning institutions requiring significant capital outlay, such aspolytechnics, will be opened.

In June 2003 a controversial education bill was passed. The bill says that allchildren, even those in religion-based schools, have the right to receiveinstruction in their own faith. Christians say that it is discriminatory, and assertthat the state should not be allowed to interfere in private schools. ManyMuslim children study in private Christian schools, which have a goodreputation. These schools will now have to offer classes in Islam.

Education has suffered from alack of investment

Indonesia 19


Education statistics, 2002

Age group No schooling Attending schoolNo longer

attending school5-9 32.7 66.6 0.610-14 0.7 91.7 7.6

15-19 1.0 49.7 49.320-24 1.3 9.4 89.425-29 1.7 1.2 97.1

30-34 3.1 0.3 96.535-39 5.4 0.3 94.3

40-44 8.4 0.3 91.445+ 25.9 0.1 74.0Total 11.4 24.6 64.0

Source: Central Bureau of Statistics.

Health

Rapid improvements have been made to healthcare since the late 1960s. Healthpolicy has concentrated on the establishment of public health centres in ruralareas. Preventive healthcare, involving in particular the provision of cleandrinking water, immunisation, pest control and improved nutrition, has alsoreceived priority. Between the mid-1960s and the mid-1990s the number ofpublic health centres increased from less than 1,250 to more than 7,000,supplemented by more than 28,000 auxiliary and mobile centres. The numberof hospitals and medical staff also increased dramatically, with particularlylarge increases in the number of specialist hospitals (although despite theextensive nature of the public health network, quality is often low). The effectof this improvement is illustrated by a decrease in the infant mortality rate from145 per 1,000 live births in 1967 to an estimated 38 per 1,000 live births in 2003,and an increase in the life expectancy at birth from 46 years to an estimated68.9 years during the same period.

There remain considerable regional inequalities, however, with maternalhealthcare in particular being a major problem in rural areas. Furthermore, thedemands on the health service are rising as a result of greater life expectancy (andconsequently a higher incidence of degenerative diseases) and increasingurbanisation. Health spending, meanwhile, has been falling since the Asianfinancial crisis that broke in 1997, a trend only partially offset by a correspondingincrease in donor support for the sector. Overall health spending fell by 7% in realterms in fiscal year 1997/98 (April-March) and by 12% in 1998/99, and was allocatedonly 6% of development spending in the 2003 budget.

Owing to budgetary constraints, there is a policy of zero personnel growth inthe public sector, which is having negative effects on health service delivery.There are approximately 0.7 hospital beds per 1,000 people, which is low byregional standards and compares with 0.8 beds per 1,000 in India. In recentyears, the government has been actively promoting private healthcareprovision, particularly at secondary and tertiary levels. According to the UNDP,the government is responsible for only 20% of expenditure on health!less thanone-half of the average for the East Asia and Pacific region. The increasing role

An emphasis on basic healthservices has paid off

Demands on the health serviceare rising

20 Indonesia


of the private sector in healthcare does raise questions about access, but privatefacilities are legally required to provide subsidised services to the poor.

In late September 2004 a radical bill was passed to ensure that the country�spoor, estimated at about 40m people, will receive free health services. The newnational social-security system (SJSN) will cover not just healthcare but also lifeinsurance, workers� welfare, severance payments and pensions. The govern-ment will now be required to provide social security for the whole population,whereas current insurance schemes cover only 20% of the population.

Natural resources and the environment

Natural resources form the backbone of Indonesia�s subsistence and formaleconomies. Millions depend for their living on subsistence farming, fishing, andtree-crop and cash-crop cultivation. The country also has vast oceanic resources.Large industrial concerns have interests in the plantation sector and in thecountry�s once vast forests, which have been decimated by commercial loggingsince the 1970s (see Economic sectors: Agriculture). Rich deposits of oil, gas,coal, tin, copper, nickel, bauxite, gold, silver and iron sands, kaolin, marble,granite, limestone and pumice are the mainstay of an important mining andquarrying sector (see Economic sectors: Mining and semi-processing).

Despite the importance of natural resources to the economy, they are exploitedin a destructive, polluting, unsustainable and inefficient manner. Wealthgenerated from the exploitation of natural resources has not been distributedequitably, nor has it been reinvested in the country. Even in the country�snational parks!which cover about 10% of the country!resource exploitation isheavy and unsustainable, owing to encroachment by logging companies,mineral prospectors and smallholder farmers. Environmental laws are openlyflouted by the private sector, often in collusion with local and provincialgovernment officials. Environmental destruction has intensified since Soehartoresigned from office in May 1998. The more general breakdown in law andorder, coupled with economic hardship, has led to a surge in illegal logging,mining and fishing, which have now reached alarming levels.

In June 2003 a World Bank report stated that air, water and ground pollutionare increasing in Indonesia. The annual dry-season forest fires are a majorcontributor to air pollution. The Bank estimates that air pollution costs thecountry US$400m a year, primarily in health costs!inflammation of therespiratory tract is now the sixth most common cause of death. Despiteabundant rainfall and fresh water resources, access to clean water is decreasing.The country has one of Asia�s lowest rates of sewerage and sanitation cover,and consequently has the highest incidence of typhoid in Asia. Increasingwater pollution is not only damaging human health but also fisheries,agriculture and coral reefs. Industrial effluents, particularly those from themining industry, are one of the main causes of water pollution. Indonesia alsolacks the means to deal with the population�s solid waste"open dumps arecontributing to air pollution as well as contamination of the water supplies.

The environment facesgrave threats

Indonesia has vast endow-ments of natural resources

A new social security bill ispassed

Indonesia 21


Probably in recognition of the potential for water shortages and its own lack offunds, the government is planning to privatise the water industry. Thegovernment has put before the House of People�s Representatives (DPR, thelower house) a bill on water allowing local administrations to privatise watersupplies and allow private and foreign investors to participate. As with allprivatisation of utilities, however, there remain concerns about the privatesector�s commitment to ensuring water provision in more sparsely populatedareas, where the costs might be higher than the return.

In September 2004, as part of its commitment to the Kyoto Protocol, thegovernment announced that in October it would set up a commission in chargeof approving carbon emission swap agreements. The National Commission forClean Development will include representatives from the Ministry ofEnvironment, the Ministry of Energy and Mineral Resources, the Ministry ofForestry, the Ministry of Trade and the Ministry of Industry. Companiesplanning to �sell� carbon emissions must report their projects to thecommission for approval. Once approved, they will go to the designated worldauthority for approval.

The government aims to outlaw leaded gasoline by 2005. A survey conductedby the Environmental Impact Analysis Agency (Bapedal) in 2001 found that airquality in the ten largest cities ranged from good to unhealthy, while that inJakarta and Bandung ranged from moderate to unhealthy. An earlier survey byBapedal found that transportation accounted for 70% of total air pollution. Theenvironment ministry has signed an agreement with carmakers to tightenvehicle emission standards to meet the world standard, the EURO 2, by 2005.

Transport, communications and the Internet

Investment in infrastructure has collapsed since the 1997 financial crisis, andpoor infrastructure is already proving an obstacle to potential economic growth.The generally low return on infrastructure projects is coupled with legaluncertainty and concerns about security and political stability, deterring privateinvestors.

Land transport depends mainly on road and, to a lesser extent, rail networks.The total length of roads in 2001 was 355,951 km, of which 59% was asphalt-covered. Railways cover approximately 3,100 km on Java and 1,300 km onSumatra (the latter in three unlinked networks), and only 10% of this consists ofdouble-track railway. There is only one railway company in Indonesia, the state-owned Kereta Api Indonesia. The sector is badly in need of investment, and thegovernment has been actively inviting foreign investors to participate, asbudgetary constraints prevent it investing itself. The ageing infrastructure hasbeen blamed for the sharp increase in accidents; there were 132 accidents in2001, but 217 in 2002. Many railway crossings have no security gates, especiallyin rural areas, and at end-2003 it was reported that 31.1% of locomotives and45.1% of coaches had been operating for more than 30 years. There are plans tobuild a high-speed 800-km rail link between Jakarta and Surabaya, capital ofEast Java province, but foreign investment is needed before the projectcan begin.

There is inadequateinvestment in infrastructure

Progress is made on carbonemissions

22 Indonesia


In July 2003 the then president, Megawati Soekarnoputri, announced therelaunch of a large number of infrastructure projects that had been put on holdsince the 1997-98 crisis. Among the projects are plans costing Rp4,900bn(US$580m) to construct toll roads around the second city, Surabaya, thecompletion of the Tanjung Jati B power plant in Java and a Rp4,120bn canaldesigned to end the annual flooding of Jakarta.

Despite being an island nation, Indonesia has a surprisingly small domesticocean-going fleet (to the detriment of net services in the current account), andlacks the port facilities to attract major vessels. Most cargo is transshipped atSingapore and arrives in smaller feeder vessels. However, the country�s maincontainer port, Tanjung Priok in Jakarta (which handled 31.2% of exports and47.3% of imports in 2000 and is the fourth-cheapest port in the world) is nowprivately owned, and heavy investment is being made to upgrade the port. Thevolume of international sea cargo loaded in 2001 in Indonesia reached 141.1mtonnes, up 9.1% year on year. Meanwhile sea cargo unloaded grew from 45mtonnes in 2000 to 51.7m tons in 2001. The small ocean-going fleet is supportedby an inter-island shipping fleet of 1,333 vessels with a capacity of 27mdeadweight tonnes (dwt) and a traditional fleet of 2,793 locally built sailingvessels with a total capacity of 397,616 dwt.

Indonesia has 179 commercial airports, 61 of which are large enough forwide-bodied jets. The Soekarno-Hatta international airport at Cengkareng nearJakarta was officially opened in 1985 and, together with many other airportsthroughout the country, has been modernised and extended since then.Indonesia�s airlines developed rapidly in the early 1990s, but suffered badly owingto large foreign-currency-denominated debts during the economic crisis and wereforced to make sweeping cuts to their operations. There are currently two state-owned carriers, Garuda and Merpati, and ten private carriers, seven of whichentered the industry in 2000 following a relaxation of entry restrictions.

The government-owned telephone system covers almost the entire country, andhas been greatly extended and made more effective since the mid-1970s by thedeployment of telecommunications satellites. This satellite system alsoprovides connections to the international direct dialling network. There was asharp increase in telephone lines from 1.4m in 1992 to 4.7m in 1997, but thereare still under four lines per 100 people. There are, however, 220,000 wartel(telephone kiosks), located in even the remotest areas, which means thatcoverage is much higher than the stated number of lines would imply.Businesses account for 19.8% of lines, households for 78.8% and the governmentfor the remaining 0.4%. An international connection service is available to only300,000 people, or around 0.15% of the population. The 1997-98 crisis has led tothe rescheduling and indefinite delay of a number of expansion projects.

The two largest telecoms companies in Indonesia are Telkom and Indosat,which are 65% and 16% state-owned respectively. Telkom is the domestictelecoms provider, and is engaged in the voice, data and image communicationsectors. It dominates the telecoms infrastructure with 7.2m lines. The muchsmaller Indosat traditionally provided international telecoms services.

Progress with the liberalisationof the telecoms sector is slow

Indonesia 23


Liberalisation of the sector has started. Since August 2002 there has beencompetition in the local calls and mobile markets between Telkom�s andIndosat�s subsidiaries, Telkomsel and Satelindo. Under the new arrangement,telecoms companies are able to enter the Indonesian market without having toform joint ventures or alliances with either Telkom or Indosat. Since December2002, 41.9% of Indosat has been owned by Singapore Technologies Telemedia,but there remains a 49% cap on foreign ownership in telecoms companies.

The market for mobile phones grew rapidly in the run-up to 1997, owingprimarily to reduced handset prices following a reduction in import duty.Growth in the market temporarily halted owing to the economic crisis, but hassince resumed. The greater flexibility and competitiveness of the mobile phonesector meant that during the economic slowdown cellular providers were ableto offer innovative schemes and low-cost prepaid services to sustain the market.Nevertheless, mobile-phone penetration remains low in Indonesia, at less thanfive phones per 100 inhabitants, compared with 24 per 100 people in Malaysia;however, by end-2002 it was larger than the fixed-line market. The number ofusers is estimated to have increased from 6.6m at end-2001 to 18.5m byend-2003.

Personal computer (PC) penetration is low by regional standards. Data from anindustry body, the Indonesian Computer Association, suggest that PCpenetration was as low as 11 per 1,000 population in 2003, although there are40 Internet service providers (ISPs). Computers are assembled locally, butChinese-made PCs have recently entered the market and are considerablycheaper than either locally made ones or imports from Japan and the US. Ofthe 40 ISPs, 97% are located in Jakarta, and provide web-hosting, e-commerceand VoIP (voice over Internet protocol) services. The use of the Internet fortrade transactions is still low, but it is not just the low Internet penetration ratethat prevents faster growth in e-commerce, but also the cash-based nature ofthe Indonesian economy and the low level of credit-card use. Concerns aboutthe legality of transactions, intellectual property, consumer protection andimport duties are deterring use of the Internet for trade. The recent rises intelephone tariffs is another factor constraining Internet use.

Energy provision

Indonesia is endowed with a wide variety of energy sources. It has large,although declining, petroleum reserves, as well as significant reserves of naturalgas and coal. It also has great potential for the development of hydroelectricand geothermal power, and also of non-conventional sources of energy, such aswind and wave energy and solar power.

Indonesia is a member of OPEC. The Ministry of Mines and Energy estimatedat end-2002 that Indonesia�s proven oil reserves stood at 5bn barrels!a 14%decline since 1994. The majority of the proven reserves are onshore. Most oilreserves consist of light, low-sulphur crudes, which command a premium overheavy crudes produced in the Middle East. The two main export crude oils areSumatra Light and Duri crude. There are more than 2,500 km of crude oil

Oil and gas are leadingenergy sources

Indonesia has a diverseenergy base

Mobile phones are gainingmarket share

Internet usage is at a low level

24 Indonesia


pipelines in Indonesia, as well as nearly 500 km of petroleum-productpipelines and more than 1,700 km of natural gas pipelines. Oil production(crude and condensate) has been steadily declining, standing at 1.2mbarrels/day in 2002, down from 1.4m b/d in 2000 and 1.6m b/d in 1995. CentralSumatra, where the large Duri and Minas oilfields are located, is the largest oil-producing province. Other significant oilfield development and productionareas are offshore north-western Java, East Kalimantan and in the Natuna Sea.

Indonesia has eight petroleum refineries in operation, with a total installedcapacity of 1.02m b/d. Pertamina, the state oil and gas company, owns two ofthe seven refineries that it operates, and the Ministry of Finance owns theremaining five. Kilang Minyak Intan Nusantara!a joint venture of Al-BanaderInternational Group of Saudi Arabia (40%), China National ElectricalEquipment Corporation (40%) and a local company, Intanjaya AgromegahAbadi (20%)!is investing a total of US$6bn to build two Indonesian oilrefineries, one in Parepare, South Sulawesi, and the other in Batam Island, Riau.Both projects are scheduled to commence operating in 2005, processing around300,000 b/d. The refineries will be export-oriented, taking Saudi crude andrefining it for sale primarily to the Chinese market.

Oil and gas exploitation takes place through production-sharing contracts withPertamina. There are currently about 130 production-sharing contracts, of which40 have produced oil or natural gas. The others are at the exploration stage. InOctober 2001 the DPR passed a new oil and gas bill that liberalises the sectorand ends the monopoly enjoyed by Pertamina since 1971. Pertamina wascorporatised in mid-2003, and is set to be fully privatised by 2006. In February2003 the government improved the conditions of concessions on offer byraising the production share for contractors from 15% to between 20% and 25%for oil, and from 30% to between 35% and 40% for gas. The more favourableterms were a response to the sharp fall in investment in the oil and gas sector.Potential investors have complained about the high level of bureaucracy (andassociated corruption), the high level of taxation, inadequate legal protectionand the security risk.

Indonesia had proven natural gas reserves of 92.5trn cu ft at end-2001, andproduces about 2.5trn cu ft annually. There is a potential further 75.7trn cu ft ofreserves. Most of the natural gas reserves are located near the Arun field inNorth Sumatra, around the Badak field in East Kalimantan, off the coast of Java,in Irian Jaya and in the Natuna field in the South China Sea. A multinationalenergy company, BP, has also begun work to tap probable and proven reservesof 23.7trn cu ft in the Tangguh gasfield in Berau Bay off Papua (Irian Jaya).Production from the field is expected to begin in 2005. Indonesia is now theworld�s largest exporter of liquefied natural gas (LNG). Typically, 70% ofIndonesia�s LNG exports have gone to Japan, 20% to South Korea and 10% toTaiwan. However, in 2003 Japan cut its LNG imports from Indonesia because ofconcerns about the security of supply. BP has been seeking markets in Chinafor the LNG from Tangguh.

A new refinery will boostexports to China

Gas production is rising

Exploration is mainly throughproduction-sharing contracts

Indonesia 25


As only 10% of Indonesia�s area has been fully surveyed, estimates of coalreserves vary widely, from 4.2bn tonnes (proven) to 36bn tonnes (unproven).Around 85% of Indonesia�s coal reserves consist of lignite, and the remainder ofanthracite. Major known reserves are in Sumatra and Kalimantan, with lesserreserves in Java, Sulawesi and Papua. At least 2.6bn tonnes of reserves arereadily recoverable. Coal production is growing rapidly, with output rising from27.6m tonnes in 1993 to 76.8m tonnes in 2000 and 114.6m tonnes in 2003.Indonesia is now the world�s third-largest exporter of steam coal. However, inrecent years the sector has been hit by a series of strikes and protests as a resultof unclear mining legislation and political uncertainty.

The world�s largest coal mine, Kaltim Prima Coal (KPC), is located in north-eastern Kalimantan and generates US$450m in coal export revenue a year. InJuly 2003 a majority stake in KPC was bought by a local company, BumiResources, for US$500m. The mine is still to be partially divested, with 31% togo to local and provincial governments and their partners and 20% to bebought by a state-owned mining company, Batubara Bukit Asam.

Provision of electricity is the responsibility of the state electricity company,Perusahaan Listrik Negara (PLN), which inefficient management, bad businesspractice and corruption has rendered in effect bankrupt. According to PLN, only55% of households are electrified, with average consumption of 451 kwh perhead in 2003, compared with 1,574 kwh in Thailand and 2,828 kwh in Malaysia.There are regional discrepancies in service provision, with the majority ofelectrified households located in urban areas. To expand power generationcapacity, in the early 1990s PLN entered into 27 independent power producer (IPP)contracts with private-sector companies to build and run power stations inIndonesia. Contractual disputes stemming from the rupiah devaluation in 1997(PLN was buying power in US dollars and selling in rupiah) prevented many ofthese projects from starting. However, demand for electricity has continued togrow throughout the post-crisis period, and is expected to continue expandingover the 2002-2005 period at a rate of 11% per year in the main consuming regionsof Java and Bali, despite significant ongoing increases in tariffs.

In 2002-03 progress was made towards renegotiating and reviving many IPPprojects. By July 2003 the government had managed to sign landmarkagreements with 26 IPPs that will lead to a saving to PLN of US$5.9bn in totaland could lead to significant new investment in the electricity sector. The newagreements should mean that PLN will be able to buy power from the IPPs at aprice lower than its selling price to consumers. The government�s ultimate aimis the liberalisation of the power sector and the privatisation of PLN.

Indonesia produces about 100bn kwh of electricity annually, with around 87%of output generated from thermal sources (oil, gas and coal), 10.5% from hydro-power and 2.5% from geothermal sources.

The dearth of investment in power generation means that there are regularshortages in some parts of the country. In mid-2003 the government announcedplans to open tenders for the construction of new power plants. It alsoannounced a link-up with two electricity companies in the Malaysian states of

Power generation is in crisis

Indonesia�s reserves of coalare being developed

New power plants are planned

26 Indonesia


Sarawak and Sabah that have surplus electricity. They will supply powerstations in West Kalimantan and Sumatra respectively. PLN reportedly set asideUS$1.2bn in 2003 to build a number of power-generation facilities in order toforestall a looming power crisis.

The economy

Economic structure

Main economic indicators, 2003(Actual unless otherwise indicated)

Real GDP growth (%) 4.5Consumer price inflation (av; %) 6.8

Current-account balance (US$ m) 7,331.7 a

Exchange rate (Rp:US$; av) 8,577.1

Population (m) 220.5 a

External debt (year-end; US$ m) 136,748.9 a

a Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit, CountryData.

Indonesia has a well-balanced economy in which all major sectors play animportant role. Agriculture (including animal husbandry, fishing and forestry)has historically been the dominant activity in terms of both employment andoutput. The country has a vast range of mineral resources, which have beenexploited rapidly over the past three decades, enabling the mining sector tomake an important contribution to the balance of payments. The manu-facturing sector began a rapid expansion in the mid-1980s, and in 1991 the shareof manufacturing in GDP exceeded that of the agricultural sector for the firsttime. Recently the services sector has expanded, boosted by the tourismindustry, and in 2003 it accounted for nearly 40% of GDP and employed aboutone-third of the working population.

Comparative economic indicators, 2003Indonesiaa Malaysia a Indiaa Thailand a Chinaa

GDP (US$ bn) 243.3b 103.2 b 592.4 143.2 b 1,409.5GDP per head (US$) 1,103 4,127 558 2,237 b 1,088

GDP per head (US$ at PPP) 3,483 6,297 2,693 7,377 4,909Consumer price inflation (av; %) 6.8b 1.1 b 3.8b 1.7 b 1.2b

Current-account balance (US$ bn) 7.3 13.4 3.4 8.0 b 45.9

Current-account balance (% of GDP) 3.0 13.0 0.6 5.6 b 3.3Exports of goods fob (US$ bn) 63.3 105.0 57.2 78.4 b 438.3

Imports of goods fob (US$ bn) -39.6 -79.2 -74.4 -66.7 b -393.6External debt (US$ bn) 136.7 48.8 101.7 52.3 196.8

Debt-service ratio, paid (%) 16.4 5.1 13.9 15.9 4.8

a Economist Intelligence Unit estimates. b Actual.

Source: Economist Intelligence Unit, CountryData.

Low levels of domestic disposable income mean that exports have been theprimary engine of growth. Before the mid-1970s exports consisted mainly of asmall number of primary commodities, including natural rubber, coconut oil

The economy is diversified

Exports provide the mainimpetus for growth

Indonesia 27


and copra, tin and crude oil. The decline in petroleum prices after 1983 resultedin a concerted push towards industrialisation, as a result of which semi-processed and manufactured products, particularly textiles, increasingly came todominate exports. A determined effort to promote tourism since the mid-1980shas also had a big impact on services export earnings during the past decade.

Economic policy

The economy was in a desperate state when the New Order was established in1967. Production and investment had fallen in many sectors since 1950, and realgrowth in GDP had averaged around 2% a year in 1950-65, less than the rate ofgrowth of the population. Manufacturing accounted for less than 10% of GDP,and was characterised by substantial excess capacity caused by uncertaintiesabout prices, supplies and government regulations. In the early 1960s budgetdeficits amounted to as much as 50% of total government expenditure, exportearnings slumped and inflation accelerated to a peak of 640% in 1966.

A reappraisal of economic objectives took place after the economy wasrehabilitated in 1969; they were henceforth defined as stability, growth andequity, collectively described as the �trilogy of development�. The means ofattaining these objectives were a series of five-year development plans knownas Repelita, designed to establish development priorities and set specific growthtargets. The Repelita system was replaced by Propenas, after the end of RepelitaVI in March 1999. The Propenas sets out broad policy for a five-yeardevelopment strategy from 2000 to 2004.

From the mid-1970s the government�s economic policy represented a blend oftwo separate development strategies. The first (espoused by the �technocrats�)called for priority to be given to sustainable economic development throughthe efficient allocation of resources and the maintenance of macroeconomicbalance and international competitiveness. The second (promoted by the�technologists�) was more strongly rooted in the tradition of economicnationalism, and placed greater emphasis on promoting Indonesia�s develop-ment as a technologically sophisticated industrial power, irrespective of theeconomic costs of achieving this goal. This conflict swung back and forth formuch of the New Order period. The technologists were in the ascendancy from1993, and politically well-connected business groups then used this advantageto justify protectionist policies in the name of the national interest.

The economic crisis in 1997-98 laid to rest many of the technologists� moregrandiose schemes. The distinction between the two camps has mattered lessin recent years in view of the constraints imposed on policy by the imperativesof debt repayment and restructuring and of maintaining basic macroeconomicstability!a policy straitjacket that continues to apply to the current government.

While it lasted, strong GDP growth obviated the need to address the growingneed for economic reform, but this led to the creation and toleration of a rangeof distortions that partly explain the crash of 1997-98. Investment becameincreasingly concentrated in import-dependent manufacturing and in property

Economic rehabilitation beganin the 1960s

A reappraisal of economicobjectives took place

A conflict over developmentstrategy emerges

The economy develops a rangeof fatal distortions

28 Indonesia


development. By contrast, investment to create backward linkages in manu-facturing and the agricultural sector was neglected. This misallocation ofinvestment was encouraged by the breakneck and poorly regulated expansionof the banking system after the reform package of October 1988 (see Economicsectors: Financial services).

The rapid pace of development also translated into widening current-accountdeficits and large-scale foreign borrowing by corporations and banks, much ofit short-term. The need to finance the deficits and to meet debt-servicingobligations distorted the domestic interest-rate structure, with negative impli-cations for the real economy. Further layers of distortion were introduced by themaintenance after 1996 of an exchange-rate system in which the rupiah waslinked to a strengthening US dollar, and by the continuing regulation of foreignand domestic trade. These two factors contributed significantly to the slow-down in export growth that began in the mid-1990s. The link between the USdollar and the rupiah also created a false sense of security, and convincedprivate entities seeking overseas credit that they did not need to hedge theirborrowings. The rush of debtors to cover their unhedged obligations createdthe conditions for the initial collapse of the rupiah in July-September 1997.

The New Order government enshrined the balanced-budget principle in law,requiring that public expenditure should not exceed domestic budgetaryrevenue plus foreign aid inflows. The balanced-budget principle was notunduly restrictive in practice. The definition of foreign aid as a form of revenuerather than a means of financing deficits, and the government�s use of itsbalances with Bank Indonesia (the central bank) for off-budget funds, createdplenty of leeway and undermined fiscal stability. Another element of flexibilitywas added in the early 1990s, when, in pursuit of a more effective counter-cyclical fiscal policy, the government allowed itself to run surpluses or deficitsas long as a broad balance was maintained over the medium term.

Indonesia�s economic policy performance over the past five years, under theauspices of the IMF, can be summarised as having been successful in theimplementation of macroeconomic policy but disappointing on the micro-economic and structural reform front. Key reforms, in particular privatisationand bank restructuring initiatives, have been repeatedly delayed and have ledto strained relations between the government and the IMF. This was primarilybecause of an increasingly assertive and populist parliament, which has toapprove policy. However, progress was made under the administration ofMegawati Soekarnoputri, particularly on the divestment of nationalised banksby the Indonesian Bank Restructuring Agency. Laws against money-launderinghave also been passed and an anti-corruption committee established, and inearly 2004 a new bankruptcy law, aiming to simplify and make the processmore transparent, was enacted.

The 2000 budget covered a nine-month period from April 1st to December 31stin order to permit a transition to calendar-year accounting from 2001. A newsystem of classification introduced at the same time ends the former practice ofincluding foreign aid as government revenue and is more specific in itsbreakdown of other sources of state income.

The balanced-budget principleis enshrined in law

Macroeconomic policy in thepast five years has been sound

Indonesia 29


The government�s track record in pursuing fiscal stabilisation has beenimpressive since 1997, despite the high cost of banking recapitalisation and thetemptation to monetise budget deficits. The ratio of government debt to GDPhas consistently declined since 1998 and is estimated to have fallen to 80% in2003, from over 100% in 2001. Until end-2003 the government was helped bydebt-rescheduling agreements that reduced the debt-servicing bill, but from thebeginning of 2004 Indonesia has been meeting its obligations in full. Thegovernment has also been active in reprofiling its domestic debt so that theaverage maturity of the debt is estimated at 7.8 years in 2004, down from 4.4years in 2002. A stronger rupiah and falling interest rates in 2002-04 havehelped to keep the budget deficit from burgeoning.

Key budget assumptions2003 2004

Real GDP growth (%) 4.0 4.8

Inflation (%) 6.0 6.5Oil price (US$/b) 27.9 34.0Oil production (�000 b/d) 1.09 1.07

Exchange rate (Rp:US$) 8,500 8,900Interest rate (%)a 10.1 7.6

a Annual average rate on three-month Bank Indonesia certificates (SBI).

Source: Ministry of Finance.

The 2003 budget deficit came in slightly below the targeted Rp34.4trn (US$4bn),owing to successful efforts to restrain spending. The lower deficit was also theresult of slow disbursement on key infrastructure and development projects.The government failed in its attempt to lower the fuel subsidy, but revenuefrom the privatisation of state-owned companies (as opposed to distressedprivate assets taken under state control) reached Rp8trn, well above the full-year target of 6.1trn. The final deficit, Rp33.7trn, was equivalent to 1.9% of GDP.

Approved and revised 2004 budget(Rp trn unless otherwise indicated)

RevenueDomestic revenue 349.3 Tax revenue 272.2 Non-tax revenue 77.1ExpenditureTotal spending 374.4Central government spending 255.3 Interest on domestic debt 41.3 Interest on foreign debt 24.4 Subsidies 26.6 Social assistance 14.3Funds for regional autonomy 119.0FinancingBudget deficit (% of GDP) 1.2Budget deficit 24.4Net foreign financing of deficit -16.1Domestic financing of deficit 40.6Privatisation revenue 5.0


The 2003 budget deficit met itstarget

30 Indonesia


The budget deficit is officially forecast at Rp24.4.trn, or just 1.2% of GDP, in 2004,but this is likely to be overshot. The budget deficit in the first half of the yearreached Rp18.6trn, equivalent to 76% of the full-year target. A number of factorsare working against the government�s target, including the overtly vote-seekingdecision to provide an extra month�s salary for civil servants, the military andthe police. However, the principal culprit is the cost of the fuel subsidy. Thebudget was initially premised on an average oil price for the year ofUS$22/barrel. This was revised in July 2004 to US$34/b, but even this looks likean underestimate. The cost of the fuel subsidy looks as though it will reachRp63trn in 2004, up from an initial estimate of Rp14.5trn. Financing of thedeficit appears adequate, however. First-half privatisation revenue amounted toRp3.5trn, nearly 70% of the full-year target, and successful bond issuance hasmet over 50% of the full-year target.

In early March 2004 the government returned to the international debt marketfor the first time since the 1997-98 financial crisis. A US$1bn ten-year bond issuewas launched!more than double the size of the US$400m issue thegovernment originally proposed!with a 6.75% coupon. The government raisedthe size of the issue following an enthusiastic initial response to the issue frominvestors. In the event the issue was still eight times oversubscribed, whichpushed the yield down to 6.85%, a level far lower than other emerging debtissuers with better sovereign ratings.

In late February 2004 the Indonesian Bank Restructuring Agency (IBRA) wasofficially closed. IBRA was created following the 1997-98 economic crisis to helprehabilitate the national economy; on behalf of the government, it took controlof non-performing assets, particularly in the financial sector, previously ownedby the private sector. At their peak, the assets had a book value of Rp650trn,equal to about one-third of GDP.

IBRA�s mandate was to recover some US$33bn in non-performing loans madeby the banks, primarily by selling off the seized assets and collecting unpaidbills. The majority of the assets were eventually sold at a substantial discount(averaging 27%) to book value, and only 28% of bad loans were recovered. In2002-04 IBRA was more successful in selling off banking sector assets asdemand had risen, but the agency was persistently in the media spotlight andwas regularly accused of corrupt practices. This was reflected in the fact that theagency had seven chairmen in six years. IBRA officials, meanwhile, complainedthat constant meddling by interest groups (former owners of seized assets frompowerful families) and politicians prevented them from carrying out theirduties effectively.

Both external and internal trade have traditionally been subject to a variety oflevies and controls. A wide range of duties and taxes, quantitative controls, soletrading licences and other restrictions have been imposed on exports andimports. Rini Soewandi, the trade and industry minister under Ms Megawati,continued this practice, advocating higher tariffs on sugar and quotas on riceimports in a bid to protect domestic agriculture. Domestic trade has beensimilarly regulated: foreign nationals and enterprises have been barred from

A variety of trade levies andcontrols exist

The deficit target is likely to beexceeded in 2004

Indonesia makes a successfulsovereign bond issue

IBRA closes its doors

Indonesia 31


engaging in retail trade outside major centres of population, ethnic-Chineseentrepreneurs have been discouraged from trading in rural areas, and exclusivetrading privileges for a number of products have been granted to publicly orprivately owned monopolies. While campaigning, the new president, SusiloBambang Yudhoyono, indicated that he aimed to reduce the latter restrictions.

Since the mid-1980s, partly in response to a deteriorating balance of payments,successive Indonesian governments have been replacing non-tariff barrierswith a more transparent tariff regime, as well as implementing a gradualreduction in the degree of tariff protection granted to domestic producers. Butlittle was done to relax export restrictions until they began to be dismantled atthe insistence of the IMF in 1998, and then only reluctantly. Tariffs withAssociation of South-East Asian Nations (ASEAN) trading partners have beenreduced, however. From January 1st 2002 Indonesia has been obliged tooperate a tariff of 0-5% on all intra-ASEAN trade.

The New Order government vacillated in its approach to foreign investment.However, a reform package issued in June 1994 restored an essentially freeinvestment regime. Under this regime, foreign investment is permitted invirtually all sectors, including infrastructure; wholly owned foreign investmentsare allowed; the equity limits on foreign partners in joint-venture enterpriseshave been raised to 95%; there is no minimum capital requirement for foreigninvestors; and the divestment requirement has been eased to a token 1% ofequity after 15 years. In 1999 steps were taken to speed up the approvalprocess, tax incentives were offered for investments in certain sectors, and adraft bill is being considered by the DPR, which, if passed, would furthersimplify licensing procedures and provide equal treatment for foreign anddomestic investors.

The reform of a complex structure of foreign-exchange controls and multipleexchange rates was accomplished by 1970, when the rupiah was made fullyconvertible. The government subsequently pursued an essentially free andopen foreign-exchange policy!the few remaining direct restraints on the freeflow of capital were removed in the late 1980s. Within this framework, economicpolicy sought to adjust the nominal rupiah exchange rate to a level consistentwith maintaining the country�s international competitiveness, resulting in anannual downward drift of 3.5-5.5% against the US dollar between 1988 and 1996.The fact that Indonesia�s inflation rate was higher than that of its major tradingpartners kept the real effective exchange rate broadly unchanged duringthese years.

Rising domestic interest rates and a narrowing inflation differential promptedstrong inflows of foreign capital and an appreciation of the rupiah�s realeffective exchange rate in the first half of 1996. This phenomenon wasshort-lived, however, as political events in mid-1996 caused investors to reassessIndonesia�s political risk. By early 1997 concerns over political stability werereinforced by fears that the economy was in danger of overheating. Thisrendered the rupiah susceptible to the currency crisis that began in Thailand inmid-1997 and rapidly spread throughout South-east Asia. Having withstood the

Non-tariff barriers replaced bynew tariff regime

Investment policy wasliberalised

The rupiah collapses in 1997

Foreign-exchange controlswere dismantled

32 Indonesia


pressure for a short period, the rupiah buckled and was allowed to float freelyon August 14th 1997, setting off a sharp depreciation. After the crisis, the rupiahwas initially very volatile, but it has stabilised since mid-2002. Although therehas been discussion of the benefits of capital controls, the exchange-rate regimehas remained open.

Economic performance

Prudent economic management enabled Indonesia to record consistently highrates of economic growth!well in excess of the expansion in population!for morethan two decades. This growth, which averaged more than 6% a year between1970 and 1996, was achieved despite a number of external shocks, including sharpmovements in oil prices and in international exchange rates, which affected theterms of trade and the value of the country�s external debt. From a low-incomecountry in the mid-1960s, Indonesia transformed itself into a middle-incomecountry, with an estimated income per head of almost US$1,150 in 1996.

A breakdown of the economy�s growth performance by sector shows thatindustry was the principal engine of growth. Manufacturing expanded morerapidly than the economy as a whole. The need to ensure matching growth ininfrastructure stimulated a sharp acceleration in the rate of growth of the utilityand construction sectors. The electricity, gas and water component of GDPexpanded by an average of around 14% a year between 1986 and 1996, whilethe construction sector expanded by more than 10% a year in the same period.

The growth of the other sectors, although not as dramatic, was also impressive.Agriculture grew steadily, although the food-crop subsector was held back formuch of the 1990s by unfavourable climatic conditions and the increasedconversion of paddy fields to other uses (see Economic sectors: Agriculture).

Gross domestic product, 2003(% real change)

Annual average2003 1999-2003

GDP 4.5 3.7

Source: Central Bureau of Statistics, Indikator Ekonomi.

The expansion of the mining sector also began to slow in the early 1990s as aresult of the gradual depletion of known petroleum reserves. This decline inthe oil industry was partly offset by the rapid expansion of a number of othermining activities, including the mining of coal, copper and gold. The servicessector grew rapidly, however, fuelled both by the demand generated by theexpanding primary and secondary industries and by the growth in personaldisposable incomes, the effect of which was reinforced by the booming touristindustry.

As a result of the economic crisis, GDP growth first slowed to 4.7% year on yearin 1997, and then contracted by 13.1% in 1998, the worst performance sincerecords began. Declines in output were broad-based, but the worst-affectedsectors were construction (down by 36.4%), trade, financial, real-estate and

Economic growth was rapidfor more than two decades

Industry sets the pace

The economic crisis sets off adeep contraction

Indonesia 33


business services (down by 26.6%) and hotels and restaurants (down by 18%). In1999 the economy returned to growth, but only just, as it expanded by 0.8%.Growth of 5.4% year on year in 2000 was followed by slower growth of 3.8% in2001 and 4.3% in 2002 as a result of global economic problems and domesticpolitical uncertainty.

In 2003 the economy grew by a solid 4.5%, fuelled primarily by stronghousehold and government consumption on the expenditure side of theeconomy. The good performance came despite high-profile terrorist attacks inthe country and wider difficulties in the Asian region caused by the SevereAcute Respiratory Syndrome (SARS) virus. Low interest rates encouragedprivate consumption but not investment, which remained in the doldrums,with growth of just 1.4%. Investment now accounts for less than 20% of GDP,compared with more than 30% before the 1997-98 financial crisis. All sectorsrecorded positive full-year growth, with construction, transport and financialservices registering particularly strong performances.

Throughout the 1980s and much of the 1990s the broadly conservative stanceadopted by the monetary authorities restrained inflationary pressures in theeconomy with relative success. The onset of the crisis in 1997-98 led to anepisode of severe inflation (which averaged 57.6% in 1998, according to IMFdata), driven by the collapse of the rupiah, the breakdown of production anddistribution, and the rapid expansion of the money supply to finance subsidiesand keep banks liquid. However, in 1999 the return of macroeconomic stability,together with negligible economic growth, brought inflation rapidly back downto an annual average of 2%, from which it steadily built back up to an annualaverage of 11.5% in 2001. The year-on-year rate of consumer price inflation fellduring 2002 and 2003, and stood at 5.2% at end-2003, compared with 12.5%at end-2001.

Inflation fell steadily over the course of 2003 owing to an appreciating rupiahand falling tariffs under the Association of South-East Asian Nations (ASEAN)free-trade area (AFTA). The persistence of considerable spare capacity in thedomestic economy and stable base-money growth were additional factorscontaining inflationary pressure. In 2004 there was upward pressure on theconsumer price index resulting from higher food prices, the impact of higherfuel prices on production costs and pre-election spending that boosted thedemand for goods and services. Monthly inflation rates eased in August andSeptember 2004, suggesting that inflation will resume its downward trend.

Wage increases in 2003 were modest and contributed to lower inflationarypressures. This is in stark contrast to 2000-01, when newly empoweredprovinces and districts substantially increased minimum wages. The relativerestraint shown in 2002-03 reflects a growing awareness on the part of localgovernments and unions of the worsening investment climate. Unemploymenthas been on an upward trend, largely because the level of GDP growth!and inparticular growth in manufacturing industry!is insufficient to create sufficientjobs to absorb the estimated 2m-2.5m new entrants to the labour marketeach year.

Inflation was held atmanageable levels

The economy grew solidlyin 2003

Inflationary pressure risesin 2004

Wage pressure is declining

34 Indonesia


Inflation(%; av)

Annual average2003 1999-2003

Consumer price inflation 6.6 10.7

Source: Bank Indonesia.

Unemployment rose sharply with the onset of the 1997 financial crisis, andremains a serious problem, despite recent macroeconomic stability and steadyeconomic growth. In 1998 the sectors with most layoffs were financial services,textiles, wood construction, metal and electrical industries. Textiles and forestryindustries continue to suffer, with an estimated 150,000 job redundancies in 2003.Official data from the Central Bureau of Statistics reported unemployment at4.3m in 1996 and 10.1m in 2003, with respective unemployment rates of 4.9%and 9.5%. However, Indonesia does not have a benefits system database fromwhich unemployment figures can be obtained, and these figures are likely tounderstate the real extent of the unemployment problem.

Unemployment varies greatly from region to region. In 1999 average unemploy-ment was 6.1%, but regional unemployment ranged from 1.4% in Nusa Tenggarato 15% in DKI Jakarta. Unemployment is highest amongst young people (15-24years) and those who have completed secondary education. In 2002 youthunemployment was 27.9%, compared with 9.8% for those aged between 25 and29 years and less than 5% for all age groups over 30 years. Unemploymentamong those who completed secondary education was 16.8%, compared with3.9% for those who completed only primary education or less. This trendexisted before the 1997 crisis, but more skilled workers were harder hit bythe crisis.

The 1997-98 economic crisis forced many more workers into the informal sectorand under-employment. In 2002 a total of 31.4m workers, or 31.2% of thelabour force, were under-employed (working under 35 hours a week),compared with 5.3m in 1996. Women are worst affected by under-employmentand also by employment informal-sector jobs; in 1998 women made up 72% ofunpaid workers, and 30% of female workers were under-employed, as opposedto 15% of male workers. The extent of the shortage of jobs is likely to havepushed secondary earners (usually women) out of the labour market, and theyare therefore not counted as unemployed. Most of the women workingwithout pay are domestic servants.

Migrant workers provide a partial solution to unemployment. Indonesia had435,000 migrant workers in 2000. More rigorous government regulation andsupport is needed, however, if migrant workers are to be used as a permanentsolution to domestic unemployment. Migrant workers are also potentiallyresistant to a domestic crisis. Roughly 65% of migrant workers moved to theMiddle East, while 35% moved to other parts of Asia and Australasia in 2003.However, migrant workers are exposed to external crises: workers� remittancesfell to US$1.7bn in 2003 from US$1.9bn in 2001, owing to SARS (workers werenot allowed to travel to affected countries) and the US-led war on Iraq.

Unemployment has risensharply

Underemployment hasescalated

Migrant workers are a partialsolution

Indonesia 35


The liberalisation of investment regulations announced in June 1994 provided afurther boost to foreign domestic investment, which had already been strong forthe preceding ten years. The value of foreign direct investment (FDI) projects wasto peak at US$39.9bn in 1995. The economic crisis and political unrest had adevastating impact on investment!approvals fell to a mere US$9.8bn in 2002.Domestic investment has also suffered. In 1997 projects worth Rp119.9trn(US$41.2bn) were approved, but approvals fell to just Rp25.3trn in 2002.

The implementation of investment projects has also been poor. Investmentsworth only 0.6% of total approvals were realised in 2001. The implementationrate is particularly low for import and capital-intensive �mega-projects�requiring multimillion-dollar investments, such as oil refineries, power stationsand large-scale chemical and metallurgy plants. Among the many reasons forthe lack of FDI are corruption and bureaucratic inefficiency, problems with taxand customs administration, an unsettled labour market, rising wages, alooming power shortage, rising utility costs, and a weak legal system andcorrupt courts.

Foreign investment approvals rose slightly to US$13.6bn in 2003, while domesticapprovals were also higher at Rp50.1trn. A new investment law, currently inpreparation, promises to clarify responsibilities between central, provincial anddistrict levels of government for approving and taxing investments!the sourceof much recent confusion. Tax incentives for new investment are also underconsideration, although this proposal has received a lukewarm response fromdonors, including the World Bank. Data for the first nine months of 2004suggest that both domestic and foreign approvals will be lower for the year, butthis was largely expected given the political and policy uncertainty generatedby the eight-month election period.

Regional trends

Java and Bali have enjoyed the fastest rates of growth over the past threedecades, leading to a concentration of wealth in these densely populatedislands. In 2001 Java and Bali accounted for more than 55% of national GDP;Jakarta alone accounted for nearly 15% of the total. The gap between Java, Baliand the rest of the country widened during the boom years of the 1980s and1990s, but is likely to become narrower in the years ahead as the result of adecentralisation of government power. Growth in the peripheral regions of thecountry has been concentrated in areas suitable for the cultivation of cash cropsor the exploitation of mineral resources. The pace of development has beenparticularly slow in many of the eastern provinces, which for the most parthave relatively small populations and are far from the centres of political andeconomic power.

In the short term, the economic crisis partially reversed these trends. Therecession was deepest in Java, where rice farmers were also hit by poor prices.The relatively backward and isolated areas of eastern Indonesia were sparedsome of the worst effects of the downturn, but they were already extremelypoor. On the other hand, some of the outer-island producers of export

Private investment interestslumped after 1997

Investment recoveredmodestly in 2003

Regional patterns ofdevelopment are unequal

Economic crisis partly reversestrends

36 Indonesia


commodities benefited from the depreciation of the rupiah (inflation has sinceeaten away at these gains), as did Bali�s tourism industry, until unrest elsewherein the country began to deter visitors. Broad-based structural reform will beneeded to mitigate these inequalities, but it is likely that the decentralisation ofgovernment introduced on January 1st 2001 will only exacerbate differences inwealth between resource-rich and resource-poor regions.

Economic sectors

Agriculture

Agriculture, including forestry and fishing, is of vital importance to theIndonesian economy. It is both an important source of export earnings andformal employment, and the means by which the majority of Indonesia�s ruralpopulation subsists. In the subsistence part of this economy wages are in theform of crop shares, a large portion of food crops are for home consumptionand much output goes unrecorded in the national economic statistics. Theshare of GDP contributed by agriculture has declined as Indonesia hasindustrialised. In the early 1970s agriculture contributed 40-50% of constant-price GDP, but by 1997 this had fallen to 14.8%. A contraction in the industrialeconomy, which was not reflected in agriculture, pushed the latter�s share ofGDP back up to 19.5% in 1999, but by 2003 it had fallen again, to 15%.

Rice is the main food staple in most areas, with the exception of some parts ofeastern Indonesia, where the sago palm is more suitable for cultivation.Although Indonesia is the world�s third-largest producer of rice, production hasbeen declining since Indonesia briefly gained self-sufficiency in 1985. Thecountry now buys rice on the open market every year, making it also one ofthe world�s largest rice importers. The main rice-producing regions are thefertile islands of Java and Bali, where industrialisation and high populationdensity have resulted in the loss of large swathes of arable land. Indonesia losta total of 1m ha of rice paddy between 1983 and 1993. To reverse this trend, thegovernment has been developing paddy in the less fertile provinces of Riau,Jambi, South Sumatra, Bengkulu and West Kalimantan.

In recent years the government has come under mounting pressure to deal withrice farmers� complaints of low prices, particularly during harvests, which theyblame on the abundance of rice imports. In January 2004 the governmentannounced that rice imports would be banned for four months each yeararound harvest time to protect local farmers and their production. The ban wassubsequently extended indefinitely, as a good harvest has reduced the need forimports. In 2003 Indonesia produced 51.8m tonnes of unhulled rice andimported 2.75m tonnes, down from 3.7m tonnes in 2002. Stocks stood at7.4m tonnes at end-2003.

In recent years palm oil production has expanded rapidly, despite thedownturn in the rest of the economy, and Indonesia is now the world�s second-largest producer of the commodity after Malaysia. The planted area increasedfrom only 106,000 ha in 1967 to 2.7m ha (on large estates, not including

Agriculture is of crucialimportance

Rice is the main food crop

Oil palm cultivation is growingin importance

Indonesia 37


smallholders) in 2002, and more than 2m people are now employed in thesubsector. Over the same period crude palm oil (CPO) production rose from168,000 tonnes in 1967 to 9.9m tonnes in 2003, of which 6.5m tonnes wasexported. About 80% of local CPO consumption is accounted for by thecooking oil industry, 10% by the oleo chemical industry, 3.1% by margarineproduction and the remainder by other industries, largely soap manufacturing.

0

100

200

300

400

500

1998 99 2000 01 023,000

3,500

4,000

4,500

5,000

5,500

Rubber; left scale

Coconut; left scale

Palm oil; right scale

Annual production of three main crops (large estates)�000 tonnes

Source: Royal Monetary Authority of Bhutan.

Large plantations were first established in North Sumatra, and then throughoutthe 1990s rapid expansion was fostered in Aceh, Riau, Jambi, South Sumatraand West Kalimantan. The government has actively encouraged further oilpalm development in eastern Indonesia, and huge (as yet undeveloped)concessions have been allocated in Kalimantan, Sulawesi and Papua.

CPO prices rose sharply in 2002 and 2003, and in August 2002 Indonesia andMalaysia established a consultative group on CPO trading to prepare for thelikelihood that major importing countries, such as China and India, would setup non-tariff barriers to imports of the commodity. Malaysia and Indonesiacurrently account for 90% of world CPO production. They do not compete witheach other to a significant extent on the world market; the main competition totheir CPO exports comes from countries producing other natural oils, such assoybean oil.

Indonesia was once the world�s largest producer of natural rubber. After aperiod of neglect and decline in the 1960s and early 1970s, the planted area wasexpanded and existing plantations rehabilitated through the introduction ofnew, high-yielding varieties. Total output rose from 736,000 tonnes in 1968 to1.6m tonnes in 2002, of which smallholder production accounted for over1.3m tonnes. Indonesia now lies second in the list of world producers, betweenThailand (the largest) and Malaysia; the three countries account for 85% ofworld supply. To combat low prices following the demise of the InternationalRubber Organisation in 1999, the three countries entered into an agreement in2002 aimed at lifting world prices past the US$1/kg mark. They pledged to cutoutput by 10% and exports by 4% over three years, starting from 2002, withIndonesia promising to cap its exports at 1.23m tonnes during the period.

Rubber producers faceharder times

38 Indonesia


0

500

1,000

1,500

2,000

2,500

3,000

3,500

1998 99 2000 01 02

Rubber

Coconut

Palm oil

Anual production of three main crops (smallholder estates)��000 tonnes

Source: Royal Monetary Authority of Bhutan.

Indonesia is now the world�s fourth-largest producer of coffee; over 90% of itsoutput consists of the robusta variety, while the remainder, nearly 10%, is ofarabica. The main coffee-growing regions are found in the southern provincesof Sumatra (Lampung, Bengkulu, Jambi and South Sumatra) and parts ofSulawesi. Output of coffee expanded from 157,000 tonnes in 1968 to anestimated 609,000 tonnes in 2002. The fall in international prices (particularlyin 2001), coupled with the high cost of farm maintenance and fertiliser, has ledfarmers to abandon coffee cultivation in recent years. Owing to financialconstraints, farmers have tended to pick the beans before maturity, which hasresulted in low quality and low yields.

Typically, 85% of output is exported. Over 90% of Indonesia�s coffee output isproduced by smallholders, who own 2 ha or less each, but who have beensteadily increasing the area planted from less than 322,000 ha in 1968 to morethan 1.3m ha by 2002. However, poor productivity remains a problem, andyields are commonly as low as 650 kg/ha. Around 30% of coffee trees are over30 years old and no longer at peak productivity levels.

The plantation of cocoa has been growing rapidly in recent years, and in2001/02 (October-September) Indonesia overtook Ghana to become the world�ssecond-largest producer behind Côte d�Ivoire. Exports were 350,000 tonnes in2001/02. Cocoa prices soared in 2002 in response to the conflict in Côted�Ivoire. Higher prices partly accounted for the increase in Indonesian output,as farmers had the means and the incentive to increase their use of fertiliser,improve farm maintenance and use more effective methods to counter themain pest affecting the crop, the cocoa pod borer. Although prices remainedhigh in 2003, production fell by an estimated 20% as approximately 80% ofplantations were affected by pests. Exports are mainly to the US (40% in 2002),Brazil (17%), Malaysia (18%) and Singapore (11%). South, South-east and CentralSulawesi account for 75% of output. The total plantation area is estimated at700,000 ha, with some 350,000 growers involved. Domestic consumption isrelatively small, at 35,000 tonnes.

Coffee yields are poor

Cocoa has become aleading export

Indonesia 39


Some of Indonesia�s most remote Moluccan islands were once at the centre ofthe global spice-trading routes. Ternate, Tidore and later Ambon were thesource of cloves, and the Banda islands were the only source of mace andnutmeg!Indonesia is still the world�s largest producer of nutmeg. Pepper,historically a key commodity in Java and Sumatra, has been growing inimportance recently!world demand has been rising by around 5% a year.Indonesia is the world�s second-largest pepper producer after India, at 62,000tonnes of pepper in 2003, but production has been falling.

The spice trade has diminished in importance in recent years, partly because ofthe religious violence on the Moluccas. Nutmeg production was just 6,000tonnes in 2002, while clove production was around 80,000 tonnes, most ofwhich was used by the domestic kretek (clove-spiced cigarettes) manufacturingindustry. Clove farmers are now free of the marketing monopoly granted to asemi-official agency headed by a son of Soeharto in late 1990, which cost clovefarmers an estimated US$761m in lost revenue between 1992 and 1997.Cinnamon production has been rising in recent years, and the value ofcinnamon exports averaged US$17m in 2002-03. Cinnamon is primarily grownon plantations on Sumatra island.

A host of other crops are of great importance to smallholders in various regionsof the country. Coconuts and cashew nuts are of particular importance in partsof Sulawesi, tea is grown in Java, and North Sumatra and Central Sulawesihave acquired a reputation as producers of passion fruit. Most production is inthe hands of smallholders. In 2002 production of coconuts and cashew nutsstood at 3.1m tonnes and 87,900 tonnes respectively, while tea yields were41,100 tonnes from smallholdings and 130,900 tonnes from large estates.

Indonesia is the principal exporter of wood and wood products in South-eastAsia. Plywood is the main export, as a result of government regulations thatfirst banned the export of roundwood in 1980 and then the export of roughsawn wood in 1985. Both bans were later replaced with prohibitively highexport taxes, which were lowered to 20% in early 1999 at the behest of the IMF.In October 2001 the ban on log exports was reinstated for a period of sixmonths in a bid to stem losses from the smuggling of illegally felled logs. Theban was later made permanent in early 2002. Decreasing targets have been setin recent years for the total cutting volume!22m cu metres in 2001, 12mcu metres in 2002, 6.8m cu metres in 2003 and 5.7m cu metres in 2004. In 2002Indonesia exported 5m tonnes of plywood, generating revenue of US$441m.

By law all forest resources come under state ownership, but exploitation rightsare leased to private companies under the forest utilisation right system (HPH).According to official statistics, the number of operating forest concessionspeaked at 579 in 1991. Since then the number has declined, falling to 387 in2000. Recently the government has declared the promotion of small-scale forestmanagement by local communities to be a major policy priority.

Indonesia has suffered massive deforestation in recent years, but opaquestatistics make it virtually impossible to determine exactly how much forestremains. Forest loss was estimated at 3.8m ha per year by a non-governmental

Smallholders rely on manyother cash crops

Indonesia has a largeforestry industry

The spice trade has diminishedin importance

The industry is facing a raw-material shortage

40 Indonesia


organisation, Forest Watch Indonesia (FWI), in late 2003. Papua is where theworst deforestation has occurred, as the region has granted forest concessionsto 15 companies. The wood-processing industry has been allowed to expandwithout reference to the available supply of timber, resulting in vastovercapacity. The shortfall in the official timber supply is being met by illegallogging, which has reached epidemic proportions and is now thought toaccount for 50-70% of output from the sector.

FWI estimated that Indonesia is suffering a financial loss of US$7.2bn annuallyfrom illegal logging and forest-product trading. The illegal activity also threatensthe survival of rare animal species. The complexity of the problem means thatit requires the co-ordinated efforts of central and local administrations as wellas the international community. The government has been liaising with the EU,Malaysia, Japan and China, all of which have signed memoranda ofunderstanding (MOUs) pledging to ban the import of illegal logs fromIndonesia. In early 2004 UK buyers announced a ban on the import ofIndonesian plywood following a report from Greenpeace, an internationalenvironmental non-governmental organisation, saying that 80% of Indonesianplywood exports to the UK were made from illegally cut timber. TheIndonesian government has started to provide a list of companies that arelicensed to export plywood.

Fishing in Indonesia accounted for 2.9% of constant-price GDP in 2003, but isalso of great importance in the subsistence economy. There are an estimated3.5m fish farmers in Indonesia, with 50% of these fishing on a small scale infreshwater ponds. However, there is a widening gap between supply anddemand for fish. Fish provide two-thirds of Indonesia�s animal protein, butmarine fisheries are in decline. The export of fishery commodities rose by 11%in volume to 696.3m tonnes in 2003, and increased in value by 7.1% year onyear to US$2bn.

The productivity of reef fishing is threatened by the use of destructive fishingtechniques employing explosives and cyanide. The commercial effort is focusedon high-value species, such as prawns and tuna. The government estimates thatthe total potential catch is 6.2m tonnes per year. World Bank and the UN Foodand Agriculture Organisation, however, argue that the national catch isunderstated and the potential yield overestimated, leaving little room forfurther expansion in commercial fisheries. The fisheries in western Indonesiaare operating at or above maximum sustainable yields. If there is still anypotential for expansion, it is to be found in the eastern region of the country.The industry has been hampered by low growth and productivity owing topoor management and marketing infrastructure, environmental degradationand a lack of credit facilities for poor fish farmers. Poaching by foreign vesselshas become a serious problem that is costing the government an estimatedUS$2bn in lost revenue each year. Regulations allowing foreign vessels tooperate legally with permits are currently in preparation.

Fishing is nearing full potential

Indonesia 41


Mining and semi-processing

Indonesia is well endowed with mineral resources. Foreign investment hasbeen encouraged in the sector because of the capital intensity and expertiserequired for mineral ventures. However, many high-profile mining projectshave been caught up in the euphoria of decentralisation, and have been subjectto predatory attacks by local politicians seeking additional revenue. Past landacquisitions, conducted with the assistance of the New Order security forces,are also resurfacing in numerous disputes with local communities.Furthermore, the January 2001 regional autonomy law conflicts with currentmining law, and there is urgent need for clarification. This uncertain legalenvironment, coupled with rising security concerns, has led to a 90% fall inexploration spending by mining companies since 1997.

Indonesia is one of the world�s leading producers of tin, with extensive onshoreand offshore deposits estimated at well over 1m tonnes. These are locatedmainly on the islands of Bangka, Belitung and Singkep off the eastern coast ofSumatra. The industry is dominated by the 70%-state-owned tin mining andprocessing company, Tambang Timah, which accounts for 80% of the country�stin production. Production of tin ore fell to 71,695 tonnes in 2003, down from88,142 tonnes in 2002 but above the output of 47,753 tonnes in 1999. It isestimated that the same amount of ore is produced illegally, which has been akey factor in the recent weakness of international prices (until 2004 at least).

Indonesia has 500m tonnes of known reserves of bauxite. Deposits inKalimantan remain untapped, but deposits in the Riau islands are beingexploited to supply an aluminium smelter located in North Sumatra.Production has risen sharply in recent years, and stood at 1.3m tonnes in 2003,up from just 808,749 tonnes in 1997.

Indonesia has been a large-scale producer and exporter of copper since 1973,when Freeport Indonesia, a wholly owned subsidiary of a US company,Freeport-McMoRan, started mining operations on the Ertsberg mountain inPapua. With the Ertsberg mine having been virtually exhausted, the companyshifted production to the nearby Grasberg mine in January 1990, and hascontinued to invest substantial amounts in the development of this open-castoperation. Grasberg is the world�s second-largest copper mine and is highlyprofitable, making approximately US$1m per day. The company employs18,000 people, and is the country�s largest single taxpayer. A new copper mine,operated by Newmont Nusa Tenggara, a subsidiary of a US firm, NewmontMining, on the island of Sumbawa in West Nusa Tenggara, became operationalin 1999. It is capable of processing 160,000 tonnes of ore a day.

Indonesia became an important nickel producer in the mid-1970s, when twolarge deposits were developed on Sulawesi. Almost all of the country�s outputof nickel is exported, with only a small proportion used for the localmanufacture of stainless steel. The total production of nickel ore has increasedsince the mid-1980s, and stood at 4.4m tonnes in 2003.

Indonesia is a majorproducer of tin

Mining faces troubled times

Indonesia also mines bauxite,copper, nickel, gold and silver

42 Indonesia


More than 125 contracts of work to develop gold and silver deposits weresigned between 1985 and 1988. As a result, new deposits were discovered anddeveloped. In addition, large associated deposits at the Grasberg copper mine inPapua have boosted output (this is now the largest gold mine in the world).Production of gold rose from 2,391 kg in 1983 to a peak of 166,091 kg in 2001,before falling back to 141,019 kg in 2003. The country�s production of silver alsoincreased sharply, from 35,293 kg in 1983 to 348,314 kg in 2001, before similarlyfalling back in 2003 to 285,205 kg.

Manufacturing

Indonesia�s manufacturing sector is diverse. Much of it is made up of small-scale and cottage industries, mainly producing consumer goods for thedomestic market, which employ the bulk of the industrial labour force.However, in recent years a growing medium- and large-scale componentemerged, which, by the time that Indonesia became engulfed in economic crisisin late 1997, accounted for most of the sector�s gross output and value added(91% in 1996). The medium- and large-scale segments of the manufacturingsector are now largely private-sector concerns.

From 1965 the manufacturing sector grew at annual rates well in excess ofthe rate of overall GDP growth. Its share of constant-price GDP rose from8.3% in 1965 to 20.8% in 1991, when it surpassed that of the agriculturalsector (19.6%) for the first time. By 2003 manufacturing accounted for 28.3%of GDP. The decline of oil and gas export revenue during the early and mid-1980s forced the government to promote alternative exports in general andmanufactured exports in particular. As a result of several policy packages,between 1983 and 1999 the value of manufactured exports increased inabsolute terms from US$3.2bn to US$32.2bn, and in relative terms from 15.2% to77.7% of total exports.

The manufacturing sector, which accounted for 25% of GDP in 1997, suffered inthe wake of the 1997-98 financial crisis. The situation had not improved muchby 2002, in which year a total of 138,088 people in the manufacturing sectorlost their jobs. The decline was primarily owing to labour disputes, risingproduction costs, security problems, illegal charges, legal uncertainty and thesmuggling of cheap imports. Competition from neighbouring countries was anadditional factor depressing sentiment in the sector. The traditional, morelabour-intensive, industries are suffering most. In 2002, 242 companies in thetextiles, garments and leather went bankrupt, as did 215 companies in the food,beverage and tobacco industry. At end-2002 the Central Bureau of Statisticsestimated that there were 19,696 manufacturing firms in Indonesia.

Indonesia has developed a range of heavy industries. Its iron and steel industryis centred on state-owned Krakatau Steel, an integrated iron and steel producingcomplex at Cilegon in West Java, which began production in 1973. Nationalsteel output typically reaches 2.89 m tonnes every year, of which Krakatauaccounts for 2.5m tonnes. Local consumption is 3.9m tonnes annually. The localindustry has been facing increasing competition from cheaper imports from

Indonesia�s manufacturingbase is highly diversified

Manufacturing grows fasterthan GDP

A range of heavy industrieswas built up

Growth in the manufacturingsector has slowed since 1997

Indonesia 43


India and China. In response, in October 2002 the government raised tariffs onimported steel to 20% (from 5%) on hot-rolled coil (HRC) and to 25% (from 10%)on cold-rolled coil. However, in February 2004 the tariffs were removedcompletely because of a surge in the international prices of both steel and theraw materials that Indonesia imports to make steel locally.

There is also an aluminium smelter, run by Indonesia Asahan Aluminium (PTInalum), a joint venture between the Japanese Overseas EconomicCo-operation Fund and the Indonesian government. It has been operating inNorth Sumatra since 1985.

After being based almost entirely on the production of fertilisers until the mid-1980s, the petrochemical industry began producing a large variety of products,including benzene, methanol, formic acid, paraxylene, polyethylene, poly-propylene, polystyrene and purified terephthalic acid.

To meet demand generated by the rapid pace of development since the 1970s,there has been a rapid expansion of domestic cement capacity and output. By1996 the cement industry had a total annual production capacity of 27.3m tonnes.Demand, however, has slumped since the crisis. In 1997 domestic consumptionwas 28m tonnes; by 1999 it had fallen to 18.4m tonnes. Nevertheless, exports haveremained strong, and in 2001 reached 8m tonnes (up from 3.8m tonnes in 1998),with a value of US$161m. Higher domestic consumption accounted for the fall inexports to 5.7m tonnes, worth US$112m, in 2002.

The pulp and paper industry, which initially consisted of a few state-ownedcompanies, has expanded dramatically since the mid-1980s, when it began toattract growing private investment interest. By the end of 1999 the industryconsisted of 17 pulp mills and 88 paper mills, with a combined annualproduction capacity of 4.9m tonnes of pulp and 10.7m tonnes of paper. Theindustry has run into problems in recent years, however, because of hugeexcess capacity. The paper industry demands 25m cu metres of timber per year,but only 3.5m cu metres is officially made available. Illegal logging makes upmuch of the shortfall. In recent years the industry has also been accused ofwidespread environmental damage, and of having seized land withoutconsultation or compensation during the Soeharto years.

The textile and garment industry was initially developed as a heavily protectedproducer of import substitutes. By the early 1980s, however, as domesticdemand began to become sated, the industry embarked on a major exportdrive. This resulted in a rapid increase in exports from negligible levels in 1980to a value of US$7.1bn in 2003, making the industry the second-largest earnerof foreign exchange after petroleum and the largest single employer in themanufacturing sector. The sector proved relatively immune to the economiccrisis and continued to expand in the late 1990s, but in the past couple of yearsthe industry has been losing out to Vietnam, Cambodia and other low-costproducers. Indonesia has to import raw cotton for its textile industry, but theready availability of oil and natural gas means that it can make nylon, polyesterand polyamide using local raw materials. The industry depends on importedtechnology and heavy machinery. Much of the technology is ageing, and

Textile production is startingto fall

The pulp and paper industry issuffering

44 Indonesia


output is of poor quality and productivity low. The inability of companies toinvest since the 1997 crisis is one of the reasons for the low-technology state ofabout 50% of the textile industry.

Indonesia has a competitive advantage in vehicle production given its lowwage costs, but there is concern about the relatively low level of technology inuse as well as the high incidence of illegal levies, such as bribes, which areestimated to account for 30% of production costs. Vehicle production has beengrowing strongly in the past couple of years, reaching 299,000 units in 2002.Exports have also been growing, from a low base, and stood at 37,000 units in2003. In 2001 there were about 120 companies producing automotivecomponents, with sales totalling US$650m, of which exports constitutedaround 20%.

Vehicle sales rose rapidly during the 1990s and reached 385,000 units in 1997,up from 206,000 in 1994. They subsequently plummeted to 58,000 units in1998, but have been rising steadily since, to reach 355,000 units in 2003. Saleshave been boosted by lower inflation and the stronger rupiah. (Cars are eitherimported or, if produced domestically, include a high level of imported content,estimated at 70%.) Vehicle sales were up by 27.7% year on year in the first halfof 2004, despite uncertainty caused by the parliamentary and presidentialelections. The market is dominated by minibuses and jeeps, which accountedfor nearly 70% of the total stock of vehicles in 2002.

The automotive sector (two- and four-wheel vehicles) was deregulated andliberalised in 1999, and there are now no limits on foreign ownership, local-content requirements or incentives. Tariff barriers have been lowered, althoughthey remain high by international standards, and in 2002 the governmentannounced an increase in the tax on cars to 40%, from 30% previously. Theautomotive sector is excluded from the Association of South-East Asian Nations(ASEAN) Free-Trade Area (AFTA) at present, but is scheduled to be opened up in2006. This will mean a reduction in tariffs to 0-5%, but probably also a local-content requirement of more than 40%.

Construction

The high levels of economic growth in the two decades before 1997, and ofinvestment growth in particular, provided a strong stimulus for the constructionindustry, which received a flood of orders for infrastructure, industrial,housebuilding and other development-related projects. Like the manufacturingsector, the construction sector recorded annual growth rates well in excess ofthe overall rate of GDP growth. Its average annual growth rate was 11.9% in realterms between 1973 and 1983, and 7.2% between 1983 and 1993. By 1996 theconstruction sector�s share of constant-price GDP had risen to almost 8%. Thisimpressive growth rate was accompanied by an equally impressivedevelopment of the sector, as domestic architects, surveyors, engineers andcontractors increased in number and acquired a higher degree ofprofessionalism. However, the sector was hit hard by the economic crisis.Construction contracted by 36.4% in 1998, making it the worst-performing sector

Vehicle production and saleshave increased in recent years

Construction rose on the backof the investment boom

Automotive industry is one ofthe few unprotected sectors

Indonesia 45


in the economy, and it has only recently began to improve. The sector hasstarted to grow more strongly since 2002, and expanded by 6.3% year on year in2003, although it still contributed only 5.7% of GDP.

Financial services

During the 1980s the banking sector was deregulated by the removal of directcontrols on lending and interest rates by Bank Indonesia (BI, the central bank).To replace them, BI created an institutional framework that allowed it toexercise more indirect and market-oriented forms of monetary management.This involved the introduction of a lender-of-last-resort facility, as well as thecreation of discount instruments known as Bank Indonesia Certificates(Sertifikat Bank Indonesia, SBI) and a new set of money-market securities (SuratBerharga Pasar Uang, SBPU), which could be traded within the banking systemto help regulate liquidity.

Further reforms in 1988 removed barriers to the establishment and expansionof privately owned domestic banks and foreign banks, setting off an explosionin the number of new banks, so that there were a total of 238 banks by October1997. The scale of the banking sector�s problems was exposed by the onset ofIndonesia�s economic crisis in the second half of 1997. Most banks had violatedprudential regulations covering their capital-adequacy ratios, loan/deposit ratiosand limits on their net open position (access to offshore sources of funds).

From July 1997 a combination of factors!the collapse of the rupiah, thedownturn in the real economy, high interest rates, negative interest spreads, andrumoured and actual closures!brought the banking system to its knees. Itsurvived only through large injections of liquidity support from the centralbank. The decision to close 16 banks in November 1997 without providing thesupport of a deposit insurance scheme set off a run on bank deposits across thecountry. The situation was only partly remedied in January 1998 by agovernment guarantee of domestic bank deposits and liabilities, and theestablishment of the Indonesian Bank Restructuring Agency (IBRA) torehabilitate the banking system. A total of 68 banks have been closed since1997, 12 have been nationalised and 14 have been merged into two largerentities. Recapitalisation of the banking system is now complete, at a cost ofRp650.trn (US$69m). Bonds were issued to cover the cost of the programme.

Since 2002 there have been clear signs of recovery in the banking system. IBRAhas successfully restructured and sold the bulk of its banking sector holdings,and both foreign and domestic interest in the sales has been high. The numberof banks has almost halved from pre-crisis levels, to stand at 135 at end-2003.The sector has partially restored its intermediary function by increased lendingto the household sector and small businesses. However, lending to thecorporate sector remains moribund. Banks are reluctant to lend because of thehighly indebted nature of many large corporates, while demand from com-panies themselves has been weak. Banks continue to prefer to keep theirliquidity in the relative safety of government bonds. Consumer loans are

Restructuring the banks beganin the early 1980s

The bubble bursts

The banking sector ishealthier, but problems remain

Poorly supervisedbanks proliferate

46 Indonesia


considered less risky as they are diverse, are not dependent on the fortunes ofone sector and are typically small in size. Partly as a result of the banks�caution, the non-performing loans ratio had fallen to 2.6% by end-2003,compared with 3.6% in 2001 and an estimated 70% in 1997-98.

The long-moribund Jakarta Stock Exchange (JSX) was relaunched in 1977, but itwas not until the announcement in the October 1988 financial reform packageof changes to the taxation system that put dividend and interest income on anequal footing that the market began to stir. The JSX index rose from 83 at thestart of 1988 to a new record of 682 in April 1990. The number of listed firmsrose to 104 during this period. These developments were accompanied by theinauguration of a secondary over-the-counter market in February 1989 and theestablishment of a privately owned stock exchange in Surabaya in June 1989.The fortunes of the capital market turned in mid-1990, and by early 1992 theJSX index had slumped to about 250. In an attempt to support its revival, thegovernment introduced a number of measures to tighten supervisory pro-cedures and enhance public confidence in the exchange, which was privatisedin April 1992. These measures led to a recovery that, after wide fluctuations,eventually brought the index to a new peak of 725 by the end of June 1997.

The region was then plunged into an economic crisis and, despite efforts to liftinvestor confidence, the index went into freefall: in mid-September 1998 it stoodat 292, almost 60% below its level at the end of June 1997. By end-1999 theindex had recovered to 676, although markets remained extremely vulnerableto political instability. A return to relative stability following the advent of thepresidency of Megawati Soekarnoputri in July 2001 saw the index recover: itwas up by 8.4% year on year in rupiah terms in 2002, and rose strongly thenext year to stand at 691.9 at end-2003.

Other services

The domestic trade (retail and wholesale) sector and the hotel and restaurantsector are the most important other services in the economy, togetheraccounting for 12.9% of real GDP in 2003. Growth in these sectors in recentyears has been broadly in line with the overall rate of growth in GDP.

The domestic trade sector is growing steadily, despite a number of officialcontrols. These were intended to protect indigenous traders from competitionfrom resident ethnic-Chinese and (to a lesser extent) ethnic-Indian and Arabbusiness communities. Restrictions include a prohibition on foreign involve-ment in retail trade outside major urban centres, and a number of restrictionson the participation of ethnic-minority communities in rural trade. The latterregulations have been increasingly flouted in recent years, but although thegovernment has turned a blind eye, political sensitivities have prevented theformal deregulation of the sector.

Large amounts of foreign and domestic investment funds were channelledinto the hotel and tourism sector from the mid-1970s onwards. However, theincrease in tourist arrivals fell below expectations, with 592,000 recorded in

Retailing and hotelsdominate services

Controls have limiteddomestic trade�s growth

Tourism has been a leadinggrowth industry

Capital markets oscillatewildly

Indonesia 47


1982. The prospect of declining export revenue from oil prompted acomprehensive review of the sector. In April 1983 visa requirements were liftedfor tourists from most west European countries, all ASEAN member countriesand many countries in the Pacific area, including the US and Canada. Furtherefforts to promote tourism were launched in subsequent years, and 1993-2003was designated Visit Indonesia Decade by the culture and tourismdepartment.

From 1986 the growth of the industry accelerated sharply, with the number oftourists visiting Indonesia increasing by an annual average of 19.7%, from825,000 in 1986 to an estimated 5m in 1995. In the same period tourist spendingincreased by 25% a year, from US$590.5m to US$4.3bn. In the following twoyears earnings continued to rise, but the number of tourist arrivals stabilised ataround 5m a year.

From mid-1997 tourist visits started to drop, falling to only 3.8m in 1998, 3.9m in1999 and 4.15m in 2000, as a result of rising civil unrest and political instability.In 2000 earnings from tourism were US$4.8bn, down from a peak of US$5.3bnin 1997. Tourism suffered badly from cancellations following the September 11th2001 terrorist attacks on the US. The industry appeared to be recovering in2002, until in mid-October terrorist bombings in Bali, Indonesia�s principaltourist destination, killed over 200 people, the majority of them Westerntourists. Since then the global economic downturn, the negative impact ontrade and travel of the US attack on Iraq, and the regional outbreak in 2003 ofSevere Acute Respiratory Syndrome (SARS) have combined to prevent asignificant recovery in the sector. Further terrorist attacks, on the JW Marriotthotel in the capital, Jakarta, in August 2003 and outside the Australian embassyin September 2004, will further delay a full recovery in the tourism industry.

The external sector

Trade in goods

High oil prices throughout the 1970s drew Indonesia into dependence on oiland gas exports, but the merchandise trade account remained in surplus despitea deficit in the non-oil and gas trade balance. Weaker oil and gas prices in the1980s induced a major drive to broaden the base of trade. The governmentthen pursued a successful diversification into non-oil and gas exports, pushingthe non-oil and gas balance into surplus in 1993 for the first time in over20 years.

In 2003 the impact of this policy could still be seen in exports worth anestimated US$61bn, of which oil and gas exports accounted for only 22.4%despite high oil and gas prices. In 2001, when global trade slowed markedly,Indonesia did not suffer as much as many of the major exporters in Asiabecause of its diversified export base, particularly its lack of reliance ontechnology exports, and the value of non-oil and gas exports fell by only 4.7%year on year. The same characteristics meant that in the first half of 2004, whenglobal business demand was strong, Indonesian export growth was unexciting.

Diversification away from oiland gas takes place

Tourism has suffered fromfears of terrorism

48 Indonesia


The long-term competitiveness of exports is being affected by a number ofinteracting factors. Cuts to government subsidies are forcing up prices for water,telephone services and electricity. Frequent disruptions caused by a growingtrade union movement, and rising wage costs, are also underminingcompetitiveness. The lack of investment since 1997-98 means that physicalcapacity is becoming increasingly obsolete and unproductive. On a longer-termnote, the lack of investment in education means that it is becoming increasinglydifficult for Indonesia to move to higher value added production.

Foreign trade, 2003(US$ m)Exports fobAgricultural goods 2,526Industrial goods 40,880Minerals 3,996Oil & gas 13,652Total incl others 61,058Imports cifConsumer goods 2,863Raw materials 25,496Capital goods 4,192Total 32,551Balance 28,507


Although exports have regained and even surpassed pre-crisis levels, the profileof imports has yet to recover fully from the effect of regional economicinstability in 1997. In 1996 the import bill totalled US$42.9bn, includingintermediate goods worth US$30.5bn (71% of the total) and capital goods worthUS$9.7bn (22.6% of the total). In 2003 total imports were worth only US$32.5bn,according to customs data, with intermediate and capital goods valued atUS$25.5bn (78.5% of the total) and US$4.2bn (12.9%) respectively. A dependenceon imported intermediate goods to supply the manufacturing industry!one ofthe main factors that rendered the economy so vulnerable to currencydevaluation in 1997!has yet to be addressed by government policy. The 5%year-on-year fall in demand for capital goods in 2003 (following a 7% drop in2002) shows that companies are still investing progressively less in new projectsand in upgrading existing facilities. Capital goods now account for only 12% ofimports, compared with 22.5% in 1996. Consumer demand in 2002-03 wasstrong, bolstered by an appreciating rupiah, and as a result consumer goodsimports rose by nearly 18% year on year in 2002 and by 8% in 2003.

In 2003 the US, Japan and Singapore, traditionally the three largest markets forIndonesian exports, accounted for 50.5% of export receipts. Trade with the USpicked up, after falling by 1% in 2002, and the US�s share of Indonesian exportsrose to 15.3%, up from 13.3% in 2002. Trade with Japan and China grewparticularly strongly. Trade with Japan grew by 25% year on year, partly owingto higher oil and gas prices, while trade with China rose by 80% and nowaccounts for nearly 9% of Indonesia�s exports, reflecting the China�s growingimportance as a motor for the wider Asian economy. Trade with Singapore,Indonesia�s third-largest overseas market, was also higher, again probably

Imports have yet to recoverfully from the 1997 crisis

Rising costs underminecompetitiveness

China emerges as a majortrading partner

Indonesia 49


largely as a result of higher international oil prices. In December 2003Singapore announced that data on trade with Indonesia would now be madepublic for the first time since 1974. Data were previously released to a restrictedaudience, as a result of large disparities between Indonesian and Singaporeandata caused by rampant smuggling. A similar pattern of trade exists for imports,Japan being the largest partner (supplying 19% of imports). China overtook theUS and Singapore to become Indonesia�s second-largest supplier, with a 15%share of the import bill.

The ASEAN Free-Trade Area (AFTA)

Plans for an Association of South-East Asian Nations (ASEAN) Free-Trade Area(AFTA) were first unveiled in 1992, and a common effective preferential tariff(CEPT) scheme then allowed for the gradual reduction of tariffs on intra-Asiantrade, with a full free-trade system taking effect on 1st January 2002.

This has not taken place entirely as planned, largely as a result of exemptions to tariffreductions and a clause permitting the continued use of non-tariff barriers to protectsensitive goods and industries. Malaysia has stalled and won a two-year exemptionto protect its domestic car industry, while Thailand is protecting its glass industry andthe Philippines its cement industry. Singapore has looked to bilateral agreements toloosen its own trade relations as a result of the protectionist tendencies exhibited byother AFTA partners.

Nevertheless, the average tariff on intra-ASEAN trade has now fallen to 3.2%, and aprogramme to introduce an ASEAN Harmonised Tariff Nomenclature (AHTN) isbeing introduced. Only six ASEAN members!Indonesia, Malaysia, the Philippines,Singapore, Thailand and Brunei!are in the vanguard of nations working towards thefree-trade area; the six engaged nations account for 96% of intra-ASEAN trade. Theother four ASEAN members!Vietnam, Laos, Myanmar and Cambodia!willintroduce tariff reductions between 2006 and 2010.

Summary of foreign trade, selected years(US$ bn)

1985 1990 1997 2000 2001 2003Oil & gasExports fob 12.6 11.1 11.6 14.4 12.6 13.7Imports cif -1.3 -1.9 -3.9 -6.0 -5.5 -7.6Balance 11.4 9.2 8.3 8.4 7.1 6.1Non-oil & gasExports fob 5.9 14.6 41.8 47.8 43.7 47.4Imports cif -9.0 -19.9 -37.8 -27.5 -25.5 -24.9Balance -3.1 -5.3 4.1 20.3 18.1 22.5TotalExports fob 18.5 25.7 53.4 62.1 56.3 61.1Imports cif -10.3 -21.8 -41.7 -33.5 -30.8 -32.6Balance 8.2 3.8 12.4 28.6 25.2 28.5


50 Indonesia


Invisibles and the current account

A heavy dependence on imports and the persistent deficit on invisibles led to acurrent-account deficit throughout the 1970s, 1980s and early 1990s. Notableexceptions to this rule were the oil boom years of 1974, 1979 and 1980. Thecollapse in merchandise imports at the time of the 1997-98 crisis, however,served to generate a large surplus on the merchandise trade account and morethan offset the deficit on the income and services accounts, enablingIndonesia�s current account to move into surplus in 1998. Despite rising debt-servicing costs, the strong trade balance meant that the current-account surpluswas maintained in 1999-2002.

Many of the main elements of the invisibles account run in constant deficit. Asmall domestic ocean-going fleet means that freight and shipping is always inthe red. This is traditionally partly offset by inflows of tourism revenue, but theservices deficit rose sharply in 2003 to an estimated US$11.5bn. Tourism receiptswere sharply lower in 2003 owing to fears of terrorist activity (after the October2002 bomb in Bali that killed 202 people) and the regional outbreak of SevereAcute Respiratory Syndrome (SARS). Net investment income recorded anestimated deficit of US$6.2bn in 2003, down from a deficit of US$7bn in 2002.In 2003 international interest rates were low, and Indonesia rescheduled someinterest payments due to official creditors (under a rescheduling deal with theParis Club of creditor nations), further reducing interest repayments. Thesesubstantial deficits on the invisibles account were not offset by remittancesfrom overseas, although the latter remained strong at about US$2bn, up fromaround US$800m in 1996. The overall current-account surplus is estimated tohave fallen in 2003 to US$7.3bn, down from US$7.8bn in 2002, primarilybecause of the larger deficit on the services account.

Current-account estimates, 2003(US$ m)

Merchandise exports fob 61,058Merchandise imports fob -32,551

Trade balance 28,507Services, net -11,549Current-account balance 7,332

Source: IMF, International Financial Statistics.

Capital flows and foreign debt

For most of the past 30 years Indonesia has relied primarily on concessionalofficial borrowing to meet its financing requirement (current-account deficitplus debt repayments). This aid has been disbursed mainly through twoconsortia of official donors: the Inter-governmental Group on Indonesia (IGGI),which was established in 1966 under the chairmanship of the Netherlands; andfrom 1992, after a falling out with the Dutch over East Timor, the ConsultativeGroup for Indonesia (CGI), chaired by the World Bank. From 1992 to 2001 theCGI has made annual commitments in the order of US$5bn, with the exceptionof the crisis year of 1998 (US$7.9bn) and to a lesser extent 1999 (US$5.9bn). The

Borrowing covers the current-account deficit

Current-account deficits werethe norm until 1998

The services deficit rosein 2003

Indonesia 51


CGI pledged US$3bn in 2003. These funds are not always drawn down, asmuch of the funding is earmarked for particular projects and the Indonesiangovernment often fails either to provide its own share of the financing or tomeet other conditions.

The 1997 Asian economic crisis pushed the capital account sharply into deficit.The large increase in official capital flows was insufficient to offset a collapse inthe flow of private capital. A net private capital inflow of US$11.5bn in 1996was transformed into a net outflow of US$13.8bn in 1998. The net outflow fellto an estimated US$1.8bn in 2003. Post-crisis measures to encourage foreigninvestment have been undermined by political instability and legal uncertainty,and the government has yet to restore investor confidence. Data from BankIndonesia (BI, the central bank) show that the divestment of foreign-held assetstotalled US$2.7bn in 1999, US$4.5bn in 2000 and US$3.3bn in 2001. Inflows arereported to have been restored in 2002, but only to the tune of US$145m.Although foreign direct investment inflows were weak throughout South-eastAsia, Indonesia was the only country to record a net outflow.

Foreign investment policy

Beginning in 1966, the New Order government actively encouraged foreign investment.This was underlined by the promulgation of the relatively liberal Foreign CapitalInvestment Law of 1967, which, with several amendments, continues to govern foreignprivate investment. It permits foreign companies to invest in projects approved by thegovernment, and to operate in Indonesia for a period of up to 30 years withguaranteed rights of profit repatriation and protection against expropriation.

In the 1970s and early 1980s the vast inflows of oil wealth reduced the government�sneed for foreign investment funds. Consequently, increasingly severe conditionsbegan to be placed on potential foreign investors. The rules governing theemployment of expatriates and the import of machinery and materials wereprogressively tightened, the range of activities open to foreign investment wasrestricted, and rigid requirements were imposed with regard to local partnershipsand equity divestments. These increasingly stringent requirements, combined withthe growing prospect of stagnation in the domestic market, resulted in a sharpdecline in interest in private investment from 1984 onwards.

Coinciding as it did with the tightening resource constraints imposed on thegovernment by the changing external economic environment, this investmentdownturn triggered a comprehensive reappraisal of the government�s foreigninvestment policy. An investment promotion drive was launched. The first majorpackage of deregulatory reforms was introduced in 1986, to be followed by furtherrelaxation of the terms governing foreign investment. The number of sectors open tosuch investment has increased steadily, the minimum initial capitalisation require-ments for foreign investment projects have been reduced, and restrictions onexpatriate employment and the use of imported inputs have been eased.

Under the new regulations, introduced gradually between 1989 and 1994, 100%foreign equity ownership is permitted in most sectors, subject to certain conditions.All investment applications outside the oil and gas sector and the financial sector,

Private capital flows collapse

52 Indonesia


which are governed by different procedures, must be submitted to the InvestmentCo-ordinating Board (BKPM), the body responsible for processing applications.However, policy towards foreign investment remains inconsistent. Proposals to easerestrictions on the sale of majority stakes in �strategic� industries to foreigners, andthe easing of visa and residency restrictions, were accompanied by a decision inmid-2000 to increase royalties on mining products. There is growing political andpopular opposition to foreign acquisitions, stemming from resentment towardsforeign involvement in some of the secessionist conflicts in recent years, perceivedoutside interference in economic policymaking since the 1997-98 crisis and a popularbelief that state assets have been sold to foreigners at undervalued prices. Thegranting of financial autonomy to regional governments, which took effect inJanuary 2001, is a new source of uncertainty, despite the fact that the centralgovernment has exhorted the newly empowered regional authorities to refrain fromoverburdening investors with unnecessary levies.

The value of foreign direct investment (FDI) projects approved by the BKPM rosefrom a low of US$859m in 1985 to US$8.1bn in 1993, before surging to unprecedentedlevels in 1994-97. In the peak year, 1995, approvals reached US$39.9bn (see Theeconomy: Economic policy). However, there has always been a gap between thevalue of FDI projects that have been approved and the number or size of projectsactually implemented: historically, only about one-quarter of approved projects havebeen implemented. This trend has been particularly marked in larger, capital-intensive projects, many of which have been postponed or delayed indefinitely.

From the late 1980s Indonesia�s debt profile began to change, which increasedthe country�s vulnerability to the regional currency crisis when it began in mid-1997. Non-guaranteed private and short-term debt started to dominate the debtstock on a scale that was partly masked by official data, which understated thetrue value of these components. By the end of 1997, according to World Bankdata, 42% of private debt totalling US$77.3bn was short-term, with an averagematurity of about 18 months. Private debt accounted for 57% of Indonesia�stotal stock of debt.

Since the crisis, the composition of the debt stock has shifted back towards agreater emphasis on public medium- and long-term debt, and away fromprivate debt. Between the end of 1999 and the end of 2002, according to datafrom the World Bank, Indonesia�s external medium- and long-term debt fell bynearly US$19bn, whereas public-sector debt fell by only US$3.6bn. The declinein private foreign debt was mainly a result of debt repayment by non-bankcorporations. According to BI, the stock of debt at end-2003 stood at US$135bn.

Long-term debt peaked in 1999 at US$122bn, and in 2002 was worthUS$100bn, on a par with 1996-97 levels. Public debt has increased both inabsolute terms and as a proportion of the total, from US$55.9bn in 1997 toUS$70bn in 2002, and accounted for 70% of all long-term debt in the latter year.Short-term debt had fallen by about one-third since the crisis, but has beencreeping up steadily since 1998, when it stood at US$20.1bn, to US$23.3bn in2002. Despite being at much lower levels than in 1997, short-term debt stillmade up 23.3% of total debt stocks in 2002, compared with 24.2% in 1997. It is

The debt profile has altered

Indonesia 53


not a cause for concern, however, as the bulk of short-term financing in recentyears has been trade-related.

The rising cost of debt servicing has forced the government to restructurerepayments through the Paris Club. In 2000 debt repayments of US$2.5bn wererescheduled, followed by US$5.8bn in 2001 and US$5.4bn in 2002-2003. Thelatter agreement covered both principal and interest repayments for the firsttime; previous agreements had covered only principal repayments. Additionalcommercial debt held by the government has been restructured via frameworkof the London Club of commercial creditors under the principle of equaltreatment for private and public creditors. However, the government�s decisionnot to renew its financing programme with the IMF at end-2003 means that thecountry is no longer eligible for rescheduling by either the Paris Club or theLondon Club. Indonesia continues to co-operate with the IMF in a post-programme monitoring (PPM) phase, involving two assessments a year, duringwhich the IMF advises on policy. PPM will last as long as drawings remainhigher than the country�s quota with the IMF.

Foreign reserves and the exchange rate

As a result of large capital inflows, the overall payments account generallyenjoyed large surpluses until 1997, which was reflected in the accumulation offoreign-exchange reserves. This was reversed as a result of the economic crisis.International reserves (using the broad definition of gross foreign assets, orGFA) increased sharply from the late 1980s onwards, from US$5bn at end-1988to a peak of US$28.9bn at end-June 1997. Reserves then fell sharply owing to amassive net outflow of (mainly private) capital, reaching US$16.6bn by end-March 1998.

In May 2000, to comply with international reporting standards, BI begancalculating foreign reserves based on the concept of International Reserve andForeign Currency Liquidity, which provides a more accurate assessment ofliquid assets at the government�s disposal. The new method results in acalculation of foreign reserves that is lower than the GFA method, but whichhas nevertheless risen steadily since mid-1999 to reach US$36.25bn at end-2003.

After a long period from the early 1970s, during which the rupiah was peggedto the US dollar but subject to periodic large devaluations, the governmentintroduced a managed float aimed at maintaining the competitiveness ofIndonesia�s non-oil and gas exports in the face of the inflation differential withits main international customers and competitors. The rupiah�s year-end valueagainst the US dollar fell from Rp1,733:US$1 in 1988 to Rp2,383:US$1 in 1996, anaverage annual rate of depreciation of 4.1%.

The Asian currency crisis forced the government to allow the rupiah to floatfreely on August 14th 1997, and thereafter the currency was buffeted by a rangeof external and domestic developments!indebted corporations buying USdollars to cover their unhedged liabilities, the growing crisis in the bankingsector and political instability. From Rp2,450:US$1 on the eve of the crisis atend-June 1997, the rupiah hit lows of around Rp17,000:US$1 in early January

Debt restructuring is agreed

The crisis has taken its toll onforeign reserves

The rupiah has been forcedout of its managed float

54 Indonesia


and mid-June 1998. Helped by the weakening US dollar, inflows of official aid,the current-account surplus and the de facto debt moratoriums, the rupiahstrengthened rapidly from September 1998. Mounting political instability duringthe presidency of Abdurrahman Wahid from 1999 led to further episodes ofsevere weakness. The return of relative economic and political stability underMegawati Soekarnoputri led to a more stable and resilient rupiah.

The rupiah performed modestly in 2003, appreciating from Rp8,940:US$1 atend-2002 to Rp8,465:US$1 at end-2003, a rise of 5.6%. The appreciation wasassisted by falling inflation and the government�s successful macroeconomicmanagement. Restructuring of debt through the Paris Club and London Clubnegotiations with official and commercial creditors also substantially reducedthe demand for foreign currency, which in turn kept pressure off the rupiah.The rupiah has been volatile in 2004 owing to the political and economicuncertainty generated by the parliamentary and presidential elections and as aresult of heavy debt-servicing obligations in the absence of debt-reschedulingagreements. The currency has not depreciated unduly, however, suggestingmore supportive economic fundamentals, and stood at Rp9,100:US$1 at end-October 2004.

The rupiah stabilises

Indonesia 55


Regional overview

Membership of organisations

The Association of South-East Asian Nations (ASEAN) was established in1967. The five original members were Indonesia, Malaysia, the Philippines,Singapore and Thailand. Brunei joined in 1984, as did Vietnam in 1995, Laosand Myanmar in 1997 and, most recently, Cambodia in 1999.

ASEAN summit meetings, which bring together the heads of government ofmember states, must now be held every three years. The most recent was inIndonesia in 2003. Informal summits of heads of governments are also held. Inaddition, the foreign and economic affairs ministers of member countries meetannually. Joint meetings of foreign and economic affairs ministers are held beforeeach ASEAN summit. There is also a standing committee (consisting of themembers� accredited ambassadors to the host country), which usually meetsevery two months. There is a permanent secretariat, based in the Indonesiancapital, Jakarta, and a number of committees.

The organisation started with some grand objectives, but has generally failed todeliver. Early hopes that ASEAN could engineer a regional economicdevelopment strategy!with particular countries concentrating on particularindustries!were soon dashed. In 1977 the Basic Agreement on theEstablishment of ASEAN Preferential Tariffs was concluded, but a decade lateronly about 5% of trade between members was covered by this system.(Members had been permitted to exclude �sensitive� sectors, a let-out clausethat a subsequent agreement in 1987 only slightly curtailed.)

Plans for a proper ASEAN Free-Trade Area (AFTA) were unveiled in 1992, withthe aim of achieving this by 2008. A common effective preferential tariff (CEPT)scheme was applied in 1993, providing for the gradual reduction of tariffs on intra-ASEAN trade in certain goods over a number of years. Again, however, memberstates could exclude �sensitive� items, limiting progress. A new AFTA programme,covering a wider spread of products, was launched in 1994. During the mid-1990sthe timescale for implementing the programme was steadily tightened, with theaim being to reduce tariffs on most goods to below 5% by 2000. A limited AFTA,between the original six members of ASEAN and involving a reduction on tariffson intra-ASEAN trade to between 0% and 5%, came into operation on January 1st2002. (Countries joining recently have been allowed more time.)

The 1997-98 regional financial crisis exposed ASEAN�s failings in a brutalfashion. The organisation was unable to stop the regional currencydevaluations or alleviate the subsequent economic hardship. A Statement onBold Measures, released at end-1998, was exactly the opposite of what the titleimplied. Unfolding events in Indonesia then moved the focus on to theorganisation�s security plans. ASEAN members� commitment to the principle ofnon-interference in the internal affairs of other members complicated theresponse to the crisis in East Timor. (Some members did eventually participatein the multinational force that intervened in East Timor, but not under ASEANauspices.)

Association of South-EastAsian Nations (ASEAN)

56 Indonesia


On the economic front, ASEAN�s slow progress towards AFTA has encouragedsome of its members, notably Singapore, to opt instead for bilateral tradepacts. But ASEAN�s hopes of further multilateral deals have not beenextinguished. In November 2004 ASEAN and China are due to sign a majortrade deal, which aims to eliminate most tariffs on intra-regional trade by 2010(2015 for the less developed members of ASEAN). Tariffs will not gocompletely!countries will be able to designate a number of sectors as sensitive,and the greatest liberalisation is therefore likely to occur in areas where Chineseand ASEAN trade is complementary. Tariff reductions in agricultural trade havealready started.

The organisation�s political hopes could be severely tested in the next fewyears. Changing governments in member countries could undermine anyremaining pretence of political consensus in the region. On the security front,the ASEAN Regional Forums (ARFs, which bring together the ASEAN ministersof foreign affairs with those of other countries, notably China) are likely toremain little more than talking shops, with negligible impact on changinggeopolitical trends.

APEC started life as a forum for informal discussion between six members ofthe Association of South-East Asian Nations (ASEAN), Brunei, Indonesia,Malaysia, the Philippines, Thailand and Singapore, and their six dialoguepartners in the Pacific, Australia, Canada, Japan, New Zealand, South Korea andthe US. In 1991 China, Hong Kong and Taiwan became members, followed byMexico and Papua New Guinea in 1993, and Chile in 1994. Peru, Russia andVietnam joined in 1998. APEC describes itself as �the primary vehicle forpromoting open trade and practical economic co-operation� in the region, withthe goal of advancing �Asia-Pacific economic dynamism and sense ofcommunity�.

APEC has had a permanent secretariat since 1992, and also runs fourpermanent committees!on budget and managerial issues, on trade andinvestment, on economic trends generally, and on economic and technical co-operation. In addition, there are 11 working groups!on agricultural technical co-operation, energy, fisheries, human resources, industrial science and technology,marine resource co-operation, small and medium-sized enterprises,telecommunications, tourism, trade promotion and transport. There is also anAPEC business advisory council (ABAC), which includes up to three seniorprivate-sector representatives from each member country. APEC as a whole hasits headquarters in Singapore, while ABAC is based in the Philippines. APEC�smain business is done at annual meetings of member states� ministers offoreign affairs and economic affairs, which are followed by informal gatheringsof members� heads of state. Every other ministerial meeting is held in a South-east Asian country. The chairmanship of APEC rotates on a yearly basis.

During the 1990s APEC�s star first waxed brighter and then started to wane. Thehigh point was probably reached in 1994, when members agreed a timetablefor the liberalisation of trade across the region: the ambitious aim was toeliminate all trade barriers by 2020, and then to extend reciprocal concessionsto non-members. In 1995 and 1996 APEC debated how best to achieve this

Asia-Pacific EconomicCo-operation (APEC) forum

Indonesia 57


target, but discussions in 1997 and 1998 were driven off course by the regionalfinancial crisis. APEC�s response to the crisis!generally worded exhortations tomember states to develop financial and capital markets, and so on!was farfrom convincing and signalled the inherent weaknesses of the organisation.Subsequent meetings also provided other distractions from the trade liberali-sation theme: East Timor in 1999, information technology in 2000 and security(following the September 11th terrorist attacks on the US) in 2001. Discussionreturned to trade relations in 2002, but was only very general in nature. The2003 meeting in Bangkok made little further progress, concluding with broadcommitments to multilateral trade and investment liberalisation, and toimproving regional security arrangements. Thus APEC has in effect gone backto its roots and become an informal talking shop, giving up all aspirations to bea serious regional reformer.

58 Indonesia


Appendices

Sources of information

Bank Indonesia, Annual Report

Central Bureau of Statistics, Indikator Ekonomi (monthly)

Central Bureau of Statistics, Statistik Indonesia (annual)

Bank for International Settlements, International Banking and Financial MarketDevelopments (quarterly)

IMF, International Financial Statistics (monthly)

International Institute for Strategic Studies, The Military Balance (annual)

OECD, Geographical Distribution of Financial Flows to Developing Countries(annual)

UN, Monthly Bulletin of Statistics

UN, World Investment Report (annual)

World Bank, Global Development Finance (annual)

World Bank, World Development Report (annual)

Australian National University, Bulletin of Indonesian Economic Studies (threetimes a year), Canberra

Michael Vatikiotis, Indonesian Politics Under Soeharto: Order, Development andPressure for Change, Routledge, London and New York, 1993

World Bank, Indonesia: Accelerating Recovery in Uncertain Times, WashingtonDC, 2000

World Bank, Indonesia: The Imperative for Reform, Washington DC, 2001

Kevin O�Rourke, Reformasi, the struggle for power in post-Soeharto Indonesia,Allen & Unwin 2002

Bank Indonesia: www.bi.go.id

Central Bureau of Statistics: www.bps.go.id

Investment Co-ordinating Board: www.bkpm.go.id

National Development Planning Agency: www.bappenas.go.id

Jakarta Stock Exchange: www.jsx.co.id

Indonesian Bank Restructuring Agency: www.bppn.go.id

Select bibliography andwebsites

International statistical sources

National statistical sources

Indonesia 59


Reference tables

Populationa

1999 2000 2001 2002 2003Total (m) 206.52 209.55 212.10 214.20 216.2 % change 1.04 1.47 1.22 0.99 0.93

a Mid-year estimates except 2000 figure, which is taken from the ten-yearly census.


Geographical distribution of population by province, 2000Area Population Density Growth, 1990-2000

Province (sq km) (�000) (persons per sq km) (% annual av)Aceh 51,722 3,929 76 1.46

North Sumatra 73,732 11,642 158 1.32West Sumatra 42,918 4,249 99 0.63Riau 95,339 4,948 52 4.35

Jambi 53,641 2,407 45 1.84South Sumatra 93,239 6,899 74 2.39

Bengkulu 19,841 1,564 79 2.97Lampung 35,295 6,731 191 1.17Bangka Belitung 16,075 900 56 0.97

Jakarta 664 8,361 12,635 0.17West Java 34,588 35,724 1,033 2.03

Central Java 32,564 31,223 959 0.94Yogyakarta 3,186 3,121 980 0.72

East Java 47,911 34,766 726 0.70Banten 8,653 8,098 936 3.21Bali 5,637 3,150 559 1.31

West Nusa Tenggara 20,147 4,009 199 1.82East Nusa Tenggara 47,618 3,823 83 1.64

West Kalimantan 149,415 4,016 27 2.29Central Kalimantan 154,750 1,855 12 2.99South Kalimantan 43,264 2,984 69 1.45

East Kalimantan 223,193 2,452 11 2.81North Sulawesi 15,243 2,001 132 1.33

Central Sulawesi 63,384 2,176 35 2.57South Sulawesi 62,478 8,051 129 1.49

South-east Sulawesi 37,943 1,820 48 3.15Gorontalo 12,280 833 68 1.59Maluku 46,367 1,163 26 0.08

North Maluku 31,402 732 25 0.48Papua 370,156 2,214 6 3.22

Total 1,892,645 205,843 109 1.49

Source: Central Bureau of Statistics, 2000 Census.

60 Indonesia


Labour force(m unless otherwise indicated)

1999 2000a 2001 2002 2003Working-age population (over 15 years old) 141.1 141.2 144.0 148.4 150.9Labour force 94.8 95.7 98.8 102.9 102.9

Employed labour force 88.8 89.8 90.8 91.6 92.8Unemployed labour force 6.0 5.8 8.0 9.1 10.1

Unemployment rate (%) 6.4 6.1 8.1 9.3 9.8Labour force participation rate (%) 67.2 67.8 68.6 68.2 67.9

Distribution by sectorAgriculture, forestry, hunting & fisheries 38.4 40.7 39.7 40.6 �Mining & quarrying 0.7 � � 0.6 �Manufacturing industry 11.5 11.6 12.1 12.1 �Electricity, gas & water 0.2 � � 0.2 �Construction 3.4 3.5 3.8 4.3 �Wholesale trade, retail trade, restaurants & hotels 17.5 18.5 17.5 17.8 �Transportation, storage & communications 4.2 4.6 4.4 4.7 �Financing, insurance, real-estate & business services 0.6 0.9 1.1 1.0 �Community, social & personal services 12.2 9.6 11.0 10.4 �Others � � � 11.5 �Total 88.8 89.4 89.6 91.6 �

a Excludes Maluku.

Source: Bank Indonesia, Annual Report 2001.

Transport statistics1998 1999 2000 2001 2002

Road vehicle registrations at year-end (�000)Cars 2,769 2,898 3,039 3,189 3,403Motorcycles 12,629 13,053 13,563 15,275 17,002Goods vehicles 1,587 1,629 1,707 1,777 1,865Buses 627 645 666 685 714Total 17,612 18,224 18,975 20,927 22,985RailPassengers (m) 169.8 160.3 191.9 187.2 175.7Passenger-km (m) 16,790 17,829 19,228 18,270 16,330Goods traffic (m tonnes) 18.1 19.3 19.5 18.7 17.1Freight (m tonne-km) 4,963 5,035 5,009 4,859 4,450Air transportFleet (no. of aircraft) 704 910 512 514 545Passengers (�000) 11,697 10,597 13,383 15,069 17,433 Domestic 7864 6674 8654 10,394 12,687 International 3833 3923 4728 4,675 4,746Cargo handled (�000 tonnes) 319 316 307 311 282 Domestic 148 155 161 164 136 International 171 161 146 147 146


Indonesia 61


National energy production statistics1999 2000 2001 2002 2003

Crude oil (m barrels) 495.5 517.5 489.9 458.5 379.3a

Liquefied natural gas (�000 tonnes) 29,812.4 27,203.0 24,344.2 26,184.7 10,797.6 b

Liquefied petroleum gas (�000 tonnes) 2,249.8 2,047.3 2,190.1 1,765.4 1,779.7b

Coal (m tonnes) 69.4 76.8 90.3 103.1 54.8c

Electricity (m kwh) 84,583.0 92,821.0 101,630.0 111,795.0 �PLN electricity distribution (m kwh) 71,337.7 79,050.3 84,029.0 86,504.0 82,232.0 d

a To November 2003. b To May 2003. c To June 2003. d To November 2003.


Government finances(Rp bn; fiscal years ending Mar 31st)

1996/97 1997/98 1998/99 1999/2000Revenuea 95,840 132,001 263,888 219,604 Domestic revenue 84,792 108,184 149,303 142,204 Direct taxesb 40,105 66,470 78,968 64,838 Oil/gas companies 19,872 35,357 49,711 20,965 Other corporate & personal 25,496 28,458 25,846 40,626 Property tax 2,280 2,655 3,411 3,247 Indirect taxes 29,431 32,423 43,134 50,302 Sales taxes & VAT 20,393 24,501 28,940 34,597 Excise duties 4,033 4,807 7,756 10,160 Import duties 2,807 2,990 5,495 2,950 Export tax 70 125 943 2,595 Other taxesc 570 530 540 565 Non-tax receipts 9,087 8,761 26,660 26,499 Foreign aid receipts 11,048 23,817 114,586 77,400

Expenditure 80,632 131,806 263,888 218,632 Recurrent expenditure 48,511 84,607 171,205 137,156 Personnel 18,021 19,175 24,781 33,569 Materials 7,244 9,032 11,425 11,039 Regional subsidies 9,841 9,872 13,290 19,498 Debt serviced 9,042 29,697 66,236 44,811 Other 4,363 16,831 55,473 28,239 Development expenditure 32,121 47,200 92,683 81,476

Balance 15,208 195 0 972

a Totals do not sum because of errors and omissions. b Excludes unspecified �other taxes�. c Direct and indirect. d Internal and external.

Sources: Bank Indonesia, Indonesian Financial Statistics; Ministry of Finance.

62 Indonesia


Summary of government budgets(Rp trn)

2001 2002 2003a

Total revenue & grants 286,006 301,875 342,473 Tax revenue 185,260 219,628 248,472 Domestic taxes 174,255 207,029 236,903 Income tax 94,971 104,497 122,449 Oil/gas 25,725 15,682 18,144 Non-oil/gas 69,246 88,815 104,305 Non-tax revenue 100,746 82,247 94,001 Oil 57,857 44,013 41,679 Gas 17,369 14,524 18,685Expenditures 340,326 344,008 377,250 Current 213,388 19,374 191,789 Personnel expenditures 38,206 41,298 50,426 Balanced fund 81,477 94,763 101,500

Overall balance -54,320 -42,133 -34,777Financing 54,320 42,133 34,777 Domestic financing 34,387 23,501 31,531 Foreign financing 19,933 18,630 2,906

a Preliminary data.


Gross domestic product(market prices)

1999 2000 2001 2002 2003Total (US$ bn)At current prices 154.7 165.0 164.1 203.8 243.3Total (Rp bn)At current prices 1,215,231 1,389,770 1,684,281 1,897,800 2,086,758At constant (1993) prices 1,319,189 1,389,770 1,442,985 1,504,381 1,572,159 % change, year on year 0.8 5.4 3.8 4.3 4.5Per head (Rp)At current prices 5,821,744 6,569,151 7,857,252 8,740,385 9,464,679At constant (1993) prices 6,319,772 6,569,154 6,731,595 6,928,479 7,130,671 % change, year on year -0.6 3.9 2.5 2.9 2.9

Sources: Central Bureau of Statistics.

Indonesia 63


Real gross domestic product by expenditure(Rp bn at constant 1993 prices; % change year on year in brackets)

1999 2000 2001 2002 2003Private consumption 272,070 281,957 285,675 296,559 308,477

(4.6) (3.6) (1.3) (3.8) (4.0)

Government consumption 27,014 28,768 31,352 35,362 38,843(0.7) (6.5) (9.0) (12.8) (9.8)

Gross fixed investment 76,144 93,360 95,197 95,397 96,696(-18.7) (22.6) (2.0) (0.2) (1.4)

Stockbuilding -8,714 -27,234 -13,042 -17,569 -19,562(-0.6)a (-4.9)a (3.6)a (-1.1)a (-0.5)a

Exports of goods & services 92,106 116,194 119,600 118,920 123,724(-31.6) (26.2) (2.9) (-0.6) (4.0)

Imports of goods & services 79,385 95,112 107,028 101,727 103,725(-40.0) (19.8) (12.5) (-5.0) (2.0)

GDP 379,236 397,934 411,754 426,943 444,454(0.8) (4.9) (3.5) (3.7) (4.1)

a Change as a percentage of GDP in the previous year.


Nominal gross domestic product by expenditure(Rp bn at current prices; % of total in brackets)

1999 2000 2001 2002 2003Private consumption 838,097 850,819 972,938 1,120,164 1,238,892

(76.2) (67.3) (66.3) (69.6) (69.3)

Government consumption 72,631 90,780 113,416 132,219 163,701(6.6) (7.2) (7.7) (8.2) (9.2)

Gross fixed investment 226,016 275,881 314,066 326,165 352,361(20.6) (21.8) (21.4) (20.3) (19.7)

Stockbuilding -113,853 -72,236 -53,624 -73,876 -67,258(-10.4) (-5.7) (-3.7) (-4.6) (-3.8)

Exports of goods & services 390,560 542,992 624,341 577,082 558,096(35.5) (42.9) (42.5) (35.8) (31.2)

Imports of goods & services 313,720 423,318 503,482 471,188 459,097(28.5) (33.5) (34.3) (29.3) (25.7)

GDP 1,099,732 1,264,919 1,467,655 1,610,565 1,786,691


Prices and earnings(% change, year on year)

1999 2000 2001 2002 2003Consumer prices (av) 20.5 3.7 11.5 11.9 6.6

Average nominal wages 22.9 24.0 23.4 20.0 16.0Average real wages 2.0 13.6 9.7 7.2 8.8Unit labour costs 57.5 5.9 -2.0 29.9 23.8

Source: IMF.

64 Indonesia


Money supply(Rp bn unless otherwise indicated; end-period)

1999 2000 2001 2002 2003Money (M1) incl others 116,880 160,923 175,110 188,008 220,552 % change, year on year 28.8 37.7 8.8 7.4 17.3

Quasi-money 525,227 587,922 669,916 695,310 734,223Money (M2) 642,107 748,845 845,026 883,318 954,775 % change, year on year 12.2 16.6 12.8 4.5 8.1

Source: Bank Indonesia, Indonesian Financial Statistics.

Interest rates(money market discount rates; % annual av)

1999 2000 2001 2002 2003Lending interest rate (%) 27.7 18.5 18.5 18.9 16.9Deposit interest rate (%) 25.7 12.5 15.5 15.5 10.6

Money market interest rate (%) 23.6 10.3 15 13.5 7.8

Source: IMF.

Agricultural production(�000 tonnes unless otherwise indicated)

1999 2000 2001 2002 2003Food cropsPaddy 50,866 51,899 50,460 51,490 52,138Cassava 16,459 16,089 17,055 16,913 18,524Maize 9,204 9,677 9,347 9,654 10,886Sweet potato 1,666 1,828 1,749 1,772 1,991Soybeans 1,383 1,018 827 673 672Peanuts 660 737 710 718 786Cash cropsPalm oil 5,999 6,552 6,939 7,256 �Copra 2,789 2,778 � � �Cane sugar 1,801 1,780 1,836 1,869 �Rubber 1,500 1,501 1,522 1,630 �Cocoa 363.5 411.3 426.9 432.2 �Coffee 521.4 613.5 609.5 610.1 �Tea 161.0 162.6 172.0 172.0 �Tobacco 138.0 146.1 145.7 146.2 �Rosella 2.3 2.6 2.6 2.5 �

LivestockMeat 1,193 1,445 1,451a � �Eggs 640 783 795a � �Milk (m litres) 436 496 505a � �FishSaltwater 3,683 3,807 � � �Freshwater 1,045 1,082 � � �ForestryLogs (�000 cu metres) 20,620 13,798 10,051 � �

a Estimates.

Sources: Central Bureau of Statistics.

Indonesia 65


Minerals production(�000 tonnes unless otherwise indicated)

1999 2000 2001 2002 2003a

Coal 70,703 76,820 90,351 103,060 114,610Nickel ore 3,235 3,349 3,365 4,366 4,395

Copper 2,645 3,194 3,289 3,787 3,238Bauxite 1,143 1,175 1,276 1283 1,263

Silver (�000 kg) 292 335 348 289 285Gold (�000 kg) 129 118 166 142 141

Tin 48 50 62 88 72

a Preliminary.


Main composition of trade(US$ m; fob-cif)

1999 2000 2001 2002 2003Exports fobTextiles & garments 7,236 8,337 7,676 6,963 7,103Crude petroleum & products 5,435 7,742 6,904 6,535 7,175Liquefied natural gas 4,357 6,624 5,732 5,578 6,477Wood & products 3,796 3,561 3,265 3,252 3,162Total exports incl others 48,665 62,124 56,321 56,893 61,058Imports cifIntermediate goods 18,475 26,019 23,879 24,228 25,496Capital goods 3,060 4,777 4,832 4,411 4,192Consumer goods 2,468 2,719 2,251 2,651 2,863Total imports incl others 24,003 33,515 30,962 31,130 32,551


66 Indonesia


Balance of payments, IMF series(US$ m)

1998 1999 2000 2001 2002Goods: exports fob 50,371 51,242 65,406 57,364 59,165Goods: imports fob -31,942 -30,598 -40,366 -34,669 -35,653

Trade balance 18,429 20,644 25,040 22,695 23,514Services: credit 4,479 4,599 5,213 5,500 6,660

Services: debit -11,961 -11,573 -15,011 -15,880 -17,054Income: credit 1,910.0 1,891.0 2,456.0 2,004.0 1,318.0

Income: debit -10,099.0 -11,690.0 -11,529.0 -8,940.0 -8,366.0Current transfers: credit 1,338.0 1,914.0 1,816.0 1,520.0 2,255.0Current transfers: debit 0.0 0.0 0.0 0.0 -504.0

Current-account balance 4,096.0 5,785.0 7,985.0 6,899.0 7,823.0Direct investment in Indonesia -356.0 -2,745.0 -4,550.0 -3,278.0 145.0

Direct investment abroad -44.0 -72.0 -150.0 -185.0 -180.0Inward portfolio investment

(incl bonds) -2,378.0 -1,792.0 -1,909.0 -243.0 1,223.0Outward portfolio investment 0.0 0.0 0.0 0.0 0.0

Other investment assets -44.0 -72.0 -150.0 -125.0 -500.0Other investment liabilities -7,360.0 -1,332.0 -1,287.0 -3,968.0 -2,040.0

Financial balance -10,182.0 -6,013.0 -8,046.0 -7,799.0 -1,352.0Net errors & omissions 1,849.0 2,128.0 3,637.0 701.0 -1,692.0Overall balance -3,693.0 1,972.0 3,726.0 -14.0 4,958.0Financing (� indicates inflow)Movement of reserves -6,120.0 -3,741.0 -2,011.0 1,250.0 -4,030.0Use of IMF credit & loans 5,772.2 1,382.5 1,122.7 394.2 1,426.1


Indonesia 67


External debt, World Bank series(US$ m unless otherwise indicated; debt stocks as at year-end)

1998 1999 2000 2001 2002Public medium- & long-term 67,305 73,658 69,765 68,717 70,011Private medium- & long-term 54,728 47,265 41,169 34,405 30,026

Total medium- & long-term debt 122,033 120,923 110,934 103,123 100,037 Official creditors 49,074 56,083 55,106 52,948 56,377 Bilateral 31,181 36,350 35,202 33,576 36,949 Multilateral 17,892 19,733 19,904 19,372 19,428 Private creditors 72,959 64,841 55,827 50,175 43,661

Short-term debt 20,113 20,029 22,635 21,808 23,309 Interest arrears 0 3,500 4,635 5,635 6,409Use of IMF credit 9,090 10,248 10,838 9,113 8,862

Total external debt 151,236 151,201 144,407 134,044 132,208Principal repayments 11,202 11,711 9,296 9,633 12,925

Interest payments 7,107 5,954 7,385 5,900 4,046 Short-term debt 1,324 989 1,157 864 600Total debt service 18,310 17,665 16,681 15,533 16,971

Ratios (%)Total external debt/GDP 143.4 97.7 87.5 81.7 64.9Debt-service ratio, paida 31.7 30.0 22.5 23.6 24.8

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Foreign reserves(US$ m; end-period)

1999 2000 2001 2002 2003Total reserves incl gold 27,257 29,268 28,018 32,046 36,253Total international reserves

excl gold 26,445 28,502 27,246 30,969 34,962

Gold, national valuation 812 766 772 1,077 1,291


Exchange rates(Rupiah per unit of currency; annual averages)

1999 2000 2001 2002 2003US$ 7,855 8,422 10,261 9,311 8,577

£ 12,709 12,742 14,771 13,955 14,004� 8,380 7,782 9,190 8,798 9,711

Rmb 949 1,017 1,240 1,125 1,036Bt 207.7 210.0 230.9 216.7 206.8¥ 69.0 78.1 84.4 74.3 74.0

Sources: Bank Indonesia, Indonesian Financial Statistics; IMF, International Financial Statistics.

Editors: Caroline Bain (editor); Graham Richardson (consulting editor)Editorial closing date: October 29th 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

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